NIC Inc
Q4 2016 Earnings Call Transcript

Published: 2 Feb 2017

[Operator:]

Good day and welcome to the NIC Incorporated 2016 Fourth Quarter Earnings Announcement. Today's call is being recorded. At this time, I would like to turn the conference over to Angela Davied. Please go ahead.

[Angela Davied:]

Thank you, Gwen. Good afternoon, everyone, and welcome to NIC's fourth quarter earnings call. The press release for our earnings call today was issued 30 minutes ago and 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 email 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 past or future dividends 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, 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-Q and 10-K 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 is my pleasure to introduce Harry Herington, NIC's Chief Executive Officer and Chairman of the Board.

[Harry Herington:]

Thank you, Angela. Welcome to our fourth quarter earnings call. I thank you for joining us today. 25 years ago, we set out with a mission to revolutionize government. I don't use the term, revolutionize lightly. We were introducing a truly disruptive concept to remove layers of bureaucracy from government and radically transform the way citizens and business interacted with agencies. What we created back then was a complete game changer. Even though we have far surpassed the text only, green screen computers and modem-to-modem connections of the early 90s, our focus remains exactly the same. We have just as much passion today about radically enhancing the way people interact with government as we did a quarter-century ago and the fourth quarter of 2016 as well all the past year in general, proved this laser-like focus and unwavering commitment to improving government interactions can produce solid, recurring organic growth quarter-after-quarter, year-after-year. In fact, in 2016, we reached new heights, surpassing the high end of our guidance by achieving record revenues and profitability, launching new services, using new technology, providing the means for citizens and businesses to complete more than 350 million online transactions and securely processing more than $26 billion on behalf of our government partners. Some of the highlights from 2016 include the State of Louisiana affirming the enterprise-wide transaction-based model for digital government works as well today as it ever has. After transitioning from the pilot program to an enterprise portal in July, we now successfully manage several digital government services in a mobile app for the state. We launched the most comprehensive outdoor recreational licensing system ever built by NIC; Go Wild Wisconsin. This system produced more than three million transactions for the online purchase of more than seven million various items and generated nearly $1.8 million in revenue for us since its launch in late March. Needless to say, the new system delivered countless efficiencies to outdoor enthusiasts in the badger state. At our Annual Stockholders Meeting last May, we introduced Gov2Go, the nation's first digital government assistant that delivers citizen-centric government interactions. This system continues to break down the barriers of state agency silos and deliver on the promise of one person, one government. This promise means you no longer have to navigate all of the various state agencies for all of your government interactions. Gov2Go delivers one government access point and an experience that is personalized for each individual through its virtual assistant functionality. Our vision for Gov2Go is regardless of which state you live in, you turn to this single platform to interact with all levels of government. In many ways, this is similar to the disruptive game-changing approach we were founded on. While it may not provide significant new revenue streams in the short term, it is a new channel for interacting with government. We recognize there is a shift in expectations and younger generations will not allow themselves to be tethered to a desktop computer in order to complete their business with government agencies. We are in front of this trend. We understand their desires and have been working with several partner states to bring Gov2Go to their citizens. Transforming the future of government interactions through Gov2Go will require an investment in 2017 that Steve will touch on in a moment, but I will close by saying we believe in this platform. It gives NIC a competitive edge and represents the future of digital government. Also in 2016, we generated positive momentum in our federal business development efforts. We launched digital park entrance passes at three national parks earlier this year and during the fourth quarter, we expanded these efforts to include the U.S. Forest Service as we now provide digital passes to the Columbia River Gorge in Oregon. This offers a new opportunity to showcase our services with the U.S. Department of Agriculture in addition to the Department of Interior, another positive door opener. And last quarter, we shared with you our new engagement with the Library of Congress, which is currently underway and progressing nicely. And finally, we are hopeful positive developments are on the near-term horizon for our partnership with Booz Allen Hamilton, the prime contractor on their recreation.gov award, which we announced last spring. On our last call, we informed you that the incumbent vendor for recreation.gov had filed a protest with the U.S. Court of Federal Claims. It is our understanding that the hearing took place last week and that the next step would be for the court to issue a written ruling within the next few months. Nevertheless, we're pushing ahead to all we can to get our ducks in a row, so that once this process has concluded, we can mobilize quickly. One thing to be aware of is that the RFP contemplated a 15-month phase-in period to build out and implement the system, during which time we expect to incur fairly substantial start-up cost, which due to the ongoing delay related to the protest, we have not fully incorporated into our 2017 guidance. We will provide updates on future earnings call as events unfold, but needless to say, we continue to be excited about this opportunity and the positive momentum we saw in 2016 on the federal front. Even with so many positive developments recently, they are now in our rearview mirror and we are aggressively looking forward. We will continue to seek out new digital government services to develop, new technologies to use and new partners to join the NIC family. One new partner I'm excited to announce is the State of Illinois. In December, the State announced, we were the successful bidder on a state-wide permitting and licensing RFP, and while we do not yet have a contract, negotiations are underway and progressing well toward a new partnership for our license and permitting platform. The statement of work will provide for a digital government platform that can be extended over time to support license and permit solutions for key Illinois agencies. We intend to deliver the first phase of the Illinois platform using the cloud and leveraging components available in other NIC states. This innovative approach helps us drive efficiencies across the NIC family and in support of our current and future partners. I believe this solution demonstrates our flexibility and how we pursue new partnerships and secure beachheads in states, particularly one the size of Illinois. More on the specific investment in the system in a moment when Steve discusses our 2017 guidance. As we continue to develop new services and add new partnerships, we are reaffirmed our confidence in the ongoing growth and stability of our company, with the initiation of NICs first regular quarterly cash dividend, which we announced last quarter. On January 30, NIC's Board of Directors declared the regular quarterly cash dividend of $0.08 per share, totaling approximately $5.3 million to be paid on March 21 to stockholders of record on March 7. Again, we're pleased to solidify our commitment to provide ongoing value to stockholders and reinforce our positive outlook for NIC. Overall 2016 was a year of continued progress and positive development for our business. We finished the year strong, produced healthy financial results. I am pleased with what we accomplished. I know we are making the right investments in 2017 to continue to strengthen our business. What we are building today is definitely shaping tomorrow. I look forward to charging ahead through our 25th anniversary year, as we deliver the best service possible through our government partners and continue our mission of making government more accessible for everyone. And now for a deeper dive in our operations, I'll turn the call over to Robert Knapp, NIC's Chief Operating Officer; Robert?

