NIC Inc
Q4 2008 Earnings Call Transcript

Published: 5 Feb 2009

[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, Wednesday, February 4, 2009. With that I'd like to turn the conference over to Ms. Nancy Beaton, Director of Investor Relations. Please go ahead.

[Nancy Beaton:]

Thank you, David. The press release for NIC's fourth quarter earnings announcement was issued 30 minutes ago. For those of you who haven't received the release, the announcement is available on our corporate web site at www.nicusa.com. You may also call our headquarters at 1-877-234-3468, and we will email 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 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 and there could 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, 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 with the SEC on March 17, 2008 and NIC's Form 10-Q for the quarter ended September 30, 2008 filed with the SEC on November 6, 2008. And now I would now like to introduce Harry Herington, Chairman of the Board and Chief Executive Officer of NIC.

[Harry Herington:]

Thank you, Nancy. Good afternoon and I want to thank everyone for joining us. I am very pleased with the news we are going to share today about our 2008 performance and NIC's outlook for 2009. Given the current economic climate, I think it is important to remind everyone that NIC is in a very different place strategically and financially than many other companies. We are in a great place. It's a good time to partner with NIC. It's a good time to work for NIC. And in my opinion, it's a great time to invest in NIC. When we first started the company, we established three very straightforward principles to live by. We want to, number one, be the best government partner that our partners have worked with. Number two, be the best place our employees have ever worked. And number three, be the best investment our shareholders have ever made. I always say, if we deliver flawlessly on number one and number two, number three will take care of itself. We have delivered on our partnerships through the strength of our self-funded model that provides revenue and cost savings to the State without using limited State budget dollars for support. As we will later discuss in these hard economic times, partners lain heavily on NIC for more services. And new states are even more interested in our model. As for employees, let me just say we have the brightest and most dedicated team that has continued to step up to the plate for our partners. I have repeatedly told them it is their hard work and commitment that has enabled NIC to secure a strong hold in the market and continue to create opportunities for this company. The payoff of both of these is the positive results that we will share with you today. On our last quarterly earnings call, we started with the obvious question, what impact has the economic downturn had on NIC? As much as we all wish this global crisis was behind us, it clearly is not. Every sector of the economy is facing challenges as a result. Yet NIC is fortunate that our business model and the manner in which we manage our business have largely insulated us from these issues. The business model we pioneered 17 years ago continues to succeed today. We are debt-free, generate consistent free cash flow and deliver growth. However, we also recognize that the economy has taken its toll on our state partners and the business and citizens they serve. Reports of state budget shortfalls are commonplace as the discouraging series of private sector layoff, budget cuts and restructuring in the news everyday. We take this very seriously. If we're going to be the best partner government has ever worked with, we cannot ignore major challenges they face. We believe our self-funded model places us in the perfect spot to assist our partners with the issues they are dealing with daily. Our solutions offer them tremendous savings and efficiencies and drives additional revenues into state coffers. We work with our state partners everyday to expand the services they provide to the citizens and businesses they serve through a proven model that does not require tax dollars or draws from the limited agency budgets. And because these end users are the ones who ultimately pay us, we look at the services they need and the impact of the economy on them as well. We have to provide them solution that saves them time and money. Due to this proactive approach and the efficiencies our services bring to all parties, our current portfolio is solid and provides steady organic growth as you will see from our fourth quarter and full year numbers. And while the impact of the economy on states is extremely serious, it does present us an opportunity to help our partners wherever we can and continue to educate potential state partners that our solution is best suited to help address their budget challenges. Due to the severe budget issues, the ability for agencies to write checks for future projects will be limited in many states. We believe this is an obvious time for new states to look at us as evidenced by our sales pipeline. We currently have three new state RFP opportunities in front of us, New Jersey, New Mexico and Texas, with a combined total population of 34 million. The timeline for each is as follows

[Steve Kovzan:]

