NIC Inc
Q2 2017 Earnings Call Transcript

Published: 2 Aug 2017

[Operator:]

Good day and welcome to the NIC Inc. 2017 Second Quarter Earnings Announcement. Today’s conference is being recorded. At this time, I would like to turn the conference over to Angela Davied, VP of Corporate Communications. Please go ahead.

[Angela Davied:]

Thank you, Vicki. Good afternoon, everyone and welcome to NIC’s second quarter earnings call. The press release for NIC’s second quarter 2017 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 877-234-3468 and we will e-mail the information to you. Following a reading of our cautionary statement regarding forward-looking information, CEO, Harry Herington; Chief Operating Officer, Robert Knapp; and Steve Kovzan, NIC’s Chief Financial Officer 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 estimates, projections, the expected length of contract terms, statements relating to the company’s business plans, objectives and expected operating results, statements relating to possible future dividends, and other possible future events, 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, including 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 and to sign contracts with new states and federal government agencies 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 sec.gov. Any forward-looking statements made during this call speak only as of the date of this call. 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's my pleasure to introduce Harry Herrington, NIC's Chief Executive Officer and Chairman of the Board.

[Harry Herington:]

Thank you, Angela. Welcome to our second quarter earnings call. I'm starting the call today with a topic on the lot of peoples' mind. The Texas Request For Offer or RFO, which is released recently and is known as Texas.gov 3.0. It is our long standing policy not to comment on open procurement and we will observe this policy with the Texas RFO. However, I think it's important to mention a couple of key points. First, I will say that this is a rebid as part of the standard mandatory rebid process all contracts must go through once they reach the end of all contract renewals. The terms of the RFO are generally aligned with the state's intentions they outlined during a procurement vision session last October. NIC in particular, our team in Austin has been preparing for this rebid for a long time, and has worked to strategically position our agency relationships, technology platforms and digital solutions to align with the state's long-term vision for Texas.gov. As for timing, the timelines made public by the state call for bid responses to be submitted by the end of August with the intention to award the contract by the end of the year. Well I have great confidence in the work by our team in Texas this partnership and rebid effort go all the way to the top within our organization. With our Board of Directors briefed on our strategy, as well as oversight and involvement by myself and the entire executive team. I believe we are doing the right thing as we pursue this rebid and I'm excited about the opportunity to continue to deliver world-class digital government services in the lone star state just like we have done for the eight years. Moving on to other government partners, I'm also excited to report that we officially welcomed a new state to the NIC family this quarter with the signing of a long-term contract with the State of Illinois. I have shared with you in the past that we will be working with the state to develop an enterprise, licensing and permitting platform. Our team has been up and running for months developing the core platform and working hard to deliver the first phase of the platform within the next six months. Robert and Steve will share more details on the contract in a moment including some financial details. But for now I'd like to welcome our newest partner Illinois and thank them for placing their confidence in NIC. Another new partnership we've been talking about for a while is our work with Booz Allen Hamilton as a subcontractor on the recreation.gov project. Last quarter, I shared with investors that a final ruling in favor of the red.gov award to Booz was delivered by the U.S. Court of Federal Claims relating to the contract protest by the incumbent vendors. Since our last earnings call, the incumbent appealed the ruling. However the government continues to move forward and the official kick off of the project was on July 1, 2017. While we are still finalizing our subcontract with Booz, we have staffed our red.gov team with developers, designers and marketers and we are working in good faith with the expectation of launching the new red.gov in October of 2018. We will provide additional updates on this matter