NIC Inc
Q1 2008 Earnings Call Transcript

Published: 5 May 2008

[Operator:]

Good afternoon, ladies and gentlemen and thank you for standing by. Welcome to the NIC first quarter earnings announcement conference call. During today’s presentation all parties will be in a listen-only mode. (Operator Instructions). This conference is being recorded Monday, May 5, 2008. I would now like to turn the conference to Nancy Beaton, Director of Communications and Investor Relations. Please go ahead, ma'am.

[Nancy Beaton:]

Thank you, operator. The press release for NIC’s first quarter earnings announcement was issued 30 minutes ago. For those of you that haven’t received the release, the announcement is available on our corporate website at nicusa.com. You may also call our headquarters at 1-877-234-3468 and Vanessa will fax the information to you. Before we begin, let’s cover our customary Safe Harbor statement. Specifically, the statements in this release regarding continued implementation of NIC’s business model and its development of new products and services are forward-looking statements. There are a number of important factors that could cause actual results to differ materially from those suggested or indicated by such forward-looking statements. These include among others the success of the company in signing contracts with new states and government agencies including continued favorable government legislation. NIC’s ability to develop new services, existing states and agencies adopting those new services, acceptance of eGovernment services by businesses and citizens, competition and general economic conditions, and the other important cautionary statements and risk factors described in NIC’s 2007 annual report on form 10-K filed March 17, 2008. I would like to now introduce Harry Herington, Chief Executive Officer of NIC.

[Harry Herington:]

Thank you, Nancy. Welcome and Buenos Dias on this beautiful Cinco de Mayo afternoon. I want to thank everyone for joining us on our first quarter earnings call. I will begin with an overview of the company's performance and then our Chief Financial Officer, Steve Kovzan, will provide additional information about our finances. After that we will open up the call and take your questions. But first, as you may have noticed, we have a new voice on the call. Nancy Beaton joined NIC in February, as the Director of Communications and Investor Relations. I have worked closely with Nancy over the past several months and believe she is a great addition to our team. Before we get into the specifics for the first quarter, I would like to take this opportunity to remind everyone of the special dividend paid to shareholders in February. NIC paid a special cash dividend of $0.25 per share totaling approximately $15.7 million. The view of the executive team and the Board of Directors is the returning capital to the shareholders is a sound strategy and the special dividend demonstrates that. The tax treatment for the special dividend will be determined after the end of 2008 and will be dependent on our 2008 earnings. In anticipation of your questions concerning future dividends, clearly we have demonstrated to our buyers for returning excess cash to investors. But we are not currently offering a regular dividend in order to maintain as much flexibility for the business as possible. Now, back to the business at hand; 2008 is off to a solid start. First quarter numbers are inline with expectations and help to provide the momentum to meet our goals for the remainder of the year. On to the three topics of the first quarter, first our contract update, second is non-DMV growth and third I would like to talk about an interesting new alignment. Let’s start with contract update. We are pleased to announce the three of our current partners have again awarded NIC the enterprise portal contract. In first quarter, NIC signed a long-term contract in both Hawaii and Maine following competitive rebids they issued in 2007 after original contract renewals were exhausted. In Hawaii NIC was awarded a five year contract through 2013 with multiple 3 year renewal opportunities. In Maine NIC was awarded a contract for up to 10 years which includes a four year contract with up to 6 years in extension. Alabama has extended another annual renewal as part of its five year contract. We think these partners as well as all of our partners for their continued trust and look forward to providing the businesses and citizens of their states with improved ways to interact with government. We are placing extremely high value on keeping our existing business by being the best possible provider of eGovernment portals for our partners. We take every rebate and renewal very curiously. As many of you know, I have directed the growth of the portal business for years, and I am passionate about the business and these relationships. A passion you will find in all of our employees. So, I would like to thank them for their efforts in the first quarter as well. Now let's talk about the sales pipeline. As expected, 2008 is already a busy year for RFPs. I can tell you that we are seeing multiple signs of success from our sales investment and have a solid pipeline. As you may know, California and Texas have publicly stated their intention to award portal contracts in 2009. We know these opportunities will be fiercely competitive, but we firmly believe NICs enterprise portal model is superior and we are aggressively working to demonstrate the value we bring to these state. In addition to California and Texas, we see the self-funded model receiving a lot of interest. In today's time of tight state budget, disallow state to expand their online services without using tax payer dollars. That said it is important to note that we actively review every RFP and every step of the RFP process to ensure the model is in the best interest of the state, NIC and our shareholders. While we do not disclose specifics, we are aware of several new states that are in different stages of the RFP process. But, it is important to remember that we are working with the timelines of the state government. And, while we do everything we can to encourage the states to issue RFPs, keeping with their stated timeline and the final decision to issue an RFP is outside of our control. Okay, now let's take a look at our primary source of organic growth, our non-DMV services. As we have discussed in the past, when NIC launches a new state portal, our first application is typically DMV or the sale of driver history records to approved entities like insurance companies. In about nine months, we can see $0.50 in revenue per capita from this application. Due to the federal regulations concerning access to DMV information, we immediately have almost 100% market penetration with DMV. Additional revenues that allow us to grow 10-15% per year on a same-state basis come from the other services we launch in the state or what we call the non-DMV services. For the full year 2007, we launched 368 new revenue generating non-DMV services, or more than 1 a day. We are off to a great start in 2008 and are ahead of our 2007 pace having launched 164 new revenue generating applications in the first quarter and have 220 more in the pipeline. In the first quarter 2008, thanks to eight non-DMV transaction revenues grew 26%, which is slightly above our historical pace of 25% and right in line with expectations. We are still aggressively working to triple non-DMV revenues to $75 million by the end of 2010. Finally, I would like to take just a quick minute to mention a new alliance. NIC struck an alliance in first with Connected Nation, a national nonprofit organization that has gotten it recognition as a best practice model for broadband expansion. We had success with Connected Nation and our partner Kentucky and have decided to join the national partnership to accelerate broadband access to online government services, to people and businesses in rural areas. Not only is the right thing to do, but it is a great fit for the business. We know that expanding high speed accessing communities naturally leads to higher usage of online services including eGovernment services. We see this as a win, win, win. NIC's role will be as a leading expert on eGovernment services and I have been requested to serve on the organization’s Board of Directors. Only NIC is positioned to deliver the type of relevant government services that can make a difference in the lives of these families and businesses to which we are expanding access. With that I will turn the call over Steve to add color on our financial performance.

