Q2 2019 Earnings Call
Good day and welcome to the <unk>.
Q2 earnings Conference call today's conference is being recorded.
This time I would like to turn the conference.
Security Officer Genie <unk>. Please go ahead ma'am.
Thank you operator, good afternoon, everyone and welcome to the nice see second quarter earnings call. The press release for and I see second quarter 2019 earnings announcement was issued 30 minutes ago. Our earnings release is also available on our corporate website www dot dot dot com forward slash investor Dash relation.
You May also call our headquarters at 1877234, 34, 68, and we will email the information to you.
Joining us on the call today are and I see CEO , Harry Herington, and Steve, causing an eye sees 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 companys expected effective tax rate statements relating to possible future dividends and share repurchases and other possible future events, including potential acquisitions expansion vertical solutions and the assumptions on which these 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 the 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 statement 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 Form 10-K , and 10-Q filed with the FCC.
These filings are available at the Fccs website at Www Dot FCC Dot 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 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, and I see Chief Executive Officer, and Chairman of the board. Thank you Jamie.
Well the last few calls I'll update you on the progress we're 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.
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 linked list of long term government partners, who recently extended the relationships within I see.
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 twentyth 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 owners and accurately.
Next up is Rhode Island during the quarter, we signed a new two year contract with Rhode Island Department of administration, which includes two one year renewal options for a total of four years.
We have had the privilege of partnering with Rhode Island, since 2001, and I'm incredibly proud of our team and Providence for the innovation there right everyday for multitude agencies in that state.
Our next update comes from Arkansas were recently received a one year contract extension.
So became our fourth state partner back in 1997 and today, we manage around 1000 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, where it might be in the solution.
Another great partner in South Carolina, where contract was renewed for one year with one remaining one year renewal option, South Carolina became or 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 to use of the Nazis industry, leading secure payment platform.
And finally, my last contract today comes from the federal business, where the federal Motor carrier Safety administration or Fmcs same 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 roadway safer ready has been demonstrated the trucking companies using the PSP to screen, new hires lower cash rigs 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 18000 active PSP subscribers as of the end of June with more than 600 active accounts added in the second quarter Hello.
It was certainly a busy quarter on the contract renewal front and I want to give special thanks to our long term partners and Utah, Rhode Island, Arkansas, South Carolina, and the FMC essay for continued put their trust in that I see.
We look forward to what the different 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 a 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've already leveraged or regulatory licensing acquisition and were awarded a new contract in an NFC enterprise state during the second quarter.
On our last earnings call, we announced the acquisition of complete a best in class licensing platform company currently focused on helping government regulate the cannabis and HAMP 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 and I see it previously deployed custom cannabis regulatory solutions for the state of Oregon, Hawaii and Maine.
In addition in actually accomplish had previously partnered to provide cannabis licensing solutions to Marilyn Montana, Oklahoma and Rhode Island.
We are thrilled they're 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 completion is also highly configurable and scalable and capable writing licensing for several other highly regulated industries, such as liquor licensing and various professional licensing type.
This is an important aspect that made the acquisition of a smart investment for us.
We acquired we acquired a business focused on cannabis and hip 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 referred to the business as Nic licensing solutions, which more accurately reflects the breadth of the services. This business will ultimately provide to 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 within IC 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'll 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 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.
Launched in the second half of 2020, Nic will become the largest provider of hunting and fishing 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 and a total of 13 states, specifically, Illinois ranks eight emanation 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 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 am 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.
And 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 regression space with that it's my pleasure to turn call over to Nic is Chief Financial Officer, Steve Kovzan, Steve Thanks, Harry.
In the second quarter of 2019.
We earned 21 cents per share compared to 25 cents in the prior year quarter.
I have one non core items to call out for the current quarter EPS was higher by one cents 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 returns.
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 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 gas revenues were up 14% from the prior year quarter, driven by payment processing services and 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 Dot 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 Dot Gov, along with the first quarter.
