NIC Inc
Q2 2019 Earnings Call Transcript

Published: 1 Aug 2019

[Operator:]

Good day, and welcome to the NIC Q2 Earnings Conference Call. Today's conference is being recorded.At this time, I would like to turn the conference over to Chief Security Officer, Jayne Holland. Please go ahead, ma'am.

[Jayne Holland:]

Thank you, operator. Good afternoon, everyone, and welcome to NIC’s second quarter earnings call. The press release for NIC's second quarter 2019 earnings announcement was issued 30 minutes ago, our earnings release is also available on our corporate website at egov.com/investor-relations. You may also call our headquarters at 1877-234-3468 and we will e-mail the information to you.Joining us on the 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, then we will open for questions.Any statements made during this call that do not relate to historical or current facts constitute Forward-Looking Statements. These statements include statements regarding the Company's potential financial performance for the 2019 fiscal year or future fiscal years, estimates, projections, expected length of contract terms, statements relating to the Company's business plans, objectives and expected operating results, statements relating to potential new contracts or renewals, statements relating to the Company's expected effective tax rate, statements relating to possible future dividends and share repurchases and other possible future events, including potential acquisitions, expansion of vertical solutions 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 and 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 Company's ability to identify and acquire suitable acquisition candidates and to successfully integrate any acquired businesses as well as possible data security incidents.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 sections titled Risk Factors and Caution About Forward-Looking Statements of the Company's most recent forms 10-K and 10-Q 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, we undertake no obligation to update or revise publicly, any forward-looking statements whether as a result of new information, future events or otherwise.Now, I would like to introduce Harry Herington, NIC's Chief Executive Officer and Chairman of the Board.

[Harry Herington:]

