Tyler Technologies

Tyler Technologies' second-quarter revenue grew 8% year over year to $645 million, while non-GAAP operating margin was 25.7%. The firm maintained its 2026 guidance for revenue while raising non-GAAP guidance mainly to account for higher interest income and share buybacks in the second quarter.

Why it matters: Tyler struggled a bit in 2025 while bouncing back in the first quarter, only to report lackluster results in the second. The reasons were difficult comparisons and a year that was going to be a little more back-end loaded. The firm provides only annual guidance, so results can be lumpy. We continue to see Tyler on a positive trajectory with a buoyant demand environment and a healthy pipeline. We also see ramping artificial intelligence product revenue with several solutions in the marketplace showing good traction. Total software-as-a-service revenue grew 22% year over year to $231 million, while total SaaS bookings grew 21%. We calculate total bookings growth of 13% year over year, which continues to show a nice rebound after optically weaker growth in 2025.

The bottom line: We maintain our $500-per-share fair value estimate for wide-moat Tyler and view the shares as attractive. We think the third quarter will be critical in demonstrating that Tyler is on track to hit full-year targets and that bookings are being converted into revenue. Along with much of our coverage, the stock looks cheap, and we highlight it as a favored idea. We believe the firm is among the most insulated software vendors from the artificial intelligence onslaught.

Coming up: Tyler maintained full-year revenue guidance at $2.535 billion-$2.575 billion, while raising non-GAAP EPS guidance to $12.95-$13.20. Given the continued rebound in bookings, management noted increased confidence in its outlook for the rest of the year. Our estimates are within these ranges. The company raised its long-term outlook at its June investor day, so maintaining the growth outlook here was expected.

We continue to view Tyler, with its holistic portfolio, leading solutions, and an imperative for customers to upgrade existing technologies, as well positioned to grow consistently on an annual basis. Total revenue grew 8% year over year to $645 million, compared with the FactSet consensus estimate of $652 million. The company does not provide quarterly guidance, so we find the comparisons to consensus helpful for context. Our model was generally in line with consensus. Subscriptions grew 12% year over year, including 22% growth in SaaS revenue and 4% growth in transaction revenue. Subscriptions represented the largest line-item miss in our revenue estimates. We think the transaction-based revenue deals for things like statewide DMVs are showing strong momentum, with eight signed and 10 more in the pipeline. Management noted these typically represent millions of dollars in annual revenue.

SaaS revenue was slightly light, which is surprising given recent strength and something we view as likely to be only a near-term issue based on timing. Not only is SaaS driving nearly all new deals, and flips from on-premises to the cloud continue to accelerate, but deals are also getting bigger as add-on sales help. That said, there were no large deals this quarter. Approximately 55% of the company’s revenue base is derived from SaaS, so the runway remains long. While new customers come in a SaaS arrangement, legacy customers have been slowly flipping, even in public safety, which had been slow to adopt cloud solutions.

Forward-looking indicators are mixed, with both acceleration and deceleration, which we think is mostly due to challenging comparisons a year ago. Still, after some choppy performance in 2025, we think this warrants close attention. Non-GAAP annual recurring revenue was $560 billion, up 8% year over year. Meanwhile, bookings were up 13%, with average contract durations returning to a normal range. Management highlighted a number of deals but noted that deal volume was driven by typical, smaller bread-and-butter-sized contracts this quarter. A lack of large deals likely contributes to the topline miss against consensus estimates.

On a reported basis, profitability was slightly worse than anticipated, with non-GAAP operating margin of 25.7%, compared with 26.5% a year ago. We continue to view 50-100 basis points of margin expansion for the year as realistic, with more meaningful expansion over the long term.

Our fair value estimate for Tyler is $500 per share, which implies a fiscal 2026 enterprise value/sales multiple of 8 times and an adjusted price/earnings multiple of 40 times.

Our forecast includes a shift to subscriptions from maintenance, license, and software services revenue. We model a five-year revenue compound annual growth rate of 8%, with a model transition passing through the trough in 2026 as subscription growth is offset by license and maintenance declines. In our view, revenue growth will be driven by new customers and increasing deal sizes. We think deal sizes are growing more because of increasingly larger customer sizes--that is, moving from small municipal governments, to countywide and statewide deals. We also see NIC contributing to maintainable revenue growth going forward. While an ever-broadening portfolio should allow cross-selling to begin to contribute to growth over the next several years.

We model non-GAAP operating margin expanding from 26% in 2025 (actual) to the low-30% area in 2030. We see this as driven by the normal progression of a business model transition to subscriptions. Historically, the company has targeted at least 100 basis points of margin expansion annually, which we see as fairly methodical off the bottom, although management has committed to 50 basis points-100 basis points of margin expansion.

We believe the underlying market is substantial and growing. Tyler pegs the total addressable market, or TAM, at $18 billion. Certainly NIC expands the TAM further. This consists of more than 88,000 cities, towns, local agencies, school districts and counties in the US, representing more than 450,000 potential system implementations. Layering in higher education and the federal government, we believe the true opportunity is likely considerably larger than management’s current estimate.

We assign a wide economic moat to Tyler Technologies, arising primarily from switching costs, with intangible assets serving as a secondary moat source. We believe the company’s software and transactional elements, which account for the vast majority of revenue, have a wide moat, while the company’s professional services and hardware segments contribute to maintaining customer relationships and enabling software sales, but would not otherwise have an economic moat. We believe Tyler’s moat will allow the company to earn returns in excess of its cost of capital over the next 20 years.

