NIC Inc
Q1 2020 Earnings Call Transcript

Published: 27 Apr 2020

[Operator:]

Good day and welcome to the First Quarter Earnings Conference Call. Today’s conference is being recorded. At this time, I would like to turn the conference over to Angie Davids. Please go ahead.

[Angie Davids:]

Thank you, operator. Good morning, everyone, and welcome to NIC’s First Quarter Earnings Call. The press release for NIC’s first quarter 2020 earnings announcement is issued 30 minutes ago. Our earnings release is also available on our corporate www.egov.com/investor-relations. You may also call our headquarters at [phone] and we will email the information to you. Joining us on the call today are NIC’s CEO, Harry Herington; and Steve Kovzan, NIC’s Chief Financial Officer. Following a reading of our cautionary statement regarding forward-looking information, our CEO and CFO will deliver prepared remarks and we’ll open for questions. Any statements made during this call that do not relate to historical or current facts constitute forward-looking statements. These statements often address the company’s potential financial performance for the 2020 fiscal year or future fiscal years, estimates, projections, expected length of contract term, statements relating to the company’s business plans, objectives and expected operating results, statements relating to potential new contracts of renewal, statements relating to the company’s expected effective tax rate, statements relating to possible future dividends and share repurchases, statements related to the ongoing impact of the COVID-19 pandemic and other possible future events, including potential acquisitions and the assumptions upon which those statements are based. Forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties which may cause actual results to differ materially from the forward-looking statements. These risks include regional or national business, political, economic, competitive, social and market conditions, including various termination rights of the company and its partners, the ability of the company to renew existing contracts in whole or in part, and to sign contracts with new federal, state and local government agencies, the impact of potential information technology, cyber security or data security breaches or incidents, the company’s ability to identify and acquire suitable acquisition candidates and successfully integrate any acquired businesses, and the impact the COVID-19 pandemic may have on demand for the company’s services as well as its government agency partners, its workforce and the broader economy. You should not rely on any forward-looking statement as a prediction or guarantee about the future. A detailed discussion of risks and uncertainties that could cause actual results and events to differ materially from such forward-looking statements is included in the section titled Risk Factors and Cautions About Forward-Looking Statements in the company’s most recent Forms 10-K and subsequent reports filed with the SEC. These filings are available at the SEC’s website at www.sec.gov. Any forward-looking statements made during this call speak only as of the date of this call. Except as may be required by applicable law, the company undertakes no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events, or otherwise. Now, it is my pleasure to introduce Harry Herington, NIC’s Chief Executive Officer and Chairman of the Board.

[Harry Herington:]

