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Edited Transcript of EGOV earnings conference call or presentation 1-May-17 8:30pm GMT

Thomson Reuters StreetEvents

Q1 2017 NIC Inc Earnings Call

OLATHE May 3, 2017 (Thomson StreetEvents) -- Edited Transcript of NIC Inc earnings conference call or presentation Monday, May 1, 2017 at 8:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Angela Davied

NIC Inc. - Director of Corporate Communications & IR

* Harry H. Herington

NIC Inc. - Chairman of the Board and CEO

* Robert W. Knapp

NIC Inc. - COO

* Stephen M. Kovzan

NIC Inc. - CFO and Principal Accounting Officer

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Conference Call Participants

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* Allen Klee

Sidoti & Company, LLC - Research Analyst

* Brian Kinstlinger

Maxim Group LLC, Research Division - SVP and Senior Information Technology Services Analyst

* Gary F. Prestopino

Barrington Research Associates, Inc., Research Division - MD

* John Robert Campbell

Stephens Inc., Research Division - Research Analyst

* Joseph Anthony Vafi

Loop Capital Markets LLC, Research Division - Analyst

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Presentation

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Operator [1]

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Good day, and welcome to the NIC Inc. 2017 First Quarter Earnings Announcement. Today's conference is being recorded.

At this time, I would like to turn the conference over to Ms. Angela Davied. Please go ahead, ma'am.

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Angela Davied, NIC Inc. - Director of Corporate Communications & IR [2]

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Thank you, operator. Good afternoon, everyone, and welcome to NIC's first quarter earnings call. The press release for NIC's first quarter 2017 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 (877) 234-3468 and we will e-mail the information to you.

Following a reading of our cautionary statement regarding forward-looking information, CEO, Harry Herington; Chief Operating Officer, Robert Knapp; and Steve Kovzan, NIC's Chief Financial Officer will deliver prepared remarks. Then we will 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 estimates, projections, the expected length of contract terms, statements relating to the company's business plans, objectives and expected operating results, statements relating to possible future dividends, 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, including 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 and to sign contracts with new states and federal government agencies 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 Forms 10-K and 10-Q filed with the SEC. These filings are available at the SEC's website at sec.gov. Any forward-looking statements made during this call speak only as of the date of this call. We undertake no obligation to update or revise publicly any forward-looking statements whether as a result of new information, future events or otherwise.

Today, before I introduce our CEO, Harry Herington, I want to congratulate him. Harry was recently named as 1 of the top 25 Doers, Dreamers and Drivers of Digital Government by Government Technology Magazine. This award is given annually by one of the leading sources of digital government news and recognizes individuals in the digital government field, who demonstrates that the use of innovative technology can transform government operations, dramatically improve citizen engagement and enhance service delivery. Harry is also the only individual honorary recognized this year from the private sector. All that said, NIC could not be prouder of our CEO, he is truly a leader within digital government and challenges all of us everyday to dream about how government interactions could be better and save people time. And he encourages us to drive that change forward, hand-in-hand with our government partners. On behalf of everyone at NIC, Harry, congratulations.

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

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Harry H. Herington, NIC Inc. - Chairman of the Board and CEO [3]

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Thank you, Angela, and thank you for that awesome introduction. Welcome to our first quarter earnings call. Although I am very honored to be recognized as a Doer, Dreamer and Driver within the digital government industry, it is not a recognition I can claim credit for. The real credit goes to each and every NIC employee and government partner. They are the ones who innovate day-in and day-out. They are the ones on the frontlines driving true change and how citizens and businesses interact with government. It is their success that garnered the attention of the industry and I applaud them. I also congratulate them for making a difference everyday.

Just a few weeks ago, I had the opportunity to meet with our great group of government partners as we welcomed them to Little Rock, Arkansas for our 2017 Partner Conference. The theme of the meeting was Together Building the Government of Tomorrow, Today. Tomorrow, during our Annual Stockholders Meeting, I will share more about how the future really is taking shape today. And how we're evolving NIC strategy. However, this theme Together Building the Government of Tomorrow, Today, also sums up the first quarter of 2017. There were several ways we advanced digital government across many states, and we truly are shaping the future of government interaction across the country. First, you may recall that last year at our Annual Stockholders Meeting, we introduced to you the Gov2Go, the digital government assistant that learns about you, tracks your government interaction and notifies you when it's time to complete a transaction.

