NIC Inc
Q3 2013 Earnings Call Transcript

Published: 8 Nov 2013

[Operator:]

Good day, ladies and gentlemen, thank you for standing by. Welcome to NIC's 2013 Third Quarter Earnings Announcement. [Operator Instructions] After the presentation, the conference will be open for questions. [Operator Instructions] This conference is being recorded today, Thursday, the 7th of November, 2013. I would now like to turn the conference over to Angela David, Director of Investor Relations. Please go ahead.

[Angela Skinner:]

Thank you, Luke. Good afternoon, everyone, and welcome to NIC's third quarter earnings call. The press release for NIC's third quarter 2013 earnings announcement was issued 30 minutes ago and our earnings release is also available on our corporate website at egov.com/investors. You can 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 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 risks 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 contracts; 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; legal fees and other expenses related to the SEC matter in excess of directors' and officers' liability insurance policy limits; general economic conditions; and the other important cautionary statements and risk factors described in NIC's 2012 annual report on Form 10-K filed with the Securities and Exchange Commission on February 28, 2013. Any forward-looking statements made during this presentation speak only as the date of this call. NIC does not intend to update these forward-looking statements and undertakes no duty to any person to provide 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 third quarter earnings call, and thank you for joining us today. Pursue your passion. I was recently asked by Forbes and an obscure magazine about my management philosophy. And that is how I responded to both of them, "Pursue your passion." It's what I follow, it's what I tell my employees and it's what I tell my children. If you pursue your passion and keep a long-term laser-like focus on doing what fuels that passion, then everything else will fall in place. I truly believe "Pursue your passion" has become a part of NIC's company culture. And it is what continues to drive success again and again for our organization. We are focused on passion of making access to government, more secure and efficient through the thousands of eGovernment solutions that we have developed over the years. This quarter produced strong financial results as we pursued our passion as a company. It also resulted in national recognition as Forbes ranked NIC #11 on its list of 100 Best Small Companies in America and Barron's included us once again on its Barron's 400 Index. This is the fifth consecutive year that Forbes has ranked us on this prestigious list. And with a magazine that looked at just the fastest-growing technology companies, NIC ranked fourth among that group. We also continue to be the only company headquartered in Kansas to make the list. And then there is the Barron's 400 Index. Did you know that less than 2% of all companies in North America make this list 2 years in a row? That is a phenomenal achievement and reflects the creativity, commitment and, yes, the passion of NIC. I'm very proud of this recognition, proud that NIC is representing the Sunflower State on each list. I'm proud to be the CEO of such a successful organization. I'd like to thank our employees, our Board of Directors and our partners for helping NIC achieve these honors. Another component of our long-term success has been NIC's ability to return value to stockholders in the form of special cash dividends. Since 2007, we have returned more than $149 million to stockholders as special dividends. I am pleased to share that NIC's Board of Directors has once again decided to return a special cash dividend to our stockholders. As discussed in our October 29 news release, we will be paying $0.35 per share. Our strong cash flows and the resulting financial flexibility have allowed us to pay special dividends and return cash to our stockholders that is not necessary to grow the business. The third quarter also demonstrated that as you pursue your passion, sometimes you need to make tough decisions in the short term, to achieve your long-term goals. In other words, as many of us have heard before, sometimes you need to give up something good in order to go after something great. As we previously announced in September, we decided not to pursue the collection of approximately $5.1 million due from the Commonwealth of Pennsylvania for eGovernment services provided from the beginning of our contract on January 1, 2013 through June 30, 2013. Steve will talk more about the financial impact on the quarter in a moment. But I will say this

[Robert W. Knapp:]

Thank you, Harry. As we celebrate the national recognition, we recently received for our financial performance, we also have a lot to celebrate in terms of our efforts with our portal partners. Every September, the Best of the Web winners are announced by e-Republic and this year NIC partners took 9 of the top 10 spots. These winners are recognized by their eGovernment efforts, primarily represented by their dot-gov web-running portals. While these portals represent the look and feel of the site, more importantly, they encompass the breadth of interactive services between citizens and businesses with their states. For the first time in state history, Tennessee took top honors for the redesigned tennessee.gov. This portal has placed in Best of the Web 8x since partnering with NIC in 2000. And 1 of the features of the new design is the modular look and feel, which is very similar to the user experience of a mobile application. Rounding out the top 5 of the Best of the Web were Utah in second place and South Carolina and Maine in fourth and fifth place, respectively. This was the first time that South Carolina ranked among the top state websites in the country. I know our team in Columbia was very excited about this, and I was excited for them. Our partners in the Arkansas, Hawaii, Mississippi, Nebraska, Rhode Island and Texas were also recognized as finalists. Congratulations to all of our partners and local portal teams, especially to Tennessee. This is a great honor for our partners in Nashville and we are proud to partner with them. In addition to the top state websites, eRepublic also recognizes the best eGovernment services each September as part of the Digital Government Achievement Awards. A total of 19 eGovernment services developed by NIC teams for 14 of our partners won awards. Congratulations to our NIC partners and teams for winning Digital Government Achievement Awards this year. eGovernment services are at the heart of what NIC is all about and we are always honored when our solutions are recognized. Another exciting development this quarter was the launch of pa.gov, the official website for the Commonwealth of Pennsylvania. Our team in Harrisburg helped launch a new site that is complete with a more powerful search engine, mobile-friendly responsive design that scales and is easy to use across all devices and is touch screen compatible. Secretary, Kelly Logan, who leads the Department of Administration said it best that the goal of the new pa.gov is to "better serve our customers, the people of Pennsylvania." That is exactly what we believe at NIC as well, and we look forward to continuing this partnership as we develop more sites and eGovernment services in the future. One more good-news item in Pennsylvania. The Driver Abstract Records Service went live in late October, marking the start of self-funded operations in the Commonwealth. While we're on the topic of Driver Abstract Records, I'm also pleased to announce that the DMV service in Wisconsin went live in early September. This service is serving as the initial funding source for future projects in the Badger State. Throughout the year, we have been providing updates on our operations in Virginia. This quarter, we completed a successful transition of legacy services to the care of the state by the August 31 transition deadline. On the last 2 calls, we have discussed that we will continue to work with 2 of our largest eGovernment partners