Also our newly acquired Rx Gov, and ICEE licensing solutions businesses has started to scale contributing a combined $400000 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 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 continue enhance continued enhancements to our citizen centric go platform.
And our exco.
PMP 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 Rx Gov asset acquisition, which closed in the third quarter of last year.
Totaling approximately $600000.
And from the completed acquisitions.
Which closed on May onest of this year totaling approximately $200000 I'll touch on the complete 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.
It was primarily driven by lower revenues and profits from the new Texas payment processing contract compared to legacy contract.
In addition to modest dilution from our newly acquired businesses.
I'll conclude my remarks today with the discussion of our updated guidance for 2019.
Which takes into consideration our strong financial results through the first half of the year, the completed 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 with portal revenues ranging from $317 million to $320.5 million.
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 in software and services revenues ranging from $27.5 million to $28.5 million.
We now anticipate earnings per share earnings per share to range from 71 to 73 cents compared to our previous guidance of 70 to 74 cents.
Our guidance really reflects approximately $1 million in revenues and $800000 in operating expenses or excuse me operating losses.
Which excludes intangible asset amortization expense.
Relating to the company's recent acquisition completed.
Intangible asset amortization expense related to the completed acquisition is currently expected to approximately approximate $700000 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 completed 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 four cents.
In addition, our guidance reflects approximately $1.2 million in buildup costs for the remainder of the year to configure our comprehensive outdoor recreation solution to meet the specific needs of Illinois.
Harry mentioned, we will not only be delivering hunt and fish licensing component. We will also deliver a campsite reservation component in 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 $800000 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 discreet items, one last item to point out on the completed acquisition.
The goodwill and intangible assets will be deductible for tax purposes.
As always our projections do not include revenues or costs from any unannounced contracts and with that I will turn the call back over to Harry Hey, Thank you Steve.
We continued 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 on our third quarter earnings announcement.
With that Monash, we will open the call up for questions.
Thank you.
Ladies and gentlemen, if youd like to ask a question. Please signal by pressing star one on your telephone keypad. If you are using a speakerphone. Please make sure. Your mute function is turned off to allow your signal to retail equipment again for installed one to ask a question. We will take our first question from Peter Heckmann.
Davidson. Please go ahead Sir.
Good afternoon, gentlemen wanted to ask on the updated guidance.
Give us a lot of information in a short period of time it looks like the revenue range is up maybe $10 million to $14 million in the year.
And get about 10.
Coming from stronger is off reserves growth portion is coming from complete portion is coming from higher seems today.
Yes, seeing anything in there.
Anything else going library already there are significant contributors.
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 from completion.
Great Great and then on.
Illinois, and it will be missed did I heard you say three and a half million dollars.
Each.
But I missed it was that annual or over the life of the contract and if so what is the life of the contract.
So.
In Pennsylvania, I believe I believe the Pennsylvania contract is it is a 10 year contract in total.
And.
The $3.5 million is annual.
Revenue expectations same thing with.
Illinois.
The Illinois.
The 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 in some time and I think it's in mid 2023, but then it's got a four year renewal option that that pushes it out to 2027 and the revenue expectation for the.
For the outdoor recreation component is also three and a half million dollars year.
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 any all benefits or anything that would have helped things David in the quarter.
No no pricing benefits certainly on the DHR revenue growth of 4% which is.
Probably stronger a little bit stronger than normal, it's just higher volumes across a number of states.
And on the on the gas side.
Strong payment processing growth.
A small handful of states.
On.
Mainly new Jersey, Indiana and in a few in it and a few others.
Got it got it okay I'll get back in the queue I appreciate it.
All right. Thanks.
Thank you ladies and gentlemen, if you find that your question has been answered you may remove yourself from the queue by pressing star two and as a reminder to ask a question. It is star one we do have our next question from John Campbell of Stephens incorporated. Please go ahead.