During the first quarter of 2017, we continued to expand this platform. We recently added Gov2Go Pay, which enhances the platform with one-click payments. This allows citizens to enjoy the same, quick-purchase convenience as they do today to major online retail sites, like Amazon. In addition, I am pleased to announce that Nebraska became the latest state to deliver digital government services via the Gov2Go platform. The initial 8 services available on Nebraska, include alerts and reminders for property taxes, state income taxes, border registrations, state park permits, electrical license renewals, pesticide dealers and product registration renewals and weighing and measuring device registrations. I am very pleased to see the convenience of Gov2Go, reach even more citizens. And I absolutely know this will transform how people interact with government in the future.

I also have good news to share regarding progress with the federal Recreation One-Stop or Recreation.gov. You may recall nearly a year ago, the U.S. Department of Agriculture Office of Forest Service awarded Booz Allen Hamilton, the contract for Recreation One-Stop support services, which provides reservation services for federal recreational areas and facilities through Recreation.gov. At that time, we announced our teaming agreement with Booz, and our intention to sign a subcontract with them to provide certain services related to the contract. However, you'll also recall upon the initial contract award, the incumbent provider protested it. That protest went through several stages, including with the recent ruling by the U.S. Court of Federal Claims in favor of the government. The protest is over, and we believe there are no additional hurdles to be cleared. During this protest period, we have begun building out our team in anticipation of this day, and are working to establish the final timelines with Booz and our Recreation.gov federal partners aiming for target to launch the new solution in October 2018. Once Booz's prime contract with the federal government and our subcontract with Booz are finalized, we will provide some color on our financial projections for this service on future earnings calls. Until that time, I would just say, we are obviously pleased to see this exciting partnership move forward.

While we're bullish about what the future may bring with these new developments, it was a collection of several tried and true services, such as motor vehicle inspections, motor vehicle registrations, payment processing, property tax payments and business registration filings that drove healthy revenue growth in the first quarter of 2017 as well as solid same-state growth from Interactive Government Services. In fact, IGS revenues were up 10% over the first quarter of 2016. Steve will dive into more financial details in a moment, but overall, I am pleased with our growth this quarter, as well as all of the new developments on the horizon.

A few weeks ago, our government partners left Little Rock expressing their confidence in NIC and their belief that we are doing the right things to drive digital government innovation across the United States. This reaffirmed to me that we are delivering the best services possible to our partners and these services continue to drive healthy financial results and provide steady growth for our company.

With that, I will turn the call over to Robert Knapp, NIC's Chief Operating Officer for additional insights into our operations. Robert?

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Robert W. Knapp, NIC Inc. - COO [4]

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Thank you, Harry. As I prepared the updates to share with you this quarter, I was reminded that during the first quarter call last year, we announced the exciting launch of the comprehensive recreational outdoor licensing system, Go Wild Wisconsin. That system continues to perform very well. And most recently, our team and partners in Madison kicked off the 2017 spring turkey hunting season, resulting in more than 66,000 permits sold in a 6-day period. At peak volumes, 5,000 people were waiting in the online queue for permits to go on sale. Today, I have another positive development to share from Wisconsin. The portal will be working with their partners at the Wisconsin Department of Transportation to build a new title and registration processing solution. Once completed, the new digital service will provide all of the title and registration services required with the sale of a -- or transfer of a vehicle and will also enable vehicle registration renewals. This new solution will include a new front-end online service and updates to the back-end web services used by dealer management systems. This comprehensive system will include enhancements such as heavy vehicle registrations, online training and e-mail reminders. It will also allow authorized users to order license plates and stickers directly from the Wisconsin Department of Transportation. The current system processes approximately 2.7 million transactions annually. Starting in the second quarter, we expect to incur approximately $300,000 in cost per quarter to build out the system. With the goal of a pilot phase launch in early to mid-2018, with the full launch shortly thereafter. Based upon our current projections, we estimate the service could generate upwards of $2.5 million to $3 million in annual revenues, which is modestly higher than the annual revenues we earn from Go Wild Wisconsin. Needless to say, we are thrilled with this new piece of business, and we thank our partners at the Wisconsin Department of Transportation for continuing to place their trust in us.

