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Executives

Angela Skinner - Director, Investor Relations

Harry H. Herington - Chairman and Chief Executive Officer

Robert W. Knapp - Chief Operating Officer

Stephen M. Kovzan - Chief Financial Officer

Analysts

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

Saliq Khan - Imperial Capital, LLC

Raghavan Sarathy - Dougherty & Company LLC, Research Division

John Campbell - Stephens Inc., Research Division

Brian Kinstlinger - Sidoti & Company, LLC

Gary F. Prestopino - Barrington Research Associates, Inc., Research Division

NIC (EGOV) Q4 2013 Earnings Call February 6, 2014 4:30 PM ET

Operator

Good day, ladies and gentlemen, and thank you for standing by. Welcome the NIC's 2013 Fourth Quarter Earnings Announcement. [Operator Instructions] This conference is being recorded today, Thursday, February 6, 2014.

And I would now like to turn the conference over to Angela David, Director of Investor Relations. Please go ahead.

Angela Skinner

Thank you, Claudia. Good afternoon, everyone, and welcome the NIC's fourth quarter earnings call. The press release for NIC's fourth quarter 2013 earnings announcement was issued 30 minutes ago. Our earnings release is also available on our corporate website at egov.com/investors. You may also call our headquarters at 1 (877) 234-3468, 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 and statements regarding continued implementation of NIC's business model and its development of new products and services.

Forward-looking statements are subject to inherent risks and uncertainties, and there can be no assurance that such statements will prove to be correct. There are a number of important factors that could cause actual results to differ materially from those suggested or indicated by such forward-looking statements. These include, among others, NIC's ability to successfully integrate into its operations recently awarded eGovernment contracts; NIC's ability to implement its new portal contracts 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 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; general economic conditions; and 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, and in subsequent periodic reports filed with the SEC. Any forward-looking statements made in this release speak only as of the date of this release. 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 fourth quarter earnings call, and thank you for joining us today. They say that good things come to those who wait. I, for one, definitely believe in patience. I also believe in taking action. To excel requires the right combination of knowing when to be patient and when to take action to produce the best result. Take for example the SEC matter that was put to rest last quarter. Our CFO, Steve Kovzan, and the NIC were put in a difficult position. Balancing the harm to his livelihood of not contesting the government's contention versus personally shouldering the middle pressure as he fought for what he believes to be right. Steve believes the confessions that the SEC demanded of him were too costly for him to consider settling. Steve maintained throughout his ordeal that he has done nothing wrong and stood firm. The great news, is Steve was 100% vindicated and won on all of the SEC claims. I am very proud of Steve, and the courage he demonstrated throughout this process.

The stress of dealing with these claims affected Steve and his family. But he stood firm for what he believed was right and was victorious. Everyone at NIC is pleased to have this behind us. So again, the great news, it's over.

However, this victory came with a price. In the fourth quarter, we exceeded our insurance coverage for this matter by approximately $2.5 million. Steve will talk about how costs related to this matter affected earnings last quarter. In the meantime, let me just say that it'll be a very rare occurrence in the future whenever I mention again the quote "previously disclosed SEC matter."

That wasn't the only good news to come NIC's way recently. More than 18 months after issuing its RFP, the State of Connecticut recently joined the NIC family of state partners. The state signed a 3-year agreement with renewal terms that they can exercise to extend the contract through 2020. In his announcement about the new partnership, Connecticut's Governor, Dannel Malloy focused on modernization. He said, "We're going to modernize the way state government interacts with its citizens and put a process in place that will ensure the state's online presence continues to keep up with technology changes". We're happy to help you achieve this goal, Governor.

In addition to redesigning the state's official website, ct.gov, our team in Hartford is already working on a new business portal. Special thanks to Governor Malloy, and all of our new partners in Connecticut for placing their confidence in NIC.

I know together we will not only modernize the state's online presence, but help it become one of the leading eGovernment forces in the country. One of the first items, the state wants to focus on is creating a one-stop business portal. Several NIC partners have launched versions of what we call Business One-Stop. In this quarter, we received data on just how important these types of services are to business. The University of Utah surveyed nearly 1,500 businesses across Arkansas, Indiana and Kansas about the importance of efficient eGovernment services in running a successful business. Nearly all, 96% of the businesses surveyed in these 3 NIC partnered states, said the business to government online services their states provide saves them time. 94% said the services were reliable and 92% said the services were easy to use. Even better, nearly every business said they preferred to do business online with the state rather than in person or paper form of interaction. And 82% said good eGovernment services reinforce the perception that the state is pro-business. Remember, about 75% of all online government services that NIC built are business-to-government services, and we will continue to work with our partners to do all we can to make business interactions with government as efficient as possible.

Speaking of business, 2013 was a very good year for our business. As we had Wisconsin as a partner, got our Pennsylvania portal up and running, launched 41 new mobile applications and hundreds of new eGovernment services, and securely processed $25 billion in payments on behalf of our government partners. In addition, for the year, total same-state portal revenues were up 14%, significantly higher than our 8% to 10% historical average. This is driven by a phenomenal 27% increase in same-state non-DMV revenues and a 5% increase in same-state DMV revenues.

For DMV, this was a level of growth we have not seen in many years. All in all, we exceeded the high end of our revenue and earnings guidance. Our patience in constructing the right contracts, services and partnerships, combined with timely action in concert with our partners propelled us along our path of growth and success.

One last thing, as I wrap up my remarks, I've been telling stockholders to be patient as we work to secure our second self-funded contract with the federal government. I've also told you that I will be as transparent as possible along the way about how things are progressing. Today, we will have updates to share with you, and I'm pleased to report we are gaining traction in the federal arena.

