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NIC Inc (EGOV)
Q2Â 2019 Earnings Call
Jul 31, 2019, 4:30 p.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Good day, and welcome to the NIC Q2 Earnings Conference Call. Today's conference is being recorded.
At this time, I would like to turn the conference over to Chief Security Officer, Jayne Holland. Please go ahead, ma'am.
Jayne Friedland Holland -- Chief Security Officer
Thank you, operator. Good afternoon, everyone, and welcome to NIC second quarter earnings call. The press release for NIC second quarter 2019 earnings announcement was issued 30 minutes ago. Our earnings release is also available on our corporate website at www.egov.com/investor-relations. You may also call our headquarters at 1-877-234-3468 and we will email the information to you. Joining us on the call today are, NIC CEO, Harry Herington; and Steve Kovzan, NIC's Chief Financial Officer. Following a reading of our cautionary statement regarding forward-looking information, our CEO and CFO will deliver prepared remarks, then we'll open for questions.
Any statements made during this call 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 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 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, expansion of vertical solutions and the assumptions upon which those 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 and 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 Company's ability to identify and acquire suitable acquisition candidates and to successfully integrate any acquired businesses, as well as possible data security incidents.
You should not rely on any forward-looking statements as a prediction or 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 Caution About Forward-Looking Statements of the Company's most recent forms 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 may be required by applicable law, we undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise.
Now I'd like to introduce Harry Herington, NIC's, Chief Executive Officer and Chairman of the Board.
Harry H. Herington -- Chief Executive Officer and Chairman of the Board
Thank you, Jayne. On our last few calls, I updated you on the progress we are making on three key components of our 2019 strategy, to secure and grow our core state enterprise business, to enhance and diversify our overall business with the continued expansion of our vertical solutions, and to use our financial strength to pursue long-term growth opportunities, including acquisitions.
At the midpoint of the year, I am pleased to report, we continue to make excellent progress on each front this past quarter. First, I'll start with the lengthy list of long-term government partners who recently extended the relationships with NIC. Following a competitive rebid, we signed a new four-year contract with the State of Utah, which includes two three-year renewal options for a total of 10 years. We've had the privilege of partnering with Utah since 1999, with 2019 marking our 20th anniversary, and the state has routinely been recognized as a leader in digital government with multiple Best of the Web awards from the center of digital government and numerous other honors and accolades.
Next step is Rhode Island. During the quarter, we signed a new two-year contract with the Rhode Island Department of Administration, which includes two one-year renewal options for a total of four years. We've had the privilege of partnering with Rhode Island since 2001, and I'm incredibly proud of our team in Providence for the innovation they provide every day for multitude of agencies in that state.
My next update comes from Arkansas, where we recently received a one-year contract extension. Arkansas became our fourth state partner back in 1997. And today, we manage around 1,000 digital government services. Our team in Little Rock continues to deploy innovative solutions day in and day out. As an example, the Arkansas Department of Finance and Administration recently received a prestigious American Association of Motor Vehicle Administrators Service Award for Excellence in Government partnerships for its MyDMV solution.
Another great partner is South Carolina, where our contract was renewed for one year with one remaining one-year renewal option. South Carolina became our partner back in 2005 and is one of our premier payment processing states, deploying over a dozen new payment services in the second quarter alone, driving a 16% year-over-year increase in volumes through South Carolina's use of NIC's industry-leading secure payment platform.
And finally, my last contract update comes from the Federal business, where the Federal Motor Carrier Safety Administration or FMCSA extended its contract with us to provide the pre-employment screening program or the PSP for an additional six months, with two six-month renewal options remaining. PSP has been a phenomenal service since its launch in 2010, making our roadways safer, where it has been demonstrated that trucking companies using the PSP to screen new hires, lower their cost rates [Phonetic] by 8% and driver out of service rates by 17% on average compared to those that do not use PSP. Our DC-based team has enrolled nearly 18,000 active PSP subscribers, as of the end of June with more than 600 active accounts added in the second quarter alone.
