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Tax Savings Drive NIC's Profits Higher

By Brian Feroldi - May 1, 2018 at 2:36PM

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While expenses continue to put pressure on profits, a lower tax rate allowed NIC's bottom line to move in the right direction.

The last few months have been challenging for investors in NIC (EGOV). The provider of digital government services announced last quarter that it had lost out on a lucrative contract extension with the state of Texas, which will act as a major headwind for revenue and profit growth. At the same time, profits have been trending in the wrong direction as management has prioritized product improvements over near-term net income growth.

Despite the somber backdrop, NIC's first-quarter report this week was largely filled with positive updates, and management highlighted a handful of trends that should keep the company on solid footing for the foreseeable future.

NIC Q1 results: The raw numbers

Metric

Q1 2018

Q1 2017

Year-Over-Year Change

Revenue

$86.7 million

$83.2 million

4.2%

Net income

$15.5 million

$14 million

10.7%

Earnings per share

$0.23

$0.21

9.5%

Data source: NIC.

What happened with NIC this quarter?

  • NIC posted portal revenue growth of 5% while software and services revenue was basically flat year over year.
  • Operating expenses grew across the board as the company continues to invest in product enhancements. 
  • Operating income declined by 2% to $20.6 million as expense growth outpaced revenue growth during the quarter.
  • The company's tax rate declined from 33% in the year-ago period to 25% in the quarter as a result of the recent changes to the U.S. tax code. The lowered tax bill more than made up for the falling operating income.
  • The company was awarded contract extensions with the state governments of Kansas, Kentucky, and Oklahoma during the quarter.
Businessman looking at laptop

Image source: Getty Images.

What management had to say

CEO Harry Herington was pleased with the company's first-quarter results: "We kicked off the year with solid financial performance. We launched several new services, and I would like to thank all of our government partners for working with us to advance digital government innovation."

On the conference call with analysts, Herington shared an important update on the company's contracting status with the state of Texas:

On April 16th, NIC submitted a formal protest with the Texas Department of Information Resources challenging the agency's decision to award the contract for portal operations, maintenance, and development services to another vendor. Following our debrief meeting with the State of Texas and after reviewing procurement documents we identified discrepancies that gave us serious concerns related to procurement and selection process. ... This is only the second time in our 26-year history that we have filed a protest. However, we have an obligation to our stockholders and to our employees to ensure this is a fair, transparent, and competitive procurement process.

Looking forward

Management held a special call with investors in March to share guidance for the year. Here's an overview of what was covered at that time:

  • Full-year revenue is expected to land between $333 million and $343 million. The midpoint of this range represents growth of less than 1% year over year. 
  • EPS is expected to be between $0.75 and $0.79. The midpoint of this range represents a decline of about 1%. 

Management also highlighted that loss of the Texas contract will have a "significant" impact on revenue and profits in 2019 since the current contract is slated to expire on Sept. 1, 2018.

CFO Steve Kovzan had the final words on the conference call and did his best to reassure Wall Street that the business is heading in the right direction: "I was pleased with our financial performance in the first quarter of 2018 and I am confident we are pursuing the right strategies and making the right investments to help keep NIC at the head of the pack within the digital government industry."

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