NIC (EGOV): Loses Its Biggest Customer (Texas) – Stock Drops 20% Instantly
As I write this, NIC (EGOV) stock is down 20% for the day. For potential buyers of the stock, there have been two developments in the last 24 hours. One, EGOV announced it lost the Texas dot org portal. It is still in the running for payment processing on behalf of the state. Texas, as a whole, accounted for 20% of EGOV’s revenue. It may have accounted for even more than 20% of the company’s profits. Two, shares of EGOV are now down 20% in price. EGOV has no debt and has some net cash. So, a 20% decline in the stock price is equivalent to a 20% re-pricing of the entire business’s value. Right now, I can’t say that one of these events is clearly outsized versus the other. So, I can’t say that the news of the last day should make you much more or much less inclined to buy the stock. That’s because the loss of Texas is a big loss for the business. However, we already knew: 1) That any business EGOV has could be lost and 2) That any re-bid for something like Texas could be done at a lower level. So, the expected probability of losing Texas wasn’t 0% before yesterday. And yet the stock dropped by almost 20% when the company announced it has lost revenue of about 20% of the total company. You see how the similar scale of the two items – the loss of a profitable business and the reduction in the stock’s price – make it difficult to say whether the stock has become a lot more or a lot less attractive.
So, I would caution those who say this clearly is a buying opportunity or this clearly is the moment to bail out on the stock – right now, I don’t see this moment being either of those things.
What do I see?
There were some other points discussed in the earnings release and the earnings call transcript. You can read the full transcript at Seeking Alpha.
- Same-state revenue growth in interactive government services continues to be excellent and management continues to expect it to keep being excellent. Interactive government services – these exclude driver history records – were up 11% for all of 2017. As discussed a little in the article I wrote on EGOV and even more in the comments to that article, a fast rate of growth in same-state interactive government services means EGOV will be less reliant on car related revenue and may even be able to grow its overall business even if it can’t win more state contracts and keeps losing some contracts.
- The information (really “guidance”) provided on taxes was also excellent. In 2018, the company expects its tax rate – “before any discrete items” – to be in the range of 24% to 25%. Historically, EGOV’s tax rate had been in the high 30s. It was between 35% and 40% in something like 13 of the last 15 years. So, I would say EGOV owners may be able to retain somewhere between 10% and 15% more of their pre-tax earnings than had been the case previously. I mentioned in the article I wrote on EGOV that this is the kind of company that could benefit a lot form the new corporate tax rate in the U.S. The appraisal value of the company should be 15% to 20% greater under the new tax rate than under the old tax rate. If EGOV deserved a market cap of “X” under the old 35% tax rate, it will deserve a market cap of at least 1.15x under the new 21% tax rate.
- EGOV isn’t going to provide guidance for 2018 till the Texas payment processing contract process is complete. Management said it will communicate with analysts and investors once that has been settled and they have new guidance. This isn’t really a “business” issue. But it is a potential “stock” issue. We know the last news EGOV put out was that it lost its biggest customer. The stock plunged after that. So, that will be the most recent news and most recent stock move investors now see when considering whether to buy the stock if they aren’t an owner or to sell the stock if they are an owner. If EGOV was giving guidance, people might focus on that. But, EGOV isn’t going to do that. So, there will be a lot of uncertainty around the stock before the company comes out with guidance. Management will be completely quiet about the Texas issue. So, there will be no reassurances offered. That makes now probably the best time to watch the stock closely for the right time to pounce.
So, the right time to pounce on the stock may be soon. But, is EGOV really the right business to own long-term?
There are two conflicting long-term considerations here. The ability to win more new business than the company loses has been bad lately. EGOV hasn’t been winning enterprise level contracts. And it has lost some.
Most notably: Texas.
Offsetting this we have really impressive growth in same-state interactive government services. If nationwide interactive government services are going to grow at something like 8% to 10% for a long time and EGOV still has half of all U.S. states under contract – this company can offset a lot of market share loses.
But, you never want to see market share losses. And EGOV has certainly had a terrible time winning entire new states. So, the one thing I would worry most about with the Texas loss is that it might be part of a pattern where I was wrong to say that EGOV has perhaps about as much chance of winning new business as losing new business (when it has half of all U.S. states as clients).
On the other hand, I’ve always been very cautious about same-state revenue growth in interactive government services. And yet, EGOV’s results for the last year and what management has said about results in that area are nothing but very, very bullish.
So, the company might transition away from dependence on cars much sooner than I expected.
Finally, if you haven’t read my original article on EGOV – do that now.
Make sure to read the comments as well. There’s a discussion both of the Texas dot gov re-bid and of EGOV’s dependence on cars and the risk driverless cars presents for the company.
If you have questions on EGOV, please feel free to ask them below. Andrew or I will respond to your questions here.