This quarter, we also continued to expand the scope of Your Pass Now. As you may recall, we initially launched the Digital Park Pass service as part of a pilot project with the Department of Interior National Park Service in 3 national parks: Acadia National Park in Maine, Theodore Roosevelt National Park in North Dakota and Colorado National Monuments. Since that time, we have added a new partner with the U.S. Department of Agriculture, U.S. Forest Service, and Your Pass Now is now available at the Columbia River Gorge in Oregon and Wayne National Forest in Ohio. We have also added 2 new national parks: Sequoia and Kings Canyon National Parks in California. While this service is not yet a meaningful revenue generator, it continues to demonstrate the convenience our digital government services can offer federal agencies as well as provide an example of how we believe Park Passes could work across a host of state parks as well. I know our solutions are making the difference in people's lives and providing convenience, and I am always pleased when those efforts are recognized by various industry groups. Recently 2 NIC solutions were nominated for the ACT-IAC Igniting Innovation Awards. These awards are given by the American Council for Technology and the Industry Advisory Council and showcase innovative solutions that improve services for citizens and government operations at the federal, state and local levels. Narrowed from a field of more than 110 submissions, 2 NIC services were included among the top 30 finalists: the sexual assault evidence kit tracking system developed by our team in West Virginia and Your Pass Now. Both solutions were on display last week as a part of the ACT-IAC Igniting Innovation showcase.

And finally, I would like to close today by sharing with you several states who have extended contracts with us and awarded us new contracts since our last call. The State of Alabama recently awarded us a new 5-year contract following a competitive rebid process. The contract includes a 3-year base term plus 2 1-year renewal options the state may exercise to take our agreement through March 2022. In addition, Idaho and Oklahoma both awarded us 1-year contract extensions, taking the Idaho contract through June 2018 and the Oklahoma contract through March 2018.

Finally, LiensNC, our Liens filing service in North Carolina managed by NIC services received a 2-year contract renewal, extending the contract through April 2019. A big thank you goes out to the states of Alabama, Idaho and Oklahoma as well as the coalition of title insurance underwriters in North Carolina for continuing to place their confidence in us as we partner to advance their digital government programs.

And with that, I'll turn the call over to Steve Kovzan, NIC's Chief Financial Officer. Steve?

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Stephen M. Kovzan, NIC Inc. - CFO and Principal Accounting Officer [5]

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Thanks, Robert, and good afternoon to everyone on the call. NIC produced healthy financial results for the first quarter of 2017, earning $0.21 per share compared to $0.19 in the prior year quarter. Results for the quarter include certain discrete tax benefits that positively affected EPS this quarter, resulting from adoption of the new accounting standard for stock-based compensation. The new rule simplifies several aspects of accounting for stock-based compensation, including the related impact on accounting for income taxes and the deductions we recognized when restricted stock awards vest. When such awards vest, if the stock price has risen since the date of the awards were granted, we recognize what are referred to as Excess Tax Benefits, which are tax deductions over and above those we expected to realize when the awards were first granted. With the adoption of the new rule, Excess Tax Benefits generated when awards vest are now recognized as a reduction to the provision for income taxes. Previously, we recognized such benefits in additional paid-in capital in the balance sheet. In other words, there used to be no effect on the income statement, but now there is. This resulted in a $500,000 reduction in our income tax provision, increasing earnings per share for the first quarter by approximately $0.01. It also contributed to the lower effective tax rate for the quarter of 34%, down from 37% in the prior year quarter. Keep in mind that the opposite could happen in future quarters if we had a tax deficiency, which would increase the provision for income taxes and lower earnings. Because we currently grant most restricted stock awards to executives and management-level employees in the first quarter of every year, we currently expect most Excess Tax Benefits or tax deficiencies to be recognized in the first quarter of each year when awards vest.

Finally, this change was purely a GAAP accounting rule change and does not change the cash taxes that we ultimately pay. One final note on taxes for the quarter. The lower effective tax rate was also impacted by favorable benefits related to the domestic production activities deduction, which you may recall we began recognizing in the third quarter of 2016.

Moving on to the core financial results for the quarter. During the first quarter of 2017, total revenues grew 6% to $83.2 million, with portal revenues of $77.2 million, up 5% over the prior year quarter. Total same-state portal revenues grew 5% for the quarter. Breaking down the components of same-state revenue growth, same-state IGS transactional revenues grew 10% this quarter, mainly due to the consistent deployment of new services and increased adoption of existing services across several portals, including motor vehicle inspections and registrations, property taxes and business registration filings among others. Same-state DHR transactional revenues were up 1% for the quarter. And finally, same-state software development revenues decreased 31% for the quarter. This was somewhat anticipated as we cycled against an exceptionally strong quarter of 25% same-state T&M growth in the first quarter of last year, driven by select number of large projects in a few states.

