NIC Inc
Q4 2007 Earnings Call Transcript

Published: 25 Feb 2008

[Operator:]

Welcome to the NIC fourth quarter earnings announcement conference call. During today’s presentation all parties will be in a listen only mode. (Operator Instructions) This conference is being recorded today, Wednesday, February 6, 2008. And now I shall turn the conference over to Chris Neff, Vice President of Marketing. Please go ahead, sir.

[Chris Neff:]

Thank you Operator. The press release for NIC’s fourth quarter earnings announcement was issued approximately 30 minutes ago. For those of you that haven’t received the release, the announcement is available on the homepage of our corporate website at NICUSA.com. You may also call our headquarters at 1-877-234-3468 and my assistant Vanessa will fax the information to you. Before we begin, let’s cover our customary Safe Harbor statement. Specifically, the statements in this release regarding continued implementation of NIC’s business model and its development of new products and services are forward looking statements. There are a number of important factors that could cause actual results to differ materially from those suggested or indicated by such forward looking statements. And these include among others the success of the company in signing contracts with new states and government agencies including continued favorable government legislation. NIC’s ability to develop new services, existing states and agencies adopting those new services, acceptance of the government services by businesses and citizens, competition and general economic conditions, and the other important cautionary statement and risk factors that are described in NIC’s 2006 annual report on form 10-K which was filed on March 15, 2007, as well as a quarterly report on form 10-K for the quarter ended September 30, 2007, filed on November 7, 2007, with the securities and exchange commission. I’d now like to introduce Harry H. Herington, Chief Executive Officer of NIC.

[Harry H. Herington:]

Thank you Chris. Good afternoon. Just prior to issuing our quarterly earnings release, NIC released an announcement that Jeff Frasier decided to retire as Chief Executive Officer effective this Monday, February 4, and will remain as Chairman of the Board. The second release we issued a half hour ago covered this news in detail. The summary is that Jeff incurred some expenses between 2004 and 2006 that were not in compliance with NIC’s expense reimbursement policy. Jeff and the NIC Board Of Directors agreed it is imperative that top management sets the right tone for corporate governance and Jeff elected to retire as CEO. I want to take this moment to thank Jeff for everything he’s done to build NIC into the industry leading e-government provider we are today. Quite simply NIC would not exist if it wasn’t for Jeff. And we owe him a major debt of gratitude for his vision, his perseverance and his commitment to building such a great company. Jeff is a close personal friend of mine and I’ve spent the last 12 years working with him to grow this business. I’m very honored to take the baton from Jeff and continue forward with our outstanding management team. I also want to thank the NIC Board Of Directors with the confidence they’ve placed in me. I look forward to working closely with members of the board as NIC continues to prosper. Back to the primary purpose of this call. NIC’s performance and the future growth trajectory we see for the business. I’ll begin with an overview of the company’s performance and then our Chief Financial Officer Stephen M. Kovzan will provide additional information concerning our financials. After that we’ll open up the call and take your questions. Let’s begin with the special cash dividend that we announced with today’s news release. On Monday, February 4, the NIC Board Of Directors declared a special dividend of $0.25 per share payable on February 28, 2008, to shareholders of record on February 18, 2008. We estimate the dividend payout will total approximately $15.7 million. We are very pleased to announce this divided just as we were at this time last year when we declared our first special dividend. We have sufficient capital to operate our business and invest strategically to ensure we can support future growth opportunities. The view of the executive team and Board Of Directors is that returning capital to shareholders is a sound strategy. And we are pleased to once again announce again a special dividend to the benefit of all shareholders. All right, on the sales front, 2008 will be a very busy year as we have several new state RFP’s looming including portal opportunities in California and Texas that according to the schedules released by the states will be awarded in 2009. We recognize these opportunities will be challenging to win and that competition will be fierce. Having said that, NICs portal offering is superior to all others and we will be very aggressive demonstrating the superior value we deliver as the industry’s top government portal manager. We have high expectations for winning these states and are very serious about our goal of serving 120 million people with long-term portal contracts by the end of 2010. We currently serve 69 million people in 21 states so we have our work cut out for us. But we continue to be bullish about our prospects for success. As usual, we’re not in a position to speak specifically about states in our pipeline that are not yet at the RFP stage. However, I can say that our sales team continues to spend a great deal of time with top officials of many high potential states, and the reality of selling enterprise state portals is that RFP’s do not get issued until the leaders of the state are on board including the governor, chief of staff, budget officer and the chief information officer. One interesting development we’ve seen recently is that states are now seeking out NIC. And asking us to come to town to help them understand our self-funded model and how that can help them offset some of their budget concerns. State officials across the country are warning of budget shortfalls for the next several years. Our self-funded solution was originally developed in 1991 to help the state of Kansas create an egovernment platform when it was facing tight finances. And while we’ve won new business in both good and bad times we’ve historically seen more interest from states during down turning economic conditions. NIC is fortunate to be the dominant egovernment provider. Tight government budgets align well with the strength of our core funding model because we allow government leaders to increase efficiencies, reduce waste, and do more with less by migrating services to the internet. We’re among few companies that are not impacted by the credit crises and the mortgage industry. Regardless of economic conditions, the doors of state governments do not close. Businesses continue to be regulated, taxes need to be paid, and legislatures keep implementing new rules. As a partner of state government, NIC is well positioned to grow by supporting the growing needs of our government partners. On the operational side of the house the message is consistent

