NIC Inc. (EGOV) CEO Harry Herington on Q3 2018 Results – Earnings Call Transcript

NIC Inc. (NASDAQ:EGOV) Q3 2018 Earnings Conference Call November 1, 2018 4:30 PM ET

Executives

Angela Davied – VP, Corporate Communications and IR

Harry Herington – CEO

Robert Knapp – COO

Steve Kovzan – CFO

Analysts

Carter Trent – Stephens

Peter Heckmann – D.A. Davidson

Angela Davied

Thank you, Operator. Good afternoon everyone and welcome to NIC’s Third Quarter Earnings Call. The press release for NIC’s third quarter 2018 earnings announcement was issued 30 minutes ago. And our earnings release is also available on our corporate website at egov.com/investor-relations. You can also call our headquarters at 1-877-234-3468 and we will e-mail the information to you.

Following the 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 2018 fiscal year estimates, projections, the expected length of contract terms, statements relating to the Company’s business plans, objectives and expected operating results, statements relating to potential new contracts or renewals, statements relating to the Company’s expected effective tax rate and the potential effect of tax law changes, statements relating to possible future dividends and share repurchases and other possible future events, including potential acquisitions and the assumptions upon which those statements are based.

Forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties, which may cause actual results to differ materially from the forward-looking statements. These risks include regional and national business, political, economic, competitive, social and market conditions, including various termination rights of the Company and its partners, the ability of the Company to renew existing contracts in whole or in part, and to sign contracts with new federal, states and local government agencies, the Company’s ability to identify and acquire suitable acquisition candidates and to successfully integrate any acquired businesses, as well as possible data security incidents.

Any statements regarding our expected effective tax rate for 2018 reflect provisional amounts subject to adjustments during the one-year measurement period permitted under applicable law. You should not rely on any forward-looking statement as a prediction or guarantee about the future. A detailed discussion of risks and uncertainties that could cause actual results and events to differ materially from such forward-looking statements is included in the Sections titled Risk Factors and Caution About Forward-Looking Statements of the Company’s most recent Forms 10-K and 10-Q filed with the SEC.

These filings are available at the SEC’s website at sec.gov. Any forward-looking statements made during this call speak only as of the date of this call, except as may be required by applicable law, we undertake no obligation to update or revise publicly any forward-looking statements whether as a result of new information, future events or otherwise.

And now, it is my pleasure to introduce Harry Herington, NIC’s Chief Executive Officer and Chairman of the Board.

Harry Herington

Thank you, Angela. Welcome to our third quarter earnings call. In maintaining our philosophy of transparency, I will start the call today with the Texas status update. As I’ve shared with you on previous call, our portal contract in Texas ended on August 31st and our new payment processing contract began on September 1st. We are maintaining a small team in Texas and those individuals are focused on providing excellent payment processing services as well as pursuing growth opportunities in this state, and we do believe there are viable opportunities to expand our business there.

During the quarter, the Executive Director of the Texas Department of Information Resources, DIR, denied our protest. This is a final internal protest option. While we saw several concerns of our procurement process and the contract award, we accept the state’s decision and we consider the protest over. Now, it’s our responsibility to demonstrate the Texas that they made wrong decision and for our teams to work to secure new business in the Lone Star state.

Setting Texas aside, there is good news report for the quarter. We continue to demonstrate the many aspect of our business are performing. There is strong interest across the country in RXGov. Core services are producing solid financial results and are delivering digital government efficiencies to citizens and businesses. We are growing our federal business. More states are adopting our innovative citizen-centric solutions and we are expanding our footprint and deepening our expertise in our vertical solutions area.

Let’s take a closer look at each of these. Let’s start with our RXGov. On the last earnings call, we announced the purchase of a prescription drug monitoring technology from Leap Orbit to form the new RXGov platform. Since the launch of RXGov, the reception by government has been exceptional. We’ve got several meetings to discuss the benefits of our solution and opportunities for us to sell RXGov look promising. I hope to be able to report even more developments next quarter.

Moving on to the core business, same-state IGS revenues were up 11% for the third quarter of 2018. This is driven by many of our Maine state services, driving license renewals, income taxes and motor vehicle licenses. In addition, we continue to expand some of the services we do best. This includes the payment processing. Recently in New Jersey after a competitive bid process, we were awarded a 5 year contract with two one-year renewals to provide credit card payment processing for the entire state.

