NIC Inc
Q2 2014 Earnings Call Transcript

Published: 8 Aug 2014

[Operator:]

Good day, and welcome to the NIC Second Quarter 2014 Earnings Announcement Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Angela Davied. Ms. Davied?

[Angela Davied:]

Thank you, Greg. Good afternoon, everyone, and welcome to NIC's second quarter earnings call. The press release for NIC's second quarter 2014 earnings announcement was issued 30 minutes ago. Our earnings release is also available on our corporate website at egov.com/investors. You can also call our corporate headquarters at 1 [phone] and we will email 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 for questions. Any statements made during this call 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 and new projects under existing contracts 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 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 successfully integrate into its operations recently awarded eGovernment contracts; NIC's ability to implement its new portal contracts and new projects 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 the 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 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 cyberattacks and any resulting liability; and general economic conditions; and the other important cautionary statements or risk factors described in NIC's 2013 annual report on Form 10-K filed with the Securities and Exchange Commission in February 27, 2014. Any forward-looking statements made during this call 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. It has been said, you get out of something what you put into it. For more than 20 years, we have put everything into using the latest technology to make government more accessible to citizens and businesses. And every day, more than 800 employees across the country go to work and focus their efforts on forming new partnerships, developing new applications and marketing new services. You could say that every business day, we put in a minimum of 6,400 hours to make government better. During the second quarter of the year, it was easy to see how our efforts paid off. Current partnerships were reaffirmed in many of our portal states. New partnerships took off. Our portals continued to come up with new ways to make government more efficient. And our efforts paid off to you, our stockholders, as revenues and earnings exceeded expectations. We've put in a lot of hard work, and what we got out were solid financial results and a business that continues to fire on all cylinders. First, let's talk about the partnerships. I am very pleased to report that during the second quarter, and in recent weeks, we secured more than half of our contracts up for rebid in 2014, proving that our value proposition and business model are as strong as ever. Furthermore, we were awarded several contract extensions in a number of states that Robert will cover in more detail. I would like to extend a sincere thank you to our government partners, who continue to believe that self-funded eGovernment services are the best way to make government more accessible. I would also like to thank the NIC team members, whose dedication has kept our partnership strong. Before I move off this topic, I would like to mention one portal contract in particular that is very near and dear to my heart. Since day one, NIC has partnered with the State of Kansas, and the Kansas portal is where I got my start, as did my friend, and NIC's Chief Administrative Officer and General Counsel, Brad Bradley. So I couldn't be happier to report that the State of Kansas recently awarded us a new seven-year contract, which include renewal options. This contract was awarded several years ahead of the date through which the state could extend the current contract. We value all of our partnerships, but to have solidified our longest standing partner ahead of schedule is a strong indicator that we're doing something right, and means a great deal to Brad, myself, our employees, our Board of Directors, especially including Ross Hartley, the cofounder of our company. As CEO, it is also good to see the investment we've put into launching a new portal results in new services and efficiencies for the people of that state. For example, this past May, our Wisconsin portal celebrated its 1-year anniversary. The goal we originally set out with our state partner for our team in Madison was to employ 10 applications in the first year. Our team delivered twice that, launching 20 new services in all. 5 of the new services were mobile apps, with 1 of those mobile apps, the commercial driver license practice exam, being the first of its kind launched by state government. Furthermore, we continue with the buildout of the comprehensive hunting and fishing licensing system for the Department of Natural Resources, set to pilot next year and launch in early 2016. Clearly, our partnership in Wisconsin is off to a fantastic start. As evidenced by the launch of our newest portal in Connecticut this past quarter, we are keenly aware that we can accelerate our growth by adding new state partners, which I frequently refer to as home runs. The good news on this front is that our pipeline remains active, the level of interest by states and federal agencies in our approach to eGovernment remains high, and opportunities for future pipeline announcements remain plentiful. In fact, we continue to track a number of federal opportunities, in which we have educated agencies on the value and benefits of transaction-based eGovernment. As an update on Louisiana, we remain in active contract negotiations, which are progressing nicely and nearing the final stages, taking us one step closer to launching the pilot phase of this opportunity. So I hope to have more good news to report about our partnerships with Louisiana soon. And now I'll turn the call over to Robert Knapp, NIC's Chief Operating Officer, to provide more information about the ways that the NIC portal teams put in outstanding efforts for our government partners and the people they serve. Robert?

