OUTSOURCED GOVERNMENT CONTRACTS | 12 Months Ended |
Dec. 31, 2014 |
OUTSOURCED GOVERNMENT CONTRACTS | 3. OUTSOURCED GOVERNMENT CONTRACTS |
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Outsourced portal contracts |
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The Company’s outsourced government portal contracts generally have an initial multi-year term with provisions for renewals for various periods at the option of the government. The Company’s primary business obligation under these contracts is generally to design, build, and operate Internet-based portals on an enterprise-wide basis on behalf of governments desiring to provide access to government information and to complete government-based transactions online. NIC typically markets the services and solicits users to complete government-based transactions and to enter into subscriber contracts permitting the user to access the portal and the government information contained therein in exchange for transactional and/or subscription user fees. The Company enters into separate agreements with various agencies and divisions of the government to provide specific services and to conduct specific transactions. These agreements preliminarily establish the pricing of the electronic transactions and data access services the Company provides and the division of revenues between the Company and the government agency. The government oversight authority must approve prices and revenue sharing agreements. The Company has limited control over the level of fees it is permitted to retain. Any changes made to the amount or percentage of fees retained by NIC, or to the amounts charged for the services offered, could materially affect the profitability of the respective contract to NIC. |
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The Company is typically responsible for funding the up-front investment and ongoing operations and maintenance costs of the government portals, and generally owns all of the intellectual property in connection with the applications developed under these contracts. After completion of a defined contract term, the government partner typically receives a perpetual, royalty-free license to use the software only in its own portal. However, certain customer management, billing and payment processing software applications that the Company has developed and standardized centrally and that are utilized by the Company’s portal businesses, are being provided to an increasing number of government partners on a software-as-a-service, or “SaaS,” basis, and thus would not be included in any royalty-free license. If the Company’s contract were not to be renewed after a defined term or if its contract was terminated by a government partner for cause, the government agency would be entitled to take over the portal in place with no future obligation of the Company, except as otherwise provided in the contract and except for services provided by the Company on a SaaS basis, which would be available to the partner on a fee-for-service basis. |
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Any renewal of these contracts beyond the initial term by the government is optional and a government may terminate its contract prior to the expiration date if the Company breaches a material contractual obligation and fails to cure such breach within a specified period or upon the occurrence of other events or circumstances specified in the contract. In addition, 18 contracts under which the Company provides outsourced portal services or software development and services can be terminated by the other party without cause on a specified period of notice. Collectively, revenues generated from these contracts represented 62% of the Company’s total consolidated revenues for the year ended December 31, 2014. In the event that any of these contracts is terminated without cause, the terms of the respective contract may require the government to pay a fee to the Company in order to continue to use the Company’s software in its portal. In addition, the loss of one or more of the Company’s larger state portal partners, such as Alabama, Arkansas, Colorado, Indiana, Kentucky, New Jersey, Pennsylvania, Tennessee, Texas, or Utah, as a result of the expiration, termination or failure to renew the respective contract, if such partner is not replaced, could significantly reduce the Company’s revenues and profitability. See the discussion below under “Expiring Contracts” regarding the expiration of the Company’s contracts with the states of Arizona and Delaware. |
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Under a typical portal contract, the Company is required to fully indemnify its government clients against claims that the Company’s services infringe upon the intellectual property rights of others and against claims arising from the Company’s performance or the performance of the Company’s subcontractors under the contract. At December 31, 2014, the Company was bound by performance bond commitments totaling approximately $6.6 million on certain outsourced portal contracts. The Company has never had any defaults resulting in draws on performance bonds (See Note 6). |
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The following is a summary of the portals in each state through which the Company provides enterprise-wide outsourced portal services to multiple government agencies: |
