NIC Inc. (EGOV) CEO Harry Herington on Q3 2019 Results - Earnings Call Transcript

Oct. 30, 2019 9:47 PM ETNIC Inc. (EGOV)
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NIC Inc. (NASDAQ:EGOV) Q3 2019 Earnings Conference Call October 30, 2019 4:30 PM ET

Company Participants

Angie Davied - Vice President Corporate Communications at H&R Block

Harry Herington - Chief Executive Officer

Steve Kovzan - Chief Financial Officer

Conference Call Participants

Alexis Huseby - D.A. Davidson

John Campbell - Stephens Inc

Operator

Good day, and welcome to the NIC Third Quarter 2019 Earnings Conference Call. Today's conference is being recorded.

At this time, I would like to turn the conference over to Angie Davied. Please go ahead.

Angie Davied

Thank you, operator. Good afternoon, everyone and welcome to NIC's Third Quarter Earnings Call. The press release detailing the quarter's results was issued 30 minutes ago. It and our other earnings documents are available on our corporate website at www.egov.com/investor-relations. Additionally, interested parties can also call our headquarters at 1877-234-3468 and we will e-mail the information to you.

Joining us on the call today are NIC's CEO, Harry Herington; and Steve Kovzan, NIC's Chief Financial Officer. Following a reading of our cautionary statements regarding forward-looking information Harry and Steve will deliver prepared remarks. At the conclusion of those remarks, we will open the line for questions.

Any statements made during this call that do not relate to historical or current facts constitute forward-looking statements. These statements often address the company's potential financial performance for the 2019 fiscal year or future fiscal years estimates projections the expected length of contract terms statements relating to the company's business plans, objectives and expected operating results, statements relating to the potential new contracts or renewals, statements relating to the company's expected effective tax rate, statements relating to possible future dividends, and share repurchases and other possible future events, including potential acquisitions and the assumptions upon which the statements are based.

Forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties, which may cause actual results to differ materially from the forward-looking statements. These risks include regional or national business, political, economic, competitive, social and market conditions, including various termination rights of the company and its partners, the ability of the company to renew existing contracts in whole or in part and to sign contracts with new federal, state and local government agencies. The effect of potential information technology, cybersecurity, or data security breaches, or incidents in the company's ability to identify and acquire suitable acquisition candidates and to successfully integrate any acquired businesses.

You should not rely on any forward-looking statement as a prediction that will guarantee about the future. A detailed discussion of risks and uncertainties that could cause actual results and events to differ materially from such forward-looking statements is included in the sections titled risk factors and cautions about forward-looking statements of the company's most recent Form 10-K and 10-Q filed with the SEC. These filings are available at the SEC's website at www.sec.gov.

Any forward-looking statements made during this call speak only as of the date of this call except as maybe required by applicable law. We understand no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events, or otherwise.

Now, it is my pleasure to introduce Harry Herington, NIC's Chief Executive Officer and Chairman of the Board.

Harry Herington

Thank you, Angie. This is Angie's first earnings call with NIC. Angie Davied not be confused with our previous Vice President of Communication, who had a very similar name joined us a short while ago as our Senior Vice President of Marketing and Communication. She has a long history of success in leading marketing initiative at privately held and publically traded company and we are looking forward to leveraging her expertise. NIC is evolving our marketing capability and her addition to the company will further enable us to continue to aggressively support new growth opportunities. I would like to officially welcome Angie to the NIC family.

About a month ago, the Center for Digital Government announced the winners of its Government Experience Awards. These awards recognize the achievements and best practices of states, cities, and counties that are pushing the boundaries of how both businesses and citizens' services are delivered.

As I've mentioned on previous calls, these awards are often referred to as the Oscars for digital government excellence. In total, NIC's partners were recognized for 12 of these awards including five of the top eight states in the overall state government experience. In fact NIC partners had four of the top three spots as there was a tie for second place.

I like to take this opportunity to congratulate our award-winning partners that are leading the charge to enhance government services. I will start with the first place winner Indiana. Indiana has been a phenomenal partner of NIC for the past 24 years and has routinely been recognized as the leader in the industry.

Second place was a tie between two of our partners; Arkansas and Maryland. Third place went to Mississippi and Kansas took fifth place. I would also like to congratulate the NIC partner states finalist in Louisiana, Maine, and Vermont for their outstanding services. We are extremely proud of the vision all of you have demonstrated and the well-deserved recognition you have received from the industry.

I'm also excited that you have selected NIC to help implement these solutions and look forward to working with you to continue to identify amazing innovative opportunities for the digital government industry in the coming years. Another area that I'm proud to share is the number of long-term partnership we maintain across this country.

At NIC, we take a great deal of pride in not only being able to say that we work with a particular state or agency, but even more so in creating, growing, and renewing our partnerships over time. This quarter several of our long-term partners continued to demonstrate their trust in us by extending their contracts with NIC.

