Fellowship Investments CFA Research Challenge

CFA Institute Research Challenge
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Fellowship Investments

NIC Inc.
CFA Institute Research Challenge January 27, 2014
1
Date: 01/27/2014 Ticker • EGOV: NASDAQ Sector/Industry • Technology/Application Software
Current Price • $16.97 Target Price • $16.00 Recommendation • SELL
Highlights
SELL Recommendation: Based on DCF, P/E, and
EV/EBITDA valuation approaches, we developed a target
price of $16.00. This price target yields a potential loss of
2.8%. We are issuing a sell rating on EGOV due to our target
price falling below current market value in addition to
diminishing growth opportunities
State Opportunities Drying Up: EGOV currently has
contracts with 29 states. With some states choosing to
provide eGovernment services in house (Missouri and New
York) and failed attempts to obtain contracts with other states
(Washington, California, and Georgia), there are fewer and
fewer opportunities on the state level.
Uncertainty in Oklahoma: There is significant evidence
pointing towards Oklahoma cutting ties with EGOV after
contract expiration (March 2015). EGOV prides themselves
on their retention rate (90%) and will now be losing Delaware
and potentially Oklahoma in 2015.
Unproven Federal Track Record: Management has stated
their desire to win contracts on the federal level and claims to
have numerous opportunities in the pipeline. However,
EGOV has little experience in dealing with the federal
government and currently has just one contract with the
Federal Motor Carrier Safety Administration (FMCSA).
High Concentration of Revenue: EGOV is dependent on
portal revenues generated from services provided through
contracts with state governments. Competitors such as
Maximus and Accenture offer an array of services to
minimize overall risk. Additionally, 22% of EGOV’s total
revenue comes from Texas.
Earnings/Share:
Q1 Q2 Q3 Q4 Year P/E Ratio
2012A $0.09 $0.09 $0.09 $0.13 $0.40 43.2X
2013A 0.15 0.16 0.08 0.09 0.49 44.3
2014 A/E 0.14 0.17 0.16 0.14 0.61 27.8
2015E 0.16 0.18 0.16 0.14 0.64 26.6
2016E 0.17 0.19 0.19 0.16 0.71 23.9
Valuation
Est. Price Weight
DCF $15.10 (1/3)
P/E $16.30 (1/3)
EV/EBITDA $16.50 (1/3)
Target Price $16.00
Figure 1: Source Bloomberg

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Figure 4: Timeline
Source Company Website
Business Description
Founded in 1991, NIC Inc. (EGOV) provides eGovernment
services in the United States. EGOV develops and implements
official government websites on the local, state, and federal
level. Headquartered in Olathe, Kansas, they provide
eGovernment solutions to more than 3,500 government
agencies across the nation. The company recognizes revenue
through two segments, Portal (94%) and Software & Services
(6%). The portal segment generates revenue through their
innovative self-funded transaction based model and from fixed
revenue through time and material contracts. The transaction
charges are paid by the end user through a convenience fee,
typically ranging from $1-$2. The revenues provided by these
portals are broken into four categories, Interactive Government
Services (IGS), Driver History Records (DHR), Portal Software
Development, and Portal Management. DHR customers are
typically insurance companies and EGOV considers this their
core source of revenue that is used to fund new services. IGS
revenues are transactions conducted by business and consumer
users that are not DHR revenues such as hunting and fishing
licenses and criminal history searches. Portal management and
portal software development contains revenues generated by
the introduction of new software as well as fee based contracts
with Delaware and Arizona. The majority of revenue generated
by the software and services segment is the result of a federal
contract between EGOV and the Federal Motor Carrier Safety
Administration.
With contracts in 29 states and established relationships with agencies across the country, EGOV has
a strong foothold in eGovernment on a state level. However, despite having contracts with 58% of the
states in the U.S., their contracts only consist of 44% of the total U.S. population. More specifically, 9
of the 10 most populated states are not under contract with EGOV. Expansion into more highly
populated states and penetration into the federal market are necessary for EGOV to continue its
growth trajectory.
Figure 2: Source Company Data
Figure 3: Source Company Data