[Robert W. Knapp:]

Thanks, Harry. Today, I'm going to open with the comments I typically save for the end of my remarks, thanking our partners who continue to place their confidence in us. As most of you are aware, 2014 is a very busy year for contract rebids and renewals. The good news, as Harry mentioned, is that more than half of our contracts up for rebid this year have been finalized and awarded to us. So let's touch briefly on each of the contract rebids we were awarded this quarter, to go along with Colorado, which we announced last quarter. The State of Iowa signed a 2-year contract with our subsidiary, Iowa Interactive, LLC. The agreement also includes 4 1-year renewals that the state can exercise to extend the contract through June 2020. The State of Rhode Island signed a 3-year contract with our subsidiary, Rhode Island Interactive, LLC. This agreement includes 2 1-year renewals that the state can exercise to extend the contract to July 2019. A 2-year contract was awarded by the New Mexico Motor Vehicle Division to our subsidiary, New Mexico Interactive, LLC. This agreement also includes 2 1-year renewals that the MVD can exercise to extend the contract through June 2018. And another contract recently signed was by the State of South Carolina with our subsidiary South Carolina Interactive, LLC. This new 5-year contract includes renewal options that the state can exercise to extend the agreement through July 2021. In addition to these 4 contract rebids, we were awarded renewals by our Kentucky and Indiana partners. The Commonwealth of Kentucky awarded a 1-year contract extension to our subsidiary, Kentucky Interactive, LLC. And the State of Indiana awarded a 2-year contract renewal to our subsidiary, Indiana Interactive, LLC. Add to all of this good news, the news of our 7-year contract in Kansas, and it was a tremendously successful quarter from a contract retention standpoint for NIC. So with that, I would like to extend a sincere thank you to all of our partners that continue to place their confidence in us, Iowa, Rhode Island, New Mexico, South Carolina, Kentucky, Indiana and Kansas. We look forward to developing more great services and making government even more accessible in the future. Speaking of making government more accessible through technology, our portal teams launched several new services this quarter. Here's a sample of some of the great things we accomplished recently. If you read any government technology news site, you will read about the "gamification of government." In short, gamification is the use of game elements like earning points, badges and leader boards in nongame context to engage users and expand the services' reach. Games and government may not sound like 2 things that go hand-in-hand, but it is a growing trend, and our Hawaii portal has helped their state join the ranks of those using gamification in government. The portal launched a new personalized dashboard at my.hawaii.gov using a single sign-on system across various state agencies, allowing a user to keep a personalized history of all online transactions with the state. The dashboard encourages people in Hawaii to skip traffic, avoid lines and save trees, and ultimately tracks "mySavings," which tallies sheets of paper saved, miles saved and minutes saved by conducting government transactions online as opposed to following a paper-based process in person at a government agency office. In Idaho, our portal continues to implement On The Go mobile payments for a variety of local governments. On The Go has often been referred to as square for government, and our team in Boise put On The Go payments to good use over the Fourth of July weekend. The City of Spirit Lake, Idaho has a population of less than 2,000 people with a Parks and Recreation Department primarily staffed by volunteers. The city wanted to sell as many boat and sporting rentals as possible over the holiday weekend, and our portal team had the perfect solution. Student volunteers were armed with On The Go handheld payment devices, and they roamed the beaches and parks, renting equipment on the spot to outdoor enthusiasts. Not only did it help generate revenue for the small town, it also helped people have more fun on the lake and spend less time waiting in line. In Mississippi, our team developed a new mobile web app for the Department of Public Safety in just 2 months. Those with the Commercial Driver's License in the State of Mississippi must submit their medical card to the department. This new mobile web app provides a way for the medical card to be submitted electronically, using the camera feature on a mobile device. So a truck driver can quickly and easily upload proof of his or her medical card from any location at any time. In Oklahoma, our focus is truly on end users, the citizens and businesses who use eGovernment services. However, it is also great to hear about our services delivering internal efficiencies to our government partners. The Oklahoma Pardon and Parole Board has experienced significant efficiencies since implementing the Oklahoma Pardon and Parole Board docket search and investigative reporting suite of services. Specifically, payroll process -- parole processing time has decreased from between 30 and 90 days to