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NIC Inc (NASDAQ:EGOV)
Q4 2019 Earnings Call
Jan 29, 2020, 4:30 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good Day everyone and welcome to the NIC Q4 Earnings Conference Call. Today's conference is being recorded and at this time, I'd like to turn the conference over to Angie Davids, Senior Vice President, Marketing and Communication. Please go ahead ma'am.

Angie Davids -- Senior Vice President, Marketing and Communication

Thank you, operator. Good afternoon everyone and welcome to NIC's fourth quarter earnings call. The press release for NIC's fourth quarter 2019 earnings announcement was issued 30 minutes ago. Our earnings release is also available on our corporate website at egov.com/investor-relations. You may also call our headquarters at 844-944-3468 and we will email 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 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 2020 fiscal year 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 related to possible future dividends and share repurchases and other possible future events including potential acquisitions 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 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 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 t is included in the sections titled Risk Factors and cautions 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 it is my pleasure 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, Angie. For more than 28 years, NIC has been consistently evolving and innovating to continue to lead the digital government industry. That evolution has included executing on a vision anchored by three key strategies. First and foremost, to secure and grow our core state enterprise business. Second, to enhance and diversify our overall business with the continued investment in our vertical solutions and third, to leverage our financial strength for returning capital to our stockholders in the form of quarterly cash dividends and proactively exploring strategic acquisition opportunities. Our fourth quarter and full year results are a direct reflection of our execution on these strategies and the resulting momentum as we continue to transform NIC for the future.

From a growth perspective, I am pleased to share that for the fourth consecutive quarter, we saw double-digit growth in same state revenues capping off 2019 with a growth rate of 11% in the fourth quarter and at 10% for all of 2019, the highest level of organic growth we have seen in the past five years. Furthermore, our software and services business had another strong quarter with revenues growing 20% over the prior quarter and 38% for all of 2019. Steve will share more details about our results for the quarter and the year and our guidance for 2020 later on this call.

I would also like to thank five of our state partners in Connecticut, Hawaii, Maine, Mississippi, and Montana for renewing contracts with NIC in the fourth quarter. We ended 2019 securing 15 extensions of our state enterprise contracts including a new contract to expand our services in the State of Virginia and we are laser focused on continuing this momentum in 2020. Our next focus area was on expansion of our vertical solutions. I am pleased to announce a pending new development in our payments vertical with the State of Florida. Earlier this month, after a year-long competitive bid process, we were selected unanimously as the state's enterprise payment provider with the Florida Department of Financial Services officially announced its intent to award NIC a contract for e-payment collection and processing services. However, we have not yet signed the contract with the state as the award is currently under protest, which we know from first-hand experience over the years is not an uncommon position in government procurement. Nevertheless, we could not be more excited about the opportunity to serve the citizens of the state of Florida. This award further solidifies our leadership in the digital government payment space and validates our decision to strategically focus on the payments vertical to grow and diversify our business. Since this opportunity is still an active procurement, we will be serving our practice of not commenting further at this time.

An important element of our continued momentum in 2019 was the addition of Brian Anderson as our Chief Technology Officer. Brian has brought added attention and vision to the areas of vertical product development and delivery. His technology leadership has been invaluable to NIC as a whole and extremely beneficial as we evolve our vertical platforms and research and development teams. In 2020, we have no intention of slowing down. Our priority this year will be on accelerating the momentum that was gained in 2019 by driving additional growth and innovation across our state enterprise and vertical divisions.

The final item that I want to touch on today is our financial strength. Our solid performance which consistently generates strong cash flows allowed our Board of Directors to declare a regular cash dividend totaling $0.32 per share in 2019 and I'm very pleased to announce our Board of Directors recently approved a 12.5% increase in our regular quarterly cash dividend to $0.09 per share for the first quarter of 2020 which I believe is an incredibly strong reflection of our optimism in the future growth and performance of NIC.

Before I turn the call over to Steve, I want to stress how excited we are for the year ahead. The evolution of NIC continues to happen at a rapid pace and we are as driven as we have ever been over the past 28 years to make government more accessible for everyone through technology and improve the digital government experience for businesses and citizens and our government partners. And with that, I will turn the call over to NIC's Chief Financial Officer, Steve Kovzan.

