National Research Corp (NRC) 2007 Q3 法說會逐字稿

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

As a reminder, this conference is being recorded Wednesday, November 7, 2007. I would now like to turn the conference over to Mr. Michael Hays, Chief Executive Officer. Please go ahead, sir.

Thank you, Susan, and welcome, everyone, to National Research Corporation's conference call for the third quarter, 2007. My name is Mike Hays, the Company's CEO, and joining me on the call today is Pat Beans, our CFO.

Before we commence our 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 involve risks and uncertainties that can cause actual results or outcomes to differ materially from those currently anticipated. These forward-looking statements are pursuant to the Safe Harbor 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'll turn it back to you, Mike.

Thank you, Pat. And again, welcome everyone. We have a robust set of topics to discuss with you today in addition to our standard metrics that we report, and, of course, a review of our third quarter and year-to-date financial performance.

As the press release suggested, the Company did post record revenue in earnings for the third quarter and I'd like to have Pat share with you those details, as well as the year-to-date performance, so I'll turn the call back over to Pat at this time.

Thanks, Mike. For the three months ended September 30, 2007, the Company achieved revenues for the quarter of $14 million compared to $13.3 million for the same period in 2006, a 5% increase.

For the nine months ended September 30, 2007, the Company achieved revenues of $38.1 million compared to $33.5 million during the same period in 2006, a 14% increase.

For the three months ended September 30, 2007, net income for the Company was $2.5 million, or $0.36 per share compared to $2.3 million, or $0.34 per share, for the same period in 2006. This represents a 7% increase in net income and a 6% increase in earnings per share for the quarter.

Net income was 18% of revenue, up from 14% for the second quarter. This brings the Company up to a 15% year to date.

For nine months ended September 30, 2007, net income for the Company was $5.7 million, or $0.82 per diluted share, compared to $4.9 million, or $0.70 per diluted share, in the same period of 2006, an 18% increase in net income and a 17% increase in diluted earnings per share for the nine-month period.

During the third quarter of 2007, direct expenses as a percent of revenue were 43%, which is at the lower end of our model. This was primarily driven by an increase in the mix of higher margin improvement products.

During the third quarter, the Selling, General and Administrative expenses were $3.2 million, compared to $3 million in 2006, and were 23% of revenue compared to 22% in the same quarter of 2006.

Depreciation and amortization were 5% of revenue during both 2007 and 2006 third quarter. We expect this expense to remain within our model of 4.5 to 6% of revenue in 2007.

Cash flow for the third quarter was $3.1 million compared to $1 million in the same period in 2006. In the first nine months of 2007 we reduced notes payable from the TGI acquisition by $4.3 million.

Cash and short-term investments as of September 30, 2007, were $2.9 million.

I will now turn it back to Mike for additional comments.

Thank you, Pat. Regarding the metrics that we publicly report, let me start with sales.

Our sales efforts continued to produce by broadening relationships with current clients, as well as bringing new clients onboard. Net new sales for the third quarter of 2007 were $2.5 million. Healthcare Market Guide sales for the third quarter were $623,000, which compares to Healthcare Market Guide sales in the second quarter of $371,000 and first quarter Market Guide sales of $271.

Total recurring contract value for the quarter ended at $48.6 million, of which 98% is from commercial contracts, which have increased 20% year over year.

As Pat touched upon, in addition to the absolute growth in commercial contract value, our product mix is shifting towards higher-margin membership and improvement-based products. A case in point is a large healthcare system that recently selected NRC+Picker was primarily due to the unique profile of our improvement products.

While that is not new news, approximately 40% of this client's contract is comprised of these higher margin improvement tools, with the balance being measurement services.

This focus on improvement products within the NRC+Picker business unit, combined with our efforts to grow Healthcare Market Guide as well as a Governance Institute should continue this trend towards a larger proportion of higher margin subscription-based revenue.

On the new product development front, as you know, we have built a robust pipeline of additional products that are now being market tested. Today I am pleased to announce two new membership programs that we have rolled out under the banner of the Governance Institute.

The first is the TGI Board Support program. This program provides the tools and resources that enable Board coordinator function within healthcare organizations to excel. That's practice, content, covering scheduling, record-keeping, updating By-laws, Trustee orientation and continued education, performance evaluation and regulatory compliance are a few of the topic areas, which member benefits address.

The market's acceptance of the Board Support program has far exceeded our chartered membership requirements for a program launch. In fact, at the inaugural Board Support conference held in August, over 100 of TGI's 500 members were represented with an amazing 100% positive rating.

Given such broad-based and immediate demand for the program, we have elected to roll all the member benefits of this new program into the basic TGI membership. This decision has, in essence, created an instant enrollment of 500 current TGI members in this new program.

The price point of the basic TGI membership with this enhanced set of member benefits was increased by 36% for current TGI members, and an increased membership fee structure for new members is now in place.