I'll let Robert share the details, but I will close by saying I am very pleased with the progress. And with that, I'll turn the call over to Robert Knapp, NIC's Chief Operating Officer, to tell you all about it.

Robert W. Knapp

Thank you, Harry. Harry's absolutely right. Our success is a balance of being patient and taking action. We continue to work hard to create a new federal government business opportunity. The results of those efforts have not always been evident, but I assure you a lot of work has been and continues to be underway. As Harry said, today, I have some encouraging updates to share.

First, in mid-January, the Omnibus Appropriations bill was passed by both the U.S. House of Representative and the Senate. This single piece of legislation covers the entire federal discretionary budget for fiscal 2014. NIC worked tirelessly in support of language in this bill, that will help advance our business development efforts in Washington D.C. Our efforts were successful and the provisions authorized by Congress encouraged the consideration of self-funded or no-cost transaction based funding for various federal projects.

This development are very positive and removes certain barriers that we were encountering. I would like to thank our federal team in D.C. for their hard work on the Omnibus Appropriations bill. Additionally, we believe other federal opportunities are reaching key milestones. Earlier this month, one agency published a final rule about a new federal transaction based system, allowing the agency to make progress towards a procurement. In addition, a second agency was also authorized through the Omnibus language to charge transaction fees as part of a new electronic system. And third, we expect a proposed rulemaking notice on another transaction based opportunity to be published imminently. These results may not seem monumental, but in the -- the larger scheme of working through the federal procurement process, they are significant. These are just a few recent examples of the good work underway and they are paving the way for more good things to come.

Nearly 4 years ago, we secured our first self-funded business with the federal government. Since May 2010, we have managed the pre-employment screening program for the U.S. Department of Transportation, Federal Motor Carrier Safety Administration, a service that provides instant and secure access to commercial driver safety information, including crash and inspection data.

During the fourth quarter of 2013, our partners at the FMCSA released a study that analyzed carriers that use the pre-employment screening program on at least a monthly basis when hiring new truck drivers against the control group of carriers that do not use the service. The results, trucking companies use PSP on an average -- trucking companies using PSP on an average had an 8% lower crash rate and a 17% lower driver out-of-service rate than those that did not use the service. In fact, the study found that carriers using PSP prevented nearly 3,600 truck drivers from being placed out of service at roadside law-enforcement stops, and prevented nearly 900 commercial motor vehicle crash occurrences in the 12 months of the study. Those are amazing statistics, not only is this service helping trucking companies make better hiring decisions, it is saving lives, one safe driver at a time.

Switching topics. Did you know that every year, more people go fishing than visit Disney World, or that there are nearly 14 million hunters in America. It's true. Hunting and fishing are big business, particularly in Wisconsin. Outdoor Life Magazine named Appleton, Wisconsin the #1 best hunting and fishing town in the United States. And the state has also been ranked as the #1 trophy, Whitetail Deer state in the country. In addition, Wisconsin ranked second among the 50 states for the most resident and nonresident hunters. What does all this mean for NIC? Well, we are proud to announce that we recently signed an agreement with the Wisconsin Department of Natural Resources to take over and rebuild the state's hunting and fishing license services. This agreement extends beyond our master portal contract with the state and runs through May of 2021.

In addition to hunting and fishing licenses, we will support applications, draws, harvest registrations, commercial licensing, recreational, vehicle renewals, snowmobile passes and kiosks. Steve will talk in more detail about what this means financially for NIC, but we have a specialized and dedicated team in Madison developing a comprehensive, best-in-class service. It is a complex undertaking and the hunting and fishing licensing component will not be piloted until the fall of 2015, with the full launch in 2016. Even so, we are excited about this opportunity and the long-term growth it will generate. And that's not all that is happening in Wisconsin. In just 7 months since we established the portal, our Wisconsin team and their partners launched 9 new eGovernment services, including 2 mobile applications. Our team is also managing the customer service efforts for 1 Wisconsin state agency, that has more than 3,500 customers. Needless to say, we are off to a strong start in Wisconsin and I know 2014 will be a big year for our team there.

Overall, we had a tremendously successful year that exceeded our expectations. 2013 was one of the best years in our company's history. We have new employees developing great eGovernment services in Harrisburg, Pennsylvania and Madison, Wisconsin.

NIC's portals once again took 9 of the top 10 spots in the Best of the Web contest, and we launched 41 new mobile applications and hundreds of new online government services. Better yet, those new services and apps delivered efficiency, convenience and security, one transaction at a time.

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. First, let me begin by thanking NIC's Board of Directors and my fellow employees for their unwavering support throughout my battle with the SEC. I would also like to thank all of you on this call, our analysts and stockholders, for your support and words of encouragement over the past 3 years. And finally, I'd like to give a big shout out to my legal team from the WilmerHale Firm in Washington D.C. and the Dentons Firm, here in Kansas City. We fought the battle, we won the battle and it's over. Again, thank you, to everyone who stood by me. I'm forever grateful for your support.

Now onto the business at hand. First, let's begin with a couple of non-core items and a minor reclassification that affected the comparability of results between quarters. As Harry alluded to in his remarks, the successful conclusion of the SEC matter came with a cost. Selling and administrative expenses in the current quarter include approximately $2.5 million in legal defense and other third party costs, net of insurance reimbursement related to the SEC matter. This compares to approximately $100,000 in the prior year quarter.

On an after-tax basis, this lowered earnings per share by approximately $0.02 this quarter. We currently expect this to be the last of the expenses for the SEC matter.

