NIC Inc
Q4 2017 Earnings Call Transcript

Published: 1 Feb 2018

[Operator:]

Good day and welcome to the NIC 2017 Fourth Quarter Earnings Announcement Conference Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Angela Davied. Please go ahead.

[Angela Davied:]

Thank you, Isaac. Good afternoon, everyone. And welcome to NIC's fourth quarter earnings call. The press release for NIC's fourth quarter 2017 earnings announcement was issued 30 minutes ago and our earnings release is also available on our corporate website at egov.com/investor-relations. You can also call our headquarters at 877-234-3468 and we will email the information to you. Joining us on the call today are NIC's CEO, Harry Herington; our Chief Operating Officer, Robert Knapp; and Steve Kovzan, NIC's Chief Financial Officer. Following the reading of our cautionary statement regarding forward-looking info our CEO and CFO will deliver prepared remarks. Then, 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 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 potential new contract renewals, statements relating to potential effective tax law changes, 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 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 full or in part, 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 on the SEC's website at sec.gov. Any forward-looking statements made during this call speak only as of the date of this call except as required by law, and 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, Angela. Today we're going to keep our remarks focused on key issues and our financials. As you know, the State of Texas relates the request for offer or RFO in mid-July last year. This RFO was issued as part of the standard rebid process all states must follow after they've exercised all of their contract renewals. The RFO included two components; one for managing texas.gov and existing digital government services and the second for payment processing. We have been informed by the Texas Department of Information Resources that we have been selected to negotiate a contract for payment processing services related to the texas.gov 3.0 procurement but not feel the component. Because this remains an urban [ph] procurement, we are prohibited by the terms and conditions of the Texas RFO from providing any additional information at this time. We do not want to risk being disqualified from the payment, processing, procurement negotiations. What I can share is that while we are very disappointed we did not secure both pieces of the procurement. We look forward to delivering outstanding payment processing services to the state for many years to come. As a reminder, our current contract for the State of Texas runs through the end of August, so our Texas operations and the associated revenue we are currently generating will not change overnight. We are also already explained ways that we may be able to expand our business going forward in Texas. I also want to emphasize that NIC is a financially strong company, in fact in 2017 we renewed 10 contracts and secured 2 contract rebids. Recently the State of Mississippi extended its contract with us for an additional two years, and the State of Maryland renewed its contract with us ahead of schedule for one year. We also recently signed a 6-year contract with Liens NC, LLC, the coalition of title insurance underwriters in North Carolina that we work with to provide the online Liens agent system. And our YourPassNow solution continues to expand; Yellowstone National Park, Everglades National Park, and Whiskeytown National Recreation Area recently joined the platform. We've also signed a contract with National Park service to make YourPassNow available at all of its location. There are 417 total sites managed by the National Park Service and 118 of them charge entrance pass fees. This is a great service that makes it even more convenient for all Americans to visit our nation's public lands and I'm excited to see it continue to expand. In 2017 we grew total revenues by 6% over the prior year. We will continue to make the right investment and innovate in the areas such as cloud-based platforms and new comprehensive systems for variety of agencies. All while we've worked to provide a new level of efficiency to digital government services; and we continue to expand our footprint with the federal government while we remain laser focused on delivering value to all of our government partners day-in and day-out. Finally, due to the significance of Texas to our revenue combined with the fact that this remains an open procurement, we will not be providing annual guidance for 2018 until the procurement has concluded. At that time we will issue a press release and hold the conference call with investment community to discuss our annual guidance. And keeping with our historical disclosure policy during open procurement and to comply with Texas state procurement regulations, we will not provide any more information or answer any questions on this topic. Again, we do not want to put our payment, processing, procurement at risk of being disqualified. We appreciate everyone respecting this. And with that, I will turn the call over to NIC's Chief Financial Officer, Steve Kovzan for review of our financial performance during the fourth quarter of 2017 and the full year. Steve?

