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Executives

Jeffery Fraser - Chief Executive Officer, Co-Founder

Harry Herington, President

Stephen or Steve Kovzan - Chief Financial Officer

David Oboyski - Director of Investor Relations and Communications

Analysts

Sam for Jeffrey Kessler - Lehman Brothers

Paul Kaump - Northland Securities

NIC Inc. (EGOV) Q3 2007 Earnings Call November 7, 2007 8:30 AM ET

Operator

This conference call is being recorded today, Wednesday November 7 2007. I would now like to turn the conference over to Mr. David Oboyski - Director of Communications and Investor Relations. Please go ahead, Sir.

David Oboyski

Thank you. We issued a press release for NIC’s 3rd quarter earnings announcement 30 minutes ago. For those of you who have not received the release, the announcement is available on the home page of our corporate site at www.nicusa.com.

Before we begin, I want to cover our customary Safe Harbor statement. Specifically the statements in this release regarding continued implementation of NIC’s business model, and its development of new products and services, are forward-looking statements. 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, the success of the company in signing contracts with new state and government agencies; including continued favorable government legislation; NIC’s ability to develop new services; existing state and agencies adopting those new services; acceptance of eGovernment services by businesses and citizens; competition and general economic conditions; and other important cautionary statements and risk factors described in NIC’s 2006 annual report on Form 10-K filed on March 15 2007 and quarterly report on Form 10-Q for the quarter ended June 30 2007 filed on August 6 2007 with the Securities and Exchange Commission.

I would now like to introduce Jeff Fraser, NIC’s CEO and one of its founders.

Jeff Fraser

Good morning to all of you listening. Joining me today for the call are NIC President Harry Herington and Steve Kovzan, our Chief Financial Officer. I would like to take this opportunity to congratulate Steve again on his promotion. In August, after an extensive search, we promoted Steve from Vice President of Finance and Chief Accounting Officer to be our new CFO. He brings eight years of experience with NIC and he is clearly the best person to help us lead the company’s growth.

I will begin today’s call with an overview of our growth initiatives. Harry will provide an operations update, and then Steve will finish with the financial overview for the quarter. At that point, we will open up the call to your questions.

About this time last year, we announced our four-year strategic growth initiatives which had two main goals:

1.) Double the U.S. population we serve from 60 million in 2006 to 120 million in 2010. In other words, to boost to our new state win rate from one state every 18 months to 24 states per year.

2.) Accelerate the development of new services and increase the adoption of existing services in our current projects. In other words, grow revenue in our current portals faster.

Now in addition, we are aggressively supporting and promoting our current and future partners efficient government agendas. In other words, the “E” in EGOV no longer just stands for electronic. Our partners are no longer satisfied by just choosing the internet as another method of service delivery. Results are showing, to deliver eGovernment services efficiently, the internet should be the primary method, and in many cases, the only method of service delivery.

With regards to winning new states, last Friday we announced that we have finalized the contract with West Virginia to operate the state’s official website. With that contract, West Virginia becomes our 21st state, bringing our total populations served to 69 million. I would like to thank West Virginia for choosing NIC. The state had high expectations for eGovernment services and for the value it brings to the state’s residents and businesses. We are honored that they see us as the best partner to bring their expectations to life and we are excited to start implementing the kind of services only NIC can deliver.

We are looking at one to three more opportunities this year and we are pressing hard in every U.S. state, commonwealth, district, and the Canadian provinces to deliver our message and support of their efficient government agenda.

Over the next 18 months, we project more than enough RFP opportunities to reach our goal. Same is true for our populations served goal. Our opportunity pipeline for 2008 and 2009 represents nearly 80 million people. We invested in this initiative to win more state contracts and win them faster and so far, we are tracking close to plans.

With regards to growing revenues on our existing portals, we pay special attention to one particular metric, same-state non-DMV revenue growth. So far this year, it is tracking at 35% which is 12 months ahead of plan, and the primary reason we have adjusted our guidance the last two quarters.

Our strategic growth initiative exceeded even my expectations, and it is 100% due to our government partners and our employees working together to make governments operate better and more efficiently.

Now let me turn it over to Harry. He will walk you through the operational developments that are contributing to this performance.