on future earnings calls as information becomes available. With new partnerships underway, as well as work to secure existing partnerships, one element is consistent in all of them. Government turns to NIC because they view us as their R&D shop. They know we will use the latest innovation to keep the interactions with their citizens and businesses on the cutting edge. They need to partner who will help them evolve as technology evolves. As the R&D shop for government, we must stay at the leading edge of emerging technology. This includes things like autonomous vehicles, virtual reality, artificial intelligence. It is easy to think about these technologies as technology of the future. But I believe the technology of tomorrow is here today. These technologies are being used now with enhancements and increased adoption by more Americans daily. We know it's our job to make sure that we are constantly thinking about how the latest technology can be used for government interactions and during the second quarter of 2017, we did just that. I read recently that by the end of the year it's expected there will be more than 30 million voice control devices in U.S. homes, this include devices like Amazon Echo, Google Home and Microsoft Cortana. As this format technology continues to take off our teams are working with our government partners to launch more voice activated solutions. During the second quarter we launched Amazon Echo Skills that included more data driven real time functionality. In May, our team worked with the Utah division of Wildlife to launch Utah Fishing. This new skill helps people where fishing hot spots are across the state and also includes species information and even what type of fishing lures seem to be working best. This past month the team also launched Utah Public Meetings, hundreds of public meeting are convened across the state every day and the state as well cities, counties and school boards are all required by law to provide notice of these public meetings, now people in Utah can simply ask Alexa and she tells them about public meetings by location or zip code. Mississippi explained that their Alexa Skill to include custom reminders. Mississippi specific news briefings and traffic alerts within a 20 mile radius of the users’ device. As our partner, Mississippi CIO, Craig Orgeron said in a recent trade publication article instead of just asking Alexa when your professional license is due what if she were able to ask you if you would also like to renew it. I couldn’t agree more. Voice activated technology is evolving quickly and like Dr. Orgeron, I think it is easy to envision a day where you would be able to use Alexa or Cortana to complete a government transaction without ever turning to the screen of a laptop or a mobile device. Not only our chat box an important component in voice activated solutions, but there are many other ways to use this technology that simulates human conversation. During the second quarter we harness the power of chat box to assist with our customer service efforts. Also in Mississippi our team and government partner launched Missi, she is a new chat box that assist with customer service questions on the state’s official government portal ms.gov. In addition to speaking with a customer service rep via instant messaging chats, Missi answers question around the clock. Today she uses a series of predetermined scripts based on popular customer service questions to provide answers via links to people to find the information they need. Overtime Missi will apply machine learnings to gradually learn semantics and the context of words in a sense in order to deliver a more exact response. It goes without saying, that this is an exciting time to see all these new innovative ideas taken off. And as important as it is for NIC to stay at the forefront of technology, our consistent revenue growth in the second quarter was driven by some of our traditional core services, such as motor vehicle inspections and corporate fillings. Once again our core business of providing efficient online government services to citizens and businesses continue to perform well. With the first half of the year in the books as they say, I am pleased with how the business is performing. We are executing well in our core business, which continues to deliver solid revenue growth and our work to advancing emerging technologies for government continues to evolve. And I am incredibly proud of the innovative solutions our teams delivered this past quarter and look forward to what new innovations our team may come up with this second half of the year. Now with that, I will turn the call over to Robert Knapp, NIC’s Chief Operating Officer for additional insights to our operations. Robert?

[Robert Knapp:]