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Industry Overview and Competitive Positioning
Companies offering eGovernment solutions are part of the software and programming industry which
has experienced significant growth over the past decade. This industry is highly competitive due to
large revenue opportunities from contract wins with government agencies along with transaction fees
from payment processing. Additionally, there are growth opportunities resulting from increased
internet usage and the move to a paperless world. With firms competing to win long-term contracts
and provide their software and services to a diverse range of clients, companies must find ways to
compete on factors such as cost, security, performance, and overall functionality.
EGOV has a dominant position for eGovernment services on a state level, but have yet to establish a
presence with the federal government. In our opinion, EGOV has three direct competitors, Tyler Tech
(TYL), Maximus (MMS), and Accenture (ACN). We define a direct competitor as one who competes
for one or more of the services that EGOV offers to state governments or one who has established
contract relationships at the federal level. TYL poses the biggest threat to EGOV because they focus
on providing services to local governments and the public sector utilizing information management
solutions. In 2013, TYL began providing e-filing court document services for Texas, which was a
contract previously held by EGOV. This is a good indicator that EGOV may face stiffer competition for
acquiring new state contracts or services in the future. ACN is the leader in eGovernment and has
contracts both internationally and with the U.S. federal government. For example, in September of
2014, ACN was awarded two contracts to manage the U.S. Army’s general fund financial system with
an estimated value of $53.1 million.
1
Accenture’s size and reputation could make it difficult for EGOV
to obtain valuable and highly sought contracts, which we believe are crucial in providing long-term
growth for EGOV. MMS also has a large presence in the federal market, specifically with their contract
for the Affordable Care Act. With opportunities at the state level slowing down, EGOV has made it a
priority to win contracts at the federal level. However, ACN and MMS both have established positions
in this market, raising questions regarding the likelihood that EGOV can become a legitimate
competitor in this space.
We view indirect competitors as those who do not currently compete with EGOV on a local, state, or
federal level, but could become a threat due to the nature of their business. For example, National
Information Services (FIS) is a payment processor that offers ePayment and government payment
solutions. Given EGOV’s dependence on their transaction-based revenue, FIS poses a threat if they
are able to offer safer or less costly payment solutions. Furthermore, both Microsoft (MSFT) and
Oracle (ORCL) have well-established brands with the necessary software and programming
capabilities to offer similar services as EGOV. While they do not currently compete with EGOV for
contracts, it is important to consider what the impact would be should they enter this niche market.
Increasing Internet Usage
As shown in Figure 5, the percentage of people using the internet continues to rise. This should drive
demand increases for eGovernment services as the world becomes increasingly connected. With
over 70% of the U.S. population using the internet, companies that provide elite online and mobile
services will establish themselves as a leader in a fast growing market. Less developed countries
such as India, Mexico, and South Africa offer long-term growth opportunities as they typically lag in
technological advancements.
1
Accenture Company Website
http://newsroom.accenture.com/news/accenture-awarded-two-contracts-to-manage-us-armys-general-
fundfinancial-system.htm

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Figure 6: Percentage of countries offering mobile
government services in 2012 and 2014
Source: United Nations E-Government Survey
Figure 7: World and regional eGovernment leaders
Figure 5: Change in percentage of people using the Internet, selected countries
Global Expansion
There is a clear trend occurring for
governments across the world to offer more
services online. This allows governments to
reduce their budgets while simultaneously
providing their citizens with conveniences.
Eliminating the use of paper-based forms to
collect citizen information, which are costly
and time-consuming to process, enable
these budget contractions and efficiency
enhancements. In addition to increases in
internet usage globally, smartphones are
becoming more and more prevalent. As
demonstrated in Figure 6, government
agencies are ensuring that eGovernment
services are mobile friendly, providing
companies long-term growth opportunities on
an international level. This becomes evident
when considering that countries with lower
levels of income have barely entered the
market. EGOV has repeatedly informed
investors that their focus remains primarily in
the United States.; however, international
opportunities remain a possibility. EGOV has
inherent efficiencies by operating solely in
the U.S., such as fewer bureaucratic
procedures to handle in addition to increased
focus on their existing customer base. However, competitors such as Maximus and Accenture are
able to establish their foothold in a much larger international market. According to NXP
Semiconductors (NXPI), “only 33% of government documents are digital today, with that number
expected to reach 42% by 2017. This will provide access to roughly 1B+ new eDocuments.”
2
That
number should continue to escalate beyond 2017.
2
NXPI Analyst Day Presentation 2014

