2015 CFA Institute Research Challenge-Kansas City
University of Missouri – Kansas City
Sponsored by the CFA Society Kansas City
Paul Frauen
Adam McClusky
Sam Snider
2
UMKC CFA Institute Research Challenge Team
Investment Thesis
SELL Recommendation
Price Target: $16.79
Highlights
• Limited new portal
growth potential
• Dependency on same
state revenue growth
• Difficulty of entrance
into federal space
• Necessary shift in
historical risk/reward
profile
3
UMKC CFA Institute Research Challenge Team
Investment Thesis: Coming to a
Crossroads
Current EGOV
Positioning
Investment
Thesis
Risk/Reward
Profile
Valuation
Conclusion
4
UMKC CFA Institute Research Challenge Team
Investment Thesis: State Portals
Upcoming Contract Expirations
Enterprise
Date
New Jersey*
2/28/2015
Alabama
2/28/2015
Oklahoma
3/31/2015
Delaware**
3/31/2015
Kentucky*
8/31/2015
Mississippi
12/31/2015
*Renewal option
**Will not be renewing
Source: 3Q 2014 NIC, Inc. 10-Q
Investment
Thesis
Risk/Reward
Profile
Valuation
Conclusion
5
UMKC CFA Institute Research Challenge Team
Risk/Reward Profile: Historical
Low Risk:
▫ Minimal upfront investment ($0.5-1M)
▫ No debt servicing obligations
▫ Lack of third party competition at the enterprise
level
Investment
Thesis
Risk/Reward
Profile
Valuation
Conclusion
6
UMKC CFA Institute Research Challenge Team
Risk/Reward Profile: Historical
High reward:
▫ Speedy cost recovery (~12 months from “go-live”)
▫ Long-term base contracts = reliable initial revenue
base
▫ Same state growth driven by cross-selling of
Interactive Government Services (IGS)
▫ High margins, ROIC
Investment
Thesis
Risk/Reward
Profile
Valuation
Conclusion
7
UMKC CFA Institute Research Challenge Team
Risk/Reward Profile: Forward Looking
Risk
Implications
Diminishing opportunities for new
state contracts
• Retention of existing contracts and
same state growth critically
important
• Forced to compete at the agency
level
Maturation of existing contracts
• Cross-selling opportunities
diminish
States’ desire for flexibility (shortterm renewals, alternative funding
arrangements)
• Revenue stream becomes less
predictable
Bureaucratic hurdles and
capacity/scalability concerns at the
federal level
• Requires significantly more
investment with uncertain
payback period
Investment
Thesis
Risk/Reward
Profile
Valuation
Conclusion
8
UMKC CFA Institute Research Challenge Team
Valuation: Relative
Sales Growth
Profit Growth
EGOV
2013
2014
18.1%
9.15%
21.6%
~11%*
MAXIMUS
2013
2014
13.0%
27.76%
-6.2%
25%
ACCENTURE
2013
2014
2.1%
5.04%
28.5%
-10%
Gross Margin
Net Margin
ROA
ROE
ROIC
42.9%
12.9%
17.8%
34.8%
34.8%
29.4%
8.8%
13.6%
22.0%
22.0%
32.9%
11.5%
19.5%
66.2%
65.8%
40.8%
14.4%
22.3%
39.8%
40.2%
26.6%
8.5%
17.1%
28.1%
27.1%
*Adjusted for non-recurring expenses
Investment
Thesis
Risk/Reward
Profile
Valuation
Conclusion
32.3%
9.8%
16.1%
57.0%
47.9%
9
UMKC CFA Institute Research Challenge Team
Valuation: Relative
Trailing EV/Sales
4.0
Forward EV/Sales
3.6
2.1
2.0
3.3
4.0
1.6
0.0
2.0
1.7
MMS
ACN
0.0
EGOV
MMS
ACN
EGOV
Trailing P/E
40.0
1.9
27.1
26.4
20.0
Forward P/E
40.0
18.9
0.0
25.9
25.1
EGOV
MMS
20.0
18.7
0.0
EGOV
MMS
ACN
*EV as of 2/17/15
Investment
Thesis
Risk/Reward
Profile
Valuation
Conclusion
ACN
10
UMKC CFA Institute Research Challenge Team
Valuation: Relative
Relative:
$15.77
*EV as of 1/21/15
Investment
Thesis
Risk/Reward
Profile
Valuation
Conclusion
11
UMKC CFA Institute Research Challenge Team
Valuation: Precedent Transaction
▫ Chosen Deals
 Siris Capital Group acquisition of Digital River
 EV/EBITDA
 50% Premium
 Bridge Line
 5 Acquisitions
▫ Premiums
 Sensitivity Range: 25%-50%
 Based on trailing 3-month US small cap tech M&A
activity