[Stephen M. Kovzan:]

Thanks, Robert, and good afternoon to everyone on the call. NIC earned $0.08 per share in the current quarter compared to $0.09 in the third quarter of last year. As Harry mentioned, results in the current quarter include a onetime noncash pre-tax charge of approximately $5.1 million recorded in cost of portal revenues to write off accounts receivable from our Pennsylvania contract. On an after-tax basis, this lowered earnings per share by approximately $0.05. We recognized no revenues from Pennsylvania in the third quarter and will not do so until the portal becomes self-funded, which as Robert just mentioned, occurred in late October with the launch of the Driver History Record Service. Total revenues were $61.3 million for the quarter, up 15% over the prior year quarter. Quarterly portal revenues were $57.7 million, also up 15% over the prior year quarter, with same-state portal revenues growing 15% in the current quarter. For the first time, in the third quarter, same-state revenues include revenues from both Maryland and Oregon, but exclude revenue from Virginia as it no longer meets the definition of a same-state portal. We call that -- our definition of a same-state portal is a portal in operation and generating revenue for 2 full comparable periods. Now, breaking down the major components of same-state revenue growth for the quarter. Same state DMV transactional revenue growth was in positive territory for the fourth consecutive quarter, up 5% over the third quarter of 2012. This was driven by volume growth across several portals, including Texas and an August 1 fee increase in one of our medium-sized portals. Excluding the fee increase, same-state DMV revenues were up approximately 4%. Same-state non-DMV transactional revenues were up 28% for the quarter, fourth consecutive quarter that non-DMV growth was well above our historical average. This component of same-state portal revenues comprises the hundreds of online services, which not only win Digital Government Achievement Awards, as Robert just mentioned, but serves the primary growth engine of our company. In particular, as was the case the past few quarters, large non-DMV services in Texas, Colorado and New Jersey helped drive this growth. The Texas Motor Vehicle Inspection Service, part of DPS Direct, generated approximately $3.8 million of revenue for the quarter. The new court payment system in Colorado contributed to that portal's non-DMV growth of approximately $600,000 and New Jersey's non-DMV revenue growth was up more than $600,000 for the quarter. One thing investors should keep in mind is that July 1 marked the one-year anniversary of the New Jersey Temporary Vehicle Tag Service and September 1 marked the one-year anniversary of the Texas DPS Direct Vehicle Inspection Service. As a result, we will begin cycling against tough, full quarter comparables beginning next quarter. And we currently expect our same-state, non-DMV, same-state total revenue growth to begin to decelerate, particularly in comparison to the phenomenal growth we've experienced the past 4 quarters. Same-state counter [ph] materials revenues relating to portal software development were down 10% for the quarter as expected, primarily due to the expiration of certain Texas master work order projects in August of last year. Finally, same-state portal management revenues were up 8% from the prior year. Again, due to the increase of Delaware's annual fixed fee from $1.3 million to $2 million in the fourth quarter of last year. Moving onto our newer portals. Current quarter revenues from Wisconsin were $360,000. As the DMV Driver History Record service launched in early September, as Robert previously mentioned, and to reiterate, we recognized no revenues in Pennsylvania in the third quarter. The portal gross profit percentage for the current quarter was 31%, down from 37% in the prior year quarter. Excluding the onetime $5.1 million charge at Pennsylvania, the portal gross profit percentage for the current quarter would have been 40%. In addition to the onetime charge, current quarter cost of portal revenues also includes approximately $2 million of startup costs from Wisconsin and Pennsylvania. Moving onto the software and services portion of the business. Total software and services revenues were $3.6 million in the quarter, up 20% from the prior year quarter, driven by a $400,000 revenue contribution from the new North Carolina Lien service and continued strong performance from the federal PSP service. Moving down the income statement. Selling and administrative expenses in the current quarter increased 26% or $2.3 million from the third quarter of 2012. The increase was attributable to higher costs for corporate level IT and security infrastructure due to our growth, higher incentive compensation benefits costs, also a result of our growth and higher costs related to the previously disclosed SEC matter. Depreciation and amortization expense in the current quarter increased 34% from the prior year quarter, due mainly to capital expenditures incurred over the past year to enhance corporate level IT infrastructure and to deploy the Motor Vehicle Inspection Service in Texas. As a percentage of total revenues, however, depreciation and amortization expense was 3% in both the current and prior year quarters. Finally, our operating margin was 13% for the quarter, reflecting the onetime charge in Pennsylvania. Excluding the charge, our operating margin would have been 22% in the current quarter, up from 20% in the prior year quarter. To conclude my remarks, despite the onetime charge in the third quarter, I was quite pleased with our results, particularly our strong organic revenue growth. I was also quite pleased that our strong financial performance and free cash flow over the past year provided us the flexibility to again return capital to stockholders in the form of another special cash dividend. With that, I'll turn the call back over to Harry.