[Stephen M. Kovzan:]

Thanks Harry. And thanks to another solid quarter, NIC outperformed both our internal expectations as well as our guidance to investors for 2007. The fourth quarter portal revenues were a record $21.3 million, an 18% increase over the same period last year. On same state basis quarter revenues grew by 12% which is in line with our expectations and reflects the seasonality that we typically see in the fourth quarter. Fourth quarter growth was driven by a 21% increase in same state non-DMV transactional revenue and then 9% increase in same state DMV revenue. As we noted in our press release, the number of applications contributed to this growth and we are particularly pleased that our tax filing, professional licensing and motor vehicle registration services continued to perform quite well. Portal growth margins for the quarter were 44% reflecting normal fourth quarter seasonality but up from 41% in the fourth quarter a year ago. As we often share with you during our quarterly calls, NIC monitors portal margins closely and reinvests strategically in the portal business to balance between the longer term expectations of our government partners and our commitment to generating respectable returns for our investors. We continue to believe mid to upper 40% range is a reasonable margin target for the foreseeable future. Operating income was $3.1 million in the fourth quarter up 15% over fourth quarter 2006. On the expense side delineated administrative expenses for the quarter were $5.8 million or 27% of total revenues. This is up $4.4 million or 25% of portal revenues in the fourth quarter of 2006. This increase was planned and reflects spending associated with our ongoing investment in business development to accelerate our future growth as we’re previously discussed with you. Taking a closer look at our liquidity, NIC’s cash and investments balance rose to $55.8 million in the fourth quarter, up $3.4 million from September 30, 2007. As a reminder, we used $46.7 million in short term investments and cash reserves and the $0.75 per share special dividend to shareholders earlier this year February 2007. While we are on the topic of dividends I did want to share an accounting note about the special dividend we just declared. The dividend may result in a partial return of capital to shareholders with the balance being taxable to shareholders as a qualified dividend. The exact amount of the return to capital if any is dependent upon the earnings of the company through the end of the 2008 fiscal year. Once we make the final determination we will notify shareholders at the close of the year. Moving on to full year 2007 performance. As I mentioned at the beginning of my remarks we had a solid 2007. Total revenues rose 20% to $85.8 million and total revenues grew 18% to $82.5 million. On the same state basis total revenues grew 15% with a component breakdown of DMV revenues growing 10% and transactional non-DMV revenues rising 31%. Selling and administrative expenses as a percentage of portal revenues were 26% up from 22% in 2006. This again is a reflection of NIC’s incremental investment in business development in portal operations to drive long-term growth. Operating income was unchanged at $16.1 million for the year and NIC earned $0.19 per share 2007 compared to $0.17 in 2006. I would like to point out that results for 2007 include a gain of $0.5 million or $0.01 per share from the third quarter sale of our minority investment in Egovernment Solutions Limited, a London based private joint venture. We also reduced our income tax expense by almost $.5 million or $0.01 per share in 2007 to reflect changes in the companies unsure tax positions. Moving on to guidance for full year 2008, NIC expects total revenues of $98.5 million to $100.7 million with portal revenues ranging from $95 million to $97 million and software and services revenues of $3.5 million to $3.7 million. We’ll also expect operating income to range from $17 million to $18.5 million, a net income of $10.7 million to $11.7 million. Portal margin should range to 45% to 47% which is in line with our performance for the last several years. Selling and administrative expense should drop to 24% to 25% of portal revenue in 2008 which reflects a return to our historical levels to modest corporate expense growth. We also expect depreciation and amortization expenses of portal revenue to range from 3% to 4% percent in 2008 as we’ll continue to make IT investments in a few key areas including data center and ongoing security upgrades which are essential to help support our long-term expansion and ensure our portal investments are as secure as possible. On a final note, we expect interest income in 2008 to be lower than 2007 partially as a result of paying the special dividend at the end of this month but primarily because of the declining short term interest rate environment we currently are experiencing. And as always, NIC’s projections do not include any new or unsigned portal contracts. With that I’ll turn the call over to Harry again.