Investment
Thesis
Risk/Reward
Profile
Valuation
Conclusion
12
UMKC CFA Institute Research Challenge Team
Valuation: Precedent Transaction
Precedent:
$16.00
Investment
Thesis
Risk/Reward
Profile
Valuation
Conclusion
13
UMKC CFA Institute Research Challenge Team
Valuation: DCF
Enterprise Value
Equity Value
Dil Shares Outstanding
Present Value Per Share
Upside (as of 2/20/15)
Recommendation
1,060
0
94
1,155
65
$17.69
3.7%
Sell
Terminal Year FCF
WACC
Terminal Value
Implied Perpetuity Growth Rate
78
8.7%
1,629
3.7%
Less: Debt
Plus: Cash
Numbers in millions except per share
Investment
Thesis
Risk/Reward
Profile
Valuation
Conclusion
14
UMKC CFA Institute Research Challenge Team
Valuation: DCF
Input
Assumptions/Methodology
Revenue*
Simulated using 5 scenarios ranging from worst case to
best case
Margins
Small but steady increase as benefits of operating leverage
are partially offset by additional federal spending
Effective Tax Rate
Held constant at 39% (consistent with company guidance
and historical average)
CAPEX
Growth parallels revenue growth
WACC*
Cost of equity: CAPM
Cost of debt: N/A (assume constant capital structure)
Exit Multiple*
11.0x EBITDA (based on relative valuation)
* Indicates highly sensitive inputs
Investment
Thesis
Risk/Reward
Profile
Valuation
Conclusion
15
UMKC CFA Institute Research Challenge Team
Conclusions and Recommendations
SELL Recommendation
Relative:
$15.77
Precedent:
$16.00
50%
25%
25%
DCF:
$17.69
Price Target: $16.79
Investment
Thesis
Risk/Reward
Profile
Valuation
Conclusion
16
UMKC CFA Institute Research Challenge Team
Presentation Body
•
•
•
•
•
•
•
•
•
•
•
•
•
•
Investment Thesis: Price Target
Investment Thesis: Crossroads
Investment Thesis: State Portals
Risk/Reward Profile: Low Risk
Risk/Reward Profile: High Reward
Risk/Reward Profile: Forward Looking
Valuation: Relative, Ratio Analysis
Valuation: Relative, Multiples Charts
Valuation: Relative, Football Chart
Valuation: Precedent, Overview
Valuation: Precedent, Football Chart
Valuation: DCF Summary Result
Valuation: DCF Assumptions
Conclusions and Recommendations
Compan
y
Overvie
Appendices
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
Competitive
•
Landscape
•
Existing Contract Overview
State Enterprise Growth Prospects
Revenue Concentration
Existing Enterprise Portal Contracts by
Year
Contract Extension Trends
Mgt. Comments on Federal Expansion
Business Model Overview
Income Statement
Balance Sheet
Cash Flow
Financial Analysis: Profitability
Financial Analysis: Growth
Financial Analysis: Liquidity/Efficiency
EGOV Dividend History
Relative Multiples
Relative Valuation
Precedent Transaction: Valuation
Precedent Transaction: Deals
Revenue Simulation
State Contract Value Estimation
DCF Model Spreadsheet
DCF Model Results
WACC Estimation
SensitivityValuation
Analysis: Price Sensitivity
Sensitivity Analysis: Terminal Sensitivity
17
UMKC CFA Institute Research Challenge Team
Existing Contract Overview
▫ 28 Enterprise Contracts
 Includes DE (expires March 2015)
▫ 3 Additional States with Agency-Level Contracts
 New Mexico
 Virginia
 Louisiana (currently in pilot phase – no revenue)
▫ 1 Federal Contract
 Department of Transportation
 Federal Motor Carrier Safety Administration
18
UMKC CFA Institute Research Challenge Team
State Enterprise Growth Prospects
State
Pop. (MM) Importance Likelihood
Evidence
California
38.3
High
Low
Nationally recognized state portal*, conversations with state CIO office
New York
19.8
High
Low
State portal already optimized for mobile
Florida
19.6
High
Low
Conversations with state CIO office
Illinois
12.9
High
Low
State portal already optimized for mobile
Ohio
11.6
High
Low