As I mentioned, last quarter, in my prepared remarks on our 2017 guidance, we currently expect same-state T&M revenues to be somewhat of a headwind this year after an unusually strong year of nearly 20% growth in 2016. Results for the first quarter of 2017 also included revenues of approximately $1.6 million from the company's newest portal in Louisiana compared to approximately $200,000 in the prior year quarter. In addition, revenues from the Tennessee portal contract totaled approximately $1.8 million for the current quarter compared to $2.3 million in the prior year quarter. Our contract with the State of Tennessee expired on March 31, 2017. We have concluded the transition of all services to the state and we do not currently anticipate any additional revenue from Tennessee.

Next, software and services revenues grew a healthy 15% for the quarter, again driven by continued strong performance from the Pre-Employment Screening Program, which we manage for the U.S. Department of Transportation, Federal Motor Carrier Safety Administration and from other payment processing services. Our growth for the quarter produced operating income of $21.1 million, up 4% from the prior year quarter, resulting in an operating income margin of 25%, down slightly from 26% in the prior year quarter.

Moving on, factoring in the incremental spend we will make in Wisconsin to build out the new title and registration processing system throughout the rest of the year, that Robert just mentioned, we remain comfortable with the revenue and earnings guidance ranges for full year 2017 that we shared with you on our last earnings call back in February. Recall that our guidance includes approximately $4 million of investment, mainly for Gov2Go and the enterprise licensing and permitting platform that we intend to use in Illinois and elsewhere in certain portal states. Contract negotiations continue to progress in a positive direction with the State of Illinois and once they are concluded and the contract is signed, we will share more financial color with you on our future earnings call. Furthermore, as Harry just mentioned, once Booz Allen Hamilton's prime contract with federal government and our subcontract with Booz are finalized, we will provide more color on our financial projections for the Recreation One-Stop award on our future earnings call.

In conclusion, I was pleased with our financial performance in the first quarter of 2017, and I know we are doing the right things to develop and deploy new innovative solutions with our government partners that we expect will continue to grow the company and keep us at the forefront of the digital government evolution.

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

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Harry H. Herington, NIC Inc. - Chairman of the Board and CEO [6]

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Thanks, Steve. I agree, I too was pleased with our results for the quarter. After networking and collaborating with our partners a few weeks ago at Little Rock, at our partner conference, I am confident we have built strong lasting partnerships, and are developing the types of innovative services, citizens and businesses want and deserve.

With that, operator, we will now open the call up to questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from John Campbell with Stephens Inc.

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John Robert Campbell, Stephens Inc., Research Division - Research Analyst [2]

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Congrats on the quarter and contract renewals and the federal progress. And Harry, congrats on the award, it seems like things are going well for you guys.

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Harry H. Herington, NIC Inc. - Chairman of the Board and CEO [3]

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Thank you.

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John Robert Campbell, Stephens Inc., Research Division - Research Analyst [4]

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Absolutely. Just double-checking on this, Steve, as it relates to guidance. Are you guys factoring in, I guess, for the full year guidance, factoring the loss of Tennessee. And then, I guess, you include nothing from the upcoming Illinois deal. Is that right?

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Stephen M. Kovzan, NIC Inc. - CFO and Principal Accounting Officer [5]

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That's right. You got it exactly right. We won't recognize any more revenue in Tennessee for the rest of the year. So what we recognized in Q1 is it. And we've not reflected any revenue in our guidance yet from Illinois. There is certainly a possibility that could be the case for you to get a contract signed and progress on that. But at this point, we have not.

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John Robert Campbell, Stephens Inc., Research Division - Research Analyst [6]

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Okay. That's helpful. And then, I guess, just as far as timing with Illinois' contract. Where you guys have it right now, relative to kind of where you've had other -- newer contracts, what's the typical turn time you usually see?

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Harry H. Herington, NIC Inc. - Chairman of the Board and CEO [7]

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The deal with these contracts is each state is different. Actually, beneath, every contract is different. We can't even speculate on the time because every state has different approval processes. They have to go through different individuals that have to sign off on it. And all I can say is it's progressing nicely, and I am confident that things are moving in the right direction.