[Steve Kovzan:]

Thanks, Harry. As Harry indicated we are off to a solid start in 2008. In the first quarter, total revenues were record $23.8 million, 20% increase over the same period last year. On a same state basis total revenues grew by 12%, compared to 16% in the first quarter 2007. Drop on the percentage basis was due in part to DMV fee increases that became effective in three of our states in late 2006, that enhanced our growth in the first quarter last year and that we are cycling against now. As a reminder absent DMV price increases we have historically seen flat to low single-digit growth in DMV. This quarter's decrease in same state growth was anticipated. Breaking out the components of same state growth non-DMV transaction revenues grew at a healthy 26% as Harry mentioned, while DMV revenues were largely flat. Total gross margins for the quarter were 47% same as the prior year quarter. On the expense side, selling and administrative expenses for the quarter were $6 million as compared to $5.1 last year. However, as a percentage of portal revenues, selling and administrative expenses were 25% in the current quarter, down from 26% in the first quarter of 2007. Operating income was $4.7 million in the first quarter up 17% over first quarter 2007. Taking a closer look at our liquidity, operating cash flow was $5.7 million for the quarter, as we continue to generate cash from operations well and excess of our earnings during this period, when we are using our tax net operating loss carry forward and not paying much in taxes. Our cash and investments at the end of the quarter totaled 45.1 million as compared to 55.8 million at the end of 2007, but as a reminder, we used 15.7 million of our cash in investments to pay the $0.25 per share special dividend in February. One house keeping item of note, as we disclosed in our 2007 Form 10-K, we hold approximately $7 million of AAA-rated student loan auction rate securities at par. Due to liquidity issues in the global credit markets, we have experienced failed auctions since mid-February on all the securities we currently hold; as a result we decided to classify these securities as a long-term at the end of the quarter. We see this as purely a liquidity issue and not a reflection of the underlying credit of our particular securities which were the highest available in the auction rate market. Moving on to guidance, I would just like to reiterate our guidance for full year 2008 that was provided on our last earnings announcement in February. We expect total revenues of $98.5 million to a $100.7 million with portal revenues ranging from $95 million to $97 million and software and services revenues of $3.5 million to $3.7 million. We also estimate operating income to range from $17 million to $18.5 million and net income of $10.7 million to $11.7 million. Portal margin should range from 45% to 47% and selling and administrative expenses should range from 24% to 25% of portal revenue in 2008. We also expect depreciation and amortization expense as a percentage of Portal revenues to range from 3% to 4% likely closer to 4% in 2008, as we will continue to make IT investments in a few key areas including data centers and ongoing security upgrades, which are essential to help support our long-term expansion and to ensure that our Portals are as secure as possible. Finally, we expect interest income in 2008 to be lower than 2007, partially as a result of paying the special dividend in February, but primarily because of the declining interest environment we are currently experiencing in addition to our lower average investment balance. As always note that NICs projections do not include any new or unsigned Portal contracts. With that I'll turn the call back over Harry.