Second, our current quarter income tax provision includes approximately $600,000 in expense related to changes in state income taxes, including true ups upon the filing of state returns in the fourth quarter. This lowered earnings per share by approximately $0.01, and contributed to the increase in our effective tax rate this quarter to approximately 44%. However, as I will touch on in a moment when I discuss guidance for next year, we expect our effective tax rate to approximate 40% in 2014, in line with our effective tax rate for 2013.

Our effective tax rate for the prior year quarter was only 30%. The lower rate related to several factors, including the favorable outcome of an IRS examination along with changes in state taxes. These items from the prior year quarter combined to lower our income tax expense in the prior year quarter by approximately $900,000, adding between $0.01 and $0.02 to earnings per share last year.

Excluding the non-core items in the current year quarter, NIC would have earned $0.12 as compared to our reported EPS of $0.09.

I have one last housekeeping item before we proceed. You'll note that certain income statement amounts in the prior year quarter have been reclassified to match the current year presentation, resulting in a reduction in both portal revenues and portal cost of revenues by a little less than $1 million. The reclassification had no effect on operating income, net income or earnings per share. Now onto the results for the quarter followed by full year 2013 results and concluding with our guidance for 2014.

As we expected, our growth moderated this quarter, particularly when compared to the phenomenal growth we had in the previous 4 quarters. As we are now trending against some very tough revenue growth comparables from our success in launching new services in Texas, New Jersey and Colorado, among others, over the past 15 months.

For the fourth quarter, total revenues grew 8% to $60.8 million. Quarterly portal revenues were $57.3 million, up 7% over the prior year quarter. Total same-state portal revenues grew 4% for the quarter. Breaking down the major components of same-state revenue growth. Same-state non-DMV transactional revenues in the fourth quarter were up 8% from the prior year quarter. As we cycled against a full quarter of revenues from the Texas, DPS Direct Vehicle Inspection Service, which launched in September 2012, as well as a full quarter of revenues from our other high-volume services launched in various portals over the past year, including New Jersey and Colorado.

We also had a few portals with Biennial or every other year, licensing services that saw revenue declines from the prior year quarter. All of these contributed to an unusually modest quarter of non-DMV growth. However, as I'll cover in a moment, our guidance for 2014 reflects strong, non-DMV growth in line with our historical averages across the majority of our portal businesses.

Same-state DMV transactional revenues grew nicely again this quarter, up 5% from the prior year quarter. Driven in part by higher volumes, as well as a price increase in one portal as we previously announced.

Lastly, same-state time and materials revenues were down 21% for the quarter, as we cycled against a very healthy fourth quarter in the prior year.

Moving onto our newer portals. Current quarter revenues from Pennsylvania and Wisconsin were a combined $2.6 million with self-funded revenues for Pennsylvania beginning in late October and for Wisconsin, beginning in September as we previously announced.

Selling and administrative expenses were $10.9 million in the current quarter, a 31% increase over the fourth quarter of 2012, driven by the defense costs related to the successful conclusion of the SEC matter. Excluding SEC costs, selling and administrative expenses as a percentage of total revenues would've been 14% for the current quarter compared to 15% in the prior year quarter.

Now onto a recap of our full year 2013 results. It goes without saying that 2013 marked a year of exceptional growth for NIC. We closed out 2013 with record annual earnings per share of $0.49, up from $0.40 in 2012, and we exceeded the high end of our earnings guidance for the year, despite the onetime $5.1 million charge related to our Pennsylvania portal, which lowered EPS by about $0.05 and despite $4 million of net costs from the SEC matter, which lowered EPS by about $0.04.

From a revenue standpoint, we also exceeded the high end of our guidance with record total revenues of $249.3 million, up 19% over 2012. Portal revenues also increased 19% over 2012 to a record $235.2 million. Same-state portal revenues finished the year up 14%, with same-state non-DMV transaction based revenues up a phenomenal 27%. Driven by full year revenues from the Texas DPS Direct Vehicle Inspection Service and several new business services in New Jersey and Colorado, among others. Same-state DMV revenues were strong throughout the year, up 5% while same-state portal management revenues were up 7%. And as expected, same-state time and materials revenues decreased 20% for the year, due mainly to the expiration of certain master work orders in Texas, back in August of 2012. I'll come back to the master work orders in a moment when I discuss our guidance for 2014.

The portal gross profit margin increased to 39% for the year, compared to 38% in the prior year. Software and services revenues increased 20% to $14.1 million, driven by solid performance from the federal PSP service and the launch of the North Carolina lien service. For the year, PSP revenues were up 15% in 2012 and NC lien has contributed $1.2 million in revenues. Combined, these services drove a 26% increase in software and services gross profits for the year.

And finally, operating income increased 22% for the year to $52.6 million, comfortably exceeding the high end of our annual guidance, with operating margins up 21% for the year, in line with our guidance and despite some fairly significant nonrecurring costs.

Now, onto our guidance for fiscal year 2014. We currently expect total revenues of $260 million to $270 million with portal revenues ranging from $246 million to $255 million, and software and services revenues ranging from $14 million to $15 million. We currently anticipate net income to range from $34.7 million to $37.7 million. This translates earnings per share of approximately $0.53 to $0.58.

Given the developments in our business over the past year or so, there are certainly a lot of puts and takes that have been factored into our guidance, which I'll walk you through now. I'll discuss the more significant takes first than the puts. As you all know, we recently made difficult decisions to walk away from 2 state portal contracts for the first time in our company's history, namely Arizona and Virginia. Collectively, we estimate the reduction in revenue from these 2 contracts will lower our total portal revenue growth rate in 2014 by approximately 2%.