[Robert Knapp:]

Thank you, Harry. I'll begin by echoing Harry's comments. Our portal teams are executing on our mission, delivering great work, expanding our partnerships to more government agencies, harnessing the latest technology and developing new revenue-generating services. In particular, during the fourth quarter of 2016, our financial results were driven by what you might say are bread-and-butter services like motor vehicle registrations in Colorado, payment processing in Maryland and hunting and fishing licensing in a number of states, particularly Wisconsin with Go Wild. We also launched several new services during the fourth quarter. I am always pleased when we can streamline a service and deliver more transparency to a process. This is the case in Nebraska. The Nebraska State Records Board, recently approved Nebraska Interactive and our partners at the Nebraska Brand Committee to build a comprehensive end-to-end solution for the State's cattle industry, which was previously bogged down in manual, paper-based processes. This new system will enable online payments, record cattle metrics and track brand inspections. Brand inspectors will be able to input cattle data into a tablet device. Cattle producers will be able to pay fees instantly on site and all of this data collected in the field will sink in near real-time. No more paper and no more data entry by hand. The portal will generate revenue per each head of cattle inspected. Cattle is big business in Nebraska. In fact, it's the largest agriculture industry in the state and head of cattle far exceed the state's total population. Being a part of the NIC family also means sharing best practices and streamlining development time from state-to-state. In Maryland, our team and their partners at the Maryland Department of assessments and taxation recently launched a Uniform Commercial Code or UCC Services System. We have developed several UCC services over the years. However, what is impressive about this particular system is that we were able to leverage the codebase from the system we developed in South Carolina, which eliminated six to eight months of development time. More than 42,000 filings have already been processed in the first 10 months of the new system and the addition of new system enhancements are already underway. This is a great example of how we strive to rapidly deliver great services to all of our government partners every day. Arkansas is another portal, which continues to deliver great efficiencies to its government partners and the people of their state. Harry mentioned our vision of Gov2Go to create a single access point for all of a citizen's government interactions. We continue to expand the notification capabilities of Gov2Go during the fourth quarter. During election season Gov2Go came to Apple TV. Through this additional channel, those with Apple TV could look up personalized voting information and receive reminders about where to cast their vote. We look forward to incorporating more states into the national Gov2Go platform in 2017. Also, out of Arkansas, we have seen more and more people using the touchscreen kiosks we deployed in DMV offices back in 2015. You may recall that when we set up dozens of iPad-based kiosks in several revenue offices as part of our state pilot. Since that time, nearly 150,000 transactions have been conducted using the kiosks, saving approximately 20 minutes from each visitor's trip to the DMV. In addition to delivering convenience and efficiencies, it is also great news when our work is recognized with awards and honors. In November, the federal pre-employment and screening program was honored as a semifinalist for the Harvard Innovations in American Government Awards. Specifically, the Harvard Kennedy School asked Center for Democratic Governance and Innovation chose PSP as a semifinalist from a field of more than 500 applicants. This program sets out to recognize, promote and disseminate innovative programs, policies and practices, so they can become widely adopted and established as best practices. It is an honor to receive this caliber of recognition. Congratulations to our team in DC and their partners with the Federal Motor Carrier Safety Administration. Finally, I will close by thanking our partners who continue to place their confidence in NIC. Recently two NIC subsidiaries received contract extension. Connecticut Interactive received a three-year contract extension from the State of Connecticut, taking the contract through January 2020 and the State of Montana extended its contract with Montana interactive for two years, taking the agreement through December 2019. Thank you to our partners in Connecticut. Montana. We appreciate the trust you continue to place in us and we look forward to many more years of successful partnership and innovative digital government solutions. And with that, I'll turn the call over to Steve Kovzan, NICs Chief Financial Officer, Steve.

[Steve Kovzan:]