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John Robert Campbell, Stephens Inc., Research Division - Research Analyst [8]

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Okay. That's helpful. And then, I'm sure you guys are going to get this question almost every quarter until we get a little bit more clarity on the federal side. But it sounds like you expected to go live in 2018 and you're going to give us, I guess, a little bit more granular financial details at that time. But just 10,000-foot view, could you guys maybe help us -- just very broadly size it up. I mean, are we talking about a $1 million type annual contribution, or is it tens of millions. Anywhere in that territory?

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Harry H. Herington, NIC Inc. - Chairman of the Board and CEO [9]

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I understand your frustration and trust me, you know me, I'd love to be as transparent as I can. The problem we've got is, Booz hasn't negotiated with the federal agency yet, okay. And so and we haven't finalized negotiating with Booz until that happens and we are pretty much, I don't want to use the word gag order, but we're pretty much -- we can't talk about it. Even if -- I thought coming off that I could share some with you. I'm not allowed to talk about it until they finish what they're doing. So I can't speculate. I can't talk in my sleep on this one.

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Operator [10]

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Our next question comes from Brian Kinstlinger with Maxim Group.

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Brian Kinstlinger, Maxim Group LLC, Research Division - SVP and Senior Information Technology Services Analyst [11]

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First, you had mentioned, obviously the Illinois relationship. I'm curious if you could just talk about the feedback so far from the customer regarding the platform?

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Harry H. Herington, NIC Inc. - Chairman of the Board and CEO [12]

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Well, the issue that we've got right now around here is that, we're in the process of negotiating with them. I mean, clearly, they were very excited about it because we went through the present -- the RFP. We went through the orals with them and we've had conversations. I mean, this is what they need and it's a solid platform that we think we'll be able to use in many locations. But beyond that, there's really not a lot I can tell you 'til we finalize our discussion with them.

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Brian Kinstlinger, Maxim Group LLC, Research Division - SVP and Senior Information Technology Services Analyst [13]

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But then given you're developing this platform that they're going to use, once you do move into contracts, will you still have the typical startup costs that you see in the state? Or does this kind of take care of some of those startup costs?

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Stephen M. Kovzan, NIC Inc. - CFO and Principal Accounting Officer [14]

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Brian, this is Steve. Certainly, we're going to have incremental startup costs beyond what we're spending right now. We are building the licensing and permitting platform that we will ultimately use in Illinois, but we're also going to use in at least one other state to replace a legacy system and potentially in a couple of other states. But certainly, once we sign a contract, we will then have some incremental spend for folks that will be dedicated to Illinois. So yes, we'll also have kind of some of the typical startup in terms of staffing up a local team for Illinois.

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Brian Kinstlinger, Maxim Group LLC, Research Division - SVP and Senior Information Technology Services Analyst [15]

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Great. And then congrats with Booz Allen behind you, I know that process is super frustrating. And I won't ask any numbers questions. But you mentioned, October '18 is the launch. I'm curious, is it possible that you can recognize revenue before the launch? Or is that whenever it launches at the first time you might generate revenue on that contract?

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Harry H. Herington, NIC Inc. - Chairman of the Board and CEO [16]

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Again, I can't even speak to this. I'm not allowed to speak of this until -- and you can understand that, I've got restrictions from Booz Allen, I've got restrictions from the federal agency. I mean until we get through this, I am just prohibited from talking.

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Brian Kinstlinger, Maxim Group LLC, Research Division - SVP and Senior Information Technology Services Analyst [17]

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Okay. On the Tennessee revenue, can you tell us where that was, is that IGS, DHR or something else so we can kind of think about where the revenues can come out of in the second quarter? Can you remind us?

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Stephen M. Kovzan, NIC Inc. - CFO and Principal Accounting Officer [18]

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It's a little bit of both. I would say, that it's a combination of DHR and IGS, and a little bit of software development kind of project management in total.

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Brian Kinstlinger, Maxim Group LLC, Research Division - SVP and Senior Information Technology Services Analyst [19]

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Okay. And then finally, every quarter, I'll ask it for many years now, obviously, just curious if there are any new RFPs that are in the pipeline right now?

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Harry H. Herington, NIC Inc. - Chairman of the Board and CEO [20]

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No. There's no RFPs that are in the pipeline right now. I mean, we're having great conversations across the country, but that's where it stands. So I guess, more specifically, there are no RFPs on the street today that are -- I just want to clarify whether it's in.

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Operator [21]

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Our next question comes from Joseph Vafi with Loop Capital.