Harry Herington

Thank you, Steve. I would like to echo Jeff’s congratulations to Steve. I worked closely with Steve during his eight years with NIC. He was instrumental in putting in place the financial discipline that has contributed to the company’s growth over the past several years, and he has always been a variable resource I could count on. When we announced that we are conducting a CFO search, the most common question I received from investors was, “Why the hell are we looking for someone but Steve?” For those of you that know Steve, as you might expect, the transition went very smoothly.

To talk about transition, I would like to begin the report with a few comments on the Arizona transition. Progress in Arizona continues according to plan. As you may recall, this is the first time that we have transitioned a state portal from another vendor of NIC. One of Arizona’s concerns in displacing IBM was the transition, especially because of the added complexity of the legacy IT provisions.

I am happy to report we are successfully on track. As of today, NIC has assumed control of the 49 legacy applications and/or maintaining the existing user experience. Over the next 69 months, we will completely replace IBM’s applications with NIC’s state of the art services.

While we keep our large library services to help Arizona, we continue to work hard at expanding that advantage for all of our partners. An indicator of best success is our application development pipeline. In the third quarter, we launched 83 new non-DMV revenue generating applications. We have a record high 178 in the development pipeline.

I would now like to take a couple of minutes to congratulate our partners for some recognition they received recently that rewards their vision to efficient government.

In September, the Center for Digital Government announced its annual Best of the Web awards. When we talk about cutting the edge, it is always helpful to know just where that edge is. The Center for Digital Government’s Best of the Web is a great measure of that. Our partners won 8 of the top 10 spots, with Utah taking 1st, Maine placing 2nd and Virginia taking 3rd. Our partners worked hard to build services that serve their citizen and businesses. It is refreshing to see them get the recognition they deserved.

I would also like to thank our partners for an award that NIC recently received. For the first time ever, the Center for Digital Government awarded companies doing business with government, Best in Class awards for the innovative achievements that they provide. NIC was honored to receive one of these prestigious awards. The great thing about this award is that your partner must nominate you. Even better, NIC had more government partners nominating us for the award than any other recipient had. As nice as it was for our partners to nominate us, they deserve even more recognition for the willingness to share ideas and to come together to provide solutions for efficient government that Jeff mentioned earlier.

Each year, we invite our partners to our eGovernment leadership summit. This is one of the things that set NIC apart from its competition. No one else can bring together so many of the top thinkers and leaders in eGovernment. This partners summit is a great place to share best practices and ideas, and start thinking about new ideas and innovations. At the summit, we discuss the latest developments in Web 2.0, security and other technologies. I am looking forward to see more innovations that will come from this conference over the coming months and years.

Now with that, I am going to turn the call over to NIC’s Chief Financial Officer, Steve Kovzan who will report on our financial highlights.

Steve Kovzan

Thanks very, very much. NIC’s net income in the 3rd quarter was $3.8 million worth $0.06 per share, on record revenues of $21.6million. Operating income in the 3rd quarter was $4.4 million compared with the $3.6 million in the prior year’s quarter for an increase of 23%. I would like to point out that 3rd quarter results include a gain of $0.5 million on the sale of a minority investment and an income tax expense reduction of $5 million as well. I am sorry, $0.5 million dollars, thanks for the clarification.

In the 3rd quarter, we sold our 12% minority investment in eGovernment Solutions Limited, a private joint venture based in London, and recognized a gain of $0.5 million or a penny per share on the cash proceeds from the sale. Third quarter results also reflect a change in our uncertain tax positions that reduced income tax by $0.5 million also adding a penny per share.

Both of these items are reflected below the operating income line in our income statement. Quarterly portal revenues were a record $20.7 million in the 3rd quarter, 20% above the year-ago quarter. Same-state portal revenues grew 19% compared to 8% in the 3rd quarter of 2006. Portal gross margins, 48% in the 3rd quarter and the same on a year-to-date basis, which is slightly above the 45 to 47% we projected for all of 2007. Recall that the 4th quarter of the year is our seasonally weakest due to the lower number of business days during the holiday periods. Accordingly we expect our margins to dip in the 4th quarter and fall within the 45 to 47% range for the year.

As expected, selling and administrative expenses as a percentage of a portal revenue were 25%, compared to 23% in the same quarter last year. The increase is mainly attributable to our investments and growth. NIC’s liquidity improved in the 3rd quarter, with cash investments at $52.4 million, up $9.2 million from the 2nd quarter.