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Governmental Constraints
One threat to this industry is the bureaucratic nature of providing services for governments. According
to EGOV’s CFO, Steve Kovzan, it is a lengthy process from the initial discussion with governmental
agencies to contract negotiations and agreement of services. This entire process typically takes 12-18
months. Additionally, factors such as elections and third party interests can deter contract
negotiations or prevent them entirely. For example, EGOV was chosen as the winner during RFP
negotiations for the Washington state contract. However, insurance companies lobbied to prevent
EGOV from formally entering contract negotiations to avoid paying higher driver history record fees. A
letter to Washington Governor Jay Inslee from Karl Newman, President of the NW Insurance Council
reads, “NW Insurance Council represents 12 insurance groups and companies writing auto, home, life
and business insurance in the Northwest. Our member companies employ more than 1200 people
and our Associate Members represent more than 1000 independent insurance agents in our state.”
3
After establishing their presence, NW Insurance then requested Inslee to prohibit EGOV from
obtaining a contract despite being granted authority by the Department of Enterprise Services. See
Appendix 10 for the entire letter.
Investment Summary
High Risk
We are issuing a SELL recommendation with a target price of $16.00. Accounting for an assumed
$0.50 special dividend in F2015, this investment exposes investors to a potential loss of 2.8%. Our
recommendation is justified by EGOV’s uphill battle in the federal space, limited opportunities at the
state level, and a loss of services provided because some states are seeking more flexibility when
selecting software vendors. Additionally, there is substantial risk associated with EGOV due to their
small-cap growth classification. Stocks of this nature typically experience significant volatility. This is
evident with EGOV considering their stock price has fluctuated by 53.7% over the past 52 weeks. A
high return would be necessary to justify the risk associated with EGOV, which is unlikely based on
our analysis. To assess these various risks, we created a per capita metric of $1.82 to better estimate
the consequences or rewards from losing/gaining state contracts. For this metric, we took total F13
revenue divided by the total population of all states under contract with EGOV. Using this logic, we
can forecast with reasonable confidence the implications on EGOV’s revenue from various contract
scenarios.
Concern at State Level
Texas
As of 3Q14, the state of Texas represented 22% of total revenues for EGOV. Over the past year,
EGOV struggled to grow revenues in Texas after they lost a contract for e-filing court documents in
September 2013. These services were awarded to TYL after receiving a contract from the Texas
Office of Court Administration to manage the e-filing of court documents.
4
Tyler Technologies expects
to manage all of the e-filing of court documents for Texas with expected annual revenues of $17-$19
million.
5
This is troublesome for two distinct reasons. EGOV earned roughly $4 million annually from
e-filing court documents, demonstrating TYL’s ability to generate four to five times the revenue that
EGOV earned from the same service. Additionally, it is concerning that TYL is capable of winning
services from a state in which EGOV already has a master contract. While Texas did begin providing
vital record services in Texas with expected revenues of $4 million annually, this merely off-sets the
loss of court documents. Furthermore, due to the nature of vital records, there is little room
3
NW Insurance Council letter to Washington Governor Jay Inslee;
http://www.nwinsurance.org/ProactiveHighlights2013/NWIC%205024%20Letter%20to%20Gov.pdf
4
Tyler Technologies. (2014). F2013 10-K.
5
Tyler Technologies. (2014). F2013 Annual Report

