Surviving the dot-com bust

• By Dibya Sarkar
• May 16, 2002

Two companies specializing in e-government software and services have weathered

the dot-com industry bust, either gaining in profitability or nearing it

during the past year.

Both EzGov Inc. and NIC (formerly the National Information Consortium)

provide software and services for Web portals and related applications,

with most of their business coming from the state and local government market.

Mirroring the fallout in the commercial market, many government-focused

Internet firms folded or were bought out during the past year, including

Fedcenter.com and govWorks (as documented in the movie "Startup.com").

But EzGov and NIC believe they have it made.

Atlanta-based EzGov had its second consecutive profitable quarter in

the first quarter of this year, earning more than $6 million in revenue.

That puts the company on pace to double its 2001 revenue of $12.2 million,

company officials said. Plans include making an aggressive push into the

federal market.

Overland Park, Kan.-based NIC last month reported a 54 percent increase

in revenues over the same period last year. During an April 25 Webcast conference

call, chief executive officer Jim Dodd said it was the "finest quarter"

in the company's 11-year history, reporting a record-high $12.4 million

in revenue.

The public company reported positive earnings before interest, taxes,

depreciation and amortization of $500,000 in the first quarter, compared

with a loss of $500,000 in the same period last year. Net loss for the current

quarter was $900,000, or 2 cents per share.

"I think if they've made it this far, they'll survive," Thomas Meagher,

first vice president for equity research at BB&T, said of the two companies.

"There's no doubt about that. But the question, obviously from an investor

standpoint, is, 'Are the numbers going to be there?

EzGov is a much more

attractive company in terms of profitably, he said."I think the difference

between EzGov and NIC is that the EzGov model is essentially a software

licensing model whereas I believe NIC is looking more to the outsourced

service model," Meagher said. "I think the software licensing model can

be a lot more profitable in a much quicker time frame."

During the past year, EzGov has done just that. It scaled back its hosting

services and focused more on its core business: software development and

licensing, said Ed Trimble, president and CEO.

The company has formed several major alliances with integrators, such

as EDS, IBM Corp. and PricewaterhouseCoopers, which use its FlexFoundation

product, a Web-based commercial off-the-shelf software platform for payments,

e-forms and business rules.

Early last year, EzGov suffered a terrible blow with the accidental

death of co-founder Bryan Mundy. Although devastated, the company stepped

up its efforts to succeed and its board of directors became more involved,

Trimble said. "I think [Mundy's death] brought us closer on a personal and

emotional level," he said.

Since then, the company expanded to 170 employees and established offices

in Washington, D.C., Amsterdam and London. It has more than 60 public-sector

clients, of which 15 are state governments and international governments.

Internationally, the company has established itself in Great Britain

through an alliance with EDS. The companies built an online tax filing system

for the Inland Revenue, the equivalent of the U.S. Internal Revenue Service,

and an online money claims application for the Court Service, an executive

agency that carries out administrative and support tasks for courts there.

NIC continues to focus on the state and local government market. The

company provides online government services for businesses and citizens

for more than 1,000 state and local agencies, reaching nearly 50 million

people, according to company officials. The company also has helped develop

and manage 16 state government Web portals.

The company usually offers three means of financing e-government applications:

The government pays for the entire implementation up front; the company

assumes the technological investment, recouping it by charging convenience

fees for e-government applications (commonly called a "self-funding" model);

or a combination of the two.

Dodd said that more than two-thirds of NIC's revenue comes from transaction-based

revenues and outsourcing contracts, "and we see that kind of mix into the

indefinite future."

Meagher said industry analysts have never "really been enamored" with

the self-funding model because adoption rates for e-government have been

slow. "I think it really caused the investment community some concern because

[NIC] would build the site, they would maintain it and they would hope to

get revenues off of it at some point in time, and that was a very, very

slow process, much slower than they had anticipated in terms of adoption,"

he said. "And that's why it took a lot longer I think than they had anticipated

to get themselves to where they are right now."

Although governments are struggling financially, EzGov and NIC are optimistic

about their growth this year. Trimble said that lawmakers and officials

need to be educated about how e-government projects can benefit their constituents

and that they need to justify their projects to a greater extent.

NIC's Dodd said certain security and data retrieval projects might be

"accelerated" due to homeland security. For example, infrastructure security

and the integration of public criminal history records directly intersect

with Web-based initiatives surrounding homeland security.

However, Meagher said e-government is a "partial casualty" of Sept.

11.

"It's kind of been put on the back burner in my assessment in light

of everything else that has to happen," he said. "And so between that and

the budget shortfalls, if it comes down to putting driver's licenses online

or doing something else that would be homeland security-related, my sense

is the states are going to pay attention to that first."