It was certainly a busy quarter on the contract renewal front. And I want to give special thanks to our long-term partners in Utah, Rhode Island, Arkansas, South Carolina and the FMCSA for continue to put their trust in NIC. We look forward to what the digital government future holds together with you. Not only did we extend several long-term partnerships during the quarter, our core state enterprise business again produced strong financial results with same state revenues up 10%, generating double-digit organic growth for the second consecutive quarter. Steve will discuss the financial aspects of the quarter in a moment, but needless to say, I'm extremely pleased with this continued momentum.
Turning to the second prong of our growth strategy, diversifying and growing the business through our vertical solutions, we have already leveraged a regulatory licensing acquisition and were awarded a new contract in NIC Enterprise State during the second quarter. On our last earnings call, we announced the acquisition of Complia, a best-in-class licensing platform company currently focused on helping government regulate the cannabis and hemp industries. Quickly following the acquisition, we entered into an agreement to provide our new cannabis licensing and registration platform to the state of West Virginia. As a reminder, prior to the acquisition, NIC has previously deployed custom cannabis regulatory solutions for the states of Oregon, Hawaii and Maine. In addition, NIC and Complia had previously partnered to provide cannabis licensing solutions to Maryland, Montana, Oklahoma and Rhode Island.
We are thrilled that West Virginia is now in the fold. And we are excited about the exceptional addressable market opportunities within its relatively new and growing vertical. As I mentioned last quarter, the technology platform we acquired from Complia is also highly configurable and scalable and capable of providing licensing for several other highly regulated industries such as liquor licensing and various professional licensing types. This is an important aspect that made the acquisition of a smart investment for us.
We acquired a business focused on cannabis and hemp licensing. This is only beginning, as we plan to build upon the platform and expand its use for additional types of licensing. As a result, going forward, we refer to the business as NIC Licensing Solutions, which more accurately reflects the breadth of the services this business will ultimately provide to the government.
We will continue to leverage our financial strength to pursue the right acquisitions that complement our vertical strategy, expand our footprint in new and existing sectors and enhance our ability to deliver industry-leading digital government services. Our strong balance sheet and recurring cash flows allows us to make critical investments in our core business, while maintaining our commitment to pay a regular quarterly cash dividend. They also enable us to pursue attractive acquisition opportunities that fit strategically, culturally and financially with NIC, as evidenced by the two acquisitions we made in the past year. Through a disciplined and focused M&A strategy, we believe we can grow and diversify our revenues and drive significant shareholder value over time.
Next, I'm very excited to announce that we will be expanding our footprint in Illinois. As we recently signed an agreement with the Illinois Department of Innovation and Technology and the Illinois Department of Natural Resources to provide our comprehensive outdoor recreation solution to the state, which will ultimately deliver online and point-of-sale services for hunting and fishing licenses, campsite reservations, and snowmobile and watercraft licenses, along with other services.
The solution will include an integration with the micro services platform that supports the enterprise licensing and permitting solution. As we previously shared with you, when we launched the outdoor recreation solution in Pennsylvania, which is slated to launch in the second half of 2020, NIC will become the largest provider of hunt and fish licensing services in the country. When we launch the Illinois solution, which we currently expect will be in early 2021, NIC will offer hunt and fish licensing solutions in a total of 13 states. Specifically, Illinois ranks eight in the nation with $1.3 million hunting licenses, tags, permits and stamps sold in 2018. Steve will cover the financial aspects of this opportunity in a moment, but I'd like to extend a personal thank you to the Illinois Department of Innovation and Technology and the Illinois Department of Natural Resources for your trust and commitment to NIC and our industry-leading outdoor recreation solutions.
As we passed the halfway mark of 2019, I'm thrilled with the continued momentum in our business. As I shared with you today, all the elements of our strategy continues to gain traction. We secured numerous contract renewals, generated double-digit organic growth revenue in our core state enterprise businesses and expanded our vertical footprint with two new contract wins, one from our recent regulatory licensing acquisition, and one in the outdoor recreation space.
