NIC's (EGOV) CEO Harry Herington on Q1 2014 Results - Earnings Call Transcript

| About: NIC Inc. (EGOV)

NIC Inc. (NASDAQ:EGOV)

Q1 2014 Results Earnings Conference Call

May 5, 2014 4:30 PM ET

Executives

Angela Davied - Director of Communications & Investor Relations

Harry Herington - Chairman and CEO

Robert Knapp - COO

Steve Kovzan - CFO

Analysts

Brian Kinstlinger - Sidoti and Company

Jeff Kessler - Imperial Capital

John Campbell - Stephens Inc.

Operator

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the NIC First Quarter 2014 Earnings Announcement Conference Call. During today’s presentation all parties will be in listen-only mode. Following the presentation, the conference will be open for questions. (Operator Instructions)

This conference is also being recorded today, Monday, May 5, 2014. I would now like to turn the conference over to our host, Ms. Angela Davied. Please go ahead, ma’am.

Angela Davied

Thank you, Tom. Good afternoon, everyone. And welcome to NIC's first quarter earnings call. The press release for NIC's first quarter 2014 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 and resulting liability and general economic conditions and other important cautionary statements and risk factors described in NIC's 2013 annual report on Form 10-K filed with the Securities and Exchange Commission on February 27, 2014.

Any forward-looking statements made during this presentation 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 Herington

Thank you, Angela. Welcome to our first quarter earnings call and thank you for joining us today. As I thought about all that has transpired over the quarter, one word kept coming to mind, consistency.

Consistency is the foundation that drives many great corporations, an automobile manufacturer needs consistency in its manufacturing plant, so that regardless of the plant your cars built in there is a standard of quality you can expect.

The same goes for pharmaceutical companies. They must be exact and consistent as they develop the latest medicine and while we are not a manufacturing company, manufacturing vehicle on an assembly line, or mixing exact formulas of prescription drugs, consistency is also important for NIC.

For us, consistency takes many forms. The payment processing component of any online government transaction needs to be simple and efficient, whether you registering your car in Texas or registering your boat in Maine.

We also strive to make the security measures we take to protect personal information consistent throughout our company. We have more than 30 general managers across United States, all of whom are held to similar annual growth metrics, with consistent expectations to develop new and innovative eGovernment solutions.

For more than 20 years, this operational consistencies have resulted in consistent financial results, recurring revenues and healthy growth rates, that are fairly predictable quarter-to-quarter, year-after-year. This quarter was no different

We continue to do what we do best. Grow our core business by adding new partnerships, adding new online government services and making sure more people use existing services. Steve will talk about the more significant items that drove our results for the quarter in a moment. But one thing should resonate loud and clear, our core business is as strong as ever and it’s because we remain consistent in our mission and making good government great.

Government partners represent some of our new portals, as well as partnerships we’ve had since the early ’90s convened in Kansas City in early April for our partner conference. In total about 100 people gathered for the conference with half of our portal states represented.

The theme of the conference was Together We Are Making Good Government Great. Our key message throughout the conference was one that we have been communicating consistently for years. Our single focus is on making government more efficient and more accessible through the innovative use of technology. This is our only business, not a division or something we do on the site.

Over the course of two days, we networked and shared several ideas that can continue to advance eGovernment innovation. I really enjoyed talking with all of our partners in attendance and it was great to have so many passionate and smart people in one room excited about using technology to make government even better. I will speak to this further tomorrow at our Annual Stockholders Meeting.

Staying true to our mission and being innovative also involves exploring alternative funding models other than our traditional self-funded model in states where unique circumstances may warrant them.

We understand the probability that alternative funding models may result in shorter term contracts, but they provide good opportunities for both NIC and government with unique situations.

Three years ago the State of Delaware approached NIC and requested we consider an alternative funding arrangement. Delaware was unable to use driver history records as an initial funding source and proposed that the enterprise-wide eGovernment initiate be financed by a single state agency that would pay NIC an annual fixed fee of approximately $2 million from appropriated budgeted dollars.