I'll lead off that list with Vermont as we recently announced following a competitive rebid process the State of Vermont selected us to continue as the state's preferred digital government service provider. A role we have proudly performed for the past 13 years since 2006. The three-year contract with the state includes one three-year renewal option for possible total of six years.

Next is Idaho where we recently announced a two-year contract with the state which includes one two-year renewal options for possible total of four years. Idaho has been a partner for the past 19 years and we are thrilled to continue to deliver the best of the best in digital government services for the state and its citizens and business.

And next, Maryland has signed a one-year contract with us with option for an additional year.

Finally, I would like to thank Virginia for its recent contract award. As we announced after competitive bid process the Commonwealth of Virginia awarded NIC a new enterprise services contract to provide digital government solution. The multivendor award is for five years initially and includes three one-year renewal options for possible total of eight years.

For several of you on this call, you are aware of for our long history in Virginia which dates back to 1997. For those of you who are less familiar, I'll provide a bit of background and color. We delivered services to the Commonwealth under our traditional enterprise-wide self-funded contracts from 1997 until the fall of 2013. When we parted ways after the state chose to go in a different direction with the digital government strategy.

Although we no longer had an enterprise contract with the Commonwealth, several agencies partnered directly with NIC to continue to provide services. As a result, we have maintained a lean, but highly capable team of employees in Richmond who have done a phenomenal job over the years growing the reputation and number of agency relationships in Virginia to the point where our annual revenue run rate is now more than half of what it was when we transitioned out of our enterprise relationship back in 2013.

Our strategy over the years in Richmond was to keep demonstrating value to our agency partners, so that one day we'd have the opportunity to again expand our role with the Commonwealth and this new contract gives us the opportunity to do just that.

We are incredibly proud to continue our 20-year commitment to the Commonwealth and its citizens and businesses and we are excited to open this new chapter in our shared story. We look at all of these contracts as investments by our partners in our relationship as well as a show of confidence that NIC will work cooperatively in their best interest and the best interest of the citizens and businesses they serve.

We are grateful for that confidence and we are incredibly excited about what we can achieve as we proceed together in the future to further enhance digital government. The trust we earn and the superior award-winning digital government experiences we create with our partners are certainly satisfying in and of itself. But they're also exciting for NIC because they drive our company's growth.

As you have seen in this afternoon's earnings release, NIC continues to gain momentum with organic same-state revenue growing approximately 12%. Our third consecutive quarter of double-digit growth. This level of growth is higher than NIC has seen in more than five years. I'm quoted in today's earnings release, saying that this growth shows that we're just beginning to hit our stride and I truly believe that to be the case.

But I want to be clear that the momentum we are building isn't something that just happened during the third quarter. Instead, like the award and the new and extended contracts it is the result of years of working with the right way with our partners. NIC knows digital government better than anyone else. That knowledge empowers us to understand what our partners are trying to achieve and the processes they need to follow in order to achieve it.

Furthermore, I believe our business development pipeline is strong and the avenues for growth we see on the horizon are big. We will continue to identify opportunities to make responsible investment in our core business to position NIC to realize growth potential and position the company for long-term success while remaining committed to leveraging our financial strength by returning capital to our stockholders in the form of acquisition opportunity.

Every NIC employee, including my senior leadership team and myself is laser focused on continuing to increase the momentum. As the CEO of this company I am enthusiastic about what we will achieve in the future. Thank you for your continued confidence in NIC and I will now turn the call over to our Chief Financial Officer, Steve Kovzan. Steve?

Steve Kovzan

Thank you, Harry. In the third quarter of 2019, we earned $0.21 per share compared to $0.24 in the prior year quarter. I have one non-core item to call out for the current quarter. EPS was higher by $0.01 due to certain discrete tax items that are more fully described in our earnings release. In the prior year quarter certain similar discrete tax items increased EPS by $0.02.

Moving on to the core results for the quarter. Total revenues increased 4% to $90.4 million with total state enterprise revenues flat for the quarter. This will be the last quarter where revenues from the legacy Texas contract will be a headwind to our growth comparison as the legacy contract expired on August 31 of last year.

For comparison purposes, state enterprise revenues in the current quarter from the new Texas payment processing contracts totaled $7.8 million compared to $2 million in the prior year quarter. In addition, the prior year quarter included $13.3 million of revenue from the legacy Texas contract.

Total same state revenues increased a strong 12% for the quarter compared to the third quarter of last year reaching double-digit growth for the third consecutive quarter as Harry just mentioned. Breaking down the major components of same state revenue growth. Same state transaction-based Interactive Government Services or IGS revenues were up 17% from the prior year quarter, driven by payment processing services in New Jersey Indiana and handful of other states, as well as several other key services.

