NIC (NASDAQ:EGOV), a provider of specialty software services primarily focused on government agencies, reported its fourth-quarter results last week. Revenue and net income both took a step back during the quarter due to the loss of revenue from its largest customer.

However, a lower tax bill helped the company keep its bottom-line losses within a reasonable range.

NIC Q4 results: The raw numbers

Metric

Q4 2017

Q4 2018

Year-Over-Year Change

Revenue

$83.5 million

$78.6 million

(6%)

Net income

$10.8 million

$9.8 million

(9%)

Earnings per share

$0.16

$0.15

(6%)

Data source: NIC.

Smiling young businessman sitting in a chair and using laptop in a lobby.

Image source: Getty Images.

What happened with NIC this quarter?

Portal revenue fell 8%, to $72.4 million. The majority of the loss was attributable to significantly lower revenue from the state of Texas. For context, Wall Street was expecting $73.9 million in total revenue. NIC also saw:

  • Software and services revenue grow 23%, to $6.3 million, which helped offset lower portal revenue.
  • Operating income decline 28%, to $13 million, due to higher costs related to the acquisition of RxGov.
  • The company's tax rate plunged 1,400 basis points to just 24% of net income. The lower rate helped cushion the blow to net income and EPS (earnings per share).
  • EPS of $0.15, which came in higher than the $0.13 that market watchers were expecting.

Zooming out to the full year, here's an overview of the key numbers from 2018:

  • Revenue grew 2%, to $345 million.
  • Net income grew 13%, to $58.2 million.
  • EPS grew 13%, to $0.87.

What management had to say

CEO Harry Herington did his best to reassure investors that NIC is still a strong company:

"NIC's core business is rock solid and we are leveraging the momentum of our vertical strategy. Our enterprise contracts continue to generate strong same state revenue growth, our long-standing government partners continue to extend their contracts with us, and we were awarded two new contracts to deliver our comprehensive and innovative product solutions to key NIC government verticals we expect to drive long-term revenue growth."

On the conference call with Wall Street, CEO Herington stated that RxGov signed its first deal -- a five-year contract with the State of Maryland. Management also called out a number of other contract wins with government agencies in Pennsylvania and renewals in Nebraska and Colorado. 

Check out all our earnings call transcripts.

Looking forward

CFO Stephen Kovzan admitted that fiscal 2019 will be "a reset year of sorts" for NIC. The headwinds from the loss of revenue from Texas is going to act as a "significant revenue and profitability headwind."

In response to that challenge, here's an overview of the guidance that's being shared with investors:

  • Revenue is expected to land between $333.5 million and $342.5 million. This represents a decline of about 2% at the midpoint. However, this figure is nicely higher than the $328 million that Wall Street was expecting.
  • EPS is expected to land between $0.70 to $0.74. This represents a decline of 17% but it compares favorably to the current consensus estimate of $0.68. 

As usual, CEO Herington did his best to express optimism about NIC's future:

"I am focused on and excited about the future and growing the business. Myself, the executive team, all the NIC employees are dedicated to making 2019 one of NIC's best years ever."

There are both positive and negative takeaways for investors in this report. The good news is that RxGov landed its first significant customer and renewals in every state aside from Texas remain strong. Management also expects strong organic growth in 2019 from existing customers. This suggests that the company's core business is doing well.

The bad news is that the loss of revenue from NIC's revised contract with Texas is going to make posting good numbers harder. The company was able to overcome that headwind in 2018, thanks in large part to a lower tax bill, but that's not a repeatable event.

Overall, I have a hard time getting excited about NIC when the upcoming year is expected to feature negative growth in both revenue and earnings. It might be good to focus time and attention instead on software companies that are expected to put up strong growth in 2019.