After careful consideration we agreed to try this unique approach recognizing the associated risk that go along with being paid directly by single-state agency. Since the execution of the contract, we have developed 55 services and mobile applications for 17 state agencies in Delaware and these services have proven to be very successful, winning a number of awards. In fact, one award recently recognized the success of the state’s IT program and applauded its ability to create cost saving efficiencies and increased partnership between agencies.

While the state is pleased with the work we have done and how we are benefiting their citizens and businesses, they are struggling with the ongoing use of appropriated tax payer dollars to pay for our services.

Admittedly, our services are not inexpensive, but we believe they are the best top shelf eGovernment solutions in the country. It is also relevant to note that Delaware is facing a multi-million dollar budget shortfall with the legislative requirement to pass a balanced budget. As a result, the state has indicated that they will bring their eGovernment services back in-house when the current contract term expires at the end of September.

We have built outstanding relationships in the states over the past three years and I do not view Delaware is a failure. It was a beneficial contract for both the state and NIC. While I am disappointed this funding model did not work for the state I am committed to continuing to explore revenue models that are departure from our traditional self-funded model in situations where they make sense.

Some may work, some may not, but as with any successful growing company, we must always be willing to take smart risk and find creative ways to deliver very best an eGovernment services for states, local and federal governments, and some day even international.

While around the subject of risk, another matter I’d like to address is the recent development in which many of you may already be aware. In Oregon, there is a legal matter that has been going on for the past few years between the Oregon Trucking Association and the State of Oregon.

This past March, an Oregon county circuit court judge ruled that the Oregon Department of Transportation did not have the authority to enter into an agreement with the Oregon Department of Administrative Services granting the Department of Administrative Services the right to provide electronic access to certain records, including driver history records.

We have an agreement with Department of Administrative Services to manage electronic access to driver history records on behalf of the state. It is important to understand that we have a valid contract with the Department of Administrative Services and our contract is with not with Department of Transportation.

It is also equally important to note that we are still actively delivering services and collecting revenue. Since we are not a party to this matter, we cannot comment further. But I did want to inform you and the investors that we are following the developments carefully and are standing beside our partners in Oregon as they deal with this legal challenge.

And the best part that the government has ever had is the consistent focus that fuels our passion and drives our financial success companywide. It is a singular and we’re being focused on our core business, a business model that stands alone in the industry that has stood the test of time, that continues to provide the steady, healthy growth that investors with cumbered effect that we delivered once again in the first quarter this year.

However, in order to consistently grow, companies have to evolve and be willing to take risk. I’m proud of how NIC continues to evolve and I’m comfortable with the risk we take. It is it’s willingness to push the envelope that has enabled us to consistently grow the business.

In fact our steady consistent growth helped us to be recognized once again by Barron’s by being included in the Barron’s 400 Index for the third consecutive year. This index includes the top 6% of all publicly traded company in North America. Even more impressive, only 50% of the companies that are in the index remain on the list for two consecutive years, let alone three consecutive years. We appreciate the Barron’s contingency to recognize our financial strength.

I’ll wrap up my comments with this. I remain excited about the future growth opportunities we have as a company. I often say my goal is world domination and it’s true. I think every state government, federal government and international government can benefit that we may now see innovative solutions that we deliver under our unique business model and I’m excited about the pipeline of future growth opportunities we have as a company.

We are in active contract negotiations with the State of Louisiana and we continue to be excited about other state and federal self funded opportunities that we hope will result in our fees this year and next. I will end my remarks as I began our core business is as strong as ever. And I’m pleased with the consistent growth we continue to demonstrate.

And with that, I’ll turn the call over to Robert Knapp, NIC’s Chief Operating Officer for additional operating highlight.

Robert Knapp

Thank you, Harry. One of the things that Harry mentioned was consistency and specifically consistency with our payment processing services. Payment processing is a key component of many successful eGovernment online services. I'd like to share with you a few examples of the impressive work we did in the first quarter of the year to successfully and securely process payments on behalf of our government partners.

We processed nearly $150 million in tax payments for the Kentucky Department of Revenue. We process approximately $13 million in eLicense sales for both resident and nonresident hunting and fishing licenses for the State of Montana.