Thanks Robert and good afternoon everybody. Today I will discuss results for the quarter, briefly recap full year 2016 and then close with our guidance for 2017. In the fourth quarter of 2016, we earned $0.20 per share, compared to $0.13 in the prior year quarter. Similar to the third quarter of 2016, discrete tax benefits positively affected EPS this quarter. Our effective tax rate was 19% in the quarter compared to 36% in the prior year quarter. The lower effective tax rate was primarily attributable to favorable benefits relating to the amendment of our fiscal 2013 and 2014 federal tax returns during the quarter to include the Section 199 domestic production activities deduction, which we recognized for the first time in the third quarter of 2016 for our fiscal 2015 and 2016 tax years. These discrete tax items increased earnings per share this quarter by approximately $0.03. Moving on the core results for the quarter, total revenues rose 10% to $78.3 million, with portal revenues also up 10% over the prior year quarter. Total same-state portal revenues grew a healthy 9% for the quarter, breaking down the major components of same-state revenue growth. Same-state Interactive Government Services or IGS revenues were up 10% from the prior year quarter. As Robert mentioned, this growth was driven by some of our key nationwide services including motor vehicle registrations, payment processing and hunting and fishing licensing. Same-state Driver History Record or DHR revenues grew 2% over the prior year quarter, driven primarily by higher transaction volumes in a number of states and rebounding nicely from the softness we saw in the third quarter of 2016 when same-state DHR revenues were down 1%. Lastly, same-state time and materials revenues were up in and usually high 83% for the quarter due to the completion of some large projects in a handful of states. As the saying goes, we'll take it when we can get, but I'll reiterate what I said in the past. This small percentage of our revenue is lumpy and far less predictable quarter-to-quarter than our transaction-based IGS and DHR revenues as evidenced by our same-state TNM growth rates the last three quarters, which were down 25% in Q3 2016. down 10% in Q2 2016 and up 25% in Q1 2016. Results for the fourth quarter of 2016 also included revenues of approximately $1.4 million from the company's newest portal in Louisiana. In addition, revenues from the Tennessee portal contract, totaled approximately $1.5 million for the quarter. As we shared with you on our last earnings call, we expect to continue transitioning services back to the State of Tennessee in anticipation of our contract expiration on March 31, 2017. Wrapping up portal results for the quarter, revenues from the legacy Iowa portal contract, which concluded on November 30, totaled approximately $200,000 for the quarter. Moving on, software and services revenues increased 7% to approximately $5.1 million in the fourth quarter of 2016, driven by several payment processing services. Last year at this time, we reported our first full quarter of revenues from payment processing services in the City of Portland. Unfortunately, we recently learned, we will no longer provide payment services for parking meters after March 2017, as a city's parking meter vendor now has the integrated capability to process payment and for a much lower price than we are willing to accept. Although we will continue to provide other payment services to the City, parking payments were by far the largest component, accounting for approximately $1 million of high-margin revenue in 2016. Now on to a recap of our full year 2016 results. Total revenues were approximately $317.9 million in 2016, up 9% over 2015, exceeding the high end of our total revenue guidance for the year. Portal revenues also increased 9% over 2015 to approximately $297 million. Same-state portal revenues finished the year up 9% in line with our historical 8% to 10% average, with same-state IGS transaction-based revenues up 12% and same-state DHR revenues up 2%. Same-state time and materials revenues relating to portal software development increased 19% in 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 11% in 2016, driven by continued growth from payment processing services and the federal pre-employment screening programs. Operating income increased 16% for the year with operating margins improving to 24% up from 23% in 2015. We closed out 2016 with earnings per share of $0.84, up from $0.63 in 2015, far exceeding the high end of our earnings guidance for the year. Recall that 2016 results include discrete tax items related to the Section 199 domestic production