Thank you, Jayne. On our last few calls, I updated you on the progress we are making on three key components of our 2019 strategy to secure and grow our core state enterprise business, to enhance and diversify our overall business with the continued expansion of our vertical solutions and to use our financial strength to pursue long-term growth opportunities, including acquisitions.At the midpoint of the year, I am pleased to report we continue to make excellent progress on each front this past quarter. First, I will start with a lengthy list of long-term government partners who recently extended their relationships with NIC. Following a competitive rebid, we signed a new four year contract with the State of Utah, which includes two, three year renewal options for total of 10 years.We have had the privilege of partnering with Utah since 1999, with 2019 marking our 20th anniversary, and the state has routinely been recognized as a leader in digital government, with multiple best of the web awards from the center of digital government, and numerous other honors and accolades.Next up is Rhode Island. During the quarter, we signed a new two year contract with Rhode Island Department of Administration, which includes two one year renewal options for total of four years. We have had the privilege of partnering with Rhode Island since 2001.And I'm incredibly proud of our team and providence for the innovation they provide everyday for multitude of agencies in that state.Our next update comes from Arkansas, where we recently received a one-year contract extension. Arkansas our fourth state partner back in 1997. And today, we manage around thousand digital government services.Our team in Little Rock continues to deploy innovative solutions day in and day out. As an example, the Arkansas Department of Finance and Administration recently received a prestigious American Association of Motor Vehicle Administrators Service Award for excellence in government partners for its My D&B Solutions.Another great partner in South Carolina, where our contract was renewed for one year, with one remaining, one year renewal option. South Carolina became our partner back in 2005, and it's one of our premier payment processing states, deploying over a dozen new payment services in the second quarter alone, driving a 16% year-over-year increase in volume through South Carolina use of NIC industry leading secure payment platform.And finally, my last contract update comes from the Federal business, where the Federal Motor Carrier Safety Administration or FMCSA extended its contract with us to provide the Pre-Employment Screening Program or the PSP. For an additional six months with two six months rental options remain.PSP have been a phenomenal service since its launch in 2010 making our roadways safer, where it has been demonstrated at trucking companies using the PSP to screen new hires, lower their cost rates by 8% and driver out of service rates by 17% on average, compared to those that do not use PSP. Our DC based team has enrolled nearly 18,000 active PSP subscribers as of the end of June, with more than 600 active accounts added in the second quarter alone.It was certainly a busy quarter on the contract renewal front and I want to give special thanks to our long-term partners in Utah, Rhode Island, Arkansas, South Carolina and the FMCSA for continue to put their trust in NIC. We look forward what the Digital Government future holds together with you.Not only did we extend several long-term partnerships during the quarter, our core state enterprise business again produced strong financial results. With same state revenues of 10%, generating double-digit organic growth for the second consecutive quarter. Steve will discuss the financial aspects of the quarter in a moment. But needless to say, I'm extremely pleased with this continued momentum.Turning to the second prong of our growth strategy, diversifying and growing the business through our vertical solutions. We have already leveraged a regulatory licensing acquisition, and were awarded a new contract and an NIC Enterprise State during the second quarter.On our last earnings call, we announced the acquisition of Complia, a best-in-class licensing platform company, currently focused on helping government regulate the cannabis and hemp industries. Quickly following the acquisition, we entered into an agreement to provide our new cannabis licensing and registration platform to the State of West Virginia.As a reminder, prior to the acquisition, NIC have previously deployed Custom Cannabis Regulatory Solutions for the states of Oregon, Hawaii and Maine. In addition, NIC and Complia had previously partnered to provide cannabis licensing solutions to Maryland, Montana, Oklahoma and Rhode Island.We are thrilled the West Virginia is now in the boat and we are excited about the exceptional addressable market opportunities within its relatively new and growing vertical.As I mentioned last quarter, the technology platform required from Complia is also highly configurable and scalable and capable of providing licensing for several other highly regulated industries such as liquor licensing, and various professional licensing types.This is an important aspect that made the acquisition of a smart investment for us. We are acquired a business focus on cannabis and hemp licensing. This is only the beginning as we plan to build upon the platform and expand issues for additional types of licensing.As a result, going forward. We refer to the business as NIC licensing solutions, which more accurately reflects the breadth of the services this business will ultimately provides to government. We will continue to leverage our financial strength to pursue the right acquisitions that complement our vertical strategy, expand our footprint in new and existing sectors and enhance our ability to deliver industry leading digital government services.Our strong balance sheet and recurring cash flows allows us to make critical investments in our core business, while maintaining our commitment to pay a regular quarterly dividends. They also enable us to pursue attractive acquisition opportunities that fit strategically, culturally and financially within NIC.As evidenced by the two acquisitions we made in the past year. Through a disciplined and focused M&A strategy, we believe we can grow and diversify our revenues and drive significant shareholder value overtime.Next, I'm very excited to announce that we will be expanding our footprint in Illinois. As we recently signed an agreement with the Illinois Department of Innovation and Technology and the Illinois Department of Natural Resources to provide our comprehensive outdoor recreation solution to the state, which will ultimately deliver online and point-of-sale services for hunting and fishing licenses, campsite, reservations, and snowmobile and watercraft licenses, along with other services.The solution will include an integration with the micro services platform that supports the enterprise, licensing and permitting solution. As we previously shared with you, when we launched the outdoor recreation solution in Pennsylvania, which is slated to launch in the second half of 2020, NIC will become the largest provider of hunt and fish licensing services in the country.When we launched the Illinois solution, which we currently expect will be in early 2021 NIC will offer hunt and fish licensing solutions in a total of 13 states. Specifically, Illinois ranked eighth in the nation with 1.3 million hunting licenses, tags, permits, and stamps sold in 2018. Steve will cover the financial aspects of this opportunity in a moment.But I would like to extend a personal thank you to the Illinois Department of Innovation and Technology and the Illinois Department of Natural Resources for your trust and commitment to NIC and our industry leading outdoor recreation solutions.As we pass the halfway mark of 2019, I’m thrilled with a continued momentum in our business. As I shared with you today, all the elements of our strategy continues to gain traction. We secured numerous contract renewals, generated double-digit organic growth revenue in our core state enterprise businesses, and expanded our vertical footprint with two new contract wins. One from our recent regulatory licensing acquisition and one in the outdoor recreation space.With that, it is my pleasure to turn the call over to NIC's Chief Financial Officer, Steve Kovzan. Steve.

[Steve Kovzan:]