between 5 and 10 days. As a result, the state saved over $13 million during its 2014 fiscal year. Docket preparation time has decreased from 4 weeks to 3 days, and results notification time has gone from 2 weeks to 2 days. Clearly, these examples demonstrate that our teams continue to work hard with their partners to deliver eGovernment efficiencies. I'll conclude my remarks with an update on the legal matter in Oregon between the Trucking Association, among others, and the state. Last quarter, we discussed that a county circuit court judge ruled that the Oregon Department of Transportation did not have the authority to enter into an agreement with the Oregon Department of Administrative Services, granting the Department of Administrative Services the right to provide electronic access to certain records, including driver history records. Since that time, the state filed its appeal to the judge's earlier ruling in early July. The judge also granted a separate motion to stay any additional proceedings while the appeal is pending. I will remind you that we are not a party to this lawsuit, so we cannot speculate as to the time it will take for the appeals process to run or the ultimate outcome of this matter. However, we continue to support the state and its position throughout this process, and our Oregon team continues business as usual. 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. During the second quarter of 2014, NIC earned a record $0.17 per share with record total quarterly revenues of $71.2 million. Portal revenues were a record $66.8 million, up 8% over the prior-year quarter, driven by consistent same-state revenue growth and the launch of our newest state portal in Connecticut. Total same-state portal revenues also increased 8% for the quarter. Excluding Texas from the calculation, same-state revenues grew in the double digits, a healthy 10% for the quarter. Breaking down the 2 major components of same-state revenue growth. First, same-state interactive government services, or IGS transactional revenues, what we previously referred to as non-DMV, grew 8% this quarter. This growth was driven mainly by higher revenues from several key services including payment processing, motor vehicle registrations, court record searches and professional license renewals, among others. Second, same-state transactional revenues from driver history records, what we previously referred to as DMV, and now refer to as DHR, were up 9% this quarter, our highest level of quarterly growth in many years. This growth was primarily due to price increases in 3 states, 2 in the current quarter and 1 that we previously announced in the third quarter of last year. We currently expect these 3 states to contribute approximately $4 million in incremental DHR revenue on an annual basis as a result of the price increases. It's important to note, however, that with this additional revenue comes the commitment from us to add resources and reinvest in portal operations. Setting aside the price increases, we continue to see strong DHR transaction volume growth across various portals, as we have the past several quarters, which has provided a nice tailwind to our top line growth and gross profit margins. Moving on to our newer portals. As we announced last quarter, our newest portal, Connecticut, began recognizing DHR revenues in April 2014, generating $1.1 million in revenues during the current quarter. In addition, revenues from our newer portals in Pennsylvania and Wisconsin were $2.3 million and $1.2 million, respectively. In the prior-year quarter, revenues from Pennsylvania were $2.5 million, while the Wisconsin portal did not begin generating revenues until the third quarter of 2013. Now I'll address a few housekeeping items on legacy contracts. Revenues from the Virginia state agency partnerships were $700,000 in the current quarter, while revenues from the legacy Virginia State portal contract in the prior-year quarter were $1.6 million. The transition in Arizona was completed last quarter. Therefore, we recognized no revenues from Arizona during the second quarter of 2014. This compares with revenues of $1.1 million from Arizona in the prior-year quarter. Moving on to the software and services businesses. For the quarter, software and services revenues were up 13%, driven primarily by growth from payment processing services with certain state agencies provided by our NIC services division, and by continued growth from the Pre-Employment Screening Program, which we manage for the U.S. Department of Transportation Federal Motor Carrier Safety Administration. PSP revenues were $2.5 million in the current quarter compared to $2.2 million in last year's quarter. The operating margin for the quarter was a healthy 26%, despite some of the revenue growth headwinds we are facing in Texas and from the expiration of legacy contracts in Arizona and Virginia. I'll conclude my remarks by saying that we were quite pleased with our results this quarter, as they exceeded our expectations, and our strong results through the first half of the year have put us on track to meet or exceed the high end of our previously issued total revenue and earnings guidance for the year. And with that, I will turn the call back over to Harry.