Stephen M. Kovzan -- Chief Financial Officer

Thanks, Harry. In the fourth quarter of 2019, we earned $0.15 per share, flat versus the prior year quarter. I have one non-core item to call out, EPS was $0.02 higher in the fourth quarter due to discrete tax items more fully described in our earnings release. Moving on to the core results for the quarter. As a reminder, this was the first quarter where revenues from the legacy Texas contract were not a headwind to our growth comparison. Furthermore, we began including revenues from the Texas payments contract in the same state category in the fourth quarter. We capped off the year with another quarter of strong same state enterprise revenue growth, which increased 11% compared to the fourth quarter of last year reaching double-digit growth for the fourth consecutive quarter as Harry just mentioned.

Breaking down the major components of same state growth, same state transaction based Interactive Government Services or IGS revenues were up a strong 16% driven by payment processing revenues in New Jersey and Texas, revenues from the new auto titling and registration system in Wisconsin as well as other services across our state enterprise businesses. Same state transaction based Driver History Record or DHR revenues were flat compared to the prior year quarter, which was down sequentially from 2% growth in the third quarter of 2019 and down from 3% growth for full year fiscal 2019. As we've discussed in the past, we do not have transparency into what drives DHR volumes over time and the fourth quarter is no different. While one quarter does not make a trend, we are hopeful DHR volumes going forward will rebound. And lastly, on a combined basis, same state development and fixed fee management revenues were down 3% for the quarter. Software and services revenues were up $1.2 million or 20% over the prior year quarter. This robust growth was attributable to continued strong performance of the federal Pre-Employment Screening Program and the revenues from our recently acquired our RxGov and NIC Licensing Solutions businesses, which contributed a combined $800,000 in revenue during the quarter.

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 closed in the third quarter of 2018, which totaled approximately $700,000 for the quarter, up $500,000 from the prior year quarter; and from the Complia acquisition closed on May 1st of 2019, which totaled approximately $250,000 for the quarter. Operating income for the quarter decreased 7% resulting in an operating income margin of 13%, down from 16% in the prior year quarter. Recall that state enterprise gross profit margins and consequently operating income margins are seasonally lowest in the fourth quarter of each calendar year due to the lower number of business days during the holiday season. The decline in operating income and the operating margin compared to the prior year quarter mainly reflects costs to implement our comprehensive outdoor recreation solution in Pennsylvania and Illinois and modest dilution from the company's recently acquired RxGov and NIC Licensing Solutions businesses including higher amortization expense. We currently expect to launch the Pennsylvania outdoor recreation solution around the midpoint of this year and the Illinois outdoor recreation solution in the first half of 2021, which I will touch on more when I discuss our full year 2020 guidance in a moment.

Now I'll recap full year 2019 results. Total revenues were $354.2 million in 2019, up 3% from 2018 while state enterprise revenues were $320.7 million, flat to last year. Full year 2019 included $30.4 million from the new Texas payment processing contract compared to $8.1 million in the prior year. The prior year also included $49 million in revenues from the legacy Texas contract. The headline for 2019 was our phenomenal same state enterprise revenue growth of 10%, the highest we've seen in the past five years with same state IGS revenues up 16% and same state DHR revenues up 3%. As a reminder, revenues from Texas and Illinois were excluded from the same state category for the full 2019 fiscal year.

Software and services revenues increased a stellar 38% to $33.5 million driven by a full year of revenues from the federal Recreation.gov service as well as higher volumes from the federal DoT Pre-Employment Screening Program and revenues from our recently acquired RxGov and NIC Licensing Solutions businesses, which contributed an incremental $2.3 million in revenue in 2019. Operating income decreased 17% to $62.4 million for the year with operating margins of 18%, down from 22% in 2018 mainly reflecting lower revenues and profitability from the new Texas payment processing contract compared to the legacy Texas contract. In addition to higher costs to implement our outdoor recreation solution in Pennsylvania and Illinois which totaled more than $3 million for the year and to dilution from the company's recently acquired RxGov and NIC Licensing Solutions businesses including higher amortization expense. Our effective tax rate for the year was 22% compared to 23% in 2018. Our effective tax rate in 2019 was positively impacted by certain discrete tax items more fully described in our earnings release. These discrete tax items positively impacted EPS by $0.05 for the year, whereas in 2018 discrete tax items positively impacted EPS by $0.02. We closed out 2019 with earnings per share of $0.75.