With that, it's my pleasure to turn the call over to NIC's Chief Financial Officer, Steve Kovzan. Steve?
Stephen M. Kovzan -- Chief Financial Officer
Thanks, Harry. In the second quarter of 2019, we earned $0.21 per share compared to $0.25 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 the release of reserves for unrecognized income tax benefits resulting from the completion of an IRS examination of our 2016 tax return during the quarter, which I am pleased to report resulted in no change from our previously filed return.
Moving on to the core results for the quarter. Total revenues decreased 1% to $91.6 million, with state enterprise revenues down 4% from the prior year quarter, driven largely by lower revenues from the new Texas payment processing contract compared to the legacy contracts -- contract as we had previously disclosed.
For comparison purposes, state enterprise revenues in the current quarter included $8 million from the new Texas payment processing contract compared to $18.3 million of revenues from the legacy contract in the prior year quarter. Total same state revenues increased a strong 10% for the quarter, reaching double-digit growth for the second 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 14% from the prior year quarter, driven by payment processing services in a handful of states as well as several other key services. Same state transaction-based driver history record or DHR revenues increased 4% over the prior year quarter. And lastly same state development revenues increased 5% for the quarter, driven by the timing of various time and material 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 3% for the quarter. Software and services revenues totaled $8.7 million for the quarter, up 47% over the prior year quarter. This stellar growth resulted mainly from continued strong performance of the federal Pre-Employment Screening Program as well as revenues from the federal Recreation.gov service, which generated approximately $1 million in revenues during the second quarter, which from a seasonality standpoint, we expect to be one of the highest volume quarters of the year for Recreation.gov along with the first quarter. Also our newly acquired RxGov and NIC Licensing Solutions businesses have started to scale, contributing a combined $400,000 in revenue this quarter, which is just the start of what we believe will be an exciting long-term growth opportunity for both vertical solutions.
Moving onto a closer look at our operating expenses for the quarter. Selling and administrative expenses were essentially flat, both in nominal dollars and as a percentage of revenue, compared to the prior year quarter, which we'd like to see. Enterprise technology and product support costs increased 18% for the quarter. And as a percentage of total revenues, were 7% compared to 6% in the prior year quarter. This increase was driven primarily by development costs related to continued enhancements to our citizen-centric Gov2Go platform and RxGov PDMP platform and to higher technology infrastructure costs.
Depreciation and amortization expense increased by approximately $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, totaling approximately $600,000 and from the Complia acquisitions which closed on May 1st of this year, totaling approximately $200,000. I'll touch on the Complia acquisition more in a moment when I cover our updated guidance for 2019.
Operating income for the quarter decreased 21%, resulting in an operating income margin of 19%, down from 24% in the prior year quarter. This was primarily driven by lower revenues and profits from the new Texas payment processing contract compared to the legacy contract in addition to modest dilution from our newly acquired businesses.
I'll conclude my remarks today with a discussion of our updated guidance for 2019, which takes into consideration our strong financial results through the first half of the year, the Complia acquisition including the related purchase accounting effects and anticipated operating results, previously disclosed executive severance costs incurred in the first quarter of 2019 and build-out cost related to the aforementioned Illinois outdoor recreation opportunity.
We currently expect total revenues of $347.5 million to $352.5 million. Reported revenues ranging from $317 million to $320.5 million and software and services revenues ranging from $30.5 million to $32 million. Our previous guidance for total revenues range from $333.5 million to $342.5 million with portal revenues ranging from $306 million to $314 million and software and services revenues ranging from $27.5 million to $28.5 million. We now anticipate earnings per share to range from $0.71 to $0.73, compared to our previous guidance of $0.70 to $0.74.
Our guidance reflects approximately $1 million in revenues and $800,000 in operating expenses -- or excuse me operating losses, which excludes intangible amortization expense relating to the company's recent acquisition of Complia. Intangible asset amortization expense related to the Complia acquisition is currently expected to approximately -- approximate $700,000 in 2019 and approximately $1 million on an annual run rate basis beginning in 2020.