[Steve Kovzan:]

Thanks, Harry. In the fourth quarter of 2017 we are in $0.16 per share compared to $0.20 in the prior year quarter. As discussed in additional detail in our earnings release, certain discrete tax items reduced earnings per share in the current quarter by $0.01 and increased earnings per share in the prior year quarter by approximately $0.03. Excluding these discrete tax items, our EPS in the current quarter would essentially be flat compared to the prior year quarter at $0.17. Moving on to the core results for the quarter. Total revenues rose 7% to $83.5 million with portal revenues also up 7% over the prior year quarter. Total same state portal revenues grew 6% for the quarter breaking down the major components of same state revenue growth, same state interactive government service or IGS revenues were up 13% from the prior year quarter. This solid growth was driven by some of our key nation-wide services including motor vehicle registrations and corporation filings. Same-state driver history record or DHR revenues were flat compared to the prior year quarter. And lastly, same-state time and materials revenues decreased 27% for the quarter similar to what we saw in previous quarters due to fewer T&M projects across various NIC portal states. Results for the quarter also included revenues of approximately $2.4 million from the company's newest partnerships in Illinois. Our team was able to deliver the first phase of the enterprise licensing and permitting system on-schedule by the end of 2017, and as we've shared in the past, we expect to receive an additional $600,000 in 2018 for completing the remaining system functionality. A few final portal revenue housekeeping items; revenues from the legacy Tennessee portal contract totaled $1.5 million in the prior year quarter and revenues from the legacy Iowa portal contract totaled approximately $200,000 in the prior year quarter. Recall that our contract with the State of Tennessee expired on March 31, 2017 and the Iowa contract expired November 30, 2016. Now onto recap our full year 2017 results. Total revenues were approximately $336.5 million in 2017, up 6% over 2016 exceeding the high end of our total revenue guidance for the year. Portal revenues increased 5% over 2016 to approximately $311.4 million. Same-state portal revenues finished the year up 6% with same-state IGS transaction based revenues up 11% and same-state DHR revenues up 1%. Same-state time and materials revenues relating to portal software development decreased 29% for the year. The components of our same-state growth for the year largely mirrored our results for the fourth quarter. Software and services revenues increased 20% in 2017 driven by this summer's one-time spike in revenues from the same of lifetime senior passes through the year pass now digital park pass service we managed on behalf of the National Park service, as well as continued growth from the federal pre-employment screen program and other payment processing services. Operating income increased 1% for the year with operating margins down slightly to 23% from 24% in 2016. We closed out 2017 with earnings per share of $0.77 exceeding the high-end of our earnings guidance for the year compared to $0.84 in 2016. As discussed in further detail at our earnings release, certain discrete tax items increased earnings per share in 2017 by approximately $0.02 and in 2016 by approximately $0.10. Excluding these discrete tax items, our EPS in 2017 would essentially be flat compared to 2016. Our continued financial strength in cash flow generation allowed our Board of Directors to declare regular quarterly cash dividends totaling $0.32 per share in 2017 and our Board of Directors recently declared a regular quarterly cash dividend of $0.08 per share for the first quarter of 2018 payable in March 2018. Finally, as you are all aware on December 22, 2017 the President signed into law the tax cuts and jobs act representing the most substantial overhaul of the U.S. tax code in more than 30 years. Prospectively, we currently expect the new tax laws will have a significant positive impact on NIC's effective tax rate and the amount of cash taxes we ultimately pay. The act includes a number of changes to existing tax law affecting companies like NIC including most notably, a permanent reduction in the federal corporate income tax rate from 35% to 21% starting in 2018 which more than offsets the elimination of the Section 199 domestic production activities deduction and the Section 162 end deduction for qualified performance based executive compensation, both of which we benefited from for the past several years. Furthermore, we were pleased to see Congress keep the research and development tax credit which we will continue to benefit from and from an immediate deductibility of all qualified capital expenditures placed in production after September 27, 2017, also referred to as bonus depreciation. All-in-all, we anticipate our normalized effective tax rate in 2018 to decrease by potentially more than 10 percentage points in range from 24% to 25%. We will continue to evaluate the impact of the tax law as federal tax regulations and guidance maybe issued in the future. And with that, I'll turn the call back over to Harry.