Now let's move on to our guidance for fiscal year 2020. We currently expect total revenues to range from $380.5 million to $391 million; earnings per share to range from $0.76 to $0.81; and adjusted EBITDA which excludes non-cash operating expenses for depreciation and amortization and stock-based compensation to range from $88.5 million to $93 million. The high-end of our guidance reflects a 10% increase in total revenues with healthy upper single digit same state enterprise revenue growth, in line with historical averages, but down from the stellar 10% same state growth in 2019. As a housekeeping note, beginning in 2020, we intend to reclassify the Texas payment processing contract from the state enterprise segment to software and services given that our business in Texas is limited to payment processing and is not a traditional enterprise contract where we develop and manage digital government services and handle payment processing. To this end, we have not incorporated the new Florida payments award Harry just mentioned into our guidance because it is currently under protest. Furthermore, we will refrain from discussing the financial potential of the opportunity until the protest has concluded and a contract has been signed. Nevertheless, I echo Harry's comments in that we are incredibly excited about the Florida award and the overall growth potential of our payments vertical.

Next, I'll provide some color on substantial investments we will continue to make in our outdoor recreation platform, including the development of a comprehensive campground reservation solution currently expected to launch in Pennsylvania around the midpoint of this year and Illinois in the first half of 2021 and as a reminder, we currently expect each state to generate around $3.5 million annually in healthy margin transaction based revenues over the lives of those long-term contracts. Our 2020 guidance reflects approximately $2.4 million in incremental revenues from Pennsylvania following its anticipated mid-year launch with total combined development and implementation costs for Pennsylvania and Illinois spread throughout the year, expected to approximate $5.5 million contributing to combined operating losses of approximately $3 million.

The last piece of revenue guidance pertains to our recently acquired RxGov PDMP and NIC Licensing Solutions businesses. We currently expect combined revenues from these businesses to range from $4.5 million to $7 million in 2020. The low-end of this range mainly reflects full year revenue run rates from both businesses and a modest amount of upsell and add on growth from existing contracts with the high-end of the range reflecting incremental revenues from opportunities in the sales pipeline. Moving on to capital expenditures and capitalized software development costs. We currently expect capital expenditures to range from $6 million to $7 million in 2020, up from $4.3 million in 2019 reflecting higher IT infrastructure refreshment needed in a handful of enterprise states and requirements for the Pennsylvania outdoor recreation contract in addition to other normal fixed assets additions in our centralized hosting environment to support enhanced IT and security infrastructure and for our various verticals and platform solutions. We currently expect capitalized internal use software development costs will range from $9 million to $10 million in 2020, up from $8.3 million in 2019 reflecting ongoing investments in our platform solutions including outdoor recreation in the aforementioned camp round reservation solution in addition to enhancements to our industry-leading payment processing solutions. Depreciation and amortization expense is expected to increase by $3 million to $3.5 million in 2020 compared to 2019 due mainly to higher amortization of capitalized software development costs related to previous and ongoing investments in our various platform solutions and a full year of purchase accounting amortization from our recently acquired RxGov and NIC Licensing Solutions businesses. Moving on, we expect to generate modestly lower interest income on our investable cash balances in 2020 given the decline in interest rates we saw in the back half of 2019. Our EPS guidance for 2020 reflects approximately $0.02 from interest income compared to the $0.03 we earned in 2019. From an income tax standpoint, we currently expect our effective tax rate before any discrete tax items to approach 26% in 2020 as we have recently seen changes in certain state tax laws that have required us to alter how we apportion our revenues by state, which has modestly increased our state effective tax rate and thus our overall effective tax rate. However, if we were to ultimately recognize potential discrete tax items due to the expiration of statutes of limitations, our effective tax rate could be closer to 25% in 2020.