Recall, however, that in Virginia, we did keep our 2 largest non-DMV services and a handful of smaller agency services. Our guidance reflects approximately $2 million of non-DMV revenue from Virginia for the year. Our guidance also reflects approximately $750,000 of portal management revenue from Arizona, all in the first quarter of 2014, as the state recently extended our fixed fee contract through March 31st as part of the final transition.

We currently expect revenues from Arizona to end after the first quarter. Next, on the surface, 2014 appears to be a pause year for growth in Texas. As our overall revenue growth in Texas will be tempered due entirely to a decline in revenues from certain master work orders. However, we expect the core business in the Texas portal to grow at a healthy rate and to approximate our historical same-state growth rate. Even as we trend against some very tough comparables in 2013, resulting from the success of the DPS Direct Vehicle Inspection Service.

For some historical perspective, recall that back in May 2009, when we acquired the then existing Texas Portal Management Contract, we also became the prime contractor for a related set of master work orders. In this arrangement, even though Deloitte Consulting was the subcontractor, and we were the prime, Deloitte continued to manage and collect revenues for the majority of the master work orders while paying us for our involvement with them on a time and materials basis and to a lesser extent, on a transactional basis.

Certain master work orders expired in August 2012 as we've previously announced and the remaining 2 master work orders are set to expire in August of 2014. As we've previously discussed, we made the decision sometime ago not to rebid on a court e-filing service in Texas, which was also a master work order project, but one that we managed, not Deloitte. As a standalone master work order, it was not a profitable service and Deloitte subsidized its losses through our contractual arrangement. We earned revenues from the service throughout most of 2013, with the final transition of service to the state taking place this past fourth quarter.

Thus, our guidance for 2014 reflects no non-DMV transaction based or time and materials revenues from the e-filing service. Also, we recently learned that the state currently intends to take in-house 1 of the 2 remaining master work order projects that is managed by Deloitte, beginning sometime in the spring of this year. This is an eProcurement service from which NIC is paid transactional non-DMV revenues from Deloitte for our involvement with the service in addition to time and materials revenues. So what does this all mean?

While we expect to launch several new non-DMV services in Texas this year that will largely fill the revenue void, left by these 2 master work services, we currently expect our overall revenues in Texas to decline by a few percentage points in 2014. On a consolidated basis, we estimate the loss of revenue from these master work orders will lower our total portal revenue growth rate in 2014 by 1% to 2%.

So that concludes my discussions of the major takes in 2014. Now onto the puts, where I'll cover current expectations for our newer portals in Pennsylvania, Wisconsin and Connecticut. For Pennsylvania, our guidance reflects $8.8 million to $9.3 million in portal revenues in 2014. As a reminder, Pennsylvania launched the DMV service and began generating self-funded revenues in late October of 2013.

In Wisconsin, we currently expect revenues of $3.7 million to $4.2 million, consisting mostly of DMV revenues as our team in Madison focuses on the build-out of the new hunting and fishing license service, which Robert just discussed.

Due to the substantial upfront costs to design and build this complex and comprehensive system, our current estimates reflect approximately a breakeven year of profitability in Wisconsin. However, we're very excited about the service over the long-term, which has the potential to generate revenues of at least $2 million per year once the service is launched.

Moving onto Connecticut. We currently expect to incur the typical startup costs in Connecticut during the first half of the year, with a driver history service expected to launch by the second half of the year. Revenues from Connecticut are currently expected to range from $1.5 million to $2 million for the year, resulting in a modestly dilutive to breakeven year from a profitability standpoint. However, we expect to finish the second half of the year with Connecticut contributing nicely to our bottom line. And that concludes my discussion of the major puts in 2014.

So setting aside all the puts and takes, when we peel back the onion, we find that our core portal business is as healthy as ever. As we currently anticipate, organic revenue growth rates for the year in line with our historical averages. If we exclude Texas, the high end of our total revenue guidance reflects solid, double-digit same-state total revenue growth with a same-state non-DMV revenue growth rate in the upper teens. If we include Texas, the high end of our total same-state revenue growth rate is expected to be in the upper single digits for the year.

One final note on our Portal business. We currently expect portal gross margins for the year to approximate 40%, give or take, percentage point or 2. Touching briefly on our software and services business. As we enter 2014 following another year of solid revenue growth for the federal PSP service, which grew approximately 15% in 2013. However, we have factored a somewhat lower growth rate in the mid- to upper single digits for PSP into our software and services revenue guidance for 2014, as the service continues to mature.

2013 also saw the launch of the new North Carolina construction lien service in April. The service generated approximately $1.2 million of revenue in its first 9 months of operations. Our 2014 software and services revenue guidance contemplates a full year of revenue from the North Carolina service at a run rate similar to 2013.

Moving on, selling and administrative expenses are currently expected to again, approximate 16% of total revenues, reflecting continued investment in our corporate wide, information technology and security infrastructure as a result of our portal growth, and to protect against the constant security threats.

We currently expect depreciation and amortization expense to range from 3% to 4% of total revenues in 2014 in line with our historical average, with capital expenditures expected to range from $6.5 million to $7 million or about the same level as 2013.

Finishing up with income taxes. We currently expect our effective tax rate in 2014 to approach 40%. Entering 2014, we are in the same position now with the research and development tax credit that we were in a few years ago entering 2012. Kind of feels like déjà vu all over again. Over the past several years, we have recognized an average annual benefit from the R&D tax credit ranging from $500,000 to $600,000 as reflected in our income tax provision. However, legislation extending the R&D tax credit beyond December 31, 2013, has yet to be enacted. We would recognize any benefit of the reinstatement in our effective tax rate at the time it becomes law. For now, we cannot. Thus we have not factored the R&D credit into our effective tax rate estimate for 2014.

