NIC Inc
Q4 2012 Earnings Call Transcript

Published: 8 Feb 2013

[Operator:]

Ladies and gentlemen, thank you for standing by. Welcome to the NIC Fourth Quarter 2012 Earnings Announcement Conference Call. [Operator Instructions] I'd now like to turn the conference over to our host, Ms. Angela Skinner. Please go ahead.

[Angela Skinner:]

Thank you, Tega. Good afternoon, everyone, and welcome to NIC's Fourth Quarter Earnings Call. The press release for NIC's fourth quarter 2012 earnings announcement was issued 30 minutes ago. Our earnings release is also available on our corporate website at egov.com/investors. You may also call our headquarters at 1 [phone], and we will e-mail the information to you. Following a reading of our cautionary statement regarding forward-looking information, CEO, Harry Herington; Chief Operating Officer, Robert Knapp; and Steve Kovzan, NIC's Chief Financial Officer, will deliver prepared remarks. Then we'll open up for questions. Any statements contained in this release that do not relate to historical or current facts constitute forward-looking statements. These statements include statements regarding the company's potential financial performance for the current fiscal year, statements regarding the planned implementation of new portal contracts, statements regarding continued implementation of NIC's business model and its development of new products and services. Forward-looking statements are subject to inherent risk and uncertainties, and 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 integrate into its operations recently awarded eGovernment contract; NIC's ability to implement its new portal contracts in a timely and cost-effective manner; NIC's ability to successfully increase the adoption and use of eGovernment services; the possibility of reductions in fees or revenues as a result of budget deficits, government shutdowns or changes in government policy; the success of the company in renewing existing contracts and in signing contracts with new states and federal government agencies; continued favorable government legislation; NIC's ability to successfully transition out of expired contracts; 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 possibility of security breaches through cyber attacks; and general economic conditions and the other important cautionary statements and risk factors described in NIC's 2011 Annual Report on Form 10-K filed with the Securities and Exchange Commission on February 24, 2012. Any forward-looking statements made during this presentation speak only as of the date of this call. NIC does not intend to update these forward-looking statements and undertakes no duty to any person to provide any such update under any circumstances. Now, it is my pleasure to introduce Harry Herington, NIC's Chief Executive Officer and Chairman of the Board.

[Harry H. Herington:]

Thank you, Angela. Welcome to our fourth quarter earnings call and thank you for joining us today. It's been a little over 1 month now since we rang in the new year. For many people, this means the setting of New Year's resolutions. I have to admit, I am not a big fan of New Year's resolutions. Most seem to fall by the wayside by January 15. However, I do embrace the concept of setting your vision for the future, establishing goals and resolving to accomplish even more this year than the one before. At NIC, this isn't something we do at the beginning of the year, but something we continuously do throughout the year. When I think about what we resolved to do at NIC even better this year than in the past, it's simple

[Robert W. Knapp:]

Thank you, Harry. Harry mentioned that eGovernment, at its best, uses all of the digital channels available to conduct business between government and its citizens and businesses. Today, mobile plays a huge role in how we approach delivering the very best in eGovernment services. In a November 2012 report, the Pew Research Center talked about cellphones becoming a portal for an ever-growing list of activities. Conducting business with government is definitely a part of that list. According to the study, the percentage of Americans who use their cellphones to access the Internet has more than doubled from 25% in 2009 to 56% today. More people are using their phones to download mobile apps as well. Nearly 43% of Americans use their cellphones to download apps, up from 22% less than 4 years ago. This data definitely supports our mobile-first strategy as we develop new online services for our government partners. Having an online service or a website developed into a mobile application is not a nice-to-have addition. Mobile has quickly become the way that an ever-increasing percentage of the population accesses our online services. During the fourth quarter, we launched several new mobile applications for our partners. In Alabama, our team worked to launch the first mobile application for the Alabama Department of Conservation and Natural Resources. The mobile app is called Outdoor Alabama and offers a variety of tools for on-the-go hunters, anglers and outdoor enthusiasts across the state. If you're wondering what road conditions and traffic are like in Tennessee, finding that information just got easier with the launch of the new Tennessee SmartWay mobile application. The app can alert you to traffic incidents and construction delays using your current location, and users can also add favorite locations with the ability to scroll through and see real-time images of their favorite routes. For people in Utah who use public transportation, there is a new way to help prevent you from missing the bus. Working with the Utah Transit Authority, our team developed a new on-time service that brings bus stop locations to a user's mobile device, and alerts them when buses are minutes away from a designated stop. In addition to our mobile applications, our mobile-first strategy involves retrofitting the online services and websites we've developed in the past to work optimally on a mobile device. It is referred to as responsive design. You have probably heard us talk about responsive design on past calls. It involves building the online service in such a way that the device you are using is automatically detected and then scales the design and content according to the device. Our Indiana portal completed its responsive design implementation for the state during the fourth quarter. Nearly 150 state websites, consisting of more than 60,000 pages, were coded using responsive design. Thanks to this project, all of these pages can now be easily viewed from any mobile device. Another highlight of the fourth quarter was the success of the DPS Direct service in Texas. You'll recall that in September we launched the vehicle inspection service, the first of 8 services in this new suite of applications for the Regulatory Services Division of the Texas Department of Public Safety. The fourth quarter marked the first full quarter of revenues from the vehicle inspection service, which drove a significant portion of our non-DMV revenue increase for the quarter. I'm very pleased with the initial performance of this service. Strong results during the fourth quarter also came from our New Jersey portal. Over the course of this year, the portal has become profitable solely through non-DMV services. And during the fourth quarter, our New Jersey portal launched several new services. One allows businesses to register with the state as a small business enterprise for state contracts, another provides online breathalyzer test results from the state police, and the third is our online vital records service which retrieves birth, death and marriage certificates. There's a lot of good momentum in our New Jersey portal and it's great to see our vision for this portal becoming a reality. Finally, as I often do, I want to close my portion of the call by thanking a few of our current partners. This past quarter, Oklahoma renewed its contract with us for 1 year, taking the agreements through December 2013. Recently, Kansas extended its contract for 1 year, taking the agreement through January 2014. The Federal Motor Carrier Safety Administration also renewed its contract for 1 year, taking the agreement through February 2014. And Nebraska renewed its contract for 2 years, taking its agreement through January of 2016. Thank you to our partners in Oklahoma, Kansas, the FMCSA, and Nebraska for continuing to place your confidence in us. And with that, I'll turn the call over to Steve Kovzan, NIC's Chief Financial Officer. Steve?

