Q3 2019 Earnings Call

Good day and welcome to the Nic third quarter 2019 earnings Conference call Today's conference is being recorded.

This time I would like to turn the conference over to Angie David. Please go ahead.

Thank you operator, good afternoon, everyone and welcome to and I see third quarter earnings call. The press release keep telling the quarter's results was issued 30 minutes ago. It at our other earnings documents are available on our corporate website at Www Dot Gov Dot com.

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Additionally, interested parties can also color headquartered at one eight gotta setting 2343468.

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Joining us on the call today are 90, CEO , Harry Herington, if he's Cabazon Iraqi Chief Financial Officer.

Following a reading of our cautionary statement regarding forward looking information here, you see will deliver prepared remark.

Increasing of those remarks, we will open the line.

Any statements made during this call that you're not really oracle or current facts constitute forward looking statements. These statements I can address the companys interim financial performance for the 2018 fiscal year or future fiscal year Escalettes projection expected Lincoln contract term statements relating to the company.

This is plans objectives and expected operating results statements relating to potential new contract renewal.

Waiting for the company's expected effective tax rate.

Lets relating to possible featured visitors.

Every purchases and other possible future events.

Including potential acquisitions any assumptions upon which the statement okay.

Forward looking statements are based on current expectations and assumptions that are subject to risks and uncertainties, which may cause actual results could differ materially from the forward looking statement.

These risks include regional or National does it.

Difficult economic competitive social and market conditions, including various termination right.

As a company and its partner the ability of the company to run here interesting contract in whole or in card and different contracts with the new federal state and local government.

The impact of potential information technology, cyber security or data security breaches or incident in the company's ability to identify and acquire suitable acquisition candidates into successfully integrate any acquired businesses.

You should not rely on any forward looking statement as a prediction that will guarantee about the teacher I detailed discussion of risks and uncertainties that could cause actual results and events could differ materially from such forward looking statements, including the sections titled risk factor in cautions about forward looking statements. Other companies. Most recent Form 10-K and 10-Q.

How did the FTC. He filings are available at the end to eat website at Www Dot FTC got go any forward looking statements made during this call speak only as of the gates 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.

Information future events or otherwise.

Now it is my pleasure introduce Harry Herington, and IP, Chief Executive Officer, and chairman of the board.

You Andy This is Andy first earnings call within I see and you David not to be confused through their previous Vice President of communication you had a very someone name joined just a short while ago as our senior Vice President marketing and communications.

He has a long history of success and leading marketing initiatives privately held a publicly traded companies and we were looking forward to leveraging her expertise.

And I see 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 answer to the and I see family.

About a month ago the center for different government announced the winter of its government.

During the war these awards recognize the achievements and best practices upstate cities and counties.

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 excellent.

In total and I think partners were recognized for 12 of these awards, including five of the talk state in the overall state government experience in fact, Nic partners held for the top three spot as there was a tie for second place.

I'd like to take this opportunity to congratulate our award winning partners that are leading the charge through enhanced government services.

I will start with the first place winter, Indiana.

Indiana has been a phenomenal partner of the nicely for the past 24 years and has routinely been recognized as a leader in the industry.

In place was a tie between two or more perk, Arkansas in Maryland.

Third place went to Mississippi, and Kansas took fifth place.

I would also like to congratulate the and I see partner stake finalists in Louisiana main in Vermont for their outstanding services.

We're extremely proud of division all of you have demonstrated and the well deserved recognition you received from the industry.

I'm also excited bigger selected Nic to help implement these solutions and look forward to working with you continue to identify amazing innovative opportunities for the different government industry in the coming here.

Another area that I'm proud to share is the number of long term partnerships, we maintain across this country at Nic, we take a great deal price and not only being able to say that we work with a particular state or agency, but even more so in creating growing and renewing or partnerships overtime. This quarter. Several of our long term partners continue to demonstrate their true.

Us enough by extending their contracts within I see.

I'll lead off that lift with Vermont as we recently announced following a competitive rebid process. The state of Vermont selected us to continue at this stage preferred digital government service provider or will we have probably performed for the past 13 years since 2006.

The three year contract with the state include one three year renewal option for possible total of six years.

Nick It's Idaho, where we recently announced a two year contract with the state which includes one two year renewal options for possible for years.

Idaho has been a partner for the past 19 years, and we were thrilled continues to deliver the best of the best and digital government services to the state and its citizens and businesses.

And next Maryland assigned a one year contract with us with the option for an additional year.

Finally, I would like to thank Virginia, where its recent contract awards.

As we announced after competitive bid process, the Commonwealth of Virginia awarded and I see a new enterprise services contract to provide digital government solutions.

The multi vendor award is for five years initially and includes three one year renewal option for possible of eight years.

For several of you on this call you are aware of 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 a traditional enterprise wide self funded contract from 1997 until the fall of 2013.

When we parted ways after the state chose to go in a different direction with their digital government strategist.

Although we no longer hadn't enterprise contracts with the combo several agencies partner directly with the and I see continuing to provide services.