Thanks, Harry. NIC had a good fourth quarter even with the softness we saw in DMV. On a same-state basis, portal revenues grew by 11%. Breaking out the components of same-state growth, non-DMV transactional revenues grew at 28%. This is the fourth consecutive quarter in which same-state non-DMV transaction revenues have grown by at least 25% over the prior year quarter. DMV revenues decreased 2% on a same-state basis. It is typical to see lower transaction revenue in the fourth quarter due to the lower number of business days. However, as Harry previously mentioned, we do believe there are macroeconomic trends that had an impact on fourth quarter DMV revenue and the softness we have seen in DMV throughout 2008. We have planned for this to continue in 2009 which is reflected in our guidance that I will discuss in a moment. Our portal gross margin for the quarter was 41% and was primarily the result of the seasonally lower number of business days and lower revenues in the fourth quarter and to lower DMV revenues. Our margin this quarter was also impacted by the launch of an exciting new service in Alabama where the portal recently began providing payment processing services for all state-regulated liquor stores. We recognized over $700,000 in revenue from this service, but also incurred over $600,000 of variable credit card fees. This application generated over $100,000 in bottom line profit this quarter and could approach $0.5 million in profit on an annual basis. Like the impact on our margins which amounted to about 1%, we do not perceive this as a negative. As you are aware, an ever growing percentage of our non-DMV transaction revenues are generated from online applications whereby users pay for information or transactions via credit cards. While we earn a lower gross profit percentage on these transactions as compared to our non-DMV applications, we plan to continue to implement these services as they contribute favorably to our operating income growth. On the expense side, selling and administrative expenses for the quarter were $5.2 million and as compared to $5.8 million last year. As a percentage of portal revenues, selling and administrative expenses were 22% in the current quarter, down from 27% the fourth quarter of 2007. Interest income for the quarter was just over $100,000, down from about $0.5 million in the fourth quarter of last year, reflecting lower short-term interest rate on our invested cash which is primarily held in sweep accounts, in funds comprised of safe U.S. Government agencies and direct obligations of the U.S. Treasury. Now on to full year 2008 performance, we had another solid year as our results came in at the high end of our annual guidance to investors. We have stated in the past that while we are not recession proof, we are to a large extent recession resistant. Our performance these past 12 months continues to reinforce this. For the year, total revenues rose 17% to $100.6 million and portal revenues also rose17%, $96.8 million. On a same-state basis, portal revenues grew 11% with the component breakdown of DMV revenues growing 1% and transactional non-DMV revenues rising 25% percent. Selling and administrative expenses as a percentage of portal revenue were 23%, down from 26% in 2007. Operating income grew a healthy 15% to $18.6 million for the year. Interest income was $700,000 in 2008 down from $1.7 million in 2007. Again, this decrease was due mainly to the declining short-term interest rate environment we experienced through the year. We are $0.19 per share in 2008, unchanged from 2007. Results for 2008 include an income tax expense reduction of approximately $400,000 or $0.01 per share which primarily reflects changes in our uncertain tax positions. Results for 2007 include a gain of approximately $500,000 or $0.01 per share from the sale of a minority investment. We also reduced our income tax expense by approximately $400,000 or $0.01 per share during 2007 to reflect changes in our uncertain tax positions. As Harry stated earlier, our consistent financial performance is allowing us to return capital to shareholders in the form of a $0.30 per share special cash dividend. Quick accounting note about the special dividend we just declared, this dividend may result in a partial return of capital to shareholders with the balance being taxable to shareholders as a qualified dividend. The exact amount of the return of capital, if any, is dependent on the earnings of the company computed on a tax basis through the end of our 2009 fiscal year. Once we make a final determination, we will notify shareholders after the close of the year. Moving on to our guidance for full-year 2009, NIC expects total revenues of $109.7 million to $112.9 million, with portal revenues ranging from $106 to $109 million and software & services revenues of $3.7 million to $3.9 million. We also estimate operating income to range from $19.1 million to $21.1 million and net income to range from $11.4 million to $12.7 million. While our financial guidance has been tempered by the current macroeconomic-related DMV softness that we expect will continue into 2009, we believe that NIC will continue to perform quite well with same-state non-DMV revenue growth mirroring our historical rates. Portal margins should remain in the mid 40% range with selling and administrative expenses between 22 and 23% of portal revenue, which reflects only modest corporate overhead growth. We also expect depreciation and amortization expense as a percentage of portal revenue to range from 3 to 4% in 2009. Finally, we expect interest income in 2009 to be lower than in 2008, again due to the declining short-term interest rate environment that we expect will continue in 2009 and factoring in the dividend we will pay at the end of this month which will total approximately $19.2 million. As always, please note that our projections do not include any new or unsigned portal contracts. With that, I'll turn the call back over to Harry.