State portal already optimized for mobile
Georgia
10.0
High
Low
State portal already optimized for mobile
Michigan
9.9
High
Low
State portal already optimized for mobile
North Carolina
9.8
High
Low
State portal already optimized for mobile
Viriginia
8.3
Moderate
Low
Prefer to decentralize to the agency level
Washington
7.0
Moderate
High
State portal not optimized for mobile
Massachusetts
6.7
Moderate
Low
State portal already optimized for mobile
Arizona
6.6
Moderate
Low
EGOV elected not to rebid due to preference for T&M based funding
Missouri
6.0
Moderate
Low
Neighbor to EGOV's oldest partner; nationally recognized state portal**
Minnesota
5.4
Moderate
High
State portal not optimized for mobile
Louisiana
4.7
Moderate Moderate 12-18 mo pilot ($2 million, but no revenue) underway with 1 agency
Nevada
2.8
Moderate
High
State portal not optimized for mobile
New Mexico
2.1
Moderate
Low
Servicing MVD for 5 years, but no further expansion
New Hampshire
1.3
Low
High
State portal not optimized for mobile
Delaware
0.9
Low
Low
Contract will lapse March 2015
South Dakota
0.8
Low
High
Recently issued RFP for self-funded eGovernment solutions
Alaska
0.7
Low
High
State portal not optimized for mobile
North Dakota
0.7
Low
High
State portal not optimized for mobile
Wyoming
0.6
Low
High
State portal not optimized for mobile
*2013 Finalist for Best in the Web: State Portal Category (Center for Digital Government)
**2014 Finalist for Best in the Web: State Portal Category (Center for Digital Government)
Compan
Estimated number ofy new state portal contracts: 8
Overvie
Competitive
Valuation
Estimated
total number of state portal contracts: 36
Landscape
19
UMKC CFA Institute Research Challenge Team
Revenue Concentration*
• Service Type
▫ Driver History Record (DHR) Retrieval
▫ Motor Vehicle Registrations
34%
13%
• Customer
▫ LexisNexis Risk Solutions
22%
• Portal
▫ Texas
▫ Contracts Without Cancellation Penalty
*Revenue sources of 10% or greater
Investment
Thesis
23%
59%
Source: NIC, Inc. 3Q 2014 10-Q
Valuation
Conclusion
20
UMKC CFA Institute Research Challenge Team
Existing Enterprise Portal Contracts by Year
*Based on 2004-2013 NIC, Inc. 10Ks and 2014 4Q NIC, Inc. 10Q
Compan
y
Overvie
Competitive
Landscape
Valuation
21
UMKC CFA Institute Research Challenge Team
Contract Renewal Trends
*Based on 2009-2013 NIC, Inc. 10Ks
Compan
y
Overvie
Competitive
Landscape
Valuation
22
UMKC CFA Institute Research Challenge Team
Management Commentary on Federal Expansion
Harry H. Herrington (CEO, Chairman):
 “As far as federal, frustrated is a good word for us, absolutely. I
would say I was naïve… Security at the federal level is night and
day above what we’ve seen in the past, with the stringent
requirements they take you through.”
 “We worked with agencies that they would change some of their
rules and regs so that they can do self funding….That’s where our
initial investment went”
Stephen M. Kovzan (CFO):
 Regarding recently announced plans to spend an incremental $1
million on agency education and an expanded federal sales staff:
“Well, I think, our current intention is to have as part of our
expense run rate going forward. It’s not a one time deal.”
Source: NIC, Inc. 4Q Earnings Call Transcript
23
UMKC CFA Institute Research Challenge Team
Business Model
▫ Establish baseline
revenue using
transaction-based, selffunding model (typically
with DHR as foundation)
▫ Cross-sell IGS to build on
DHR foundation
▫ Use alternative funding
models (fixed fees, time &
materials), as a last resort
only
4%
Interactive
Government
Services (IGS)
6%
Driver History
Records (DHR)
36%
54%
Fixed Fees
Time &
Materials
Note: Percentages as of 12/31/2013
