NIC Inc
Q3 2015 Earnings Call Transcript

Published: 6 Nov 2015

[Operator:]

Good day. Welcome to the NIC Third Quarter 2015 Earnings Announcement. Today's call is being recorded. At this time, I would like to turn the call over to Angela Davied. Please go ahead.

[Angela Davied:]

Thank you, Anne. Good afternoon, everyone. Welcome to NIC's third quarter earnings call. The press release for NICs third quarter 2015 earnings announcement was issued 30 minutes ago and our earnings release is also available on our corporate website at egov.com/investor-relations. You may also call our headquarters at 877-234-3468, and we will email the information to you. Following a reading of our cautionary statement regarding forward-looking information, our 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 included during this call that do not relate to historical or current facts constitute forward-looking statements. These statements include estimates, projections, statements relating to the Company's business plans, objectives, and expected operating results 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, the ability of the Company to renew existing contracts and signed contracts with new state 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 are included in the sections titled Risk Factors and Cautionary about Forward-Looking Statements of the Company's most recently filed Forms 10-K and 10-Q. 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. We undertake no obligation to update or revise publicly any forward-looking statement, 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 third quarter earnings call and thank you for joining us today. Quarter-after-quarter, our Company has delivered consistent solid financial results driven by our unwavering focus on doing what we do best, harnessing the power of the latest technology and developing the very best digital government services. The third quarter 2015 followed a similar path. Once again, NIC posted solid financial results and we continue to innovate and deliver new ways that government can use technology. First, let us take a look at our financial performance for the quarter. Overall, it was a good quarter. We continue to grow core areas of the business at rates that were generally in line with our historical averages. Steve will go over the financial metrics for the quarter in more detail in a moment, but I was pleased to see total revenue growing at a steady rate over the previous year. This growth reinforces for me that the business remains rock solid and is operating as it should by producing a steady stream of recurring revenue from thousands of online services. It was also good to see strong operating income growth this quarter, especially during the year in which we continue invest in growth areas such as federal business development and the Louisiana pilot. Our financial strength has also allowed the NIC Board of Directors to once again declare a special cash dividend. We will pay $0.55 per share on January 4, 2016 to stockholders of record as of the close of business on November 13, 2015. This special dividend will bring our total capital return to stockholders to more than $240 million, since we first started paying dividends in 2007. In addition to special cash dividend, we recognize there are additional ways in which we can deliver value to stockholders. Over the years, our Management team and the Board of Directors have discussed measures such as implementing a regular quarterly cash dividend and initiating a stock repurchase program. We continue to have these discussions and are considering such options in the future. Regardless of the capital return decisions we make in the future as a Board and Management team, we continue to believe the best use of capital that cannot be reinvested in the core business or used for strategic growth opportunities is to returning to stockholders. On a personal note, last quarter I entered into a Rule 10b5-1 stock trading plan, which allows me to sell up to 300,000 shares of NIC stock through the fourth quarter of this year. I did this purely for a stake planning and diversification purposes. The last time I sold NIC stock was back in 2012 and I have gifted shares to charitable organizations and universities and supported a few times since then. In fact, I am in the process of gifting 15,000 shares to aid in a building of a new boys' and girls' club center in North Kansas. However, I fully recognize the CEO selling any amount of Company stock regardless of the timing or intention raises a few eyebrows, which is why I am being transparent with my intentions here with you today. Finally, Robert will share some great innovative services that were launched on behalf of our partners this past quarter. One way we focus on innovation is to bring together hundreds of our portal corporate IT employees for our annual tech conference. Today, we wrapped up our 2015 tech conference held in Kansas City. You have heard me say before that NIC serves as the R&D shop for government and I am always amazed by the ideas our technology teams have brought, the new ways in which cutting-edge technologies can be used by government. I won't give away to our competitors what we are up to, but I can assure you this group understands that the day we quit evolving with technology, is the day we go out of business. Given what I saw first stand at the tech conference this week; we will be around for years to come. With that wrapping up the quarter, overall, I am pleased with our financial performance. There were several operational highlights that were propelled NIC's growth this quarter and to share more those, I will turn the call over to Robert Knapp, NIC's Chief Operating Officer.

