NIC Inc
Q4 2009 Earnings Call Transcript

Published: 5 Feb 2010

[Operator:]

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the NIC Fourth Quarter Earnings Conference Call. During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be open for questions. (Operator Instructions). This conference is being recorded today, Thursday, February 4, 2010. I'd now like to turn the conference over to Nancy Beaton, Director of Investor Relations and Communications. Please go ahead, ma'am.

[Nancy Beaton:]

Thank you, (ph) Brandy. The press release for NIC's fourth quarter 2009 earnings announcement was issued 30 minutes ago. For those of you who haven't received the release, the announcement is available on our corporate site at nicusa.com. And you may also call our headquarters at 877-234-3468, and we will e-mail you the information. Before we begin, let's cover our customary safe harbor statement. Any statements contained in this release that do not relate to historical or current facts constitute forward-looking statements. These statements include NIC's financial guidance for the current fiscal year including statements regarding the potential for growth in revenues and income and statements regarding continued implementation of NIC's business model and its development of new products and services. Forward-looking statements are subject to inherent risks and uncertainties that there can be no assurance that these statements will prove to be correct. 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. These include, among others, NIC's ability to successfully integrate into its operations reently awarded eGovernment contracts; NIC's ability to successfully increase the adoption and use of eGovernment services; 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 eGovernment services by businesses and citizens; competition and general economic conditions including the recent deterioration in general economic conditions; and the other important cautionary statements and risk factors described in NIC's 2008 Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 13, 2009 and in NIC's quarterly reports on Form 10-Q filed with the SEC in 2009. I'd now like to introduce Harry Herington, Chairman of the Board and Chief Executive Officer of NIC.

[Harry H. Herington:]

