NIC Inc
Q1 2010 Earnings Call Transcript

Published: 4 May 2010

[Operator:]

Welcome to the NIC first quarter 2010 earnings announcement conference call. During today’s presentation all parties will be in a listen only mode and following the presentation the conference will be open for questions. (Operator Instructions) I would now like to turn the conference over to Chris Neff.

[Chris Neff:]

The press release for NIC’s first quarter 2010 earnings announcement was issued 30 minutes ago. For those of you who haven’t received the release, the announcement is available on our corporate website at www.NICUSA.com. You may also call our headquarters at 877-234-3468 and we will email the information directly to you. 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 the potential for growth in revenue and income and statements regarding continued implementation of NIC’s business model and it’s development of new products and services. Forward-looking statements are subject to inherent risks and uncertainties in there can be no assurance that such 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 in to its operations recently 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 and 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, the SEC investigation and general economic conditions including the current economic slowdown and the other important cautionary statements and risk factors described in NIC’s 2009 annual report on Form 10K filed with the Securities & Exchange Commission on March 16, 2010. NIC does not intend to update these forward-looking statements and undertakes no duty to any person to provide any such updates under any circumstances. With that, I’d now like to introduce Harry Herington, Chairman of the Board and CEO of NIC.

[Harry H. Herington:]

We are pleased with NIC’s performance and are excited about several news worth items over the past few months including a seamless transition in Texas which has positioned us extremely well to meet several important milestones in the second quarter; the great start in New Mexico with the motor vehicle services are performing well; two new solutions that we believe will stake our claim as the leader in mobile eGovernment and make our partners’ eGovernment services available on some of the coolest new tech devices and NIC’s first self funded service for the federal government which is in the final system testing. Starting with our newest federal service, we are very excited about the pre-employment screening system for the US Department of Transportation Federal Motor Carrier Safety Administration or FMCSA for short. This is a ground breaking new service to provide secure online access to driver safety data including crash and inspection information which motor carriers use as part of their decision making process for new drivers. The service is currently in final testing and we will issue an announcement when it officially launches. This service for FMCSA is NCI’s first self funded engagement in the federal space and we expect it will open doors for other self-funded opportunities in the federal government. It’s been a significant undertaking for our team in DC. I want to thank everyone at NIC and in the industry who has helped us deliver this service. I also want to thank our partners at FMCSA who were willing to be innovative with their funding model and have been great to work with. We look to a long and successful relationship built around this important and effective service. Moving to Texas, we are extremely pleased with the transition to the new Texas contract. This tremendous transformation in such a short period of time makes our achievement that much more noteworthy. We have started work on several major enhancements including a new enterprise wide payment engine and content management system. These enhancements will be in place this quarter when we unveil the new portal which is something we’re very excited about. Even while our team has been working tirelessly on these new projects, we’ve also been collaborating with the state on developing new services which will become the primary focus for the portal once these initial deliverables are launched. We have a satisfied partner, a best in class portal and more news to share from Texas on future calls. In New Mexico we have another successful new engagement. The motor vehicle division initial suite of DMV service are performing quite well and the partner is very pleased with our team’s performance. We have many new services in the pipeline and look forward to further performance improvement in New Mexico. Let’s move on to discuss innovation or more specifically NIC’s view of innovation. We are driven to expand access to government information and services. This includes offering self funded to new segments of government as we have done with FMCSA as well as introducing services in to new channels and on new devices. A huge eGovernment opportunity that has been gaining momentum is mobile and it will continue to grow as more people own smart phones with web browsers and fast connectivity. I’m very excited about the expertise NIC brings to the mobile arena. For years we have offered limited access via mobile such as collection results but the technology did not make it feasible for full featured mobile apps until recently. Today, many of our portals have mobile websites and several of our states have developed mobile optimized portals that feature streamline access to key services that are also designed specifically for mobile devices. In addition, eight states have already launched iPhone apps and last quarter Arkansas became the first state to introduce secure mobile payments for government services. With this development, we can now offer a seamless mobile experience for users from the time they first hit a website to the point where services are accessed, a transaction takes place and a secure payment is made. Mobile is the preferred channel for millions of people especially younger citizens who are the next generation of eGovernment users and NIC wants to ensure that our partners’ services are available to this new mobile generation. While we’re on the topic of next generation of eGovernment users, let’s talk about the recent iPad launch. When the iPad was first announced we realized it was going to be a revolutionary product and immediately started to work on an app that could be rolled out in time for the initial iPad launch in April and we didn’t pick just any app. We wanted something that would appeal to a younger target market that was likely to be a big segment of the device’s user base. The interactive driver’s license test was a perfect fit because it helps teens practice for the written driver’s exam. We were fortunate to have five states step forward to launch the app simultaneously