Thank you, Angie, and thanks to everyone joining us for todays call. As you have probably already predicted, the impact of COVID-19 on NIC and our unique role assisting our government partners with their response will shape a great deal of what we will discuss with you this afternoon. Many of our investors know I’m a very straightforward individual and that NIC has a long history of providing appropriate transparency into our business and strategies, and this call will be no different. Steve Kovzan and I will provide relevant operational and financial results for the first quarter of 2020. However, a lot occurred in the final weeks of the quarter as the COVID-19 crisis gripped our nation. Needless to say, NIC’s priorities quickly evolved as our government partners responded to this unprecedented event. To begin, I would like to recognize the tremendous job the government has done navigating through the COVID-19 pandemic. For the first time in history, governments across the nation were forced to close agency offices and transitioned almost all government operations online. In addition, this occurred during a critical time when citizens and businesses needed access to government information, guidance, and services the most. The challenges our government faces are unprecedented, and many of the agencies NIC supports, pursued creative strategy to keep government operating, including transitioning many of their services online as branch offices physically closed. I would also like to recognize NIC’s nearly 1,000 employees who have gone above and beyond, working unbelievable hours these past several weeks and keeping our operations running smoothly, as NIC quickly transitioned into a completely virtual workforce and delivering essential services to our government partners and communities during this national pandemic. This crisis has absolutely brought out the best in NIC employees, and their incredible efforts have taken many forms, from our technology teams rapidly adding, hosting capacity at all hours of the day and night to ensure that COVID-19 informational websites could withstand traffic spikes that were at times in excess of 2,000% of normal traffic, to our application specialists who would routinely receive a phone call late in the day with a request from the governor’s office and then work non-stop through the night to deliver tested solutions that’d be launched to coincide with the governor’s press conference. The scenarios I just described happened countless times during the past few weeks and illustrate our commitment to doing our best to support government and help agencies take care of the citizens and businesses they serve every day. Working virtually side by side with our government partners, we have launched more than 130 COVID-19 specific services since mid-March, as well as dozens of informational websites that state agencies are using as a primary communication channel. Here are some of the examples of Essential Solutions NIC has quickly deployed. In Louisiana, our team digitized a manual triplicate form process that COVID-19 testing teams in the field are required to complete, and transitioned it to a simple, single, easy-to-use online submission. The service was so successful that it’s now being used in more than 200 testing facility statewide, including drive-through locations. In addition, our team in West Virginia recently implemented the same technology and launched a similar solution for its testing locations. In Kansas and Rhode Island, our teams designed and launched a personal protective equipment marketplace that allows suppliers to fast-track making personal protective equipment available to necessary healthcare establishments. And in Virginia, we provided a suite of services to enable the state to rapidly process an unprecedented number of unemployment claims by quickly adding call center functionality and deploying a mobile friendly solution for residents to file weekly claims electronically. In the first week since the application launched, more than 52,000 Virginians used this mobile service to submit unemployment filings. And at point in time, we have more than 2,500 people using the application simultaneously. We are proud of the essential services NIC teams have provided to government during this crisis and are thankful for the trust they have placed in us during this critical time. Our multidimensional COVID-19 response has required additional investment to increase bandwidth and expand our technical and operational capacity to keep digital government open for business. These unanticipated near-term investments were in direct response to pandemic support and were not planned for. Yet as an essential service provider to government and as part of our value proposition, we made the decision to do what was necessary to keep our digital solutions functioning under unprecedented user demand. While these investments might have a modest negative near-term impact to our bottom line, we are confident this is correct decision for NIC because it was the right thing to do for our communities. While no company, including NIC, is immune to the financial impacts of COVID-19, we do believe that because of NIC’s history, the confidence placed in us by our government partners and the strength of our business model, NIC will remain strong throughout this crisis and beyond. Government faces a potential long-term period of reduced tax revenues, expanded recovery payments, and tremendous competition for how to use each budget dollar. NIC’s proven transaction-based model provides government with the confidence that their digital services will continue to serve and expand as necessary and will not yet be another draw on their limited agency budgets. In recent days, the media and government leaders have focused on reopening the economy and businesses returning to work. It is important to realize NIC never left. Prior to and during the COVID-19 response, NIC continues to secure new long-term contracts and deliver operational wins. To-date, this year, we have continued our 2019 momentum by securing several contract extensions. These include rebids or extensions for enterprise businesses in Alabama, Kentucky, Louisiana, New Jersey, New Mexico, and the Department of Transportation’s pre-employment screening program, which are more fully described in our earnings release. We have maintained phenomenal long-term relationships with all these partners, and we thank them for continuing to place their trust in NIC. NIC also secured a significant win with our RXGov portfolio. On the same day that Maine issued their stay-in-place order in March, the state awarded NIC a five-year contract for our RXGov platform, becoming the third state to sign up for our RXGov solution to manage prescription drug monitoring. In addition, I’m pleased to announce we recently finalized the implementation of our cannabis licensing solution for the state of Missouri. And the state has contracted for additional module, which NIC will be deploying over the next several months. Our agreement in Missouri runs through mid-2024 with renewal options that the state may exercise through mid-2026. I would like to personally thank Missouri and our long-term partner in Maine, for giving us the privilege to deploy our industry-leading vertical solutions in their states. Finally, there is tremendous concern surrounding the unknown economic impact of COVID-19 on our country. However, I would remind everyone, for the past 28 years, NIC’s core business has remained financially stable in both good economic times and bad. We are debt free and we continue to generate consistent cash flows, which provides a significant financial flexibility and confidence in these uncertain times. This financial flexibility enabled us to repurchase over 241,000 shares under our $25 million repurchase program at highly attractive prices during a five-day period in mid-March, when the market first started to negatively react to the COVID-19 crisis. We executed a 10b5-1 automated trading plan under our recent opening trading window that commenced when the trading window closed on March 18. However, despite the strength of our balance sheet and the confidence we have in our business, we canceled the plan on March 22, because we felt it was prudent, given the uncertainty of the pandemic on the broader economy. As I say in uncertain times, cash is king. And that was the guiding principle with our decision. To this end, I will close my remarks on a positive note by informing everyone that after careful consideration our Board of Directors renewed their commitment to continue our regular quarterly cash dividend. Now, more than ever, we feel it’s important to support our economy by returning much needed cash directly to our individual and institutional stockholders and indirectly through their various investments in mutual funds, 401(k) plans and other retirement accounts. With that, I am pleased to turn the call over to NIC’s Chief Financial Officer, Steve Kovzan.