Please refer to our Form 10-Q filed this afternoon for additional information on the Complia acquisition, including the purchase price allocation and the estimated amortization period for each of the acquired intangible assets. Our guidance also reflects approximately $2.6 million in previously disclosed executive severance costs incurred in the first quarter of 2019, which reduced earnings per share by approximately $0.04. In addition, our guidance reflects approximately $1.2 million in build-out costs for the remainder of the year to configure our comprehensive outdoor recreation solution to meet the specific needs of Illinois. Terry mentioned we will not only be delivering hunt and fish licensing component, we will also deliver campsite reservation component and a snowmobile and watercraft licensing component.
We currently expect to launch the entire system by early 2021 and to generate in excess of $3.5 million annually in transaction-based revenues over the life of the contract, which is similar in size to what we expect to generate from Pennsylvania. Also, as a result of this new agreement with Illinois, we will reduce the annual maintenance fee to the base enterprise, licensing and permitting solution by approximately $1 million to approximately $800,000 per year over the term of the master agreement. This change has been reflected in our updated state enterprise revenue guidance for 2019.
Finally, from an income tax standpoint, we expect our effective tax rate to approximate 25% for the full year 2019, excluding the impact of any future discrete items. One last item to point out on the Complia acquisition, the goodwill and intangible assets will be deductible for tax purposes. As always, our projections not include revenues or costs from any unannounced contracts.
And with that, I will turn the call back over to Harry.
Harry H. Herington -- Chief Executive Officer and Chairman of the Board
Thank you, Steve. We continue to execute well on our 2019 strategic objectives and I love the momentum of our business heading into the second half of the year. I look forward to updating you on our progress again in the fall in the third quarter earnings announcement.
With that, Manish, we will open the call up for questions.
Questions and Answers:
Operator
Thank you. [Operator Instructions] We will take our first question from Peter Heckmann of Davidson. Please go ahead, sir.
Peter Heckmann -- Davidson -- Analyst
Good afternoon, gentlemen. I wanted to ask on the updated guidance. [Indecipherable] information in a short period of time, but it looks like the revenue range is up maybe $10 million to $14 million on the year.
Stephen M. Kovzan -- Chief Financial Officer
[Technical Issues]
Peter Heckmann -- Davidson -- Analyst
Portion of that's coming from stronger software and service growth, portion is coming from Complia, portion is coming from higher same state. Am I missing anything in there? [Technical Issues] anything else going live or any of those significant derivatives?
Stephen M. Kovzan -- Chief Financial Officer
No. That's it. I think it's a good strong first half of the year, our expectation for the second half of the year, and a little bit certainly from Complia.
Peter Heckmann -- Davidson -- Analyst
Great. And then on Illinois and Pennsylvania, I missed it, I heard you say $3.5 million each and I -- but I missed it, was that annual or over the life of the contract? And if so, what is the life of the contract?
Stephen M. Kovzan -- Chief Financial Officer
So, in Pennsylvania, I believe the Pennsylvania contract is a 10-year contract in total. And the $3.5 million is annual revenue expectations. Same thing with Illinois. The Illinois agreement that we entered into with the Department of Natural Resources runs coterminous with the enterprise licensing and permitting contract. So I think it has an initial term that ends some time in -- I think it's in mid-2023, but then it's got a four-year renewal option that pushes it out to 2027. And the revenue expectation for the outdoor recreation component is also $3.5 million a year.
Peter Heckmann -- Davidson -- Analyst
Okay. Great. That's helpful. And then within same state, anything to call out in terms of either pricing increases on the DHR side or any, what do you call it, every other year by [Indecipherable] what it helped same state in the quarter?
Stephen M. Kovzan -- Chief Financial Officer
No pricing benefits certainly on the DHR revenue growth of 4%, which is probably stronger than -- a little bit stronger than normal, it's just higher volumes across a number of states. And on the IGS side, a strong payment processing growth in a small handful of states mainly New Jersey, Indiana and a few others.