As a result, we have maintained at layne highly capable team of employees enrichment.

We've done a phenomenal job over the years growing their 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 relationships back in 2013.

Our strategy over the years enrichment with to keep demonstrating value to our agency partners. So that one day, we'd have the opportunity to again expand our role with the call minimal.

And this new contract gives us the opportunity to do just that.

We're incredibly proud to continue our 20 year commitment the Commonwealth and its citizens and businesses and we're excited open this new chapter in our shared story.

We look at all of these contracts as investments for our partners and our relationship as well as a short confident that Nic will work cooperatively and their best interests and the best interest of their citizens and businesses. They serve we're grateful for that confidence and we're incredibly excited about what we can achieve as we proceed together in a few.

Sure to further enhance digital government.

The trust we earned.

And the Superior award winning Didnt government experiences, we create with our partners are certainly satisfying in of itself.

But they're also exciting for Nic because they drive or companies grow.

As you have seen in this afternoons earnings release and I see continues to gain momentum with organic same state revenues growing approximately 12%.

Our third consecutive quarter of double digit growth.

It's lover growth is higher than NFC as seen in more than five years I'm quoted in today's earnings release as 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 awards and the new and extended contracts. It is the result of years of working at the right way with our partners.

And I see nodes digital government better than anyone else.

That knowledge empowers this to understand what our partners are trying to cheat and the processes they need to follow in order to achieve it.

Furthermore, I believe our businesses don't pipeline is strong and the avenues for growth, we see on the horizon or big we will continue to identify opportunities to make responsible investments in our core business to position and I see to realize growth potential and position the company for long term success.

While remaining committed to leveraging our financial strength or returning capital to our stockholders and the fans acquisition opportunities.

Every inox employees, including my senior leadership team and myself is laser focused on continuing to increase the momentum as a C. O. This company I'm enthusiastic about what we will chief in the future.

Thank you for your continued confidence in Nic and I will now turn the call over to our Chief Financial Officer pickup.

Thank you hearing in the third quarter of 2019, we earned 21 cents per share compared to 24 cents in the prior year quarter.

One noncore items to call out for the current quarter.

EPS was higher by one cents due to certain discrete tax items that are more fully described in our earnings release.

The prior year quarter, certain similar discrete tax items increased EPS by two cents.

Moving onto 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.

Our growth comparisons.

At the legacy contract expired on August 30, Onest of last year.

For comparison purposes, they enterprise revenues in the current quarter from the new Texas payment processing contract.

<unk> $7.8 million compared to $2 million in the prior year quarter. In addition to prior year quarter included $13.3 million 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 was third consecutive quarter as Harry just mentioned.

Breaking down the major components of the same state revenue growth.

Same state transaction based interactive government services for high G.S. revenues were up 17% from the prior year quarter, driven by payment processing services Jersey, Deanna and a handful of other states as well as several other t. services.

Same state transaction based driver history Records for DHR revenues increased 2% over the prior year quarter.

And lastly, same state development revenues increased 15% for the quarter driven by various types of materials projects across multiple states.

While same state fixed fee management revenues from our Indiana contracts were flat for the quarter on a combined basis same state development and fixed fee management revenues increased 9% border.

Software and services revenues totaled $9.3 million for the quarter up 51% over the prior year quarter. This phenomenal growth resulted mainly from continued strong performance of the federal preemployment screening programs as well as from the recreation Dot Gov service, which generated approximately $900000 revenue during the quarter.

Recall that we launched a new recreation Dot Gov service with Booz Allen Hamilton on October 1st 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 Dot Gov service generated approximately $300000 in 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 Rx Gov, and Nic licensing solutions businesses continue to scale contributing a combined $1.1 million revenue quarter.

Moving onto a closer look at our operating expenses for the quarter selling and administrative expenses were down slightly in nominal dollars and as percentage of revenue declined 9% in.

In the current quarter compared to 10% prior border.

Enterprise technology and product support costs.

Increased 9% for the quarter and as a percentage of total revenues were 7% in both 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 Rx Gov asset acquisition, which closed in the third quarter of last year and total approximately $700000 for the quarter and from the complete acquisition, which closed on me.

First of this year and total approximately $200000 for the quarter.

Operating income for the quarter decreased 8%, resulting in an operating income margin of 20% down from 22% prior year quarter.

These declines were primarily driven by lower revenues and profits from the do 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 launch in the first half of 2020 in 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 healthy year over year revenue trajectory in keeping with Nic is proud history, a steady consistent growth.

I wish everyone on the call and webcast, a happy and healthy holiday season.

With that I'll turn the call back over to Harry.

Thank you Steve.

I wish there with away for me to share over the phone the level of excitement, we fill and every corner going to exceed.

At beginning of this year, we outlined a three prong strategy to secure and grow our corestate enterprise business to diversify expanding upon our vertical strategy and to leverage our financial strength through more active capital allocation and we believe we're progressing on every front, we have significant momentum as evidenced by the contract renewals.