[Harry H. Herington:]

Thank you, Steve. I'll end as I began

[Operator:]

[Operator Instructions] Our first question comes from the line of Brian Kinstlinger with Sidoti & Company.

[Brian Kinstlinger:]

If you're generating revenues in Pennsylvania at the beginning of October, I'm curious if there's been any action or investigation taken as Representative Matthews suggested?

[Harry H. Herington:]

No. We are rocking and rolling in Pennsylvania, and I feel very confident that everything is fine.

[Brian Kinstlinger:]

Now adjusted for the onetime charge and the startup cost in Pennsylvania, which are going to completely reverse, obviously, here. You seem to be back to a gross margin similar to the first half of this year. Are you guys comfortable with that as you look to next year or do you plan to increase investment to intentionally reduce that?

[Stephen M. Kovzan:]

Well, Brian, this is Steve. The wildcard in terms of our gross margin is ultimately oftentimes the success we have in winning the states -- there are a couple of states out there that we discussed on the call today, that's Louisiana, and if we are successful in signing a contract, we'll have startup costs in a state like that, particularly with Louisiana because it's going to have an 18-month pilot period potentially. So new state expenses would be the wildcard. But in terms of planned investments for next year, without providing any firm forward-looking guidance, we don't have any significant new investments playing that would materially alter our gross profit margin necessarily going forward.

[Brian Kinstlinger:]

And speaking of Louisiana, if it goes forward like the pilot suggests, first of all, would you still -- is it safe to assume $0.50 per capita, as is the rule of thumb? But then how would you guys manage that differently knowing that in your traditional state 6 months in you start to sell other services, would you scale back on resources in order to -- so that state doesn't dilute earnings or would that not be that material for 18 months for you to think about it that way?

[Stephen M. Kovzan:]

Brian, I'll start first and Harry may jump in as well. Again, where we are with Louisiana is that their current intent is for there to be a pilot program. So it's a little bit too early and again because we still consider it an open procurement it's a little bit too early for us to speculate and maybe once we get a little bit more clarity there, we'll be able to provide you some more information at a later date. But at this point in time, I don't think we really have anything to discuss in great detail.

[Harry H. Herington:]

Steve is absolutely correct. It's an open procurement. You know my policy. I never speak or even speculate until I get or when I've negotiated something, I know what I've got, I know what I've promised to deliver and I can tell everybody. So it's just -- it's premature at this point.

[Brian Kinstlinger:]

Last question I have is, you guys have done a great job with small states and medium-sized states. And you've won a few large ones, but a bunch of the large ones seem to have alluded you so far. And I guess -- I'm guessing there's more red tape. So I guess, maybe where -- when maybe [ph] we see RFPs or what's holding those larger states back from even issuing RFPs in your mind?

[Harry H. Herington:]

This is Harry and I'll jump in and say, I'm actually quite pleased with our progress. If you look over the last few years, we've been knocking, the large and medium and the larger states off. You are correct early on, I think there was -- we can do it ourselves and do it as well as anyone else. And I think the NIC partners have proven that they stand out. You look at all the awards we won this year or our partners won this year, last year, or the last 10 years. And it's clear that the NIC partners are performing above and beyond anyone else. All of the states have recognized that and, slowly but surely, we have won them over, RFPs have come out. I feel very comfortable with our pipeline. You know me, I never speak to time, but if history is any indication, just look at the last couple of years.

[Operator:]

Our next question comes from the line of Peter Heckmann with Avondale Partners.

[Peter J. Heckmann:]

I just want to make sure that I'm clear here. So Wisconsin started generating revenue from Driver Abstract sales in early September and Pennsylvania started in late October?

[Harry H. Herington:]

That sounds right.

[Stephen M. Kovzan:]

Correct.

[Peter J. Heckmann:]

Okay. And generally, we expect a somewhat normal rollout there in terms of the self-funded model, right? I mean, those are not limited in terms of the number of services?

[Harry H. Herington:]

Those are normal, self-funded, enterprise-wide contracts.

[Stephen M. Kovzan:]

The only thing I would say, Pete, is that we did say that for -- on our last call we did mention that for the year, we expected Wisconsin to be dilutive for us for the year because of startup expenses and other things going on there. But certainly, we believe the opportunities in those states like Harry said to be pretty typical, self-funded opportunities.