Thanks Harry. In the second quarter of 2019, we are in $0.21 per share compared to $0.25 in the prior year quarter. I have one non-core item to call out for the current quarter. EPS was higher by $0.01 due to the release of reserves for unrecognized income tax benefits resulting from the completion of an IRS examination, of our 2016 tax return during the quarter, which I’m pleased to report resulted in no change from our previously filed return.Moving on to the core results of the quarter. Total revenues decreased 1% to $91.6 million with state enterprise revenues down 4% from the prior year quarter, driven largely by lower revenues from the new Texas payment processing contract, compared to the legacy contract as we had previously disclosed.For comparison purposes, state enterprise revenues in the current quarter included $8 million from the new Texas payment processing contract, compared to $18.3 million of revenues from the legacy contract in the prior year quarters.Total same state revenues increased a strong 10% for the quarter, reaching double-digit growth for the second consecutive quarter as Harry just mentioned. Breaking down the major components of same-state revenue growth.Same-state transaction based interactive government services, or IGSs revenues were up 14% from the prior quarter driven by payment processing services in a handful of states as well as several other key services.Same-state transaction based Driver History Record for DHR revenues increased 4% over the prior year quarter. And lastly, same-state development revenues increased 5% for the quarter, driven by the timing of various timing material projects across multiple states, while same-state fixed fee management revenues from our Indiana contract were flat for the quarter. On a combined basis, same-state development and fixed fee management revenues increased 3% for the quarter.Software and Services revenues totaled $8.7 million for the quarter, up 47% over the prior year quarter. This stellar growth resulted mainly from continued strong performance of the federal pre employment screening program, as well as revenues from the federal recreation.gov service, which generated approximately $1 million in revenues during the second quarter, which from a seasonality standpoint, we expect to be one of the highest volume quarters of the year for recreation.gov along with the first quarter.Also, our newly acquired RxGov and NIC licensing solutions businesses has started to scale, contributing a combined $400,000 in revenue this quarter, which is just the start of what we believe will be an exciting long-term growth opportunity for both vertical solutions.Moving on to a closer look at our operating expenses for the quarter. Selling and administrative expenses were essentially flat, both in nominal dollars and as a percentage of revenue compared to the prior year quarter, which we like to see. Enterprise technology and product support costs increased 18% for the quarter and as a percentage of total revenues were 7% compared to 6% the prior year quarter.This increase was driven primarily by development costs related to continued enhancements to our citizen-centric Gov2Go platform and RxGov PDMP platform and to higher technology infrastructure costs.Depreciation and amortization expenses increased by approximately $1 million from the prior quarter through the mainly by intangible asset amortization from the RxGov asset acquisition which closed in the third quarter of last year, totaling approximately $600,000. And from the Complia acquisitions, which closed on May 1st of this year, totaling approximately $200,000. I will touch on the Complia acquisition more in the moment when I cover our updated guidance for 2019.Operating income for the quarter decreased 21% resulting in an operating income margin of 19%, down from 24% in the prior year quarter. This was primarily driven by lower revenues and profits from the new Texas payment processing contract compared to the legacy contract, in addition to modest dilution from our newly acquired businesses.I will conclude my remarks today with a discussion of our updated guidance for 2019 which takes into consideration, our strong financial results through the first half of the year, the Complia acquisition, including the related purchase accounting effects and anticipated operating results. Previously disclosed executive severance costs incurred in the first quarter of 2019 and build out costs related to the aforementioned Illinois outdoor recreation opportunity.We currently expect total revenues of $347.5 million to $352.5 million with portal revenues ranging from $317 million to $320.5 million and software and services revenues ranging from $30.5 million to $32 million.Our previous guidance for total revenues range from $333.5 million to $342.5 million, reported revenues ranging from $306 million to $314 million and software and services revenues ranging from $27.5 million to $28.5 million.We now anticipate earnings per share to range from $0.71 to $0.73, compared to our previous guidance of $0.72 to $0.74. Our guidance reflects approximately $1 million in revenues, and $800,000 in operating expenses, or excuse me operating losses, which excludes intangible amortization expense relating to the company's recent acquisition of Complia.Intangible asset amortization expense related to the Complia acquisition is currently expected to approximate $700,000 in 2019, and approximately $1 million on an annual run rate basis, beginning in 2020.Please refer to our Form 10-Q file this afternoon for additional information on the Complia acquisition, including the purchase price allocation and the estimated amortization periods for each of the acquired intangible assets.Our guidance also reflects approximately $2.6 million in previously disclosed executive severance costs incurred in the first quarter of 2019, which reduced earnings per share by approximately $0.04.In addition, our guidance reflects approximately $1.2 million in build up costs for the remainder of the year to configure our comprehensive outdoor recreation solution to meet the specific needs of Illinois. Harry mentioned, we will not only be delivering hunt and fish licensing component, we will also deliver a camp site reservation component and a snowmobile and watercraft licensing component.We currently expect to launch the entire system by early 2021 and to generate in excess of $3.5 million annually in transaction based revenues over the life of the contract, which is similar in size to what we expect to generate from Pennsylvania.Also, as a result of this new agreement with Illinois, we will reduce the reduce annual maintenance fee to the base enterprise licensing and permanent solution by approximately $1 million, two approximately $800,000 per year over the term of the master agreement.This change has been reflected in our updated state enterprise revenue guidance for 2019. Finally, from an income tax standpoint, we expect our effective tax rate to approximate 25% for the full year of 2019, excluding the impact of any future discrete items.One last item to point out on the Complia acquisition. The goodwill and intangible assets will be deductible for tax purposes. As always, our projections not include revenues or costs from any unannounced contracts.And with that, I will turn the call back over to Harry.

