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NIC (NASDAQ:EGOV)

Q1 2013 Earnings Call

May 06, 2013 4:30 pm ET

Executives

Angela Skinner

Harry H. Herington - Chairman and Chief Executive Officer

Robert W. Knapp - Chief Operating Officer

Stephen M. Kovzan - Chief Financial Officer

Analysts

Brian Kinstlinger - Sidoti & Company, LLC

Lauren Slabaugh - Stephens Inc., Research Division

Peter J. Heckmann - Avondale Partners, LLC, Research Division

Raghavan Sarathy - Dougherty & Company LLC, Research Division

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the NIC's 2013 First Quarter Earnings Conference Call. [Operator Instructions] Today's conference is being recorded, May 6, 2013. I would now like to turn the conference over to the Angela Skinner. Please go ahead.

Angela Skinner

Thank you, Alicia. Good afternoon, everyone, and welcome to NIC's First Quarter Earnings Call. The press release for NIC's first quarter 2013 earnings announcement was issued 30 minutes ago. Our earnings release is also available on our corporate website at www.egov.com/investors. You may call our headquarters at 1 (877) 234-3468 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 presentation 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 these new services; acceptance of eGovernment services by businesses and citizens; competition; the possibility of security breaches through cyber tax; and general economic conditions are 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 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. Welcome to our first quarter earnings call and thank you for joining us today.

As the first quarter of 2013 came to a close, Americans across the country were swept up in March Madness, hoping their college basketball teams would make it to the national championship game. This tournament season was particularly exciting for me as I am both a graduate of Wichita State and University of Kansas. But more than that, I ended this term and season with a greater appreciation for the coaches. They must evaluate their players’ performance and their bad calls by the rest and manage the clock, all in the heat of the moment and adjust the plays they call and the game strategy accordingly. Plus, they have to deal with the critics the next day after the game.

I am in a similar role here at NIC. I'm going to address the recent news coming out of Arizona, Pennsylvania and Washington in a moment. But what I will say now is this: I'm in a unique situation. Few other CEOs have to deal with the amount of transparency into the business process and contract negotiation as I do as CEO of NIC. It stems directly from the success we achieved over the past 20 years, making government more transparent and we've been very successful at accomplishing just that.

So while events unfold that are all in the normal course of business to us, you, analysts, stockholders, et cetera, get a play-by-play look. You have information and access into the process like never before. But even as you watch the plays unfold, you still can't see everything that is happening. It is easy to second-guess when you're not in the huddle or at practice. Sometimes the team makes the shot and sometimes they don't. However, I am confident in the place I am calling "Inside the Huddle" and ultimately the direction this company is headed.

Let's start with Pennsylvania. Operationally, we were off to a good start in our newest portal. Our team in Harrisburg has been busy working on a long list of projects that will establish a strong foundation for the future of online eGovernment services for the commonwealth. We currently have a team of about 1 dozen employees working in Harrisburg now: web developers, creative designers and project managers. Several of these positions were filled during the first quarter and we have several more positions still left to be filled.

Our portal team, as well as members of corporate IT, have already put the post-production environment and other core IT infrastructure components in place that are enabling the development of new online services.

We have a design prototype and roadmap in place for the new pa.gov site and have already launched our first service in Pennsylvania to manage 24/7 customer service support for PA Biz Online, the commonwealth's online business registration system. And this is just the beginning. There's a lot more work to be done as we begin migrating agency websites and building citizen and business-pacing online services, activity which will obviously result in additional capital expenditures and human resource investment over the course of this year and into the future.

In the past few weeks, there has been news circulating about the validity of our contract with the Commonwealth of Pennsylvania and payments owed to NIC for our services in the first quarter, which are currently under review by the commonwealth's Treasurer.

I'll address contract met first. As you know, each procurement law and process are different, state-by-state. And for each state, NIC conducts its own thorough legal review of the situation to make sure we're comfortable that a fair and open procurement process is taking place.

That is exactly what transpired in Pennsylvania. Given the commonwealth's thorough research and legal justification process, including the public comment period during which no issues were raised and no other bids came forward, we were quite comfortable with accepting a sole-source award and negotiate an agreement. I remain very comfortable with the Commonwealth's procurement process today as I was a few months ago when we were awarded the contract.

As for the matter of our payment currently under review with the treasurer, this is an ongoing process, and we are working with the Commonwealth to resolve the matter. In the meantime, our team remains focused on the work we were hired to do, building a new and improved pa.gov, developing the most innovative eGovernment services possible. We are not deterred by the recent ripples in the course of events in Pennsylvania. And we remain committed to advancing transparency within government, even if that means the brightest spotlight to shine on our partners and ultimately on NIC.