Thank you, Nancy. I want to welcome everyone to NIC’s fourth quarter earnings call. The fourth quarter topped off a transformational year for NIC. 2009 was fuelled by continued organic revenue growth in our existing states; success in securing all renewals and re-bids with our existing partners, and our success in closing significant opportunities with new partners such as Texas including the acquisition and subsequent award of the long term portal management contract; the Motor Vehicle Division, and our first Federal self-funded contract with U.S. Department of Transportation, Federal Motor Carrier Safety Administration. I expect this strong momentum to carry over into 2010 as we enter the year with a full sell pipeline that we hope will soon manifest in the form of RFPs. But before I get too deep into 2010 let’s spend some time on our key accomplishments in the fourth quarter. First, we are pleased to announce that our partners in Nebraska and Oklahoma have again awarded us with new contracts after competitive re-bids. The Nebraska contract has an initial term of 4 years, with one two year renewal option that runs through 2016, and the contract with Oklahoma has a one year term with four single year renewal options that extend to 2014. We continue to work with our partners to expand the number of online cost saving services. They are for businesses and citizens, and we are honored that Nebraska and Oklahoma wanted to extend our longstanding relationship. In today’s budget-strapped environment, these state partners and frankly all of our state partners should be applauded for deploying a model that brings more services online in a cost effective manner. We (indiscernible) them and thank them for the partnership. Now moving on to some of our newer partners. As we previously discussed with you on our third quarter earnings call back in November, we are developing a premium (indiscernible) screening system for the U.S. Department of Transportation, Federal Motor Carrier Safety Administration. This service will electronically provide crash and inspection data now at a federal level to motor carriers and drivers in the hiring process to help insure that the safest drivers are on the road. There has been a lot of interest in this service from both the (indiscernible) and investors. So let me provide you a status update. A key next step that must take place before customers will be able to pull data from the service is an additional regulatory requirement. A System of Records Notice document or known as the SORN must be followed by the agency and must remain open for public comment for 45 days before the application can be launched. In a nutshell, the SORN is a federal requirement that gives notice that the service will disseminate personal information such as the name of an individual or some other identifier assigned for the individual. NIC has a long history of protecting the public since the data, and is working closely with the Federal Motor Carrier Safety Administration to take every step necessary to ensure our track record remains unblemished. In the interim and in conjunction with our partner, we will be launching a website that provides information about the service and enables motor carrier customers to begin the sign up process. Overall we are making excellent progress and we are targeting to have the application live some time near the end of the first quarter. Needless to say we are excited about this groundbreaking opportunity. It provides NIC with more work at the federal level and it is our first self-funded opportunity for federal agency and it could have tremendous financial upside. I also want to give you a quick update on few states. First we will start with Texas. (indiscernible) 2010 marks a significant operational milestone in Texas. We have fully and successfully integrated on the ground and into the new TexasOnline 2.0. I want to congratulate the team and our partners on the seamless transition. On the last call, we provided a lot of detail around the work in Texas but we continue to receive questions about how much opportunity there is given that portal has been live for several years. I want to provide a bit of color around that. The state has done a tremendous in launching a number of services since 2000. Our partners in Texas acknowledged there are still plenty of new services to be brought online. They are aggressively helping us identify opportunities, and we are also leveraging our suite of applications across all of nationwide portal network. We are confident we can fill the project pipeline in the next seven years of the contract. This year and every year going forward we work with our state partner to develop a budget and prioritize services to keep that application pipeline full. The state and NIC share common goal to bring more services online and get more people using the services. The work we do in Texas this year is dedicated to this shared goal. While some of that work will come with an investment for example in the former marketing to launch a new site or the content management system we are developing, it is all designed to help the state hit this goal. With interim help NIC increased revenues and margins overtime. Another opportunity where we see (indiscernible) is New Jersey. Status of New Jersey has not changed since our last earnings call. We’ve been awarded the enterprise-wide contract by the state, but are still working to finalize the last few pieces before we can officially deem it a win. And (indiscernible) you on this call, the time it has taken to get New Jersey to get across the finished line may seem unusually long. However, let me remind you that the (ph) pace of government can be different than in the private sectors. Specifically New Jersey we’ve had a change in administration and it should come as no surprise to anyone that this can and usually does fall down all active procurements. After 18 years of experience what we are seeing does not concern us. We are still moving full steam ahead with dedicated resources on the ground and the recent inauguration of government (indiscernible) behind us, we are doing everything we can to get to the point where we van officially announce New Jersey as a win. As for other new states, we are not ware of any RFPs on the street at this time. I opened this call by saying we entered 2010 with a full sell pipeline. And while we do not talk about specific states of the pipeline, I’m confident that our value proposition is resonating strongly with prospect states, particularly in these difficult economic times. We are actively educating budget strapped states and encouraging them to look at our success across the nation. This is (indiscernible) off with calls and (indiscernible) with key officials and agency heads as they plan their eGovernment strategy and next steps. We are hopeful that multiple states issue RFPs in the near future. We know that 2010, and in particular the first six months of 2010 is a critical time for NIC. Four years ago the company set a very aggressive goal to serve 120 million of population by the end of this year. While we have not yet hit our goal, it is with or on our side and we are running as fast as we can to achieve it. However, I would just caution that we not – I’d just caution that we will make the best decisions for the company and our shareholders, and not become upset by the state population number. For example, I think everyone on this call would agree that dedicating a certain number of our senior sales executives to winning the pre-employment screening system was absolutely the right call. We are hopeful it will contribute significantly to our bottom-line over time and open more doors at the federal level. Even though it doesn’t add to our state population total, we are hopeful that we will have at least similar economics to that of a small to medium-sized state portal with significant upside potential. It is our intention to pursue similar contracts in the future at the federal level if the business model and economics make sense for us. Okay, let’s get down to the operating highlights for the quarter. Portal revenues increased 45%. It was (indiscernible) same-state revenue growth of approximately 10% and another significant contribution from the acquired Texas contract. One component of our revenue (indiscernible) at this quarter was consistent organic growth in the non-DMV area. The applications such as tax filings, vehicle title and registration, hunting and fishing licensing and the Alabama state liquor store payment service we launched in the fourth quarter of 2008 grew up 24% same-state non-DMV revenue growth this quarter. For the year, we exceeded the high-end of the company’s top and bottom line 2009 financial guidance. Our strong performance, combined with the way we prudently manage our debt-free business has allowed us again to return capital to shareholders. We are pleased to announce the NIC Board of Directors has declared our fourth consecutive annual special cash dividend. The $0.30 per share dividend is payable on February 26, 2010 to shareholders of record on February 16, 2010. We estimate the dividend payout will total approximately $19.3 million. And with that, I’m going to hand the call over to Steve for more detailed discussion of our financial performance; and then we’ll open it up for questions. Steve?