[Harry Herington:]

Thank you, Steve. We continue to execute well on our 2019 strategic objectives and I love the momentum of our business head into the second half the year. I look forward to updating you on our progress again in the fall in the third quarter earnings announcement.With that Manas, we will open the call up for questions.

[Operator:]

Thank you. [Operator Instructions] We will take our first question from Peter Heckmann of Davidson. Please go ahead, sir.

[Peter Heckmann:]

Good afternoon, gentlemen. I wanted to ask on the updated guidance, you gave us a lot of information in a short period of time, but it looks like the revenue range is up maybe $10 million to $14 million on the year. Portion of that is coming from stronger software and service growth, portion is coming from Complia, portion is coming from higher same-state. Am I missing anything in there, is anything else going live or any other significant contributors?

[Harry Herington:]

No, that is it. I think it's a good strong first half of the year, our expectations for the second half of the year. And a little bit, certainly from Complia.

[Peter Heckmann:]

Great. And then Illinois and Pennsylvania, I missed it. I heard you say $3.5 million each. And I thought I missed. Was that annual or also the life of the contract and if so what is the life of the contract?

[Harry Herington:]

So, in Pennsylvania, I believe the Pennsylvania contract is a 10 year contract in total. And the $3.5 million is annual revenue expectations. Same thing with Illinois, the Illinois agreement that we entered into with Department of Natural Resources runs coterminous with the enterprise licensing and permitting contract.So I think it has an initial term that sometime I think it's in mid 2023, but then it's got a four year renewal option that pushes it out to 2027. And the revenue expectation for the outdoor recreation component is also $3.5 million a year.

[Peter Heckmann:]

Okay, great. That is helpful. And then within same-sate anything to call out in terms of either pricing increases on the DHR side or any- what do you call that every other year by any all benefits or anything that would have helped same-state in the quarter?

[Harry Herington:]

No pricing benefits, certainly on the DHR revenue growth of 4%, which is probably a little bit stronger than normalized and it's just higher volumes across a number of states. And on the IGS side, strong payment processing growth in a small handful of states, mainly New Jersey, Indiana and a few others.

[Peter Heckmann:]

Got it. Okay, I will get back in the queue. I appreciate it.

[Harry Herington:]

Alright Pete thanks.

[Steve Kovzan:]

Thanks Pete.

[Operator:]

Thank you. [Operator Instructions] We do have our next question from John Campbell of Stephens Incorporate. Please go ahead.

[John Campbell:]

Hey, guys, congrats on another great quarter.

[Harry Herington:]

Thank you very much.

[Steve Kovzan:]

Hi John.

[John Campbell:]

Sure. Steve, just looking at results versus last year, I just want to make sure I have got kind of all the moving parts down. So revenues down 1%, profits down 15 or so, I know you had some negative margin mixture from Texas. You have also had the acquisition expense kind of left is coming, but if you could maybe just talk to some of those shifts and just the relative impact of each, I'm just trying to get a better grip on the Texas impact given you are going to be lacking that soon.

[Harry Herington:]

Yes, certainly. I mean, John as I shared in scripted remarks, I would say that most of the operating income impact relates to lower profitability from the new Texas payment processing contract compared to the legacy contract.We certainly also had some dilution including, amortization expense, purchase accounting amortization expense from the two acquisitions. And then finally, we continue to build out the Pennsylvania solution where we are not recognizing - the Pennsylvania outdoor recreation solution I should clarify where we are not recognizing any revenue yet that will launch sometime mid next year. So I would say those are the primary drivers.

[John Campbell:]

Okay that is helpful, and then really good growth out of the software and services segment. Steve, I think you mentioned RxGov I think was a $1 million contributor. But outside of that you caught up the PSP strength. I mean, if you back out the RxGov lift, I mean, that is still a 30% growth rate. You also raised the guidance for the software segment. So I'm guessing that is probably PSP related as well. So I guess first, is that true and the if so what is driving the kind of better than what you guys expected PSP lift and how stable is that growth?