Moving on to Maryland. Our Maryland portal is off to a strong start. As our team celebrated its first full year in Annapolis, Governor Martin O'Malley unveiled the new maryland.gov site. The state's Chief Information Officer, Elliott Schlanger called the new site, "Much, much more than a facelift to maryland.gov."

The new site was enhanced by analyzing user searches and feedback, as well as local focus groups that were conducted last year. In the end, the new site takes a mobile-first approach to providing access to information on any device and delivers on the governor's promise to make state government more available, more helpful and more convenient.

And last but not least, our third new portal, Oregon, also had good news to report this quarter. Our Oregon portal was recognized for their work to advance industry through technology. The Business express One-Stop service that was launched last year was recently honored by Computerworld Magazine. This service brings together 9 agencies and provides a single online location for those looking to start, expand or close a business in Oregon. Computerworld claims that Annual Honest Program is the longest-running program honoring individuals and organizations that use information technology to promote positive social economic and educational change. The Oregon Business Xpress service was honored because of its application of technology to meet business needs.

In addition to the good news from our new portals, I also have a few positive developments to report in Virginia. As most of you on this call are aware, NIC is in the process of transitioning out of our contract to Virginia. However, we recently signed an agreement, which allows us to continue operating 1of our larger transaction-based services for the state. We have signed an 18-month agreement with the Department of Game and Inland Fisheries to continue providing the online hunting and fishing license service.

In addition, we are in discussions with the Commonwealth about the potential to manage other large non-DMV services for a period of time after transition. While the overall transition continues, needless to say, I'm excited that we will continue to assist this agency with its eGovernment services.

When I started this call today, I referenced that there are times when things go your way and sometimes, simply put, when they don't. In 2007, NIC signed an agreement with the state of Arizona to migrate a group of legacy services from the existing vendors and to maintain those services going forward for a fixed annual fee. We entered into this agreement acknowledging that it was clearly unique for NIC and last, the ability to self fund via transaction-based revenues.

I vividly recall the conversations back in 2006 that my executive team and I had about pursuing Arizona and whether it was a right deal for NIC. We ultimately decided it was. We saw this as an opportunity to convince the state that our self-funded model was the best path to a sustainable and innovative eGovernment program. Furthermore, we were generally comfortable with the financial profile of the contract, as it provided a steady revenue stream with a fixed annual fee and the opportunity to grow by building new applications via time and material projects.

Yet we recognized that there was an inherent risk that comes with getting paid from appropriated budget dollars and that risk proved real. Recall that following the economic collapse in early 2008, the state reduced our fixed annual fee for baseline services by $1 million due to significant budget shortfalls. Early on, it became quite clear that the current administration was not interested in self-funded model of eGovernment.

And despite our best efforts over the years to transition our model, it did not happen. And I accept full responsibility for that. However, I still believe it was the right decision in 2007 to aggressively try to evolve the administration's thinking that enterprise-wide, self funded eGovernment would benefit the state of Arizona.

During the first quarter, Arizona released a request for proposal, which took an already questionable contract even further away from our core business and significantly increased the financial risk profile. The RFP was not a rebid of the existing contract. The fixed fee baseline funding was eliminated and no award for enterprise-wide portal services was issued. Instead, it appears the state has decided to bring several eGovernment services in-house and to provide for future outsourced IT projects through time and materials funding as the individual statements toward have yet to be identified. In other words, it asks for an antiquated approach to outsourcing IT services, an approach that is completely counter to the efficiencies NIC provides and to what our business is all about.

As a result, and after careful review and consideration, we chose not to respond to the state's RFP. Our current contract at Arizona expires on June 26, 2013, and we are currently working with the state to finalize transition details. Decisions like this are never easy to make. But in the end, I firmly believe that our model of providing centralized outsourced eGovernment service is the best solution for government and for our stockholders.

Our team in Phoenix is committed to be on the best transition partner possible and we appreciate the opportunity to have partnered with the State of Arizona over the past 7 years.

Just like our business in Arizona, our business with the Federal Election Commission generates revenue from a fixed fee and time and materials arrangement under which we maintain the FEC's online campaign expenditure and FX compliant system. You may recall that the FEC's business came to us through an acquisition more than a decade ago. The current contract expires on May 31, and the FEC had recently issued an RFP for the rebid of the contract. Unfortunately, we were just informed that NIC was not selected as the winning bidder. This was not an issue of performance as we had built a strong relationship with the FEC over the years, but rather we understand it was an issue of price. We believe we were not selected mainly as a result of our higher-priced bid. We submitted a bid with margins acceptable to us, and were not willing to play the low-bid game to win work, given that this contract was already our lowest margin piece of business.