Switching costs for software are often driven by several factors, in our view. The more critical the function and the more touch points a software vendor has across an organization, the higher the switching costs. There is also the direct time and expense of implementing a new software package for the customer while maintaining the existing platform and retraining employees on a new system. Additionally, there is an operational risk of changing software vendors, including business process reengineering, loss of data during the changeover, and overall project execution. A major implementation is likely to involve a system integrator and can take over a year in bad cases. Last, lost productivity is likely to be an issue as customers move up the learning curve on the new system, along with the distraction of users involved in the function where the change is occurring.

Retention metrics typically help inform investors on the presence and durability of a moat. These come in two flavors: gross, which describes what percentage of the customer base remains customers after a given period, and net, which highlights what percentage of customer spending is retained by the software provider after a given period. Tyler’s gross or customer retention has been steady in the 98% area or higher for years, which we characterize as best-in-class. Importantly, local municipalities and state governments are not acquired by their peers and do not go out of business or cease operations, so retention, by the nature of the company’s customers, has long been nearly 100%.

Software-related revenue represents 30%-35% of total revenue, while transaction processing revenue represents 50%-55% of revenue, professional services represent approximately 13% of revenue, and hardware represents approximately 2% of revenue.

Tyler provides the core systems that enable the normal operation of governmental units, including municipal bonds for enterprise resource planning systems, Odyssey for court management systems, along with other key applications for public safety (police station and jail-related modules), education, and payments and transaction processing capabilities. Core systems tend to have longer installations, which can extend for decades. We believe existing core systems at customer sites are aging and even well past the end of their useful lifespans in many instances. In some cases, customers are still operating on green screens with 50-year-old Fortran and Cobol-derived custom solutions, where it is becoming increasingly difficult to maintain the underlying code. Further, Tyler typically has multiyear contracts with its customers, which usually span three to five years.

We think that local governments are inherently different than typical enterprise software users in that they are not trying to attract new customers or drive profitability. Core systems are relied on to fulfill their intended function. In that regard, if there are no problems, the systems are largely assumed to be adequate to remain in use, which is why so many outdated systems still exist in the first place. Further, it took local governments and related institutions longer to adopt cloud-based software. Tyler has long offered software-as-a-service options for customers, and these solutions are finally being adopted en masse.

From a transactional perspective, Tyler historically had its e-filing business, which allows for digital court filings and is often attached to Odyssey sales, and its own payments portal business. The company then acquired NIC, which we long saw as a natural add-on business for Tyler. NIC builds and maintains websites and portals for governmental institutions and provides the underlying transaction processing capabilities. In return, the company normally takes a percentage of the value of each transaction.

Software is the foundation of transaction capabilities, regardless of the underlying business model. Therefore, the same factors that drive switching costs on the software side make changing vendors on the transactional side just as challenging. Since money is changing hands and transactional processing directly handles incoming receipts, switching costs are likely to be just as high as they are for software, especially since Tyler’s software solutions are core systems. Transaction processing is also a mission-critical function, so customers are likely to be highly reluctant to change vendors.

As it relates to intangible assets, we posit that Tyler has developed proprietary technology and a brand, which go hand-in-hand and are required and recognized by its unique customer base. Tyler benefits from building up a portfolio of software that would be difficult for a startup, or even an established software vendor without government expertise, to replicate. Further, we think Tyler has established a strong reputation for an underserved vertical market, with local governments being inherently different from enterprise buyers. Government operations differ in important ways from commercial operations. For example, the accounting is dramatically different (GASB versus FASB), and there is much less emphasis on attracting new customers for local governments, unlike for traditional enterprise clients. Therefore, we believe when a state or local government plans to invest in software, assuming Tyler has a solution that serves the relevant area, the company will be in the mix for most deals.

We see the request-for-proposal process as longer and more intricate. Funding sources could be different for an on-premises installation compared with a SaaS implementation. SaaS is overwhelmingly preferred by enterprise buyers, whereas government buyers have only recently begun adopting cloud delivery. An on-premises deal might involve a municipality’s capital budget, whereas a SaaS deal might be an ongoing operating expense, which in turn has a different approval process. Additionally, given the uniquely risk-averse nature of local government and public institutions, deals require a variety of reference accounts—and Tyler has spent decades building a roster of clients, beginning with small local institutions, building over time to major cities and even statewide deals.

Historically, pricing is more critical for government customers than it is for enterprise customers, as sole-source contracts have been frowned on. However, we believe government buyers are increasingly mimicking enterprise customers in a search for best-in-class functionality and more sophisticated total cost-of-ownership considerations rather than strict price comparisons. In our view, the combination of these factors represents a barrier and while it is possible to replicate, it would be expensive and time-consuming. Given the niche market, we think the potential competitor set is somewhat limited. Further, now that Tyler has established itself throughout the US and is moving toward state and even federal deals, especially after the Socrata and NIC acquisitions, we believe it is inching toward representing the path of least resistance for prospective customers. We view the company’s name and solutions as an intangible asset that captures a proven ability to serve public institutions, which we consider a secondary moat source.

Tyler is the runaway market leader seeking to upgrade a large and underserved local government and related public institution market that we believe is ripe for modernization.

NWS public safety solutions is primed for acceleration after a period of heavy investment in the product following the acquisition, while we also view the recent NIC deal as highly synergistic.

The SaaS model is likely to draw in more customers and extend what is already a long-tail growth story.

Despite Tyler's recent success, its revenue growth has been pressured by the organic transition to a subscription model, so expansion appears subdued.

Tyler is acquisitive and has completed several large deals that were more challenging than anticipated to integrate.

Upselling is less a part of the investment case for Tyler than for many other software stocks, although acquisitions are making this a more relevant growth vector.