Thank you, Harry. I’ll kick things off today with updates on the award winning Gov2Go solution. While Arkansas may have been the first to launch Gov2Go other states are jumping on board quickly. Last quarter I shared that Nebraska joined Gov2Go with a suite of eight services, this quarter I am pleased to announce that Colorado now offers the Gov2Go platform to its citizens and businesses. Initially Gov2Go provides people in Colorado information about official state holidays and those in Douglas County Colorado can receive alerts about property taxes. We will continue to add new services to Gov2Go in Colorado overtime and I want to congratulate our partners there for embracing the changing landscape of government interactions by providing their citizens multiple channels to access government, which now includes having government interactions centrally managed with timely and personalized alerts using the nation’s first personal assistant for government Gov2Go. In addition to the launch in Colorado, Gov2Go recently received top honors from the National Association of Secretaries of State, specifically congratulations to our partner Arkansas Secretary of state Mark Martin and his team for receiving the 2017 Ideas Award for their work in launching Gov2Go. Since 2011 the National Association of Secretaries of State has presented its prestigious Annual Ideas Award to recognize the innovation and excellence in state programming, not only is Arkansas where Gov2Go made its debut, but today more than 20% of all adults in the state use Gov2Go. I am so proud of our partners who help made Gov2Go a reality and congratulate them on their award from the National Association of Secretary of State, it is very well deserve. Another service that continues to expand across United States, it is Your Pass Now. National Parks and U.S. Forest Service sites continue to recognize the value of offering a convenient and digital entrance pass to their visitors. This month Castillo de San Marcos National Monument in Florida launched Your Pass Now. Also you may have read in the headlines recently that the price of a senior citizen lifetime national park pass is increasing on August 28th from $10 to $80 to help pay for park enhancements and major projects. While seniors have until August 27th to mail in a paper application or apply online the wait time to receive an online pass is currently nine weeks and if seniors apply for a pass through the mail, the wait time is 12 weeks. Your Pass Now was an ideal solution to this problem. Our team made lifetime senior citizen passes available for purchase via Your Pass Now in just 10 days of development time. Seniors can use their Your Pass Now receipt for immediate access to all 2000 site and parks across the United States while they wait for their pass to arrive in the mail. In less than a week since it went live more than 57,000 seniors have purchased the Senior Pass through Your Pass Now. Thank you to the National Park Service for expanding this service with us and we look forward to bringing the convenience of Your Pass Now to visitors of our National Treasures from coast-to-coast. Also on the Federal front this quarter, we completed The Library of Congress copyright Royalty Board Electronic Filing and Case Management System or ECRB. As we have shared with you in the past, this system was modeled after a successful e-filing solution we deployed for the State of Nebraska it allows for the electronic submission, dissemination, management, tracking and reporting of motions, briefs, exhibit, comments and other litigation or regulatory documents generated by the copyright royalty judges. You may recall, we will be paid approximately $500,000 for the building of the system and our partners at The Library of Congress have the option to extend our contract for annual maintenance with fee revenues of approximately $200,000 for the next five years. In fact we’ve just received our first renewal option from The Library of Congress for the first year of maintenance extending through September 2018. It is also important to note that this is a cloud based solution and is FedRAMP and FISMA-compliant and integrate with pay.gov the federal government’s payment processing solution. These are all important components for the company as we continue to expand our federal qualification and business development efforts. The service is off to a great start and we look forward to continuing our partnership with The Library of Congress for many years to come. Another portal update comes from Maryland, where we continue to reach new milestones with the successful Business One Stop Service referred to as Business Express. Since its launch Business Express filings have grown substantially with 75% of all individual filings now conducted online. The portal also recently surveyed users about their digital government experience, the result are in and 97% surveyed are not only satisfied with digital government services in Maryland, but would also recommend them to a friend. Moving on to Illinois as Harry just mentioned, we signed a new long-term contract with the state during the second quarter. The contract includes a six year base term plus four one year extension that state can exercise that could take the agreement through July 2027. The initial statement of work provides for an enterprise licensing and permitting platform that can be extended overtime to support all licensing and permit solutions for several key Illinois agencies. We’ve been developing this cloud based solution over the past several months using an API micro services approach that leverages components available in other NIC states to provide a comprehensive platform, from which various components and modules can be configure quickly to survey number of licensing and permitting needs in Illinois, as well as other NIC states. We are working to deliver the first phase of the platform by the end of the year at which time we would be paid a fixed fee of $2.4 million for the initial statement of work with an additional $600,000 to be paid sometime in the first half of 2018 for the remainder of the base platform. The contract also calls for annual maintenance fees for the base platform ranging from $1.75 million to $2.1 million over the remaining five years of the base contract. Future licensing and permitting solutions deployed on this platform for individual state agencies are expected to be funded by transition fees. We are incredibly excited about this new partnership and we welcome the state of Illinois to the NIC family. I'll close my remarks today by thanking those government partners who continue to place their confidence on us. We recently signed contract renewals with Rhode Island and New Mexico extending both contracts through June 2018. And the Federal Motor Carrier Safety Administration renewed their contract with us to extend the agreement through August 2018 for the company to continue to managing the pre-employment screening program. Finally, Pennsylvania extended our contract for two years, taking the agreement through November 2019. Thank you to our partners in Rhode Island, New Mexico, Pennsylvania and at the Federal Motor Carrier Safety Administration. We look forward to continuing to deliver great service to your agencies and the people you serve. And with that, I'll turn the call over to Steve Kovzan, NIC's Chief Financial Officer. Steve?