We launched a donation kiosk for the Oregon State University Hatfield Marine Science Center allowing the science center to collect debit and credit card donations from visitors for the very first time. Half of all property transfer tax returns in the State of Vermont were submitted online.

Over the past three years, since we launched this service for the Vermont Department of Taxes, we have processed more than $50 million in transfer taxes. In Hawaii, our work with the state judiciary to develop the eTraffic service resulted in 37,000 citations paid using a mobile device or nearly $3.5 million in fine.

And finally in South Carolina, we processed more than $22 million in property taxes this January. That’s 45% higher than the amount of online property taxes we processed in January 2013.

As you can tell, secure payment processing really is critically important part of what we do for our government partners. Another important part of providing the best in eGovernment solutions is security. It seems to be a regular currency stage to hear about a retailer whose customer information has been hacked. The data breaches with several large retailers this past fall but still fresh in everyone’s mind. Individuals are not the only ones needing to protect their personal information.

Corporations can be the target of identify fraud as well. NIC is proud to have developed a unique online solution to monitor suspicious corporate identity activity and during the first quarter of 2014, Maine became the second state in the United States to use this online corporate fraud monitoring service.

Operated through the Secretary of State’s office, this new service allows business owners and registered agents to be automatically notified of any filing process against their business entities. Utah was the first state in the nation to launch this service, and I want to thank both of our teams in Maine and Utah for the work they did to lead the way in this important initiative.

Next, let’s take a look at some of the developments this quarter with our newer portals. As we previously announced, we added Connecticut as a new state partner in January. In just a few months, our team in Hartford has ramped up the portal, hiring local candidates surrounding our portal team, working on the redesign of Connecticut.gov, holding conversations with state agencies and commencing development for the new state business portal.

Finally, I'm pleased to inform you that we began generating revenues from Connecticut driver history records in April. Clearly, a lot of work is underway and I look forward to what we will report from Connecticut in the future. Last summer, Wisconsin came on board and our team there is busy helping advanced eGovernment for their state. This past quarter, they worked with the Department of Motor Vehicles to launch a CDL, or commercial driver’s license practice exams. This online exam will help prepare commercial drivers take the states written exam.

Our team in Madison also worked with the Department of Tourism to launch a communications management system that will help the department share information about the state’s scenic landmarks, parks and recreational activities. And finally, just a couple of weeks ago, Wisconsin’s Governor, Scott Walker announced the new and improved Pocket Ranger mobile application that we launched with the Wisconsin Department of Natural Resources.

Originally launched in late 2013 with hunting information, the mobile app now includes fishing information, lake access information and much more. Finally, Pennsylvania, which joined the NIC family in early 2013, launched two very large projects in March. First, our team in Harrisburg worked with the Governor’s Office of Innovation to launches a new website. This site is dedicated to reducing costs, increasing efficiency and improving service in state governments.

Also in March, our team worked for several agencies to launch the first phase of PA Biz Online. Similar to other one-stop online business resources, this new site helps Pennsylvania entrepreneurs navigate the steps to start and grow business, find resources and forms and register a business with multiple departments as required by law, including the Department of Labor and Industry, Department of Revenue and Department of State. It’s great to see this kind of progress across our newer portals.

Before I close I want to give a quick shout out and congratulate our team in Honolulu for being recognized by the Hawaii Business Magazine as one of the best places to work in Hawaii. Based on confidential employee surveys and an extensive review of employee benefits and working condition, NIC’s Hawaii portal took home top honors.

Finally, I'll close by thanking the State of Colorado for continuing to place its confidence in NIC. During the first quarter, the state signed a new long-term contract with our Denver subsidiary, Colorado Interactive, LLC. The new contract includes an initial five-year term with renewal options that the state can exercise taking the contract through April 2023. Again, thank you to all of our partners with the State of Colorado. It’s been a pleasure to serve you and the citizens and businesses of your state since 2005 and we look forward to many more years of partnership.

And with that, I'll turn the call over Steve Kovzan, NICs Chief Financial Officer. Steve?