[Steve Kovzan:]

Yes it is PSP related, PSP has certainly it just continues to perform quite well and has been up nicely. Now, not all the rest of the growth in the software and services segment is PSP. I did point out that both RXGov, the combination of RXGov and Complia most of it being RXGov contributed about $400,000 in revenue in the quarter that we didn't have in the prior year quarter.But certainly the bulk of the remainder of that is PSP and I guess that we generally say that, our team on the ground the DC, just continues to do a great job of signing up new users to the PSP. I think we signed up another 600 [Multiple Speakers] during the current quarter in its strong economy.And so we may be getting certainly a bit of a lift from that as truckers are potentially looking to partner stronger economy into better pay and switching jobs and things of that nature. So it's certainly performed better than what we expected going into the year.

[John Campbell:]

That is really helpful. If I could squeeze in one more just related to PSP. Any sense for kind of what your overall penetration is, what that addressable market is, and it seems like you are winning new accounts daily. So just trying to get a sense for how big that could actually be.

[Harry Herington:]

Yes, I would say most of the accounts, John, that we are winning going forward tend to be smaller companies, smaller carriers. I think our team has done a fantastic job. And obviously, their initial focus in the early years was to get as many of the bigger target market companies on board.But I think our team is continually trying to expand that addressable market by reaching out to companies and convincing them of the merits of using PSP. But we have not put necessarily a total addressable market. All I would say is that over the years, it just continues to perform quite well and our team just does a great job of signing up folks.

[John Campbell:]

Okay. Great. Good work guys. Thanks.

[Harry Herington:]

Thanks John.

[Operator:]

And next question comes from Gary Prestopino of Barrington Research. Please go ahead.

[Gary Prestopino:]

Hi, good afternoon.

[Harry Herington:]

Hey Gary.

[Gary Prestopino:]

How many states are you doing the cannabis monitoring for now?

[Harry Herington:]

I think we are in nine - eight - I’m going to seek your confirmation, eight states.

[Gary Prestopino:]

And then could I just get a little clarification on Illinois. I'm a little confused and that happens often, but you were doing something in Illinois with some kind of licensing platform, right?

[Harry Herington:]

Yes, enterprise licensing.

[Gary Prestopino:]

Right. But this comprehensive outdoor recreation solutions is independent of what you are doing for Illinois?

[Harry Herington:]

It's a combination of both. No, it's going to be part of their enterprise license, but at the same time we are bringing in our platform there and that is why it's sort of a hybrid, if you would.

[Steve Kovzan:]

Yes, it will leverage kind of the micro services base that supports the enterprise licensing and permitting platform. But we are definitely bringing in our platform essentially that we built - that the foundation of which was the Go Wild Wisconsin platform that we are also configuring and implementing for Pennsylvania.

[Gary Prestopino:]

So this would be an example of some of these new vertical solutions that you have that is not being sold to a partner state, shall we say? Is that a correct assumption here, since the Illinois wasn't one through in RFP?

[Harry Herington:]

I don't know, if I quite understand your question. Why don't you restate your question.

[Gary Prestopino:]

Yes. What I'm trying to get out is and I have talked to Steve about this, you have got these vertical solutions, right? And, you don't have to have an RFP with a state as I assume to win this business through these vertical solutions. So I'm trying to get at what success have you had, if any and is this an example of that?

[Harry Herington:]

This is an example, what I would tell you is when we have got a contract there, they don't necessarily have to go to bid, they will go to bid a times, that is that the agency's discretion. But typically, we have the flexibility to bring our verticals in underneath our master contracts. And that is of course, what we would prefer, but we are going to follow whatever procurement desires and rules they might have in each state. But this is an example where we can leverage an existing contract come in and bring in that vertical and show them the value that that brings.

[Gary Prestopino:]

Okay. Thank you.

[Steve Kovzan:]

Thank Gary.

[Operator:]

Thank you. [Operator Instructions] It does not appear we have any further questions at this time. I would like to turn the conference back over to the speakers for any additional or closing remarks. Thank you.

[Harry Herington:]

Thank you [Manish] (Ph). And I want to thank everybody who joined this afternoon. I look forward to speaking with you next quarter. Have a great afternoon.

[Operator:]

Ladies and gentlemen, this concludes today's call. Thank you for your participation. You may now disconnect.