SaaS Adoption And Cloud Migration Will Transform Revenue Streams

Key Takeaways

• Shift to SaaS and cloud solutions enhances recurring revenues, operating margins, and future earnings growth through improved efficiency and increased demand in the public sector.
  
• Strategic focus on integrated software and payment solutions boosts profitability and supports significant future revenue and margin expansion targets.
  
• Shift to cloud solutions and increased R&D expenses pressure revenue growth and margins, with declining traditional sales impacting stability.

Catalysts

Provides integrated software and technology management solutions for the public sector.

• Accelerated adoption of SaaS solutions, with 97% of new software contract value in the cloud and a 23% growth in SaaS revenues, indicates a shift towards higher recurring revenues and improved operating margins, positively impacting revenue growth and net margins.
  
• The company's 2030 vision includes multi-year strategic plans for revenue and margin expansion, targeting organic recurring revenue growth of 10% to 12% CAGR and non-GAAP operating margins of 30% or more, which will drive future earnings growth.
  
• Strong demand in the public sector market, particularly state and local government budgets, supports the digital modernization trend, potentially leading to increased revenue as governments invest in Tyler’s solutions to improve efficiency and service delivery.
  
• Significant progress in cloud transition efforts, with plans to migrate more than 80% of on-premises clients to the cloud by 2030, is expected to increase recurring revenues and operating margins due to the efficiency of cloud-optimized products.
  
• Differentiated payments business strategy, focusing on integrating payment solutions with software offerings and providing proprietary back-office services, aims to drive higher margin transaction revenues, enhancing the company’s overall profitability and earnings growth.

Tyler Technologies Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Tyler Technologies's revenue will grow by 9.6% annually over the next 3 years.
• Analysts assume that profit margins will increase from 12.3% today to 15.4% in 3 years time.
• Analysts expect earnings to reach $432.9 million (and earnings per share of $9.77) by about March 2028, up from $263.0 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 88.9x on those 2028 earnings, down from 94.9x today. This future PE is greater than the current PE for the US Software industry at 29.5x.
• Analysts expect the number of shares outstanding to grow by 1.32% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.48%, as per the Simply Wall St company report.

Tyler Technologies Future Earnings Per Share Growth

Risks

• The anticipated decline in maintenance revenue by 4% to 6% due to the shift from on-premises to cloud solutions could negatively affect total revenue growth.
  
• The expiration of the Texas payments processing contract, which is a commoditized, low-margin arrangement, may impact transaction revenue growth, even though it might lead to better margins due to its low profitability.
  
• Declining license revenues, expected to fall by 18% to 20%, signal a reduced contribution from traditional sales channels, potentially impacting overall revenue stability.
  
• The anticipated research and development (R&D) expense increase by more than 50% could pressure net margins due to transitioning resources and concluding capitalized projects.
  
• Transitioning professional services revenue, projected to be flat or down 3%, reflects the shift to more efficient cloud implementations but may reduce lower-margin revenue streams in the short term.

Valuation

• The analysts have a consensus price target of $704.633 for Tyler Technologies based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $785.0, and the most bearish reporting a price target of just $595.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $2.8 billion, earnings will come to $432.9 million, and it would be trading on a PE ratio of 88.9x, assuming you use a discount rate of 7.5%.
• Given the current share price of $580.3, the analyst price target of $704.63 is 17.6% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.