NIC is a provider of eGovernment services that helps governments use the Internet to increase internal efficiencies and provide a higher level of service to businesses and citizens. We accomplish this currently through two channels: our portal outsourcing businesses and our software & services businesses. In our primary portal outsourcing business, we enter into long-term contracts with governments to design, build and operate Web-based, enterprise-wide portals on their behalf. These portals consist of Web sites and applications we have built that allow businesses and citizens to access government information online and complete transactions, including applying for a permit, retrieving driver's license records or filing a government-mandated form or report. The business model supporting most of our long-term contracts is a self-funded model. Our self-funding business model is one where we absorb the costs to build the portal's technical infrastructure and develop eGovernment services. After a service has launched, we and our government partners share a portion of the fees generated from electronic transactions which are paid by the end users of the service. This allows us to generate revenues by sharing in the fees we collect from eGovernment transactions. Our government partners benefit through reducing their financial and technology risks, increasing their operational efficiencies and gaining a centralized, customer-focused presence on the Internet, while businesses and citizens receive a faster, more convenient and more cost-effective means to interact with governments. We are typically responsible for funding up-front investment and ongoing operations and maintenance costs of the government portals.
Currently, we have contracts to provide portal outsourcing services to 23 states, and were recently awarded a new portal contract in New Jersey, which has not yet fully deployed. We typically enter into three- to five-year contracts with our government partners and manage operations for each contractual relationship through separate local subsidiaries that operate as decentralized businesses with a high degree of autonomy. Our business plan is to increase our revenues by signing long-term portal contracts with new government partners and by delivering new services to a growing number of government entities within our existing contractual relationships.
Our software & services businesses operate primarily through two subsidiaries, NIC Technologies and NIC Conquest, which provide software development and services other than portal outsourcing services to state and local governments. NIC Technologies primarily designs and develops online campaign expenditure and ethics compliance systems for federal and state government agencies. Currently, NIC Technologies is primarily engaged in servicing its contracts with the Federal Election Commission and the state of Michigan. During the third quarter of 2009, NIC Technologies entered into a new contract with the U.S. Department of Transportation, Federal Motor Carrier Safety Administration, (“FMCSA”) to develop and manage a National Motor Carrier Pre-Employment Screening Program. NIC Conquest is primarily a provider of software applications and services for electronic filings and document management solutions for the California Secretary of State (“California SOS”). NIC Conquest completed the maintenance and operations phase of its contract with the California SOS effective December 31, 2009, and delivered a final release of its application to the California SOS for acceptance testing. Once the California SOS completes its acceptance testing and moves the final release into production, NIC Conquest will have no future obligations under this contract and will no longer operate in this line of business. We offer UCC applications through several of our state portals, typically through the Secretary of State’s office; however, transactional revenues associated with these applications are not associated with NIC Conquest and are included in portal revenues.
Segment Information
Our two reportable segments consist of our portal outsourcing segment and software & services segment. The portal outsourcing segment includes our subsidiaries that operate outsourced government portals and the corporate divisions that support portal operations. The software & services segment primarily includes our subsidiaries that provide software development and services other than portal outsourcing services to state and local governments, and includes NIC Technologies and NIC Conquest. For additional information relating to our reportable segments, refer to Note 13 in the Notes to Consolidated Financial Statements included in this Form 10-K.
Industry Background
The market for government-to-business and government-to-citizen transactions
Government regulation of commercial and consumer activities requires billions of transactions and exchanges of large volumes of information between government agencies and the businesses and citizens they regulate. These transactions and exchanges include driver's license record retrieval, motor vehicle registrations, tax returns, permit applications and requests for government-gathered information. Government agencies typically defray the cost of processing these transactions and of storing, retrieving and distributing information through a combination of general tax revenues, service fees and charges for direct access to public records.
The limits of traditional government transaction methods
Traditionally, government agencies have transacted, and in many cases continue to transact, with businesses and citizens using processes that are inconvenient and labor-intensive, require extensive paperwork and use large amounts of scarce staff resources. Transactions and information requests are often made in person or by mail, which increases the potential for the compromise of sensitive personal information or errors that require revisions and follow-ups, particularly if the transactions and information requested are processed manually. Even newer methods, including telephone response systems, tape exchanges and dial-up computer networks, rely on multiple systems and potentially incompatible data formats, and require significant expertise and expenditures to introduce and maintain. As a result, businesses and citizens often have no choice but to face costly delays to complete essential tasks. These delays include waiting in line at a government agency, waiting for answers by telephone or waiting for responses by mail. Businesses and citizens encounter further inconvenience and delay because they usually can work with government agencies only during normal business hours. Even when electronic alternatives are available, they often require a cumbersome process of multiple contacts with different government agencies. Increases in the level of economic activity and in the population have exacerbated these problems and increased the demand for new services.
Growth of the Internet, electronic commerce and eGovernment
The Internet is a global medium that enables millions of people worldwide to share information, communicate and conduct business electronically. According to eMarketer, over 200 million people in the U.S. will regularly use the Internet in 2010.
Penetration of personal computers also continues to rise. According to Forrester Research, the number of personal computers in use globally will grow to 1.3 billion units by 2010. Mature markets, including North America, Europe, and Asia-Pacific, will have added 150 million new personal computers by the end of this decade, while emerging markets will have increased personal computer penetration by 572 million units.
Access to high-speed Internet services provides users with a more responsive Web browsing experience. eMarketer estimates there were 312 million households with access to broadband services worldwide in 2007 and estimates this number will jump to 534 million by 2012. In the U.S. alone, eMarketer estimates there were 66 million households with access to broadband services in 2007, and believes this number will grow to 94 million in 2012.
The use of mobile technology to access eGovernment services on the Internet is also increasing rapidly. According to ComScore, in 2009, approximately 22 million people in the U.S. accessed the Internet daily using mobile technology, which is double the number of users in 2008. The rapid growth in mobile technology and smart-phone usage is expected to continue.
Similar growth trends are seen for eGovernment. Research firm Input predicts that spending on state and local government information technology outsourcing will grow to $20 billion in 2010.