[Stephen M. Kovzan:]

Thanks, Harry. And good afternoon to everyone on the call. I’ll first talk about some of the highlights of the quarter and the year, and then provide some color on our guidance for 2010. For the fourth quarter, total revenues were $35.2 million, driven by revenues from the acquired Texas contract and steady organic revenue growth from our core portal business. Total gross profits grew 26% over fourth quarter 2008. Texas contributed approximately $2.1 million of gross profit and approximately $8.1 million in revenue and $6 million in cost of revenue. Sequentially, Texas revenues were down approximately $700,000 from the third quarter, reflecting normal fourth quarter seasonality due to the lower number of business days during the holiday season. One last item on Texas. Included in cost of portal revenues for the quarter was approximately $300,000 in transition expenses related to the new Texas online 2.0 contract that commenced on January 1, 2010. On a same-state basis, portal revenues grew 10% the fourth quarter. Breaking down the components of this growth, non-DMV transactional revenues grew at 24% and DMV revenues were flat from fourth quarter 2008, reflecting continued economic related weakness that we’ve seen for the past several quarters. (ph) Portal gross margin for the quarter was 36%, down from 41% the prior year quarter. The margin continues to be impacted by Texas, as margins from the acquired contract are lower than our company-wide average. Absent Texas, our quarter margins would have been approximately 39%, mainly reflecting normal fourth quarter seasonality in our business. However, a few other items had a modest impact on our portal margin for the quarter. First, as we discussed on our previous earnings call, our New Mexico MVD portal launched in late October contributing nearly $400,000 in revenues in the fourth quarter, offset by approximately $400,000 in startup expenses. While dilutive to our margin in Q4, New Mexico is expected to begin contributing positively to our bottom line in the first quarter of 2010. Second, as Harry just mentioned, we are currently investing in New Jersey and have dedicated resources on the ground, moving that initiative forward. As a result, we incurred approximately $200,000 in startup costs during the quarter, which modestly diluted our portal margin. You may have also noticed a dip in our software and services gross profit margin this quarter. This is because we incurred approximately $400,000 in startup expenses on the Federal DOT contract, which is reflected in the cost of software and services revenue line. As Harry mentioned, we are hopeful this service will launch near the end of the quarter. Moving on, selling and administrative expenses were $6.1 million in the fourth quarter, compared to $5.2 million in the prior year quarter. This increase was primarily attributable to approximately $200,000 of acquisition related expenses associated with the Texas contract, and higher incentive compensation and benefit expenses. As a percentage of total revenues, selling and administrative expenses were 17% in the current quarter, down from 21% in the fourth quarter of 2008. Operating income for the quarter was $3.9 million, as compared to $4.1 million in the prior year quarter. However, in addition to the new portal startup dilution I previously mentioned – which, by the way, we view as a good problem to have – it’s important to note that our results for the quarter also included approximately $1.7 million of intangible asset amortization expense from the acquired Texas contracts. The good news is that the majority of the Texas contract intangibles were fully amortized upon the completion of the acquired contract that expired on December 31, 2009. Absent this amortization, our operating income would have increased 36% in the fourth quarter. Going forward, we expect to recognize approximately $300,000 of intangible asset amortization expense per year for each of the next three years related to Texas and the Master Work Order projects. Now on to full-year 2009 results

[Harry H. Herington:]

Thank you, Dave. Brandy, let’s open the call for questions.