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Joseph Anthony Vafi, Loop Capital Markets LLC, Research Division - Analyst [22]

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Just if you could just circle back to the Illinois contract for a second. Was there, I mean, I think, I was modeling maybe perhaps a little bit more into startup costs there in Q1 for Illinois. Is there -- how much more do you expect the Illinois cost to ramp up during the Q2 and beyond versus what happened in Q1?

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Stephen M. Kovzan, NIC Inc. - CFO and Principal Accounting Officer [23]

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Well, we -- Joe, we haven't yet kind of provided guidance there yet simply because, again, we haven't signed our contract there. In our current guidance, we are projecting for the year about $2.5 million to build out that licensing and permitting platform that's going to be used there and in other states. But we haven't yet provided guidance. And there is no startup expense -- incremental startup expense in our guidance at the current time for Illinois.

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Joseph Anthony Vafi, Loop Capital Markets LLC, Research Division - Analyst [24]

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That's helpful. And then just basically going back to Brian's previous question on RFP pipeline and business opportunity moving forward. I wonder if you could provide an updated view on M&A that you may have given that there is -- doesn't seem to be a lot going on RFP pipeline, you've got a nice cash balance and the like, and things in government and technology are moving pretty rapidly. Are there opportunities out there to maybe expand your business model beyond what you're doing now except leverage your client relationships and your know-how inside of your clients?

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Harry H. Herington, NIC Inc. - Chairman of the Board and CEO [25]

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Yes, I'll answer that, this is Harry. Couple of things, #1, don’t take the fact that there is not an RFP on the street as if there is not a pipeline active and that we are not working numerous opportunities out there, okay. So I just want to dispel that a little bit. We're in great conversations, several places across the country. M&A is a great question, and it's one I get, as you imagine, on a regular basis. We constantly are evaluating opportunities that are out there. Things that we think can either bring value to NIC with -- whether that'd be a technology we don't have, whether that'd be contract vehicles that we can find value in, whether that brings a revenue source for us. We always said we wouldn't grow our company by acquisition otherwise acquiring just to get some of this revenue because you end up chasing your tail when you do that. But we're always constantly evaluating what's out there, as you can imagine, people knock on our door a lot, and we get to see what's out there and see whether it fits or not. And so I can't say that there is something that we're actively looking at, I can't say that there's not. But what I can tell you, it is on our radar and we've made no (inaudible) about it. If we find the right opportunity, we do have the cash and the ability -- we're debt-free, and the ability to borrow money for that. But it has to be the right opportunity.

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Joseph Anthony Vafi, Loop Capital Markets LLC, Research Division - Analyst [26]

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Okay. And then just one quick follow-up on the federal side. Is there any -- are you seeing increased activity there, new opportunities to partner based on what you've done so far with Booz and your other contracts. Or is -- basically is that piece of the business or opportunities accelerating there about the same?

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Robert W. Knapp, NIC Inc. - COO [27]

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Yes, Joseph, this is Robert. I mean I would tell you our federal business practice, if you will, is as exciting as it has been a long time. We have a lot of opportunities that we are developing, and yes, when you look at what we've done with Your Pass Now and some of the national parks and both with the Department of Interior and with the U.S. Forest Service. Those certainly are great talking points for us to show our abilities and to be able to use those in other agencies across the federal government. And so there is still a lot of appointments and so forth going on with the administration. And so that certainly adds an element of bureaucracy that we have to continue to manage through. And as those appointments become more and more solidified across federal government, we certainly think the opportunities are very strong as we continue to push forward.

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Operator [28]

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Our next question comes from Gary Prestopino with Barrington Research.

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Gary F. Prestopino, Barrington Research Associates, Inc., Research Division - MD [29]

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Couple of questions here. First of all, just on the tax rates, Steve, your guidance called for 36.5% and obviously, you explained what happened in Q1. Should we use the 36.5% tax rate for the rest of the year, every quarter?

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Stephen M. Kovzan, NIC Inc. - CFO and Principal Accounting Officer [30]

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Yes, I mean, I think a tax rate going forward like that for the rest of year is certainly fine and conservative, in that when we estimate our tax rate for the year, certainly when we did that in our guidance, we didn't take into consideration kind of some of these windfall tax benefits that we incurred here in the first quarter. But going forward, I think it's probably going to be closer to that rate than where we are today.

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Gary F. Prestopino, Barrington Research Associates, Inc., Research Division - MD [31]

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Okay. And in regard to Recreation.gov, I know you can't talk and say much about it, but you're still anticipating that there will be startup expenses that you will make us aware of that once you are able to talk about the contract in general?