[Harry Herington:]

Thank you, Steve. Again, one more reminder that we will not be able to answer any questions related to the Texas procurement. With that Isaac, we are now opening the call for questions.

[Operator:]

[Operator Instructions] And we'll take our first question from John Campbell with Stephens. Please go ahead.

[Unidentified Analyst:]

I was wondering if you could just give a recreation.gov update; I know that's a projected October start, is there any update for timelines or expected timelines for any actual financial contributions or anything like that that you guys can drive for us at this time?

[Robert Knapp:]

We should continue to work with Allen [ph], who obviously we are working with in delivering of that system and it is still under legal situation that hasn't been resolved yet at this point in time and so we really can't comment until that's taken care off.

[Harry Herington:]

What I would say is, we are working full steam ahead. The agency with Hamilton [ph] and we're looking forward to this opportunity.

[Unidentified Analyst:]

I know you guys can't speak specifically to any contracts right now but just kind of looking at the recent trend of kind of looking at these contracts as separate portal management and payment processing contracts, it seems like we've had kind of different outcomes, different times when this has happened; so in the future when looking at you guys individually in each of those areas instead of at an enterprise level, what are the pain points, what are the strong suites, what are you guys going to be really pitching moving forward individually in each of these areas that is the EGOV strength in these areas instead of looking at it kind of an enterprise level?

[Harry Herington:]

Well, first off we're still pursuing enterprise level, we're still having conversations. I know it's been little bit of time before we've secured that an enterprise-wide transaction funded contract but we're still having conversations there. The other thing is we've looked at and we're having great conversations with some of the enterprise-wide platforms, we've talked about Gov2Go and the licensing opportunity that's in Illinois and those type of things. And then we're very flexible, the things we've looked at and sometimes that's what's led to the contracts not being as long-term as others or we look at other funding opportunities whether it's for a particular agency or set of agencies.

[Operator:]

We'll take our next question from Peter Heckmann with Davidson. Please go ahead.

[Peter Heckmann:]

What do you think in terms of strategy for the company from here? If we thought about how offset potential lost revenue from Texas; how do you think that growth shakes out? Is it federal or is it enterprise portals? Is it agency deal for states? And in order to shift the strategy will the company need to invest some more money?

[Harry Herington:]

You asked a lot of information and I will tell you -- I will give you a shorter answer than the question itself, we've been focused for the past several years. How do we diversify beyond just our traditional enterprise-wide transaction based opportunities, we knew that we had to grow this company in different ways; we knew that technology was changing, the needs of government whether that be local, state or federal was changing and the sales proposition that we brought to the table needed to change with that. That's one of the reasons you saw -- several years ago we focused hard on federal and see that they have got to the point now where they have the ability to do transaction based in other types of services that we provide to the citizens and businesses, so we made a definitive investment there and we continue to push that and we're excited about the traction that we gained and we continue to gain there. At the same time we looked at the states and said, even though we have great conversations and we've -- and you've seen some opportunities that have come -- have gotten out there and just never made it all the way to the finish line, what's driving this, what do they need. The Gov2Go platform, that is just a new platform that we're out there pushing so it differentiates us, it's actually a platform that enables us to do a lot more with government the way they need to do business with their citizens and their businesses by consolidating that into one spot where people can go to. And then the licensing I just mentioned, I mean that's another where we look at from a micro services and a unified licensing platform where you can capture the majority of the businesses in a state. So I would say we are being -- we've been innovative and flexible and we're seeing some of that pay off now. Texas is what it is, we're focused on how do we grow this company.