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for revenue to expand beyond $4 million annually, while the court filing service that TYL won has
substantial room for growth. In December 2012, the Texas Supreme Court mandated e-filing services
for the Court of Criminal Appeals and the 14 Courts of Appeal effective January 1, 2014 with e-filing in
all other counties becoming mandatory on a graduated schedule through July 1, 2016.
6
Oklahoma
In 2001, Oklahoma was added to EGOV’s portfolio of web portals, maintained by subsidiary
Oklahoma Interactive. In 3Q12, EGOV stated that losing Oklahoma “could significantly reduce the
company’s revenues and profitability.”
7
In September 2014, the Oklahoma spokesman for the office of
Management and Enterprise Services, John Estus, announced that Oklahoma would not be renewing
their contract with EGOV. Based on our per capita metric of $1.82, EGOV’s revenue would decrease
by $7 million annually or 2.83% of F2013 revenue. While this is a relatively small portion of total
revenue, the impact on reputation and the shift toward states wanting more flexibility with their
contracts has more severe, long-term implications. Oklahoma Secretary of Finance, Preston
Doerflinger, is quoted saying, “The needs of agencies today are very different than the needs of
agencies ten years ago.”
8
Furthermore, John Estus mentioned that EGOV could continue to compete
for contracts in the state; however, the process will promote competition and leave discretion to
individual agencies. Additionally, Estus cited numerous criticisms regarding the contract with EGOV
and believed that it was unwise for the state to put all of their eggs in one basket. Moving forward,
Estus guided to a 13 month timeline to assure the public that no complications would arise from the
transition. In an interesting development, Estus announced that the state of Oklahoma had recently
entered into a partnership with the state of Texas. This new partnership enables both states to have
full access to current and past contracts, enabling greater flexibility in selecting vendors. Given the
recent headwinds in Texas and the fact that Texas represents 22% of EGOV’s total revenue, this is a
major area of concern. Should Texas choose a route similar to Oklahoma, EGOV would struggle to
recover.
Delaware, Arizona and Virginia
After 2Q14, EGOV’s contract ended with Arizona and they will no longer be conducting business in
that state. Based on the 2013 10-K, Arizona accounted for approximately 1.0% of the company’s total
consolidated revenue, or $2.5 million annually. Additionally, Delaware was set to end in 3Q14;
however, they renewed the contract for an additional 6 months to assist in the transition process.
Delaware will no longer partner with EGOV for their state portal after 1Q15. According to EGOV
management, Delaware had a fixed fee contract that generated $2.2 million annually or 0.90% of F13
total revenue. These contract losses cause worry when coupled with Texas headwinds and the threat
of losing Oklahoma. Furthermore, issues in Virginia beginning in 2012 illustrate the trend of states
wanting flexibility in the services they offer. EGOV’s subsidiary, Virginia Interactive, was established in
1997 and was one of EGOV’s longest running contracts. In April 2012, Virginia Information
Technologies Agency announced EGOV’s services would be broken up in order to increase
competition, flexibility, and allow for greater transparency.
9
The state of Virginia awarded contracts to
multiple vendors. For example, CapTech Ventures will be responsible for Virginia’s website while AIS
Network, Cyberdata Technologies and Sitevision received contracts for web hosting. Additionally,
Broadpoint Technologies and Cyberdata Technologies will be responsible for the operations,
maintenance, and management of the site. After awarding new contracts to various vendors, EGOV
still supports several services for Virginia, including the development of new online applications.
However, those services are winding down and revenues fell from $1.6 million in 2Q13 to $700,000 in
6
eFileTexas; http://www.efiletexas.gov/
7
3Q12 quarterly report
8
Oklahoma City Record. (2014, 10 1). End of state's contract with Oklahoma Interactive gives agencies vendor
choices. Retrieved from The Journal Record.
9
Virginia Information Technologies Agency. (2012). VITA COMPLETES NEW APPROACH FOR EGOV
SERVICES.