[Robert Knapp:]

Thank you, Harry. I agree with Harry. Our teams and the services we provide performed well during the quarter. We continue to drive improvement as we launch new innovative services and reaped awards with our partners at our services were recognized as some of the best in eGovernment. Some of the top contributors to third quarter IGS growth were a vehicle registration service in Colorado, a criminal history records search service in South Carolina, payment processing in New Jersey and the Texas Vital Records service. As I mentioned earlier, our teams were also busy working on new innovation for our partners. One example comes from our team in Salt Lake City as they began building a highway patrol media server for the Utah Department of Public Safety. The media server will be used to store police officer dash camera and body camera videos, which can be valuable in capturing evidence, increasing transparency and improving officer training. Our team is building the media server in a way that will eventually be able to be used by all levels of law enforcement within the state, including local police departments. Another new development during the third quarter comes from the City of Portland, Oregon. In June, our NIC Services subsidiary won a competitive bid to provide payment processing services for the city. The new contract, which is separate and apart from the Oregon state portal master contract required that the services be launched within six months is a strong testament to how efficient it is to implement our payment engine, all of the payment processing services were migrated and ready to launch in just half the time, three months. In just the first two weeks following the launch of the service in mid-September, we process about 400,000 transactions. We currently estimate NIC Services could generate $1 million in annual revenues from this service. The third quarter also marks award season in the digital government services industry. Arkansas was named the best a website in the country as part of the Center for Digital Government Best of the Web competition. Last quarter, we shared with you the innovative new service provided by our Arkansas team Gov2Go, the virtual government assistant to remind citizens of their government transaction, for instance, when your vehicle registration or property tax is due. The service is also available on the Apple watch. This innovative technology played a large role in portal selection as the best in the nation. We were also proud to have our government partners in Utah, Indiana, Mississippi and Texas round out the top-five in the Best of the Web, with our partners in Kentucky, Maine, Maryland, Oregon and Rhode Island recognize this finalist. They all represent the best of the best eGovernment and from all of us at NIC congratulations to our partners in Arkansas, as well as to all of our partners honored in this year's Best of the Web competition. In addition to Best of the Web recognizing the top state web portals the Center for Digital Government also honors the top online government services with Digital Government Achievement Awards. NIC partners winning awards included Utah for its public notice website social media integration, Arkansas State Auditor Automated Online Filing System, Montana and its Safety Assessment Management System, Arkansas Vehicle Registration Renewal iPad Kiosks and Indiana for its Management & Performance System and the only federal online service to win a digital government achievement award was the Pre-Employment Screening Program of the Federal Motor Carrier Safety Administration. I am proud of our portal teams for building and operating great services on behalf of our great partners. Congratulations to all of our partners recognized for their outstanding eGovernment services. Finally, it is always my pleasure to announce the states and government agencies that continue to place their confidence in NIC. During the third quarter, the U.S. Department of Transportation Federal Motor Carrier Safety Administration, FMCSA, signed a new one-year contract to allow us to continue operating the Pre-Employment Screening Program following a competitive rebid. The agreement also includes two one-year renewal's options, the FMCSA can exercise which could extend the contract through August 2018. We also received contract renewals from the state of Texas and Maine. The State of Texas awarded us the final one-year extension available under the existing master portal agreement taking a contract through August 2018. In addition, the state of Maine extended its contract with us taking the agreement through July 2018. We appreciate the confidence the Federal Motor Carrier Safety Administration as well as the states of Texas and Maine continue to place in NIC. We greatly appreciate our partnerships with you and look forward to developing more innovative eGovernment services long into the future. With that, I will turn the call over to Steve Kovzan, NICs Chief Financial Officer. Steve?