[Peter J. Heckmann:]

Okay. And then in the state of Washington thanks for giving us that update. It sounds -- you're kind of tag commentary there suggested that this may be something that has to sit for a while and before you get the champion to come in and revisit it and maybe figure out a new funding model. Is that the right way to think about that?

[Stephen M. Kovzan:]

Not quite. And here's -- I appreciate you bringing that up. One thing, and whenever I talk about the pipeline, I tell everybody, I'll tell you what I can tell you, but typically, I can't tell you anything because we don't ever want to tip our hand. And I'm actually tipping my hand a little bit early on this one. We have champions there, we have a strong champion in Washington. Because of the legislation that's in place and because of the lack of ability to find enough large-scale, self-funded opportunities to fund that one, I finally looked at my team and said, you know what? The odds are against us at this stage until something changes there even though we've got strong supporters that I'm -- I owe it to the stockholders, ultimately but so I say, you know what as far as I'm concerned? This is an active -- active is probably the -- this is an NIC -- non-NIC opportunity just like any other 6 we don't have right now. But I'm not going to characterize it the same as I would Connecticut or Louisiana. That would be unfair for you and the other analysts and shareholders for me to say that.

[Peter J. Heckmann:]

Okay. And then, lastly, as regards to special dividend, given now a strong record, I think, 7 years or so of somewhat irregular special dividends. But you solved a fairly high-class problem of a very large net cash balance and strong underlying free cash flow. Do you think the Board may be getting closer to thinking about a material regular dividend or are you still holding out thinking that there may be opportunities out there either on the M&A front or potentially from a new contract that may require some significant CapEx that makes you feel like you want to keep that cash balance and reserve?

[Harry H. Herington:]

Absolutely. Let's go with the second half of what you -- this is something that is discussed, debated in-depth by the Board. I'm the Chairman of the Board. At the Board meetings, we actually -- you start with should you pay a dividend. Where we're at, it's obvious, we should, we like giving that back to our stockholders. We think that's the right thing to do if we can't find an active use that would help grow our company, make it stronger. And then, the next thing that we debate is, all right, should we make it a regular dividend or should it be a special dividend? We always stick with a special dividend up to today because we want to keep the opportunity for an acquisition, investment in technology. We're a high-growth, as you saw from the Forbes ranking, as you saw from some of the other honors that we've received, we're a high-growth company and there are opportunities presented to us time and time again and we need that flexibility at this stage. That doesn't mean next year, 5 years from now, the Board won't change its mind on how to do it. What I would tell you and others, it is something that we debate as a Board every single year.

[Peter J. Heckmann:]

Okay. And then, last, I did have one more question. I don't believe you changed at all your prior guidance, is that correct?

[Stephen M. Kovzan:]

Yes, let me -- no, we're not changing anything per se. I think, our last statement that we've made about guidance, Pete, is that we felt that we should comfortably meet or exceed the high end of our previously issued guidance.

[Operator:]

Our next question comes from the line of Lauren Slabaugh with Stephens Inc.

[James Rutherford:]

This is James Rutherford in for Lauren. Given the recent healthcare.gov fiasco, do you think that the President and the federal government in general will be any less or able or willing to make changes to federal portals and systems, and really just will this development affect your prospects gains for the business in the future?

[Harry H. Herington:]

Well, there's a great question. I actually like that question a lot. It's not where I thought you were going to go. You know what? Robert is pretty much running our federal initiative, I'm going to let him take a stab at that one.

[Robert W. Knapp:]

Great. Well, I'll jump in. Obviously, we do see with healthcare.gov a tremendous opportunity that the procurements are going to be looked at, and the procurement process and -- so certainly, we think that presents a great opportunity for NIC to continue our education of what we do at the state level and what we do with the Department of Motor Vehicle -- I mean, with the Department of Transportation, and how we can more rapidly educate and advance our efforts. Yes.

[James Rutherford:]

Great. Okay. And so one second question, thinking about moving parts of the model, your model, what do you think is the biggest accelerator of organic growth from here just moving forward?

[Stephen M. Kovzan:]

Well, I would say that, historically -- this is Steve, historically, the accelerator of our organic growth, when you say organic growth, we think of that as same-state revenue growth. That's always going to be the thousands of online services, eGovernment services, that we build every day. I always say that we tend to grow by a lot of, using a baseball term, bunts and singles by -- every year, we deploy hundreds and hundreds of services to drive historically what's high single-digit, low double-digit growth. Now the last 4 quarters, it's been phenomenal growth. We've grown probably twice as fast as we've been able to historically. But it's always going to be those hundreds of services that we deploy each year, that we come [indiscernible] and we innovate in our various portals. But I don't think I could certainly point to 1 or 2 that will be the material [indiscernible] of our growth, it's a collective effort.

[Harry H. Herington:]

Yes, and I would agree, this is Harry, I agree with that 100%. And James, I'm going to go back to your last question and answer this question a little bit with that. I'm a guy that always looks for a silver lining in anything that's happening. One of the nice things, if there is a nice thing about the healthcare exchange issue that's out there, it is driving education to the public that you can do eGovernment online. Now this one might have issues, and understand there's such a promotion that there's issues with this one. That almost infers that others are out there working well. I think that's going to drive users to us and give us opportunities.

