Seeking Alpha
Profile| Send Message| ()  

After the market close on Thursday, February 2, 2012, NIC, Inc. (EGOV) reported its fiscal 2011 fourth quarter results for the quarter ending December 31, 2011. NIC is a holding in our Crabtree Technology model on Covestor.

The company reported Non-GAAP earnings per share of $0.08, which was in-line with the consensus estimate. Reported revenue of $45.1m (up 11% year-over-year) was slightly below the $46.2m estimate.

Other Metrics

Quarterly portal revenues were $42.3 million, up 9% over the prior-year quarter, including initial Mississippi and Delaware revenue;

  • Total same-state portal revenue grew 6% for the quarter. Breaking down the major components of same-state revenue growth -- same-state non-DMV transactional revenue grew 18% over the prior-year quarter. However, same-state DMV transactional revenues decreased 2% from the prior-year quarter, and same-state time and materials revenues decreased 15% from the prior-year quarter;
  • Total Software and Services Revenues were $2.8m (up 33% y/y), of which $1.5m came from the Federal Pre-Employment Screening program;
  • $1.7m in gross legal costs related to the ongoing SEC action, but only $300,000 net, after various re-imbursements such as from NIC's D&O insurance;
  • Tax Rate was 42% in the quarter, up from 37% in the prior-year quarter.
  • Cash Flow from Operations: $13.5m;
  • Total Cash Flow (ex-reserved cash for dividend): $11.1m.

Guidance

For FQ1 (March): None

For full Fiscal 2012 (December):

  • Revenue: $199.5m - $204.5m, compared with $209.7m consensus.
  • The $202m mid-point = 12% y/y growth, with 6-9% of that from same-state revenues;
  • Net Income of $21.5m - $23.5m;
  • Non-GAAP EPS: $0.36, compared with $0.41 consensus and $0.35 just achieved in 2011;
  • Note that the full year 2012 $0.36 estimate would be $0.38, were it not for the company's effective tax rate rising from 37% in 2011 to 42% in 2012.

What It Means

NIC's fourth quarter was almost completely in line with expectations. Though the company listed some negative developments (e.g. Maryland being not yet financially viable) these issues fell into the category of management conservatism, rather than a change to expectations. Therefore, the Q4 performance means the company continues to execute on its own and the Street's expectations.

Postives/Upward Changes to Expectations

  • Official forward guidance is conservative and doesn't include possible upside from several non-operational sources, including, 1) the possible extension of the Federal Tax -- Research and Development Tax Credit; and 2) revenue from Maryland.
  • Management hinted strongly on the earnings conference call that it expects to win further Federal-level business, following on the Pre-Employment Screening Program.

Negatives/Downward Changes to Expectations

  • Management's 2012 EPS and revenue guidance was lower than the four-analyst consensus, though it doesn't imply a deceleration in overall growth - the analysts were simply too optimistic going into the quarterly results.
  • NIC's new Oregon contract is noteworthy because of its size: 165 existing state agency web sites and online services. This larger scope will require higher-than-normal start-up costs.
  • NIC's Maryland contract is still not financially viable, though there's still some expense going on there.
  • Texas will be dilutive for all of 2012, with an operating loss of $1.5m - $2.0m. However, the four-year contract-length revenue opportunity is still gauged by the company at $30m - $35m, with above average profit margins.

Valuation (DCF and Comparative Analysis)

As part of our continuing analysis of NIC, we maintain a Discounted Cash Flow model for the company. We have updated it with the NIC's most recently quarterly performance. The following parameters and values are used to arrive at our DCF value:

  • Term: 5 years;
  • Initial Cash Flow: $24.465m (this represents the calculated free cash flow for the last 12 months);
  • Short Term Cash Flow Growth Rate: 7% (NIC's actual Free Cash Flow 7-Year CAGR = 9%);
  • Long Term Cash Flow Growth Rate: 5%;
  • Discount Rate: 7.48% (This figure comes from our CAPM-derived model, including a 30-year bond rate of 3.11%, a risk premium from Ibbotson of 4.4% and a calculated beta of 0.99);
  • Current Share Count: 64.325 million.

Using these inputs, our calculated DCF value per NIC share is $17.65. This is a premium to NIC's current $12 share price. While DCF models have their flaws, they are most appropriate for companies with consistent cash flow, steady growth trajectories and a history of returning value to shareholders via buybacks and dividends. NIC is such a company, even though it is relatively small. Moreover, its future growth will come not from transformative (i.e., cash flow negative) events like major acquisitions or capital commitments, but from winning business in larger states: Of the 10 most populous U.S. states, on Texas is a current NIC client. Thus, future free cash flow is likely to be relatively predictable.

Comparative Analysis

The following table compares NIC and six other technology service and software-as-a-service companies:

NIC

CGI Gp.

LinkedIn

OpenTable

Ancestry.com

Zillow

Ariba

Ticker

EGOV

GIB

LNKD

OPEN

ACOM

Z

ARBA

Price (2/6/12)

$12.08

$20.49

$80.30

$51.01

$30.51

$31.61

$28.76

Market Cap

$776.5m

$5.3 b

$7.8 b

$1.2 b

$1.3 b

$872.0 m

$2.7 b

LTM Revs

$176.7m

$4.4 b

$436.1 m

$133.1 m

$378.2 m

$55.7 m

$479.1 m

Op CF Margins

15.1%

13.2%

28.8%

36.7%

29.8%

28.0%

14.5%

MRQ Rev Growth

10.4%

2.4%

125.7%

40.1%

30.0%

131.6%

39.0%

Forward P:E

23.3

11.0

140.7

34.5

20.0

105.5

25.6

EV: Revs

3.98

1.45

16.98

8.68

3.73

14.08

5.42

Float: Shares Out

0.909

0.777

0.442

0.685

0.680

0.238

0.987

Source:

Yahoo Finance

LTM=Last 12 months, CF=Cash Flow, MRQ=Most Recent Qtr.

The primary conclusions we can draw from this table are:

  • NIC may lack the raw profitability of some of its faster growing SaaS peers, but it also lacks their hypoxic valuations;
  • NIC is nearly a monopoly in its space, which perhaps accounts for its P:E-to-Growth ratio of more than 2.

What You Should Do About It (Buy, Sell or Hold)?

We are maintaining our "Buy/Long" rating on shares of NIC. The company's fourth quarter performance and 2012 outlook were consistent with company strategy. The very nature (government IT) of NIC's market will prevent it from growing very quickly, as it is dependent on the "wheels of government" to turn and we all know they turn slowly.

But NIC's history of never losing a client or a contract re-bid means it does not face the customer churn of SaaS vendors like Ancestry.com, Ariba or Red Hat. And this means we are far more confident in NIC's 10-12% annual revenue growth trajectory and its continued near-monopoly in government IT services.

Please see our complete research report on NIC, published on Seeking Alpha in December 2011.

Source: Earnings Analysis: Why NIC Is A Buy