Peter Heckmann -- Davidson -- Analyst
Got it. Okay. I'll get back in the queue. Appreciate it.
Stephen M. Kovzan -- Chief Financial Officer
All right, Peter. Thanks.
Operator
Thank you. [Operator Instructions] We do have our next question from John Campbell of Stephens Incorporated. Please go ahead.
John Campbell -- Stephens Incorporated -- Analyst
Hey, guys. Congrats on another great quarter.
Stephen M. Kovzan -- Chief Financial Officer
Hey, John.
Harry H. Herington -- Chief Executive Officer and Chairman of the Board
Thank you very much.
John Campbell -- Stephens Incorporated -- Analyst
Sure. Steve, just looking at the results versus last year, I just want make sure I've got kind of all the moving parts down. So, revenue is down 1%, profit's down 15% or so. I know you had some of the negative margin mix shift from Texas. You also have the acquisition expense kind of lift is coming, but if you could maybe just talk to some of the shifts and just the relative impact of each. I'm just trying to get a better grip on the Texas impact, given you're going to be lapping that soon.
Stephen M. Kovzan -- Chief Financial Officer
Yes. Certainly, I mean as I -- John, as I shared in scripted remarks, I would say that most of the operating income impact relates to lower profitability from the new Texas payment process -- processing contract compared to the legacy contract. We certainly also had some dilution, including amortization expense, purchase accounting amortization expense from the two acquisitions. And then finally, we continue to build out the Pennsylvania solution, where we're not recognizing -- the Pennsylvania outdoor recreation solution, I should clarify, where we're not recognizing any revenue there yet that will launch sometime mid next year. So, I would say those are the primary drivers.
John Campbell -- Stephens Incorporated -- Analyst
Okay. That's helpful. And then really good growth out of the Software & Services segment. Steve, I think you mentioned that rec.gov I think was a million contributor, but outside of that, you caught up the PSP strength. So I mean, if you back out the rec.gov lift, I mean, that's still a 30% growth rate. You also raised the guidance for the Software segment. So I'm guessing that's probably PSP-related as well. So I guess, first, is that true? And then, if so, what's driving the kind of better than what you guys expected PSP lift and how sustainable is that growth?
Stephen M. Kovzan -- Chief Financial Officer
Yeah. That's -- yes, it is PSP-related. PSP has certainly -- it just continues to perform quite well and has been up nicely. Now, not all of the rest of the growth in the Software & Services segment is PSP. I did point out that both RxGov -- the combination of RxGov and Complia, most of it being RxGov, contributed about $400,000 in revenue in the quarter that we didn't have in the prior-year quarter. But certainly there -- about the bulk of the remainder of that is PSP and I guess I would generally say that our team on the ground in DC just continues to do a great job of signing up new users to the PSP. I think we signed up another 600.
Harry H. Herington -- Chief Executive Officer and Chairman of the Board
600. Yes, that's what I said in my remarks.
Stephen M. Kovzan -- Chief Financial Officer
[Speech Overlap] during the current quarter and it's a strong economy. And so, we may be getting certainly a bit of a lift from that as truckers are potentially looking to parlay a stronger economy and the better pay and switching jobs and things of that nature. So, it's certainly performed better than what we expected going into the year.
John Campbell -- Stephens Incorporated -- Analyst
That's very helpful. If I can squeeze in one more just related to PSP, any sense for kind of what's your overall penetration is, what that addressable market is? And it seems like you're winning new accounts daily. So, just kind of get a sense for how big that could actually be.
Stephen M. Kovzan -- Chief Financial Officer
Yes, I would say most of the accounts, John, that we're winning going forward tend to be smaller companies, smaller carriers. I think our team has done a fantastic job and obviously their initial focus in the early years was to get as many of the bigger target market companies on board. But it's -- I think our team is continually trying to expand that addressable market by reaching out to companies and convincing them of the merits of using PSP, but we've not put a necessarily a total addressable market. All I would say is that over the years, it just continues to perform quite well and our team just does a great job of signing up folks.