In summary, 2014 will clearly be a year of puts and takes for NIC, but also a year for continued growth and progress. The loss of 2 -- of revenue from 2 legacy state portal contracts, combined with a lateral year in Texas, our largest contract, due entirely to the Master Work Orders, makes 2014 a challenging growth year, particularly in comparison with the blockbuster growth year we experienced in 2013.

However, setting aside these anomalies, our core portal business is as strong as ever, as we expect continued solid performance in 2014 with healthy organic revenue growth in line with historical averages. We also expect a meaningful full year revenue and profit contribution from Pennsylvania, our second largest population state, while investment years in Wisconsin and Connecticut set the stage for continued bottom line growth beyond 2014. We also entered 2014 with a solid new state pipeline and a strong foundation to grow our federal business over the longer term, both of which we hope will contribute favorably to our growth beyond 2014. Finally, as always, our projections do not include revenues or costs from any unannounced federal or state contracts, including Louisiana, where we won the RFP bid, but have yet to begin contract negotiations, and are waiting for the state on the next steps.

With that, I'll turn the call back over to Harry.

Harry H. Herington

Thank you, Steve. As you heard today, overall, we had an outstanding 2013 at NIC. We launched hundreds of new services, added new partners and drove growth that exceeded the high-end of our guidance. 2014 is positioned to be a solid year. We are firing up all cylinders and our federal business development efforts are gaining traction. I look forward to what we will accomplish throughout the year.

With that, Claudia, will now open the call for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the line of Peter Heckmann with Avondale Partners.

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

Thanks for all the detail on the puts and takes because obviously there's a bit more complexity to 2014, and we fully appreciate it. I missed the comment, and if you could repeat it, if we were to exclude the drags from Arizona and Virginia, as well as the expiration of the Master Work Order in Texas, what would be an adjusted same-state rate for your guidance for '14?

Stephen M. Kovzan

Well, I think the comment that we had, Pete, is that we expected Arizona and Virginia. So the decline in revenue from those 2 states to be about 2% of our total revenue growth, or -- excuse me, portal revenue growth. And then the drag in Texas is about 2% as well.

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

Okay, and that's on total revenue?

Stephen M. Kovzan

Yes. Total portal revenue.

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

Helpful. And then, when you talk about a strong pipeline of new states, should I infer that there are some active or live RFPs in the marketplace, or you are anticipating some, as we move throughout the year?

Harry H. Herington

Hi Pete, this is Harry. I would say there is not any RFPs out there [indiscernible] know about at this point. However, our team, as you've seen over the past few years, have been extremely successful, and we've got several states that we're in deep conversations with, so I'm very pleased.

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

Okay, that's fair. And then, is there any updates to provide on the state of Washington, is that still bogged down with the legislative rule on P2Ps?

Harry H. Herington

It is. I mean, like I said before, that's one worth putting back in as a go-get. We're still in active conversation -- they want us. But we have that drag, and a few other things that we're just in conversation, figuring out how we can resolve, do we, be patient, which I would say that's one of our strengths, or do we find a way to work around it. But it is a -- I would put that in as a -- just about any of the other states out there, that we haven't announced. It's back in the pipeline.

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

Okay. And then a last question, I'll get back into queue. This is for Steve. Steve, would we expect any additional reimbursements from insurance in 2014 and is any of that included in the guidance?

Stephen M. Kovzan

No. Nothing as it pertains to the SEC matter is included in our guidance. That is, no expenses from the SEC matter included in the guidance. We believe we've accrued everything there is to accrue in the fourth quarter and also reflected expected insurance reimbursement accordingly. So none of that is reflected in 2014.

Operator

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

Saliq Khan - Imperial Capital, LLC

The question I have was with the current attention that -- which we are seeing with the Affordable Care Act, NIC has received many questions asking if the company will be developing and managing state-run health insurance exchanges. Now we know that you've been working with Kentucky and Utah in the past, can we see potential for -- the firm developing -- for applications for different states as well, going forward?

Harry H. Herington

Go ahead, Robert.

Robert W. Knapp

This is Robert. We continuously, obviously look for opportunities to work on these systems. As you mentioned, in Kentucky, we have done quite a bit of work around the payment processing and the integration of that, with the health exchange there. We, certainly all of our general managers out there, look for opportunities exactly like that, and will continue to do so.

Saliq Khan - Imperial Capital, LLC

Great. The only other question that I had was, are there any possibility of the company entering new markets outside of the United States? So particularly, I'm referring to Mexico, the Bahamas or anything of the Caribbeans or the Canadian provinces as well?

Harry H. Herington

Yes, Saliq. Absolutely. One thing that I've told everybody, I am very interested in whatever opportunity there is out there. We are looking, we have our priorities in order. Right now, it is the States and we're in active discussions with several federal government. You heard the traction -- we've got them very, very pleased with the traction that removed some of the barriers we were seeing. And that should give us a good glide path into some opportunity there. But I've challenged my team for years, and especially recently, over, pay attention at an international level, and look for, then, similar state to how we attack federal. Are the specific industries or specific solutions, versus an enterprise-wide that we could go into another country. So I would say, we have things out there, but it's third on our priority.

Operator

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

Raghavan Sarathy - Dougherty & Company LLC, Research Division

First question is for Robert. You talked about some of the progress you are making on the federal agency side. Can you give us some color on when we should expect revenue from some of the -- the 3 agencies, it seemed like you made a lot of progress, trying to get some sense for -- some timing of when we could potentially see some revenues from these opportunities?

Robert W. Knapp

Similar to our other sales efforts, I'm not going to make specific commentary on these. And that includes timeline. I would just say that this Omnibus language provides a real advocacy for no cost, and it's proving very beneficial in our meetings with federal agencies, and so we're excited about the opportunities.