In closing, our guidance reflects continued strong same state enterprise revenue growth in line with historical averages driven by the expected deployment of dozens of new services across several states in addition to incremental revenue contributions from our recently acquired RxGov and NIC Licensing Solutions businesses. Our guidance also reflects continued investments in key government vertical solutions, outdoor recreation, payments, licensing and healthcare where we have been winning significant new business to drive long-term growth. That wraps up my prepared remarks today, so I will turn the call back over to Harry.

Harry H. Herington -- Chief Executive Officer and Chairman of the Board

Thank you, Steve. I am certainly pleased with our historical results, but more importantly, I am pleased with the momentum I see everyday at NIC. 2020 will be a year of continued digital government leadership as we focus on growing our state enterprise contracts, enhancing and diversifying our overall business through our vertical solutions, and leveraging our financial strength by returning capital to our stockholders. With that, Lauri, let's open up the call for questions.

Questions and Answers:

Operator

Thank you. [Operator Instructions] We'll take our first question from Peter Heckmann with Davidson.

Peter Heckmann -- D.A. Davidson -- Analyst

Hi, good afternoon everyone, thanks for all the detail. I was wondering -- hey, I might have missed it, did you quantify what your expectations were for any increase in revenue from Virginia in 2020?

Stephen M. Kovzan -- Chief Financial Officer

No, we didn't specifically quantify that. Any increase that we do receive from Virginia would be kind of captured in our expectations for same state growth.

Peter Heckmann -- D.A. Davidson -- Analyst

Okay and you had made a comment that I didn't quite catch about revenue related to PSP and I think Recreation One-Stop, could you repeat that as regards revenue for 2020?

Stephen M. Kovzan -- Chief Financial Officer

No, we didn't make any specific comments on PSP or Recreation One-Stop for 2020, just regarding [Phonetic].

Peter Heckmann -- D.A. Davidson -- Analyst

Okay and then, so just as a follow-up there then on the PSP, I think the current extension expires in the next 30 days or so and any updated expectations in terms of a potential rebid or another extension anything we haven't seen yet?

Harry H. Herington -- Chief Executive Officer and Chairman of the Board

Yeah Pete, this is Harry, and of course, we're in conversations with them, and you know, I can't speak to that when it's sort of an open negotiation of an procurement item.

Stephen M. Kovzan -- Chief Financial Officer

Yeah, there is no RFP on the street today, Pete. So, we're in discussions of continuing business there but nothing finalized as of yet.

Peter Heckmann -- D.A. Davidson -- Analyst

Okay, well congrats on Florida and we'll look forward to hearing more on that one in future quarters.

Stephen M. Kovzan -- Chief Financial Officer

I appreciate it, Pete, thank you.

Operator

[Operator Instructions] We'll move next to Gary Prestopino with Barrington Research.

Gary Prestopino -- Barrington Research -- Analyst

Good afternoon, everyone.

Harry H. Herington -- Chief Executive Officer and Chairman of the Board

Hey, Gary.

Stephen M. Kovzan -- Chief Financial Officer

Hey, Gary.

Gary Prestopino -- Barrington Research -- Analyst

Several questions here, OK. With these outdoor recreation contracts that you're putting in Pennsylvania and you got one in Illinois, here, I guess my understanding of that was that this platform could kind of be plug and play and used across all 50 states, if that was the case and I don't know if I'm right or wrong with that, but I guess what I'm getting at is that you're looking at $2.4 million of incremental revenue, $5.5 million of development costs and a loss of $3 million. As this starts gaining more traction, does it scale at a much better rate. I mean is it going to be that much in development costs as you roll it out to different states?

Harry H. Herington -- Chief Executive Officer and Chairman of the Board

Gary, this is Harry. You're looking at this the right way. I'd never call it plug and play and the reason for that because every state has their own rules and regulations, but that being said, when you look at the platform that we're building and we're taking these two opportunities and what we took from Wisconsin to really come out with the premier platform, then it's just a matter of tailoring it going forward for the most part. So we're very excited about these investments because what it does give us when the day is done.