Source: NIC, Inc. 2013 Annual Report
24
UMKC CFA Institute Research Challenge Team
NIC Inc (EGOV US) - Income Statement
In Millions of USD except Per Share
Revenue
- Cost of Revenue
Gross Profit
+ Other Operating Revenue
- Operating Expenses
Operating Income
- Interest Expense
- Net Non-Operating Losses (Gains)
Pretax Income
- Income Tax Expense
Annual Tax Rate
Income Before XO Items
Net Income
Net Inc Avail to Common
Shareholders
FY 2007
85.8
45.5
40.2
-24.1
16.1
0.0
-2.2
18.4
6.4
35%
12.0
12.0
FY 2008
100.6
55.8
44.8
-26.2
18.6
0.0
-0.6
19.3
7.3
38%
11.9
11.9
FY 2009
132.9
79.2
53.7
0.0
31.6
22.0
--0.1
22.1
8.1
37%
13.9
13.9
FY 2010
161.5
99.5
62.0
0.0
32.6
29.4
-0.0
29.4
11.0
38%
18.4
18.4
FY 2011
180.9
108.8
72.1
0.0
33.6
38.5
-0.0
38.5
15.5
40%
22.9
22.9
FY 2012
210.2
127.6
82.6
0.0
39.4
43.2
-0.0
43.2
16.8
39%
26.3
26.3
FY 2013
249.3
147.4
101.9
0.0
49.3
52.6
-0.1
52.6
20.5
39%
32.0
32.0
12.0
11.9
13.9
18.4
22.9
26.3
32.0
Abnormal Losses (Gains)
Tax Effect on Abnormal Items
Normalized Income
-0.3
0.1
11.7
--11.9
-0.5
-0.6
12.9
2.4
-0.8
19.9
-0.3
0.1
22.7
0.5
-0.2
26.7
9.1
-3.3
37.9
Basic EPS Before Abnormal Items
Basic EPS Before XO Items
Basic EPS
Basic Weighted Avg Shares
Diluted EPS Before Abnormal Items
Diluted EPS Before XO Items
Diluted EPS
Diluted Weighted Avg Shares
Source: Bloomberg
0.18
0.19
0.19
61.8
0.18
0.19
0.19
62.5
0.19
0.19
0.19
62.5
0.19
0.19
0.19
62.8
0.20
0.22
0.22
63.0
0.20
0.22
0.22
63.1
0.31
0.28
0.28
63.5
0.30
0.28
0.28
63.6
0.36
0.35
0.35
64.0
0.35
0.35
0.35
64.2
0.41
0.40
0.40
64.5
0.41
0.40
0.40
64.6
0.58
0.49
0.49
64.9
0.58
0.49
0.49
65.0
25
UMKC CFA Institute Research Challenge Team
NIC Inc (EGOV US) - Balance Sheet
In Millions of USD except Per
Share
Assets
+ Cash & Near Cash Items
+ Short-Term Investments
+ Accounts & Notes Receivable
+ Inventories
+ Other Current Assets
Total Current Assets
+ LT Investments & LT
Receivables
+ Net Fixed Assets
+ Gross Fixed Assets
- Accumulated Depreciation
+ Other Long-Term Assets
Total Long-Term Assets
Total Assets
Liabilities & Shareholders'
Equity
+ Accounts Payable
+ Short-Term Borrowings
+ Other Short-Term Liabilities
Total Current Liabilities
+ Long-Term Borrowings
+ Other Long-Term Liabilities
Total Long-Term Liabilities
Total Liabilities
+ Total Preferred Equity
+ Minority Interest
+ Share Capital & APIC
+ Retained Earnings & Other
Equity
Total Equity
Total Liabilities & Equity
Source: Bloomberg
FY 2004
FY 2005
FY 2006
FY 2007
FY 2008
FY 2009
FY 2010
FY 2011
FY 2012
FY 2013
30.8
0.0
17.6
3.4
4.7
56.5
36.9
20.5
22.3
2.2
2.1
83.9
36.7
45.0
28.7
1.1
2.4
113.9
38.2
17.6
28.1
0.7
8.9
93.6
60.4
0.0
37.5
0.4
6.6
104.8
68.6
0.0
39.0
0.0
4.1
111.7
51.7
0.0
42.1
0.0
6.8
100.5
61.6
0.0
49.3
0.0
23.1
134.1
62.4
0.0
55.3
0.0
10.2
127.8
74.2
0.0
52.8
0.0
35.6
162.7
0.0
2.6
11.6
9.0
33.9
36.5
93.1
0.0
3.3
13.8
10.5
30.6
33.9
117.8
0.0
3.8
13.2
9.4
22.4
26.2
140.1
0.0
6.1
15.0
8.9
11.7
17.8
111.4
0.0
6.6
17.5
10.8
8.0
14.6
119.4
0.0
6.4
20.3
13.8
5.5
11.9
123.6
0.0
6.8
22.3
15.6
4.1
10.8
111.4
0.0
8.9
26.4
17.6
1.4
10.3
144.4
0.0
16.0
37.5
21.4
1.3
17.3
145.1
0.0
15.2
42.3
27.1
2.2
17.3
180.0
14.4
0.0
6.4
20.8
0.0
0.0
0.0
20.8
0.0
0.0
200.9
24.5
0.0
8.2
32.7
0.0
0.0
0.0
32.7
0.0
0.0
207.4
34.2
0.0
6.7
40.9
0.0
0.0
0.0
40.9
0.0
0.0
210.2
36.5
0.0
7.3
43.8
0.0
0.7
0.7
44.5
0.0
0.0
165.9
41.8
0.0
9.5
51.3
0.0
0.9
0.9
52.2
0.0
0.0
154.2
42.9
0.0
13.6
56.4
0.0
0.6
0.6
57.0
0.0
0.0
139.6
41.6
0.0
15.2
56.8
0.0
1.3
1.3
58.1
0.0
0.0
107.9
45.0
0.0
32.8
77.9
0.0
1.4
1.4
79.3
0.0
0.0
96.8
43.7
0.0
19.2
62.8
0.0
3.4
3.4
66.2
0.0
0.0
84.3
39.1
0.0
44.2
83.3
0.0
4.8
4.8
88.0
0.0
0.0
88.4
-128.7
72.3
93.1
-122.3
85.2