[Stephen M. Kovzan:]

Let’s jump in and take a closer look at the quarter. In the first quarter 2010 operating income was $5.6 million up 19% from the prior year quarter. Quarter revenues were a record $37.2 million, up 41% over the prior year quarter and driven by revenues from the acquired Texas contract as well as steady organic revenue growth from our core portal business. Portal gross profits grew 21% over first quarter 2009. We had nice contributions from our two newest states this quarter. Texas contributed approximately $2.2 million of gross profit on approximately $8.7 million in revenues and $6.5 million in cost of revenues while New Mexico contributed approximately $300,000 of gross profit on revenues of approximately $500,000 and cost of revenues of approximately $200,000. On a same state basis, portal revenues grew 6% in the first quarter which we recognize is starting out lower than our 10% guidance for the year. Breaking down the components of same state revenue growth non-DMV transactional revenues grew 19% in line with our expectations. DMV revenues were flat from first quarter 2009 which is consistent with the ongoing economic related weakness we have seen for the past several quarters and also in line with our expectations and a third component of our same state growth time and material projects which represent about 10% of our portal revenues decreased 4% during the quarter as we cycle against a larger base of projects in the first quarter of 2009. This component of portal revenues tends to be somewhat lumpy and less predictable than our transaction based revenues from quarter-to-quarter and we saw the impact of that this quarter. For the year we currently expect same state revenues to grow close to the 10% range. Our portal gross margin for the quarter was 37% down from 44% in the prior year quarter. Consistent with the last few quarters and as expected, our margin continues to be affected primarily by Texas, which as Harry has mentioned has been and will be making investments in portal enhancements that are an ongoing part of our new contract. Absent Texas and the start up expenses in New Jersey which totaled approximately $200,000 this quarter our portal margins would have been approximately 42%. You may have also noticed a dip in our software and services profit margin again this quarter. This was because we incurred approximately $500,000 in additional start up expenses on the federal DOT contract which as Harry mentioned is currently in final system testing. Moving on, selling and administrative expenses were $7.3 million in the first quarter, a 16% increase over the prior year quarter. This increase is driven by several factors including higher Texas sales commissions and acquisition related expenses as well as higher incentive compensation and benefit expenses including stock based compensation and higher costs in connection with the previously disclosed ongoing SEC investigation. As a percentage of total revenues however, selling and administrative expenses were 19% in the current quarter down from 23% in the first quarter 2009. With regards to the ongoing SEC investigation, we incurred nearly three quarters of a million in legal fees and other third party expenses this quarter. That compares to approximately $400,000 in the prior year quarter. To date we have incurred nearly $3 million in expenses related to this matter and we expect to continue to incur significant expenses until the SEC resolves this matter with each of the parties who received Wells notices and until the audit committee completes its ongoing review of expense reimbursements to Jeff Fraser. Recently, we were in formally advised that our directors’ and officers’ liability insurance carrier may reimburse the company for certain expenses incurred prior to the issuance of the Wells notices in early March and would reimburse the company for certain expenses incurred after that time subject to certain conditions. To date, we have not excluded any expenses incurred through the end of the first quarter of 2010 in connection with the SEC investigation from selling and administrative expenses pending formal notice from the carrier as to expenses that will be reimbursed. To the extent that the carrier agrees to reimburse the company for expenses, we will treat such reimbursement as a reduction of selling and administrative expenses in the period we determine such reimbursement to be likely. We cannot currently estimate the amount of possible future D&O insurance reimbursements, if any, nor can we assure that all future expenses or liabilities, if any, incurred by the company in connection with the SEC investigation will be covered by our D&O insurance. However, we will update investors on the status of the insurance reimbursement on future earnings calls and through our periodic filings with the SEC. One last housekeeping item before we take your questions, the full year 2010 financial guidance that we provided during our last call in February remains unchanged. As always, our guidance does not include revenues from any unannounced contracts and that includes New Jersey which has not been factored in to our revenue projections. With that, I’ll turn the call back over to Harry.

