TYL Tyler Technologies
Wide-moat government software franchise, but the price already assumes flawless SaaS margin expansion.
The story
Tyler Technologies is the dominant vertical software vendor to US state and local governments, covering courts, public safety, ERP, payments and permitting. Its moat comes from extreme switching costs, multi-decade customer relationships and procurement friction that keeps out generalist rivals. The company is in a late-stage shift from on-premise licenses to SaaS hosted on AWS. That shift has held down margins for now, but it should lift recurring revenue and operating leverage as flips complete and the cloud runs at scale.
Growth of 9-10% fits Tyler's history of high-single-digit organic growth plus SaaS flips and payments volume, fading to 4% as the market saturates. The 26% target margin assumes GAAP margins move toward the current mid-20s non-GAAP level as hosting efficiency improves and acquisition amortization rolls off; it is not the 30%+ that pure SaaS peers earn. The reported 0.56 sales-to-capital ratio is distorted by goodwill from the NIC acquisition, so the model uses an incremental 2.0 that reflects how little capital the business needs. Beta is set below the 1.1 software anchor because government demand is acyclical. A 12-year horizon is justified by a durable franchise with a long reinvestment runway.
Value drivers
| Revenue growth (Y1) | 9.5% |
| Terminal growth | 4.0% |
| Forecast horizon | 12y |
| Target operating margin | 26.0% |
| Years to target margin | 7 |
| Sales-to-capital | 2.00 |
| Beta | 0.90 |
| Failure probability | 1.0% |
| Cost of capital (WACC) | 9.2% |
| Terminal WACC | 9.6% |
Valuation bridge
| PV of explicit FCFF | 4.27B |
| PV of terminal value | 4.23B |
| Equity value | 8.83B |
| ÷ shares → per share | $215.50 |
Projected free cash flow to the firm
| Yr | Revenue | Growth | Margin | NOPAT | Reinvest | FCFF | PV |
|---|---|---|---|---|---|---|---|
| 1 | 2.66B | 9.5% | 18.7% | 403.27M | 115.41M | 287.86M | 263.71M |
| 2 | 2.90B | 9.0% | 20.0% | 467.91M | 119.72M | 348.19M | 292.21M |
| 3 | 3.15B | 8.5% | 21.2% | 538.44M | 123.25M | 415.20M | 319.20M |
| 4 | 3.40B | 8.0% | 22.4% | 614.73M | 125.86M | 488.88M | 344.31M |
| 5 | 3.65B | 7.5% | 23.6% | 696.55M | 127.43M | 569.12M | 367.19M |
| 6 | 3.91B | 7.0% | 24.8% | 783.52M | 127.85M | 655.66M | 387.52M |
| 7 | 4.16B | 6.5% | 26.0% | 875.14M | 127.03M | 748.11M | 405.06M |
| 8 | 4.41B | 6.0% | 26.0% | 927.65M | 124.88M | 802.76M | 398.18M |
| 9 | 4.66B | 5.5% | 26.0% | 978.67M | 121.34M | 857.32M | 389.56M |
| 10 | 4.89B | 5.0% | 26.0% | 1.03B | 116.38M | 911.22M | 379.30M |
| 11 | 5.11B | 4.5% | 26.0% | 1.07B | 109.98M | 963.86M | 367.55M |
| 12 | 5.31B | 4.0% | 26.0% | 1.12B | 102.16M | 1.01B | 354.44M |
Key risks
- SaaS migration costs and AWS hosting expenses keep margins below target longer than expected
- Government budget pressure or slower procurement cycles slow new deals and flips
- Premium valuation leaves no room for error; even with generous drivers the value is still below the price
Catalysts
- SaaS flip completion driving recurring revenue mix toward 90% and visible margin expansion
- Payments and transaction revenue growth from digital government services