Steve Kovzan

Thanks, Robert and good afternoon to everyone on the call. Before I get into the details for the quarter, I’d like to point out a change in the way we now refer to our two main categories of portal revenues.

For years, we have used the terms DMV and non-DMV. We have DMV referring to the transaction fees we collect for providing electronic access to driver history records and non-DMV referring to the transaction fees we collect to process all of the other thousands of eGovernment services, including services we manage for various Departments of Motor Vehicles such as vehicle tag registrations and driver’s license renewals.

We found over the years that this has created confusion from time to time with some people incorrectly assuming that all services we develop and manage for DMVs across the country are included in the DMV category.

So in an effort to provide more clarity, we have changed the nomenclature for these two categories. We now refer to DMV revenue as, DHR, or driver history record, revenue. We believe this more simply and clearly defines what is included in this category of portal revenues, only the transaction fees we collect from driver history records. All other revenues from eGovernment transactional services are included in the category we now call IGS, or Interactive Government Services. Again, we hope this change provides more clarity going forward.

Now on to the results for the quarter. During the first quarter of 2014, NIC earned $0.14 per share with total revenues of $65.4 million. Before I dive further into the results, I want to point out one item that affected the comparability of results between quarters, which I mentioned on our last earnings call when speaking to our guidance for 2014.

Our effective tax rate for the current quarter increased to 39% from 37% in the prior year quarter. The lower rate in the prior year quarter related to a favorable benefit from the federal research and development tax credit, totaling approximately $500,000, or about $0.01 in EPS. We recognized no benefit from the R&D tax credit in the first quarter of 2014, because legislation extending the credit beyond December 31, 2013, has not been enacted. As we have done in the past, we would recognize any benefit of the reinstatement in our effective tax rate at the time it becomes law, for now we cannot.

For the quarter, portal revenues were a record $61.5 million, up 6% over the prior year quarter, driven by the consistent deployment of new services and increased adoption of existing services across several portals. As we mentioned on the earnings call last quarter in speaking to our guidance, 2014 is expected to be a year of continued growth and progress for our core portal business with a few puts and takes. For loss of revenue from legacy state portal contracts in Virginia and Arizona, combined with modestly lower revenues in Texas due to the expiration of certain master work order projects, makes 2014 a challenging growth year compared to the blockbuster growth we experienced in 2013. However, as I will touch on in a moment, our core business is solid with organic revenue growth for the quarter in line with our historical averages.

Before I get into our same-state metrics for the quarter; as a housekeeping matter, we excluded from the quarter’s same-state revenue growth calculation our newer portals in Wisconsin and Pennsylvania, as well as legacy portals in Virginia and Arizona. Having said that, total same-state portal revenues grew respectable 7% for the quarter. Excluding Texas from the calculation, same-state revenues grew in the double digits, a healthy 10% for the quarter.

Breaking down the components of same-state revenue growth, same-state IGS transactional revenues grew 7% this quarter. Again, we previously referred to this category as non-DMV. As we discussed during the last earnings call, we anticipated lower IGS growth throughout 2014 compared to the blockbuster growth we experienced in 2013, as we cycle against several anniversary milestones of large services in Texas, Colorado, and New Jersey, along with the expiration of certain master work order projects in Texas. Excluding Texas, same-state IGS revenue growth was a healthy 15%, in line with historical averages.

Same-state DHR transactional revenues, again what we previously referred to as DMV continue to exceed our expectation as they have over the past year and grew 4% this quarter due mainly to higher transaction volumes across several states. DHR growth rates began trending higher in the second quarter of last year, so we will begin trending against those higher growth rates next quarter and we will be eager to see if current growth rates continue.

Same-state portal management revenues were up 3%, and finally, same-state time and materials revenues increased 22% this quarter, due to higher project-based revenues across various portals. Keep in mind, this category of portal revenues is somewhat lumpy quarter-to-quarter and does now have the same degree of predictability as our transaction-based services.