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Figure 8: Team Estimates
2Q14. Combining these losses, EGOV’s total revenue decreases by approximately 1.90%.
Considering EGOV’s core business lies at the state level and numerous setbacks have occurred over
the last several years, we remain pessimistic regarding EGOV’s ability to drive earnings growth.
Unproven Federal Track Record
In the third quarter of 2009, EGOV acquired a federal contract with the U.S. Department of
Transportation to develop and manage a National Motor Carrier Safety Administration Pre-
Employment Screening Program (PSP). The PSP was off the ground and fully operational in F2010.
We estimate the impact of this program to be $8-$10 million a year. Since the program started,
management has communicated to investors that federal contracts would be a pillar of growth for the
company. While it remains a possibility that management has multiple opportunities in the pipeline,
there has been nothing to substantiate these claims. Despite entering the federal space four years
ago, EGOV has been unable to win another federal contract or give hard evidence that another
contract will be awarded in the near future. Furthermore, EGOV faces fierce competition in this space
from firms such as Maximus and Accenture, both of which are in better positions to capture any
meaningful federal opportunities. These reasons lead us to believe that EGOV will be unable to
strengthen their foothold with the federal government. Uncertainty surrounding when a new contract
will be obtained and the value associated with it has convinced us to omit any speculation of these
contracts in our valuation.
Valuation
Our target price of $16.00 was calculated by
placing equal weights on the DCF, EV/EBITDA,
and P/E valuation methodologies. To promote
flexibility for our valuation, we generated best,
worst, and business as usual (base) scenarios to
accommodate for evidence that supports various
outcomes. In depth explanation of how we
forecasted these scenarios will be discussed in
the financial analysis. Ultimately, we placed
weights of 45%, 35%, and 20% on the worst,
base, and best case scenarios, respectively.
These scenarios allowed us to consider different
events and their potential impact on revenue, net
income, and EPS estimates.
Price Target Sensitivity:
Various weights placed on our distinct
scenarios
Valuation Methods
DCF EV/EBITDA Multiple P/E Multiple Price Target
Worst Base Best
100% 0% 0% $14.30 $15.10 $15.20 $14.90
75% 15% 10% $14.70 $15.80 $17.20 $15.40
50% 25% 25% $15.20 $16.40 $16.60 $16.10
45% 35% 20% $15.10 $16.50 $16.30 $16.00
00
25% 25% 50% $16.00 $17.70 $17.30 $17.00
10% 15% 75% $16.70 $18.60 $18.10 $17.80
0% 0% 100% $17.40 $19.40 $18.80 $18.50

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Figure 10: Source Bloomberg
Multiple Methodologies
We used P/E and EV/EBITDA multiples as part of our valuation so we could consider both historical
and current market valuation of EGOV. Our estimated multiples were determined by comparing
current and past P/E and EV/EBITDA multiples in addition to ROE and EPS growth for both EGOV
and their competitors. Using the P/E approach, we developed a 23X, 25X, and 22X multiple for the
business as usual, best case, and worst case scenarios, respectively. We believe the use of different
multiples were necessary to reflect different growth opportunities present in these different scenarios.
Using the EV/EBITDA approach, we selected 11.2X, 12.5X, and 10.5X multiples for the business as
usual, best case, and worst case scenarios, respectively. This ultimately led to a price target of
$16.30 using the P/E approach and $16.50 using the EV/EBITDA approach.
DCF
Revenues are closely tied to the contracts that
EGOV obtains. With an assumed rate of $1.82
per capita, we can generate rough estimates
regarding the impact on revenues that losing and
gaining state contracts have in our different
scenarios. Therefore, the DCF allows us to
capture future growth opportunities and threats.
Using a cost of equity of 8.89% and a terminal
growth rate of 4.00%, we derived a price target of
$15.10.
Financial Analysis
3Q14: In the third quarter, EPS was $0.16 cents versus Bloomberg consensus estimates of $0.15.
This represents EPS adjusted growth of 23%. We adjusted EPS from the year before up $0.05 a
share to reflect the one-time $5.1 million charge off for the state of Pennsylvania. This growth was
primarily driven by strong same state portal revenue growth of 9% for the quarter. IGS revenues
increased 11% for the quarter in part due to higher revenues from payment processing, motor vehicle
registrations, court record searches, and professional license renewals. Connecticut began
generating DHR revenues in April and generated $1.1 million in revenues during the third quarter.
Portal revenues from Pennsylvania and Wisconsin were $2.3 million and $1 million.