[Steve Kovzan:]

Thanks Robert. Good afternoon to everyone on the call. During the third quarter of 2015, NIC earned $0.19 per share with total revenue growing 8% for the quarter to $75 million. Total same estate portal revenues also grew 8% for the quarter, driven by the consistent deployment of new services and increased adoption of existing services across several portals. Breaking down the two major components of the same-state revenue growth, same state IGS transactional revenues grew 11% this quarter, due to higher revenues from several key services we noted in our earnings release and same state DHR transactional revenues increased 7% this quarter, due mainly to a price increase in one of our portals took effect during the first quarter of 2015, as well as the full quarter of revenues from a new DHR monitoring service in one of our portals that launched in the second quarter of 2015. For the quarter, our portal gross profit percentage was 41%, up from 40% in the third quarter of 2014, due in part to the new driver record monitoring service I mentioned a moment ago. Our portal margin in the third quarter includes startup costs from the Louisiana pilot, which were around $300,000 for the quarter. Moving on, for the quarter, software and services revenues were $4.9 million, up 17%, driven by continued strong performance from the Pre-Employment Screening Program, which we manage for the U.S. Department of Transportation Federal Motor Carrier Safety Administration. The operating margin for the quarter was a very healthy 27%, driven by steady revenue growth that outpaced our total expense growth this quarter, reflecting the nice job we have done all year managing our cost structure. One final note on our results for the quarter, our effective tax rate was 36% this quarter, down from 37% in the prior year quarter. Results in the current quarter include the recognition of a favorable income tax benefit totaling $400,000 or approximately $0.01 per share, resulting from a reduction of uncertain tax positions in connection with expired statute of limitations matters and the successful completion of an IRS examination of the Company's 2012 federal tax return and from other adjustments related to the filing of the Company's 2014 federal tax return during the third quarter of 2015. With that, I will turn the call back over to Harry.

[Harry Herington:]

Thanks Steve. As you have heard today, business performed well in the third quarter. Our laser focus on developing innovative eGovernment services is not only driving our growth, but winning awards for innovation and providing us the financial means to continue to return value to you, our stockholders, in the form of another special cash dividend. It was a good quarter and I look forward to what the rest of the year has in store. With that Anne, we will open the call up for questions.

[Operator:]

[Operator Instructions] We will take our first question from John Campbell from Stephens.

[Hayden Blair:]

Hey guys. This is actually Hayden sitting in for John.

[Harry Herington:]

Hi, Hayden.

[Hayden Blair:]

Congratulations on the great quarter.

[Harry Herington:]

Thank you.

[Hayden Blair:]

Absolutely, so just a couple of quick questions, one will be start up costs related to Louisiana pilot continue into the third quarter and there are going to be any other additional costs related to any other startups or pilots in fourth quarter as well.

[Harry Herington:]

Yes. The Louisiana pilot cost will continue in the fourth quarter and potentially into 2016 based on the pilot rollout schedule, but at this point in time we do not foresee any other startup costs aside from the Louisiana.

[Robert Knapp:]

…and it is in line with what we talked about beginning of the year.

[Hayden Blair:]

Correct.

[Hayden Blair:]

On the FMCSA, PSP program renewal, were there any pricing or contract structure changes that would potentially affect that moving forward anything that was hung up on or cause any sort of problems in renewal process?

[Harry Herington:]

No.

[Robert Knapp:]

No.

[Hayden Blair:]

Okay. Then I guess, while I am on just real quick to federal front. I know you guys mentioned recreation one-stop potential or it was an RFP that has been issued as well as a potential RFP for the general services administration. Any update on either of those two contracts?

[Harry Herington:]

Yes. I will give you a quick one on both of those. I mentioned those last quarter and the reason for that was to provide transparency on the types of federal opportunities that are becoming available. I am not going to discuss all of them. There are several that we are. I just thought those two where it is kind of appropriate - [ph] yes there is traction and we are starting to see some great opportunities. I will start with the and also with the 18-S blanket purchase agreement. As I mentioned last quarter, they had sent that out like vendors to provide digital government solutions to GSA and other federal agencies and total 80 companies responded to [ph], including NIC. We received an exceptional technical ratings, but unfortunately, we were not selected as a vendor in the initial process. Now, needless to say I am disappointed by that it is important to note that this in no way limits any of our current efforts in the federal business. In fact, we remain engaged with GSA and are monitoring this procurement closely as GSA has publicly stated they are going to onramp new vendors in the future who were able to perform this work, so that is 18-S. Recreation one-stop that RFP as we mentioned last quarter is out, we are involved. We have responded to that. I can't discuss any specifics other than to say that we remain actively involved in this procurement.