The second new membership program TGI has rolled out is called 'The Medical Leadership Institute'. This program was driven by our witnessing an increasing number of physicians attending the Governance Institute Leadership conference over the past year.

It's clear to us from this trend, as well as from member feedback, that healthcare organizations have an unmet need to strengthen physician leaders' management skills and we're doing so by providing the tools and resources and Best Practices to them.

The Medical Leadership Institute member benefits mirror the slated deliverables included in the basic TGI membership, however, all of which have been tailored to the needs of this medical leadership group within hospitals and healthcare systems.

The Medical Leadership Institute charter conference was attended by 30 TGI member and non-member organizations, which is a number far closer to anticipated levels that trigger a program launch.

The Medical Leadership Institute membership fee is $15,950 annually, matching the fee structure of the Governance Institute.

With the introduction of the Board Support component to the basic TGI membership and The Medical Leadership Institute program, we have now moved the opportunity for TGI from 3,000 potential hospitals at $11,500 annual fee, or $34.5 million, to $95.7 million.

Given the margins inherent in the TGI business model, combined with its prospects for growth, we look forward to TGI adding to NRC's consolidated financial performance in an ever-increasing way going forward.

As well, the TGI membership model approach to subscription-based products will be built upon by other NRC divisions in the coming quarters. All this to say TGI has been, and should continue to be, a positive acquisition and partner with NRC.

During our last earnings call, I also outlined moves, which created Healthcare Market Guide as a separate business unit. I'm happy to report with that clarity of focus and all dedicated resources in place, Healthcare Market Guide is moving forward towards achieving its goal of doubling revenue and more than doubling earnings by yearend 2009.

This move has also help crystallize the untapped opportunity to cross-sell products between the three business units, those being NRC+Picker, Healthcare Market Guide, and Governance Institute. In fact, of the 1,100 healthcare systems in the United States that do business with NRC, 90% only do business with one of our business units; 9% do business with two of the three; and only 1%, or 13 clients, do business with all three units.

This simple fact has documented for management that NRC could double revenue by capitalizing on this install base of current clients.

Consequently, in addition to each business unit doing more for its respective clients and gaining market share in their own right, we are accelerating our efforts to maximize the established client relationships we now have to drive revenue across all divisions.

With that, Susan, I'd like to open the call to questions.

Thank you. (OPERATOR INSTRUCTIONS). Ryan Daniels from William Blair.

Good morning. It's Christina [Blasheck] for Ryan this morning. How are you? One follow-up item. On these two new product launches you were discussing, I missed the dollar opportunity that you mentioned at the end for TGI because of these two new products.

Prior to the rollout of the two new products the market opportunity, as we calculate it, is $34.5 million, and that has gone to $95.7 million.

Okay, great! Given new product launches and your ongoing efforts to cross-sell to your existing clients, do you still anticipate for -- or could you give us any color on your long-term guidance on revenue or net income? Is revenue, do you still believe, is going to be within the 20 to 30% guidance you previously provided?

That's what our aspirations are, is to stay within that window of 20 to 30%.

Okay. And then, net income is -- is that 15%?

Correct.

Great! And then, one other quick question. Given your ability to leverage your expenses this quarter, direct expenses, I notice the SG&A were less than we had anticipated. Do you expect that this is going to be an ongoing trend and is your guidance going to be any different for 2008 than what you've provided for '07?

In terms of direct expenses, we are, as Pat suggested, at the lower end of our model. I don't know that we're changing our model, per se, but we would like to see a higher proportion of higher-margin products, so that number could be affected.

Okay, great!

In terms of the SG&A, if we were to go much lower, or outside of our model, we'd try to spend it up and invest in different things, especially just sales and marketing, so I wouldn't anticipate that guidance changing.

So, staying in that 23 to 25% range?

Correct.

Okay, great! I think that's it for now. Thank you.

Thank you. (OPERATOR INSTRUCTIONS). Andrew Weiner from Burnham.

Hi, good morning, guys. Could you elaborate a little bit on -- you raised the price of the TGI offering by about one-third. When do most of the contracts typically renew and to the extent you've had renewals already, what has been the uptake?

Basically, of the 500 TGI members, about one-twelfth of them renew every month. There really isn't a lot of seasonality. And we have gone through a cycle of renewals at the higher price point and that's stuck.

So, over the course of the next 12 months, starting a couple of months ago, we should move through the renewal period for 100% of the TGI members. And again, at that point the new price structure comes into effect. And, as you may recall, Adam (sic), we (inaudible) recognize that membership revenue of one-twelfth.

So, it will takes us a year to move through the increased pricing, and then, over the course of that follow-on 12 months from the renewal date, we should realize that increased revenue stream.

And I'm sorry if I missed it, but I had to hop off for a minute. What has happened to the TGI membership base since the Company was acquired? I think you had a goal at that time of doubling the membership base.

