National Research Corp (NRC) 2007 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the National Research Corporation second-quarter 2007 conference call. (OPERATOR INSTRUCTIONS).

As a reminder, this conference is being recorded today, Wednesday, August 8th, 2007. I would now like to turn the conference over to Mr. Michael Hays, Chief Executive Officer. Please go ahead, sir.

Thank you, Adam, and welcome, everyone, to National Research Corporation's second-quarter conference call. My name is Michael Hays, the Company's CEO, and joining me on the call today is Pat Beans, our CFO.

Before we commence remarks, I would like to ask Pat to review conditions related to any forward-looking statements that may be made as part of today's call. Pat?

Thank you, Mike. This conference call includes forward-looking statements related to the Company that involves risks and uncertainties that could cause actual results or outcomes to differ materially from those currently anticipated. These forward-looking statements are made pursuant to the Safe Harbor's provisions of the Private Securities Litigation Reform Act of 1995. For further information about the facts that could affect the Company's future results, please see the Company's filings with the Securities and Exchange Commission.

With that, I will turn it back to you, Mike.

Thank you, Pat, and again welcome, everybody, to our earnings call.

In my view our financial performance for the second quarter was mixed. Our 12% top-line growth in my view was poor, while our net income growth of 24% was clearly within our acceptable range. For the first six months, revenues increased 20%, while net income grew 28% as a result of leveraging cost against our higher revenue.

Let me turn the call back to Pat for a detailed review for the quarterly and year-to-date financials.

Thanks, Mike. For the first three months ended -- for the three months ended June 30, 2007, the Company achieved revenues for the quarter of $11.9 million compared to $10.7 million in the same period in 2006, a 12% increase. For the six months ended June 30, 2007, the Company achieved revenue of $25.1 million compared to $20.1 million during the same period of 2006, a 20% increase. For the three months ended June 30, 2007, net income for the Company was $1.6 million or $0.23 per share compared to $1.3 million or $0.19 per share for the same period in 2006.

The net income is up 24%, while the earnings per share increased 21% for the three months. Net income was 14% of revenue, up from the 13% for the same -- for the first quarter of 2007, yet slightly below our model of 15%.

For the six months ended June 30, 2007, net income for the Company was $3.2 million or $0.46 per share compared to $2.5 million or $0.37 per share for the same period in 2006, a 28% increase in net income and a 24% increase in earnings per share.

During the second quarter of 2007, direct expenses as a percent of revenue were 44% compared to 47% in 2006. We continue to maintain our direct expense within the model and increase our high margin improvement products as a percent of total revenue.

Our annual goal for direct expenses remains in the range of 43 to 45% of revenue.

During the second quarter, the selling, general and administrative costs were $3.3 million compared to $3 million in 2006. SG&A expenses for the quarter were 27% of revenue compared to 29% in the same quarter in 2006. Depreciation and amortization were 5% of revenue during the second quarter in both 2007 and 2006. We expect this expense to remain at the lower end of our model of 4.5% to 6% of revenue in 2007.

Cash flow from operations for the second quarter was $3.1 million compared to $1 million in the same period in 2006. During the first six months of 2007, we reduced our notes payable from the TGI acquisition by $4.3 million. Cash and short-term investments as of June 30, 2007 were $2.9 million.

I would like to now turn it back over to Mike for additional discussions.

Thanks, Pat. Sales for the quarter were $2.5 million, up 18% over second quarter in 2006. Healthcare Market Guide sales for the second quarter were $371,000, which is an improvement over the first-quarter performance. Total recurring contract value for the second quarter ended at $47.6 million, which is $1.3 million lower than where we stood at the end of the first quarter. This reduction was driven by categorizing the remaining value of our VA contract as non-recurring after being notified we were unsuccessful with the incumbent in the recompete bidding process.

Directly after this, however, the VA has initiated discussions to extend that same contract which speaks to the inherent shifting of direction. Given this continued lack of stability within the federal sector, we have elected to materially reduce our focus on this segment. We are simply having far too great a success building the commercial side of our business to allow our focus to be diverted to what has proven to be a lesser quality revenue source.

In fact, over the last 12 months recurring contract value for the Company's commercial business has increased 22%, driven by our highly affected sales effort. Yet given the need to first backfield reductions in the federal contract value, we are only benefiting from 50% of this incremental growth in our top and bottom-line performance.

Sales for the last four quarters have equaled $12.6 million, offset now by $6.3 million in federal contract value reductions. Given good July sales, we have all but replaced the VA contract value, and going forward we should see new sales add greater incremental growth to our total recurring contract value since we now have no material risk associated with revenue concentration.

We have also made a major change to the Healthcare Market Guide in order to achieve greater top-line growth and benefit from its disproportionate bottom-line contribution. I personally engaged myself in the day to day of Healthcare Market Guide this past quarter and found we as a company are holding back its growth. The 800 pound gorilla, NRC+Picker business unit, commands the attentions and resources here in Lincoln which places Healthcare Market Guide as a secondary priority.

