NIC Inc
Q4 2019 Earnings Call Transcript

Published: 30 Jan 2020

[Operator:]

Good day, everyone, and welcome to the NIC Q4 Earnings Conference Call. Today's conference is being recorded. And at this time, I would like to turn the conference over to Angie Davids, Senior Vice President of Marketing and Communications. Please go ahead ma’am.

[Angie Davids:]

Thank you, operator. Good afternoon, everyone, and welcome to NIC's fourth quarter earnings call. The press release for NIC's fourth quarter 2019 earnings announcement was issued 30 minutes ago. Our earnings release is also available on our corporate website at www.egov.com/investor-relations. You may also call our headquarters at 844-944-3468, and we will e-mail 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 statements 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 includes statements regarding the company's potential financial performance for the 2020 fiscal year, estimates, projections, the 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 related to possible future dividends and share repurchases 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 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 statements 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 cautions 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, it is my pleasure to introduce Harry Herington, NIC's Chief Executive Officer and Chairman of the Board.

[Harry Herington:]

Thank you, Angie. For more than 28 years, NIC has been consistently evolving and innovating to continue to lead the digital government industry. That evolution has included executing on a vision anchored by three key strategies

[Steve Kovzan:]

Thanks Harry. In the fourth quarter of 2019, we earned $0.15 per share flat versus the prior year quarter. I have one non-core item to call out. EPS was $0.02 higher in the fourth quarter due to discrete tax items more fully described in our earnings release.Moving onto the core results for the quarter. As a reminder, this was the first quarter where revenues from the legacy Texas contract were not a headwind to our growth comparison. Furthermore, we began including revenues from the Texas payments contract in the same state category in the fourth quarter. We capped off the year with another quarter of strong same state enterprise revenue growth, which increased 11% compared to the fourth quarter of last year, reaching double-digit growth for the fourth consecutive quarter as Harry just mentioned.Breaking down the major components of same state growth, same state transaction-based interactive government services or IGS revenues were up a strong 16% driven by payment processing revenues in New Jersey and Texas, revenues from the new auto titling and registration system in Wisconsin as well as other services across our state enterprise businesses.Same state transaction-based driver history record or DHR revenues were flat compared to the prior year quarter, which was down sequentially from 2% growth in the third quarter of 2019 and down from 3% growth for full year fiscal 2019.As we've discussed in the past, we do not have transparency into what drives DHR volumes over time and the fourth quarter is no different. While one-quarter does not make a trend we are hopeful DHR volumes going forward will rebound. And lastly on a combined basis, same state development and fixed fee management revenues were down 3% for the quarter.Software and services revenues were up $1.2 million or 20% over the prior year quarter. This robust growth was attributable to continued strong performance of the federal pre-employment screening program and the revenues from our recently acquired RxGov and NIC Licensing Solutions businesses, which contributed a combined $800,000 in revenue during the quarter.Depreciation and amortization expense increased by approximately $1.1 million from the prior year quarter, driven mainly by intangible asset amortization from the RxGov asset acquisition closed in the third quarter of 2018, which totaled approximately $700,000 for the quarter, up $500,000 from the prior year quarter and from the Complia acquisition closed on May 1st of 2019, which totaled approximately $250,000 for the quarter.Operating income for the quarter decreased 7% resulting in an operating income margin of 13% down from 16% in the prior year quarter. Recall that state enterprise gross profit margins and consequently operating income margins are seasonally lowest in the fourth quarter of each calendar year due to the lower number of business days during the holiday season.The decline in operating income and the operating margin compared to the prior year quarter mainly reflects costs to implement our comprehensive outdoor recreation solution in Pennsylvania and Illinois and modest dilution from the Company’s recently acquired RxGov and NIC licensing solutions businesses including higher amortization expense.We currently expect to launch the Pennsylvania outdoor recreation solution around the mid-point of this year and the Illinois outdoor recreation solution in the first half of 2021 which I will touch on more when I discuss our full year 2020 guidance in a moment.Now I’ll recap full year 2019 results. Total revenues were $354.2 million in 2019 up 3% from 2018, while state enterprise revenues were $320.7 million flat to last year. Full year 2019 included $30.4 million from the new Texas payment processing contract compared to $8.1 million in the prior year. The prior year also included $49 million in revenues from the legacy Texas contract.The headline for 2019 was our phenomenal same state enterprise revenue growth of 10%, the highest we've seen in the past five years with same state IGS revenues up 16% and same state DHR revenues up 3%. As a reminder, revenues from Texas and Illinois were excluded from the same state category for the full 2019 fiscal year. Software and services revenues increased stellar 38% to $33.5 million, driven by a full year of revenues from the federal Recreation.gov service as well as higher volumes from the federal DoD Pre-Employment Screening Program and revenues from our recently-acquired RxGov and NIC Licensing Solutions businesses, which contributed an incremental $2.3 million of revenue in 2019.Operating income decreased 17% to $62.4 million for the year with operating margins of 18% down from 22% in 2018, mainly reflecting lower revenues and profitability from the new Texas payment processing contract compared to the legacy Texas contract. In addition to higher costs to implement our outdoor recreation solution in Pennsylvania and Illinois, which totaled more than $3 million for the year and to dilution from the company's recently acquired RxGov and NIC Licensing Solutions businesses including higher amortization expense.Our effective tax rate for the year was 22% compared to 23% in 2018. Our effective tax rate in 2019 was positively impacted by certain discrete tax items more fully described in our earnings release. These discrete tax items positively impacted EPS by $0.05 for the year, whereas in 2018 discrete tax items positively impacted EPS by $0.02. We closed out 2019 with earnings per share of $0.75.Now let's move onto our guidance for fiscal year 2020. We currently expect total revenues to range from $380.5 million to $391 million. Earnings per share range from $0.76 to $0.81 and adjusted EBITDA, which excludes non-cash operating expenses for depreciation and amortization and stock-based compensation to range from $88.5 million to $93 million.The high-end of our guidance reflects 10% increase in total revenues with healthy upper single-digit same state enterprise revenue growth, in line with historical averages but down from the stellar 10% same state growth in 2019. As a housekeeping note, beginning in 2020, we intend to reclassify the Texas payment processing contract from the State Enterprise segment to software and services. Given that our business in Texas is limited to payment processing and is not a traditional enterprise contract where we develop and manage digital government services and handle payment processing.To this end, we have not incorporated the new Florida Payments Award, Harry just mentioned into our guidance because it is currently under protest. Furthermore, we will refrain from discussing the financial potential of the opportunity until the protest has concluded and a contract has been signed. Nevertheless, I echo Harry's comment in that we are incredibly excited about the Florida award and the overall growth potential of our payments vertical.Next, I'll provide some color on substantial investments we will continue to make in our outdoor recreation platform including the development of a comprehensive campground reservation solution; currently expect to launch Pennsylvania around the midpoint of this year and Illinois in the first half of 2021. And as a reminder, we currently expect each state to generate around $3.5 million annually in healthy margin, transaction-based revenues over the lives of those long-term contracts.Our 2020 guidance reflects approximately $2.4 million in incremental revenues from Pennsylvania following its anticipated midyear launch with total combined development and implementation costs for Pennsylvania and Illinois spread throughout the year, expected to approximate $5.5 million, contributing to combined operating losses of approximately $3 million.My last piece of revenue guidance pertains to our recently acquired RXGov PDMP and NIC Licensing Solutions businesses. We currently expect combined revenues from these businesses to range from $4.5 million to $7 million in 2020. The low end of this range mainly reflects full year revenue run rates from both businesses and a modest amount of upsell and add-on growth from existing contracts with the high end of the range reflecting incremental revenues from opportunities in the sales pipeline.Moving on to capital expenditures and capitalized software development costs. We currently expect capital expenditures to range from $6 million to $7 million in 2020, up from $4.3 million in 2019, reflecting higher IT infrastructure refreshment needed in a handful of enterprise states and requirements for the Pennsylvania outdoor recreation contract, in addition to other normal fixed assets, additions in our centralized hosting environment to support and enhance IT and security infrastructure and for our various verticals and platform solutions.We currently expect capitalized internal use software development costs will range from $9 million to $10 million in 2020, up from $8.3 million in 2019, reflecting ongoing investments in our platform solutions including outdoor recreation in the aforementioned campground reservation solution, in addition to enhancements to our industry leading payment processing solutions.Depreciation and amortization expense is expected to increase by $3 million to $3.5 million in 2020, compared to 2019, due mainly to higher amortization of capitalized software development costs related to previous and ongoing investments in our various platform solutions and a full year of purchase accounting amortization from our recently acquired RxGov and NIC Licensing Solutions businesses.Moving on, we expect to generate modestly lower interest income on our investible cash balances in 2020, given the decline in interest rates, we saw in the back half of 2019. Our EPS guidance for 2020 reflects approximately $0.02 from interest income, compared to the $0.03 we earned in 2019.From an income tax standpoint, we currently expect our effective tax rate before any discrete tax items to approach 26% in 2020, as we have recently seen changes in certain state tax laws that have required us to alter how we apportion our revenues by state, which is modestly increased our state effective tax rate and thus, our overall effective tax rate. However, if we were to ultimately recognize potential discrete tax items due to the expiration of statutes of limitations, our effective tax rate could be closer to 25% in 2020.In closing, our guidance reflects continued strong same state enterprise revenue growth in line with historical averages driven by the expected deployment of dozens of new services across several states, in addition to incremental revenue, contributions from our recently acquired RxGov and NIC Licensing Solutions businesses.Our guidance also reflects continued investments in key government vertical solutions, outdoor recreation, payments, licensing and healthcare, where we have been winning significant new business to drive long-term growth.That wraps up my prepared remarks today. So I will turn the call back over to Harry.

[Harry Herington:]

Thank you, Steve. I’m certainly pleased with our historical results. But more importantly, I'm pleased with the momentum I see every day at NIC. 2020 will be a year of continued digital government leadership, as we focus on growing our state enterprise contracts, enhancing and diversifying our overall business through our vertical solutions and leveraging our financial strength by returning capital to our stockholders.With that, Shlori, let's open up the call for questions.

[Operator:]

Thank you. [Operator Instructions] We'll take our first question from Peter Heckmann with Davidson.

[Peter Heckmann:]

Hi, good afternoon to everyone. Thanks for all the detail. I was wondering – hey, I might have missed it. Did you quantify what your expectations were for any increase in revenue from Virginia in 2020?

[Steve Kovzan:]

No. We didn't specifically quantify that. I – any increase that we do receive from Virginia would be kind of captured in our expectations for same state growth.

[Peter Heckmann:]

Okay. Okay. And you had made a comment that, I didn't quite catch about revenue related to PSP and I think Recreation One-Stop. Could you repeat that with regards to revenue for 2020?

[Harry Herington:]

No. I didn't – we didn't make any specific comments on PSP or Recreation One-Stop for 2020. Just forgotten it, yes.

[Peter Heckmann:]

Yes. Okay. And then, so just as a follow-up there that on the PSP, I think the current extension expires within the next 30 days or so. And any updated expectations in terms of a potential rebid or another extension, anything we haven't seen yet?

[Harry Herington:]

Pete, this is Harry. And of course, we're in conversations with them and I can't speak to that when it's sort of an open negotiation or open procurement item.

[Steve Kovzan:]

Yes. There's no RFP on the street today, Pete. So we're in discussions of continuing business there. But nothing finalizes as of yet.

[Peter Heckmann:]

Okay. Well, congrats on Florida, and we'll look forward to hearing more on that one in future quarters.

[Harry Herington:]

I appreciate it, Pete. Thank you.

[Operator:]

[Operator Instructions] We'll move next to Gary Prestopino with Barrington Research.

[Gary Prestopino:]

Good afternoon, everyone. Several questions here, okay? With these outdoor recreation contracts that you're putting in Pennsylvania and you got one in Illinois here. I guess my understanding of that, was that this platform could kind of be plug-and-play and use across all 50 states if that was the case. And I don't know, if I'm right or wrong with that? But I guess, what I'm getting at is that, you're looking at $2.4 million of incremental revenue, $5.5 million of development costs and a loss of $3 million. As this starts gaining more traction, does it scale at a much better rate? I mean, is it going to be that much in development costs as you roll it out to different states?

