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NIC Dominating Its Niche In Cyberspace

Posted: Dec 05, 2008 12:31 PM by Eric Fox

Tickers in this Article: DKS, WMT, EGOV

NIC Inc. (Nasdaq:EGOV), an online outsourcing company whose products allow governmental entities to provide services over the internet, is a leader is its small niche of building portals for state governments. Overall, this is one stock that investors should keep on their radar in 2009. Why? Quite simply, the company dominates its business of state outsourced business portals and is using this platform to add higher growth and higher revenue services.

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Corporate Structure
The company has two divisions: the portal outsourcing business and the software services segment. The portal outsourcing business builds and operates portals through which individuals and businesses access government information online, including license records, vehicle registration, property tax information and other essential information. This segment makes up almost all the company's revenues. The software and services segment includes software that allows states to offer electronic filing of commercial and corporate filings by businesses.

NIC earns 85% of its revenues from its portals through business-focused transactions that include public records searches, criminal history checks and insurance-related searches (drivers' records) through state Department of Motor Vehicle (DMV) agencies. These services grow at 1-3% per year, or along with population growth.

Leveraging Base
The company is using its portal platform to add services to increase incremental revenue. These include giving state residents the ability to renew vehicle registrations more conveniently at Jiffy Lube. Consumers can even renew hunting and fishing licenses when they shop at retailers like Wal-Mart (NYSE:WMT) and Dick's Sporting Goods (NYSE:DKS)

The company breaks down its revenue stream into DMV-related and non-DMV-related transactions to demonstrate to investors that it is growing its business. In the quarter ending September 30, 2008, NIC grew non-DMV revenues by 23%, to $8.8 million, while DMV revenues grew by 5% over the same quarter of 2007, to $11.7 million. (Find out if management is doing its job of creating profit for investors, read Assess Shareholder Wealth With EPS.)

Financials
The company reported third-quarter revenues of $24.9 million, and net income of $3.1 million, which represents earnings per share of $0.05. Although revenues were up year over year, earnings declined from $0.06 per share in the third quarter of 2007. Cash and short-term investments totaled $62.4 million. NIC also renewed three state contracts during the quarter with Vermont, Virginia and Kansas. The company has no debt.

Risks for Investors
There are some risks to investing in NIC. For one, the company's base revenue of DMV-related transactions is slow growing, and there is no guarantee that its attempt to leverage its portal base will succeed.

The company is also exposed to business spending, which may slow during a recession. In addition, lower tax revenues may cause the 29 states without portals to put off establishing them.

There are also some state contracts up for renewal in 2009, including Utah, South Carolina and Oklahoma. The renewal status of these states is unknown, although the company proudly notes that it has never lost a contract renewal or a rebid that was competitive.

There is also an overhang of shares that may hit the market in late December 2008. Years ago, a trust was created that contained the company founders' shares. This voting trust was dissolved in June, and a lock-up on 8.2 million shares ends on December 20, 2008. The other 13.2 million shares are held by officers and directors. They are subject to a Rule 144 lock-up and are still subject to trading restrictions. This large overhang of stock may have been partly, but certainly not totally, responsible for the year-to-date sell-off of 52% through December 5. (For more on Securities and Exchange Commission information and regulations, check out SEC Filings: Forms You Need to Know.)

Outllook
NIC Inc. is leading its business niche, but the company faces some risks to profitability in 2009, particularly in a recessionary environment.

By Eric Fox

Eric J. Fox, is the founder of Brittain Capital Management, LLC., which manages the Alesia Fund, LP., a Value oriented long/short investment partnership. You can read more of his views on investments at his blog - Stock Market Prognosticator.

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