[Harry H. Herington:]

We will now open the call for questions.

[Operator:]

(Operator Instructions) Your first question comes from Carter Malloy – Stephens, Inc.

[Carter Malloy:]

First question just on the confidence of the 10% same state growth this year taking in to the potential continual declines in the time and materials business. Can you just give us some sense of your comfort around that number going forward?

[Stephen M. Kovzan:]

Well, like I said I think we’re going to be closer to the 10% mark which is what we guided to for the year and our guidance largely remains unchanged. I mean I think what we saw this quarter is much a timing issue as anything with some of these projects that we had in the prior year quarter that were more substantial than what we saw this quarter but like I said, by in large we’re comfortable with our guidance for the year.

[Carter Malloy:]

On the DOT contract, I know we’re getting close to being live there but you’re still kind of full with the $1.5 to $2 million on that in revenues?

[Stephen M. Kovzan:]

I think generally.

[Carter Malloy:]

Then lastly and I’ll hop back in the queue but on Texas, how long until you guys have that up to a full run rate where it kind of looks like your other states from a profitability standpoint? Or, essentially how long does that continue to drag margins?

[Stephen M. Kovzan:]

Well certainly in Texas it’s going to take a little bit of time. As we’ve shared with investors we think as we launch new services in Texas over time and the incremental margin potential is pretty exciting particularly given the size of the state and so over time we’re going to be driving Texas closer towards what we see the rest of the company. It’s not going to happen overnight but this is the direction we’re heading.

[Harry H. Herington:]

Just to add to that, remember that Texas had been in place for about eight years. We’re stepping in to an existing contract in which we had to make significant enhancements to and totally change to a new portal contract. But, we’re taking on their existing apps and so it will take us some time this isn’t like starting fresh.

[Carter Malloy:]

But as far as taking on the big projects, the big upfront stuff, could we assume that you at least clean a lot of that up in the next year?

[Stephen M. Kovzan:]

No Carter, I think we’re going to have ongoing projects in Texas. I think our investment and our level of spend is going to be ongoing and we are going to manage the profits in Texas like we do in every other state, the balancing act between when we do those larger projects and we will reach a mutual agreement with the state as to when we’ll do them and when we’ll phase them in overtime and we’ll do them the way we do them everywhere else.

[Carter Malloy:]

Maybe I should simplify the question, can I assume that the Texas gross margins improve? I’m okay if they don’t for a while and I understand and appreciate you guys are putting up big efforts there but can I assume that those improve over time?

[Stephen M. Kovzan:]

That’s our expectation.

[Harry H. Herington:]

That is what all of us are working towards. We’re just a very conservative group, Steve and I have always been conservative. We’re looking at what we had to embrace, it was unknown what we had to walk in to when we first got there and some large promises made from us because of expectations from the state so we’re just not willing to jump out and say when that’s going to occur. But, I think beyond being conservative you also know that we’re very aggressive and we’re not satisfied where we are now. We’re definitely working to better the margins.

[Operator:]

Your next question comes from Chad Bennett – Northland Securities.

[Chad Bennett:]

A couple of questions, first on the DOT start up expenses, I think you said $500,000 for the quarter. Steve is that kind of a run rate? I can’t imagine, did we have all those expenses in place the whole quarter or did they kind of ramp any type of color on what DOT expenses look the next few quarters here?

[Stephen M. Kovzan:]

Well Chad I mean certainly in the start up phase we’re incurring a lot more to develop the application and test the service and things of that nature so there might be some incremental expenses. Yet, at the same time we’re also going to see what the service is going to acquire of us longer term as it ramps and we get a better feel for adoption and things of that nature. So for now I think from a cost structure standpoint we’ll [inaudible].

[Chad Bennett:]

Just another question, any type of color in terms of how many people have enrolled or subscribed to the DOT service?

[Harry H. Herington:]

Currently we have more than 800 that have enrolled. We’re in pre-enrollment right now. But, I really can’t speak too much on that because we’re working very closely with the agency and I don’t want to steal any of their thunder.

[Chad Bennett:]

Is there any reason to believe that the DOT revenue would be materially different from a gross margin perspective at time type of scale than your portals?

