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Why Are Analysts Bullish About Tyler Technologies?

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Tyler Technologies (TYL) is a provider of integrated information management solutions and services to the public sector, focused mainly on local governments. The company generates revenues through the sale of software licenses and royalties, subscription-based services, software, maintenance and support services, and appraisal services.

In the first quarter, Tyler posted total revenues of $294.8 million, up 6.6% year-over-year, exceeding analysts' estimates of $289.4 million. Non-GAAP diluted earnings came in at $1.43 per share, an increase of 16.5% year-over-year and outpacing Street estimates of $1.32 per share.

However, software subscription arrangements declined to 66% of the total new software contract value in Q1, versus 73% in the same quarter last year.

VendEngine Acquisition

Earlier this month, the company announced the acquisition of VendEngine, a privately-held cloud-based software provider for $84 million in cash. VendEngine provides financial technology to prisons in around 230 counties and 32 states in the United States. The acquisition is expected to close in the third quarter of this year.

Following the acquisition announcement, Needham analyst Scott Berg assigned a Buy and a price target of $480 (16.2% upside) on the stock. Berg commented on the acquisition in a research note to investors, “We believe the acquisition is consistent with Tyler's strategy of acquiring adjacent Cloud based technologies that complement their existing product portfolios for jail administration.”

According to Tyler, VendEngine “provides essential tools and services for incarcerated people and their families-such as trust accounting and digital messaging services-and their modular-based comprehensive suite of applications plugs into most facility management systems.”

VendEngine also provides incarcerated individuals with further educational opportunities including certification and degree programs through partnerships with third parties.

Berg commented on VendEngine’s cloud-based solutions portfolio, “The solutions typically acquired by Tyler are Cloud based, as we expect the company to continue migrating their solutions to the Cloud over time. VendEngine is already a multi-tenant solution limiting the amount of investment required to transition for a public Cloud deployment.”

FY21 Guidance Update following NIC acquisition

On June 7, Tyler updated its guidance for FY21 following the closing of its acquisition of NIC Inc., in April this year. In February this year, the company announced the acquisition of NIC in an all-cash deal worth $2.3 billion. NIC is a provider of digital government solutions and payments serving 7,100 federal, state, and local government agencies.

As a result of the close of this acquisition, Tyler expects total GAAP revenues between $1.51 billion to $1.54 billion while non-GAAP diluted earnings are anticipated to be between $6.65 per share to $6.77 per share in FY21.

Tyler stated in its press release regarding the NIC acquisition, “With the addition of NIC’s highly complementary, industry-leading digital government solutions and payment services to Tyler's broad client base and multiple sales channels, the combined company will be well equipped to address the tremendous demand at the federal, state, and local levels for innovative platform solutions.”

With this acquisition, NIC is expected to contribute non-GAAP revenues between $310 million to $315 million from the date of acquisition. This would also include “approximately $21 million of COVID-related revenues from TourHealth and pandemic unemployment services that are not expected to recur in future years.” (See Tyler Technologies stock analysis on TipRanks)

Following the raised guidance for FY21 from Tyler management, analyst Scott Berg updated the financial model for TYL and said, “During the update call, management highlighted four key points regarding the acquisition, 1) Industry leader for public sector payments, 2) Delivering Tyler solutions through NIC contracts, 3) Combine the strength of MicroPact and NIC, and 4) Vision for Connected Communities.”

Consensus among analysts on Wall Street is a Strong Buy based on 5 Buys and 1 Hold. The TYL average analyst price target of $501 implies approximately 21.3% upside potential to current levels.