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2Q14: In the second quarter, EGOV increased EPS 6.25% YoY earning $0.17. Revenues hit a record
high during 2Q14 at $71.2 million, up 8% YoY. Same state growth was 8% for the quarter, dragged
down by the loss of service revenue in Texas. Revenues from Virginia were $700K in 2Q14 compared
to $1.6 million in 2Q13. This comes on the heels of the state of Virginia’s decision to break up their e-
Government services in order to garner a diverse platform of IT vendors.
Forecasts
Forecasts developed for EGOV need
to be sophisticated enough to capture
both the array of growth opportunities
and obstacles for EGOV going
forward. With this in mind, we created
a three-prong scenario analysis that
identifies the most likely growth
prospects for a best case, worst case,
and business as usual scenario.
Assumptions in all Three Scenarios
Due to the recent news of the Louisiana state contract being finalized, we assumed that Louisiana
would start earning $0.50 per capita beginning in F15 and full revenue recognition of $1.82 per capita
beginning in F16. We delay full revenue recognition because EGOV will launch a pilot phase for the
first year. These metrics represent a $2.3 million and $8.4 million increase in revenue for F15 and
F16, respectively or a 0.90% and 3.40% increase in total revenue. Furthermore, EGOV’s contract with
Delaware will expire beginning 2Q15, thus, we eliminate the revenue generated from that contract in
all three scenarios. EGOV received a fixed fee of $545K per quarter, or $2.2 million annually,
representing a 0.94% loss in total revenue. Additionally, we expect EGOV to continue issuing a
special dividend. The reason for this is twofold; they have given a special dividend the last 7 years in
a row and management recently announced a $0.50 special dividend for F2014. We expect the
special dividend will increase to $0.55 for F2016 and F2017 with an additional increase to $0.60 in
F2018. EGOV maintaining a zero debt capital structure is also assumed throughout our analysis.
Best Case
For our best case scenario, we assume that EGOV acquires contracts with Michigan and North
Carolina in F2016. Additionally, we assume that EGOV will have same state growth on the high end
of management guidance. Management expects same-state growth to be in the 8-10% range. Given
the discussions about potential contracts and the current relationships EGOV has with Michigan and
North Carolina, we believe that this scenario has potential to become reality. However, in our best
case scenario, it should be noted that EGOV does not acquire any federal contracts. We believe that
any analysis containing future federal contracts will be speculative at best. Using our $1.82 per capita
metric, we can assume that the combined impact of gaining Michigan and North Carolina will increase
revenues by $36 million annually or a 14.4% increase in total revenue. Given the length of time it
takes to procure a state contract till the time EGOV begins recognizing full revenues from a state, we
assume full revenues will not be generated until 4Q16. We expect these incremental revenues will
grow within management’s same-state growth guidance. For F2016 we forecast EPS of $0.75 versus
Bloomberg consensus estimates of $0.74.
Business-As-Usual
Our business as usual scenario takes the middle of our two extreme cases. We assume that EGOV
continues to experience same state growth within guidance while retaining their Oklahoma contract.
Furthermore, we assume EGOV is unable to acquire any new contracts over our forecast period. In
Figure 12: Source: Team Estimates and Company Data

