NIC Inc. Reports Strong Quarterly Results, Disappointing Guidance

By Brian Feroldi Markets Fool.com

NIC (NASDAQ: EGOV) has been reporting steady sales growth for more than two decades as it's worked to bring an ever-increasing number of federal, state, and local governments online. Coming into Wednesday's fourth-quarter earnings report, shareholders were expecting the company to deliver yet another quarter of modest top- and bottom-line growth. Let's take a closer look at the company's results.

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Image source: Getty Images.

NIC results: The raw numbers

Metric Q4 2016 Q4 2015 Year-Over-Year Change
Revenue $78.3 million $71.6 million 9.4%
Net income $13.6 million $9.0 million 51.1%
Earnings per share $0.20 $0.13 53.8%

Data source: NIC.

What happened with NIC this quarter?

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  • Fourth-quarter portal revenues grew by 10% to $75.0 million. On a "same-state" basis, NIC reported growth of 9%. Those numbers were driven by 10% growth in interactive government services revenue and a 2% increase in driver history record revenue.
  • Software & services revenue rose by 7% to $5.1 million.
  • NIC's operating margin increased by 100 basis points when compared to the year-ago period. That allowed operating profits to grow by a strong 19% year over year.
  • Net income of $13.6 million was up more than 51% year over year. However, the big difference between operating profit growth and net income growth came from lower provisions on income taxes.
  • The states of Montana and Connecticut recently announced that they would be extending their contracts with NIC for an additional two and three years, respectively.
  • On the flip side, the states of Tennessee and Iowa have decided to allow their contracts with NIC to lapse. The expected transition dates are/were March 31, 2017, and Nov. 30, 2016, respectively.

What management had to say

NIC CEO Harry Herington said he was quite happy with the company's quarterly results:

We finished the year strong, with our business producing solid organic revenue growth. In addition, another full quarter of revenues from Louisiana, our newest enterprise-wide, transaction-based portal, helped contribute to healthy revenue and operating income growth this quarter.

Looking forward

Management spooked Wall Street by saying that 2017 will be an investment year for the business. The stock was down about 13% around 3 p.m. Thursday. Specifically, the company said that it wants to spend aggressively on building out its enterprise licensing and permitting platform so that it can be used in multiple states. In addition, the company has some enhancements in mind for its national Gov2Go platform.

These planned enhancements are expected to cause expense growth to outpace revenue growth in 2017. As a result, the company provided investors with the following guidance for 2017:

Metric 2017 Forecast 2016 Actual Year-Over-Year Change at Midpoint
Revenue $323 million to $333 million $318 million 3%
Earnings per share $0.69 to $0.72 $0.84 (16.1%)

Management likely knew that this guidance wasn't going to sit well with Wall Street. Nonetheless, CFO Steve Kovzan did his best to reassure investors that these investments would be a net positive for the business in the long term, stating:

While these investments will dilute our earnings in the short term, they set the stage for higher growth in 2018 and beyond. We remain unwavering in our long-term focus, which has benefited NIC, our partners, and our stockholders well over the years.

NIC's strong quarterly performance showed yet again that its unique product offering is resonating with government agencies everywhere. While higher spending rates are expected to weigh on near-term profit growth, if those investments lead to higher contract-renewal rates, then they will likely prove to be money well-spent.

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Brian Feroldi has no position in any stocks mentioned. The Motley Fool recommends NIC. The Motley Fool has a disclosure policy.