In order to unleash Healthcare Market Guide's potential, we have elected to manage Healthcare Market Guide as a stand-alone division of NRC similar to our TGI division. I'm happy to announce that Jenny Martin has accepted the position of President of this new division. Ms. Martin has a very impressive list of achievements all around aggressively building businesses over the past 15 years since earning her MBA in Finance. Our goal is to double revenue and more than double its net income contribution by fiscal year-end 2009.

During this past quarter, we also established a unique partnership with [Ipsis], the world's third-largest research company which is headquartered in Paris and has offices in 47 countries. The partnership allows NRC to generate revenue outside the US and Canada without adding infrastructure and other overhead costs. Ipsis provides the local presence, and NRC provides the unique family of the Picker patient experience surveys and the online reporting engine for joint clients.

It is hard to gauge the size of this opportunity; however, after the (inaudible) this partnership has won a major contract in Australia and a contract that neither organization would have won alone.

We are also wrapping up market testing on the first group of new products that will likely begin rollout of new subscription-based improvement products by year-end if not sooner. Adam, I would like to now open the call to questions.

(OPERATOR INSTRUCTIONS). Ryan Daniels, William Blair.

It is actually [Christine O'Glachek] for Ryan Daniels this morning. I have a couple of follow-up questions. Can you provide a breakdown on a percentage basis of revenues as currently stemmed from the government versus commercial sectors?

I don't have that within -- you mean for the quarter?

Yes.

I don't have that within, but it would be the federal sector revenue for the quarter would be lower than it has a percent a year ago.

Okay. Do you know what that was approximately a year ago?

I do not. I apologize.

That is okay. And then do you have maybe any thoughts on -- you did mention that your focus going forward will probably likely be on the commercial side. Do you have any thoughts going forward on long-term opportunity and maybe what the goal is and maybe the shift?

Well, I think the long-term opportunity is similar to what we're witnessing today if I understand your question. We're running about 20%, 22% increase in contract value on the commercial sector. I would anticipate that to be within our range of the 20 to 25%.

Okay. Great. That is very helpful. And then one follow-up question on the Healthcare Market Guide. What do you think the potential is for the end of this year, '07 or '08? Or is it too early to tell at this point?

Yes, it might be a little too early to get that narrow of a focus in terms of where it would be at the end of 2007. But we feel pretty comfortable with doubling its revenue and more than doubling its net income contribution by fiscal year-end '09.

Okay. Do you happen to know what revenue contribution is for this past quarter?

I don't have that. We don't break that out. Year-end 2006 the total revenue for Healthcare Market Guide was around $5 million.

Okay. Perfect. Great. Thank you very much.

Andrew Weiner, Burnham Asset Management.

I was hoping maybe you could elaborate a little bit on this international opportunity. I think historically you have talked about the domestic opportunity I think before you acquired TGI as a $300 million sort of market. And given those sort of dynamics, internationally can you sort of order of magnitude try to advise the opportunity?

It would almost be impossible to simply because we are not really that close to each country's activity relative to patient experience measurement. And we are not totally or we don't have 100% visibility in terms of where this fits in the product portfolio of Ipsis in terms of its attention. So those two things make it a little bit more difficult.

I will say that we are not banking on material growth in that area. We see it as incremental over and above our current growth rates. We had a little success out the gate in the partnership, and hopefully that will continue but there's really no guarantee.

So that actually got to my second question, which was when you talk about maintaining an expected sort of growth rate of 20 to 25% over the sort of next few years, the contribution of this international opportunity would be incremental to that expectation?

Yes, we have to look at it as incremental, absolutely.

Okay. And to the extent that you do have success there, can you talk a little bit about what the economics should look like? Will it change? I mean obviously you will have no selling costs, so would it negatively impact some of the gross margin but have a similar impact to sort of operating margins?

Well, again I think each contract may be somewhat unique, but in the particular case of the Australian project, that revenue will come in at a much improved margin simply because our out-of-pocket costs are minimal. We're really licensing intellectual property in a already established reporting engine. So to add more users and to allow more people to use our intellectual property has minimum costs associated with it. So if that is any indication, it should improve margins on that book of business.

And I think you said apparently that you will be selling the Picker (inaudible) satisfaction survey data, etc. Is there an opportunity particularly in health care systems that are somewhat similar to the US to take some of the information that a TGI offers or even perhaps to start inviting some international participants to (technical difficulty)--?

Actually there is discussion ironically within the TGI Group that might expand out and bring in more people relative to the topic of governance, but that has not established itself or happened to date.

Great. I will let someone else ask questions. Thank you.

(OPERATOR INSTRUCTIONS). Mr. Hays, there are no further questions at this time.

Thank you, Adam, and thank you all for your time today. As always, Pat and I look forward to speaking to you on our next earnings call. Thanks, again.

Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines.