NIC (NASDAQ:EGOV), a provider of digital services to state and local governments, reported its third-quarter results on Wednesday, Nov. 1. While transaction growth continues to drive the company's top line modestly higher, management continues to make investments in the business that are causing margins and profits to wane.

Let's put the company's third-quarter results under the microscope. 

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Image source: Getty Images.

NIC Q3 results: The raw numbers

Metric Q3 2017 Q3 2016 Year-Over-Year Change
Revenue $84.5 million $80.4 million 5.1%
Net income $14 million $16.2 million (13.6%)
Earnings per share $0.21 $0.24 (12.5%)

Data source: NIC. 

What happened with NIC this quarter?

  • Portal revenues grew 2% to $76.4 million. On a same-state basis, portal revenue grew by 5%.
  • Same-state, transaction-based revenue from interactive government services grew 10% year over year. Management credited the jump to higher volumes in motor vehicle registrations and business filings. However, those gains were offset by a 41% decrease in portal development and services revenue. 
  • Software and services revenue grew 51% to $8.1 million. The gains were attributable to strong demand for lifetime senior passes from the National Parks Service.
  • Operating margin fell 100 basis points to 24%. The decline was blamed on higher development costs.
  • Net income and EPS fell year-over-year in response to the declining margins and a change in income taxes. The year-ago period featured a tax benefit of approximately $0.05 per share. That's much higher than the $0.02-per-share tax benefit that was recorded this period.
  • Several new services were launched nationwide on the company's Gov2Go platform.
  • The state of Indiana awarded NIC a new four-year contract and a four-year renewal option.

What management had to say

CEO Harry Herington said that the company's quarterly results were "solid." He was also encouraged by the launch of expanded services on the company's YourPassNow and Gov2Go platforms.

On the call with analysts, Herington reiterated that the company must invest heavily in new service offerings in order to drive long-term revenue and profit.

It goes without saying that we must grow the core business by launching more digital government services. Core services, like permits, registrations, and filings, have always been foundational to the success and growth of our business. Growth also includes expanding our use of technology and investing in innovation. We won't be successful if we simply rely on the technology of today. 

In addition, Herington announced that NIC has entered into a new partnership agreement with Microsoft (NASDAQ:MSFT) that should help to enhance its product offering:

In addition to hosting Gov2Go in the Azure cloud infrastructure, Microsoft is bringing all of the resources to the table to promote the platform with government. And we have leveraged their full suite of functionality, like microservices, biometric authentication, artificial intelligence, chat box and more, so that the platform is built with the latest innovation. All of our government partners will benefit from the Microsoft services as they accelerate our R&D and allow us to quickly bring even more innovation to the digital government services we develop.

Looking forward

NIC's management didn't make any changes to full-year guidance, but CFO Stephen Kovzan did remind investors that there could be upside potential if the company's platform buildout for the state of Illinois comes online before year's end.

The partnership with Microsoft could be another boon for the company. After all, Microsoft's resources are vast and this new agreement could go a long way toward strengthening NIC's competitive position.

Teresa Kersten is an employee of LinkedIn and is a member of The Motley Fool's board of directors. LinkedIn is owned by Microsoft. Brian Feroldi has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends NIC. The Motley Fool has a disclosure policy.