Yes, we do want to double the membership and we want to double the spend rate. The net plan still is, obviously, in place and the increased number of membership programs start to help us in terms of that increased spend rate per member.

Membership is up, I believe, around 10% from acquisition. We're a little over 500, and I believe at acquisition it was right at around 450, 455.

Okay. And, maybe you could talk a little bit more about the Healthcare Market Guide, some of the initiatives that you've actually done to reach that goal of doubling both memberships and -- or number of customers and number of spends, spend per customer, and when we should expect to see some sort of material impact from these efforts.

Well, our goal is to double membership and double spend rate by yearend, '09. That's a pretty ambitious goal, so we've really locked in on it, at least doubling the revenue. I think we're starting to see some of that traction now. The dedicated resources are in place and an increased focus on sales is in place. We're also adding more sales people.

So, I think we're at the early stages of getting ramped up. I would hope to think by yearend 2007 we'd be hitting on all cylinders, and so we ought to see incremental growth a little bit north of what we've seen even over the last couple of quarters going into first quarter -- or, coming out of first quarter of 2008, but it won't be linear. We won't divide the doubling of revenue by 24 months and have that equal amount come in each and every quarter.

Are some of the initiatives around that though likely to make Healthcare Market Guide revenues less lumpy, if you will, within -- you usually have that big seasonal sort of burst when the new Market Guide came out. Is anything about the initiatives you're doing going to make that a little more linear throughout the course of the year?

Well, you bring up a good point. You must be reading our mind. We do right now have an annual update and that's delivered in the third quarter of each year and does create kind of a lumpiness relative to our revenue stream.

We are in the planning stages of going to ongoing data collection and updating client databases more frequently. If we do that, the revenue recognition policies, as we understand them from KPMG is that we would have to [ratably] recognize that revenue one-twelfth over the course of the year rather than 100% upon delivery of the annual update.

We have not totally decided to do that. We're in kind of a market test period right now. If that comes back positive, which early indications suggest that it may, then we're going to have to work out some of the logistics. I don't know exactly when we would roll that out. But once we do, if the market accepts it, if the market will pay up for it, depending upon the timing, et cetera, I could see where that would happen the second quarter of next year perhaps.

And then, we're going to have a little different revenue recognition stream that we're going to have to work through. After we work through it, of course, it would be pretty even, but we'll probably have a one-time event come up in Q3 of next year that might delay some of that revenue recognition from Q3 over the course of that follow-on 12 months.

We'll have a little bit more information after we get through market test, so I'd say on our next call we'd be able to outline that, what our plans are and what impact that's going to have to revenue recognition.

Okay. And maybe you could talk a little bit about what you're seeing as the sort of exit the first reporting period -- complete the first reporting period for hospitals where they actually have to publish their satisfaction data as far as interest and update of your improvement tools and what you're seeing from a competitive environment as you move into some of these more solution-oriented offerings.

Well, the first public report of [HCAPS], the National Patient Satisfaction report card probably comes out in March of 2008, so we really haven't yet gone through a complete cycle, although, as you might imagine, all the hospitals are focused on it.

We are seeing an increased focus and conversations relative to improvement tools, which I think is really what's driving the mix of business that we have, meaning that more and more hospitals are coming to the realization that once those numbers are published they're either below average and they need to increase, or they're above average and they need to stay there. So, we are seeing more traction in that regard.

In terms of the competitive set, it is, I believe, shifting, who we're finding ourselves up against. Traditionally, when it was measurement only we'd be running into the traditional measurement companies. Now that we're in a slightly different or expanded space, we run into more consultants that come on site, billable hour, change-agent type products and services.

So that mix is changing a little bit, although we're not in the billable hour consulting business. Nevertheless, that can be, perhaps, a viable alternative to reach the same goal. So, that's shifting a little bit.

I don't know if that answered all the parts of the question, Adam (sic).

Sure. I guess the last question I had was -- I think on the last call -- and again, if I missed some commentary about this, I apologize -- but at an International Partnership, I believe, or with IPSIS, I think it was, was going to take some of your solutions to some international markets. I think you actually had one customer win somewhere or something last quarter. Has that progressed at all? Anything going on in that regard?

That was the Australian project that we reported on the last call and that's up and running. There are -- I know of one other contract that is being bid out, I believe it's in New Zealand, although that's not official. We haven't won that contract yet. Hopefully, we will.

Outside of that, I'm not aware of any specific proposals that have been submitted, although there is interest on the part of that organization to take it to other countries, but I'm not aware of any that have actually been formally proposed, other than those two.

Thank you.

Thank you. (OPERATOR INSTRUCTIONS). Mr. Hays, there are no further questions at this time. I will now turn the call back to you. Please continue with your presentation or closing remarks.

Thank you, Susan. I'd like to thank everybody on the call today, and as always, Pat and I will look forward to speaking to you and giving you an update on yearend performance on our next call. Thank you very much.

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. Have a great day.