[Harry Herington:]

Thank you, Steve. Operator I think we're ready for questions now.

[Operator:]

Thank you sir. (Operator Instructions). Our first question is from Chad Bennett with Northland Securities. Please go ahead.

[Unidentified Analyst:]

Hello I am actually standing in here for Chad with just a few questions. My first is regarding the Portal contracts, I am just wondering, if there are any other renewals left for the remainder of the year and if so how many?

[Harry Herington:]

Yes, this is Harry. We have several for the remainder of the year. We've got Idaho that, well I've just got them, Idaho, Arkansas, Oklahoma, South Carolina and West Virginia. All right?

[Unidentified Analyst:]

Okay. Fair enough. And then the final question is just regarding, well given your updated fiscal '08 guidance have your expectations changed regarding non-DMV and DMV same-state sales growth?

[Steve Kovzan:]

This is Steve. We did not update our projections. I mean, we just simply reiterated the same guidance that we provided on the call back in February. So, overall our guidance has not changed.

[Unidentified Analyst:]

Okay. And, the expectations have not changed.

[Steve Kovzan:]

Correct.

[Unidentified Analyst:]

I see. Okay. I appreciate it. Thanks.

[Steve Kovzan:]

Thank you.

[Operator:]

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

[James Cakmak:]

Hi, hello, everyone.

[Harry Herington:]

Hi James.

[Steve Kovzan:]

Hi James.

[James Cakmak:]

I just had a question on the operating margins. You know, just taking the midpoint of the 2008 outlook, you were looking at more around 18%. I was wondering is that 19% plus, you think that’s sustainable absent new contract costs for 2008?

[Harry Herington:]

You are talking for the year 2008.

[James Cakmak:]

Yeah.

[Harry Herington:]

Full year.

[James Cakmak:]

Yes.

[Harry Herington:]

Well I mean, I think that certainly had a solid quarter, this quarter. And, I guess I'll just keep it with the scene that we just did it previously. Our projections for the year are unchanged and we'll leave it at that. And, if necessary, come second or third quarter, if it's unchanged we'll update our guidance, but right now we are not.

[James Cakmak:]

Okay. And, did Texas actually issue the RFP or are we still in the RFI stages.

[Harry Herington:]

We are still in the RFI stages.

[James Cakmak:]

Okay. And, the final question was with, as far as the new contract, I am sorry, the renewals with Oklahoma and Arkansas, I know that's coming up in June. Is everything still on pace with those contracts?

[Harry Herington:]

Yeah, I kind of spoke rather quickly to that, just trying to get an immediate answer, but everything is on track with all of them. We take our renewals very seriously I think I've mentioned before in these calls that we track those at least a year in advance and I have nothing to cause any concerns.

[James Cakmak:]

Okay, great. And I know you can't touch on this too much, but any color you can shed on New Jersey?