activities deduction for fiscal years 2013 through 2016 and an increase in the previously estimated federal research and development tax credit for the 2015 and 2016 tax years. Combined these items and certain other nonrecurring tax adjustments increased earnings per share by approximately $0.10 for the year. And finally our continued financial strength once again allowed our Board of Directors to declare and pay a sizable special cash dividend of $0.65 per share in the fourth quarter, marking the 10th consecutive year we have declared special dividends, bringing the total capital return to our stockholders to more than $280 million since we first started paying special cash dividends in 2007 and as Harry just mentioned, our Board of Directors recently declared our first regular quarterly cash dividend of $0.08 per share payable in March 2017. Now on to our financial guidance for fiscal year 2017, we currently expect total revenues of $323 million to $333 million with portal revenues ranging from $302 million to $311 million and software and services revenues of approximately $21 million to $22 million. We currently anticipate earnings per share to range from $0.69 to $0.72. First, I'll provide more color on our topline revenue guidance. The high end of our guidance reflects 5% total portal revenue growth with solid same-state revenue growth just below recent historical averages as we currently expect same-state time and materials revenues to be a headwind and declined modestly in 2017 after an unusually strong year of 19% growth in 2016. The high end of our revenue guidance reflects same-state IGS and DHR transactional revenue growth in line with 2016 growth rates. As a housekeeping item, Louisiana will be included in the same-state category beginning in the third quarter of 2017 as the portal began generating DHR revenues on July 1, 2016, following the successful pilot period. The loss of revenue and not to mention profit from the legacy Tennessee portal contract into a much lesser extent the loss of revenues from the Iowa portal contract, will be obvious headwinds in 2017. We currently expect revenues from Tennessee to end in March 2017, when our contract expires in range from $1 million to $1.5 million for 2017 down from $7.5 million in 2016. Revenues from the legacy Iowa portal contract ended in November 2016 and totaled $1.6 million in 2016. Finally, our revenue guidance reflects no revenues from the Illinois Licensing & Permitting Award, which I will touch on more in a moment, as we have not yet negotiated the contract. Our guidance for software and services revenues reflects approximately $500,000 from our new federal Library of Congress Contract for the delivery of the initial system sometime in the first half of the year pending the government's acceptance. And the loss of the aforementioned City of Portland parking payment service, resulting in a year-over-year decline of approximately $1 million in high-margin transactional revenue. Next, I'll provide some color on the cost side of our guidance, which reflects significant investments in the development of a few new major services either tied directly to future revenues or that we believe are critical in order for NIC to continue to leave the digital government services industry. The first investment I'll start with is our recent RFP Award in Illinois. As Harry mentioned, we will be providing a comprehensive platform from which various components and modules can be configured to quickly serve a number of licensing and permitting needs. We already have firm plans to use this platform to build out new capabilities and replace a legacy professional licensing system for another partner and may also use the system in a few other partner states in 2017 for different purposes. So, we are committed to providing a platform solution that meets the needs of multiple partners. Our guidance reflects nearly $2.5 million in incremental portal costs as an investment in this enterprise digital government platform over the course of 2017. At the time the Illinois contract is successfully finalized, we will likely occur additional costs as we staff up the team that will deliver on the Illinois contract. However, it is possible we may be in position to deliver the initial system requirements in the second half of this year and recognize revenue that could offset a sizable portion, but certainly not all of these development and delivery costs, but to reiterate, our guidance reflects no revenue from Illinois. And as Harry stated earlier, realizing our vision of one person, one government, will also require ongoing investments in Gov2Go in 2017. We are working on