Stephen M. Kovzan

The one thing that I would add to that, Rag, this is Steve, is that not unlike our state business, and probably more so, sales cycles here take some time. So be patient with us, but we are excited about the progress we're making.

Raghavan Sarathy - Dougherty & Company LLC, Research Division

Right. So that's maybe if you don't want to comment on timeline. So what -- I mean, whether there's Omnibus, there's Language and the Appropriation bill. The agencies, do they have to do additional, maybe, a law needs to be passed to for the entertainment themselves -- how does the process work? I mean, it seems like in the state level, state thing is fairly straightforward.

Robert W. Knapp

Well the languages and advocacy for looking at alternate cost, alternate funding or no-cost solution, so federal agencies will be encouraged to look at that as they're considering, but they still have to follow their same procurement processes. And as Steve alluded to, those can move as quickly or as slowly as those agencies sometimes can make happen. And so, I mean, that would be -- Harry?

Harry H. Herington

Rag, if I could, just for clarity for you and everybody on the phone, the reason we're so excited about this, number one is, you deal with government. Sometimes they have the authority to do something, but they look for specific language that says they have authority, even it's there, it's implied. And what this has done, through the Omnibus Bill is, actually gives us something that we could go back to them and say, see, you've got the authority now to do this, or remove those roadblocks. And because of that, as you heard, we've got some of the rulemaking process where they are now down the path. In certain agencies, they're going to have to rulemaking, just either for comfort. Other agencies are not going to -- the Omnibus bill will be enough. We're working with both types of agencies right now. This is an extremely positive development, because it takes away the #1 barrier. Are we legally allowed to do this? And actually, force it one step further. Not only you're legally locked, you're encouraged to do this. And so I see this is a major leap for us.

Raghavan Sarathy - Dougherty & Company LLC, Research Division

Okay, great. And then my second question is a clarification question. So Steve, you talked about the impact of Arizona, Virginia, Texas, you said two points of -- either is it portal revenue or total revenue? I couldn't hear you well.

Stephen M. Kovzan

I said total portal revenue, sorry. So it's 2% for the combination of Virginia and Arizona, and 1% to 2% for Texas.

Raghavan Sarathy - Dougherty & Company LLC, Research Division

Okay outside portal revenue, right?

Stephen M. Kovzan

Right.

Raghavan Sarathy - Dougherty & Company LLC, Research Division

Okay, and next. In terms of this Pennsylvania, I know I appreciate the color you gave on some of the other portals, in terms of costs. What -- how much cost should we think about in terms of Pennsylvania?

Stephen M. Kovzan

I would say that Pennsylvania in general is -- from a profit margin standpoint, it's not going to be tremendously different to the upside or the downside, as in comparison to our average profit margin in the business.

Raghavan Sarathy - Dougherty & Company LLC, Research Division

Okay. Just sort of -- one final question. So when I looked at the same-state portal revenues down $3 million sequentially, can you help us understand when do the sequential decline in same-state portal revenue.

Stephen M. Kovzan

Well, I think part of it relates to the natural decline -- you're talking sequentially, from the third quarter to fourth quarter. Because the third quarter -- or I'm sorry, the fourth quarter is our seasonally weakest quarter. We also saw, as I mentioned in my comments, we saw a decline in time and materials revenues on a same-state basis. Furthermore, we had a couple of states where we had some biannual or every other year licensing services that fell off in the fourth quarter. So it was an unusually weak quarter for us, in terms of growth, that we expect to pick up next year. It was kind of one of those quarters where we trended against tough comparables, our T&M revenues went down, and we also had some every other year, or biannual services affecting it as well. But I want to stress, this wasn't anticipated. When we put our guidance together and what have you, we knew this was coming. All of this was planned, we would get hit with these things. You plan forward, you move forward. So this was not a surprise for us.

Raghavan Sarathy - Dougherty & Company LLC, Research Division

Right. So Steve, so just that I would understand, the biannual thing, I'm looking at sequential, though I'm not looking at the year-over-year. So I'm looking at the sequential if I have the numbers straight the portal [indiscernible] dropped off by $3 million sequentially, and I think that the two components that you talked about, portal software development, portal management, that doesn't explain the whole thing?

Stephen M. Kovzan

So the sequential variance, Rag, I guess, what you're seeing from Q3 to Q4, again, a good portion of that is seasonality, we also have some seasonal, various business services and things of that nature that are much stronger in Q3 than Q4. There's really not one thing that quite frankly, that I can point to you, to say why we were down quarter-to-quarter. But our revenues from a Q4 standpoint were in line with our expectation.

Operator

Our next question comes from the line of John Campbell with Stephens Inc.

John Campbell - Stephens Inc., Research Division

Just quickly going through some math here and taking the midpoint of rev and EBIT guidance. And I'm getting about 150 -- I think it's about 150 bps of EBIT margin expansion into '14. Now I know you guys aren't in the business of issuing that 2 years out guidance, but as we start to build out the models for '15 and beyond, can you guys just give us just general margin trajectory, just giving -- it's looking like we're kind of on a steady grind upwards here.

Stephen M. Kovzan

Well, I think we have certainly, over the last several years steadily improved our operating margin, particularly starting in the year that we acquired the Texas contract in 2009 to today. But quite frankly, John, beyond 2014, we don't provide specific guidance beyond that. I can say that certainly, our desire is to grow our operating margins over time. But if you look at, historically how we've done that, it's been fairly modest and steady progress each year, not order of magnitude growth in our operating margin. So beyond that, I think we'll keep our comments to 2014.