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Stephen M. Kovzan, NIC Inc. - CFO and Principal Accounting Officer [32]

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Yes. Absolutely and we have mentioned that in our last call, I mean, we expect, this is going to be a 15-month startup phase-in period on this deal. So yes, we expect to incur startup expenses probably over little bit longer time period than we normally do for a typical portal opportunity.

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Gary F. Prestopino, Barrington Research Associates, Inc., Research Division - MD [33]

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Okay. And then the Gov2Go, it's nice to hear that Nebraska has now adopted it. But are you just -- are you giving that away as an additional service? Or is there any incremental charge for that?

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Harry H. Herington, NIC Inc. - Chairman of the Board and CEO [34]

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Well, as we go into the states where we are already partners, this is a platform that we're able to bring in and then start layering on top of that services. So we can get it out to more individuals and it'd be a more proactive manner of doing digital government. If we go into non-NIC states that something we'd have to consider.

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Gary F. Prestopino, Barrington Research Associates, Inc., Research Division - MD [35]

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Okay. That's right. You were going to possibly charge for non-NIC states, I recall that now. And then lastly as far as some of the numbers on the expenses, this might have been asked, but I don't recall you mentioned it was there. Anything in there in terms of the expenses weren't as high as you guys had anticipated they were going to be and that we're going to see more expenses strung out the rest of the year. Or is it about the...

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Harry H. Herington, NIC Inc. - Chairman of the Board and CEO [36]

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Yes, I mean, I would say that as we continue to build out the licensing and permitting platform in Gov2Go, we may see a modest progression in expenses over the rest of the year. But they weren't in terms of where we kind of planned them to be for the first quarter, I think we're in pretty good shape.

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Operator [37]

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(Operator Instructions) Our next question comes from Allen Klee with Sidoti & Company.

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Allen Klee, Sidoti & Company, LLC - Research Analyst [38]

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Just wanted to follow-up on taxes again. When you talked about the domestic production activity deduction, it seems like you've gotten a benefit from that the last several quarters. Could you explain that a little bit and possibly how -- if it's possible that could of kind of go on for the next few quarters?

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Stephen M. Kovzan, NIC Inc. - CFO and Principal Accounting Officer [39]

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Yes. So, Allen, this is Steve. We began recognizing that deduction in the third quarter of 2016. So we might see a little year-over-year benefit in terms of a lower rate because of that for certainly this first quarter and the next quarter in the second quarter. But then we should kind of catch up on a year-over-year basis beginning in the third quarter.

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Allen Klee, Sidoti & Company, LLC - Research Analyst [40]

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Okay. And then for the Wisconsin Hunting and Licensing, where you talked about working on Department of Transportation. Can you -- I don't know if I fully got how much additional cost used, I thought I heard $300,000 wasn't sure if that was for the quarter or for the whole year. And then when you say that it could generate up to $2.5 million to $3 million annually, what's the time to think of -- of when that could start?

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Stephen M. Kovzan, NIC Inc. - CFO and Principal Accounting Officer [41]

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Sure, no. I think what we said or what we certainly intended to say, was that kind of beginning in the second quarter, we expect to incur at least $300,000 a quarter for the rest of this year to build out the system. I think there is, we're targeting a pilot launch in mid-2018 and for launch shortly thereafter probably in the second half sometime in 2018. You there, Allen.

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Operator [42]

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And there appear to be no further questions at this time. I'd like to turn the conference back over to Mr. Harrington for any additional or closing remarks.

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Harry H. Herington, NIC Inc. - Chairman of the Board and CEO [43]

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Thank you, and thank you to everyone, who joined us this afternoon. We're excited to be celebrating our 25th anniversary this year. And during our 2017 Annual Stockholder Meeting tomorrow at 10:00 a.m. Central Time, I will share more about our plan to continue to lead the digital government services industry for another 25, 50, even 75 years or more into the future. We hope that all of our stockholders and investors will join the webcast by visiting the Investor Relations page of our website at egov.com or even better, come join us. We'll be at the Olathe Convention Center in Olathe, Kansas, just a couple of miles down the road from our Corporate Headquarters.

With that, thank you very much. Look forward to seeing you tomorrow.

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Operator [44]

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Ladies and gentlemen, that concludes today's presentation. Thank you for your participation. You may now disconnect.