[Harry H. Herington:]

That one is definitely looking at a crystal ball. I would say that we’re very excited about this opportunity. Since this is a brand new service that has never been launched before, we’re dealing with the federal government, we’re dealing with trucking companies across all of the states. We’ve been very conservative and we’re kind of feeling our way as we go here as to what the numbers are coming back. It’s way too early to say what we think the margins could be. It’s my hope and expectation we could get there but I’m not nowhere close to making a promise like that.

[Chad Bennett:]

Then one question on taxes, the revenue and actually the gross profit was I think decent in the quarter and probably towards the higher end of guidance you gave for revenue on that state if you annualize it. Should we assume that taxes had some positive seasonality in the March quarter like every other state with taxes and what not and maybe the run rate goes down a little bit in the June quarter or would that be wrong?

[Stephen M. Kovzan:]

Well, I would say that Texas was pretty similar from a transactional standpoint. If you’re talking about the revenue run rate, they experienced the same type of seasonality that many of our other portals do particularly in the fourth quarter. The one thing that Texas doesn’t have in the second quarter that maybe some of our other states have is the state income tax so we don’t necessarily have the tax filings there. We will continue to spend. We’re going to be rolling out a new portal and we will continue to make fairly significant investments in marketing so our cost structure could bump up and down a bit as we go throughout this first year of the contract.

[Chad Bennett:]

Last question, New Jersey what was the expense related to New Jersey in the quarter?

[Stephen M. Kovzan:]

$200,000.

[Operator:]

Your next question comes from Andrea James – Dougherty & Company.

[Andrea James:]

Just looking at New Mexico, why are the gross margins there so good? Is it a big state small state thing or is it specific to the services you’re providing there?

[Harry H. Herington:]

This one is specific to the services we’re providing there. It’s a very targeted service that we have there.

[Stephen M. Kovzan:]

Andrea, if you think back on the guidance that we provided specifically for New Mexico, we provide guidance of about $1.5 to $2 million and so obviously this first quarter with revenue starting out at about $500,000 for the quarter it’s kind of at the upper end of our range so the margins are a little bit higher than what we’ve guided this first quarter. We’ll see how the rest of the year goes.

[Andrea James:]

Just one more, on the FMCSA you said you had 800 pre-enrolled. Do you think most of the customers are going to be going directly to FMCSA or are they going to go through those aggregated services and then the aggregator will go to FMCSA to pull the data?

[Harry H. Herington:]

Actually, these are 800 companies that we have and we expect the companies to either go to that service or through the aggregators that are going to come to us, it’s the only way they can get the information is through this service.

[Andrea James:]

How big of a roll do you think the aggregators are going to play?

[Harry H. Herington:]

A major role.

[Operator:]

Your next question comes from James M. Cakmak – Equity Analyst – Internet.

[James M. Cakmak:]

I just wanted to touch on Texas. You guys are obviously really ramping up services there. Now that you have the backing of such a large and significant state, is it possible at this point to utilize that as leverage to distribute some of those services to the smaller states that you currently operate in?

[Harry H. Herington:]

Absolutely we’re going to look at the services that are there and those that we have transitioned over. We’ve got everything transitioned but now we’re looking to say what can we take there as well as what can we take from our existing states because we have remember a few other states that we’ll be taking back in to Texas. We’re expecting Texas to ramp fairly nicely.

[Stephen M. Kovzan:]

James, really this first quarter was really spent focusing on a couple of pretty large initiatives that we had to undertake, an enterprise wide payment engine, content management system, we’re in the throes of relaunching and rebranding the portal in the second quarter so quite frankly, we expect a greater ramp of services towards the second half of the year than what we really saw in the first quarter.

[James M. Cakmak:]

Then on New Jersey, you guy’s start up costs associated with that, what exactly is that money going to?

[Stephen M. Kovzan:]

It’s mostly people that we have on the ground in New Jersey.

[Harry H. Herington:]

James, I put a team there. I mean, it just makes sense while we’re in the process of getting it up and going.

[James M. Cakmak:]

Any updates you can provide on the renewal pipeline?

[Harry H. Herington:]

Bear with us because I’m trying to remember which ones I can speak to.

[Stephen M. Kovzan:]

Chris just informed us that we’ve got six this year that will be knocking off in due time hopefully. So none of which again, causes us any significant concerns.

[Harry H. Herington:]

But not this quarter. Everything is going fine there. As you know this is a typical thing, we deal with renewals and rebids on an ongoing basis. I don’t think we had any this quarter.