[Harry Herington:]

Gary, this is Harry. You're looking at this the right way. I never call it plug-and-play and the reason for that, because every state has their own rules and regulations. But that being said, when you look at the platform that we're building and we're taking these two opportunities, and what we took from Wisconsin to really come out with the premier platform, then it's just a matter of tailoring it going forward for the most part. So we're very excited about these investments because what it does give us when the day is done.

[Steve Kovzan:]

Yes. And Gary, I guess the other thing that I would add just echoing my remarks is that we are going to be building and enhancing campground reservations solutions, specifically for the State of Illinois. That's driving some, some of that, but absolutely, our expectation. These are the first two states that we are deploying using kind of the new cloud-based platform based on our deployment in Wisconsin. But absolutely going forward, we expect to scale and be able to do it quicker and more efficiently in each state. But we're very excited about these opportunities two very large states from hunting and fishing licensing standpoint. And, upon both of their full deployment, which we expect in 2021, it's $7-plus million in incremental healthy margin revenue.

[Harry Herington:]

And we should have captured the majority of the complexity out there with them.

[Steve Kovzan:]

So yes, that's right. I think you're looking at the right way.

[Gary Prestopino:]

All right, that's fair. I just want to get an idea of the level of investment that's going on here. And then in terms of the NIC Licensing and the RX business, RXGov, you said you're going to do $4.5 million to $7 million or revenues this year, is that correct?

[Harry Herington:]

Correct.

[Gary Prestopino:]

Okay. Would that – how does that work out to be relative to your overall corporate operating margin? Is that a situation where you're still putting a lot of development in there and it's going to mute the margin going forward this year?

[Steve Kovzan:]

I would say that we are certainly making and we’ll continue to make some modest and reasonable investments in those platforms. It's certainly not to the level that we are investing in our outdoor recreation platforms because they're a little bit more purpose-built, so certainly not to that same extent.

[Gary Prestopino:]

Okay. And then two other quick questions, Steve, this is for you, when you gave the initial guidance last January, February, was that contemplate that the release of these tax reserves or is this kind of like a nonoperational thing that just cropped up?

[Steve Kovzan:]

Yes, no. When we give our guidance, like I mentioned in my remarks, I think that we expect our absent any of these discrete tax items for exploration of statutes of limitations, we expect to be a little closer to 26%, because the uptake that we're seeing in our state effective tax rates. But if the year goes by and we see similar amounts of discrete items for statutes of limitations, our effective tax rate could be closer to 25%. And that's really all I was saying there.

[Gary Prestopino:]

Okay. And then last, beyond what you're doing with the outdoor recreation, and you've got the licensing and the prescription drug monitoring. You said new services across several states. Could you maybe just talk a little bit about that in terms of what kind of services, how many states? Just to get a – so we can get an idea of the magnitude of how this is shaping up?

[Harry Herington:]

Yes. So without specifically mentioning new services, I think as you're familiar with our business, Gary, we grow by a lot of bunts and singles, right. So these are dozens and dozens of services across a number of states next year. And historically we've been able to grow same state revenues on average 8% to 9%. That's kind of what our guidance reflects in 2020, certainly down a little bit from a really, really strong year in 2019. And what drove our outsize growth in 2019 was quite frankly, a few sizeable new payments contracts in New Jersey. And a larger footprint of payment processing that we've been doing in Indiana and so an example of what will continue to drive some of our same state growth into next year is this new auto titling and registration solution that we just launched in Wisconsin here in the second half of 2019. That will continue to drive growth in 2020. But that's from a material – from a materiality standpoint. That's one of the larger ones.

[Gary Prestopino:]

Okay. Thank you.

[Operator:]

[Operator Instructions] Okay. It appears we have no further questions in our queue at this time. I'll turn the call back over to our speakers for any additional remarks.

[Harry Herington:]

Thank you, Shlori. And I'd like to thank everybody who joined us this afternoon. I look forward to speaking with you at our Annual Stockholders Meeting on April 27th. Everybody have a great day.

[Operator:]

And everyone, this concludes today's call. We thank you for your participation. You may now disconnect.