Moving on to our newer portals, current portal revenues from Pennsylvania and Wisconsin were $2.4 million and $1.2 million respectively. In the prior-year quarter, revenues from Pennsylvania were $2.6 million, while the Wisconsin portal did not begin generating revenues until Q3 2013. Connecticut was in startup mode throughout the first quarter, so we recognized no revenues from our newest state contract. However, as Robert mentioned, the driver record service in Connecticut is now up and running and we began recognizing DHR revenues in April.

As for legacy portal contracts in Virginia and Arizona, revenues from the Virginia state agency partnerships were $600,000 in the current quarter, while revenues from the legacy Virginia state portal contract in the prior year quarter were $1.5 million. Revenues from the legacy Arizona portal contract were $800,000 this quarter, compared to $900,000 in the prior year quarter. The transition in Arizona is now largely complete.

The portal gross profit margin was 41% in the current quarter, compared with 44% in the prior year quarter. Nearly 2 percentage points of the difference between quarters were attributable to higher employee compensation cost in our Pennsylvania portal, which had not yet begun to significantly ramp its cost structure in the prior-year quarter. Furthermore, lower revenues from the legacy Virginia portal contract and startup costs in Connecticut, which totaled about $400,000 for the quarter, affected the portal gross profit margin. Considering these items, I was quite pleased with the portal gross margins for the quarter.

Moving on, for the quarter software and services revenues were up a healthy 23%, contributing to a 42% increase in gross profit, driven by continued strong performance from the North Carolina lien service and a pre-employment screening program, which we manage for the US Department of Transportation, Federal Motor Carrier Safety Administration.

Finally, I was quite pleased with our 24% operating margin for the quarter, which we achieved despite some of the previously discussed revenue headwinds we will continue to face throughout 2014. As I wrap up my comments today, I will echo what Harry said earlier. The core business is in great shape. We are holding true to the key growth drivers of our company adding new state partners, adding new services to existing state portals, and increasing the adoption of existing services. I’m confident that our unwavering focus on these areas will continue to pay off, just as it has for the past 22 years.

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

Harry Herington

Thank you, Steve. You heard today, we are off to a strong start for the year and I'm pleased with the momentum of self-funded eGovernment that continue to spread across the country. With that, Tom, we will open up the call for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from the line of Brian Kinstlinger with Sidoti and Company.

Brian Kinstlinger - Sidoti and Company

Hi, thanks. Good afternoon. I didn’t hear an update on federal. Maybe can you update us on the progress being made on the federal side? Since the Omnibus had favorable language, has there been any material changes, increases in discussions? And then specifically, Harry, you mentioned, one agency that was trying to get approval for an RFP on the last call where does that stand?

Harry Herington

I’ll give you a little bit of an update, but I’m going to be real careful and you know me I’m very cautious with these things. We’re very pleased with the Omnibus bill that was passed. We’ve had a federal agency that has language in their regs that authorize it and we’re expecting another one to come out with that shortly. I do expect to see and I’m going to say this [inaudible] qualified, I do expect to see hopefully a federal RFP come out this year, however, we have been surprised so many times when - with government RFPs that they are on that the glide path and everything is looking good and who knows what gets in front of it. But I would say things are moving forward about as positive as I can say for the federal and also with the state level.

Brian Kinstlinger - Sidoti and Company

Great. And then how much revenue are you generating today from Oregon and how much of that is DMV?

Steve Kovzan

Brian, I don’t, we, I don’t have an exact number for Oregon, but I would say, still today, the majority of the revenues that we are earnings in Oregon would probably be on DMV.

Brian Kinstlinger - Sidoti and Company

And then, can you provide -- can you highlight the other states that have any revenue from appropriated dollars even if it just part of the state revenue?

Steve Kovzan

Yeah. Other than Delaware, which, Harry mentioned in his scripted remarks, the only other portal contract that we have with a significant component of the funding source being in the form of fixed fee payment would be the State of Indiana.

As you are aware, Brian, in a number of our states and in the majority of our states we are able to earn revenues on a time and material kind of on a project basis. But in terms of fixed fees, Indiana, is the only other state at this point in time, now that we saw the last of fixed fee revenue from Arizona in the first quarter of 2014.

Harry Herington

But it’s important to note that even in Indiana, it’s structured differently, it generates its revenues similar to other enterprise-wide, it just goes to the state and then state pays us from there.