[Operator:]

Thank you, sir. We will now begin the question-and-answer session. (Operator Instructions) And our first question comes from the line of Carter Malloy with Stephens. Please go ahead.

[Carter Malloy:]

Hi, guys. Thanks for taking my questions. Couple of things here, one on the (indiscernible) they said they were very competitive where those – those large competitors, large asset competitors or where those just low competitors.

[Unidentified Company Representative:]

You know what, Carter, we didn’t hear you very well. Could you repeat the question? I am sorry. We just turned off the volume on our end here.

[Carter Malloy:]

Yeah, sure, (indiscernible). So on the two rebids (indiscernible) I am just wondering if those were national or more local type of competitors.

[Harry H. Herington:]

All I said – this is Harry, real quick, what that was is they are open to anyone. We didn’t have, I would say, any of your big five companies come in and submit bids for this, which is quite common when we go after rebid. But these are public RFPs that are issued and everybody is made aware of them.

[Carter Malloy:]

Sure, okay. And then on the model looking forward, I assume some of the revenue guide down maybe has to do with like the discretionary software development line. Should I expect that to be down meaningfully this year?

[Stephen M. Kovzan:]

Carter, when you say the software line, are you talking about the software line within the portal business?

[Carter Malloy:]

Correct.

[Stephen M. Kovzan:]

Well, I guess I would say that certainly as we have discussed before when states are in serious budget (ph) straits, the area of our business that typically has a little bit more risk than others would be in the kind of materials area. But overall, again on a blended basis, if we include DMV, non-DMV type of materials from a same-state growth standpoint, we are still guiding to about 10% growth which again (ph) is kind of right in the range that we’ve seen although the lower end of the range right within the 10 to 15 range that we – excuse me, 10 to 15% range that we have seen historically.

[Carter Malloy:]

Okay, and then, Harry, when you talked about the 120 million (indiscernible) earlier, are you guys seeing that goal from what you are seeing now and the conversations you are having now (indiscernible) or do you think we can still get there (ph) end of 2010?

[Harry H. Herington:]

No, I still believe that is a goal that we are chasing and there is a definite possibility to get there.

[Carter Malloy:]

Okay, thank you.

[Harry H. Herington:]

Thank you.

[Operator:]

Our next question comes from the line of Ian Kell with Northland Securities. Please go ahead.

[Ian Kell:]

Hi, guys. Thanks for taking my call. Just on the (ph) DoT guidance you gave, can you give us some color around your thinking about the margins for the year and how we should sort of interpret that going forward?

[Stephen M. Kovzan:]

Well, Ian, we had – we gave revenue guidance of about 1.5 million to $2 million with minimal contribution for the year. So I think that means we’re probably going to have an equal amount of expenses. So we’re basically projecting slightly better than breakeven business this year. With all the caveats that I previously mentioned about it being a new service, we think it has tremendous potential, absolutely, but I think given the fact that it’s a new service and that it’s not a mandatory service, we are kind of taking a cautious wait and see approach with our revenue projection.

[Ian Kell:]

Sure, (indiscernible) if there was some conservatism in there. And then real quick, can you just recap for me as well the same-state DMV to non-DMV growth in the quarter?

[Harry H. Herington:]

Same-state DMV growth was flat.

[Ian Kell:]

Okay.

[Harry H. Herington:]

And same-state non-DMV growth was 24%.

[Ian Kell:]

All right, great. All right, that’s all I’ve got. Thanks, guys.

[Harry H. Herington:]

All right, thank you.

[Operator:]

Our next question comes from the line of James Cakmak with Sidoti & Company. Please go ahead.

[James Cakmak:]

All right, thanks for taking my questions.