With revenues steadily dwindling in recent years due to federal budget issues, FEC revenues approximated only 1/2 of 1% of our total revenues in the first quarter. While we are disappointed with the outcome, we will not pursue work that does not produce returns acceptable to us and ultimately, our shareholders. We are honored to have partnered with the FEC for more than a decade and in typical NIC fashion, we will put our best foot forward to assist our partner with this transition.

Before I move on, I want to assure you that we remain laser-focused on creating new federal opportunities that align with our growth and product margin standards in our core vision of delivering efficient eGovernment services with transaction-based alternative funding models. I am pleased with the progress we are making to educate various federal agencies about NIC and our ability to deliver services through our no-cost model. The federal market is a tremendous long-term growth opportunity for NIC. And I look forward to sharing more about our ongoing strategy to grow our federal business tomorrow at our Annual Stockholder Meeting. But for now, I'll hold my gunpowder. And how's that for a teaser? Seriously, we hope you will listen to the call tomorrow or join us in person at The Oread hotel in Lawrence, Kansas.

Moving on to a positive development, on the new state RFP front, it was good to see this quarter that another state government is interested in our model. Louisiana joins the ranks of several other states that have recently issued RFPs to pursue enterprise-wide, self-funded eGovernment services. In fact, Louisiana becomes the fourth state to issue an RFP over the past year, joining Washington, Wisconsin and Connecticut. In Washington, it has been reported that the state is still in the process of identifying the appropriate initial funding mechanism for their enterprise-wide eGovernment portal. It should also be noted that key legislators from the state are on record supporting this initiative.

As both Louisiana and Washington are open procurement, that is all I'm going to say about these opportunities. One additional housekeeping note on the procurement front. This one on the rebid of an existing contract, the State of Iowa, our partner since 1997, recently issued an RFP for a rebid of its portal and eGovernment services. The RFP was subsequently canceled. However, we currently anticipate a new RFP being issued at a procurement process continuing at a later time.

With that, I'll turn the call over to Robert Knapp, NIC's Chief Operating Officer, for additional operational highlights.

Robert W. Knapp

Thank you, Harry. We are often asked if NIC's business is susceptible to macroeconomic trends and in many respects, the answer is no. We believe that the eGovernment services we provide and the no-cost model through which we provide them are as viable during good times of government budget surplus as they are during down periods of budget deficits.

That being said, there are times when our business experiences a surge in transaction activity based on current events. Recently, there has been a lot of discussion about gun control laws, background checks and the like. And there's hardly a local media outlet that isn't reporting about a spike in concealed carry classes and permits.

A quick Google search will pull up articles on this topic from Jacksonville, Florida to Portland Oregon and just about every town in between. In fact, Forbes recently reported that more than 12% of all adults ages 20 and older in the State of Georgia have an active concealed carry permit. This is one example of current events increasing business at NIC. In fact, of the states where we provide online concealed carry permits, Texas, Arkansas, Utah and Idaho, the number of transactions are up 90% over this same time last year and 3 more portals are set to launch online concealed carry permit services this year. While NIC definitely isn't taking sides on the gun-control matter or advocating for every American adult to obtain a concealed carry permit, it is relevant to note that from time-to-time, current events can affect NIC's business.

I also like hearing from our portals when we were using technology to set new industry standards. This quarter in Oklahoma our team launched a new service for the Oklahoma Board of Medical Licensure and Supervision. This first of its kind service incorporates QR codes on the medical licenses of physicians and other medical professionals. All newly issued or renewed physician licenses in Oklahoma will now be printed with a QR code in the lower right-hand corner, and scanning the code with your smartphone will provide instant access to the physicians' information page as it appears on the medical board's website. This information includes data such as the doctor's education, medical specialty, board certification, office address and more. This new service will provide peace of mind to patients that their physician not only has a current license, but by scanning the QR code, patients can learn additional information on the spot about the medical professional who is providing the care.

One of the most satisfying things about working at NIC is knowing that the online government services we develop are changing lives, sometimes in big ways and other times just providing a small convenience to an interaction with government. This quarter in Montana, our portal is doing its part to help combat the epidemic of prescription drug abuse. More people die in Montana each year from abusing prescription drugs than from meth, heroin and cocaine overdoses combined.

In fact, a Helena TV station recently reported that one person dies each day in Montana due to a prescription drug overdose. To help control the abuse of doctor shopping for prescription medication, our team in Helena worked with their partner to create the Montana Prescription Drug Registry that contains data on all controlled substances prescribed to citizens. More than 95% of all pharmacies in the state have loaded more than 2.6 million pieces of prescription information into the database and nearly 20,000 patient searches have been conducted by authorized physicians and pharmacists.