Steve Kovzan

Right.

Brian Kinstlinger - Sidoti and Company

Great. Last question I have, are there any updates on the signing of Louisiana and if hasn’t been signed, what do you think the holdup is?

Harry Herington

It’s government and we are still negotiating in Louisiana, I think I mentioned that in my remarks. It’s going well. It’s just - you have to get through the various parties involved and then you also have to keep in mind, this time of year we are always dealing with slowdowns, dealing with the legislature. I’d love to say, it is our number one priority. Unfortunately, as hard as I try, I can’t make it the number one priority and so sometimes we deal with that.

Brian Kinstlinger - Sidoti and Company

Okay. Thank you.

Harry Herington

Thank you, Brian.

Operator

Thank you. Our next question comes from the line of Jeff Kessler with Imperial Capital.

Jeff Kessler - Imperial Capital

Thank you. Could you elaborate a little, hi, guys.

Harry Herington

Hi, Jeff.

Steve Kovzan

Hi, Jeff.

Jeff Kessler - Imperial Capital

How are you doing? Can you elaborate a little bit on the types of services that the Federal RFP would entail?

Harry Herington

Not at this stage and the reason for that, I am very careful, that I am not going to alert any potential competitors into what I am going after.

Jeff Kessler - Imperial Capital

Okay. Fair enough. Are there any non -- other non-state businesses -- services and I am thinking specifically of cities, counties, that you are in the process of negotiating at this point?

Harry Herington

No. We have been very clear with what we have out there. I will say that, in our existing contracts, we are always working with different cities, because we can typically work with them in our existing contracts. It doesn’t usually bring material revenues, but there is revenue opportunity there.

As far as state opportunities, we have very healthy pipeline right now. I am very excited where we are at, but there are no RFPs out that anybody is aware of. I am looking to Robert, I think, he has got something there.

Robert Knapp

No. I think we commented on the last quarter’s call regarding the North Carolina liens opportunity.

Harry Herington

Yeah.

Robert Knapp

I think there was a question at that point relative to that service and certainly we are not going to make specific comments, but we continue to look for those, similar to how we do it within our portals, we look for opportunities where that same service may work.

Jeff Kessler - Imperial Capital

All right. Is Delaware, not realizing that Delaware, the Delaware negotiations are not the same types of negotiations that you have in the State of Virginia, is it a possibility that there might be an agency or two in Delaware that would want to keep you on on an ad hoc basis or whatever, or is this omnibus, this is the whole state or nothing at all?

Harry Herington

Well, here is the deal, Delaware, is a great partner, population wise it doesn’t have that large of a population and so when you start looking at transaction base, it takes significant applications to make that even become worth out while, it’s unfortunate to say.

That’s why we took a player here. We look at, they wanted our service, we wanted to work for them, they approach that and we really had to try to figure a way to make it work since DHR records were off the table there.

And we, I mean, they have indicated, we are going to take it in-house. All I can say about Delaware long-term, I mean, we are still continuing to work there. We are transitioning. We have started transitioning. We are still delivering on things, if we can find a solution that could keep us there long-term, we will. I am not holding out much hopes right now.

But I feel very confident with our relationship there, there could be an opportunity in the future. I have got to continue to try and find how I can solve the issue of the states that either do not have driver history records as an option or population-based where we struggle of -- like a State like New Jersey. They had a population base we could go at them without DHRs. I have still struggled trying to find things how it gets worked. Delaware was a good shot at it. It was great contract for us. We made a decent return. They got good services and they just got last week some great awards. So it’s just -- it is unfortunate. I hate losing a partner.

Jeff Kessler - Imperial Capital

Okay. Final question that is software and services margins were a little bit different this quarter. I'm wondering what were the causes, I mean, I see -- I have the press release. So I can read that but the bottom line was, is that the -- what are the types of things that if this is a generic to the perhaps to some of the blips that you may see upwards or perhaps downwards going forward in software and service given that is -- since it is smaller, it may be more vulnerable to having these ups and downs in the margin?