117.8
-111.0
99.3
140.1
-99.1
66.9
111.4
-87.0
67.2
119.4
-73.0
66.6
123.6
-54.7
53.3
111.4
-31.7
65.1
144.4
-5.4
78.9
145.1
3.5
91.9
180.0
26
UMKC CFA Institute Research Challenge Team
NIC Inc (EGOV US) - Cash Flow Statement
In Millions of USD except Per
Share
Cash From Operating Activities
+ Net Income
+ Depreciation & Amortization
+ Other Non-Cash Adjustments
+ Changes in Non-Cash Capital
Cash From Operations
Cash From Investing Activities
+ Disposal of Fixed Assets
+ Capital Expenditures
+ Increase in Investments
+ Decrease in Investments
+ Other Investing Activities
Cash From Investing Activities
Cash from Financing Activities
+ Dividends Paid
+ Change in Short-Term
Borrowings
+ Increase in Long-Term
Borrowings
+ Decrease In Long-Term
Borrowings
+ Increase in Capital Stocks
+ Decrease in Capital Stocks
+ Other Financing Activities
Cash from Financing Activities
Net Changes in Cash
Direct Method Cashflow
Source: Bloomberg
FY 2005
FY 2006
FY 2007
FY 2008
FY 2009
FY 2010
FY 2011
FY 2012
FY 2013
6.4
1.6
5.4
7.8
21.2
10.7
2.0
7.9
5.0
25.7
12.0
2.5
7.0
3.2
24.6
11.9
3.6
9.1
-1.9
22.7
13.9
8.2
6.2
2.2
30.5
18.4
4.7
5.7
-6.8
22.0
22.9
4.9
5.6
-2.9
30.6
26.3
6.5
4.5
-9.0
28.4
32.0
8.3
9.1
-8.6
40.9
0.0
-2.3
0.0
0.0
-20.5
-22.8
0.0
-2.6
0.0
0.0
-24.7
-27.3
0.0
-4.9
0.0
0.0
27.3
22.5
0.0
-3.9
0.0
0.0
16.9
13.0
0.0
-3.4
0.0
0.0
-2.0
-5.3
0.0
-4.1
0.0
0.0
-0.5
-4.6
0.0
-6.1
0.0
0.0
-0.5
-6.6
0.0
-12.8
0.0
0.0
-0.7
-13.5
0.0
-6.7
0.0
0.0
-1.5
-8.2
0.0
0.0
-46.7
-15.7
-19.2
-35.5
-16.2
-16.3
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
4.8
0.0
3.0
7.8
6.1
0.0
1.4
0.0
0.0
1.4
-0.2
0.0
1.1
0.0
0.0
-45.6
1.5
0.0
2.1
0.0
0.0
-13.6
22.1
0.0
2.2
0.0
0.0
-16.9
8.3
0.0
1.1
0.0
0.0
-34.4
-16.9
0.0
2.2
0.0
0.0
-14.1
10.0
0.0
2.2
0.0
0.0
-14.2
0.7
0.0
2.2
0.0
-23.0
-20.8
11.9
27
UMKC CFA Institute Research Challenge Team
Financial Analysis: Historical Trends
Profitability
Return on Equity
50%
38.8%
40%
30%
20%
30.6%
36.6%
Return on Invested Capital
37.5%
36%
34.5%
33.4%
34%
20.8%
32%
30%
10%
34.8%
30.0%
28%
0%
2009
2010
2011
2012
2013
26%
2009
Gross Margin
40.9%
40.4%
39.9%
40%
2011
2012
2013
15%
10.5%
11.4%
12.7%
12.5%
12.9%
2009
2010
2011
2012
2013
10%
39.3%
38.4%
39%
2010
Net Margin
42%
41%
35.3%
5%
38%
37%
0%
2009
2010
2011
2012
2013
Source: Bloomberg
28
UMKC CFA Institute Research Challenge Team
Financial Analysis: Historical Trends
Growth
Annual Revenue Growth
35%
Annual EPS Growth
30%
32.1%
30%
27.3%
25.0%
25%
25%
20%
21.6%
18.6%
20%
16.2%
15%
22.5%
15.8%
14.3%
15%
12.0%
10%
10%
5%
5%
0%
0%
2009
2010
2011
2012
2013
2009
2010
2011
2012
Source: Bloomberg
2013
29
UMKC CFA Institute Research Challenge Team
Financial Analysis: Historical Trends
Liquidity/Efficiency
Current Ratio
2.5
2.0
1.98
1.77
1.72
A/R Turnover
2.04
1.95
5.0
4.0
1.5
3.0
1.0
2.0
0.5
1.0
0.0
0.0
2009
2010
2011
2012
2013
3.5
2009
Days of Sales Outstanding
4.0
4.0
4.0
2010
2011
2012
2.0
100
91.5
92.2
90.8
2013
Total Asset Turnover
150
105.0
4.6
79.1
1.5
1.09
1.37
1.41
1.45
1.53
2010
2011
2012
2013
1.0
50
0.5
0
0.0
2009
2010
2011
2012
2013
2009
Source: Bloomberg
30
UMKC CFA Institute Research Challenge Team
EGOV Dividend History
EGOV Special Dividends
$0.80
$0.75
$0.70
$0.60
$0.50
$0.50
$0.40
$0.35
$0.30
$0.30
$0.30
$0.25
$0.25
$0.25
$0.25
Dec-10
Dec-11
Nov-12
$0.20
$0.10
$Feb-07
Feb-08
Feb-09
Feb-10
Nov-13
Source: Bloomberg
Nov-14
31
UMKC CFA Institute Research Challenge Team
Relative Multiples
Company
EGOV
MMS
ACN
Price 2/17/15
$16.23
$59.29
$89.30
EV ($MM)
972.0
3,756.7
52,149.0
Company Trailing EV/Sales Forward EV/Sales
EGOV
3.6
3.3
MMS
2.1
1.9
ACN
1.6
1.7
EBITDA ($MM)
72.2
256.2
4,936.0
Forward P/E
25.9
25.1
18.7
EBIT ($MM)