Montana's governor, Steve Bullock was recently reported as saying, "I heard from doctors who say this is making a difference." It is encouraging to see our online service saving lives and helping to keep prescription drugs out of the hands of individuals trying the abuse the system.

As we develop more innovative online eGovernment services, it goes without saying that they must be accessible from a mobile device. Everyone knows that searching online via mobile device continues to rise. ComScore recently released a study that shows just how prevalent mobile devices have become. The study says that out of all Internet searches via mobile device, 77% of them occur in a location that is likely to have a PC available. In just a short amount of time, the world has changed to where people would now rather search online via mobile device rather than a desktop computer or laptop.

NIC has prepared its partners to respond to this trend. 92% of all NIC partners’ sites are mobile enabled, while just 31% of non-NIC states are. Along those lines, NIC continues to develop more solutions to keep pace with the rapid evolution of mobile payments. In Arkansas, our team built a new mobile payment solution for the Arkansas governor's mansion. This new solution allows the mansion staff members to use their iPhone or iPad to accept a payment from anywhere within the mansion for things like book sales, event tickets and donations.

Arkansas First Lady Ginger Beebe had the app installed on her phone and she intends to use it to sell the mansion history book at meetings and speaking engagements across the state.

Finally, I'll close with those partners who continue to place their confidence in NIC during the first quarter. The state of Kansas signed a 1-year extension taking its contract through December 2014. Nebraska signed a 2-year extension renewing its contract through January 2016. In addition, Kentucky signed a 1-year renewal extending its contract through August 2014. And the Federal Motor Carrier Safety Administration signed a 1-year renewal extension, taking its contract to February 2014. Thank you to our partners in Kansas, Nebraska, Kentucky and the Federal Motor Carrier Safety Administration for renewing your agreements with us. We appreciate your partnerships and look forward to delivering the very best in eGovernment innovation in the months and years to come.

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. I was quite pleased with NIC's results for the first quarter of 2013. The company earned $0.15 per share with total revenues growing a healthy 26% to a record $61.2 million. This compares to earnings per share of $0.09 and total revenues of $48.7 million in the prior-year quarter.

Before I get into the details of the quarter, I want to point out a few components of our income tax provision that effect the comparability of results between quarters.

First, our effective tax rate for the current quarter decreased to 37% from 42% the prior-year quarter. The lower rate relates to a couple of factors including state taxes due to a change in apportionment methodology for certain states and a favorable benefit related to the Federal Research and Development Tax Credit, totaling approximately $400,000 for the 2012 tax year and $100,000 for the first quarter of 2013. In total, the benefit from the R&D tax credit on EPS for the quarter was about $0.01.

We recognized no benefit from the R&D credit in the first quarter of 2012 because legislation extending the tax credit through 2013 was just signed into law during the first quarter of 2013. For the year, we still expect our effective tax rate to approach 40%.

Now onto the highlights of the quarter. Quarterly portal revenues were a record $58 million, up 27% over the prior-year quarter, driven by strong revenue growth from new state portals in Oregon, Maryland and Pennsylvania and from new services in our Texas and New Jersey portals, among others.

Total same-state portal revenues grew a healthy 16% for the quarter. A quick side note on same-state revenues. We included Virginia in the same-state bucket this quarter because we continue to manage the majority of legacy services. Revenues in Virginia again approximated 2% of total consolidated revenues for the quarter. However, we currently expect revenues in Virginia to gradually wind down over the course of the transition period. And we will likely remove Virginia from the same-state bucket when quarterly revenues in Virginia decline more substantially.

Breaking down the components of same-state revenue growth. Same-state non-DMV transactional revenues, the growth engine of our business, were up an impressive 35% from the prior-year quarter, driven by the Texas Motor Vehicle Inspection Service launched in September 2012 that is part of the DPS Direct suite of services, which generated approximately $3.5 million of revenue for the quarter; and outstanding growth from several non-DMV services in New Jersey. Revenues in New Jersey exceeded $2 million for the quarter on non-DMV services alone. Same-state DMV transactional revenues increased 2% this quarter and same-state portal management revenues were up 9% from the prior-year quarter, due mainly to the increase in Delaware's annual fixed fee from $1.3 million to $2 million beginning in the fourth quarter of 2012 as we discussed on last quarter's call.

Finally, same-state time and materials revenue was the only category of portal revenue to decrease this quarter, down 30% from the prior-year quarter due primarily to the expiration of certain Texas Master Work Order projects in 2012 as we have previously discussed.

Moving on to our newer portals. Current quarter revenues from Oregon, Maryland and Pennsylvania were a combined $5.1 million with current quarter cost of portal revenues for these portals totaling $1.9 million. This compares to no revenues and $1.8 million of start-up costs for the Oregon and Maryland portals in the prior-year quarter. Nearly $0.75 million of start-up costs in Oregon were nonrecurring in the prior-year quarter. Clearly, new portals were the major contributor to the notable increase in our portal gross profit percentage for the quarter, which was 44%, up from 37% in the prior-year quarter. However, as Harry just mentioned in his remarks, we continue to expand our presence in new portals today, particularly in Pennsylvania, where we expect to see increased capital expenditures and staffing levels over the course of this year, which will increase costs and temper profit margin.

Finally, operating income for the quarter increased by a healthy 62%, resulting in a 26% operating margin, up from 20% in the prior-year quarter, driven mainly by the higher portal gross profit percentage for the quarter, which again we currently expect will moderate over the remainder of the year.

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

Harry H. Herington

Thank you, Steve. As you heard today, we are off to a strong start for the year, and I am pleased with the momentum of self-funded eGovernment that continues to spread across the country. With that, Alicia, we'll open up the call for questions.

Question-and-Answer Session

Operator

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

Brian Kinstlinger - Sidoti & Company, LLC

I'm curious if there's any other proposals that you expect you'll not bid on as contracts expire, particularly, I think the only contract that is left that is not self-funded is Indiana, and correct me if I'm wrong. And just give us a sense of that if you could?

Harry H. Herington

Well, since there's nothing else that I could look at it, it makes it kind of difficult to forecast that. But I will tell you, I don't have any concerns currently. You got to remember Arizona was unique. Arizona was unique when -- we had a debate even whether we were going to bid on the first contract, as I stated in my remarks. So no, I am not anticipating any type of any of our existing contracts is going to be any different.

Brian Kinstlinger - Sidoti & Company, LLC

Okay. And then I'm not commenting on Washington getting a contract or anything like that. I’m curious, if it means going to a process like the one that was in New Jersey that I think was a little bit more painful than some of your other states, is that still something that you would pursue? Or is it something you're not sure you're going to pursue down the road?

Harry H. Herington

I would say that it's still early in Washington and the comments I made earlier about having a unique perspective of the coaches really come in here. We dealt with situations in the past that funding -- this comes -- is very common to deal with things like this. We're working with the state right now to identify various funding opportunities and alternatives for us. The New Jersey could be one of those options but it's too early in the process to say what's going to work best for the state of Washington. Just know that I feel very confident there.

Brian Kinstlinger - Sidoti & Company, LLC

Okay. I'm just going to ask 1 piece in the federal end and then I’ll get in and ask some more in the back of the queue. But can you just speak to the size of your dedicated federal team? And then do you think you have enough resources in the strategy in place? Is the right strategy, sorry, in place for that market right now?

Harry H. Herington

I'll go in reverse order. Do I have the right strategy in place? Absolutely, I feel like I've got the right strategy in place. Beyond the -- well, I've gone anywhere from 10 to 20 when you look at those fully dedicated, as well as those that are partially dedicated to the federal space, plus I've hired a couple of different firms in Washington, D.C. that gives us not only access into the agencies and legislators but also into the marketing area arena of Washington, D.C. We are -- and you are going to hear more and more. I'm not going to steal my thunder for tomorrow. I am very comfortable where we are in the process. I told everyone when we started down on the federal path: Be patient because we not only have to educate everyone but in some cases, we got to change the law. Or we got to change regulations. Or we got to change the mindset. And I am very comfortable with where we're at, where we're investing and the people I have handpicked to lead that charge.

Operator

Our next question comes from line of Carter Malloy with Stephens.

Lauren Slabaugh - Stephens Inc., Research Division

This is Lauren Slabaugh for Carter. A quick question on the FEC costs. It looks like you guys are still spending a good bid of money on that. Could you give us an update on where that process is and if we should expect to see any resolution anytime soon?

Harry H. Herington

I'll jump in there because this is a matter that deals with, Steve, costs and the FEC. Accounting still stands 100% behind, Steve, and the matter that's before the FEC. It's really hard to forecast where we're at, or where it's going. The nice thing is we are being reimbursed by the insurance, our insurance. So there really isn't a cost to us or minimal cost to us. It sort of becomes lumpy coming and going. I personally hope that the fee hope [ph] is coming, this will be resolved quickly as possible.

Lauren Slabaugh - Stephens Inc., Research Division

Okay. That's good to hear. And then just quickly, is there any more color you can give us on the Louisiana RFP? Just in terms of timing or size or anything more than you've already said?