[Steve Kovzan:]

Thank you, Harry. In the first quarter of 2020, we earned $0.18 per share compared to $0.17 in the prior year quarter. Before we move on to core results for the quarter, as a housekeeping item, beginning in the first quarter of this year, we reclassified the Texas payment processing contract in our income statement from the state enterprise category to the software and services category in both the current and prior year quarters, given that our business in Texas is limited to payment processing like the other payment related contracts in our software and services category, and is not a traditional enterprise contract where we develop and manage digital government services and handle payment processing. We’ve also included a supplemental schedule in the Investor Relations section of our egov.com site that lays out the reclassification on a quarterly and annual basis, beginning with the third quarter of 2018 when the Texas payment processing contract commenced. Moving on to core results for the quarter. Same-state enterprise revenues grew 7% year-over-year. We had a very strong start to the quarter before the nation’s full mitigation response to COVID-19 kicked in toward the latter half of March. As a result, our same-state growth for the quarter was modestly below our internal expectations, reflecting a partial-month impact of COVID-19 on certain of our state enterprise services, most notably driver history records and to a lesser extent interactive government services, in addition to certain of our software and services businesses, including the federal pre-employment screening program and the federal Recreation.gov service, which I will speak to more in a moment. But first, I’ll break down the major components of same-state enterprise growth for the quarter. Same-state transaction-based driver history record or DHR revenues were down 4% year-over-year. For the month of March, same-state DHR revenues were down 8% compared to March 2019 and were clearly impacted by the epidemic as we have never seeing monthly same-state DHR revenues decline to this extent in our company’s history. As we’ve discussed in the past, we don’t have ideal transparency into what drives DHR volumes over time, and this situation is no different. However, when speaking with our various contacts in the industry, including data resellers, and based on media reports, we suspect lower DHR volumes could be the result of several factors that seem reasonable to us at this point. First, a temporary pause in the second half of March for both government and industry participants to adjust to stay-at-home orders and work-from-home arrangements could have led to fewer record pools by data resellers and insurance carriers. As an example, one of our government partners was unable to update bulk DHR records for a two-week period starting in late March due to work-from-home staffing challenges. Fortunately, the state was able to resume updating records the second week of April. Second, several large auto insurers announced they will be sending refunds to customers as insurance claims had fallen due to fewer drivers on the road, which could be leading to fewer DHR pools. Also, law enforcement across the country is issuing fewer citations for driving violations in response to social distancing guidelines, which could also be contributing to lower DHR volumes. Third, auto and home sales, which have historically prompted DHR record pools, are at a standstill and could be contributing to the softness as well. And finally, with companies hiring fewer employees during this sudden economic downturn, particularly in the retail, travel, restaurant and entertainment industries, companies are conducting fewer background checks, which could be contributing to fewer DHR pools. While it is difficult to predict the magnitude and duration of the pandemic’s impact on DHR volumes with any precision, we expect this softness will be most pronounced in the second quarter with most of the country on full lockdown and the broader economy in sharp decline and potentially to a lesser extent, in the third and fourth quarter, when we hope the country and the economy start to slowly open back up. Next, same-state transaction-based Interactive Government Services, or IGS revenues, were up a solid 13% for the quarter driven by higher payment processing revenues in certain states, most notably in New Jersey; revenues from the new auto titling and registration system in Wisconsin, which launched in the second half of last year, higher hunting and fishing licensing revenues in certain states as well as higher revenues and several other online services across our state enterprise business. For the month of March, same-state IGS revenues were up 8% compared to March 2019. Over the last several days of the month, we saw brick-and-mortar government offices close in several of our enterprise states to comply with stay-at-home orders stemming from the COVID-19 pandemic and saw several DMVs also allow citizens 60 to 90-day extensions to renew auto registrations and driver’s licenses, which contributed to lower IGS revenues in certain of our states. On the flip side, we saw a substantial increase in volumes from several online services across our state enterprise businesses as transactions previously conducted in government offices moved online. While it is difficult to predict the impact of the COVID-19 pandemic on IGS revenues for the rest of the year with precision, given only a partial month of results under our belts, it’s important to remember; most of our IGS services are not discretionary. And as a result, we believe most IGS transactions will ultimately occur this year, but a portion will be deferred to future periods. Furthermore, many point-of-sale services we manage in brick-and-mortar government offices are payment processing related, for which we expect revenue declines to be partially offset by an increase in online transactions for the same services or partially offset by a corresponding decline in merchant processing costs, which could approximate 60% of point-of-sale revenues. One last area I want to touch on before I move to our Software & Services businesses is our ongoing efforts on the outdoor recreation front in Pennsylvania and Illinois. For the quarter, we incurred about $900,000 of state enterprise costs to implement our outdoor recreation platform in Pennsylvania and Illinois, up from about $500,000 in the prior year quarter when we were exclusively focused on Pennsylvania. Earlier this year, when we announced our 2020 guidance, we expected to launch Pennsylvania around the midpoint of this year. However, because of the lack of state resources during the COVID-19 pandemic, including the inability to work with point work with point-of-sale agents out in the field during the lockdown, the state of Pennsylvania recently requested we move the launch date in September, which, given the circumstances, is entirely reasonable. Unfortunately, for us, that pushes the launch out of the busy season for hunting and fishing and reduces the revenues we currently expect to generate in 2020 to around $600,000, our previous estimate of $2.4 million. However, because of adjustments we have made to our project time line and development resources, we expect the operating income impact will be less than the revenue impact, somewhere in the neighborhood of only $1 million for the year, which we have incorporated into our forecast for the year, which I will discuss shortly. However, there’s a silver lining coming from this situation and that because of the delay, we negotiated an extra year to our contract, which now extends to 12 years in total. We very much appreciate the state’s partnership and look forward to a successful launch of a solution later this year. Moving on. Software & services revenues were up $1.4 million or 9% over the prior year quarter, driven mainly by revenues from our RxGov prescription drug monitoring business and recently acquired NIC Licensing Solutions business, which contributed a combined $800,000 in revenue during the quarter, and growth from the Texas payment processing contract. I will now touch on our two largest federal contracts