[James Rutherford:]

Okay. So you're really viewing it as more of an opportunity?

[Harry H. Herington:]

Absolutely.

[Operator:]

Your next question comes from the line of Raghavan Sarathy with Dougherty & Company.

[Raghavan Sarathy:]

My first question is for Harry. You talked about how you are helping the stated changes with the payments through the state portal. Can you talk about, maybe update us on the federal opportunity, which you talked at length last call about some of the educational steps you're doing, can you give us some color on what sort of progress you're making there?

[Harry H. Herington:]

I'm going to let Robert take it.

[Robert W. Knapp:]

Rag, this is Robert. Obviously, during -- since the last quarter, we had the government shutdown, which clearly impacted a lot of discussions that we were having. At the same time, we were able to have some very good continuing education efforts with some of the agencies who's personnel were still there. So we haven't seen a lot of change from the last quarter. We still see a tremendous opportunity and we continue to put a lot of effort in educating and informing federal agencies about the opportunities.

[Harry H. Herington:]

One thing I would stress, as we talk about this, with the federal shutdown, our federal application was not impacted at all.

[Raghavan Sarathy:]

Okay. And then, I'm trying to understand the puts and takes on gross margin, Steve?

[Stephen M. Kovzan:]

I'm sorry, Rag, the what on gross margin?

[Raghavan Sarathy:]

So the puts and takes on gross margin. So in the press release, you indicated that you had $2 million of startup costs related to Pennsylvania and Wisconsin. Can you give us some idea on how much was Pennsylvania versus Wisconsin?

[Stephen M. Kovzan:]

No.

[Raghavan Sarathy:]

And second part of my question is, so I know that Louisiana and some of the new states, we don't know what the gross margin would be, but if you look at the fourth quarter, given that you probably are going to be investing in Pennsylvania and Wisconsin, how should we think about the gross margin? We know it was 40% x charge but how should we think about the gross margin for the fourth quarter?

[Stephen M. Kovzan:]

Well, no, we're not going to break out our cost structure between Wisconsin and Pennsylvania. Pennsylvania is going to be the larger proportion of the amount. But in terms of the puts and takes, one of the things that you need to keep in mind, Rag, is that we will and we did begin to start generating DMV revenue in Pennsylvania, so that would be a positive impact on the margin in the fourth quarter. And in terms of Louisiana, it's probably way too early to speculate. I mean, at this point in time, again, all we were awarded was the bid, we don't even have a signed contract yet. So I can't even speculate the effect that Louisiana would have, if any, on our margin for the quarter. The other thing to keep in mind is that the fourth quarter is typically our seasonally weakest quarter when it comes to revenue. So we typically do see a bit of a decline on a same-state basis, particularly with DMV revenues and also non-DMV revenues.

[Raghavan Sarathy:]

So excluding Louisiana, how should we think about the gross margin now that we have Pennsylvania is going to contribute revenue. And then, Wisconsin, was it just 1 month of revenue from Wisconsin? Can you give us how much revenue we should expect if you don't want to break out on these 2 states, just the cost?

[Stephen M. Kovzan:]

Well, I think, the rule of thumb that we've always recommended investors use in terms of gross profit, once we get the Driver Record Service up and running, without giving you specific guidance on each of these states, would be gross profit margins starting out in the 30% range and growing over time over the course of a portal contract to about 40%. But beyond that, we're not going to provide specific point estimates for both of those.

[Harry H. Herington:]

And I want to be clear here, this is Harry. Because you've mentioned Louisiana a couple of times, kind of interesting the way you word it, the only reason I mentioned Louisiana is because it's public knowledge that it's been awarded to us, but what they have done is award the opportunity to negotiate a contract. All right? It is not that we have won Louisiana. We have won the opportunity to negotiate our contract with them and we have a ways to go there. I mean, so -- to start to factor in an expense this quarter or what have you, I think, is premature.

[Raghavan Sarathy:]

Okay. So just 1 final question. Steve, can you clarify whether the revenue from Wisconsin was just 1 month of revenue on DMV?

[Stephen M. Kovzan:]

Yes. I think, we mentioned on the script that we -- it started up in early September. It might not have been a full 30 days, but it was pretty close.

[Operator:]

Our next question comes from the line of Gary Prestopino with Barrington.

[Gary F. Prestopino:]

Remind me what your revenues in Virginia were on an annualized basis versus what you're going to have now?

[Stephen M. Kovzan:]

So our revenues on an annualized basis is about 2% of revenue in our most recent -- in 2012. So $6 million or north of $6 million, something like that, on an annualized basis. What we're saying going forward with the 2 large services that we have and the cluster of 14 other agencies and departments, we're thinking that on an annualized basis, it might be around $2 million a year.

[Gary F. Prestopino:]

Okay. And then, in terms of what happened with the SG&A this quarter, should we expect a similar elevation of the SG&A as a percentage of sales or similar growth in SG&A year-over-year going into Q4? I guess, what I'm trying to get at is some of these expenses going to continue into Q4?