[Harry Herington:]

Thank you, Steve. David, we're ready for questions now.

[Operator:]

Thank you, sir. We'll now begin the question-and-answer session. (Operator instructions) One moment please. And the first question on this call is from the line of Chad Bennett with Northland Securities. Please go ahead.

[Chad Bennett:]

Yes, hi. Good afternoon.

[Harry Herington:]

Good afternoon, Chad.

[Steve Kovzan:]

Hi, Chad.

[Chad Bennett:]

Hey, just a couple of questions, first, Steve, maybe a quick one for you. Can you give me, I know you provide this in your Q, same-state portal cost of goods sold growth?

[Steve Kovzan:]

Same-state? Sure, one second. Same-state, for the quarter we are at 20%.

[Chad Bennett:]

Okay. And just follow-up question to that, we’ve been kind of running COGS, the growth rate on the COGS line on the portal side has been exceeding kind of revenue growth I guess even if you look at it from absolute revenue growth or on a same-state basis for a few quarters here I think?

[Steve Kovzan:]

Right.

[Chad Bennett:]

Maybe only a couple, obviously you want that reversed, is there anything going on there we should know about or anything extraordinary.

[Steve Kovzan:]

Yes, and I alluded to it in my comments earlier. On a sequential basis, so from the third quarter to the fourth quarter of this year bank fees in the form of credit card fees contributed to about $600,000 of growth in cost of portal revenues from the third quarter to fourth quarter this year, due to the launch of that application in Alabama. So that was really – that’s the primary driver there. And, so, you know, we’re going to have that certainly from time to time as we launch some of these larger applications that are paid for with credit cards.

[Chad Bennett:]

I guess maybe I’m naïve, aren’t credit card fees kind of a pretty common thing and should we see more and more of this in our non-D, as a mix in our non-DMV apps or am I just technology savvy and ahead of my time?

[Steve Kovzan:]

Did you say “are they pretty common?”

[Chad Bennett:]

Yeah.

[Steve Kovzan:]

Yeah, I mean, absolutely, they’ve been a growing component of the cost base of the company for quite some time. This quarter we just happened to have a particularly large application launch that really drove credit card expense there, unusually large as compared to, you know, our typical non-DMV application that uses credit cards.

[Chad Bennett:]

Okay. So there was a difference between this credit card app versus the other hundreds that you have, is that what you're telling me?

[Steve Kovzan:]

From an order of magnitude standpoint, this one is significantly larger. This one is signify–that’s why I alluded to it in my comments, because it’s a big one for us and bottom line it could contribute up to half a million dollars a year for us.

[Chad Bennett:]

Okay. And, the regarding the ’09 guidance, you indicated the non-DMV on a same state basis should be relatively close to your historical norms there from a growth perspective. Are you guys assuming the DMV piece is kind of flat to negative, you know, looking forward to next year, I guess? We can kind of back into a number, but any help there?

[Steve Kovzan:]

Yes, flat to negatively modestly.

[Chad Bennett:]

Okay.

