skynesher
In April of last year, I concluded that Tyler Technologies (NYSE:TYL) has been engineering shareholder value. The company has seen rapid growth and shareholder value creation over time, being well positioned in terms of its business activities and through well-timed share buybacks and M&A activity.
Despite all these nice words, shares were trading at far too high levels for me to get upbeat as the valuation has “gotten out of hands”, at least that was my belief one and a half year ago.
The Business – The Thesis
Tyler provides software solutions, mostly to state, local and national governments. Typical examples to think of include ERP and financial services to clients like courts, public safety, appraisal and tax and other services.
Just a hundred-million business has grown to a billion in revenues in 2019, driven by strong growth and some 30 deals being pursued over the last 15 years. While this growth is spectacular enough as it is, the company managed to reduce the share count by 40%, all while the balance sheet has been preserved, revealing a net cash position last year.
A focus on niche markets, a robust SaaS model and innovative practices has created a great deal of competitive barriers, lying at the heart of the success of the company. This has been reflected in the share price, as a $3 stock rose to $30 in 2011, hit the $100 mark in 2013 and hit a high around $480 per share early in 2021, trading at $440 per share in April of last year.
This share price momentum was based on 2020 sales being up 3% to $1.12 billion, as the backlog rose by $130 million to $1.59 billion, as the business is in transition, transforming to a SaaS model. With sales seen up to $1.2 billion in 2021, and adjusted earnings seen at just $5.71 per share, valuations were sky high. With 42 million shares trading at $480 in February, a $20.2 billion equity valuation included a net cash position of around $700 million. This translated into a sky high valuation at 16 times sales and 100 times earnings.
In contact to many bolt-on deals, Tyler announced a larger $2.3 billion deal to acquire NIC. With a $460 million sales contribution and earnings contribution of $70 million, that deal looked a bit cheaper compared to Tyler’s own valuation. The deal was set to result in a $1.4 billion net debt load, equal to roughly 3 times EBITDA, as earnings would rise to $6.50 per share according to my calculations. That still resulted in a far too high multiple at 65 times earnings, too high to get potentially involved.
Stagnation – At Least The Shares
Despite my cautious words, shares hit a high of $550 in the autumn of 2021 as shares have come down significantly amidst higher interest rates and a compression in valuation multiples, with shares now down to $300, or actually a few dollars below that.
In February of this year, Tyler posted very strong 2021 results with revenues up 43% to $1.59 billion, of course driven by the purchase of NIC although a 9% organic growth rate looks quite solid as well. The backlog rose by roughly two hundred million to $1.8 billion, looking quite solid.
Reported GAAP operating profits rose in a minimal fashion to $181 million, the result of amortization charges doubling on the back of dealmaking, as net earnings fell to $161 million, for GAAP earnings of $3.82 per share. This is down on the year on the back of higher interest expense. Adjusted earnings rose about 30% to $7.02 per share. That is too simplistic as well as it excludes $103 million in stock-based compensation, equal to roughly $2.50 per share, as that reveals realistic earnings around $4.50 per share. Net debt was already down to a billion, a modest amount as EBITDA rose to $435 million.
With the NIC purchase only taking place during the year, growth is seen in 2022 with revenues seen at a midpoint of $1.85 billion, and non-GAAP earnings seen around $7.50 per share. The company announced two bolt-on deals earlier this year, with no financial details announced on each of them, indicating its willingness to grow further.
The company has seen a solid year so far as first quarter organic sales growth came in at 12%, albeit that organic growth slowed down to 6% in the second quarter amidst softer growth and the impact of a stronger dollar.
Third quarter results, as released late in October, revealed 9% organic growth as full year revenues are still seen at a midpoint of $1.85 billion, with non-GAAP earnings seen at $7.58 per share, a couple of pennies ahead of the initial guidance. Net debt has already come down to $851 million and with EBITDA trending at half a billion, leverage ratios have rapidly come down.
The problem with the >$7.50 per share number is that stock-based compensation still trends around $100 million, equal to $2.50 per share, indicating that realistic earnings only trend at $5 per share. Hence, at $300, shares still trade at 60 times earnings, even as sales multiples have fallen significantly to around 6 times.
A day later, the company announced its next bolt-on deal, this time spending $68 million to acquire Rapid Financial Solutions, getting its hands on a provider of secure payment solutions. No financial details have been announced; yet with a price tag equal to 0.5% of the own valuation here, this really is a bolt-on deal, not moving the needle in a big way, but revealing the commitment to focus on growth.
And Now?
With shares down a third since I last looked at the shares, and the company having been doing quite well, sales multiples have contracted in a huge fashion. The issue is that debt costs and adjustment related to stock-based compensation makes that earnings multiples remain elevated, with shares trading around 60 times realistic earnings, making me still quite cautious on the valuation.
Hence, I am still a bit cautious here and believe it is too early to get upbeat to acquire the shares here. While sales multiples have contracted a lot, net profit margins are down a bit as well, as I think it is still too early to get involved. After all, the earnings yield lags interest rates, arguably a poor compensation despite the solid growth profile of the business.
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