[Stephen M. Kovzan:]

I don’t think we did either.

[James M. Cakmak:]

Lastly, just to confirm you said Oregon is set to announce the winner at the end of the year or have the bids in by then?

[Harry H. Herington:]

No, the bids are actually due this week and it’s a very long sales cycle and they’re going to be awarding it by the end of the year.

[Operator:]

Your next question comes from [George Prince].

[[George Prince]:]

You’re doing so well with the states and then the portals and the DOT and then you’ve written all these applications and I think kind of what James is trying to get at, I don’t understand why you don’t do a better job cross selling all these great applications from state-to-state and why there isn’t great leverage there. Maybe you can talk about that?

[Harry H. Herington:]

I’ll talk about it just briefly George. First off, we do leverage state-to-state. There are some that we’re more successful than others. The issue is as we go through and we talk about which ones and we promote them, it’s what moves the needle. If I were to start to list all of the applications that once state has launched that another state launched previously I’d have a laundry list but it really doesn’t move the needle until you have a lot of them put together in aggregate. We push the larger ones such as temp tags which I mentioned this time and some driver’s license renewals. Those usually have some rules and regs or statutes associated with them so it can take a little bit longer to get that through as we cycle through some of the legislative issues that we have to deal with. But, I’m very pleased with how our partner’s embrace what we’ve launched someplace else and what we can take in to new portals.

[[George Prince]:]

You seem to win all sorts of awards, I get these great press releases all the time and I would think that it would be a layup because these states aren’t even paying for the development, they just get the benefit of what another state has gone through.

[Harry H. Herington:]

Yes, but I don’t know if you’ve ever dealt with government but there’s a lot of bureaucracy that you do have to deal with in the government that is put in place to protect the citizens and the businesses and that in itself – once a state embraces a solution they have to get through red tape that drives them insane just to get it up and going. I do appreciate the kind words you said about the awards, our partners love those and they have been winning those regularly for years and usually at the top of the list.

[Operator:]

Your next question comes from Edward Antoian – Chartwell Investment Partners.

[Edward Antoian:]

Just a couple of questions here, you said that your gross profit margin ex Texas and New Mexico were 42%, is that right?

[Stephen M. Kovzan:]

That’s right.

[Edward Antoian:]

I just did the portal revenues and backed out the revenue and expenses for Texas and New Mexico and came up to under 41%. Is it rounding or am I missing something else?

[Stephen M. Kovzan:]

I’m sorry Texas and New Jersey start up expenses.

[Edward Antoian:]

Oh, okay leave out Texas revenue and cost of revenue and leave out New Jersey?

[Stephen M. Kovzan:]

That’s right.

[Edward Antoian:]

Second, you told us that 10% of your same state revenues or your revenues at time and material, what percent is DMV right now and what percent is transaction? Just Q1 would be great.

[Stephen M. Kovzan:]

I’ll do the math for you right now.

[Harry H. Herington:]

As he’s doing the math just to fill the void I will say that time and material are not services that we look for. When we’re out there chasing applications to install it’s going to be the non-DMV and we aggressively go after those. That’s why it gets kind of lumpy when we have time and materials, we get certain applications to come through.

[Stephen M. Kovzan:]

Ed, our DMV this quarter was 45% of portal revenue.

[Edward Antoian:]

Therefore 45% was transaction?

[Stephen M. Kovzan:]

But, you also have to add the non-DMV transactional component of our revenue stream which was –

[Edward Antoian:]

So part of the transactional revenue is also DMV?

[Stephen M. Kovzan:]

Yes, DMV is part of the transactional revenue component. About another 39% is non-DMV transactional revenues.

[Operator:]

Mr. Herington I see no further questions in queue at this time.

[Harry H. Herington:]

Again, I want to thank everybody for joining us this afternoon. I look forward to speaking with you tomorrow at our 2010 annual shareholder’s meeting from the Oread Hotel in Lawrence Kansas. A portion of that meeting will be webcast and we encourage all investors that cannot attend in person to listen to the webcast. Again, I look forward to speaking with you during our next quarterly call. I hope everybody has a great day.

[Operator:]

Ladies and gentlemen this concludes the NIC first quarter 2010 earnings announcement conference call. You may now disconnect. Thank you for your participation.