Steve Kovzan

Yeah. Jeff, I think that the businesses that are included in that portion really are primarily when you think about it, it’s the pre-employment screening program for the federal government and the Department of Transportation. It’s the North Carolina liens service. And it’s a handful of mainly payment processing services that we provide to a number of cities, municipalities and counties throughout the U.S., kind of, on a one-off basis in some states where we don’t have a portal contract.

Those contracts are small but they have been growing and kind of like in our PSP business, when we’ve seen volume upticks, we’ve naturally seen some of that volume uptick drop to our margin because there is not a lot of incremental cost that goes along with businesses like those. So I can’t envision anything that would create volatile or material swings to the downside but admittedly it was a pretty solid quarter for the margin in that business.

Jeff Kessler - Imperial Capital

Right. And one follow-up question that is just on a little bit of modeling, there is no change in having what would be an easier comp side on the second half of the year than before. In other words, it looks like better second half of the year than the first half in terms of comps?

Steve Kovzan

Well, I guess, we certainly haven’t changed our guidance and where our outlook is…

Jeff Kessler - Imperial Capital

I didn’t hear you change it today but I’m just asking.

Steve Kovzan

Yeah. No, we’re not making any changes in the guidance that we have previously issued.

Jeff Kessler - Imperial Capital

Okay. Okay. Thank you very much.

Steve Kovzan

Thank you.

Operator

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

John Campbell - Stephens Inc.

Thanks for taking my questions guys.

Harry Herington

Hi John.

Steve Kovzan

Hi John.

John Campbell - Stephens Inc.

Hi. I believe you guys said that Delaware contract I guess was about $200 million contract and it’s…

Harry Herington

No.

Steve Kovzan

If it was $200 million, I would be -- I would be in Delaware, trying to figure out how (indiscernible) $2 million roughly, this most recent year that we are operating in it, it’s about $2.2 million in fixed fee revenue.

John Campbell - Stephens Inc.

Got you. Got you. So how should we think about, is there a lot of seasonality to that? Is it pretty fixed or how should we think about 4Q?

Steve Kovzan

So that business is literally about $545,000 in revenue per quarter that is included in the portal management line that will run through the end of September and then that after that it will stop.

John Campbell - Stephens Inc.

Got it. And then just, kind of, update, you guys might be able to give us on the renewal front. I mean, it does seem like there is quite a few relatively important states up for renewal this year. So if you guys can maybe just give us an idea just kind of roughly on the renewal dates?

Robert Knapp

Yeah. John, there are several as you point out, I think five that are out there right now, maybe six. And I would just say all of those are -- we feel comfortable with where they are in the process. We are very much obviously aware of them and working on them.

Harry Herington

Yeah. I don’t have the dates in front of me. This is Harry. We’ve got our annual stockholder meeting tomorrow. So we are offsite doing this call. So we are looking at our notes and unfortunately I don’t have those dates right in front of me.

Robert Knapp

Yeah. And because some of you frequently ask Rhode Island and Iowa contracts have yet to be finalized and they continue to operate on a series of extensions for three or six month periods at a time. So that’s how we continue to operate today in both of those states. So, yeah, it is a big renewal year but other than Colorado which we talked about on the call and in the earnings release, no new updates.

John Campbell - Stephens Inc.

Got it. Got it. And if I could just squeeze in one more here.

Harry Herington

Sure.

John Campbell - Stephens Inc.

So the Department of Transportation contracts, I don’t know if you guys have ever broken that out or maybe if you can break it out? If not maybe you can just talk about just general growth rates or maybe just even expectations as we kind of go throughout the rest of the year?

Steve Kovzan

Yeah. So we actually saw pretty good growth in the PSP service this quarter. I mean, revenues on that service are trending about $9 million plus a year and the first quarter was about $2.4 million in revenue from the PSP service and it grew in the low double-digit.

John Campbell - Stephens Inc.

Excellent. Thanks for taking my questions, guys.

Harry Herington

Okay. Thank you.

Operator

(Operator Instructions) Our next question is a follow-up question from the line of Brian Kinstlinger with Sidoti & Company.