The contract is separate from our enterprise digital government contract with the state and includes two major components, point-of-sale credit card payment at branch offices of the Motor Vehicle Commission or at state parks. The second component of this contract is processing online credit card payments for the New Jersey judiciary which includes traffic tickets. As I mentioned earlier, we are growing our federal business.

As we previously announced, NIC was awarded a new contract at U.S. General Services Administration or GSA. GSA has developed what it refers to as centers of excellence. They planned to take federal agencies to a multifaceted initiative that will modernize IT infrastructure across government by leveraging private sector innovation and existing government services and by centralizing best practices and expertise.

The centers of excellence evaluate a federal agency’s technology in five areas cloud adoption, contract centers, customer experience, data analytics and infrastructure optimization. NIC was selected to provide a Voice of the Customer Solution as part of the customer experience category of technology modernization.

GSA selected the United States Department of Agriculture as a first agency to participate in the centers of excellence initiative. The solution we provide will be used specifically by USDA to aggregate customer feedback from multiple channels, providing a thorough understanding of how people interact with the department. We currently anticipate the Voice of the Customer solution we developed for USDA will result in approximately $1.5 million in revenues over the next 12 months.

In addition, the USDA in late September, the GSA announced that HUD, U.S. Department of Housing and Urban Development is beginning the initial assessment and research phase of the centers of excellence initiative. We believe there are long-term opportunities to continue to expand our work as more agencies joined this GSA technology modernization program.

Finally, I will share one additional positive development. October represents the key milestone for federal business and outdoor recreational vertical with the launch of the new recreation.gov with our partner, Booz Allen Hamilto. The new comprehensive system went live on October 5th, and after a few months of testing will be announced to the public early in 2019. We are proud to be part of the team that delivers this innovative solution and look forward to sharing more developments for the public announcement in a few months.

I’ll wrap up my comments today as I began them. Our core business remains strong and our growth this quarter was robust. Federal business is growing and we’re making a difference in federal with key initiatives like rec.gov and the GSA’s Centers of Excellence contract award.

With that, I’ll turn call over to Robert Knapp, NIC’s Chief Operating Officer. Robert?

Robert Knapp

Thank you, Harry. I recently attended the Gartner symposium, one of the largest conferences in the technology industry. And the agenda included many topics that are similar to current NIC initiatives digital platforms, chatbots, artificial intelligence, machine learning, customer experience, and cyber security among other things. Take the recent work of our government partners and team in Kansas for example.

Our team in Topeka and the Kansas Board of Nursing launched the nation’s first Alexa skill for this industry. Now nurses can use an Amazon Echo device and ask Alexa. What is my license number? When does my license expire? And how do I renew my license? This is a great example of our continued efforts in NIC to use various levels of artificial intelligence to expand the way government interacts with its constituents.

As Harry mentioned, our work in our vertical solution areas continues to expand. We continue to expand our YourPassNow digital part pass solution. . Recently, Glacier National Park in Montana and Mount Rainier and Olympic National Parks in Washington, the Bureau of Land Management Yuma Field Office and the Uinta-Wasatch-Cache National Forest in Utah began offering YourPassNow to visitors.

Millions of people visit these public treasures annually. More than 40,000 passes have been sold through YourPassNow in 2018 with 18 federal sites managed by the Bureau of Land Management, U.S. Forest Service and National Park Service using this platform. Our government solutions and team in Maine added several new digital government solutions for this related to hunting season related to hunting bear, moose, deer, and turkey, as well as scallop fishing.

A new game tagging solution was launched recently to modernize an existing paper process. This new solution has been used to tag more than 4,000 animals just in the third quarter alone. They also launched a new online moose permitting system so that individuals who went a permit during the lottery process can purchase their permits online.

And the Maine Department of Marine resources worked with our team in Augusta to launch a new online scallop license lottery application while our team in Maine has developed some unique solutions specific to their geography. The foundational elements of these solutions could be used by many Department of Natural Resources across the country.

NIC also continues to expand our work in the areas of medical and recreational marijuana. Our team in Oklahoma partnered with the Oklahoma State Department of Health to use our common checkout platform for the state’s medical marijuana licensing system. Since its launch in the late August, the system has already processed nearly 15,000 transactions. Our work in Oklahoma ass to the suit of medical and recreational marijuana solutions, we provide in half of dozen states.