63.0
225.3
4,315.0
Trailing P/E Trailing EV/EBITDA Trailing EV/EBIT
27.1
13.5
15.4
26.4
14.7
16.7
18.9
10.6
12.1
*Source: Thomson ONE, 3Q 2014 NIC, INC 10-Q
Compan
y
Overvie
Competitive
Landscape
Valuation
32
UMKC CFA Institute Research Challenge Team
Relative Valuation
EGOV Relative Firms Valuation
EV/Sales
2013
2014E
2015E
Price Target
Multiple Range
Sales (NIC) Low
249.28
273.00
298.00
298.00
High
1.84
1.85
1.75
1.85
Implied EV
Implied Equity Value
Implied Share Price
Less: Debt +
Low
High
(Cash)
Low
High
Shares Out. Low
High
2.24
459.47
559.13
-106.00
565.47
665.13
65.30
$8.66
$10.19
2.10
505.05
573.30
-106.00
611.05
679.30
65.30
$9.36
$10.40
1.80
521.50
536.40
-106.00
627.50
642.40
65.30
$9.61
$9.84
2.10
551.30
625.80
-106.00
657.30
731.80
65.30
$10.07
$11.21
EV/EBITDA
Multiple Range
Implied EV
Implied Equity Value
Implied Share Price
Less: Debt +
EBITDA (NIC) Low
High
Low
High
(Cash)
Low
High
Shares Out. Low
High
2013
66.04
11.74
14.19
775.62
936.89
-106.00
881.62
1042.89
65.30
$13.50
$15.97
2014E
75.00
11.48
12.76
860.87
956.74
-106.00
966.87
1062.74
65.30
$14.81
$16.28
2015E
83.00
10.85
11.60
900.55
962.80
-106.00
1006.55
1068.80
65.30
$15.41
$16.37
Price Target
83.00
11.48
12.76
952.70
1058.80
-106.00
1058.70
1164.80
65.30
$16.21
$17.84
EV/EBIT
Multiple Range
Implied EV
Implied Equity Value
Implied Share Price
Less: Debt +
EBIT (NIC)
Low
High
Low
High
(Cash)
Low
High
Shares Out. Low
High
2013
57.71
13.94
17.14
804.51
989.02
-106.00
910.51
1095.02
65.30
$13.94
$16.77
2014E
65.00
13.61
15.51
884.39
1008.28
-106.00
990.39
1114.28
65.30
$15.17
$17.06
2015E
74.00
12.80
14.10
947.20
1043.40
-106.00
1053.20
1149.40
65.30
$16.13
$17.60
Price Target
74.00
13.61
15.51
1006.84
1147.89
-106.00
1112.84
1253.89
65.30
$17.04
$19.20
P/E
Multiple Range
Low
High
Low
0.49
21.20
23.90
Compan
0.61
22.50
26.30
y
0.68
21.20
23.90
Overvie
0.68
22.50
26.30
EPS (NIC)
2013
2014E
2015E
Price Target
Implied Price
High
10.39
11.71
13.73
16.04 Competitive
14.42
16.25 Landscape
15.30
17.88
Valuation
33
UMKC CFA Institute Research Challenge Team
Precedent Transaction Valuation
Precedent Transaction Analysis
Multiple Range
Implied Equity Value
(Offer)
Implied Deal Offer
Minus Premium
(25%)
EV/Sales
Sales 2014 E
Low
High
Low
High
Less: Net
Debt
Low
High
FMV
273.00
2.63
5.40
717.21
1474.2
-106
823.21
1580.2
Low
High
Low
High
Less: Net
Debt
Low
High
Low
EV/EBITD
EBITDA 2014 E
A
Low
High
Implied Share
Price
Minus Premium (50%)
Low
High
Dil. Shares
Low
High
411.605
790.1
65.299
$6.30
$18.15
High
Low
High
Dil. Shares
Low
High
617.4075 1185.15
FMV
75.00
17.92
17.92
1344
1344
-106
1450
1450
1087.5
1087.5
725
725
65.299
EV/NI
Net Income
2014 E
Low
High
Low
High
Less: Net
Debt
Low
High
Low
High
Low
High
Dil. Shares
FMV
39.1
51.15
51.15
1999.97 1999.97
-106
2105.97
2105.97
1052.98
1052.98
65.299
# Deals
93
90
211
411
257
Volume
8.79B
22.65B
56.23B
129.51B
81.18B
Premiums Paid
>100%
75.01-100%
50.01-75%
25.01-50%
10.01-25%
1579.47 1579.47
*Source: Bloomberg (Last 3 Months)
Competitive
Landscape
Valuation
$11.10 $16.65
Low
High
$16.13 $24.19
34
UMKC CFA Institute Research Challenge Team
Precedent Transaction: Deals
Company
Accenture
Bridgeline
Deal
Digital River
Mean
Max
Compan
y
Overvie
Acquires Acquity Group
Acquires ElementsLocal Inc.
Acquires MarketNet Inc.
Acquires Magnetic Corp
Acquires e.magination network
Acquires TMX Interactive
Investor Group Acquires DRIV
Acquires 30% of Softonic Int. SL
EV/LTM Revenue
EV/LTM EBITDA
2.24
2.1
2.7
2
5.4
2.4
1.55
Competitive
Landscape
Valuation
2.63
5.4
EV/LTM NI
17.92
17.92
17.92
51.15
51.15
51.15
35
UMKC CFA Institute Research Challenge Team
Revenue Simulation
5-yr
Scenario
Prob.