John Campbell -- Stephens Incorporated -- Analyst
Okay, great. Good work, guys. Thanks.
Stephen M. Kovzan -- Chief Financial Officer
Thanks, John.
Operator
Thank you. Our next question comes from Gary Prestopino of Barrington Research. Please go ahead.
Gary Prestopino -- Barrington Research -- Analyst
Hi, good afternoon. Hey...
Stephen M. Kovzan -- Chief Financial Officer
Hey, Gary.
Gary Prestopino -- Barrington Research -- Analyst
How many states are you doing the cannabis monitoring for now?
Harry H. Herington -- Chief Executive Officer and Chairman of the Board
I think we're in nine -- eight, [Indecipherable] eight states.
Gary Prestopino -- Barrington Research -- Analyst
Okay. And then, could I just get a little clarification on Illinois? I'm a little confused and that happens often, but you are doing something in Illinois with some kind of licensing platform, right?
Harry H. Herington -- Chief Executive Officer and Chairman of the Board
Yes, enterprise licensing.
Gary Prestopino -- Barrington Research -- Analyst
Right. But this comprehensive outdoor recreation solution is independent of what you're doing for Illinois?
Harry H. Herington -- Chief Executive Officer and Chairman of the Board
It's a combination of both. No, it's going to be part of their enterprise license, but at the same time, we are bringing in our platform there. And that's why, it's sort of a hybrid if you would.
Stephen M. Kovzan -- Chief Financial Officer
Yes. It will leverage kind of the microservices base that supports the enterprise licensing and permitting platform, but we are definitely bringing in our platform, essentially that we built -- the foundation of which was the Go Wild Wisconsin platform that we're also configuring and implementing for Pennsylvania.
Gary Prestopino -- Barrington Research -- Analyst
So, this would be an example of these dues -- some of these new vertical solutions that you have that's not being sold to a partner state shall we say? Is that a correct assumption here since the Illinois wasn't won through an RFP?
Harry H. Herington -- Chief Executive Officer and Chairman of the Board
I don't know if I quite understand your question. Why don't you restate your question?
Gary Prestopino -- Barrington Research -- Analyst
Well, I'm just -- what I'm trying to get at is, and I've talked to Steve about this, you've got these vertical solutions, right, and you don't have to have an RFP with the state as I assume to win this business through these vertical solutions. So, I'm trying to get at what success have you had, if any, and is this is an example of that?
Harry H. Herington -- Chief Executive Officer and Chairman of the Board
This is an example. What I would tell you is, when we've got a contract there, they don't necessarily have to go to bid, they will go to bid at times. That is at the agency's discretion, but typically we have the flexibility to bring our verticals in underneath our master contracts and that's of course what we would prefer. But we're going to follow whatever procurement desires and rules they might have in each state. But this is an example where we can leverage an existing contract come in and bring in that vertical and show them the value that that brings.
Gary Prestopino -- Barrington Research -- Analyst
Okay. Thank you.
Stephen M. Kovzan -- Chief Financial Officer
Thanks, Gary.
Operator
Thank you. [Operator Instructions] It does not appear we have any further questions at this time. I would like to turn the conference back over to the speakers for any additional or closing remarks. Thank you.
Harry H. Herington -- Chief Executive Officer and Chairman of the Board
Thank you, Manish. And I want to thank everybody who joined us this afternoon and I look forward to speaking with you next quarter. Everybody have a great afternoon.
Operator
Ladies and gentlemen, this concludes today's call. Thank you for your participation, you may now disconnect.
Duration: 31 minutes
Call participants:
Jayne Friedland Holland -- Chief Security Officer
Harry H. Herington -- Chief Executive Officer and Chairman of the Board
Stephen M. Kovzan -- Chief Financial Officer
Peter Heckmann -- Davidson -- Analyst
John Campbell -- Stephens Incorporated -- Analyst
Gary Prestopino -- Barrington Research -- Analyst