[Steve Kovzan:]

Just being conservative absolutely.

[Chad Bennett:]

Okay.

[Steve Kovzan:]

On a same state basis, yeah, and for the most part, our numbers in 2009 are largely same state. West Virginia was only in our numbers for 11 months in 2008 and it will be in for a full year in 2009. But, yeah, we’re –

[Harry Herington:]

We’re being conservative. We’re looking at it and saying, you know, the economy is what the economy is.

[Chad Bennett:]

Yeah, no, that’s the way to go about it. Then Steve, on the operating expense guidance looking into ’09, you have some decent growth there. I guess if I try to back into kind of your percentage of portal revenue guidance you gave, it’s kind of growing on par with overall kind of portal revenue growth if not a little bit higher. ’09 kind of was positioned as real operating leverage year. I think you’ll still see some good operating margin improvement, but maybe not what at least I was thinking. Is there any type of specific investment we’re making maybe related to Texas or other new deals that’s maybe increased since the last time we talked?

[Steve Kovzan:]

No.

[Chad Bennett:]

Okay.

[Steve Kovzan:]

Of any new business expenses factored into our guidance for next year, and I think part of our hope was that operating margins would extend a little bit more than they did, but again we’re coming in with some fairly conservative guidance, mostly tempered by DMV for next year.

[Chad Bennett:]

Okay.

[Steve Kovzan:]

But we’re hoping that DMV performs better than our guidance.

[Chad Bennett:]

Okay. And, then just one last question I guess for Harry. In terms of pipeline, you can't say much there. When you look at the sales activity, is there a big difference in terms of activity between states that are having tougher times from a budget standpoint versus those that others – that aren’t having – not that any state’s not having issues – but is there any disparity there and can you give us a sense for how open or how far up the priority list something like a portal outsourcing contract would be considering they have a number of things to deal with negative deficits?

[Harry Herington:]

Absolutely, Chad, and I’m going to address part of what you asked Steve just as far as our numbers for next year. We’re being conservative on those numbers just because of what the states are facing. We feel very positive where we’re going. I don't want you to – We’re a conservative group. Now, as far as priorities with the state, the more technical savvy they are, the quicker they call us. But I’ve got to tell you, the calls are coming from the governor’s office down. They understand that they have – they’re going to have less employees and less ability to spend money and that makes our model all the more attractive. And, the governors, you know, they have to continue to figure out how to give the same service and enhanced service in times like this. So, I would say our audience is getting better and better.

[Chad Bennett:]

Okay. All right. That’s all I have for now. Good quarter.

[Harry Herington:]

Thank you very much.

[Operator:]

Thank you, sir. And, our next question comes from the line of Charlie Anderson with Dougherty & Company. Please go ahead.

[Charlie Anderson:]

Good afternoon, guys, thanks for taking my questions.

[Steve Kovzan:]

Hey, Charlie.

[Charlie Anderson:]

I wanted to ask that first in New Jersey, when was the last update you got from them and just wondered if you could provide any color on the length that this has gone on after the midway versus previous opportunities.

[Steve Kovzan:]

Yes, and New Jersey, I’ve said this all along that the states are this – they can delay things because other things get in the way or sometimes it’s just the manner in which they go through the procurement. We heard last month – we got contact from them. We have to be very careful because in the procurement cycle, you can't reach out and really have a lot of active dialogue, because you’d stand the chance of getting yourself then precluded from continuing participation in that procurement. But, we heard last month then they were asking additional questions. It shows me that it’s still a very active opportunity. And, now we just sort of have to wait it out.

[Charlie Anderson:]

Was that 30 days ago or like early January/late January?

[Steve Kovzan:]

It was actually December, the latter part of December.