[Harry H. Herington:]

Thank you Steve. Operator, we’re ready for questions.

[Operator:]

Thank you. (Operator Instructions) One moment please for the first question. Our first questions comes from the line of Paul Kaump with Northland Securities. Please go ahead.

[Paul Kaump:]

Good afternoon ladies and gentleman and Harry congratulations on your appointment.

[Harry H. Herington:]

Thank you Paul.

[Paul Kaump:]

Couple questions for you. Non-DMV growth on same state basis look liked it slipped back a little bit from the run rate you were realizing in the first three quarters. Is there anything specific going on there or is it just a nuance of the business, something seasonal? The second question then is what should we be expecting for fiscal 2008 for non-DMV?

[Harry H. Herington:]

I will take the first part and I’ll let Steve handle the second part. It’s seasonal, as we’ve stated previously fourth quarter, when you look at our business you have to look at the number of business days there are. And fourth quarter with Thanksgiving, with Christmas, with New Years, and the other holidays it’s just there’s not as many business days so it’s just a seasonal thing we see every year. And for the second part of the question I’ll send that to Steve.

[Stephen M. Kovzan:]

Sure Paul. You know in terms of next year. This year we had a spectacular year in terms of same state revenue growth and if you might recall, I think we ended up the year up 15%. And you might recall that we were the beneficiary of some price increases in the DMV side of the house that went into place in late 2006 that positively impacted us throughout the year. We don’t expect that same level of impact on the same state basis. More specifically to your question in terms of non-state DMV growth yes I think you’ll see much stronger growth in 2008 than what you saw certainly in the 25% plus range in 2008.

[Paul Kaump:]

Okay and in your prepared remarks Harry you mentioned 1700 unique egov services. If I recall that number you used was 2000 or in excess of 2000. Did you guys lose some applications or are you counting them differently?

[Harry H. Herington:]

We’re counting them differently. What we’re looking at is sometimes you’ll have a licensing application and you might have difference versions of the same licensing application that serve different purposes and just for consistency we’ve tried to move some of those together.

[Paul Kaump:]

Okay. On then on last quarter’s conference call Jeff Frasier hinted at some imminent RFP’s our activity he thought might be coming down pike over the near term here. Have there been any changes or is there an update to prospective state RFP activity?

[Harry H. Herington:]

Well I’ve been very excited about the opportunity we’ve had, it is a very full pipeline. The only change is that California did issue a bid and which we’re looking at but beyond that there is nothing that we can speak to.

[Paul Kaump:]

Okay. Are you still comfortable and content with the notion of closing three states or more this year or are you thinking it might be lower or how do you see that panning out for the remainder of the year?

[Harry H. Herington:]

We’re expecting to double the size of the company by 2010. What I would say is we have very healthy pipeline. I’m expecting to see the RFPs hit the street, the question is of course, the terms and how much time they give us to close the opportunity.

[Paul Kaump:]

Okay. Are any of the states up for rebid this year?

[Harry H. Herington:]

Yes. Well I don’t know. Hold on one second. We have to be careful when I say that because I always speak to sometimes speak to rebid when it’s a renewal.

[Paul Kaump:]

Right.