foundational elements such as One Click Payments in order to launch Gov2Go across several of our partner states. This represents the leading-edge channel of accessing digital government services and as reflected in our guidance, we currently expect to invest approximately $1.5 million, most of which is expected to hit the selling and administrative expense line, to enhance Gov2Go, the Gov2Go national platform in 2017. The final investment I will touch on is recreation.gov. We are planning now so that once the protest has been adjudicated, we can move quickly to start the project with Booz Allen Hamilton at the prime contractor. We already have a small dedicated team in place, the cost of which is included in our guidance. The team would expand in order to build out and implement the system during the 15-month phase-in period as contemplated by the RFP, during which time we would expect to incur fairly substantial startup costs. However, we have not yet incorporated these buildout costs into our 2017 guidance because of the ongoing protest. Combined, these three areas of investment; Illinois, Gov2Go and recreation.gov, total about $4 million in costs reflected in our 2017 guidance that will be dilutive to our bottom line this year. On an EPS basis, this equates to about $0.04 per share. However, we view this as a good problem to have as certain of these investments are directly tied to future revenue growth and profit contributions in 2018 and beyond. Moving on, the high end of our guidance reflects portal and software and services gross profit margins and our consolidated operating margin below our fiscal year 2016 results, mainly due to the investments I just mentioned and the loss of revenues and profit contributions from the Tennessee portal and the City of Portland Parking Payment Service. Furthermore, we currently expect depreciation and amortization expense to increase in 2017 by as much as $1 million, following two consecutive years of declines in 2015 and 2016, as we expect capital expenditures to range from $8 million to $9 million above our $5.6 million spend in 2016. Expected 2017 CapEx reflects IT infrastructure investments and refreshes in a number of portals and in our centralized hosting environments to support and enhance our security efforts and the infrastructure needs of our portal business. In addition, we expect capitalized internal used software development costs to range from $3 million to $4 million above our $2.6 million spend in 2016, mainly to build out Gov2Go and for enhancements to our industry-leading proprietary payment processing applications and internal application development tools. Finally, as I previously mentioned, we currently expect our effective tax rate to approximate 36.5% in 2017, reflecting tax deductions from the Section 199 domestic production activities deduction and the research and development tax credit. One final reminder, as always, our projections do not revenues or costs from any unannounced contracts. I am quite pleased with how the core business performed during the fourth quarter and how our teams executed throughout the year. Our core transaction-based applications continue to provide strong recurring revenue growth in line with our historical averages and we are launching new services and creating new efficiencies every day. We believe we are making the right investments in 2017. Despite the dilutive effects, the investments will have in our bottom-line should drive future revenue growth and keep NIC at the head of the pack when it comes to providing digital government solutions. Finally, our strong business and predictable cash flows also allowed us to initiate our first regular quarterly cash dividend. Not only do we hope this reinforces the stockholders our positive outlook for NIC, we believe it could broaden our shareholder base by attracting dividend-seeking investors and improve the liquidity of and demand for our stock. We also believe this is a comfortable starting point that gives us the ability to potentially raise the dividend level as the company grows without impairing our future growth and assuming the continued growth of our cash flows, we will keep building surplus cash and maintaining the flexibility to pursue strategic growth opportunities, both internal and external or pay special dividends from time to time, but probably less frequently than annually. It goes without saying that I'm incredibly proud of our employees who create great partnerships with government and make NIC a great place to work. I look forward to reporting more positive developments with you as the year unfolds. And with that, I will turn it back to Harry.