[Stephen M. Kovzan:]

Well yes, I think, for the year, we've kind of provided guidance of SG&A about the 16% range. It's a little bit higher this quarter in part because we had higher expenses related to the SEC, ongoing SEC matter. So that one's a little bit difficult to project. But other than that, there wasn't anything that materially grew SG&A other than to say the 17% of total revenue rate.

[Gary F. Prestopino:]

Okay. And then, in terms of -- I don't know the exact number, but the states that are running their own health exchanges, I think there's, what, 16 or something like that, is that correct?

[Stephen M. Kovzan:]

14.

[Gary F. Prestopino:]

14?

[Stephen M. Kovzan:]

That's right.

[Gary F. Prestopino:]

Is there -- and what you're doing with the 2 states, Kentucky and Utah. My understanding, Kentucky, you're just a payment mechanism there. In Utah and in other states, is there any potential to provide services that would derive some revenues from what you're doing with the states with the Affordable Care Act?

[Harry H. Herington:]

I'll start and then if Robert wants to chime in from there. Number one, we're dealing with more than just 2 states. Those are 2 that we highlighted. We never really get into a lot of our states and where we're at with different processes. Yes, I do believe there's opportunity and we are making money in this. I wouldn't call it material at this point, it's still early, early in the game.

[Stephen M. Kovzan:]

So Gary, this is Steve, just to clarify your question, I think what you were saying is earning revenues beyond payment processing?

[Gary F. Prestopino:]

Right, exactly. I mean, obviously, this thing is kind of an albatross, right? And there could be ways for your expertise to make them run smoother, I suppose, if that's what you want to get into. But in additional services that would be possibly aligned with these state-run exchanges, is there a way you can monetize that or is that something you're doing, you're thinking about doing or is that something where these would just be gratis services that you're going to give away?

[Harry H. Herington:]

A bit of both, it's early in the game. As we look through -- remember, this stuff is in the process of rolling out and there's issues with that. That's what we're really good at is providing this secure and efficient access to information and services that -- the low-hanging fruit was the payment processing. We looked at that, and looked at our partners and said this is something that they trust us with, something we're very good at, and so we were able to step in on short term and provide that type of solution. We've also provided other types of informational-only in which we generate no revenue and then we are exploring with them as this becomes more -- well, shucks, we're all still learning our way through this. What other opportunities are there? It's, I would say, very premature for us to even speculate on that.

[Stephen M. Kovzan:]

Gary, the one thing I will add and that Robert touched on in his comments, just to kind of reiterate what he was saying is that a lot of the current work that's been done on these health insurance exchanges involve these complex back-end components, most of which are kind of outside what we do. So once that kind of shakes out and I think Harry and I was talking about it earlier, oftentimes, those back-end systems involve really specific knowledge...

[Harry H. Herington:]

Industry knowledge.

[Stephen M. Kovzan:]

Industry knowledge on insurance. Once that shakes out, we'll see where we fit in. But certainly, payment processing is the most immediate logical place where we've been helping.

[Harry H. Herington:]

And that's a fair statement to say our general managers, our team are -- been in active communication with our partners that are involved with this. This isn't something we're just waiting on. It's just stuff that we've already talked about.

[Gary F. Prestopino:]

Okay, fine. And last question is, you're in like 30 states now, right?

[Harry H. Herington:]

28.

[Gary F. Prestopino:]

Oh, 28? Okay. So if you look at your crystal ball and I don't know if you can share this with us or not, but what's your thoughts on the number of states coming with RFPs in 2014?

[Stephen M. Kovzan:]

So I think that's probably one that I'll... [Audio Gap] I'm sorry, we had some noise in the background in our room here.

[Harry H. Herington:]

They're trying to correct me on the number of states. You know me, I'm an honest guy, so I'll still tell you.

[Stephen M. Kovzan:]

We came up with 28 because we are not including Virginia and Arizona in that count.

[Harry H. Herington:]

Right. When I talk about the states, what I talk about it is it's self-funded, enterprise-wide. We are doing business in a few other states but those, I don't count it pretty much. Reask your question, if you would, please.

[Gary F. Prestopino:]

It's a little confusing the way I -- I was just wanting to get your ideas on how many RFPs may be out in 2014 in the states that you're obviously not operating in?

[Harry H. Herington:]

Yes. You know I can't speak to that. It's something we don't speak to. We've got ongoing conversations and champions in numerous states. In the past, we got 1 to 2 out and that has been historical. Last couple of years, we've had much better success at that. There's no way for me to even speculate, because -- and that's the other thing I'll remind everybody, and it's not just I won't to tell you, is we get states that are right on the cuffs and we've got it written that it's going on next week and we might not see it for 9 months. We've got others that -- they fast-track things. So all I'm saying is look to our history.

[Operator:]

Our next question comes from the line of Saliq Khan with Imperial Capital, LLC.