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| | Year Services | Contract Expiration Date |
NIC Portal Entity | Portal Website (State) | Commenced | (Renewal Options Through) |
Connecticut Interactive, LLC | www.ct.gov (Connecticut) | 2014 | 1/9/2017 (1/9/2020) |
Wisconsin Interactive Network, LLC | www.wisconsin.gov (Wisconsin) | 2013 | 5/13/2018 (5/13/2023) |
Pennsylvania Interactive, LLC | www.pa.gov (Pennsylvania) | 2012 | 11/30/2017 (11/30/2022) |
NICUSA, OR Division | www.oregon.gov (Oregon) | 2011 | 11/22/21 |
NICUSA, MD Division | www.maryland.gov (Maryland) | 2011 | 8/10/2016 (8/10/2019) |
Delaware Interactive, LLC | www.delaware.gov (Delaware) | 2011 | 3/31/2015 (in transition period) |
Mississippi Interactive, LLC | www.ms.gov (Mississippi) | 2011 | 12/31/2015 (12/31/2021) |
New Jersey Interactive, LLC | www.nj.gov (New Jersey) | 2009 | 2/28/15 |
Texas NICUSA, LLC | www.Texas.gov (Texas) | 2009 | 8/31/2017 (8/31/2018) |
West Virginia Interactive, LLC | www.WV.gov (West Virginia) | 2007 | 12/31/2014 (services continue to be provided under the terms and conditions of the prior contract) |
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Vermont Information Consortium, LLC | www.Vermont.gov (Vermont) | 2006 | 6/8/2016 (6/8/2019) |
Colorado Interactive, LLC | www.Colorado.gov (Colorado) | 2005 | 4/30/2019 (4/30/2023) |
South Carolina Interactive, LLC | www.SC.gov (South Carolina) | 2005 | 7/15/2019 (7/15/2021) |
Kentucky Interactive, LLC | www.Kentucky.gov (Kentucky) | 2003 | 8/31/15 |
Alabama Interactive, LLC | www.Alabama.gov (Alabama) | 2002 | 3/1/2016 (3/1/2017) |
Rhode Island Interactive, LLC | www.RI.gov (Rhode Island) | 2001 | 7/1/2017 (7/1/2019) |
Oklahoma Interactive, LLC | www.OK.gov (Oklahoma) | 2001 | 3/31/15 |
Montana Interactive, LLC | www.MT.gov (Montana) | 2001 | 12/31/2017 (12/31/2020) |
NICUSA, TN Division | www.TN.gov (Tennessee) | 2000 | 3/31/16 |
Hawaii Information Consortium, LLC | www.eHawaii.gov (Hawaii) | 2000 | 1/3/2016 (3-year renewal options) |
Idaho Information Consortium, LLC | www.Idaho.gov (Idaho) | 2000 | 6/30/17 |
Utah Interactive, LLC | www.Utah.gov (Utah) | 1999 | 6/5/2016 (6/5/2019) |
Maine Information Network, LLC | www.Maine.gov (Maine) | 1999 | 7/1/2016 (7/1/2018) |
Arkansas Information Consortium, LLC | www.Arkansas.gov (Arkansas) | 1997 | 6/30/18 |
Iowa Interactive, LLC | www.Iowa.gov (Iowa) | 1997 | 6/30/2016 (6/30/2020) |
Indiana Interactive, LLC | www.IN.gov (Indiana) | 1995 | 7/31/16 |
Nebraska Interactive, LLC | www.Nebraska.gov (Nebraska) | 1995 | 1/31/16 |
Kansas Information Consortium, LLC | www.Kansas.gov (Kansas) | 1992 | 12/31/2021 (annual 1-year renewal options) |
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During the first quarter of 2014, the Company was awarded a three-year contract by the state of Connecticut to manage its government portal, which includes renewal options for the government to extend the contract up to an additional three years. In addition, the Company was awarded a new five-year contract from the state of Colorado, which includes an option for the government to extend the contract up to an additional four years. |
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During the second quarter of 2014, the Company was awarded a new three-year contract by the state of Rhode Island, which includes renewal options for the government to extend the contract for two additional one-year periods. In addition, the Company was awarded a new two-year contract by the state of Iowa, which includes renewal options for the government to extend the contract for four additional one-year periods. The Company also received a one-year contract extension from the Commonwealth of Kentucky. |
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During the third quarter of 2014, the Company was awarded a new seven-year contract by the state of Kansas, which includes annual renewal options for the government to extend the contract for additional one-year periods. In addition, the Company executed a two-year contract extension with the state of Indiana. The Company was also awarded a new five-year contract by the state of South Carolina, which includes renewal options for the government to extend the contract up to an additional two years. The Company also executed an 18-month contract extension with the state of Tennessee. |
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During the fourth quarter of 2014, the Company executed a one-year contract extension with the state of Texas. |
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During the first quarter of 2015, the Company received a two-year contract extension from the state of Montana and a two-year contract extension from the state of Idaho. In addition, the Company executed a one-year contract extension with the state of Alabama. |
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Other outsourced state contracts |
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During the third quarter of 2014, the Company’s subsidiary, Louisiana Interactive, LLC, signed a master contract with the state of Louisiana Division of Administration, Office of Technology Services (“Louisiana Division”) that creates a framework to provide certain eGovernment services for a pilot period. The pilot period commenced during the first quarter of 2015 and the Company anticipates it will conclude in approximately 12-18 months. Subsequent to the pilot period, the Louisiana Division has the option to receive enterprise-wide eGovernment services pursuant to the master contract. |