Moving on to guidance, we have updated our projections for 2007. These updated projections reflect strong performance form our core portal operations in the first three quarters of the year; normal seasonality in the 4th quarter; and a partial year of revenues and start-up costs from our new Arizona and West Virginia contracts, although we do not expect to see revenues from West Virginia until the 1st quarter of 2008. Additionally, the gain from the sale of the UK joint venture and the reduction of our income tax expense, items that added $0.02 to our earnings this quarter, were contributors to our projections.

With that said, let me run through the new guidance full year: total revenues between $84.1 and $84.7 million; portal revenues from $ 80.9 to 81.4 million, software and services revenues between $3.2 and $3.3 million; operating income from $13.8 to $14.5 million; net income between $9.8 and $10.3 million. As I have previously mentioned, total margin should range from 45% to 47 %; and finally, selling and administrative expenses should range from 27% to 28% of portal revenue. As always our projections do not include any unsigned or unannounced portal contracts. With that, I will turn it back over to Jeff.

Jeff Fraser

Thanks Steve. That concludes our prepared remarks. Operator we are now ready for the questions.

Question-and-Answer Session

Operator

Thank you sir. Our first question is from Jeffrey Kessler with Lehman Brothers

Sam - Lehman Brothers

Hi, this is actually Sam standing in for Jeff. Good morning. First from the 2008 pipeline, you mentioned that it represents about 80 million people. Could you give us an idea of about how many RFPs that translates to, and are you able to highlight any a specific taxes-wise [ph], maybe a big one?

Jeff Fraser

Well I am not going to talk about any individual RFPs because we would like to see as few bidders as possible. But I think we are looking at eight over the next 18 months.

Sam - Lehman Brothers

Eight over 18 months, okay. Question on Real/Ideal.. It looks like there is some demand coming in recently in California. Are you looking to supply this? Anything in your pipeline?

Harry Herington

Real/Ideal is an interesting one to be watching not only in California but throughout the country. It is actually quite a mess right now. The Federal government has put an unfunded mandate out there. Most of the states are pushing back. At the same time, there are some deadlines that they are trying to say they are going to hit or say no to. California is one of the states that looked in to see what they can do. We are watching all of those closely.

What is interesting is each state is coming at it a different way. So we have to really evaluate each of those to see if it is something to go after and if they are serious about it. Several states are putting some strong implants out there but they are actually trying to kill this deal before it is implemented. And so a very few companies are really investing a lot of money in the solutions until the dust settles.

Sam - Lehman Brothers

So you are not really looking to make any kind of investment in an application to serve these states until it plays out a little further?

Harry Herington

Well that is not exactly true. That is close to true. What it is is we have looked at individuals to partner with and we have also looked at our existing applications. We have several applications that we can ramp up and provide some solutions. But I am not dedicating any staff just to this initiative. It is sort of a side job as we continue to watch it. But we are watching it very closely.

Sam - Lehman Brothers

Okay. Thanks a lot.

Operator

Our next question is from Paul Kaump with Northland Securities.

Paul Kaump - Northland Securities

Good morning gentlemen and congratulations on another great quarter. Hey, looking onto fiscal ‘08, I know we started fiscal ‘07 by talking about additional marketing and product development spend of $48 million that is down to $45 million, is this going to be moderating in fiscal ‘08? I mean, are we going to be heading back towards the high single digit year over year growth rates, and maybe low double digit growth rates that you guys enjoyed back in ’06? Or are you guys going to still keep the foot on the gas pedal so to speak and continue to spend in both of those efforts?

Steve Kovzan

We did not enjoy the single digit growth rate. [Laughing] Paul, this is Steve Kovzan. I would say that certainly we will not see the growth in 2008 from a percentage growth standpoint. We are going to be spending on the same areas. I would say that 2007 was a stair step year in terms of our in terms of our corporate level expenses. But I would say in general, across the majority of our corporate-level decisions, you will see expense growth moderate and return to the trends you have seen in the past years, with selective investment in certain areas where we are really seeing some great success.

Paul Kaump - Northland Securities

Okay, and clearly you guys believe that your RFPs that you are talking about the next 18 months, there is going to be enough dollars marketing-wise to go around, even with you guys moderating expenses?

Harry Herington

Oh absolutely. You know what, if more come out, we will spend more money, and we will not apologize. [Voice Overlap] We will let you know when it happens.

