TYLER TECHNOLOGIES INC (TYL) stock intrinsic value fair value estimate & owner earnings analysis

Tyler Technologies is the largest software supplier dedicated to American state and local government. Its products run county courts and justice systems (Odyssey), property appraisal and tax billing, municipal and school financial systems, public-safety dispatch and records, and, through the 2021 NIC acquisition, online payment portals operated under contracts with state governments. Customers install these systems once and keep them for a decade or two; replacing a county's court or tax system is a multi-year project few elected officials want to own. Client attrition runs about 2% a year, and recurring revenue from subscriptions and maintenance was about 87% of the total in 2025. Revenue rose every year from $760 million in 2016 to $2.33 billion in 2025, including through 2020. What the owners actually earn. We measure owner earnings as operating cash flow less the swing in working capital, less the cost of stock compensation, and less the capital spending needed to keep the business where it is (including software development the company capitalizes). On that basis Tyler earned $244 million in 2020, $250 million in 2021, $198 million in 2022, $210 million in 2023, $324 million in 2024 and $484 million in 2025, or $11.06 a share last year. Two things deserve emphasis. First, stock compensation is a real and rising cost ($151 million in 2025, up from $67 million in 2020) and it is fully charged here. Second, the 2025 figure is flattered by about $73 million of one-time tax relief: the July 2025 federal tax law restored immediate deduction of research spending, which cut the taxes Tyler owed. Stripping that out, 2025 was roughly $410 million, still a clear step up from the $200-250 million plateau of 2021-2023. That step up has a named cause: the shift of customers from one-time licences to subscription hosting, which raises annual fees per customer, plus NIC payments growth. Annualized recurring revenue reached $2.06 billion at the end of 2025, up from $1.86 billion a year earlier. First-half 2026 revenue rose 8% and subscription revenue 12%, which supports the new level rather than signalling another leap. We anchor the business at about $385 million a year of cash before interest, between the tax-adjusted 2025 figure and the 2024 result, rather than the headline 2025 number. Earlier analyses were built on a different calculation and are not comparable to this one. Amortization of acquired intangibles (about $94 million a year, mostly from NIC) is added back because it is a sunk cost. The economic decay of acquired products is carried in the growth paths and in the bear case's long-run erosion, not by lowering the earnings level. Debt. Tyler repaid its $600 million convertible notes in 2026 and in May issued $1.4375 billion of 0.50% convertible notes due July 2031, convertible at about $406 a share, using part of the proceeds for a capped call and share repurchases. It bought back 2.4 million shares for $755 million in the first half of 2026 and paid about $214 million in cash for an acquisition. At June 30, 2026 it held about $1.0 billion of cash and investments, of which we treat about $150 million as needed for operations. Because the new notes cost only 0.5% for five years, well below a normal long-term borrowing rate, we credit that saving at about $340 million, leaving effective net debt of roughly $235 million. Interest is negligible against $300 million-plus of annual cash flow even in the bear case, so the 2031 maturity is not a threat. Base case ($217 a share). Cash flow before interest starts at $385 million, grows 6% a year for four years, 4% for five, then 2% for ten more before levelling out. Year one at 6% is well below the trailing growth in 2025, which was inflated by the one-time tax item. The growth credited rests on what is already in place: deferred revenue of $802 million at the end of 2025, 97% of it to be recognized within twelve months; recurring revenue growing about 10% a year as customers move to hosted subscriptions, a process that has run for six years; and the installed base renewing at about 98% a year. We do not credit new product categories, AI-driven efficiency, margin expansion or acquisitions. The long tail rests on the installed-base lock-in, which has held for more than two decades. The business is worth about $9.3 billion; less about $0.24 billion of net debt leaves $9.1 billion, or $217 a share on 41.8 million diluted shares. Bear case ($110 a share). Local-government budgets have cycled before: in the 2008-2011 downturn property-tax and sales-tax receipts fell and counties froze new IT projects, cutting new bookings and services work even though recurring revenue held. In the bear case a similar downturn hits in 2027-2028: cash flow starts at $350 million, falls about 12% as licence, services and payments-volume revenue stall while stock compensation keeps rising, stays flat a second year, then grows only 3% a year. After year ten we assume cloud-native rivals and large horizontal vendors erode the base by 2% a year for thirty years. The business is worth about $4.8 billion; less net debt gives $4.6 billion, or $110 a share. Bull case ($284 a share). Cash flow starts at $415 million, close to the 2025 level excluding the tax benefit, and grows 8% a year for four years and 6% for five, at or below the pace revenue compounded from 2016 to 2025 excluding the NIC acquisition, then 3% for ten years. The business is worth about $12.1 billion; less net debt gives $11.9 billion, or $284 a share. What could make this wrong. The two most likely errors are the earnings level and the long tail. If the $200-250 million owner earnings of 2021-2023 proves the truer run rate once the subscription conversion is complete, the shares are worth close to the bear figure. If AI tools materially lower the cost of building and migrating government systems, the switching costs behind the long tail weaken; nothing in the filings shows this yet, so it is not in the cases, but it is the main unmodelled risk. Payments revenue from state portals depends on transaction volumes and on contracts with individual states that can be lost at rebid. Margin-of-safety price. We are reasonably confident of the earnings level within a band of roughly $350-420 million, because recurring revenue is about 87% of the total, customers rarely leave, and revenue has never fallen in the period we examined. The worst plausible outcome is a long local-government spending freeze combined with a high-profile implementation failure that costs Tyler large state contracts; the business would survive it easily, since the debt is cheap, small relative to cash flow and not due until 2031, and no customer is material. If we are wrong about both the level and the long tail, the shares would be worth roughly $110-130. The company pays no dividend, so the return must come from the value of the business being recognized, helped by buybacks. The price assumes a three-to-four-year holding period. From $125 a share the bear case implies roughly breaking even, while the base case, if recognized within about three years, implies about 20% a year. Above that, a 20% annual return depends on the bull case. The margin-of-safety price is $125.