Same state transaction-based Driver History Records or DHR revenues increased 2% over the prior year quarter. And lastly same-state development revenues increased 15% for the quarter driven by various time and materials projects across multiple states.

While same-state fixed fee management revenues from our Indiana contract were flat for the quarter. On a combined basis, same-state development and fixed fee management revenues increased 9% for the quarter.

Software and Services revenue totaled $9.3 million for the quarter, up 51% over the prior year quarter. This phenomenal growth resulted mainly from continued strong performance for the Federal Pre-Employment Screening Program, as well as from the recreation.gov service which generated approximately $900,000 revenue during the quarter.

Recall that we launched the new recreation.gov service with Booz Allen Hamilton on October one of last year. So, next quarter will be the first comparable quarter for the service from a year-over-year growth standpoint.

As we previously disclosed recreation.gov service generated approximately $300,000 of revenues in the fourth quarter of 2018 which from a seasonality standpoint, we expect to be the lowest volume quarter each year. Also our newly acquired RxGov and NIC Licensing Solutions businesses continue to scale contributing a combined $1.1 million in revenue per quarter.

Moving on to a closer look at our operating expenses for the quarter, selling and administrative expenses were down slightly in nominal dollars and as a percentage of revenue declined 9% in the current quarter compared to 10% in the prior year quarter.

Enterprise technology and product support costs increased 9% for the quarter and as a percentage of total revenues were 7% in both of the current and prior year quarters. The increase was driven primarily by costs related to continued enhancements to our various vertical product and platform solutions and to higher technology infrastructure costs.

Depreciation and amortization expense increased by approximately $1.1 million from the prior year quarter, driven mainly by intangible asset amortization from the RxGov asset acquisition which closed in the third quarter of last year and totaled approximately $700,000 for the quarter; and from the Complia acquisition which closed on May 1st of this year and totaled approximately $200,000 for the quarter.

Operating income for the quarter decreased 8% resulting in an operating income margin of 20% down from 22% in the prior year quarter. These declines were primarily driven by lower revenues and profits from the new Texas payment processing contract compared to the Legacy Texas contract in addition to modest dilution from our newly acquired businesses cost to build out the Pennsylvania and Illinois outdoor recreation solution which we currently expect to launch in the first half of 2020 and the first half of 2021 respectively.

With the headwinds from the legacy Texas contract now firmly in our rearview mirror, I look forward to speaking with you next quarter when we expect to report a healthy year-over-year revenue trajectory in keeping with NIC's proud history of steady consistent growth. I wish everyone on the call and webcast a happy and healthy season.

With that I will turn the call back over to Harry.

Harry Herington

Thank you, Steve. I wish there was a way for me to share over the phone the level of excitement we feel in every corner of NIC. At the beginning of this year we outlined a three-pronged strategy to secure and grow our core state enterprise business, to diversify by expanding upon our vertical strategy, and to leverage our financial strength to more active capital allocation and we believe we are progressing on every front.

We have significant momentum, as evidenced by the contract renewals shared throughout the year and the fact we are growing our core business faster than we have in many years. But more than that, we are seeing a renewed enthusiasm throughout NIC for finding new and better ways to support our partners, each other and our communities. I am deeply proud of what I'm seeing at NIC and what we will do in years to come.

With that, operator, we will now open this call for questions.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] Will take our first question from Peter Heckmann of D.A. Davidson.

Alexis Huseby

Hi, guys. This is Alexis on for Pete today.

Harry Herington

Hi, Alexis.

Alexis Huseby

Hi. So congrats on the quarter.

Harry Herington

Well, thank you.

Alexis Huseby

Yes. I was hoping we could start off of by just diving a bit more into the Virginia contract. The structure of it seems fairly unique. I was hoping you could walk us through the structure a little bit more in detail and talking about perhaps, how it compares to state like Texas where you retained exclusively one portion of it? And then, also hoping we could get a sense of quantifying for annual revenue expected contribution from that?

Harry Herington

I can answer part of that question for you part of it will have to hold probably until -- or definitely until one of the future calls and that's actually the financial modeling for this. This is a different type contract and I would tell you that -- as you look at some of the NIC contracts, we're very flexible in how we work with our partners.

In this case, as you'll recall -- well, I know you weren't around, but I'm sure you've seen previous writings that Pete had on this. We had a traditional enterprise contract that had DHR revenue as part of that. We ended up losing that contract, walked away from that contract, I should say parting ways with the State several years ago, but we kept a small team there, as I mentioned, and continue to do work with them.

They came back out with an enterprise opportunity, in which we could work with all of the different agencies. It does not have DHR revenue with it. It will be an opportunity to work with the agencies, identify funding opportunities for those -- each of those services. And we have ways to go yet to understand truly how to model that. Very excited to make that. And I'd say, look at history, since we've left there we have continuously grown that business back to over 50% of where it was when we walked out.