John Campbell - Stephens Inc., Research Division

Okay, that's fair. And then, as it pertains to just the auto sales in general, I mean, most of the forecast we're seeing basically calls for the highest level in auto sales, since pre-recession. And I might have missed this, but what type of lift exactly does that give DMV in '14?

Stephen M. Kovzan

Well, I wish we knew. Our crystal ball, in terms of DMV is murky at best. It's -- we've never had great transparency into the decisions that insurance companies make in terms of point driver records. We have believed in general that as the economy improves and auto sales pick up, and that's probably not a bad thing for driver records, but it's hard to correlate them. Our expectations for DMV growth next year are fairly modest, certainly not at the level that we saw in 2013 of about 5%. So if we continue to cook along at that growth rate, that would be some upside to our numbers. But we're taking the conservative approach in terms of thinking about DMV.

Operator

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

Brian Kinstlinger - Sidoti & Company, LLC

I have a different point of view than the last person who asked the question on the operating margin. Actually, see it coming down, excluding the insurance, one-time payments and the charges, other charges that you had during the year, are up about 100 basis points, actually. And so I see, as a kind of earnings -- of revenue guidance that earnings are flat, about at $0.58. And so I'm wondering, why the margin compression? I get you have a little bit of startup costs, but it doesn't sound like much in your two states, and now you've got a whole new -- now you've got Pennsylvania for the full year without any [indiscernible] in the quarter by themselves. So, I guess, I'd like that -- like to find out why we see that margin compression?

Stephen M. Kovzan

Well on the, I think our guidance, Brian, implies -- the upper end of our guidance implies operating income margins of about 23%.

Brian Kinstlinger - Sidoti & Company, LLC

Yes, that's right. And this year I think they're at 24.2% if I excluded your charges that really are non-core operational expenses?

Stephen M. Kovzan

What charges are those that you're...

Brian Kinstlinger - Sidoti & Company, LLC

The $2 million, the insurance overrun this quarter, and then I think you had a charge in the September quarter as well. And so, if I back all that stuff out, that's really the view of your business year-over-year.

Stephen M. Kovzan

Well again, we've talked about the various takes and the puts. So the takes are Arizona, Virginia and a modest decline in Texas. The puts are in Wisconsin, where we're looking at a breakeven year of profitability, so I don't know if that's a disconnect between where we are, and where you were because of the new development for us by signing the hunting and fishing service. But beyond that, I'm not sure if there's really anything significant that I can point to.

Brian Kinstlinger - Sidoti & Company, LLC

And as you build that Wisconsin application, I think it was $2 million. Is that a software and services pressure in the margin? Because we see that margin actually, it's small dollars, but going lower than it's been in a while?

Stephen M. Kovzan

I don't think I'm following you on the question, Brian.

Brian Kinstlinger - Sidoti & Company, LLC

I'm just wondering where that cost of building that Wisconsin application goes to, is that software or services or portal revenue?

Stephen M. Kovzan

That's cost of portal revenue. That's not software and services.

Brian Kinstlinger - Sidoti & Company, LLC

Got it. So what I'm asking now is, I think you're saying that you expect 60% margins on software and services. I think that's a little bit more pressure than you've had in the past. Is that coming from one of the takes that you're talking about?

Stephen M. Kovzan

No. I don't think we're necessarily implying -- I don't think we even mentioned 60% margins for the software business, I'm not sure where you're coming with that.

Brian Kinstlinger - Sidoti & Company, LLC

I thought -- I'll take a look, and we'll follow up on that when -- I'm pretty sure, in your release it said the gross profit margins are clearly expected to be in the low 60% range for software and services. It says so in your press release. And I think it the past, it's been higher than 60%.

Stephen M. Kovzan

I'm sorry. So perhaps the one thing that might bring our margins down a tad is, recall that we did -- our contract with the Federal Election Commission did expire in June 30th of 2013. So we'll be losing out on about 3/4 of a million dollars in revenue from that service, that we recognized in 2013 that we won't see in 2014. But other than that, the margins in that Software business are -- will be generally similar to what we saw in 2013.

Brian Kinstlinger - Sidoti & Company, LLC

Okay. And then speaking of federal, it sounds like, as you talked about the barriers seem to somewhat have been lifted. I guess, I'm curious, are there RFPs, since we're not talking specific states or agencies, can you say if there's RFPs you've responded to yet? And I guess, do you expect some of this year to come out?

Harry H. Herington

This is Harry, and I'm going to have -- unfortunately, I'm going to have to address that very thought. There are no RFPs out there. We're in conversations with different agencies right now. Like I said, there's several that, with their rulemaking gives us access. And then the federal government oftentimes, their RFIs just a technical thing. Who knows, what's going to come up this year? That's all I can say. I mean, we're excited with the progress, and I can never tip my hand, because I don't want to inform a competitor or potential competitor where we're at.

Brian Kinstlinger - Sidoti & Company, LLC

Okay. And then, I guess I've asked this in the past. What is the typical reason you get in the federal agency that they're not going to use you. Is it legality, I mean, you already have won. So I guess I'm wondering what the pushback has been in the last couple of years of moving forward with it?

Harry H. Herington

The biggest issue that we've run into is what we've resolved, and that is, as we get out there and it doesn't matter if it's municipal government, state government or federal government. You get in there, and oftentimes they'll say, "I don't see where I have the authority to do this," even though there's nothing to prevent them from doing that. And we kept hitting up against that, and that's why the Appropriations bill is so critical, and what we're able to get accomplished there, because now we can point to something that again, not only says do you have the authority, but you're encouraged to do this, as well as then, when we look at some of the rulemaking that's out there, that shows the people are embracing that. So I would say that's the biggest. Now the other thing that -- always keep in mind: Federal government, the bureaucracy, that's there, it's just painstakingly slow. You can find people excited about it, identify projects, and then it's just going through the minutia of getting it done.