Stephen M. Kovzan -- Chief Financial Officer

Yeah and Gary, I guess the other thing that I would add just echoing my remarks is that we are going to be building and enhancing a campground reservation solution, specifically for the state of Illinois. That's driving some of that but absolutely our expectation, these are the first two states that we are deploying using kind of the new cloud-based platform based on our deployment in Wisconsin, but absolutely going forward, we expect to scale and be able to do it quicker and more efficiently in each state. We're very excited about these opportunities, two very large states from a hunting and fishing licensing standpoint and upon both of their full deployment, which we expect in 2021, it's $7 million plus in incremental healthy margin revenue.

Harry H. Herington -- Chief Executive Officer and Chairman of the Board

And we should have captured the majority of the complexity out there with them. So, yes [Speech Overlap]. I think you're looking at the right way.

Gary Prestopino -- Barrington Research -- Analyst

All right. That's fair, I just want to get an idea of the level of investment that's going on here. And then in terms of the NIC Licensing and the Rx business RxGov, you said you're going to do $4.5 million to $7 million of revenues this year, is that correct?

Stephen M. Kovzan -- Chief Financial Officer

Correct.

Gary Prestopino -- Barrington Research -- Analyst

Okay was that -- how does that work out to be relative to your overall corporate operating margin, is that a situation where you're still putting a lot of development in there and it's going demute [Phonetic] the margin going forward this year.

Stephen M. Kovzan -- Chief Financial Officer

You know, I would say that we are certainly making and we will continue to make some modest and reasonable investments in those platforms. It's certainly not to the level that we are investing in our outdoor recreation platforms because they are a little bit more purpose-built. So certainly not to that same extent.

Gary Prestopino -- Barrington Research -- Analyst

Okay and then two other quick questions. Steve, this is for you, when you gave initial guidance last January, February, did that contemplate the release of these tax reserves or is this kind of like a non-operational thing that just cropped up?

Stephen M. Kovzan -- Chief Financial Officer

Yeah, no, when we give our guidance like I mentioned in my remarks, I think that we expect our absent any of these discrete tax items for expiration of statutes of limitations, we expect to be a little closer to 26% because of the uptick that we're seeing in our state effective tax rates, but if the year goes by and we see similar amounts of discrete items for statutes of limitations, our effective tax rate could be closer to 25% and that's really all I was saying there.

Gary Prestopino -- Barrington Research -- Analyst

Okay and then lastly, beyond what you're doing with the outdoor recreation and you've got the licensing and the prescription drug monitoring, you said new services across several states, could you maybe just talk a little bit about that in terms of what kind of services, how many states just to get -- so we can get an idea of the magnitude of how this is shaping up?

Stephen M. Kovzan -- Chief Financial Officer

Yeah, so without specifically mentioning new services, I think as you're familiar with our business, Gary, we grow by a lot of bunts and singles, right. So these are dozens and dozens of services across a number of states next year and historically, we've been able to grow same state revenues on average 8% to 9% and that's kind of what our guidance reflects in 2020 certainly down a little bit from a really, really strong year in 2019 and what drove our outsized growth in 2019 was quite frankly a few sizable new payments contracts in New Jersey and a larger footprint of payment processing that we've been doing in Indiana. And so, an example of what we'll continue to drive some our same state growth into next year is this new auto titling and registration solution that we just launched in Wisconsin here in the second half of of 2019. That will continue to drive growth in 2020, but that's from a materiality standpoint, that's one of the larger ones.

Gary Prestopino -- Barrington Research -- Analyst

Okay, thank you.

Harry H. Herington -- Chief Executive Officer and Chairman of the Board

Thank you, Gary.

Operator

[Operator Instructions] It appears we have no further questions in our queue at this time, I'll turn the call back over to our speakers for any additional remarks.

Harry H. Herington -- Chief Executive Officer and Chairman of the Board

Thank you, Laurie and I'd like to thank everybody who joined us this afternoon. I look forward to speaking with you at our Annual Stockholders' Meeting on April 27th. Everybody have a great day.

Operator

[Operator Closing Remarks]

Duration: 45 minutes

Call participants:

Angie Davids -- Senior Vice President, Marketing and Communication

Harry H. Herington -- Chief Executive Officer and Chairman of the Board

Stephen M. Kovzan -- Chief Financial Officer

Peter Heckmann -- D.A. Davidson -- Analyst

Gary Prestopino -- Barrington Research -- Analyst

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