Brian Kinstlinger - Sidoti & Company

Great. Thanks. Were there any price increases that aided DMV growth this quarter?

Steve Kovzan

Well, we still had the one price increase that went into effect last year in a medium-sized state. So our 4% DHR same-state growth would have been 3% without that price increase.

Brian Kinstlinger - Sidoti & Company

And when does that anniversary that increase?

Steve Kovzan

I think it probably anniversaries this coming up quarter if I’m not mistaken, second or possibly, sometime in the third. I’m looking at Robert. I think it’s the second quarter, the coming quarter.

Brian Kinstlinger - Sidoti & Company

And is the company evaluating the other price increases in the DMV side for any of the states?

Harry Herington

The DMV price increases, isn’t something that we aggressively go after. Typically those come because the states want to accomplish something more than what the current budget constraints allow us to do and so we will negotiate some for there, so that there is a positive for them and us. But until those things happen, we just can’t talk about it.

Brian Kinstlinger - Sidoti & Company

Okay. Harry, last quarter, you said despite no state RFPs, you would have followed new state pipeline. I know the averages over the last decade of RFPs, but do you expect any state RFPs will be released in 2014?

Harry Herington

I do expect that. But what I will say is what I said earlier of course is government gets it in, you get slowdown. There is unlimited number of obstacles that can get in the way. Right now, I feel very favorable with the state pipeline and same with our federal pipeline. I see opportunities coming this year. I am pushing my national sales team hard on that business development. They are feeling confident as well. But I’m a realist. I’ve been at this for 20 years and I just know, things can get in my way and slow them down.

Brian Kinstlinger - Sidoti & Company

Now given what’s happened in Arizona and Delaware, would you again take on a state contract that’s not self funded or is there something now that…

Harry Herington

Absolutely.

Brian Kinstlinger - Sidoti & Company

You will?

Harry Herington

Absolutely. Both of those were -- when I looked at those and I made the decision to go after both of those and the reason for that, if you have to as you look at this -- number one is it going to give a good return to the stockholders? That’s the first thing I look at. When I look at this, are we going to have a good return? And then before I can get closer to the point, I’m saying, I’m willing to speak with the state about them issuing RFP and what they are going to put in there and how we are going to respond. I have to look and see, can we deliver back to the state partner what they need? All right. I mean that is critical. I'm not going to go into a state and partner with them and get a good return to the stockholders and not be able to deliver what the state needs.

In each of these that we've done, it was good for both sides that just became financially not viable for them. They look and say, we have to invest our money someplace else. I don't like going after the fixed fees. I expect to look for and identify other unique alternative funding models, that’s what I keep challenge to my team with, right. If this isn’t going to work great, are not great. But if it’s not going to work, so be it. What’s our next shot, what else are we going to look at?

I don’t look at it as necessarily risk because as long as we are getting a return while we are there and both sides are getting what they want to deliver, it’s unfortunate that we can keep it long-term. I’m going to keep shooting until I find something that will complement our self funded. I think self funded is the way to go. I believe in that a 100%. I'm just looking for solution for the outliers.

Brian Kinstlinger - Sidoti & Company

Okay. Were there any start-up costs, Steve in Connecticut during the last quarter? Can you just highlight those? I heard revenue in April, but maybe you can highlight the startups?

Harry Herington

Yes, about $400,000 in startup costs in Connecticut.

Brian Kinstlinger - Sidoti & Company

Right. And then, the last question I have -- well, my brain selling me, sorry that will be last question, I forgot. Thanks very much.

Harry Herington

All right. Thanks, Brian.

Operator

And Mr. Herington, we have no additional questions, please continue with any closing remarks.

Harry Herington

All right. So thank you very much. And I would like to thank everybody who joined us this afternoon. I look forward to speaking with you tomorrow during our 2014 Annual Stockholder Meeting at 10 a.m. Central Time. When I will share more about how NIC is making good government great, please join the webcast by visiting Investors page of our website at egov.com or I would love it, if you just drop at The Oread Hotel at the heart of University of Kansas campus in Lawrence and I can meet you and check your hand to say how great things are. Until then, everybody have a great day.

Operator

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

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