[Steve Kovzan:]

Thanks, Robert and good afternoon to everyone on the call. I was pleased with NIC's financial results for the second quarter of 2017. Total quarterly revenues grew 6% to a record $85.3 million, which record quarterly portal revenues of $79.4 million, up 5% over the prior year quarter. Earnings per share came in at $0.19 for the quarter. Total same-state basis portal revenues grew 7% for the quarter. Breaking down the components of same-state revenue growth, same-state IGS transactional revenue grew a healthy 12% this quarter, due mainly the strong results from corporate filing services and motor vehicle registrations in several states. Including Texas where we trended against a weaker quarter of revenues from the vehicle inspection service in the second quarter of 2016. As we announced last year at this time, beginning March 1, 2017, we contractually begin recognizing vehicle inspection revenues in Texas when registrations occur instead of when inspections occur, for vehicle inspected on or after March 1, 2016. This cause a temporary dip in vehicle inspection revenues in the second quarter of last year. Revenues subsequently returned to normal levels in the third quarter of last year and have generally been in line with historical level since that time. Same-state DHR transactional revenues were up 1% for the quarter. And finally same-state portal software development revenues decreased 22% for the quarter due to the timing of project based initiatives across several portals, which we expected. As I’ve shared on past earnings calls, we continue to expect same-state T&M revenues to be somewhat of a headwind this year after an unusually strong year of nearly 20% growth in 2016. Results for the second quarter of 2017 included revenues of approximately $1.7 million from the company's newest portal in Louisiana compared to approximately $300,000 in the prior year quarter during the pilot phase of the contract. In addition, revenues from the legacy Tennessee portal contract totaled approximately $2 million in the prior year quarter with revenues from the legacy Iowa portal contract totaling $500,000 in the second quarter of 2017. Recall that our contract with the state of Tennessee expired on March 31, 2017, and the Iowa contract expired November 30, 2016. Moving on software and services revenues grew 12% for the quarter driven by continued strong performance from the pre-employment screening program, which we manage for the U.S. Department of Transportation, Federal Motor Carrier Safety Administration. And by revenues from the new ECRB system for the Library of Congress, which we launched in the second quarter and which generated more than $400,000 in fixed fee revenues. Our operating income margin in the current quarter was 23%, down from 25% in the prior year quarter. This margin compression reflects higher development costs for the new enterprise licensing and permitting platform for the state of Illinois and other NIC partner states, the loss or profit contribution from the legacy Tennessee portal contract and higher selling and administrative expenses due mainly to personnel-related costs and costs to support and enhance enterprise technology, security and portal operations, including continued development of the Gov2Go platform. I'll conclude my remarks today with some additional color on Illinois and our annual guidance for 2017. During the second quarter we incurred more than $800,000 in cost of portal revenue related to Illinois, which we largely anticipated and factored into our annual guidance this year as part of the previously announced $2.5 million investment in the aforementioned enterprise licensing and permitting platform. However, we included no revenue from the Illinois in our guidance because we didn't have a signed contract at the time we issued guidance. But as Robert noted in his prepared remarks, it is possible we may be able to recognize $2.4 million of revenues yet this year, if we are able to deliver the first phase of the core platform by the end of the year. However, because of the proximity to year-end of our currently expected completion date for this first phase, there is a risk that delivery and acceptance of the system may not take place until early 2018. Any incremental revenue from Illinois would be potential upside to our current annual guidance. And with that, I will turn the call back over to Harry.