[Saliq Khan:]

I'm going to be speaking on behalf of Jeff Kessler. It sounds like a bunch of questions that Jeff and I had have been already answered. So I'll take it a little bit on a higher level. It sounds as if the lightness that we have seen on the EPS from a consensus standpoint, that story can be explained by what is going on right now in Pennsylvania. Looking a little bit further, it sounds like you haven't -- there's a number of conflicts right now that can be terminated by any other party without a cause of any sort. What opportunities are available right now for NIC to strengthen those contracts in your favor?

[Stephen M. Kovzan:]

I'll start off with that one, Saliq. This is Steve. I think, there was a pretty -- about -- and I'm looking around the table here. It's not uncommon for our contracts with our government partners to have that ability to terminate immediately. Harry just made a great point. If you look to our track record of success in retaining our state partners, it's phenomenal. We've never lost a state. We've certainly made the decision not to continue to do business with certain states. I think, if you look to our track record of success, despite the fact that they have these options, rarely if ever, have they exercised that option.

[Harry H. Herington:]

A lot of states have that in every contract that they enter into. But if they're not as easy to pull the trigger on, I think, we actually put that in our public filings. But that isn't something that you've seen -- I've been at this for 20 years. [indiscernible] that occur, as long as you are providing the service that you said you're going to provide and you over-deliver, which is what we always try to do, you don't have to worry about that. I'm always focused on, again, my passion, where are we going, what can we give it that they haven't done before? And I've never had that concern.

[Saliq Khan:]

And Harry, the long-term vision of the company itself is fantastic and it still seems you guys see it's been great. Now as you're looking at some of these awards that are being won by some of the government partners that you have in place, how was all of that essentially playing into the higher-level conversations that you're having with the prospects in the pipeline? How are they essentially perceiving the awards? Are they just saying, hey, you know what, it's not a big deal that some of these government partners that you have are winning awards, or they're saying, let's really take a look at this on a serious level and try and figure out what we can do and if we can incorporate NIC into our organization?

[Harry H. Herington:]

You have both. I would say more the latter. I mean, you're going to have some who say awards mean nothing. But even when they say that, if we show up with -- it doesn't matter if their service got an award or not. Look at the service that's being recognized, I mean, what we bring to the citizens and the businesses. But I will tell you, more times than not, our government partners and the government officials in which we don't have contracts with -- I mean, they -- what they look at is what their peers are being recognized for. And so when we show up and we talk to them and say, this isn't an NIC award and NIC didn't award this, these are coming from independent sources off of the solutions that this government agency has elected to push out there and promote and provide its citizens and businesses. That gets us in the door. Oftentimes, that gets them calling us. They'll call the agency and say how did you do this. The agency says, you need to talk to NIC, and they'll end up calling us. Our partners that win these awards become our best sales force, because they're bragging about us. They're saying, look what they've helped us accomplish.

[Saliq Khan:]

With these positive conversations that you're having, how is that essentially playing into the other conversations that you're having given the fact that we do have this government shutdown that happened recently? Are they resistant or are they saying, you know what, I guess we had a little bit of a hiccup but let's get back and try to figure out what we can do to move forward as an organization, as a government organization?

[Harry H. Herington:]

Don't confuse the government shutdown from between state and federal. The federal government shut down for a short period of time, and that inhibited our ability in some areas to have conversations, not in all areas at the state level -- I mean, at the federal level. At the state level, foot on the accelerator. We have never taken our eye off that ball, we were running hard there, we're having great meetings there. It didn't impact us there.

[Operator:]

Our next question comes from the line of Bryan Gesuale with Raymond James.

[Brian Gesuale:]

Just one last question for Harry here. Harry, maybe can you quantify the growth opportunities with this liens business that you guys are involved with in North Carolina, and they've launched in the quarter, maybe what the appetite might be from other states? And then, other similar services that are sold kind of through a different pipeline or avenue than your core business?

[Harry H. Herington:]

I'm going to let Robert tackle that one.

[Robert W. Knapp:]

Thanks, Brian. From our standpoint, as you may know, this was a service that we put in North Carolina that we originally launched in the State of Utah. And that takes -- sometimes takes time, and in this case, we were able to capitalize over a period of time and launch that in North Carolina. It's, so far, had a great track record and start. We'll see what the future in terms of what the rest of the year and next year looks like. But we certainly look at those services as opportunities and liens is one of those that other states may want to take a look at. And we are educating, as part of our ongoing sales process, about those. When you ask about products, payment processing is one we mentioned a couple of times. We certainly think there's an opportunity there. And within our core states, our existing NIC states, we're always looking at things that we've talked about previously like temporary tags as a service that how do we promote that across all of our NIC states. And occasionally, we do get interest from non-NIC states. And where that happens, we look for the opportunity to educate and see if we can build on that.

[Harry H. Herington:]

This is Harry, Brian. Robert did a great job. That is exactly the case. The one thing that I would tell you, I look at what's happening in North Carolina, I've called it for years an adjacent move. An adjacent move means we have found a way to bring a service into a different industry versus government. This is outside of government. It's a more to say quasi-government service. We need to let this one get established well, show everything, all the positives, and then we have a whole new market we can take that to with, again, our partners as our biggest cheerleaders. So I'm excited about that opportunity.

