NIC Inc.: A Safe 'Portal' in a Stormy Stock Market

A famous Kansasian once said “there’s no place like home.” After a 17-year journey that led NIC Inc. (Nasdaq: EGOV), a provider of e-government services, through a dot-com implosion that left many of its ilk by the roadside, the small cap has now solidly found its home.

Olathe, Kansas based NIC Inc. has been able to swoop in as an efficiency savior to state and local government officials who are facing difficult cost-cutting decisions while efficiently bringing in revenue and meeting needs of consumers and businesses,

With a suite of services, the company partners with government entities to streamline their dealings with businesses and the public. NIC is currently in the midst of an aggressive plan to lock up more state portal contracts, which could give investors reason to cast their vote in favor of this small-cap survivor that hasn’t received much notice.

Emerging from the dark ages that followed the dot-com meltdown, NIC had a management shuffle — which included the return of co-founder Jeff Fraser as chairman, president and chief executive — and a renewed focus on its core services. That move has required some added investment in technology and personnel over the last few years, yet it has given two analysts currently following NIC reason to believe that it will fuel continued growth.

Web portal design is a necessary part of doing business, and NIC cast its lot with serving the needs of government. Initiatives announced in late 2006 included a target of doubling the population served to 120 million from 60 million by 2010. To accomplish that, NIC is hoping to add about four states a year to its roster. Fraser told analysts on a Nov. 7 third-quarter conference call that NIC remained on track to meet that goal.

What makes NIC’s business model attractive to penny-pinching government officials is that some services are self-funded — it generates revenue through fees transactions such as driver license data access. Of 21 state clients, 18 utilize the self-funded services. NIC sets up localized operations so there’s no fear of the governments having to deal with staff in far-away places like NIC’s Kansas home.

Competition includes global services giant International Business Machines Corp. (NYSE: IBM) and BearingPoint, Inc. (NYSE: BE). In October, BearingPoint won a two-year contract worth $14.1 million to handle the Web work for the California Department of Motor Vehicles, but NIC’s advantage is that it specializes in serving government.

During 2007, NIC saw its share price climb some 70%, reversing a 19% drop in value the year before. Shares closed out the year at three-year highs of $8.90 on Dec. 26 — but far from the heady March 2000 level when it traded as high as $78. NIC’s 52-week low has been $5.04; shares closed at $8.47 on Tuesday.

Company guidance points to full-year revenue of $84.1-84.7 million and estimated net income of $9.8 million to $10.3 million when NIC reports 2007 results at the end of January.

Just before NIC reported its third-quarter results in early November, the company announced that it had acquired a contract to manage the West Virginia portal, a one-year deal with two annual renewal options. It was the second state-contract win of 2007 for NIC, the other being with Arizona and worth at least $5.7 million. Along with a three-year continuation of work for Rhode Island, NIC now services more than 2,600 state and local government agencies covering a total population of 69 million.

In November, NIC said operating income for the quarter ended Sept. 30 increased 23% to $4.4 million, boosted by $1 million in one-time gains that added $0.02 to earnings per share. Quarterly portal revenue climbed 20% to a record $20.7 million, while its transaction-based, non-driver-record licensing and vehicle-registration revenue grew 31%, compared with 26% growth in the 2006 period.

One key to NIC’s growth will be landing contracts with the bigger states, noted Paul Kaump, senior analyst with Northland Securities in Minneapolis, who has an “outperform” rating and a $10 price target on the stock. Texas and California are portal possibilities, which would give NIC a presence in two of the most-populous states. For instance, while BearingPoint won a California motor-vehicle contract, in late December the state released a request for proposal for a redesign of the overall Web portal.

“They have a lot of the small states locked up,” Kaump told SmallCapInvestor.com, “and now they are going after the larger state governments. Sometimes that takes time.”

Still, Kaump believes that in fiscal years 2008 and 2009, NIC could bid on contracts in eight states with total population of 80 million — more than double the population of current clients.

Lehman Bros. analyst Jeffrey Kessler, who also follows NIC, has an “equal weight” rating and a $9 price target on the stock.

Northland’s Kaump said that in a stock market filled with potholes, he views NIC as “kind of a defensive play” among small caps.

Investors searching for any “portal” in a stormy stock market environment should click their heels (and computer mice) to find safe refuge in an underreported stock like NIC (EGOV).

Disclosure: none