Thursday, November 3, 2016

A current AIM Equity Fund holding: NIC, Inc. (EGOV) by Andy Reed. “Hitting on All Cylinders?”

NIC, Inc. (EGOV, $22.95): “Tech-Savvy and Firing on All Cylinders”
By: Andy Reed, AIM Student at Marquette University

 Image result for NIC, Inc logo

Disclosure: The AIM Equity Fund currently holds this position. This article was written by myself, and it expresses my own opinions. I am not receiving compensation for it and I have no business relationship with any company whose stock is mentioned in this article.

NIC, Inc. (NASDAQ: EGOV) is a leading provider of government web services. The company constructs and maintains government websites. Operating through two segments, Outsourced Portals and Software and Services, the company enters into long term contracts with state and local partners. It then creates a web presence for the entity, and proceeds to collect fees from the transactions that occur on the website.
• Q2 2016 was another solid quarter for the company, reporting total revenue of $80.8mm, with same-state portal revenue increasing at a 6% clip YoY.
• The company has a refocused energy on its most profitable relationships which should help carry this lean, mean, eGovernment machine through a period of responsible and targeted growth.
• ‘Go Wild Wisconsin’, a new one stop online shop for ‘Sconnies to register for fishing, hunting and other outdoor activity licenses, continued its strong start generating $600,000 in quarterly revenue even before hunting season kicked off in earnest.
• The company reports 3Q earnings on November 3, and with solid drivers remaining in play (new technologies, expanding breadth of services, etc.), we continue to see plenty of upside in the Kansas-based eGovernment provider; however, investors will be seeking positive indicators in the form of progress towards contract renewals.

Key points: Second quarter earnings came in at the high end of street estimates at $.20 per share and $.22 ex-stock based compensation expense. This compares with Q2 2015 earnings of $.19 per share. Quarterly EBITDA for the period was $22.077mm growing at 5.84% YoY, dwarfed by the 29.25% Q1 EBITDA growth. Results were mostly in line with street expectations; however, positive sales growth and modest margin expansion came despite a change in revenue recognition in Texas, which management estimates affected same-state revenue negatively by 300bps. 

The company and Chief Operating Officer, Robert Knapp, were featured in a CNNMoney News Story during Q2 praising their goals of creating “tech-savvy” government agencies. It is clear that NIC, Inc. is finally getting the attention it deserves. With more state and local governments embracing cutting edge technology, NIC has proven to be an invaluable technology partner and consultant. Just ask Utah, Mississippi, or Maryland. Recently implemented, Mississippi and Utah have integrated NIC’s technology into Amazon’s Echo voice assistant. NIC-enabled Echo allows constituents to vocally access services and transactions through the ‘Alexa’ speaker, a growing technology offering from Amazon. In Maryland, one of the first government Apple Watch apps was unveiled and subsequently awarded for its usability and practicality. There is no shortage of innovation at this company!

As mentioned previously, NIC has a rejuvenated and refocused attitude when it comes to its government partners. Pinpointed as a weak link, Iowa’s contract was not renewed. This is a good sign for the company, as it shed one of its least profitable relationships and gives management the ability to continue to build on same-state revenue streams by enhancing existing client value.
Despite the stock’s strong performance since its addition into the AIM Equity Fund last April, we still believe NIC, Inc. will continue to be a winner over the long term. One of our biggest concerns with the original transaction was the fear that important contracts could hit the expiration date without an agreement upon renewal. While this thesis played out in Iowa, a portal partner since 1997, the loss of the partnership “…will have no impact on our bottom line,” according to CEO, Harry Herington.

What has the stock done lately? Since its addition into the AIM Small Cap Fund on April 4, 2016, the stock is up 30%. Interestingly, with a large run up in the spring months, the stock has essentially remained flat throughout the dog days of the summer and now into the fall, despite Q2 earnings coming in with a positive read on August 4. Expect some pent up movement in the stock after Q3 earnings (street consensus estimates: revenues of $80mm, EPS of $.18), as investors place their bets heading straight into election week. NIC’s largest four largest shareholders have significantly increased their stakes in the company over the past six months.

Past Year Performance: Over the past year, NIC, Inc.’s common stock is up 21% as of market close on October 31, 2016. The company has flirted with its 5-year high over the past several months, and NIC, Inc. remains of strong importance to the Domestic Information Technology portfolio. Even with its unprecedented marketplace positioning, the company still only commands an EBITDA multiple of 16.8x vs. its 5-year high of 26.7x.

Source: FactSet

My Takeaway
As mentioned previously, NIC, Inc. has outperformed the market since its addition into the AIM Fund last spring. With that being said, the fundamental underpinnings remain and hint at future success. Revenues continue to impress, and with more and more value added services offered by the company, we see this trend continuing. Management reiterated guidance on the most recent earnings call, and went so far as to note that it is likely that with the tailwinds in the industry currently, beating guidance is entirely in the realm of possibility. NIC remains a stronghold in the portfolio, and we are looking forward to watching the company end the fiscal year on a high note. 


Source: FactSet