[Hayden Blair:]

Appreciate the color there. Harry thanks for taking my questions.

[Harry Herington:]

Absolutely.

[Operator:]

We will go next to Peter Heckmann from Avondale Partners.

[Harry Herington:]

Hi, Pete.

[Peter Heckmann:]

Hey, good afternoon everybody. I wanted to know, we continue to see new RFIs, new RFOs being put out that have a self-funded or transaction fee funded component. I am wondering are you starting to see any new competition either from the legacy large integrators or small startups that are starting to key in on this opportunity.

[Harry Herington:]

Pete, this is Harry. RFO is was an interesting question, what I would say from enterprise wide standpoint no. Where we could compete is against the states themselves and even in the federal space with the federal agencies themselves. I mean, we have always seen competitors. We have competitors that go after the one-off opportunities that are there, but I do not see them typically under the self-funded. What I am usually seeing at an agency level is your typical time and material-type contracts. Now, any time I address this issue I always want to say, we are ready for the next day for some show up and I am never going to be so oriented to say we are the only one playing in this field. There could be somebody out there that hasn't serviced yet, and at some point there will be others and we take that risk very seriously.

[Peter Heckmann:]

All right, then are you seeing any changes in legislation that we should keep an eye on that either represent a hurdle for self-funded or the use of these from one department to another that that might limit the adoption of self-funded or conversely I know at the federal level they had written some language that is specifically allow the self-funded model, but are you seeing anything that would say you would specifically call it as an encouraging development?

[Harry Herington:]

No. I am not. It's the other way around. What we see is trying to encourage the agencies to be more proactive in getting the information in the services from a digital standpoint out to their constituents, so I have not seen anything from a legislative standpoint that cause me any concerns.

[Peter Heckmann:]

Okay. That is helpful. I will get back in the queue and good quarter. My only other question and I do not know if you addressed it in the comments, which is with margins, I think these are record margins on an operating level for you and I assume it is just a reflection of not having startup costs, but is there something changing there in terms of maybe that you would call out that would have a lot of those margins or is it just simply that you are in a pocket, where you just do not have a lot of start up costs and most of the other portals are running at a good run rate.

[Harry Herington:]

Yes. I would say it's more the latter Pete that portal costs are reasonable. The other portals are running well. As you know second and third quarter typically are strongest quarters and we should see margin subsided a bit in the fourth quarter due to seasonality like we normally see each year, but I would definitely say it is the latter and I do not think I could point to necessarily certain things that drove an obviously healthy margin this quarter.

[Robert Knapp:]

Although I am going to give a shout-out to the portal team somewhat have you, the teams out there do a really good job of managing their expenses based with revenue company, so we would be remiss not give them some credit.

[Peter Heckmann:]

All right. Great. Well, thank you very much.

[Robert Knapp:]

Thank you, Pete.

[Operator:]

We will go next to Brian Kinstlinger from Maxim Group.

[Brian Kinstlinger:]

Great. Thanks so much. Two follow-ups from pieces that were touched on. The first is Recreation, one, I just want to be clear. I think you said so, but the response I think September 17, so can you just clarify you did submit a bid proposal or is that inaccurate or do I have my facts incorrect?

[Harry Herington:]

This is an active procurement, so what I am going to see is we remain involved in this procurement and that is all I am going to say.

[Brian Kinstlinger:]

Okay. On the operating margin, I would have thought given your you had mentioned in the first half of the year, you done hiring within cyber and federal that your cost would have gone up a little bit more. It seems that we actually come down from the second quarter. Can you maybe touch on if you have not, where you are not hiring process for that additional personnel, and if we expect to see that over the next few quarters maybe impact results…

[Harry Herington:]

Hey, Brian. This is harry, what we talked about previously and you got a great memory. I might give you credit there. I mean that, to make investments into special security is there are number one focus and with evidence out there. It should be our number one focus and we have made investments in security, we made investment in sales. There is nothing on the horizon that I am concerned about that is going to have an impact yes we have done that and we have managed to our expenses in the process.