I’m also pleased to share that we continue to see robust adoption of our citizen-centric Gov2Go platform. New Jersey and Pennsylvania are the latest states to add state specific solutions to the platform. The continued adoption reinforces that government realizes that Gov2Go is increasingly how people want to conduct their government interactions.

Study after study highlights that citizens are confused about which agency or even which level of government to contact to complete simple specific responsibilities. Gov2Go eliminates the guess work and missing deadlines all from an easy to use mobile platform. Needless to say, we are excited to see government officials continuing to adopt it in their states.

I will close today by congratulating our government partners and sharing some contract extension news. First, the Government Experience Awards given by the Center for Digital Government recognize those states that provide the best most comprehensive digital experience for its constituents.

This year NIT partner swapped the top five honors with Utah taking first place, Maryland in second, Indiana in third, Mississippi in fourth and Arkansan tied for fifth. In addition our partners in Alabama, Maine and Nebraska were recognized this finalist. Congratulations to all of our partners on their recognition for providing outstanding citizen and business online experiences.

To conclude my remarks today, the state of Maine recently extended its contract with us and the state of Colorado announced its intention to renew our contract. The state of Maine recently awarded our Maine Information Network Subsidiary an 18-month extension taking the contract through the end of June 2020.

And in Colorado, our contract holding partner the statewide internet portal authority issued a press release announcing its Board of Directors has authorized SIPA to enter into contract negotiations to renew our contract, a special thank you to the state of Maine and Colorado for continuing to place their confidence on us. We look forward to partnering on many more digital government solutions.

And with that, I’ll turn the call over to Steve Kovzan, NIC’s Chief Financial Officer. Steve.

Steve Kovzan

Thanks, Robert, and good afternoon everyone on the call. We have strong third quarter of 2018, earning $0.24 per share compared to $0.21 in the prior year quarter. Core financial results for the quarter include total revenues of $87 million, a 3% increase over the third quarter of 2017 with portal revenues of $80.9 million, up 6% over the prior year quarter.

Total same-state portal revenues grew at healthy 9% for the quarter, breaking down the components of same-state revenue growth, same-state IGS transactional revenues increased 11% this quarter due mainly to grow from some of our core services such as driver’s license renewals, motor vehicle filings and other, as Harry mentioned earlier.

Same-state DHR transactional revenues were up 4% for the quarter driven by price increase in one state and higher volumes across several states. And finally, same-state software development revenues increased 74% for the quarter driven primarily by several time on materials projects across the number of states.

Results for the third quarter of 2018 include portal revenues of $13.3 million from the legacy Texas portal contract, which expired August 31st and $2 million from the new Texas payment processing contract, which began September 1st. Revenues from the legacy Texas portal contract total $16.5 million in the prior year quarter. Please note that all revenues from our operations in Texas have been removed from the same-state category for compatibility purposes.

Software and services revenues were 6.1 million for the quarter, down 24%. You may recall that results in the prior year quarter included one-time spike and revenues of approximately $2.8 million from the sale of lifetime senior passes through YourPassNow. Last year, the demand for lifetime senior passes increased significantly in July and August due to the pending legislative price increase of the passes, which became effective on August 28, 2017.

The one-time spike in 2017 revenue from the lifetime senior passes was certainly a driver in the 3% decrease in our operating income. Also contributing to the decrease was an increase in sewing administrative expenses driven by personnel costs for business development and company-wide IT operations. In addition to higher incentive based compensation and an increase an intangible asset amortization driven in part by the previously announced purchase, a suite of prescription drug monitoring software assets in the current quarter, which we have rebranded as RXGov.

Finally, for the quarter our effective tax rate was 19% down from 30% in the prior year quarter, driven by favorable benefits related to the Tax Cuts and Jobs Act of 2017. This quarter, our tax rate also reflects a release of reserves for unrecognized income tax benefits due to the exploration of the statutes of limitations for certain tax years, and to a lesser extent, an increase in the previously estimated research and development tax credits for 2017 and 2018 tax years, on the filing of our 2017 federal return, which was filed during the current quarter.

Combined these discrete tax items increased earnings per share in the current quarter by approximately $0.02, similar discrete tax items in the prior year quarter also increased earnings per share in that quarter by approximately $0.02.

And with that, I’ll turn the call back over to Harry.