Worst Case
10%
-4.8%
Bad Case
20%
2.2%
Base Case
40%
6.8%
CAGR
Good Case
20%
13.7%
Best Case
10%
18.8%
N/A
8.7%
N/A
2.3%
Simulation
(10K Trials)
Texas Case
Compan
y
Overvie
Est. Price
$6.87
•
Worst Case: Significant loss of business and
less than anticipated growth.
•
Bad Case: Midpoint between base and worst
case (i.e., growth lags, but not to such an
extreme)
•
Base Case: EGOV’s revenue base stays
relatively stable, with the bulk of growth
coming from existing states.
•
Good Case: Midpoint between base and best
case (i.e., EGOV gains more new business than
lost business, but not to such an extreme)
•
Best Case: EGOV consistently adds states at a
faster than anticipated rate of 2-3 per year, or
realizes a comparable amount of revenue from
alternative sources, (e.g., federal, international,
acquisitions).
(-59.7%)
$11.61
(-31.9%)
$16.41
(-3.7%)
$24.02
(+40.9%)
$31.67
(+85.7%)
$17.69
(+3.8%)
$13.97
(-18.1%)
Texas Case: Base Case assumptions with Texas
August of 2017
Competitive expiring inValuation
•
Landscape
36
UMKC CFA Institute Research Challenge Team
Estimating Value of State Contracts
• Existing contracts allotted historical revenue based on state population.
• New contracts assumed to bring in $0.50 per capita in year of
commencement from DHR, per management guidance.
• Same state growth over time estimated using a three-stage growth model
based on the age of the contract:
• 0-3 years = 59% per annum (assumes revenue will grow from
$0.50 per capita to $2.00 per capita over this time)
• 4-10 years = 10% (growth in line with historical average same
state growth rate)
• > 10 years = 3% (assumed growth into perpetuity)
• FMCSA contract assumed constant at $9.5M per annum (based on
management guidance of $9-10M)
Compan
y
Overvie
Competitive
Landscape
Valuation
37
UMKC CFA Institute Research Challenge Team
DCF Model
Free Cash to the Firm
Growth Rate
Revenue
EBIT Margin
EBIT
EBIT Growth
2013
17%
249
21%
53
12%
2014
22%
275
21%
58
10%
2015
10%
303
21%
64
10%
2016
4%
315
21%
66
4%
2017
11%
350
22%
75
14%
2018
11%
388
22%
83
11%
2019
9%
424
22%
91
9%
2020
8%
460
23%
103
14%
2021
7%
493
23%
111
7%
2022
4%
514
23%
116
4%
2023
5%
537
23%
121
5%
2024
5%
566
23%
127
5%
Interest
Pre-Tax Earnings
Tax
Net Income
Net Income Growth
S/O (Basic)
EPS
0
53
21
26
15%
65
0.41
0
58
23
32
22%
65
0.49
0
64
25
39
21%
65
0.60
0
66
26
40
4%
65
0.62
0
75
29
46
14%
65
0.71
0
83
33
51
11%
65
0.78
0
91
36
56
9%
65
0.85
0
103
40
63
14%
65
0.97
0
111
43
68
7%
65
1.04
0
116
45
70
4%
65
1.08
0
121
47
74
5%
65
1.13
0
127
50
78
5%
65
1.19
39.0%
35
10
79
39%
39
11
83
39.0%
40
12
85
39.0%
46
13
90
39.0%
51
14
95
39.0%
56
16
99
39.0%
63
17
103
39.0%
68
18
107
39.0%
70
19
109
39.0%
74
20
112
39.0%
78
21
115
(14)
(4)
(2)
(5)
(5)
(4)
(4)
(4)
(2)
(2)
(3)
54
60
(11)
(12)
43
48
34
35
Competitive
Landscape
67
(13)
54
35
82
(15)
67
37
87
(16)
71
37
91
(17)
74
35
95
(18)
78
34
Tax Rate
39.0%
EBIT*(1-tax rate)
32
Add Back: Depr. & Amort
8
Working Capital
65
Less: Changes in Working
Capital
(9)
Operating Cash Flow to
Firm
32
Capital Expenditures
(14)
Free Cash Flow to Firm
18
PV of Cash Flows
Compan
y
Overvie
31
(9)
22
46
(9)
37
34
Historical
Performance
50
(10)
41
34
76
(14)
62
37
Valuation
Note: Values in millions except per share
38
UMKC CFA Institute Research Challenge Team
DCF Model (continued)
Present Value of FCF
352
Terminal EBITDA
148
Exit Multiple
11.0x
Terminal Value
1,629
Discount Factor
0.43
Present Value of Terminal Value
708
67% of enterprise value
Enterprise Value
1,125
Less: Debt
0
Plus: Cash
94
Equity Value
1,155
Dil Shares Outstanding
65
Present Value Per Share
$17.69
Upside / (Downside)
3.7%
Recommendation
Sell
Terminal Year FCF
WACC
Terminal Value
Implied Perpetuity Growth Rate
Compan
y
Overvie
Historical
Performance
78
8.7%
1,629
3.7%
Competitive
Landscape
Valuation
Note: Values in millions except per share
39
UMKC CFA Institute Research Challenge Team
WACC Estimation
Input
Value Assumption/Methodology
Cost of Equity
8.68% CAPM
Risk-free rate
2.17% 10-Year Treasury yield as of 12/31/2014.