[Peter Heckmann:]

And then as a follow-up; are there any opportunities that you might be willing to share or point us to either in enterprise portals for states, federal opportunities, agency opportunities, anything out there that maybe the market has missed that maybe an opportunity?

[Harry Herington:]

If there is any time to break our policy and talk about things, this would be tempted [ph] but it would be inappropriate, there is nothing that I'm ready to talk about now, I don't want to signal any of the competitors or others, where we're at in different parts of ourselves, pipeline.

[Operator:]

We'll take our next question from Joseph [ph] with Loop Capital. Please go ahead.

[Unidentified Analyst:]

Just a follow-up to Pete on this point of new opportunities and alike. I was wondering if you've reconsidered any more broad M&A strategies perhaps cast a wider net out there with your clients giving kind of the uptake of cloud and new technologies and your good position in the market? And then as a follow-up -- the kind of question that gets asked every quarter on potential new activity out there among new logos. Thank you.

[Harry Herington:]

Absolutely. As far as [indiscernible] there is nothing out on the street that is public information, this is really -- nothing we can speak to there. On M&A, that is a strategy we consistently look at, we are often I'm certain to say, other companies that would make sense for us would come into the fold that would either bring a technology, contract vehicles, new revenue streams, we constantly explore those and we will going forward as with conversations we have with the Board of Directors.

[Operator:]

We'll take our next question from Allen [ph] with Sidoti & Company. Please go ahead.

[Unidentified Analyst:]

The last two years when you gave forward guidance, you kind of mentioned some initiatives that added two expenses; is there anything that you wanted to point to now that is going to change the rate of expense growth or not?

[Steve Kovzan:]

No, Allen, I think we'll hold off; hopefully we'll be able to issue our guidance for 2018 and relatively short order. And hold up a call with you then and provide some more color then.

[Unidentified Analyst:]

And then just an update for Illinois, kind of what your plans are in '18?

[Steve Kovzan:]

Well, I guess I would say that we still have some remaining functionality to deliver under the core enterprise and licensing in permitting system and I know our team in Illinois, and I want to speak for Robert is busy building relationships and making contacts with other state agencies to potentially to work with.

[Unidentified Analyst:]

And lastly, is there any consideration of changing your policy of avoiding buybacks of your stock?

[Harry Herington:]

We haven't using the term avoiding buybacks, buybacks in anything with capital allocation goes to Board of Directors, it's something that they talk about on a regular basis at all board meetings, something that they take -- and I'm certain what I take very serious. So I would just say that with all capital allocations, buybacks and dividends is an ongoing discussion.

[Operator:]

[Operator Instructions] We'll take our next question from Brian Kinstlinger with Maxim Group. Please go ahead.

[Brian Kinstlinger:]

I'm curious if you guys still believe 8% to 12% same-state growth for IGS remains sustainable. I guess I wonder as some of your contracts become more mature, will that start to fall back or are you hardly penetrated enough of the states that that -- there is enough headroom for that?

[Robert Knapp:]

I would just initially state we see as much opportunity in states with IGS as we've ever seen. And so certainly the opportunity or that growth is there, I would hesitate and look to Steve whether we've -- I am not sure if we would want to comment on that and save that for our guidance discussion but certainly when we look historically, we continue to see the same opportunity for IGS growth that we've seen in previous years.

[Steve Kovzan:]

Brian, I guess I would point you out to our most recent quarterly and annual results. If you look in the fourth quarter, same-state IGS growth was up 13% for the year, it's probably closer to 11% and so certainly upper single-digits, lower double-digits growth we think certainly for the foreseeable future is definitely achievable.

[Brian Kinstlinger:]

And then Harry you mentioned potentially breaking policy; so I'm wondering without naming any state particularly do you think that in RFP for enterprise, for state will emerge in the next 12 months based on your conversations or do you think that's unlikely?