[Brian Kinstlinger:]

So you are complete with that additional hiring. That is right?

[Harry Herington:]

You are asking a very interesting question. Here is the deal I will never be complete, all right?

[Brian Kinstlinger:]

Okay.

[Harry Herington:]

The deal is security needs change, opportunity strange, do I have anything in front of me today? No. Does that now mean that there will be new thread or new opportunity to more than I have to hire for? absolutely. What I am saying is we are right on target and there is nothing that concerns me.

[Brian Kinstlinger:]

Yes. Okay. On the driver history records, again I asked this last quarter. We had several years where you did not received price increases. We have seen now a couple of quarters where you have are there any states which have not been reflected yet in the numbers that you expect over the next one to two quarters where you might see increased rates that will keep this rate more than a 1% or 2% grow next year as we look at it?

[Harry Herington:]

Brian, as we have already said these are nice to have, so when they come, usually comes with a commitment by us as other opportunities that we can work on to stay with. We never proactively talk about those. It would be foolish on our part, so it is basically what we have is all we have.

[Brian Kinstlinger:]

Okay. A couple of more, the first is can you remind us I could not find the EPS guidance was for the year and maybe with less than two months, maybe any commentary on typically to a bit large range of I remember how you stack compared to that if it still remains consistent?

[Harry Herington:]

Yes. I mean, I think our EPS guidance for the year was $0.57 to roughly $0.63. Obviously through the first three quarters we are tracking with that, but we are not changing any guidance and our guidance remains and we are comfortable with the ranges that we have provided.

[Brian Kinstlinger:]

Okay. As we head into 2016, you made a comment on Louisiana, I think which we already known, but maybe for Wisconsin maybe you can talk and discuss how you expect that portal will progress financially from 2015 as we head into 2016 with the hunting and fishing license obviously taking up some of our budget?

[Harry Herington:]

Sure. I guess the one thing that I would say is that right now we are pushing for a I believe in March of 2016 launch of the hunting and fishing comprehensive system that we are building for the State of Wisconsin, so other than that all things are we are on track. Our investments on track and our team there is doing a fantastic job in terms of their progress on that system.

[Brian Kinstlinger:]

If I use my good memory that Harry says should I think of that as adding $2 million in annual revenue and really not a change in cost structure? How we should think about that?

[Harry Herington:]

No. I guess I will not probably comment on the cost structure side of the house until we talk about our guidance for next year, but we estimated that on an annual basis that hunting and fishing licensing system that we are building in Wisconsin could earn us up to $2 million per year.

[Brian Kinstlinger:]

Okay. Is there any reason that to believe early on it might not and adoption would be slowed is that what you are alluding to?

[Harry Herington:]

No. Not alluding to anything. I am just saying that I think we think that it is going to be approximate $2 million a year, which is what we have historically said.

[Brian Kinstlinger:]

Okay. Last question, DHR monitoring services, could you just explain what that is? In addition is that one for portal or is that for many portals that you are starting to roll that out to, it would be helpful. Thanks so much.

[Robert Knapp:]

Yes. Brian, this is Robert. It is a service that - any of our portals, but it is simply looking at where insurance companies monitor on an ongoing basis a portfolio of driver license records or changes. Then when they change, they are required to pull the full record as well, so we earn typically a much smaller per transaction fee for that service than we do for just a regular driver record.

[Brian Kinstlinger:]

Okay. Thank you.

[Harry Herington:]

Okay. Thanks, Brian.

[Operator:]

We will go next to Jeff Kessler with Imperial Capital.

[Jeff Kessler:]

On the FMCSA, the PSP program, now that you are seemingly fully ensconced with these guys for some time. Are there other programs or related or let us say tangential programs to PSP that can branch off of this as you move forward. In other words, are you talking to them about other types of related programs to this everything have to go through a separate, let us say, channel bid?