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The Company’s subsidiary, New Mexico Interactive, LLC, has a contract to manage eGovernment services for the New Mexico Motor Vehicle Division (“MVD”) and its parent, the New Mexico Taxation and Revenue Department. During the third quarter of 2014, the Company was awarded a new two-year contract by the MVD to manage eGovernment services through June 30, 2016. The contract includes a renewal option for the government to extend the contract for two additional one-year periods. |
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During the third quarter of 2014, the Company’s subsidiary, Virginia Interactive, LLC (“VI”), extended its agreement with the Virginia Department of Game and Inland Fisheries to provide eGovernment services through August 31, 2015. During the third quarter of 2014, VI extended its agreement with the Office of the Executive Secretary of the Supreme Court of Virginia to provide eGovernment services through August 31, 2015. |
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Outsourced federal contracts |
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NIC Technologies has a contract with the FMCSA to develop and manage the FMCSA’s PSP for motor carriers nationwide, using the self-funded, transaction-based business model. During the first quarter of 2014, the FMCSA exercised a one-year renewal option for the PSP contract, extending its term through February 16, 2015. During the third quarter of 2014, the Company received a six-month contract extension from the FMCSA, extending the term of the PSP contract through August 16, 2015. |
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Any renewal of the contract with the FMCSA beyond the initial term is at the option of the FMCSA and the contract can be terminated by the FMCSA without cause on a specified period of notice. The loss of the contract as a result of the expiration, termination or failure to renew the contract, if not replaced, could significantly reduce the Company’s revenues and profitability. In addition, the Company has limited control over the level of fees it is permitted to retain under the contract with the FMCSA. Any changes made to the amount or percentage of fees retained by the Company, or to the amounts charged for the services offered, could materially affect the profitability of this contract. |
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Expiring contracts |
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As of December 31, 2014, there were 11 contracts under which the Company provides outsourced portal services or software development and services that have expiration dates within the 12-month period following December 31, 2014. Collectively, revenues generated from these contracts represented 25% of the Company’s total consolidated revenues for the year ended December 31, 2014. As described above, if a contract is not renewed after a defined term, the government partner would be entitled to take over the portal in place with no future obligation of the Company, except as otherwise provided in the contract and except for the services the Company provides on a SaaS basis, which would be available to the government agency on a fee-for-service basis. |
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During the first quarter of 2013, the Company’s subsidiary, NICUSA, Inc. (“NICUSA”), chose not to respond to a request for proposal issued by the state of Arizona for a new contract. NICUSA provided transition services as required by the contract through March 26, 2014. The costs incurred in transitioning out of NICUSA’s contract with the state of Arizona, including employee retention bonuses, operating lease termination costs, and fixed asset impairment, did not have a material impact on the Company’s consolidated results of operations, cash flows, or financial condition. For the years ended December 31, 2014, 2013 and 2012 revenues from the legacy Arizona portal contract were approximately $0.8 million, $3.7 million, and $3.8 million, respectively. |
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The Company’s subsidiary, Delaware Interactive, LLC (“DI”), has a contract with the state of Delaware to manage the state’s official government portal. Currently, the primary revenue source for DI under the contract is an annual portal management fee paid to DI by the state. During the second quarter of 2014, the state informed DI that due to fiscal constraints, it did not intend to renew its contact with DI when the contract term expired on September 30, 2014. However, during the third quarter of 2014, the Company received a six-month contract extension from the state of Delaware to provide transition services through March 31, 2015, which includes options for the government to extend the contract for additional three-month periods. The Company does not believe the expiration of its contract with the state of Delaware will have a material impact on the Company’s consolidated results of operations, cash flows or financial condition. For the years ended December 31, 2014, 2013 and 2012 revenues from the Delaware portal contract were approximately $2.4 million, $2.2 million, and $1.4 million, respectively. |