[Harry H. Herington:]

Thank you, Steve. As you heard today, new portals are performing well, partnerships were reaffirmed and several new services helped make government more accessible for everyone, resulting in solid financial results for NIC that exceeded expectations. With that, Greg, we will open up the call for questions.

[Operator:]

[Operator Instructions] And our first question today comes from Peter Heckmann with Avondale Partners.

[Peter J. Heckmann:]

In terms of -- you said you were tracking several federal opportunities. I know those are hard to pin down, and it's a process that you need to curate these opportunities over a period of time. But do you feel like the agencies that have kind of crossed the finish line -- I think last quarter, it was, you'd given some updates on either rulemakings or RFIs that had come out. And given some of the activity over the last 90 days, can you say that you would expect to see some RFPs out of the federal side within the next, let's say, 2 to 3 quarters?

[Harry H. Herington:]

Pete, this is Harry, and the short answer is yes. The cautionary answer is, as I say on every single call, we can never guess when an RFP is going to come out. We get information from some of the federal agencies, from state procurement office and what have you, that an RFP is pending at times. And you know as well as I do that sometimes they come out when they say they will, and other times it can be months and sometimes years before we actually see them. I remain very optimistic. Like I've said the past 2 quarters, we have been extremely successful in educating the agencies not only on the benefits of transaction-based funding, but also the specific benefits to their constituents. And we've seen traction. I think you've even mentioned some of the traction that's out there. So I remain very optimistic where we're at.

[Peter J. Heckmann:]

Great, great, that's encouraging. And would you anticipate that all of the federal opportunities that you might see would have a transaction fund or a self-funded characteristic? Or are you expanding your search to include project-based or time and materials-type work?

[Harry H. Herington:]

Our primary focus, of course, is going to be on transaction funded. Now that being said, as we deal with these, we get the agencies to understand how the model works, how it best serves them and best serves their constituents. We have learned in the past 20-some years that by the time it makes it through procurement, it might have a time-and-material component, as well as a transaction component tied to it. And sometimes you have to play with both to get to the one or you have to work your way -- let part of it play out before you get to the transaction-based. I'm not ruling anything out. I am not going to turn NIC into a time-and-material company to chase the opportunities that are out there. We could've done that years ago. There's plenty of companies that can chase those. But if there's an opportunity that will go from the a time-and-material to a transaction-based, I will definitely look at that. Anything that will keep it as a transaction-based opportunity is what we're interested in.

[Peter J. Heckmann:]

Okay, perfect. Then last question, I'll get back in the queue, it appears that the, just the FMCSA PSP application extended or renewed for an additional 6 months, but any thoughts behind that or just a matter of just kind of general...?

[Robert W. Knapp:]

Yes. Pete, this is Robert. I think it's just a matter of general process. They, as you know, agencies get hung up in their own time line sometimes. And so they're happy with the way we're performing and chose to do that.

[Operator:]

And next, we'll hear from John Campbell with Stephens.

[N. Hayden Blair:]

This is Hayden Blair sitting in for John. Of the newer states that guys have signed, namely Wisconsin and Connecticut, when can we expect those revenues to be full throttle?

[Stephen M. Kovzan:]

Hayden, this is Steve. Both of those portals, Wisconsin and Connecticut, generated a full quarter of revenues this quarter. Wisconsin started generating revenues in the third quarter of last year, 2013, and Connecticut began generating revenues just this past quarter. So it had a full quarter of DHR revenues in the second quarter. I think we disclosed in the press release that was $1.1 million. And it's about the same amount for Wisconsin, if I'm not mistaken.

[N. Hayden Blair:]

All right. And so talk to me -- I think a couple of calls ago, you -- some international portal opportunities were mentioned. I think it was a question asked. You guys got some good domestic penetration. Is this model that you guys are applying in the United States applicable outside of the United States? And if so, what areas would you guys be potentially interested in?

[Harry H. Herington:]

Hayden, this is Harry. And absolutely, the transaction-based, the self-funded transaction model, it will be applicable just about any place. And we have paid attention in the past internationally. We're not putting a lot of energy there right now because we've got our focus on, I would say, closing the loop in the states. And then also with the federal growth opportunity and then all the efforts we've put there and where we're starting to see really good traction there, I'm not going to take the foot off the throttle there or dilute any of the energy that we have focused there. That being said, internationally, I expect it, and looking at a dark crystal ball, to operate sort of like the federal government. We're going to find specific industries where it's going to make sense, that are regulated internationally for that, say, trucking, or say, hunting and fishing, those types of things. And I'm just picking a couple out of the air, where it's going to make sense to regulate those in a different country nationally. And so we pay attention. We get calls on things like that, and the opportunity is going to present itself. I'm not going to turn my back on it. And as we get better penetration in the federal space, we'll start applying more energy trying see how we can leverage that over into other countries.