10-Year Beta
1.03
MRP
6.30% Midpoint between Ibbotson equity risk premiums
over long-term government bonds and T-bills over
period 1926-2010
Cost of Debt
N/A
WACC
8.68%
Compan
y
Overvie
S&P 500 used as market index.
Assume constant capital structure (i.e., no debt)
Historical
Performance
Competitive
Landscape
Valuation
40
UMKC CFA Institute Research Challenge Team
Sensitivity Analysis
WACC
• WACC/Exit Multiple and Price
25%
20%
15%
10%
5%
Base
-5%
-10%
-15%
-20%
-25%
*Green cells indicates
Sensitivity Analysis of EGOV Valuation
Exit Multiple (EV/EBITDA)
9.75x
10.00x
10.25x
10.50x
10.75x
11.00x
11.25x
11.50x
10.85%
$14.18
$14.38
$14.58
$14.78
$14.99
$15.19
$15.39
$15.59
10.42%
$14.60
$14.81
$15.02
$15.23
$15.44
$15.65
$15.86
$16.07
9.98%
$15.03
$15.25
$15.47
$15.69
$15.91
$16.13
$16.35
$16.56
9.55%
$15.49
$15.71
$15.94
$16.17
$16.40
$16.63
$16.85
$17.08
9.12%
$15.96
$16.20
$16.43
$16.67
$16.91
$17.15
$17.38
$17.62
8.68%
$16.45
$16.70
$16.95
$17.19
$17.44
$17.69
$17.93
$18.18
8.25%
$16.97
$17.22
$17.48
$17.74
$17.99
$18.25
$18.51
$18.76
7.81%
$17.50
$17.77
$18.04
$18.31
$18.57
$18.84
$19.11
$19.37
7.38%
$18.06
$18.34
$18.62
$18.90
$19.18
$19.45
$19.73
$20.01
6.94%
$18.64
$18.93
$19.22
$19.51
$19.80
$20.09
$20.38
$20.67
6.51%
$19.25
$19.55
$19.86
$20.16
$20.46
$20.76
$21.06
$21.36
a buying price, red cells indicate sell price. Buying threshold assumes 20% upside.
11.75x
$15.79
$16.28
$16.78
$17.31
$17.86
$18.43
$19.02
$19.64
$20.29
$20.96
$21.67
12.00x
$16.00
$16.49
$17.00
$17.54
$18.09
$18.67
$19.28
$19.91
$20.57
$21.25
$21.97
12.25x
$16.20
$16.70
$17.22
$17.76
$18.33
$18.92
$19.53
$20.18
$20.84
$21.54
$22.27
41
UMKC CFA Institute Research Challenge Team
Sensitivity Analysis
WACC
• WACC/Exit Multiple and Perpetuity Growth Rate
25%
20%
15%
10%
5%
Base
-5%
-10%
-15%
-20%
-25%
*Green cells indicates
Implied Perpetuity Growth Rate Associated with Valuation Sensitivity
Exit Multiple (EV/EBITDA)
9.75x
10.00x
10.25x
10.50x
10.75x
11.00x
11.25x
11.50x
11.75x
10.85%
5.17%
5.31%
5.44%
5.56%
5.68%
5.79%
5.90%
6.00%
6.10%
10.42%
4.76%
4.90%
5.02%
5.15%
5.26%
5.38%
5.48%
5.58%
5.68%
9.98%
4.35%
4.48%
4.61%
4.73%
4.85%
4.96%
5.07%
5.17%
5.27%
9.55%
3.94%
4.07%
4.20%
4.32%
4.44%
4.55%
4.65%
4.75%
4.85%
9.12%
3.53%
3.66%
3.79%
3.91%
4.02%
4.13%
4.24%
4.34%
4.44%
8.68%
3.11%
3.25%
3.37%
3.49%
3.61%
3.72%
3.82%
3.92%
4.02%
8.25%
2.70%
2.83%
2.96%
3.08%
3.19%
3.30%
3.41%
3.51%
3.61%
7.81%
2.29%
2.42%
2.55%
2.67%
2.78%
2.89%
2.99%
3.09%
3.19%
7.38%
1.88%
2.01%
2.13%
2.25%
2.37%
2.48%
2.58%
2.68%
2.78%
6.94%
1.47%
1.60%
1.72%
1.84%
1.95%
2.06%
2.17%
2.26%
2.36%
6.51%
1.06%
1.19%
1.31%
1.43%
1.54%
1.65%
1.75%
1.85%
1.94%
a buying price, red cells indicate sell price. Buying threshold assumes 20% upside.
12.00x
6.19%
5.78%
5.36%
4.95%
4.53%
4.11%
3.70%
3.28%
2.87%
2.45%
2.04%
12.25x
6.28%
5.87%
5.45%
5.04%
4.62%
4.20%
3.79%
3.37%
2.96%
2.54%
2.12%