[Harry H. Herington:]

Hi, James

[James Cakmak:]

Hi, just more on a high level, you guys have historically been really good at application development and deployment of new transaction based services (indiscernible) state portals. Can you provide some more insight as to how much overlap you currently have with services across the states that you partner with as well as any additional detail you can provide on? How much opportunities there are to further leverage your applications and services? I mean where does this really rank on the priority list to help drive revenue growth?

[Harry H. Herington:]

Yeah, (indiscernible), it’s Harry. I’ll tell you we – it’s a great question, I get it quite often, it’s always (indiscernible) try to answer. We have great penetration (indiscernible) really good at leveraging applications from state-to-state, but I don’t have any one state that I am in now, that I have launched, even the majority of the applications I have from another state, the upside potential is huge. Plus, we are identifying new applications on a month-to-month basis of services that are – that we are launching. So we have penetration within our (ph) table of services that (indiscernible) other states we owned and we have new services coming on continuously.

[James Cakmak:]

Okay, thank you.

[Operator:]

Thank you. (Operator Instructions). And our next question comes from the line of Jay Zises with Associated Capital. Please go ahead.

[Jay Zises:]

Thanks for taking my call. If you back out all the adjustments, what would have been the net income and the earnings per share? Someone said if the – I think it was Harry said if we backed out the million seven, it would have increased our earnings by 36%.

[Unidentified Company Representative:]

That’s correct, Jay, would have increased – our operating income would have increased 36% absent the amortization.

[Jay Zises:]

Right. Which would have increase earnings per share by a couple of cents?

[Unidentified Company Representative:]

That it would have – it would have been probably close to two to $0.03.

[Jay Zises:]

Right. And this was in the – basically in an extraordinary item which will not be repeated.

[Unidentified Company Representative:]

Yes, this – Jay, this amortization expense, the majority of it has – we recognized in 2009 and won’t be recognizing on a going-forward basis. As I said in my scripted remarks, going forward, we will only see about $300,000 a year...

[Jay Zises:]

Right.

[Unidentified Company Representative:]

intangible asset amortization expense from taxes, so yeah.

[Jay Zises:]

So, why wouldn’t we have put that on a separate line to give a more accurate picture of what our operating earnings are?

[Unidentified Company Representative:]

Well our operating earnings, I mean we report GAAP earnings...

[Jay Zises:]

Right.

[Unidentified Company Representative:]

we share with investors in our earnings release, what our – I guess would be start-up costs or non-recurring items –

[Jay Zises:]

Right, because amortization has a one-time charge, and –

[Unidentified Company Representative:]

Yes, I agree with that. We’ve just elected not to provide non-GAAP measures in our earnings releases.

[Jay Zises:]

Right. But I think it’s misleading from – from an economic point of view. I don’t think it’s an – I don’t think it’s an accurate portrayal of what the operating earnings are, I mean operating earnings would have been 36%, while earnings per share would have been 40% higher, and I think that’s – I think with not doing the investment community a favour by not treating it as a separate line, everybody – I think everybody else does, they report non-GAAP earnings.

[Unidentified Company Representative:]

(indiscernible) Jay.

[Jay Zises:]

Okay.

[Unidentified Company Representative:]

Thank you.

[Jay Zises:]

Thank you.

[Operator:]

(Operator Instructions) And our next questions comes from the line of Jeff Evanson with Dougherty & Company. Please go ahead.

[Jeffrey Evanson:]

Good afternoon, everybody.

[Unidentified Company Representative:]

Hi Jeff.

[Unidentified Company Representative:]

Hi Jeff.

[Jeffrey Evanson:]

I’m wondering if you could just maybe give us a little more color on the same-state portal guidance here towards the low end of your historical range, you say that stake economic challenges in the overall economic environment but give me a sense for what directly that’s impacting was in the financials?

[Unidentified Company Representative:]

I think in general, I mean, I think we’re probably taking into 2010 kind of a similar caution that we did in 2009 with regards to DMV revenues, I mean it’s certainly is one area and as I touched on briefly in responding to an earlier question, certainly we are being cautious with regards to what we project in terms of kind of materials revenue growth but overall I don’t think it’s really any different this year than year’s.