[Harry Herington:]

Thank you, Steve. As you just heard, the fundamentals of our business are strong and we continue to focus on the mission we set forth 25 years ago and while we continue to work with more and more state agencies, we are also diligently working to add new federal partners and expand our footprint in Washington DC. I believe 100% that we are doing the right things to grow our business and look forward to what 2017 has in store. I want to thank our employees, Board of Directors, government partners and our investors for successful year. I appreciate your support. With that Gwen, we'll open the call for questions.

[Operator:]

Thank you. [Operator instructions] And we'll go first to Peter Heckmann with Avondale Partners.

[Peter Heckmann:]

Good afternoon, everyone.

[Harry Herington:]

Hi Pete.

[Peter Heckmann:]

Hey. Just to clarify your comments as regards rec one-stop, you said there was a hearing last week and you expect a final ruling within a couple months. Should I infer from that, that the protest process is over or is there still some uncertainty as whether that protest might reopen the procurement process?

[Harry Herington:]

Pete, I'll answer. This is Harry and it is my hope that that means it's over. The way we have looked at all the investigation we've done into, this seems to be pretty much the final process, but keep in mind, we are new at this when it gets into this level of a protester that has occurred at a federal level. So could there be a surprise that we're unaware? Absolutely, but we do not think that's the case.

[Peter Heckmann:]

Okay. That's helpful. And then as regards the Illinois Permitting & Licensing Award, congratulations on that.

[Harry Herington:]

Thank you.

[Peter Heckmann:]

You're welcome and so some investments there. We'll be able to leverage those across several states, just in terms of trying to size that. I think we had maybe made an estimate from the RFP that something in the potentially $3 million a year range, is that maybe a decent place to start or are we way off?

[Steve Kovzan:]

Well Pete, hey, this is Steve. Certainly, that's kind of the number that the government throws out there and as I always say, those results may vary as it relates to contract value, but certainly we think that it's going to be a nice piece of business for us and as you can -- as we shared with you, we're investing pretty heavily to build out the system that could be used there and other places as well. So, we'll hold off on revenue until we get a signed contract. Hopefully we can update you on that next quarter.

[Peter Heckmann:]

Okay. Great. I'll get back in the queue. Appreciate it.

[Harry Herington:]

Thanks Pete.

[Operator:]

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

[Hayden:]

Hey guys. This is Hayden stepping in for John. Hey guys. So, the $1.4 million on the Louisiana revenue, is that fully ramped and is that kind of the run rate we should expect moving forward?

[Steve Kovzan:]

Yes, I think that's a pretty decent run rate. Hopefully, we continue to grow the business…

[Harry Herington:]

Because that's kind of the current ramp run rate.

[Hayden:]

Got it. And then curious just with the recurring dividend now, you talked about potentially some special dividends although likely not annually, but also I mentioned still looking at strategic opportunities and I'm just curious with all of the different product developments that we're hearing, there seems to be consistent theme of leveraging existing technology, existing product development to apply these different products to different states and governments. But what are you missing at this point? What kind of opportunities would get you excited? Are there any that you've seen and may be passed on at this point? What's that current environment for you guys like on the M&A front?

[Harry Herington:]

Well, I am not going to speak to anything we might be looking at or could have looked at or anything along those lines, but I'll say that's one of the areas that we constantly monitor, see what's out there, see what could be beneficial to NIC to what we provide to our partners. We look at also the technology right now is in a great place. When you look at what's happening with the Thomas cars, with the drones, augmented reality, virtual reality, there's so many different opportunities to take that and take it into government. So we're watching that not only from an M&A standpoint, but the technologies we invest in. Gov2Go is a great example. Gov2Go, the virtual government assistant in a game changer and you heard, we're making serious investments in that, but at the same time, we're going to live by philosophy the team has always lived by and as if we can't find the right investment to make, that's going to grow our company, we're going to give it back to stockholders. We just don't know at what frequency that might be.

[Hayden:]

And I guess maybe really quickly, there is always the obligatory question of are there any current RFPs or RFQ's outstanding that you guys are looking at?