[Brian Gesuale:]

Right. I mean, it seems to be a nice incremental positive when you take your core state customers, add the federal opportunity and then begin to be able to look at some states that may not be core portal customers that could adopt some services.

[Operator:]

Our next question comes from the line of Rob Aman [ph] with RJ Capital.

[Unknown Analyst:]

Kind of a strange question. I'm just trying to think about in model-building related to Pennsylvania for next year. Since you technically recognized revenues in Q1 and Q2, I mean, you eventually read them off, but they're in the numbers for Q1 and Q2. Will Pennsylvania be in the same state numbers in Q1 and Q2 of next year?

[Stephen M. Kovzan:]

Rob, this is Steve, that's a great question. We haven't made that decision yet. It is going to be a bit of an odd comparison. I could envision something like potentially Pennsylvania being in the same state in the first and second quarter, not in the third quarter and not in the fourth quarter. We'll just have to figure that out, not really sure. I mean, we need to discuss it still.

[Unknown Analyst:]

Okay. And then, this is a second quarter in a row where you've had DMV same-state revenue growth. Even if you took the fee increase out of it, it's been well above anything you've shown for a very long period of time. I was wondering, is this the new level we should be thinking about or do you guys still think about it as kind of 1% to 2% or maybe 3% for a same-state growth opportunity?

[Harry H. Herington:]

I'm going to -- we're all leaning forward because we all want to speak on this one. I'll start because I get -- I'm the CEO, I get that privilege. We've said time and time again, oftentimes, the DMV can be a black box. We have been able to track it with the economy and there's been some with a comment. Of course, if we get DMV increase, but you're right, throw that out. You should not consider that with the bigger equation. And it is too soon to say this is a trend. It trended the other way. What we focus on is the non-DMV growth. That we can control. That is where our growth engine is. I see these as a positive. We are aggressively trying to understand what's kind of driving this new positive with DMV but we really don't have any transparency yet.

[Stephen M. Kovzan:]

I guess, my -- I would always caution investors to view 4% or 5% as the new norm. If you're thinking long term about NIC's prospects and its revenue growth. And conservatively, we kind of internally always use kind of a flat growth number because quite frankly, that's what we've seen the last 4 or 5 years. But no doubt about it, the last -- it's been in the positive territory the last 4 quarters. And the last couple 2 or 3 quarters, we've seen growth that we haven't seen in a long, long, time. So it's a positive but I agree with Harry, it's -- I'm not ready to say that's a trend.

[Harry H. Herington:]

And then, keep in mind, fourth quarter, there's always seasonality with it. We always see it -- because the number of business days due to the holidays, things like that.

[Unknown Analyst:]

Year-over-year, that wouldn't really impact it [indiscernible]

[Harry H. Herington:]

You're absolutely correct.

[Unknown Analyst:]

And Pennsylvania and Wisconsin, $2 million startup cost, are you running full teams in both places, that's kind of the expense level we should just be thinking about going forward, there's no other ramp-up in spending that really needs to take place there?

[Stephen M. Kovzan:]

Yes, at this point in time, I don't think we see a material change in our expense run rate in those states for now.

[Operator:]

[Operator Instructions] Our next question is a follow-up question from the line of Raghavan Sarathy with Dougherty & Company.

[Raghavan Sarathy:]

A couple of questions on the new rules and to the existing portals. If I recall correctly, correct me if I'm wrong, Steve, the contract expired in Austin, there were some sort of extension, where are you in terms of the State of Iowa?

[Stephen M. Kovzan:]

Did you say Iowa? Robert, I'm looking to Robert on that one. Rob, I'm sorry.

[Robert W. Knapp:]

We're still operating within that extension and very comparable with that.

[Raghavan Sarathy:]

So the extension expires when?

[Robert W. Knapp:]

12/31.

[Raghavan Sarathy:]

And then, State of Indiana, Steve, can you refresh our memory on how much the revenue -- I know it's some sort of a mixed contract, how much revenue it generated? And I noticed they have an RFP for business one-stop, wondering whether your current contract covers business one-stop as well?

[Stephen M. Kovzan:]

Again, Rag, we don't speak to individual state revenue. So I'm not going to speak to Pennsylvania. I think, as we have previously mentioned, Pennsylvania is a contract where we do earn a portion of our revenues through a fixed fee in lieu of driver records. I'm sorry, in Indiana, I think it's what you're talking about in Indiana. And I think that fixed fee is between $4 million and $5 million a year, if I'm not mistaken, but beyond that, we don't get into a specific -- state-specific revenues. Because those amounts run through our portal management line item in some of our public filings where we break out our revenues and so Robert will touch on the business one-stop.

[Robert W. Knapp:]

Yes. And then, Rag, what I would say is we're fully aware of that RFP. And obviously, with an RFP, similar to our state, it's an open procurement, so we're not going to comment any further than that.

[Operator:]

And there are no further questions. Please proceed with any closing remarks.

[Harry H. Herington:]

Excellent. Thank you, Luke. And I want to thank everybody today for joining us this afternoon. And I look forward to speaking with you next quarter. Thank you.

[Operator:]

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.