Shared throughout the year and the fact that we're growing our core business faster than we have in many years.

But more than that we're seeing a renewed enthusiasm throughout nic for finding new and better ways to support our partners each other and our community I am deeply proud of what I'm, saying at Nic and what we will do in the years counts.

With that operator, we'll now open call for questions.

Thank you keep you would like to ask the question. Please signal by pressing star one on your telephone keypad.

If you were using a speaker phone. Please make sure you meet function is turned on to allow your signal to reach our equipment.

Again press Star one to ask a question coupons for just a moment to allow everyone an opportunity to signal for questions.

We'll take our first question from Peter Heckmann of D.A. Davidson.

Hi, guys. This is a lessons on for T. today.

Hi, like Lexus.

Hi, so congrats on the corner.

Thank you I mean, yeah, I was hoping we could set aside just diving a bit more into the Virginia contract structure that seems fairly unique just hoping you could walk us through structure, a little bit more in detail and talking about perhaps how it compares to split like Texas, where you retain exclusively one portion of it and then also hoping we could get a sense about quantifying per annual.

Revenue expected contribution from that.

I can it's part of that question for you part of it at World have to hold probably until we're 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 you know as you look at some of the next you contracts you know, we're very flexible and 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.

You've seen previous right is that Pete head on this we had a traditional enterprise contract that had DHR revenues as part of that and we ended up losing that contract walk away from that contracting you know I'd say should take parting ways with the state several years ago, but we kept a small team there as I as I mentioned.

And continued to do work with them. They came back out within the enterprise opportunity in which we could work with all of the different agencies. It does not have DHR revenue with it it would be an opportunity work with the agencies identify funding opportunities for those up each of those services and it and we have ways to go yet to understand truly you know how to model that vary.

Sided to make that I'd say well get history, you know since we've left there we have continuously growing that business back to where we're 50% of where it was when we walk at a walk yep.

Yes that makes sense, especially with the the modeling of that relatively new structure. So I've been jumping over Texas. It seems like the revenue from Texas was bigger than we expected in the quarter could you could you explain what drove that and then I will you be change it making any changes to annual guidance as a result.

No I'm less we won't be making changes to guidance I mean, clearly we had another good strong quarter and I think we're on you know a good trajectory to finish out the year strong I guess it would leave it at that but I think we've seen stronger overall, some 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 expectations 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 but keep in mind.

The one thing is that fourth quarter is always our seasonally weakest quarter and we expect to same thing with Texas, I'm, probably being our seasonally weakest in the fourth quarters.

Okay got it thanks, and then just one last one from me if I could that could squeeze it and I could you could you give us an idea of any cross selling opportunities. It's great to see some success with Hart, Scott and complete and are you how much of a chance do you get to market. Your other services to current customers.

Oh, that's absolutely what we do day in day at one of the nice things about the and I see model is we don't treaties as a separate business units internally you know when we came out with our various platforms verticals you know assays to hunt fish are excludes the licensing it immediately we educate all of our teams on the ground with all the contracts we started 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.

Okay. Thanks, guys I.

Thank you thanks Lexus.

Thank you again for those few on the phone if you would like to ask a question. Please press star one.

And at this time speakers, we have no question I'm, sorry, we haven't John a question some John Campbell of Stephens.

Hi, guys Congrats on your core.

Uh huh.

So how many contract renewals were coming up in Fourq, you if you got to ride that.

Also you guys. Appreciate you previously talked to annual same state revenue growth of 8% to 10%.

After houses years gone easy you guys get the high into that range are really exceed that next year.

Hi, John I guess I'll I'll, let me answer the second question first while we kinda gather notes on contract renewals that are coming up but.

So that the rate that were at right now from a same state road standpoint.

You know with same state gross in the mid to upper single digits.

Okay.

Yeah.

So in terms of.

John just and just in terms of a 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 dates we would expect to see probably some type of competitive RSP you know in some situations we are able to.

You know extend to extend the contract and extend our contractual relationship with an out without an RFP. We've we've listed a couple of those over the last couple of quarters, but but in all likelihood we would expect to see some type of competitive RFP you know in average as a company. We goes through you know on average four to six a year in terms of competitive RSP. So.

Yes, we did this would be toward the higher end of that okay, how competitive or these these bidding processes. When these contracts come up for how many guys are bidding on them.

It really kind of depends as we go from say seven states. We've been in a long time 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 it doesn't make us nervous I mean course they'd love to have a sole source. A here you go but you know you typically see you know two or three into or companies that would bid on it.

Okay.

That's all for me thanks, guys.

Yes.

Thank you again that star one to ask a question.

Well I think were good.

Yes, Sir.

And this is very common whenever we do a call in its right at Halloween or any other holiday and your people what kind of bunch up their call. So it doesn't surprise us not a lot of questions today I want to thank everybody that has joined US. This afternoon. It was some were very pleased of quarter and I'm looking forward to share in fourth quarter results with you early next year, everybody have a great Halloween.

Thank you ladies and gentlemen, this concludes todays conference you may now disconnect.