Harry Herington

Thank you, Steve. Strong organic revenue growth in core services, the launch of new services and our strategic vertical focus areas, a new federal contract and continued adoption of Gov2Go, all add up to a solid third quarter for NIC. I am confident we are taking the right steps now to grow our business long into the future.

With that operator, we will now open the call for questions.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] We will take our first question from John Campbell with Stephens. Please go ahead. Your line is open.

Carter Trent

This is Carter Trent taking the place of John Campbell. Congrats for the quarter. On the contract renewal side, you mentioned Maine renewed and then Colorado intended that they were going to renew as well. Are there any significant contracts up for renewal in the near term? And is there any uncertainty about the renewal of any future contract?

Robert Knapp

No, there’s no uncertainty with regards to those. As we’ve talked about before, we playing pretty aggressively 12 and 18 months in advance on those, but other than that I mean there are the normal course of renewals that are coming.

Carter Trent

And also, can you give a quick update on the RXGov Solution? I know you mentioned it briefly, I know there is quite a few prescription drug-related laws in nearly every state. So, it sounds like there is some upside there. Can you talk about expectations for that product and if there is any new wins in the quarter for you guys?

Harry Herington

This is Harry. And please bear with me, I’m having a pharyngitis. Yes, RXGov, we’re extremely excited about that over the past quarters once we’re able to announce that and demonstrate to the states update with our partner states and non-partner states. The solution we had we’ve had tremendous feedback. We know that there is going to be over the next 3 years, upwards have 12 to 15, opportunities coming into bid. And we’re excited about that. And I think the rest is yet to be told.

Operator

We will take our next question from Peter Heckmann from D.A. Davidson. Please go ahead.

Peter Heckmann

Thanks for the update. A couple of smaller follow ups, Steve. Can you give us the total revenue from Texas in the fourth quarter last year just for modeling purposes?

Steve Kovzan

I’m going to happy to get you Peter, I’m not sure that I have it here on my fingertips. Fourth quarter from last year, I want to tell you that it was probably, I want to say that it was probably in the neighborhood of about 20% of our revenue like it had been trending for all of ’17, but I’d have — I don’t have it right in front of me.

Peter Heckmann

I just want to check, if there wasn’t any unusual seasonality in that state.

Steve Kovzan

Still I guess what I would say is Pete, from a seasonality standpoint, most of our states and Texas is no exception there. Most of our states experienced higher seasonality in the fourth quarter due to fewer business days because of the holidays and Texas is not usual in that regard.

Peter Heckmann

And then on the USPA Voice of the Customer, you’d noted about $1.5 million over the next 12 months. Is that a one-time payment or is there also recurring revenue portion of this relationship?

Harry Herington

No, I think that’s really kind of more of a project base fee, which I suspect will, likely from a revenue standpoint will recognize overtime as we expand the efforts on the project. But as of right now, there is no ongoing subscription and over transactional portion for that.

Steve Kovzan

I think Pete for us the exciting point is what Harry referenced in that. This is a more of a broad government initiative. And there will be other agencies looking at this opportunity. And so that’s not only expanding within USDA but then also expanding outside in other agencies. We think there is a good opportunity.

Peter Heckmann

Okay. And then just any follow up on Illinois and the permitting. If I’m remembering correctly, you’ve delivered all of the modules there and you’re recognized all related revenue. Can you have any better idea or thought process around what additional we use it revenues could stand from that relationships?

Steve Kovzan

Yes, Pete, this is Steve, I’ll give the shot first, but we are still in the process of developing and implementing the remaining functionality, and we’ll be doing that over the course of the next 2 months here early ’19. So, we’ve not yet completed that, but we’ll be doing that in a very, very short order. And not to speak for Robert or Harry here, I know we’ve been in regular discussions with the state about other licensing and permitting opportunities beyond the core work we’re doing right now.

Robert Knapp

Yes. I think, Pete what I would say is, as we’ve been developing that initial set of functionality, our team on the ground has been actively talking with Illinois agencies about license types and what will fit within the licensing system and what time frames those will go. And we’re having good conversations both with individual agencies as well as kind of our governance agency of the project.

Operator

[Operator Instructions] There appears to be no questions at this time.

Harry Herington

Okay. Thank you, John. And I’d like to thank everybody who joined us this afternoon. And also like to invite you to join us in February for our fourth quarter earnings call. Thank you everybody.

Operator

That concludes today’s call. You may now disconnect.

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