[Harry H. Herington:]

We have a couple of states or several states that are up for rebid in 2008, and those are Idaho, Arkansas, Nebraska and Utah.

[Paul Kaump:]

And then new renewals?

[Harry H. Herington:]

We have a couple with contracts that renew annually, but I don’t have any that are jumping out at me.

[Paul Kaump:]

All right.

[Harry H. Herington:]

I don’t have any concerns with any rebids. I do worry about all the rebids, that’s just my nature, but I don’t have any concerns with the partners.

[Paul Kaump:]

And then a last question for you. You know, I know you guys increased some DMV fees in '07 for some of the states. 2008 do we see some additional fee increases? How many? Can you give us an approximation what that might look like.

[Stephen M. Kovzan:]

Yeah, I don't think we're expecting to see, certainly in our guidance or anything like that, any type of DMV fee increases built into our number this year. But last year was certainly an extraordinary year and I don't expect to see that level of same state DMV growth to continue this year. It should go back to more historical levels of anywhere of 2% to 3%, same state DMV growth.

[Harry H. Herington:]

Yeah, we see those as positive bumps but we've got our people out there chasing the applications that are going to drive long-term growth.

[Stephen M. Kovzan:]

Yeah. Our focus really is on the non-DMV side of the house. So, not like what we saw in 2007.

[Paul Kaump:]

Okay. And then, I lied, last question. Arizona and West Virginia, how are those two states commencing?

[Harry H. Herington:]

Both those states are well on track. I mean, their partners are happy with us and we're doing very well.

[Stephen M. Kovzan:]

You know, financially, Paul, we did see nearly a full quarter of revenues from the State of Arizona. Their financials reflect about between $800,000 and $900,000 in revenue from Arizona. West Virginia is still in the ramp-up phase but we're hoping that those revenues will come online very soon.

[Paul Kaump:]

Okay. Great. Thanks guys.

[Operator:]

Thank you. Our next question comes from the line of Jeff Kessler with Lehman Brothers. Please go ahead.

[Jeff Kessler:]

Thank you and congratulations, Harry, on your promotion.

[Harry Herrington:]

Thank you very much.

[Jeff Kessler:]

The question is that you briefly mentioned a new cross-selling initiative. That intrigues me. Obviously, it is a way for incremental revenue but the question is, is how are you going to get there and what is the process for getting this cross-selling initiative going?

[Harry H. Herington:]

Yeah. And I want to make sure I didn't misstate something there because this is an initiative that we've had. Previously, they were working and what we've done is we have stepped up our procedures. When we spoke last year we spoke about investing not only in new sales but we also spoke to finding ways to drive our non-DMV growth. And part of that was putting more individuals in a management oversight position with the portals totally focused on driving that cross-selling. They've been in that role for about a year now. We've seen some success there and I'm just very excited about the opportunity.

[Jeff Kessler:]

Okay. Can you speak a little bit about the components? As you see, you folks have gone through business slowdowns before and, particularly, hopefully, you were watching the company at least in the early 2000s, even though there were other managers in place, the applications that were used more and applications that were used less, as the economy changed, is there any distinction between a normal economy and a weaker economy in the types of apps that are used and does that change the margin picture at all, amongst those apps?

[Harry H. Herington:]

This is Harry, and I'll let Steve, if he wants to jump in as well, but for the most part it really doesn't change. What you might see is less tax payments. You know, as far as the actual amount being paid. But remember we make our money off the transaction itself, not off the gross amounts. So it really doesn't impact our business. So what might weaken in one spot isn't enough for us to even notice and it's picked up someplace else in a different part of the business.

[Stephen M. Kovzan:]

Yeah. I kind of look at it as you know, we are such a tremendously diversified portfolio of applications in our business that if some are modestly affected one way others are probably going up and in an economy like this. And Harry really hit the nail on the head in that, yes, while tax filling payments, the nominal dollar amount might be down in this weaker economy, less sales tax from new homes sales, we really make our money in our margin off on you know like a flat, per transaction fee for the most part.

[Harry H. Herington:]

And they all have to keep paying.

[Stephen M. Kovzan:]

And so they still have to pay their taxes, they just might not be as much.