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this scenario, we expect that EGOV will be in line with Bloomberg consensus estimates until the end
of F2014. In F2015 and F2016 we forecast EPS of $0.64 and $0.72 respectively, missing Bloomberg
consensus estimates by $0.04 and $0.02.
Worst Case
In our worst case scenario, EGOV experiences same-state growth of 6.0% - 8.0% on average along
with no new state contracts over our forecast period. Furthermore, we expect that EGOV will lose the
Oklahoma contract. Given the announcement by Oklahoma spokesman John Estus in addition to
Texas headwinds slowing same state growth for 22% of total revenue, we placed a higher weight
(45%) on this scenario to reflect what our research supports. Using our per capita metric, we assume
that the loss of Oklahoma will reduce revenues by $7.0 million annually or 2.83% of total revenue. In
F2015 and F2016 we forecast EPS of $0.64 and $0.69 respectively. Our estimates imply that EGOV
misses Bloomberg consensus estimates by $0.04 and $0.05 for F2015 and F2016.
Investment Risks
Acquisition of Federal Contracts
If EGOV acquires more Federal contracts and expands their transaction based model within the
federal government, this would drive revenue growth. EGOV’s success is derived from their self-
funded transaction based model. Furthermore, management believes that language in the 2014
Omnibus bill promotes self-funded projects and expects to receive additional federal contracts in the
future. Acquiring new federal contracts could stimulate growth and make EGOV more attractive.
Contract wins for highly populated states
EGOV is missing out on nine out of the ten most populated states in the U.S. Should EGOV obtain
one or more of these highly populated states sooner than anticipated in our best case scenario,
EGOV will outperform our expectations. There is a fair amount of evidence indicating that EGOV
could land contracts with North Carolina and/or Michigan in 2015 or 2016. EGOV already has
relationships established in both states. Earlier this year, Michigan signed a five year contract with
renewal options for EGOV to provide online election services. Additionally, North Carolina signed a
contract with EGOV in the beginning of 2013 giving EGOV authority to offer services providing full
disclosure to property owners, contractors, and other parties who request that information.
Stronger Than Expected Growth
Management has guided 8.0%-10.0% same-state growth. Rolling out new services or faster than
expected growth from existing services could increase revenue and position EGOV better than we
anticipate. For example, newly acquired Wisconsin is one of the largest hunting & fishing states in the
country and EGOV developed a service specifically catered to the Department of Conservation
agency.
Higher Margins
If EGOV’s gross and operating margins expand faster than we anticipate, our earnings forecast will be
inaccurate. According to EGOV CFO Steve Kovzan, states typically have 30%+ gross margins in their
first year of revenue with a goal of 40%+ over time. EGOV obtained Connecticut in 2014, Wisconsin in
2013, and Pennsylvania in 2012. As contracts with these states mature, EGOV should see their
margins increase.
Incorrect Weighting System
We derived our price target using a scenario analysis based on best, worst, and business as usual
approaches. Incorrectly weighting these scenarios could have significant impacts on our price target.
If the best case scenario becomes a reality, our price target will not accurately reflect EGOV’s true
position resulting from placing a low weight (20%) to our final price target.

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Appendix Table of Contents
Order Appendix Name Page #
Appendix 1 Income Statement – Business as Usual 12
Appendix 2 Segment Data – Business as Usual 12
Appendix 3 Income Statement – Best Case 13
Appendix 4 Segment Data – Best Case 13
Appendix 5 Income Statement – Worst Case 14
Appendix 6 Segment Data – Worst Case 14
Appendix 7 Balance Sheet 15
Appendix 8 Statement of Cash Flows 16
Appendix 9 Map of EGOV’s State Contracts 16
Appendix 10 Letter to Washington Governor Jay Inslee 17

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Appendix 1 – Business as Usual Income Statement
Appendix 2 – Business as Usual Segment Data

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Appendix 3 – Best Case Income Statement
Appendix 4 – Best Case Segment Data

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Appendix 5 – Worst Case Income Statement
Appendix 6 – Worst Case Segment Data

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Appendix 7 – Balance Sheet

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Appendix 8 – Statement of Cash Flows
Appendix 9 – EGOV’s State Presence

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Appendix 10 – Letter to Washington Governor Jay Inslee

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Disclosures:
Ownership and material conflicts of interest:
The author(s), or a member of their household, of this report does not hold a financial interest in the
securities of this company.
The author(s), or a member of their household, of this report does not know of the existence of any conflicts
of interest that might bias the content or publication of this report.
Receipt of compensation:
Compensation of the author(s) of this report is not based on investment banking revenue.
Position as a officer or director:
The author(s), or a member of their household, does not serve as an officer, director or advisory board
member of the subject company.
Market making:
The author(s) does not act as a market maker in the subject company’s securities.
Disclaimer:
The information set forth herein has been obtained or derived from sources generally available to the public
and believed by the author(s) to be reliable, but the author(s) does not make any representation or warranty,
express or implied, as to its accuracy or completeness. The information is not intended to be used as the
basis of any investment decisions by any person or entity. This information does not constitute investment
advice, nor is it an offer or a solicitation of an offer to buy or sell any security. This report should not be
considered to be a recommendation by any individual affiliated with CFA Society Kansas City, CFA Institute
or the CFA Institute Research Challenge with regard to this company’s stock.
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