[Harry Herington:]

No, I don't have anything. I got people that we're in constant conversations with, but nothing as far as an RFP on the street.

[Hayden:]

Got it. Thank you, sir.

[Harry Herington:]

Thank you.

[Operator:]

And we'll go to next to Jeff Kessler with Imperial Capital.

[Jeff Kessler:]

Thank you. If I am not mistaken, you did not start out New Jersey with a DHR contract and yet you just announced recently an upgrade or a new, let's call it a new app, new online annual reports and change service. Can you describe how you are able to with or without that early -- with or would the early motor vehicle ID service, how you're able to get these new apps into the states and which states are you looking at doing some of the similar things with regard to business documents and things like that?

[Harry Herington:]

Jeff yes, that's a lot of questions and I'll try to make sure I give my arms wraps around.

[Jeff Kessler:]

It all wraps around the business document filing.

[Harry Herington:]

Although that's easier and let's start with New Jersey. When we look at New Jersey and when we won that opportunity, we actually had a DHR thing that sort of backward on us and as a team, we looked around and we said, state that size, what we've got, this gives us a great proving ground. We've always felt that we could make especially the larger -- the midsized larger states a very viable opportunity for NIC and we took that risk there and it has paid off dividends. It is one that as we ramped up, we came up with services one you just referenced and the temporary tags, those types of services there, it has proven to be our shining light force. And it gives us the comfort to go after things such as Illinois and other states where you might look at and say, well there is not going to be a choice, but you know what, we can make this successful. So, New Jersey we see as a tremendous success. What we're doing there, we've done similar type of services elsewhere. It just kind of depends on center state office and now what they call it how they refer to. I would say we are always on the hunt when we have a state that launches a service to see where else can we launch it. We don't just announce that externally. Internally, Robert talks to his team and there are other places we can leverage this type of solution.

[Jeff Kessler:]

Okay. Are you going to be able -- are you going to be out there attempting to brand a platform, brand yourself, brand a platform so that essentially you're not having to lead with what any one specific service, so that when you go out there, it is the NIC whatever you -- whatever you want to call and then off of that, you can run various types of -- various type of applications that like for instance Gov2Go, which is new hasn't been out there, but would be attached to again something that you would be called -- would be part of you -- your brand. I am trying to get you to talk about the value proposition that you can offer and by branding yourself and keeping the customer in contact reminding them who you guys are?

[Harry Herington:]

Yes, I am going to answer by yes or no. I am an attorney as you probably recall and good attorneys always answer any question in yes and no. Let's start with the yes, the yes and you nailed it, Gov2Go; Gov2Go is in NIC branded solution, it's a platform that we're going to be able to go out there and leverage all levels of government within a statement from state to state. Doesn’t matter which state you're in. If you're doing business in three states, you should be able to use that virtual assistant to do business right across them and you're unaware that really which agencies are pulling for. That is an NIC branded platform and there's going to be others like them. I am not going to get into that right now as we look at some of this. However, let me give you the no part of the answer and that is when you look at Go Wild Wisconsin, or when you look at Illinois permitting think, there is tremendous of value and we'll take the Go Wild as a great example. They are a leader out there. When we go and we take what we've developed elsewhere and we take what we've got there and then we go show future partners. Future customers say look what we have launched there, look at the technology we use, there is a lot more value in showing a demonstrating proven solution that governments are standing behind and saying we are proud of this. So, we leverage both of those concepts. It's been very successful leveraging the state branded for the past 25 years and as you've just stated, we're moving into now just a few of the NIC branded opportunities.

[Jeff Kessler:]

All right. Great. Thank you very much.

[Harry Herington:]

Thank you.

[Operator:]

And we'll go next to Brian Kinstlinger with Maxim Group.

[Brian Kinstlinger:]

Hi. Good evening. Thanks.

[Harry Herington:]

Hi Brian.

[Brian Kinstlinger:]

First on Illinois, so I just want to be clear, is that on the path to be a self-funded portal customer or is it more going to be a customer that licenses software by titles?

[Harry Herington:]

Our vision becomes a transaction-based opportunity as we stand out there. It could have components of both, it could.

[Brian Kinstlinger:]

But not self-funded necessarily.

