Tyler’s Model Transition Accelerates Further, Rendering 2023 Outlook Light; FVE Cut to $475

Wide-moat Tyler Technologies reported fourth-quarter results that fell short of our estimates for both revenue and non-GAAP operating margin. We consider Tyler’s demand environment to be healthy with normal patterns of bookings, software subscriptions, and transactional revenue. However, guidance for 2023 was shy of our estimates, as Tyler expects faster software as a service (SaaS) growth but license revenue contraction. This mix shift should pressure both revenue and margins. In turn, we are lowering our fair value estimate to $475 per share, from $500 previously. We continue to see federal stimulus funds as supporting the market and see consistent growth and margin expansion over time, and we believe Tyler is the clear leader for municipal software needs, and therefore view shares as attractive.