[Harry Herington:]

Thank you, Steve. We are in the midst of unprecedented times. And although our business was impacted in the first quarter, I’m extremely pleased with NIC’s overall performance. As I stated earlier, we are financially stable, debt free company that continues to generate consistent cash flows. We have a proven business model designed to perform in any economic situation, strong relationships with our government partners and a team of dedicated employees across the country who have more than more than risen to the occasion during this crisis. While it is too soon to know how this health crisis will impact our lives and our economy for the remainder of 2020, I am by temperament an optimistic with an appetite for innovation, and I believe NIC is well positioned as any company could be at this moment. With that, operator, we will now open the call for questions.

[Operator:]

Thank you, sir. [Operator Instructions] We will now take our first question from Gary Prestopino from Barrington Research. Please go ahead.

[Gary Prestopino:]

Good morning, everyone.

[Harry Herington:]

Hey, Gary.

[Steve Kovzan:]

Good morning.

[Gary Prestopino:]

Steve, could I just ask you -- you went through some things pretty quickly related to the Pennsylvania contract and the Illinois contract in terms of puts and takes. But when you gave your guidance, you basically said it would be an incremental operating loss of $3.1 million this year with revenues offset by expenses. Has that increased now? I mean, I think you said something about $1 million impact. I’m just trying to get an idea of what the total impact of this is going to be this year due to the COVID-19.