[Robert Knapp:]

Jeff, this is Robert. Within the FMCSA, we absolutely are looking for opportunities to talk to them about tangential services or similar services that they have on and we do have a possibility to do those without going through a full-blown procurement depending on what the individual service might be.

[Jeff Kessler:]

Okay. Is there a broad brush stroke of some type of description that you could give as to perhaps what areas we are talking about in the broadest of senses, so that you can at least talk about a little bit?

[Harry Herington:]

…also trucking [ph].

[Robert Knapp:]

Yes. I would just say they were deals of...

[Jeff Kessler:]

That is pretty broad. Okay.

[Harry Herington:]

You know we never talk about what we are doing as far as future growth opportunities within either federal or the portal.

[Robert Knapp:]

Our 40 minutes it would be clueless that we had alert it somebody might be opposed to it.

[Jeff Kessler:]

Okay. Just a quick note on maybe you put this to bed quickly, a quick note on - anyway you had hiccup in Texas or perspective hiccup in Texas about a year ago. Is everything from now at a base level at which you can work forward?

[Harry Herington:]

Yes, Jeff. I mean I think we have seen volumes from the vehicle inspection service return to historical norms.

[Jeff Kessler:]

Okay. That is what I needed to know.

[Harry Herington:]

Okay. Jeff. That is all I have got. Thank you very much guys.

[Harry Herington:]

Thanks.

[Harry Herington:]

Thanks Jeff.

[Operator:]

[Operator Instructions] We will go next to Herb Buchbinder with Wells Fargo Advisors.

[Herb Buchbinder:]

Thanks a lot. Can you comment briefly about the Salt Lake thing that you are doing with storing body camera videos, this is obviously what TASER does in the storing this information on the cloud, are you competing with them, working with them and is there something you can take to other states when will it start and if any idea what this might represent in revenue?

[Harry Herington:]

Herb, this is Harry. I will share a little bit - I might then let Robert or Steve jump in, but what TASER does, TASER has a great program. I will just say right up front, because they had to create a program due to what they were capturing when they used their TASERs. They have taken that. They have taking a coordinate moved it over into the body cams, so they are doing a full evidence room, theirs is a very - where there is much more than just the body cameras they are doing and they are collecting a lot of data. Ours is more specific. What we are doing is filling on the niche need that they have in Utah that we would love to be able to take other places where either the state in some cases local departments need the store that as you know legislation is moving faster, requirements are moving fast that this departments put this cameras out there and they do not have quick solution as to what to do with the video, so in Utah, we are assisting with - I will let Robert give a little bit more detail.

[Robert Knapp:]

I would just add, as Harry said, it is something as you know, Herb, from across the country it is a very high profile there are a lot of our states that are looking at different ways, so certainly similar to the way we try to proliferate other services we will look for opportunities to bring this body I mean this media server to those other states.

[Herb Buchbinder:]

Is this sort of stop gap thing that you do for the states until they use somebody like TASER to get a more sophisticated system or not necessary?

[Harry Herington:]

No. Not necessarily, I think in Utah, it is absolutely filling the need that they wanted. If we go to another state and we want to enhance it further because of the state need, we will absolutely do that, but conversely to your point Herb at the beginning, if TASER is going to stay then there is an opportunity there for us to work with them, we would this as well.

[Harry Herington:]

Do not lose sight of nimbleness of our Company. We are company, we are - laser-focused on this part of the solution and not the comprehensive a lot agencies either could not afford or do not meet. We are focusing on the body camera, videos themselves what they need the storage, what they need for the core system other...

[Harry Herington:]

Yes. Competing with TASER, I do not have a concern with and I would say it would be complementary in some places.

[Herb Buchbinder:]

It is okay. Thanks a lot.

[Harry Herington:]

Sure, Herb.

[Operator:]

With no further questions in the queue, I would like to turn the call back over to Harry Herington for any additional or closing remarks.

[Harry Herington:]

Thank you, Anne. Thank you to everyone who joined this afternoon. I look forward to speaking with you again next year when we report on our fourth quarter earnings results in February of 2016. Thank you.

[Operator:]

This does conclude today's conference. We thank you for your participation.