[Jeffrey Evanson:]

All right, I’ll (indiscernible) doing down this path, do you recall what you’ve guided last year?

[Unidentified Company Representative:]

From a same-state standpoint?

[Jeffrey Evanson:]

Correct.

[Unidentified Company Representative:]

I don’t, but I know it’s – it was probably between the 10 to 15% range, I don’t specifically recall Jeff.

[Jeffrey Evanson:]

All right, we’ll get the transcript. If you’re being conservative.

[Unidentified Company Representative:]

Okay.

[Jeffrey Evanson:]

Thanks.

[Operator:]

The next question comes from the line of (indiscernible) Investment Partners. Please go ahead.

[Unidentified Analyst:]

Real quick. I want to just make sure, you help me out with the revenue numbers, year-on-year, so with revenues last year we’re 132.9, how much of that was Texas about 16 million?

[Unidentified Company Representative:]

Texas revenues in 2009 were 19.8 million.

[Unidentified Analyst:]

So if I’m trying to do kind of an apples-to-apples, leave out Texas and New Mexico and your federal kind of – what your projection is for 2010 versus 2009. So I back out 38 – back out 40 from the top end, I am at 121 and you Texas was (indiscernible) 19.

[Unidentified Company Representative:]

Texas for 2009 – for full year 2009, Texas was $19.8 million.

[Unidentified Analyst:]

Yeah. So just about 20, so it comes out to 113 million, so you’ve got – leave out on a same-state basis 113 going to 120, it’s a lot less than 10%, am I doing something wrong here.

[Unidentified Company Representative:]

Yeah, I think you are, I think if you start with in terms of what I think you are trying to do.

[Unidentified Analyst:]

So I’ll just do it real quick, so I’m thinking 132.9 back in now Texas of 19.8, so now I’m up to…

[Unidentified Company Representative:]

Okay. But as – the one thing that you’re including in that 132.9 is the $4.3 million in revenue from our software and services business which is not, when we talk about same-state portal revenue growth of 10%...

[Unidentified Analyst:]

Yeah.

[Unidentified Company Representative:]

There is $4.3 million of software and services revenues in there.

[Unidentified Analyst:]

Okay. Do you have – do you back going up more than 10%, because your estimate to that is 5.0 to 5.5 versus 4.3, right?

[Unidentified Company Representative:]

Yeah, when we talk about 10% same-state revenue growth.

[Unidentified Analyst:]

Yeah.

[Unidentified Company Representative:]

We’re strictly talking about the portal segment.

[Unidentified Analyst:]

Yeah, I know, okay, but the – so even take the 1.55 at top end of your revenue minus that, well how much of the 19.8 from Texas was software and service?

[Unidentified Company Representative:]

None of the 19.8 was in the software and services segment.

[Unidentified Analyst:]

All right.

[Unidentified Company Representative:]

All of the $19.8 million was included in the total revenue number of $128.6 million.

[Unidentified Analyst:]

Okay. And all of the 36 top end and two million New Mexico and two million with DOT – the DOT that’s software services, that…?

[Unidentified Company Representative:]

Yes it is, the DOT is – we are including in the software and services.

[Unidentified Analyst:]

Okay, I can get closer now.

[Unidentified Company Representative:]

Great.

[Unidentified Analyst:]

Yeah, sorry.

[Operator:]

Thank you. (Operator Instructions). And at this time we have no further questions.

[Harry H. Herington:]

And I want to thank everybody for joining us today. I am going to end this with saying we are extremely excited with the performance we have in 2009, we are extremely excited with the opportunity we have in 2010 and I look forward to see you on the next earnings call. Thank you.

[Operator:]

Ladies and gentlemen, this concludes the NIC first quarter earnings conference call. If you like to listen to replay of today’s conference please dial 303-590-3030 or 1-800-406-7325 followed by a pass code of 4201654. (indiscernible) would like to thank you for your participation, and you may now disconnect.