Tyler Tech Targets Local Government

05/13/2014 8:00 am EST

Focus: STOCKS

Tyler Laundon

Editor, Cabot Small-Cap Confidential

Our latest recommendation is a company that makes local governments work more efficiently; it is a stable firm, growing at a steady rate, and trading at a great price. It's exactly what I want right now, suggests Tyler Laundon, editor of 100% Letter.

Tyler Technologies (TYL) supplies information technology for public institutions, most notably local and state governments, schools, courts, cities, and counties. Tyler Tech provides the software, hardware, data conversion, and training to bring these organizations up to speed, and keep them running smoothly.

The company's services automate three critical functions for public institutions; financial management and education, courts and justice, and property appraisal and tax.

Its services include traditional software installations, which are typically sold as a perpetual license. However, customers are increasingly opting to purchase cloud-based subscriptions as the benefits of add-on features, such as e-filing, become better known.

Technically, the shares are oversold, having fallen below their 200-day moving average. The relative strength indicator has hit oversold conditions. Based on these technical indicators, there is around 30% upside in the stock.

Meanwhile, Tyler Tech posted one of the best quarters in company history. Government spending has returned to prerecession levels, and TYL's solutions have demonstrated advantages as compared to the competition. This is leading many institutions to select, and stick with, Tyler Tech.

In Q1, revenues rose by 17.6% (to $112.6 million) year-over-year, and net income rose by 40% (to $11.9 million). Those are good numbers, and they indicate that TYL's business is continuing to accelerate.

Tyler Tech's backlog at the end of the quarter was 40% higher than it was a year ago at the same time (now at $540.3 million). Most of this was in high margin software, indicating that profit margins should expand in 2014.

Tyler Tech is benefiting from state court systems adopting its e-filing service. This is sold as part of the software-as-a-service subscription package. The biggest impact ($3.9 million) in Q1 came from Texas' statewide e-filing contract for its courts, which helped drive a 52% rise in subscription revenue.

As more states move in this direction, TYL is in a perfect position to capitalize. For example, the state of Massachusetts recently signed on with TYL to run a pilot program to test e-filing for its court system. The opportunity is huge when we consider that there are 48 more states that could potentially be interested over the next decade.

I've been following this stock for some time because of its durable subscription-based business model.

After reporting a solid Q1, I expect institutions will add shares to take advantage of the relatively low price. We should join them. Let's seize the day to buy a great growth stock at an attractive price.

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