[Harry Herington:]

Yes, self-funded and other business model exceed €10 million range. The reason I've said transaction versus self-funded is because as Steve said, it could be both -- there might be some initial funding that would help and then it would grow for more of a self-funded type that's like a transactional basis.

[Brian Kinstlinger:]

Okay. And then the other question I have is you said substantial investment, you used that work twice, is that much more than the average state startup costs that is typical range for you guys. Can you help size it and the markets not surprise in six to nine months or three to four months whenever that happens and things change?

[Harry Herington:]

Yes, certainly don't think it's going to be order of magnitude bigger than your typical portal startup cost. Could be a little bit higher. Results may vary a little bit longer phase-in period. We talk about a 15-month phase-in period whereas for a typical portal startup, we're talking anywhere from three to nine months. So, that will give you a little order of magnitude difference there.

[Brian Kinstlinger:]

That's helpful. Thanks guys.

[Harry Herington:]

Okay. Thank you.

[Operator:]

[Operator instructions] We'll go next to Allen Klee with Sidoti & Company.

[Allen Klee:]

Hi. How would we think about the potential revenue opportunity from Gov2Go?

[Harry Herington:]

Gov2Go is short-term what it -- it's a platform and which we're leveraging in our existing states. It's going to be an inroad into new opportunities out there as far as new partners that we're demonstrated and shown in the value. Long-term it's too early to see how we're going to grow that beyond moving it from the current channels we have into that channel and trying to drive adoption from there.

[Steve Kovzan:]

Yes, and Allen, one thing that I would add is that it's really a new channel to drive more users to existing services that we built that are revenue generating right. So, you can think of it like mobile once was for us when we started building everything in responsive design. Gov2Go is a citizen-centric platform that we hope will drive more users to services that we manage.

[Allen Klee:]

Thank you.

[Harry Herington:]

Okay. Thank you.

[Operator:]

And we'll go next to Gary Prestopino with Barrington Research leaving is Matt gall and Gary that I just want to be more on the federal

[Matthew Gall:]

Hi. Good evening. This is Matthew Gall on for Gary. Thanks for taking our questions

[Harry Herington:]

Hi Matthew.

[Matthew Gall:]

First, I just wanted to touch maybe more on the federal level and Harry, you had mentioned it in your commentary, with the digital park pass that you have with the three parks for this that you start with this year, but you measured also something with the U.S. Forest Service. May be if you can just kind of expand on that a little bit what the opportunity is there that's similar digital park pass services or how can we think about that opportunity?

[Harry Herington:]

And you know that it is just a park pass entrants or entrance pass, some of them there, it's dealing with another federal agency given its broader exposure out there. When you look at rec.gov and what's happening there, the more that we do at these park pass and more that we build our reputation there and as we started going to recreation.gov and the other opportunities that could come with that, it builds our reputation. Right now, I would say financially, it's not a needle mover in the future. We did have opportunities that could fold that we're excited about.

[Matthew Gall:]

Great. Great. And then one last one for me for you Steve, first thanks for the detailed review of the investment over the three key priorities for '17, it was helpful, but just looking at the three tax benefits and maybe if you can just help me square this up, for over the last few quarters, it was like there was 8% total benefit from the tax items, but you also had mentioned that there was 10% for the year. So maybe if you could just clarify what the difference was there.

[Steve Kovzan:]

Sure and we also had some other kind of less significant nonrecurring tax adjustments throughout the year that we've disclosed in a couple of our releases and in our 10-Q. So, rounded when you combine them all, it's about $0.10 for the year. So, going forward, we expect our effective tax rate to be about 36.5%. So, that's a good rate to use going forward for '17.

[Matthew Gall:]

Okay. Great. Thank you very much.

[Steve Kovzan:]

You're welcome.

[Operator:]

And that concludes our question-and-answer session. I would like to turn things back to our speakers for any closing remarks.

[Harry Herington:]

Thank you, Gwen. And thank you to everyone who joined us this afternoon. I look forward to speaking with you again next quarter and I invite all of our stockholders to our Annual Stockholder Meeting on Tuesday, May 2 in Olathe, Kansas. Thank you very much.

[Operator:]

Thank you, everyone. That does conclude today's conference. We thank you for your participation.