Hey, guys congrats on another great quarter.
Hi, John to you very much.
Sure Steve just just looking at results versus last year I, just want make sure I've got kind of all the moving parts down. So revenue revenue was down 1% profits down 15, or so I know you had some some of the negative margin mix shift from Texas. You've also had 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 lacking that soon.
Yes, certainly I mean as I John as I.
Shared in scripted remarks, I would say that.
Most of the.
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 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 any revenue that yet that will launch sometime mid next year.
So I would say those are the primary drivers.
Okay. That's helpful. And then really good growth out of the software and services segment, Steve I think you mentioned that.
It was a million dollar contributor but outside of that you called out the PSP strings.
I mean, if you back out the dot Gov lift I mean, that's still a 30% growth rate.
You also raised the guidance for the software segments I'm guessing, that's probably PSP related as well. So I guess first is that true.
So what's driving the kind of better than what you guys expected.
Be left and how sustainable is that group.
Yes, no thats, yes. It is PSP related PSP is has 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 and services segment is PSP I did point out that both Rx Gov. The combination of Rx Gov and complete most of it being Rx Gov contributed about $400000 in revenue.
In the quarter that we didnt have in the prior year quarter, but certainly there, but the bulk of the remainder that is PSP and 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, yes.
What I said drivers during 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 as truckers are are are potentially looking to parlay, a stronger economy into better pay and switching jobs and things of that nature. So.
It's certainly performed better than what we expected going into the year.
That's very helpful. If I could squeeze in one more just related to the PSP any sense for kind of what your overall penetration is with an addressable market isn't it seems like your we are winning new accounts daily. So just kind of get a sense for how big that can actually be.
Yes, I would say most of the counce 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.
You know it's it's.
I think our team is continually trying to expand that addressable market bye bye.
Reaching out to companies and convincing them of the merits of using PSP, but but weve not put a.
Necessarily a total address a total addressable market all I would say is that over the years. It just continues to perform quite well on our team just does a great job of signing up folks.
Okay, great. Good work guys. Thanks.
Thanks, John .
Thank you and next question comes from Gary Prestopino of Barrington Research. Please go ahead.
Hi, Good afternoon, Hey, Hi guarantee.
How many.
States are you doing the cannabis monitoring for now.
Lebron 987 looks to be a confirmation.
Eight states.
Okay.
And then.
It's got a little clarification on Illinois, I'm, a little confused when that happens often but.
We're doing something in Illinois, with some kind of licensing platform right, yes, as I recall, an enterprise licensing.
Right, but this this comprehensive outdoor recreation solution is independent of what you're doing for Illinois.
It's a combination of both it's going to be part of their enterprise license, but same time, we are bringing in our platform there.
And Thats why I said, it's sort of a hybrid if you would.
Yes, it will leverage it will leverage kind of the the Microservices base that supports the enterprise licensing and permitting platform, but we are definitely bringing in our platform essentially that that we built that that the foundation of which was the go wild Wisconsin platform that we're also.
Configuring and implementing for Pennsylvania.
So this would be an example.
These use some of these new vertical solutions that you have that's not being sold to a partner state shall we say is that correct assumption here since Illinois wasn't one through an RFP.
I don't know if I quite understand your question. This is.
Right you restate your question please.
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 two 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 an example of that.
This is an example of 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 that the agencies 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 they might have in each state that this is an example, where we can leverage the existing contract coming in and bring in that vertical and show them the value that that brings.
Okay. Thank you.
Thanks, Gary.
Thank you, ladies and gentlemen, once again, if you would like to ask a question.
One.
Just take a few moments to allow everyone an opportunity to signal for any questions. Thank you.
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.
Thank you Manish and I want to thank you Brady who joined this afternoon I look forward to speaking with you next quarter have a great afternoon.
Ladies and gentlemen, this concludes today's call. Thank you for your participation you may now disconnect.