On April 23, 2012, Adobe Inc. (ADBE) made the most significant announcement since its founding in 1982. Shantanu Narayen, President and Chief Executive Officer of Adobe, got up on stage and introduced Adobe Creative Cloud- an updated suite of design tools offered as software-as-a-service (SaaS) instead of licensed software.
This decision was a defining moment for the company, which had seen its stock stagnate for over a decade. After the announcement, Adobe's stock plummeted, and net income decreased by 30% the following year. But they stuck with it, and ten years later, Adobe's stock price is up by 1,300% since the SaaS pivot and is the blueprint for successful transitions.
This success story led an entire industry to convert its business model to SaaS where customers could access instant product updates and improvements without buying a new license. It also allowed companies to work out kinks in existing software to appease customers and reduce lead times on new products.
It was one of the most successful business model transitions in the history of capitalism, and today, another company is about to do it again...
Is This Tech Stock the Next Adobe?
Tyler Technologies (TYL), founded in 1966, is a pioneer in delivering integrated software, hardware, and maintenance solutions to the public sector. Some of its products include solutions to manage all aspects of the property tax life cycle, integrated software solutions for tax billing and collections, and computer-assisted mass appraisal (CAMA) software.
Today, the company boasts an impressive footprint, with 40,000 client installations and a client base of more than 15,000 local government offices in all 50 states, Canada, the Caribbean, the United Kingdom, and other international localities.
Like Adobe, Tyler Technologies made a big step in 2019. It formalized its multi-year cloud-first strategy and started a strategic shift in how they do business after estimating that the lifetime value of a cloud customer is 2X that of an on-premise customer.
Today, with 80% of its revenue recurring and 98% gross client retention, Tyler Technologies is entering a new era of sustained growth and free cash-flow (FCF) generation. They have doubled their total addressable market to $12 billion since 2018 through several key acquisitions, added new cross-selling opportunities, and implemented several new cost-cutting measures. These changes have grown revenue and profitability, and the company is expecting 10-12% additional growth in the mid-term, resulting from government demand for new platforms.
Aiming for 100% of new client contracts to adopt a SaaS model, the company has already seen significant changes. In Q1 2023, SaaS revenue increased by 24% compared to the previous year. Over the next 8-10 years, the company plans to convert over 20,000 customers, doubling the 2022 rate.
Its 2022 gross margin stood at 42.37%, but the transition to SaaS products is expected to align this closer to the industry average of 65%. Post-Covid, revenue growth is predicted to accelerate, potentially hitting high single digits from previous low single-digit growth.
Beyond its cloud transition, Tyler Technologies continues to meet ongoing product demand. As government bodies handle increasing data, the company assists in improving data efficiency. It helps to streamline siloed data, draw insights, and even applies artificial intelligence to enhance data interpretation.
From a valuation viewpoint, Tyler Technologies' P/E (NTM) ratio is at its historical average. However, a successful transition to SaaS could significantly boost its worth. With no current sell ratings on the stock, analysts predict a potential 12-month price target of up to $500 a share.
Considering Tyler Technologies' robust growth trajectory, ongoing SaaS transition, and the projected market demand, the company presents a compelling opportunity for the forward-looking tech investor.
I'll be back next week with another tech stock to watch.
Director of Technology Investing Research, Money Map Press
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