[Charlie Anderson:]

Got it, got it. I just wondered if you could kind of take inventory of sort of the opportunities you saw in 2008 and kind of extrapolate to 2009? You know, you went in with California and then New Jersey and Georgia came out and we saw Georgia pull back, we saw California pull back. I just wonder from a sales perspective and sort of the environment perspective if there’s anything you guys feel like you did last year that maybe you’ll do differently this year to maybe entice more states or if this is more of a just sort of a macro environment that you're selling into and just in terms of contrasting some of that last year versus this year.

[Steve Kovzan:]

That’s kind of a two-part question. I’m going to address both of those. One part is what did we do last year to influence where we are right now? And I feel very comfortable with the what we’ve done over the past 12 months and what we’ve done over the past six months to influence the deals that we have and where we’re headed and where (inaudible). Sales is always an evolving science and especially with the way things are changing right now. We have to actually get more aggressive. Now is the time for us get in front of more of the purchasing offices, more of the legislators, and more of the governors and the CIOs. They are – desperate’s a great word, you know? They are desperate to figure out how they are going to be able to solve the budget problem thing and cut back on the people and still provide the same service as I mentioned earlier. That’s the answer to the second part of your question. The first part of your question is California and Georgia. And, I’m just going to throw those out there. Certain things happened in California and Georgia. Number one, as I’ve stated, I think on the last call, the California bid came out before they had the new CIO, Teri Takai (ph). And, I’m very impressed with her. She’s a very strong individual. She came on board, she looked at what was going on and I think if you've been tracking California at all, they are doing a massive, massive rework of their infrastructure and consolidation of all of that. And, that was pulled back. I would say it’s not dead. I would say it’s lower in the priority – they have the biggest deficit out there and they’re trying to figure out where they can save the most money the quickest. And, they’ve – this consolidation, it’s just a massive overhaul. And, so we just have to bide our time and continue building our relations with Teri, with Governor Schwarzenegger, and others there, and just realize they got to get the big forest fires out before they get the smaller fires that we can help them with. Georgia, similar in nature. Georgia put out three RFC opportunities. They awarded two of them. Multi-, you know, a hundred million dollar type of opportunities. One infrastructure and one dealing with telecommunications and then they put the portal bit out. Now I have to be careful, because I’m still under a noncompete disclosure with Georgia, but part of the deal was they put too much – they put the same controls in place for their first two opportunities, the infrastructure and the telecommunications and the bureaucracy that was put on there made it too expensive for anybody to deliver the Georgia one. They pulled back. What they’re doing is they have to deliver at least to a certain point with those first two and then come back and come out with something more reasonable. I feel very good about our potentials in Georgia. Again, in this game, you just have to be patient.

[Charlie Anderson:]

Got it. You described 2009 as a “crucial year.” Is that just sort of a strike while the iron’s hot kind of comment because of the economic conditions?

[Steve Kovzan:]

It’s two things. Number one because the iron is hot and because we can provide that solution. And, number two, we put healthy growth goals out there and to get to those goals at the end of 2010, if we don't start closing deals pretty quick and more deals hit the table, I’m not going to hit those goals and I understand that. And, I still feel we can get there, but that means that this is a critical year for us to start closing some states.

[Charlie Anderson:]

Do you get the sense this year that it’ll be more about large volume of smaller states or small volume of larger states or some kind of mix?

[Steve Kovzan:]

I would say a mix. We are hearing – we are getting meetings from every side of the state. I mean, the larger the state, the larger deficit they have, the more citizens they have to serve. The smaller the state, the quicker the impact hit them. We’re getting audiences in every realm.

[Charlie Anderson:]

Got it. Well, that’s it for me for now. Thanks guys.

[Steve Kovzan and Harry Herington:]

Thanks, Charlie.

[Operator:]

Thank you, sir. (Operator instructions) Our next question comes from the line of James Cakmak of Sidoti & Company. Please go ahead, sir.

[James Cakmak:]

Hey, guys, thanks for taking my question.

[Steve Kovzan and Harry Herington:]

Hi James.