[Steve Kovzan:]

Yes, that’s right. So, our expected revenues from Pennsylvania will be down about $1.8 million this year with the shift to the September launch, but the bottom-line impact from that shift is not $1.8 million, it’s about $1 million. So, yes, to your point, it’s an extra $1 million in bottom-line impact from both Pennsylvania and Illinois for the year, because of the shift in the project timeline.

[Gary Prestopino:]

Okay. And then, it’s good to see that the whole online part of your business model is really coming through here in the market. Harry, do you think that given this, what’s going on here that this just really sets a great example for why more states should really move to your model over time? And, how can you capitalize on this?

[Harry Herington:]

Yes, Gary, I would agree with that statement. I think the states and government as a whole are going to be moving more toward to provide as many services they can from a digital standpoint. And of course, my teams are laser-focused on that right now and educating. You’ve got a couple of different things. Number one, I’d like to tell people some of the innocence is now lost in agencies, and government personnel realize they have to find a way to provide access to information online that they might not have known of in the past. And it goes beyond just the citizens in the businesses. There’s also a concern in the government offices of interacting with individuals coming in and trying to do social distancing. So, I absolutely see an opportunity here. First and foremost, we’re going to focus on helping them get through this COVID-19 crisis that they’re facing.

[Gary Prestopino:]

Okay. And I would assume that most of your sales and marketing activity has just totally shut down at this point?

[Harry Herington:]

I would say the majority – I mean it would – from an integrity standpoint, this isn’t the time to go knocking on doors and saying, "Hey, we got a solution for you." At the same time, there are – we launched a couple of services during the last month. There are some things, and you just heard me talk about Maine, where as they were in the process of shutting down and saying, "All right, everybody’s got to go home," they got that contract signed. We got a couple of extensions signed within – in the past week. So, government has to continue to function. And we are going to be very respectful. We’re going to work with them as we identify them. And you’ve heard me in my remarks, some opportunities – although the majority of what we did with COVID-19 did not generate any revenue because that’s the right thing to do for our communities, for our partners. There were some opportunities that do, and so we’re working on those. But I would say, my entire team is engaged in this. They’d engage us in the right way. Number one, short term, how do we take care of our employees? How do we take care of our government partners? Over the long term, what does this mean for our stockholders? What does this mean for our company? I’m – Steve said it great. He’s never been prouder as CFO, I’m never been prouder as CEO of this company and where everybody is headed.

[Gary Prestopino:]

Okay. And then lastly, any comments on the Florida Department of Financial Services payment contract. Is that still obvious – is it still under protest?

[Harry Herington:]

Yes. And we have a policy, but I will give you just a little bit, and it’s obvious. It is under protest. Unfortunately, it also all slowed down due to the COVID-19, and they stopped all administrative hearings basically until they sort through this.

[Gary Prestopino:]

Okay. Thank you very much.

[Harry Herington:]

Okay. Stay safe.

[Operator:]

We will now move to our next question from Peter Heckmann from D.A. Davidson. Please go ahead.

[Peter Heckmann:]

Hey, good morning, everyone. Thanks for the incremental detail. I was wondering as regards the federal and state tax deadlines being pushed to July from April, do you do much in the way of property tax payments either to your consumers or businesses that were – just thinking off the second quarter, we could see maybe a little bit of further push into the third quarter?

[Harry Herington:]

Yes. Absolutely, Pete. That is one of the areas. So, we do work throughout the country with different partners from there. It’s interesting. There’s different stories coming out on that. We’re watching it very closely. Where you’ve seen a push from a federal standpoint, there are some of the states that have not yet signaled even though they are income tax from property tax that they’re going to push that out. So we’re watching it, that – the property tax payments fund, a lot of the local emergency services and those type of things. So it’s an interesting one to watch.

[Steve Kovzan:]

So yes. And Pete, just as a follow-on to that, yes. While that may happen, we expect it to be more of an issue of a – just deferred to a future period as opposed to completely lost for the year.

[Peter Heckmann:]

Yes, yes, yes. I’m just trying to think about in terms of just kind of getting the second quarter at the right position. And then within cannabis licensing, congratulations on Missouri. Remind us, is that the fourth or how many states are you working with on that solution now?