[Harry Herington:]

Thank you, Steve. I was pleased to see continued solid revenue growth for our core business this quarter. Transaction based services are the foundation of our business and every quarter I'm impressed with the new services our teams launched on behalf of our government partners. This quarter we also welcome the new partner Illinois, we launched new federal service for the Library of Congress and we're leading our government partners as we work together to harness the power of tomorrow’s technology today. With that Vicky, we will open up the call for questions.

[Operator:]

[Operator Instructions] We'll go first to Peter Heckmann with DA Davidson.

[Peter Heckmann:]

Good afternoon everyone. I wanted to follow up on Recreation One Stop that’s good to hear that this is moving forward. I'm curious at this point can you give us any additional detail in terms of -- it sounds like you're hoping the transition period would start in October. And as you talked about maybe how many employees you've hired there and how many you expect and if you expect to have the contracting with Booz by next quarterly call?

[Harry Herington:]

Well first off, welcome back Pete.

[Peter Heckmann:]

Thanks.

[Harry Herington:]

We’ve missed you. Right now we are midst of contract talks, subcontracting talks with Booz that limits a lot what we can talk about. Steve can give just a little bit of clarity on some of the revenue spin. But I need to be real careful, we're moving forward we got teams there working we're developing, but I don't want to tip my hand too much until I finalize and sign a contract with Booz Allen. With that I'll let Steve add any color.

[Steve Kovzan:]

Yes, I guess the only color that I would add Pete is that we certainly have begun to ramp up our team. And from a -- and I think as I have mentioned on it may have in the last call maybe, maybe the call before. We are incurring some startup expenses probably not materially different than the run rate we would typically incur to startup a portal. However you need to keep in mind is that this is a much longer phasing period it's about 15 months until next October of 2018 when the system would launch. But beyond that, we'll update you on future calls as developments continue and as we work to finalize our arrangement with Booz.

[Peter Heckmann:]

Got it, got it, okay. And then a follow-up on Illinois with the fixed fees, do those -- would you expect to be paid the annual fee in '18? No matter when you recognize the startup fees.

[Steve Kovzan:]

Yeah, and it's kind a hard to know Pete, like right now again our schedule puts delivery right at the end of the year. So payment certainly given typical timelines we've incurred with other states, don't know how Illinois works exactly. But yes, cash perhaps would be in 2018 if I had guess.

[Harry Herington:]

But we don't see anything that would cause us concern that it would be any later than 2018.

[Peter Heckmann:]

Right. If there is a potential you could double up in terms of recognizing both the startup fees and the first year annual fees in '18.

[Steve Kovzan:]

There is a potential we could double up recognizing revenues and collecting the cash in '18 is that what you say?

[Peter Heckmann:]

Recognizing the startup fees of $2.4 million and then also recognizing the annual fee of $1.75 million to $2.1 million.

[Steve Kovzan:]

All I see what you're saying the ongoing maintenance fees, sorry, everybody was looking at me in the room like [indiscernible]. And I wasn’t quite following you so my apologies. Yes, we could receive that initial fee, plus there is another $600,000 fee for the second half of the base platform we could also see in ‘18. And then the start of the annual fee, annual maintenance fee beginning in 2018 as well. Sorry, I'm not moving very quickly today.

[Peter Heckmann:]

No problem. That’s helpful. I'll get back in the queue. I appreciate the answers.

[Harry Herington:]

Thanks, Steve.

[Steve Kovzan:]

Sorry.

[Harry Herington:]

No, you are right.

[Operator:]

[Operator Instructions] And we'll go next to Brian Kinstlinger with Maxim Group.

[Brian Kinstlinger:]

Great, thank you. I'm only going to ask one question on Texas because I know you can’t give a lot. But you had mentioned that the terms are out there, which everyone can see. When I see the terms the budget imply less than EGOV’s revenue annually. And so that seems to suggest best case at least it will be a headwind once the contract begins, do you agree with this assessment?