[James Cakmak:]

The first thing, a macro, there’s been talk on President Obama’s stimulus plan to possibly provide states with money to help them with their budget deficits. Do you think that this could – this might have an adverse impact on the RFP activity?

[Harry Harrington:]

No. I really don't. As a matter of fact, we’re assisting our partners with that now, assisting them with some of the transparency issues that come with that, and I think it’s just going to aid in our ability to demonstrate where we can bring more value to them.

[James Cakmak:]

Okay, great. And, on New Mexico, you guys mentioned that it has the potential to possibly enter into a full-blown portal. Assuming you do win that contract, have you actually had conversations with the state to move in that direction should you win it?

[Harry Harrington:]

We’ve had conversation – I’ve got to be very careful. It’s an active procurement and there’s certain things, again, I don't want to tip my hand to too many of the competitors out there. Prior to this coming out, we had active conversations with many state agencies, with the CIO’s office, with DMV and there is a need and there’s an identified need there. But initially, they have a need within the DMV that they were very clear about and that is when we spoke with them prior, we recognized that need and we’re responding to that need. And, then we’re going to do what we’ve done previously and that is continue to educate them once we’re there as to the full enterprise portal value. This isn't the first time we’ve seen a limited RFP come out, win it and then be able to expand upon it.

[James Cakmak:]

Okay. And on the couple of RFPs coming up on Texas and Jersey, you know, these are pretty sizeable contracts. What type of additional costs do you see associated with taking these states on because they are so large and – or do you think that you can continue to maintain the same type of margins that you've been doing so far?

[Harry Harrington:]

James, I’d love to be able to answer some of those questions. I got to tell you, I’m not going to speculate too much on that. Plus, again, being in active procurement, I can promise you I’ve got competitors on here. We haven't made it to orals yet. I’m not going to tip my hand to them what I think I'm going to invest so that they can counter that during oral presentations or behind the scenes. As these become closer and closer, I will give and I always have, I will give more guidance, I will be able to tell you what it means. But, right now, it’s really too premature.

[James Cakmak:]

Okay. And, on the filling in administrative costs, can you just provide some code on how much of those costs are variable in nature?

[Harry Harrington:]

Steve, I’ll let you go.

[Steve Kovzan:]

James, when I think of variable, I think that they’re driven on revenue, is that what you're saying?

[James Cakmak:]

Yeah, I mean more discretionary on the marketing side that, you know, you have to spend a certain amount to maintain these relationships and generate RFP activity, but do you have some discretion to possible pull a little bit back as more RFPs come back to generate some leverage?

[Harry Herington:]

Yeah, I’ll answer that question, absolutely. One of the things that I put in place early on and this was years and years ago, about 15 years ago, was a very strong budgeting and business process that we go through. We started, actually, we started in July and work it all the way through the end of the year. And part of that is identifying the necessary expenses throughout the year. And I’m a conservative guy. I’m an aggressive person when it comes to leading the company in strategic direction, but I’m also conservative in nature in that I want to know if something falls off a cliff somewhere, what I can do to correct the ship. And we have throughout the year, I know what expenses I can pull back. There’s a lot of variable ones. We don't sign large contracts for a lot of marketing, ad, you know, January 1st and expect to get those services throughout the year. I’ve got those strategically placed throughout the year. If something doesn’t work, I want to have the flexibility to either stop or redirect. But, yeah, I would say that with the budget I have in place, and the team I have executing against that, if things change in our business, it can be adjusted quickly.

[James Cakmak:]

Okay, great. I appreciate it. Thanks a lot.

[Operator:]

Thank you, sir. And, we have no further questions in the queue. Now I’d like to turn the call back over to management for any closing remarks.

[Steve Kovzan:]

Thank you, David. And, again, thanks everybody for joining us. I look forward to speaking with you again next quarter.

[Operator:]

Ladies and gentlemen, this concludes the NIC fourth quarter earnings conference call. This conference will be available for replay after 7