Harry H. Herington

No. It's always difficult for me to speak to an open procurement. I can't really get into the themes of Louisiana. I mean, it's a good opportunity that just came out. The only thing I will say and that's a little bit different, and these things happen, is that they've got a 12-month pilot and evaluation period. That doesn't make me nervous. That's not different than other places that we've dealt with. But beyond that, it appears to be a solid self-funded eGovernment enterprise-wide portal.

Operator

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

Peter J. Heckmann - Avondale Partners, LLC, Research Division

Follow-up question on Pennsylvania. You talked about the -- well, looking at the revenue from the 3 new states, Oregon, Maryland, Pennsylvania at $5.1 million with related costs of $1.9 million, which as you suggest those new states coming through at mid-60s type gross margins, I guess what I heard from some of the articles I read is regarding Pennsylvania, is that, that contract restructured a little bit differently upfront. And that the state was making some hard dollar payments to NIC in order to expedite the conversion of the portal. And if so can you confirm you're not at this point adding a fee onto drivers license records and that's going to start resolving [ph] first?

Harry H. Herington

Well, a couple of things, Pete. Number one, I'm not going to comment on your margin thing. That's a little out of left field and nothing I'm going to speak to. As far as the payments from the state of Pennsylvania, Pennsylvania was a unique contract, it is a unique contract. They we're very excited to kick start some improvements on their state web portal and move into a transition from that into a total -- a true self-funded model, and it's going well. I'm comfortable with where we're at in Pennsylvania.

Peter J. Heckmann - Avondale Partners, LLC, Research Division

Okay. But I guess the way that -- one of the issues is that and several articles have said 1.7, 2.2, 2.6 [ph]. Whatever the amount of money that the question here is, is that there are some fees that are occurring that are not transaction-based prior to the full launch of the portal on July 1.

Harry H. Herington

That is absolutely the case. There are some we are anticipating that's transition out through July. Okay?

Peter J. Heckmann - Avondale Partners, LLC, Research Division

Okay. That's helpful. And then as regards the FEC contracts, so should we expect that the revenue related to that relationship will go to 0 in June or July this year? Is that how should model it?

Harry H. Herington

We're transitioning out. Our contract is over. If I was to model it, that's probably how I'd model it. You've got to keep in mind we were just notified, so we haven’t even had any conversations with them. I just want to be as -- come out and be as forefront as I could with everyone. But our contract is up May 31.

Peter J. Heckmann - Avondale Partners, LLC, Research Division

Got it. Got it. And then last question, I'll get back to the queue. Same-state DMV revenues was up 2%. It's a little bit better than trend. Was there any unique item that may have contributed to that?

Stephen M. Kovzan

I don't think so, Pete. I don't think there was anything that around the table here we could point to in terms of why it was up 2% this quarter versus some of the more flat performance we've seen recently.

Operator

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

Raghavan Sarathy - Dougherty & Company LLC, Research Division

First in Arizona. You said that you decided not to bid. Can you talk about the margin profile of that state? And then will there be any sort of transition revenue after middle of this year or is -- or should we assume that it would go to the year?

Harry H. Herington

Yes. Hold on. Could you repeat the second half your question, again, Raghavan? You kind of tailed off at the end there.

Raghavan Sarathy - Dougherty & Company LLC, Research Division

I'm sorry. So once -- you're not bidding so once the contract expires in June, will there be any sort of transition revenue from Arizona? Or should we assume just that’s going to 0, the revenue contribution from Arizona?

Stephen M. Kovzan

Yes. We're in discussions with the state right now about what transition was going to look like. But I think we probably anticipate there will be something beyond June. We're just not sure what that is and are not in position to provide any guidance and we won't comment on the margin -- on the individual margin of the state.

Raghavan Sarathy - Dougherty & Company LLC, Research Division

Okay. And then maybe this is for Harry. You talked about Iowa canceling the RFP and restarting. So in the meantime, should we expect revenue from Iowa? And then second part of it, can you talk about why didn't Iowa make a long-term commitment, since it seems like you are really the only viable platform provider there.

Harry H. Herington

Well, I appreciate that as a compliment at the end. As far as revenue, it's business as normal right now in Iowa. And that's what everybody needs to understand. Again, this is common for us. We're just sort of in a unique position that the more transparent everything has become, the more you get to see. In Iowa, I can't speak to why they chose to change the RFP. It could have been anything. They could have looked under their criminal legal clause that one of the attorneys saw. There could have been a financial component to it that wasn't worded properly. It's really -- we're unable to speak to why they looked at it and said, you know what, we need to cancel this and we need to basically reissue it down the road. I have a great relationship with the partner in Iowa. I have a strong team there. We've been there for a while. So this is just sort of a normal course of business.