[N. Hayden Blair:]

Makes sense. I guess one more, if the focus is going to be on federal opportunity, have you guys wrapped your heads around some sort of addressable market or some sort of penetration that you guys are aiming for?

[Stephen M. Kovzan:]

Yes, and this is Steve. I mean, I think we've long said that we're probably a little too early in the process in order for us to do that. At the state level, we just have so much experience and so many years under our belts understanding what that addressable market is. We're quite comfortable in talking in those terms. But from a federal standpoint, until we win that second federal contract...

[Harry H. Herington:]

Actually third or fourth.

[Stephen M. Kovzan:]

When that goes third or fourth, and we start to get some traction. I think it's a little bit early for us to do that.

[Operator:]

Our next question comes from Saliq Khan with Imperial Capital.

[Saliq Jamil Khan:]

I'm speaking on behalf of Jeff Kessler. So we're trying to split up our time over here. And the question, the only question that we had is actually on the heels of the individual that previously asked a question. But essentially, how in practice would a portal contract with the federal agency work? So essentially, how is it administered and who would the end users be, and how would they use a portal any differently than the particular states that you guys are working with?

[Harry H. Herington:]

It works quite a bit differently actually, and that was one of the -- as we explored expanding into federal, how we could attack federal. The nice thing about states, when we go into a state, we do an enterprise-wide solution. We walk into the state, we deal with the chief information officer, we're dealing with the secretary of state and others and we bring an approach that can touch every single agency, and then within that, every single department and service that they provide. When you attack the federal government, you cannot attack it as a whole. It's too massive, and there's way to much federal bureaucracy. And even within specific agencies, there's individuals that never cross paths. What we've identified from a federal standpoint is you need to look at particular services and also industries. Let's go into one that we've got going right now, and that's trucking. We didn't go after everything that deals with trucking. We narrowed it down to one specific service that hit the entire trucking industry that we could assist with the regulation throughout the entire country. That's how our federal growth is going to occur. We're going to find these opportunities that hit a specific industry, and we solve a specific problem, and then hopefully build out within that. I expect to see growth opportunity within the trucking industry with what we're doing right now as sort of adjacent growth there. But we're going to go to other agencies, laser-pick one type of service, and then hit it and grow out from there.

[Operator:]

[Operator Instructions] And next, we'll go to Gary Prestopino with Barrington Research.

[Gary F. Prestopino:]

Could you -- I couldn't write this down fast enough. When is that comprehensive hunting and fishing license portal going to be out in Wisconsin?

[Stephen M. Kovzan:]

We're going to -- it's due to pilot in, I believe, in the fall of 2015 and launch early first thing 2016.

[Gary F. Prestopino:]

Okay, all right. And is that -- I mean, Wisconsin is a big hunting and fishing like -- fishing state. I mean, that could be a very material part of the whole portal revenue, could it not?

[Stephen M. Kovzan:]

Yes, and we said a couple of calls back that we estimate that at a minimum, that could be a couple million dollars a year in revenue for the portal, and certainly the system that we're building is comprehensive enough that we could certainly take it to other states as well.

[Harry H. Herington:]

Yes, and you've already identified it. It is the second largest state in the country when it comes to hunting and fishing. And I do see opportunities down the road once we get that out, successfully launched and can promote it.

[Gary F. Prestopino:]

Yes, it would be something you could promote to a heck of a lot of other states beyond Wisconsin, correct?

[Harry H. Herington:]

Absolutely.

[Operator:]

[Operator Instructions] It appears that there are no further questions at this time. I'll turn it back over to management for any additional or closing remarks.

[Harry H. Herington:]

Thank you, Greg, and I want to thank everybody for joining us this afternoon. I'm very pleased with the solid financial results that NIC had this quarter, and I look forward to speaking with everybody next quarter. Thank you.

[Operator:]

Once again, that does conclude today's conference. We thank you for your participation, and you may now disconnect.