Brian Kinstlinger - Sidoti & Company, LLC

I guess, the last question is on the state RFP pipeline. You mentioned it was solid, but none are outstanding. So I guess, what makes it solid, and you expect that as a result, if it's solid, are you close to feeling some RFPs coming out in that market without naming states, of course.

Harry H. Herington

What we have with the state is, the reason I call it solid and I've said this for years, and what it is, is when we're in, and they're in active discussions with us, we're in meeting with the CIA. We're in multiple agencies, and they've expressed an interest in what we're doing. That is, what I consider an active state and when we have those type of conversations, then I feel like, all right, and we've had those and several, we've got an active pipeline of people that are very interested. The problem we run into, and it happens everywhere and, is, you never know when they're going to issue an RFP. You don't know what's going to get in the way of RFP. We've had numerous times that they had written and it's taken 6 months, a year to get them out. Other times we find out 2 weeks ahead of time that they're writing it, and it's racing towards the door. There's just no transparency when it gets to the procurement side of the house. And for valid reasons. The procurement side almost blocks off the agencies that we deal with. And so it's just -- it's no man's land for a while.

Stephen M. Kovzan

Brian, just one thing, in our press release, I was a little confused with your comment. And we did say that we expected gross profit margins for the software business to be in the upper 60% range.

Brian Kinstlinger - Sidoti & Company, LLC

Oh, it's says low, actually, is what I read. So it's upper. Okay.

Operator

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

Gary F. Prestopino - Barrington Research Associates, Inc., Research Division

Harry, any comments on Louisiana?

Harry H. Herington

Yes well, Louisiana is in process. As you know, we're, I think we issued in our press release, we're just waiting on them. And that's typical of any state. It's a matter of priority. And so, we push where we can, and then we make sure we give them the space they need, in order for us to start negotiations.

Operator

Our next question is a follow-up question from Peter Heckmann with Avondale Partners.

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

Just a couple more. As regards Wisconsin, I'm inferring that this is a competitive takeaway, and implicit in that competitive takeaway means that you're going to be expanding the range of services you're offering for hunting and fishing, to include mom and pop, h-ops and whatnot. Is that correct? And if so, will there be any CapEx requirements for U.S. terminals?

Harry H. Herington

Okay, what else? I'll start. Yes, several questions. And yes, this is the competitive takeaway. This is when we're very excited that we're taking and owning, it's a total replacement of a comprehensive system. There's going to be additional services and offering. Now they already offer out to all of the smaller shops. Remember, Wisconsin is the second largest hunting and fishing state in the nation. So they already offer some of that out there. They wanted to improve service, and they want add additional. As far as the CapEx…

Robert W. Knapp

There will be -- there is no hardware as a part of that deployment to a mom and pop.

Stephen M. Kovzan

So Pete, our CapEx for 2014 of $6.5 million to $7 million, that doesn't include material amounts necessarily from Wisconsin.

Harry H. Herington

No. I will add one thing for this, that I don't think we mentioned and that is, as we build this one and because it is, again the second-largest state out there, we're building this to make sure that whatever we got there, we can leverage elsewhere. That it'll be a solid system that as we look at some of these opportunities that are coming up, it will put us in a very good spot.

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

If my memory serves, there's a single competitor there that kind of mopped up the market about 5 years ago, and if you're ready and willing to get more aggressive there, that could be some nice additional growth opportunity.

Harry H. Herington

I would agree 100% with that.

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

Great. And then last question, there are a few rebids, or not rebids, or rather, contract expirations that look like they were extending, kind of short-term here. I think you mentioned one of them in the press release that had extended. Are there a couple of there that we expect to renew in the first quarter, or any kind of issues or concerns or things to think about, about the current crop of states that's coming up on the hard renewal?

Harry H. Herington

I always have a concern, you know that about me, I'm paranoid as hell when it comes to a, whether it be renewal or rebid, because I always want to make sure we're giving the best that we could possibly give, and that somebody's not going to surprise us. But I've got to tell you, I'm sleeping well. I think, with any of them that are out there, and I'm looking at Robert, who deals with it on a day in, day out basis. There's nothing out there that causes me pause. We have a solid plan in place, that we're a year out on the renewals and 18 months out on rebid. As far as tracking them, making sure that we identify any issues that stand in front of them. So I feel very confident. As far as those coming up next quarter, I'd look to, Steve?

Stephen M. Kovzan

Yes I mean, I think the one that we mentioned in the press release, Pete, was Oklahoma if I'm not mistaken. And then there were a couple others where they were coming up on some hard deadlines, and yes, we've been getting extensions if that was necessary. I'm not sure to the exact dates, but yes.

Robert W. Knapp

And I think those extensions are as much about process as anything, and we just continue to work with the state, making sure we can negotiate and work with them through that process.

Operator

And I'm showing no further questions in the queue at this time. I'd like to turn the call back over to Mr. Harrington for closing remarks. Please go ahead.

Harry H. Herington

Thank you, Claudia, and thank you to everyone that joined us this afternoon. We had a great 2013, and I am looking forward to a very solid 2014. I'm also looking forward to speaking with you again next quarter, and I invite all of our stockholders to our annual Stockholder Meeting on Tuesday, May 5th, in my hometown, Lawrence, Kansas. Thank you, and I will speak with you next quarter.

Operator

Thank you. Ladies and gentlemen, that does conclude our conference for today. Thank you for your participation. You may now disconnect.

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