[Harry Herington:]

That's one disadvantage of being a publicly traded company, I just can't talk about that, I cannot give that up for the competitors or put the stakes even if I was to allude there was something coming [ph].

[Brian Kinstlinger:]

Two more; first one -- Steve, I think I noticed, maybe I was mistaken that SG&A spiked a little bit in the fourth quarter compared to the previous three quarters; can you talk about what drove that and maybe I missed it?

[Steve Kovzan:]

I wouldn't say it was any one particular thing. I think the third quarter is probably a little bit lower and as we continue to invest in things like Gov2Go and some of these other growth initiative, there is some of that in there in addition to kind of just some of your standard year-end true-ups but nothing of individual significance that I could point to.

[Brian Kinstlinger:]

So then if I could just characterize, the fourth quarter is a little bit seasonal strong in SG&A but it's not far-off from where your run rate is right now on a quarterly basis?

[Steve Kovzan:]

I think last year's fourth quarter was a little bit seasonally strong and I'll hold off on run rate until we provide some guidance on the next call.

[Brian Kinstlinger:]

Last question, as it relates to Illinois. Can you remind us when you -- if you can, when you deliver on your final deliverable, what is the rough size of the payment in timing? And then more importantly, because that's one-time, what is the minus of the revenue generation model following that with Illinois, how will you generate going forward?

[Steve Kovzan:]

Hopefully sometime in 2018 we will deliver that final functionality and it would be an additional of about $600,000. Then the revenue model going forward is that at some point in time next year as well, the maintenance period will start and run through the next five years and we'll get about $1.7 million on an annual basis year one and that will grow to $2.1 million overtime in year five. So that's kind of the core platform but the hope is certainly that we can start building relationships, identifying services and securing agreements with agencies within the State of Illinois to grow our revenues beyond that, certainly whether that will be transactional or other types of business models.

[Brian Kinstlinger:]

Now do you have people on the street right in Illinois ahead of full implementation beginning those relationships or do you have to wait until the system is built for them?

[Robert Knapp:]

We have a team that's dedicated to forming those relationships, obviously as they are working to build out the enterprise licensing system, they are making lots of contacts and working with lots of leadership in Illinois and the intent is to expand on those as we go forward.

[Operator:]

And we'll take our next question from Herb [ph] with Stiefel. Please go ahead.

[Unidentified Analyst:]

Harry, can you evaluate the competitive landscape today and indicate to us how you can give us some confidence that you think you can retain your existing business?

[Harry Herington:]

That's a fair question. The landscape continues to evolve and it always has, what we have now is as I stated earlier, government is looking for in certain circumstances enhanced solutions, different platforms; as we've been in some of this, we've seen others visit integrators, government integrators providing those platform capped solutions. So yes, we have more competitors out there, as far as the business, it is unfortunate whenever you lose a contract and I realize that's disappointing to the stockholders but it is business, we still have over half the country under contract, we're very bullish from where we're at and where we're going. We had 10 contracts last year that were renewed with us and we secured two rebids.

[Unidentified Analyst:]

Hopefully at some point you will explain why or how you lost this business and I assume you will be able to discuss that with us maybe on the next call?

[Harry Herington:]

I can't speak anything right now about this and I try to pride myself in being as open as I can but on Texas I'm just too prohibited.

[Operator:]

And we'll take our next question from Gary Prestopino with Barrington. Please go ahead.

[Gary Prestopino:]

They have all been answered or asked. Thanks.

[Operator:]

[Operator Instructions] And at this time it appears there is no further questions, I'll turn it back over for any closing or ending remarks.

[Harry Herington:]

Thank you, Isaac. And thanks everyone who joined us this afternoon. As we have shared, we will provide our annual 2018 guidance at a later date and we will announce our first quarter 2018 financial results on April 30 followed by our annual stockholder meeting in Kansas, the following day on May 1. Thank you for your time.

[Operator:]

And this concludes today's call. Thank you for your participation. You may now disconnect.