Alexis Huseby

Yes. That makes sense, especially the modeling of those – the new structure. So -- then jumping over Texas, it seems like the revenue from Texas was bigger than we expected in the quarter. Could you explain what drove that? And then, will you be making any changes to any old guidance as a result?

Steve Kovzan

No. Alexis, we won't be making changes to guidance. I mean, clearly we had another good strong quarter and I think we're on a good trajectory to finish out the year strong. I guess, I would leave it at that. But I think we've seen stronger overall higher volumes, I guess, I would say, throughout this year.

I mean, the first three quarters of the year certainly have been a little bit higher than our expectation and that was part of the reason that we were able to take up our revenue guidance a little bit on our last call. So I think we're just seeing a continuation of that performance. But keep in mind, one thing is that, fourth quarter is always our seasonally weakest quarter and we expect the same thing with Texas, probably being our seasonally weakest of the four quarters.

Alexis Huseby

Okay. Got it. Thanks. And then, just one last one for me, if I could squeeze it in. And could you give us an idea of any cross-selling opportunities. It's great to see some success with RxGov and Complia and are you -- how much of a chance to do you get to market your other services to current customers?

Harry Herington

That's absolutely what we do day in, day out. One of the nice things about the NIC model is we don't treat these as separate business units internally. When we come out with our various platforms, verticals say it's the hunt and fish RxGov the licensing. Immediately we educate all of our teams on the ground with all of the contracts. We start educating our partners as to the value they bring and there's tremendous opportunity. We've already started seeing that opportunity as far as bringing those into our existing contracts. I'm very bullish on it.

Alexis Huseby

Okay. Thanks guys.

Harry Herington

Thank you.

Steve Kovzan

Thanks, Alexis.

Operator

Thank you. [Operator Instructions] And at this time speakers we have no questions. I'm sorry; we have a question from John Campbell of Stephens.

John Campbell

Hi, guys. Congrats on a good quarter.

Harry Herington

Hi, John.

John Campbell

So how many contract renewals are coming up in 4Q if you guys could provide that? And also you guys have previously talked to annual same-state revenue growth of 8% to 10%. After how this year has gone, do you think you guys get to the high end of that range? Or you're going to exceed that next year?

Steve Kovzan

John, I guess I'll -- let me answer the second question first while we kind of gather notes on contract renewals that are coming up but -- so the rate that we're at right now from a same-state growth standpoint, 10% the last couple of quarters and 12% this quarter. I think it'll be certainly a challenge for us to sustain long-term. We have a couple of factors driving that. What I would say more outsized growth and that is some sizable payment processing contracts you might recall that we won in New Jersey, we've also expanded our payment processing work in Indiana and a few other states that are driving our same-state growth a little bit higher this year, which is absolutely great to see.

But longer term, I think we've always felt pretty comfortable with same-state growth in the mid to upper single digits, but to continue on at a 10-plus percent clip I think will be a little bit more challenging. And so just conservatively set expectations mid to upper single-digit, so I think is a more reasonable near to intermediate term goal.

John Campbell

Okay, perfect. That’s helpful.

Harry Herington

So John just in terms of -- we've got about five or six states over the course of the next year that have contracts that are set to expire where we don't have renewal terms. So in most of those states, we would expect to see probably some type of competitive RFP. In some situations we are able to extend the contract and extend our contractual relationship without an RFP. We've listed a couple of those over the last couple of quarters, but in all likelihood we would expect to see some type of competitive RFP. On the average as a company we go through -- on average four to six a year in terms of competitive RFPs. So I guess this would be towards the higher end of that.

John Campbell

Okay. How competitive are these bidding processes when these contracts come up for renewal? How many guys are building on them?

Harry Herington

It really, kind of, depends as we go from states. The states we've been in the long-term. I mean there's always going to be individuals that show up and that's actually very healthy for the state for them to get others to come in and doesn't make us nervous. I mean, of course, we’d love to have a sole source here you will. But you typically see two to three companies that would bid on it.

John Campbell

Okay, got it. That’s all for me. Thanks guys.

Harry Herington

Hi, thank you.

Operator

Thank you. [Operator Instructions]

Harry Herington

Todd I think we're good.

Operator

Yes sir.

Harry Herington

And this is very common. Whenever we do a call and it's right at Halloween or any other holiday, people kind of bunch up their calls. So it doesn't surprise us. Not a lot of the questions today. I want to thank anybody that has joined us this afternoon. It was -- we're very pleased with the quarter and I am looking forward to sharing fourth quarter results with you early next year. Everybody have a great Halloween.

Operator

Thank you ladies and gentlemen. This concludes today's conference. You may now disconnect.

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