[Stephen M. Kovzan:]

Thanks, Robert, and good afternoon to everyone on the call. I'll start today by discussing our fourth quarter results, then I will briefly cover full year 2012 results, and I'll conclude with 2013 financial guidance. We were pleased with our results for this quarter, as NIC earned $0.13 per share with total revenues growing a healthy 27% to $57.2 million. This compares to earnings per share of $0.08 and total revenues of $45.1 million in the prior-year quarter. Before I get into the details of the quarter, I want to make a few comments on income taxes. First, our effective tax rate for the current quarter was 30% compared with 42% in prior-year quarter. The lower rate relates to several factors including the effective settlement of an IRS examination and a related decrease in the liability for uncertain tax positions, along with changes in state taxes. Combined, these 2 items lowered our income tax expense for the quarter by approximately $900,000 or between $0.01 to $0.02 per share. The change in state taxes is expected to have a positive effect on our tax rate going forward, which I will discuss a bit more in a moment when I cover our 2013 guidance. Another item that we currently expect will positively affect our tax rate going forward is the federal research and development tax credit, which was extended in January of this year. While this will be retroactive for fiscal 2012, we were not able to recognize any benefit until the first quarter of 2013 when the bill was actually enacted into law. I'll also touch on the R&D tax credit in a bit more detail when I cover our 2013 guidance in a moment. Now onto the highlights of the quarter. Quarterly portal revenues were a record $54.4 million, up 29% over the prior-year quarter, driven by strong non-DMV revenue growth from our Texas and New Jersey portals, among others. Total same-state portal revenue grew a healthy 24% for the quarter. Breaking down the major components of same-state revenue growth

[Harry H. Herington:]

Thanks, Steve. As you heard today, NIC wrapped up 2012 with strong financial performance in the fourth quarter, and we remain steadfast in helping individuals conduct business with government efficiently and securely as we continue to deliver the very best in eGovernment services across the country. I look forward to what the future holds for NIC. With that, Tega, we are open for questions.

[Operator:]

[Operator Instructions] And our first question comes from the line of Carter Malloy.

[Carter Malloy:]

On the DPS, I know you've talked about this a little in the past, but the motor vehicle inspection is being noted as a very large contract there. Of the other 7 out of 8 that are coming to launch, Steve, you gave us a lot of detail on guidance, but how important are those to your growth this year? Or is this really all about motor vehicle and that's the big one?

[Stephen M. Kovzan:]

Certainly, the predominant service in the suite of services is motor vehicle, so the others aren't anywhere close to motor vehicles.

[Carter Malloy:]

Okay. And then the broken record question for every call is any update on the federal front?

[Harry H. Herington:]

I'll jump in there, Carter, real quick, and I'll give you the broken record answer. And that is it's going well. It's going as I expected. And I -- tongue-in-cheek, during all the calls, pretty much stay the same thing and it's like we knew it's going to -- we know it's going to take time. I'm very pleased with the progress we've made in the meetings we've had, but it is an education process. And it's an influencing, once you get them educated and sold to the influence of moving the behemoth of the federal government to do something. So nothing I can report on. I'd love to say we're moments away from signing something. All I can say is I remain very positive and I'm proud of what my people are doing.

[Carter Malloy:]

And is 2013 the year that we're going to see 1 new contract or 2 to materialize?

[Harry H. Herington:]

Oh, wait. Did you not just hear what I said? You know I can't answer that.

[Carter Malloy:]

Fair enough, fair enough. And then the other thing is on your S&A line, it's such been a pretty steady 16% over all, but would hope that we can maybe get some leverage out of that going forward. Can you talk about where and why you're having that investment? Is that something in the out years, 2, 3 and 4, which you can see some leverage on?