Stephen M. Kovzan

And just to confirm. Yes, we will continue to operate there and recognize revenue and operate under the contract as we have been.

Raghavan Sarathy - Dougherty & Company LLC, Research Division

But your contract expired in March, right? So has there been extension?

Harry H. Herington

No. We got an extension.

Robert W. Knapp

Yes. I think were some type of extension.

Harry H. Herington

Like a 6-month extension.

Raghavan Sarathy - Dougherty & Company LLC, Research Division

And then just 2 final questions. So Harry, again, you said kind of your looking at different things in Washington funding. So clearly, the -- they'll be introduced the provision in the transportation bill that precludes Washington raising the fees. Would you look at something like fixed fee in Washington, just like you did in maybe in Delaware? Or you still very optimistic that you can still go to transaction model here?

Harry H. Herington

I expect there to be a transaction model. What happened in Washington was very focused and what they took off the table was the DMV component. But at the same time, there are other funding mechanisms that you identified. It could be some type of blending of fixed fee. It could be – we could look for another pure transaction-base. It's too early to tell. We are in the process of dealing with them, negotiating with them and identifying what the right solution is.

Raghavan Sarathy - Dougherty & Company LLC, Research Division

Is -- and maybe I didn't ask the question right. Is the DMV transaction off the table?

Harry H. Herington

The specific one right now for DMV abstract lookups is off the table by legislation. That does not take DMV, other type of DMV services away from us.

Raghavan Sarathy - Dougherty & Company LLC, Research Division

Okay. And then so one final question. This is for Steve. So it looks like the new portals are doing better than what you anticipated. I know you give us the composite number and at the beginning of the year, you gave us sort of expectations on Oregon, Maryland and Pennsylvania. Can you kind of update us on what was the revenue contribution from these states individually? And then like if the portal margin was 62% from these 3 states and you talked about increased investments maybe starting second quarter, how should we think about the margins from these 3 states?

Harry H. Herington

I'm going to jump in first, it's Harry. And then I'm going to let Steve jump in. Number one, because of the transparency that has happened with us and because of the various entities that we have to deal with, we are doing a blended. We're not going to go in state-by-state. This is very common to what we do with our same-state where we give those numbers as well as -- and then say, we're just going to follow that. The -- we have different states that perform at different rates, okay? And some of the margins get higher than others early on. And then they all flatten out, it just depends on how quickly we can hire individuals, how quickly we can invest in technology. So it’s -- you really can't just make that stretch and say, "Which one is doing better than the other?" It really depends on almost the day of the week.

Stephen M. Kovzan

Yes. I guess what I would say, Rag, that in general, yes, those 3 states are performing a little bit better than our initial guidance and initial expectations but it's early in the year. We've just gone through a quarter so we'll see how these states play out the rest of the year. And yes, we will be spending more money in these states, particularly in Pennsylvania where we'll be ramping our headcount and our CapEx. So it should temper our margins in future quarters.

Raghavan Sarathy - Dougherty & Company LLC, Research Division

And is there any thoughts on how we should think about modeling? Should we assume corporate average in order to be conservative?

Harry H. Herington

Yes, I mean and again, we provided general guidance in terms of where we think portal margins are going to be for the year for the consolidated company. And we certainly, were running a little bit better than that here in the first quarter. But margins should temper for the rest of the year.

Stephen M. Kovzan

And it's nice. Part of the thing is when you have this many opportunities that we're doing all at once, we're able to leverage them efficiencies that help us.

Operator

[Operator Instructions] And our next question comes from the line of Brian Kinstlinger with Sidoti & Company.

Brian Kinstlinger - Sidoti & Company, LLC

Yes. Steve, I may have missed this. But what did you say the portal margins would be tempered to by the end of the year? You said that was rough guidance on that? I missed that.

Stephen M. Kovzan

Yes. I think what I was saying is that our guidance for the year for overall portal margins would be in the upper 30% range. So again, it's earlier in the year and we expect our margins to be a bit lower than what you've seen this quarter.

Brian Kinstlinger - Sidoti & Company, LLC

And did you update your guidance or is it still the same with all the puts and takes going on right now?

Stephen M. Kovzan

We've not changed our guidance from what we issued last quarter.

Brian Kinstlinger - Sidoti & Company, LLC

In terms of Pennsylvania, have they taken more applications since the objections were raised to the contract? And can you tell us how many total revenue generating applications you have there?