[Jeff Kessler:]

Final question and that is, on some of the RFP or at least RFI or any type of inquiry interest that has come out there from the states, are you noticing any change in the splits that the states are proposing or asking for when it comes to the per-click?

[Harry H. Herington:]

No. We're really not. There's nothing different there from what we've had in the past. What we are noticing, as I've stated earlier though, is we seem to have more interest from the states calling us for business because of their crunch. They don't have more dollars to spend which actually helps us and doesn't hurt us. So they are calling us and saying, "Can you help us with these applications? We'd love to talk about your model again."

[Jeff Kessler:]

Okay. Great. Well, great. Thank you.

[Harry H. Herington:]

Thank you.

[Operator:]

Thank you. (Operator Instructions) Our next question comes from the line of Andrew Wainer with Burnham Asset Management. Please go ahead.

[Andrew Wainer:]

Hi, good afternoon guys.

[Harry H. Herington:]

Hi, Andrew.

[Andrew Wainer:]

I know you're reticent to talk about specific states but I believe when you increased the spending around driving new opportunities in the RFP area around that goal of doubling the population served in 2010, there was a comment that if you didn't see tangible results in a certain period of time, i.e., you couldn't affect the rate at which states came to market, that that spending would be pulled back. You know, given the cycles we're talking about, perhaps, maybe, you could talk about what a reasonable number of RFPs to come to market in '08 would be that would make you feel comfortable to keep you spending at current levels.

[Harry H. Herington:]

Yeah, this is Harry and that's, kind of, an interesting question because what I look at is the overall activity that we have in the pipeline where we think they're coming out and we could end up with, I could say, there's four and know that if we don't get four but there are seven that's just right on the verge, I'd be foolish to start – running that back. What I've done and what we've done as a management team is we have gone and taken them through not only their business fund process, recently, to see how they're hitting it making sure that we're using the best of the money that we put out there, but we have also put some very tight targets to them, and metrics, which I'm not at liberty to discuss here but it's metrics that we're going to be tracking and speaking back to you. And I know that at the next call we'll be halfway through the year and that would be the time that I would be more at liberty to discuss are we going to stay at the same rate or are we going to ratchet it down? I don't think we're going to ratchet down. I feel very comfortable with what I'm seeing.

[Andrew Wainer:]

Okay. But I guess, obviously, long-time shareholders here want to make sure that there is some sort of tangible financial metric as opposed to the feeling just good about the conversations and number of states that you're applying to your decisions to spend.

[Stephen M. Kovzan:]

Yeah, Andrew, this is Steve. You know, certainly, you know internally, Harry's right. I think a lot of it is that we really do take, at least I do, very much a population based view toward this. As Harry mentioned in his remarks, two states, one California just came out with an RFP. We're still a little uncertain as to how that's going to evolve. That's going to be a multi-step process and a very long procurement. But the fact that the largest state in the United States has come out and is very interested in procuring portal services is very positive and everything that we've been hearing from the State of Texas is that they're online to release their RFP with a decision to be made in 2009. Those are two very large states and we're putting a lot of effort and time into those. So those two alone, for me, justify where we are right now. You know, the two of them combined are darn near 60 million so they would double our population served by themselves. We're going to be putting forth a lot of efforts with those states. We've got to be putting our best foot forward now. So I don't see, personally, any ratcheting back in that spending. Now if one of more to completely pull something off the table and we see a lot of these states start to pull out of the pipeline, different story. But, as Harry said, I think the investment on the sales side I think has a bit of a longer term payoff than, say, the investment that we've made in our portal operations to drive our same state revenue growth. But right now, boy, I just can't imagine that slowing down given those two states alone.

[Harry H. Herington:]

I would agree.

[Andrew Wainer:]

Okay and then, maybe, without, again, specifically, talking about certain states, you highlight that Texas the rebid is out there, and California has put out an RFP, when you look at your pipeline, historically, the states we've, obviously, won have been smaller states. One, what does the pipeline look like with respect to, sort of, the size of the states and, two, has there been an increase in interest from larger states given the fact that Texas and California are out there right now?