[Stephen M. Kovzan:]

Sure. I mean, I think as a result of our fairly significant growth in recent years, we've certainly had to invest in infrastructure, people and resources, particularly in our centrally managed IT services, which will becoming an increasingly larger part of how we run our business. So again, as I mentioned in my scripted remarks, a lot of these investments are made with an eye of 1, 2, 3 years down the road. And so yes, hopefully we can in future years start to see a little bit more leverage off the selling and administrative line, like we've seen in recent years.

[Harry H. Herington:]

This is a perfect storm. When you look at all of the opportunities that hit us last year that we were launching, as well as this year with Pennsylvania and then the RFPs that are out on the street, I try to be wise, you got to look at not only delivering to your existing partners and your new partners, but what's right in front of you. It was a -- it is a tremendous time for NIC, and we're just trying to stay as ahead of that curve as we can.

[Operator:]

[Operator Instructions] Our next question comes from the line of Peter Heckmann.

[Peter J. Heckmann:]

As regards the PSP application, did you do about, what, $1.7 million in the quarter?

[Stephen M. Kovzan:]

Let me get you the exact number. PSP during the quarter was $1.7 million, yes.

[Peter J. Heckmann:]

Okay. And then update me, there was some discussion about some of the data aggregators being able to access PSP data from you directly and then bundle it. Has that been approved yet. And if so, did you see any change in volumes?

[Stephen M. Kovzan:]

Yes. That was kind of a new service that launched in the -- that we announced on our third quarter earnings call that kind of launched in the fourth quarter. So our guidance next year would reflect, Pete, just modest contributions from that new service. Until we kind of see what kind of theme it picks up and what kind of traction we get there, we haven't aggressively forecast anything from that yet.

[Peter J. Heckmann:]

All right, that's fair. And then I missed your comments on the lower state tax rate and then the R&D tax credit. Could you talk about just maybe some ranges that you would expect for tax rate for the first quarter and for the full year?

[Stephen M. Kovzan:]

Well, I guess our tax rate for the full year we're projecting at 40%. So because we're going to be adjusting for the R&D tax credit for the fiscal year 2012 in the first quarter it might be slightly lower than that. But for a full year, we're expecting 40%.

[Peter J. Heckmann:]

All right. And then as regards -- I'm seeing you're announcing some additional payment processing deals with municipalities in some of your states. Have you been able to put in place some sort of umbrella pricing for cities and counties to utilize your payment processing capabilities as part of a portal contract?

[Robert W. Knapp:]

Well, Pete, this is Robert. I mean, certainly our contracts enable us to vertically go within the state and down to those local government institutes. And so our intent is we provide those services at the same way we would provide them to the state agencies, and we make our payment processing service available at a local level as well.

[Harry H. Herington:]

And we also provide the opportunity outside of our portal state.

[Robert W. Knapp:]

Correct, right.

[Peter J. Heckmann:]

Would there be any advantage to the municipalities versus staying in the state contract, either price or kind of regulatory reporting that -- some capabilities that you might have that perhaps a bank or a merchant acquirer wouldn't have?

[Robert W. Knapp:]

Yes, I would say certainly. But an advantage that we have or we believe we have in our proprietary payment processing solution is that we've built a solution specifically for governments that provides reconciliation reports that despite -- that provides detailed disbursement capabilities that we're just not sure is generally available out there.

[Harry H. Herington:]

Not typically available.

[Robert W. Knapp:]

In the market. And so our goal is not to chase these services based on lowest cost. We hope to be able to demonstrate the value of our, again, our proprietary payment processing software that's built specifically for government. So this is in a low-cost deal for us.

[Operator:]

And our next question comes from the line of Raghavan Sarathy.

[Raghavan Sarathy:]

Just a clarification question. You said that you are expecting the total same-state time and material business to decline in the 20% range?

[Harry H. Herington:]

Well, up to 20% that's, I would say, that would probably be the upper edge of what we're expecting, yes, because of the falloff in the time and materials revenue that we previously earned in Texas under these Master Work Order projects that expired.

[Raghavan Sarathy:]

Right. So you didn't have any of that impact in the fourth quarter?

[Stephen M. Kovzan:]

That's a great question. The growth that we saw in our other businesses outside of Texas on the time and materials front actually kind of overshadowed that. So it's a great question. So we did see some of that decline in Texas, definitely within the fourth quarter.

[Raghavan Sarathy:]

And how much would be the impact from the falloff on the master contract?

[Stephen M. Kovzan:]

I wanted to say, Rag, that on our last quarter call we had mentioned something in the neighborhood of about $400,000 a month. So close to $5 million or something like that.

[Operator:]

I'm showing no further questions at this time.

[Harry H. Herington:]

All right. Thank you, Tega. And I want to thank everyone who joined us this afternoon. I look forward to speaking with you again, of course, next quarter, and I invite all of our stockholders to our annual stockholder meeting on Tuesday, May 7, in Overland Park, Kansas. Thank you again for your time.