[Harry Herington:]

I was waiting to see, who is going to be the first one to ask that, congratulations. You get the Margarita for Cinco de Mayo day. We really can’t -- and we have policy not to, it is self funded, we're very excited what they've put out there. It is a very recent release and we of course we have gone through it, and the process of just analyzing it.

[James Cakmak:]

Okay, fair enough. I appreciate your time. Thank you.

[Harry Herington:]

Thank you.

[Operator:]

Our next question comes from Jeff Evanson with Dougherty & Company. Please go ahead.

[Jeff Evanson:]

Good afternoon, everybody. Thanks for taking my questions. Can you hear me okay.

[Harry Herington:]

Yes, Jeff.

[Jeff Evanson:]

Okay, great.

[Steve Kovzan:]

Hi, Jeff.

[Jeff Evanson:]

I was wondering first, could you share with us what the revenue in the quarter was for Arizona and West Virginia, given that they are new states?

[Steve Kovzan:]

Sure, the revenue for Arizona was right around $1 million, and West Virginia was right around $300,000.

[Jeff Evanson:]

Okay.

[Steve Kovzan:]

It was a partial quarter of revenue from West Virginia and full quarter of base line revenue from Arizona.

[Jeff Evanson:]

Got it, I'm looking at the DMV transaction growth and it looks like it decelerated from fourth quarter and it was kind of running low double-digits in Q3 and Q4 those now 4%, you talked about why that decelerated?

[Steve Kovzan:]

Well, I think if you're looking at the comparisons in the fourth quarter of 2007, we were trending against a partial quarter in 2006. The fee increases that positively impacted us throughout 2007, when in place in December, so we still had a partial quarter, of positive impact in the fourth quarter of 2007. Now, we're cycling apples-to-apples against those price increases, so we're seeing just again growth that we typically talk about absent DMV price increases.

[Jeff Evanson:]

I understand that, but then it did accelerate so dramatically throughout 2007. Why was that?

[Steve Kovzan:]

Correct, because again the price increases went into effect in late 2006, so you had the benefit of price increases positively impacting our growth throughout 2007 and that's why the DMV same state growth numbers looked so high as compared to our historical norms.

[Jeff Evanson:]

Okay. Thanks for clarifying that. Now, so was all of the Arizona revenue in the software development in portal management line?

[Steve Kovzan:]

That's correct.

[Jeff Evanson:]

Okay. And then your same state growth at 12% just under kind of the mid-point of your guidance range. Do you see that as being stable at this level for the year or do you think that can accelerate throughout the year?

[Steve Kovzan:]

Well, certainly if we do our job we hope to accelerate it, but again I publicly just stick to our guidance that we've established for the year of 10% to 15%.

[Jeff Evanson:]

Okay. Steve or Harry, could you talk about a couple of your top non-DMV applications that you see as contributors for incremental growth in 2008?

[Harry Herington:]

When you speak specifically of the top and remember and I have stated this before that it’s really hard to pull one or the other out and the reason for that is DMV of course is the big one and then in different states, different applications bring more to the bottom-line

[Jeff Evanson:]

But I’m thinking about your new penetration opportunities you plan for the year?

[Harry Herrington:]

Well, all right move back up just a second. The one that -- that we're really pushing in all of our states first, our core applications such as vehicle license and registration, corporate license searches, UCC searches, professional licenses and those types. Those are ways our core push out and all the states that we don't have in. As far as new opportunities that we've got, there are some interesting ones that we're bringing on. I can't tell you what the -- really what it's going to bring in the bottom line, such as drivers licenses reinstatement in a couple of states, where somebody gets their license reinstated online, there is payment processing, we're driving that down into the locals. We're very excited about that. And, I mean we just have a variety. When you launch as many as we launch, you really look and kind of have to wait more to come in.

[Jeff Evanson:]

It's actually very helpful Harry, thank you. And, then my last question, this whole issue of state budget stress is something that's really started emerging in 2008, and I am wondering how it's impacting the volume and intensity of the calls you are getting from the states? If you could talk about what you are seeing in the marketplace out there, that would be helpful?