Harry H. Herington

Pennsylvania is business as normal. That's what I want to say about that because we never get into the actual, hey we’ve specifically launched this, this and this. We sometimes talk about the high level. Pennsylvania is businesses normal. We have got a team on the ground. I'm hiring additional individuals as we identify the resource that we need. We've made the investment and continue to make the investment in the capital expenditures. So I mean, Pennsylvania is normal.

Brian Kinstlinger - Sidoti & Company, LLC

Okay. And Virginia, the -- can you go over the numbers you expect on the retain work when the contract expired? And my question also is, are you still doing a DMV records work there and do you expect that's going to end?

Stephen M. Kovzan

We are still maintaining the driver record service for the state and we're still managing the majority of the services that we've historically managed. So we essentially, for this quarter, for the first quarter of 2013, saw relatively full run rate quarter of revenue and that should be tapering off over the course of the year. We will see some ongoing revenue from the Department of Game and Inland Fishery. It's one of our largest non-DMV services that we have there. So there will be some revenue ongoing beyond August 31 of this year when the transition period ends.

Brian Kinstlinger - Sidoti & Company, LLC

And then one last question on the federal side. You have that one large contract and I'm curious with all the pricing pressure going on in the industry overall in defense and then seeing that this 1 contract is one based on price, are you concerned about other renewals in your federal practice?

Harry H. Herington

No. This is Harry and keep in mind that the FEC was a extremely low-margin piece of business that I don't know if I would've chased had I not acquired it when I acquired other business. And it just got -- that margin got lower and lower as time went on because of budget crunch. And that’s why I say and I continue to say, we're not going to chase your traditional opportunity at federal space. We're going to create NIC transaction-based type of opportunities. I'm not worried about what's happening in the federal space with their existing DOT contract, and where we’re at, nor with everything I see out in front of me.

Stephen M. Kovzan

Yes. Again, I guess the one thing that I would add is that the types of opportunities that we're trying to create are not like what we currently have with the FEC. They are more like what we currently have with the DOT where there are no cost contracts to our partners and they're funded by the users of the service.

Brian Kinstlinger - Sidoti & Company, LLC

Last question I have. I've asked you guys this before and I don't want to steal your thunder for tomorrow by any means. But on the acquisition front, on the federal side, is it something you're contemplating at all? And if so, do you want to see how the business is growing out with your own people? Just give us a sense on that, please.

Harry H. Herington

Well, I will say one thing. I'm not announcing an acquisition tomorrow so you’re not stealing any thunder for me, although that would be interesting. Now here's the deal. An acquisition's absolutely on the table. Partnerships with somebody that's got a business there, where I can go in and either take them on as an alliance or something. Absolutely on the table. We are evaluating everything. As we look through, and as long as it goes to our strength, okay? That’s all I wanted to say that's off the table. But it's nothing that we've come out and said, hey, this is the path. But when there is no company that grow by acquisition or try to sell things by acquisition, NIC doesn't do that.

Brian Kinstlinger - Sidoti & Company, LLC

Right. I was only thinking in terms of building the relationships that maybe you don't have on the federal side. That's a different whole procurement process.

Harry H. Herington

Yes. If we found the right one at the right price that -- where their culture was similar to us and they gave us the inroads that we could build those relationships and get in and come up with the transaction-based services, if you've got somebody, I'd love to see them.

Operator

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

Raghavan Sarathy - Dougherty & Company LLC, Research Division

Just a quick follow-up on Virginia so that I understand this right. So you are migrating some of the services out and then when you said you signed a contract -- 18-month contract with game and licensing. Is that a non-DMV service that you already provide and you're kind of calling that out? And also, what sort of revenue are you generating from that service?

Harry H. Herington

Rag, yes. It is a service that we are currently providing. It's a service that we are in excess of $0.5 million a year on -- it's one of our largest non-DMV services that we have in Virginia.

Operator

I'm showing no further questions in the queue at this time. I'd like to turn the call back to you, Mr. Harrington, for final remarks.

Harry H. Herington

Thank you, Alicia. As I started this call, I'm going to end it similar. The past few weeks have really reminded me: I'm in a unique situation. Due to the fact that I only deal with government, I'm where few other CIOs -- CEOs are and that's amount of transparency to my business process and contract negotiation. I want to tell you I'm very confident in where we're at, what we're dealing with, we've dealt with in the past. This does not cause me any concern. You're going to hear tomorrow how excited I am about our business, where we've come from, where we're going. I want to thank everyone that joined us this afternoon. I'm really hoping to speak with you tomorrow during our 2013 Annual Stockholder Meeting. If you're not local, please join us on the webcast by visiting the Investors page at our website at egov.com. If you are local, please join us at The Oread hotel at the heart of University of Kansas campus in Lawrence, Kansas. Thank you, everyone, and I'll speak with you soon.

Operator

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

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