[Harry H. Herington:]

I'll take it in reverse order. The fact that Texas and California are out there, I think, clearly, demonstrates that the larger states are interested. We've had interest from, I mean, every size state you can imagine and it's, I know that I always get hit and we always get hit with this question and I'm just trying to find some way to almost [inaudible] answer, which states are you actually talking to, and we can't tell you. We can't say which states we're talking to. I'm not going to tell my competitors. I'm not going to tip my hand there. I can say that Texas and California are not the only two large states that we've spoken with in the last quarter and that we've spoken with medium sized states and small states that have expressed interest.

[Andrew Wainer:]

And I guess my last question would be can you talk, specifically, about which applications have the highest potential for cross-selling into new states? For example, I think the motor vehicle there was, at one point, some high aspirations about the motor vehicle tags.

[Harry H. Herington:]

Yes, the temporary tags are something that we are aggressively going after. Validate is one that we have mentioned in the past and it's almost a real ID type application dealing with the banks that we're getting some momentum behind it. We're really focusing on the one-stop business registrations because that encompasses several applications for many of the different agencies. And then also any of them that deal with what we call pay-port or across-the-counter-type transactions, we're looking to see and try to get as much interest as possible on all of our states so that if somebody walks up to the counter they're using an NIC application to click the money just as if they were going online. That's, kind of, a shotgun approach to the ones we're going after.

[Andrew Wainer:]

How should we think about it from a timing perspective? You've had some people working on this for a year. Maybe efforts are being intensified, is this more a function of you hope to be able to announce, sort of, states where this has been successful or should we actually see it in results if it is successful in 2008?

[Harry H. Herington:]

You're going to see it for the most part in results. I'll tell you some states where we're successful. But I've got to be very careful. Anytime I start mentioning something that we haven't deployed in a state that we'd like to, I suddenly get a lot of the smaller development shops knocking on the doors of the CIOs office or going into agencies and saying, "Hey, we understand that this is an interest that you might have and we've got a solution." And so I'm paranoid on getting on these calls and talking about applications we haven't deployed yet and tipping my hand to a potential competitor. What you'll see, and I think you saw that in 2007, you see it in the results. We had a great 2007 and I just expect to see that going forward. Numbers will speak for themselves.

[Andrew Wainer:]

Okay. Thank you.

[Operator:]

Thank you. Our next question comes from the line of Jeff Kessler with Lehman Brothers. Please go ahead.

[Jeff Kessler:]

Hi, Harry, you folks have, obviously, with your DMV function as well as driver license renewal, let's just say you have a touch into the whole driver's license process. The map of states that have, basically, approving real ID versus the map of states that a year ago said they would never take it has changed dramatically and it does appear that now that real ID, state-by-state is going to become, essentially, the reality of driver's license that have some type of biometric or electronic authentication on it. The question is, is there a way for you folks to play in real ID?

[Harry H. Herington:]

We absolutely believe there are several ways that we're going to be able to assist our partners with real ID. I mean, and I think you really, succinctly, stated what it was. I mean, we've got states out there, the Federal government is pushing a mandate on the states dealing with ID. You know, it all goes back to 9/11 and the security concerns within banks opening accounts, getting on airplanes, going into Federal buildings and what have you and there's still a lot of static as to what that's going to be. We are finding ways to assist them with that. The biggest issue is the states are embracing it but they don't really know what they're embracing yet. And we're trying to work closely with them to identify what their solution is. There's a number of states saying, "Yeah we will do something," but interesting a lot of those states that are saying we'll do something that's not really consistent with what another state's doing. And the states are still struggling with finding the dollars to implement those solutions.

[Jeff Kessler:]

Okay. Very good. Well, thank you very much.

[Harry H. Herington:]

Thank you.

[Operator:]

Thank you. And we have no further questions. I'd like to turn it back over to management for closing remarks.

[Harry H. Herington:]

Thank you, operator. And I want to thank everybody for joining us today and I look forward to speaking with you again during the first quarter earnings announcement in early May. Thank you very much.

[Operator:]

Thank you. Ladies and gentlemen that does conclude our conference for today. If you would like to listen to a reply of this conference you may do so by dialing 303-590-3000 and entering the pass code number of 11105547. You may also dial 1-800-405-2236. Those numbers again are 303-590-3000 and 1-800-405-2236, pass code number of 11105547. Thank you for using ACT. You may now disconnect.