[Harry Herington:]

So we are in – I think five – that makes five states in total now with the cannabis. Actually, I think it’s six. I take that back. Because we – because the – when we acquired Complia, they were working in four of our enterprise states, and then we launched our West Virginia service and now Missouri, so that makes six.

[Peter Heckmann:]

Okay. All right. And then anything to think about with the new contract in Louisiana, any notable terms and conditions we should be thinking about? Or just that’s required a new contract for some sort of apparent reason?

[Harry Herington:]

That’s correct. Business as usual in Louisiana for us.

[Peter Heckmann:]

Great. All right. Thank you very much.

[Harry Herington:]

Thank you, Pete.

[Operator:]

[Operator Instructions] We will now move to our next question from Ishfaque Faruk from Sidoti & Company. Please go ahead.

[Ishfaque Faruk:]

Hi, good morning, gentlemen.

[Harry Herington:]

Hi, Faruk.

[Ishfaque Faruk:]

A couple of questions from me. First of all, in terms of the Florida payment processing contracts, you briefly touched on that, Harry. Do you expect that to get like – like a few quarters out like a resolution to it of some sort? I know you briefly said that there’s some hearings.

[Harry Herington:]

Yes. Again, it’s hard for me to really predict what’s going to happen when you’re in the midst of this, and we don’t really go that far down the path. I will – what I will say, government has – let me word this correct. Government is working really hard to make sure they continue to function in every area, and Florida is no different. This was just sort of a temporary pause as they went through and determined what is the best way to deal with everybody working remotely, including the courts. But you’ve seen that throughout the country. The agencies, the courts, everyone has stepped up and our – we’ve got to continue forward. So I expect it to follow its normal progression now that we’re past this little bit of a pause.

[Ishfaque Faruk:]

Got it. Very helpful. Okay. And Harry, in your earlier remarks, you briefly touched on Virginia and claim unemployment processing claims. Do you expect to do some more of that? And that is not a very high revenue-generating service to you, is it?

[Harry Herington:]

Well, that’s a couple of different questions. First, I will start on the unemployment. We don’t do a lot of unemployment throughout the country. So it’s – let’s start there. There’s been – as you know, in the media and in government, these are very strong systems, but they weren’t designed for the impact they’re getting right now. And in Virginia, we were able to step in to assist. We’re talking with a few of our other partners to see if there is areas in which we can bring similar solutions, whether that’s to assist with some of the call centers, some of the entry points into some file and the services, things like that. How about you, Steve, from...

[Steve Kovzan:]

Yes. I guess what I would say at this point in time, Ishfaque, we will be monetizing that work that we’re doing in Virginia, but we’ll hold off until future periods to kind of provide color there until we have a little bit more clarity.

[Ishfaque Faruk:]

Got it. And lastly, on the – Steve, you gave a lot of color on the DHR side. In terms of – obviously, Q2 is going to be on the low end in terms of what you’ve seen previously. Do you expect some of that to come back like by the end of Q2? Or how are you guys thinking of it internally for your own planning purposes?

[Steve Kovzan:]

Well, just generally speaking, when we’re thinking about our forecast, yes, certainly going to be most pronounced in the second quarter. And our hope is that there is some pent-up demand in that as the country and the economy start to slowly open back up, which we’re actually starting to see now, probably a little sooner than we expected, start to slowly back up in the latter part of the year. So yes, we expect that to moderate. And there could be some pent-up demand there from data resellers and insurance companies, I should say.

[Ishfaque Faruk:]

Yes. All right. Got it. Thank you guys.

[Operator:]

Thank you. [Operator Instruction] And as there are no further questions in the queue, I would like to turn the call back to our speakers, for any additional or closing remarks.

[Harry Herington:]

Thank you, Sergey, and thank you to everyone who joined us this morning. I sincerely hope each of you stay safe and remain healthy. And you need to recognize, social distancing does not mean you need to be socially isolated. I tell my employees all the time

[Operator:]

Thank you. That would conclude today’s call. Thank you for your participation ladies and gentlemen. You may now disconnect.