Paul Kaump - Northland Securities

Okay.

Jeff Fraser

We are not going to stop spending money, I mean, we are expecting eight. We are still aggressively pursuing all the other opportunities as well. Until we are done, we are going to invest.

Paul Kaump - Northland Securities

Okay. Out of those eight, how many would you anticipate being self-funded models versus some sort of hybrid relationship?

Jeff Fraser

Well, we are shooting for, self-funded is always our first choice. [Voice Overlap]

Paul Kaump - Northland Securities

Right.

Jeff Fraser

But we ultimately do whatever our partner wants to do.

Paul Kaump - Northland Securities

Okay. Non-DMV application deployment development has been extraordinarily strong the past few quarters. You guys mentioned in your prepared remarks that you are running roughly 12 months ahead of plan. How sustainable is this over the foreseeable future? In other words, should we expect non-DMV revenue to be growing at 30%-plus over the next couple of years, or how should we be thinking about that?

Harry Herington

I would tell you, I am extremely proud of how the team is doing out there. We are ahead of track, this was the ramp up year. We changed our management, as far as how we were managing at a senior level, at the portals out there. We have put a lot more focus on non-DMV and they ramped up really fast and they were able to get some quick wins out there.

Do I think that we can sustain it? Yes I do. Do I think that you will see occasional dips and what have you? Absolutely. We did take out some of the low-hanging fruit, and we have taken out some of the more difficult ones. But you know, it is going to be spotty at times, but I do think the growth is there and will continue.

Paul Kaump - Northland Securities

Okay. Switching gears here, you were talking about one to three opportunities possibly this year. Were you talking about RFPs or actual contracts yet?

Jeff Fraser

RFPs.

Paul Kaump - Northland Securities

RFPs, okay. That is included in that eight number, correct?.

Jeff Fraser

Yes.

Paul Kaump - Northland Securities

Last question. With respect to Arizona, are you guys recognizing revenues yet? Did you recognize anything in the 3rd quarter?

Steve Kovzan

No revenues in the 3rd quarter. But we do expect to see a partial quarter of revenues in the 4th quarter.

Paul Kaump - Northland Securities

Okay, is that going to be largely just DMV-related, or is it going to be across the board?

Steve Kovzan

Well again, just a reminder, in Arizona, we do not earn revenue specifically from the DMV source. The DMV source funds the state so that the state can pay us.. So the majority of our revenues in Arizona will be of the portal management and ton [ph] materials type of revenue. That will start, we will have a partial quarter of revenues in Arizona. We just started, under our contract there, officially the clock is ticking in October.

Paul Kaump - Northland Securities

Okay,. and then how much incremental spend should we throw in through? I mean, you are talking about the transition right now, is there any excess or extra dollars being allocated to Arizona that you would not necessarily allocate otherwise?

Harry Herington

I am going to take the first stab, then I will let Steve jump in if he wants. The answer is absolutely. When we took this opportunity to web DMV [ph], one of the things we said is we will make this as seamless as possible. Which means we will put in extra dollars, extra people, we are giving it our 110% effort to guarantee them being transitioned over. So yes, there is an additional cost to do that, that is the right thing to do.

Paul Kaump - Northland Securities

Uh-huh.

Steve Kovzan

Yes, as we said last quarter call, we will probably end up spending on the higher end of the $0.5 million to $1 million we normally spend to start up a portal because we do have to transition all the existing apps over to our source code. So that is going to cost us a little more money to develop. I would say in general, Arizona will be a wash to our earnings for the next six months at least. So I would not expect too much bottom line impact from Arizona.

Paul Kaump - Northland Securities

Okay, that million, that is going to be spread out over Q4 and Q1?

Steve Kovzan

Q4, Q1 and maybe into the Q2. But hopefully we can get it done sooner than later.

Paul Kaump - Northland Securities

Okay, great, thanks a lot guys.

Operator

Alright, at this time I do not show any more questions. I will turn it back over to management for any closing remarks.

Jeff Fraser

Thank you, Operator. I would like to thank each of you for joining us this morning. We look forward to speaking with you again during our 4th quarter earnings announcement in late January. Bye.

Operator

Thank you. Ladies and gentleman this does conclude today’s conference call. We thank you for your participation and you may now disconnect.

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Source: NIC Inc. Q3 2007 Earnings Call Transcript
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