[Robert Knapp:]

Well I appreciate you are not asking many question, and of course you are asking a question, I'm not going to speculate on. Because as you know we're going to turn in a bid, we are going to go in and hopefully be selected and when that happens we would expect to go into contract talks, talk about what’s best for the state, how it would all work. I mean, it would be way too speculative at this point and particularly arrogant on my part to even speak to that. So, although I can appreciate the frustration out there, I am just -- I'm excited about the opportunity where we are headed.

[Brian Kinstlinger:]

Okay. And Booz Allen subcontract, assuming an agreement happens eventually, are you able or do you think you will generate revenue before the 15 month phase in or is it 15 months of startup cost?

[Steve Kovzan:]

This is Steve, I am looking at Robert, no I don't think we would expect to generate any revenue during that time period before it launches.

[Brian Kinstlinger:]

Great, that's helpful to understand. On Illinois the $3 million of fees that's the $2.4 million for the first piece and the $600,000 for the second piece, have the cost already been recognized is that the startup cost that they’re reimbursing you for or meaning is that 100% margin when you recognize that?

[Steve Kovzan:]

I'll see what you are saying, we are going to -- I mean, certainly we're recognizing startup expenses as we speak. And we'll have ongoing expenses to staff the Illinois project and to maintain the system. So, and grow it and build services for other Illinois agencies that again we would anticipate to be transaction funded. So, I guess Brian we’ll just kind of have to see on the timing of when we recognize the revenue and how much expense we incur in that particular period.

[Brian Kinstlinger:]

Right, of course. But essentially that will be a one quarter spike, you not a software license company, there will be a one quarter spike in profitability most likely, is that right?

[Robert Knapp:]

Could be some lumpiness when we recognize that revenue both the $2.4 million and the $600,000 depending on the timing of things. Yes, it could be.

[Brian Kinstlinger:]

And then lastly the question I think I have asked I don't know how many times, but I'll continue to do just in case, I'm curious if there any new state RFPs that have hit the street that are not recomplete for example for centralized deals [ph]?

[Harry Herington:]

Brain this is Harry. No, there are no RFPs out on the street right now, we continue to have great conversations.

[Brian Kinstlinger:]

Great, thank you.

[Harry Herington:]

Thank you.

[Operator:]

And we'll go next to John Campbell with Stephens.

[Hayden Blair:]

Hi guys this is Hayden Blair for John. So just looking at I guess the initial guidance you guys laid out for the year, I think you guys had about $4 million assume for investment in Illinois and Gov2Go. And then you talk about both of those things at links on the call here. And so I'm just wondering if you do have any sort of push to get that initial phase out for Illinois or if there is any extra expense incur from Gov2Go, how that might be impacted on that original $4 million assumption?

[Steve Kovzan:]

No, I think we're -- that original $4 million assumption is reasonably accurate and we’re generally on track to stand that for the year.

[Hayden Blair:]

Great, okay. And then on the Your Pass Now you guys continue to attack on a few new parks here and there, but the senior passage you guys are selling cover 2,000 sites and parts I believe. So, is that the number that we can use as the ultimate penetration potential from the Your Pass Now program?

[Steve Kovzan:]

No, it's not, there are different numbers for the national parks in terms of which ones charge fees and so on and so forth. So I would not use that as a number.

[Hayden Blair:]

I got it. I appreciate it. I'll get back in the queue. Thanks.

[Steve Kovzan:]

Thanks, Hayden.

[Operator:]

[Operator Instructions] And it looks like we have no further question at this time. So, I’ll turn the call back over to Harry Herington for any additional or closing comments.

[Harry Herington:]

Thank you, Vicky and I want to thank you to everybody who joined us this afternoon. I also thank you for the sensitivity on the Texas RFO and respect to service there because that is one we’re actively working. I look forward to sharing more developments about the company on our third quarter earnings call in November. Thanks everyone.

[Operator:]

That does conclude today’s conference. We thank you for your participation.