[Harry Herrington:]

Absolutely, and I'll speak of both the NIC portal states as well as the non-NIC portal states. And, basically what we're seeing is an increase in calls. The increase -- anytime the states have tightening of their budgets because of fewer tax dollars coming in. Usually there is more demand on the services. That’s an interesting mix. Less dollars and they have got more citizens and businesses requesting more services. To our existing portals, we have got our agencies coming to us and asking for assistance on how we can put those new services online, or how we can continue to drive more people to the portals. The non-NIC states, I think have definitely helped our pipeline. When we come in and demonstrate the self-funded solution, they immediately jump on that that it's something that say I can see how this works especially right now. But, we are also receiving calls from them, where they are calling up saying, I have heard of successes you have had in other states; please tell us how this works. So, I would say, I'd hate to say that we are benefiting from that but it definitely hasn't hurt us.

[Jeff Evanson:]

That's nice when you have, when prospective customers are calling you proactively. Thanks a lot, I appreciate it.

[Harry Herrington:]

Absolutely, when you put in, the fact we have invested more, we got more people for them to speak here. It is great, timing can be better. Thank you Jeff.

[Operator:]

(Operator Instructions) The next comes from Herb Buchbinder with Wachovia Securities. Please go ahead.

[Herb Buchbinder:]

Yeah, Steve, can you comment on the investment income you are going to get on your cash, given the problem with these auctions-rate securities. Does it affect the actual return you are getting or is it, just give me an idea as to what affect that is going to have on your cash income.

[Steve Kovzan:]

Sure, Herb. It's interesting because the reset rates when these securities have a failed auction, typically reset for our securities at LIBOR plus about 1.5%. But, yet on some of them they have a look back feature. Where if the reset rates over the past year exceeded a certain threshold, the interest rates may reset to a significantly lower percentage, or a lower percentage than say LIBOR + 1.5%. So, at this point, I would say that the rates that we expect to earn on these securities isn’t going to materially impact our operations although there have been some points in time where the research have been below 2% on a couple of the issue.

[Herb Buchbinder:]

Okay, might this issue have some impact on how you look at dividends and given that some of your assets now are the long-term and instead of short-term?

[Steve Kovzan:]

Again, dividend is something that the Executive Team and the Board talk about, I don’t see that the increase component relating to the securities really affects our cash generating capabilities. Certainly, if these securities are not liquid in a year from now that would impact potentially the amount we would pay out, but we're positive about where the market is heading with the securities. Clearly, it has become a matter of national priority with federal regulators trying to -- and law makers trying to bring order back to the auction rate market. So that, students can get ready access to loans, go to college, we're seeing positive developments, but it's a wait and see for us. I mean, the good is that we don’t need the cash. We still generate a lot of cash. We generated close to $6 million in operating cash flow, $5.7 million to be exact. So, if we continue to do that we're going to throw off a lot of cash this year.

[Herb Buchbinder:]

Where are you putting most of that cash now? What kind of investments you are buying?

[Harry Herington:]

Good, safe, under our mattress.

[Steve Kovzan:]

Yeah, it was kind of under our mattress. It will definitely be in something at least for the short-term in something like that good old AAA treasuries.

[Herb Buchbinder:]

Yea, I'm still there.

[Steve Kovzan:]

Yeah, I'm sorry, I don’t.

[Harry Herington:]

There was a noise. So, everything, noting to go on here that was not a…

[Steve Kovzan:]

Some background noise. Some good old AAA treasuries probably, where we planned to start putting our cash temporarily.

[Herb Buchbinder:]

Okay. What's the status of Florida, any news there?

[Steve Kovzan:]

I don’t have any particular comments on Florida.

[Herb Buchbinder:]

Okay. All right, thanks. Thanks a lot.

[Steve Kovzan:]

Sure.

[Operator:]

At this time there are no further questions in the queue. I would like to turn the call back over to management for any concluding remarks they may have.

[Harry Herington:]

Thank you, Eric. I would like to thank each of you for joining us this morning. And I would like to remind you that we have our annual shareholders meeting tomorrow, information can be found on our website. And we look forward to speaking with you again during our second quarter earnings announcement. Thank you.

[Operator:]

Ladies and gentlemen, this does conclude the NIC first quarter earnings announcement conference call. You may now disconnect and AT&T would like to thank you for your participation. Have a pleasant day.