National Research Corp (NRC) 2008 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the First Quarter 2008 Conference Call. During the presentation, all participants will be in a listen-only mode. Afterwards we will conduct a question and answer session. (OPERATOR INSTRUCTIONS) As a reminder, this conference is being recorded Wednesday May 7, 2008. I would now like to turn the conference over to Michael Hays, Chief Executive Officer. Please, go ahead, sir.

Thank you, Julie. And I'd like to personally welcome everyone to NRC's First Quarter 2008 Conference Call. My name is Mike Hays, the Company's CEO. And joining me on the call today is Pat Beans, our Chief Financial Officer.

Before we commence our remarks, I'd 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 could cause actual results or outcomes to differ materially from those currently anticipated. These forward-looking statements are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. For other information about the fact that could effect the Company's future results, please see the Company's filing with the Security and Exchange Commission. With that, I'll turn back to you, Mike.

Thank you, Pat. The Company's first quarter performance was strong across several metrics, one of which was our growth in total contract value. At March 31, 2008, total contract value was $55.6 million, up 6% over yearend 2007. A growing proportion of this metric, which represents the Company's annualized value of book contracts is made up of our subscription based products, now accounting for 27% of total contract value or $15.1 million in absolute dollars.

Before I add color to this and highlight several other achievement relative to the first quarter as well as our plans for the balance of 2008, let me ask Pat to review the first quarter financials. Pat?

Thanks, Mike. For the three months ended March 31, 2008, the Company achieved revenues of $13.5 million compared to $12.2 million during the same period in 2007, a 10% increase. For the three months ended March 31, 2008, net income for the Company was $2 million or $0.29 per basic and diluted share compared to $1.6 million or $0.23 basic and diluted per share at the same period in 2006, a 26% increase.

So, net income margin was 15% for the quarter, a 2% improvement from 13% in the same period 2007. Operating income improved by three percentage points and was 25% of revenue for the quarter.

During the first quarter 2008, direct expenses as a percentage of revenue were 44%. This net improvement compared to 47% for the fourth quarter of 2007 and 45% for the first quarter of 2007. During the first quarter of 2008, selling, general, and administrative costs represent 26% of the revenue, a two percentage point improvement compared to 28% in the first quarter of 2007. For the first quarter 2008, we were outside our model of 23% to 25% with SG&A expenses at 26%, but an improvement over 2007 at 28%. Looking at 2008, we should see SG&A expenses being leveraged against higher revenue.

Depreciation and amortization remained at 5% of revenue during the first quarter of 2008, compared to the same period in 2007. During the first quarter of 2008, the Company had $44,000 of interest expense, down from $167,000 in the first quarter of 2007. Through March 2008, the Company borrowed $5.2 million in conjunction with the repurchase of 240,800 shares of Company stock. This will raise interest expense in the several upcoming quarters as we pay down the bank debt. But the overall expense should be less each quarter compared to 2007. The repurchase of the stock at a cost of $24.08 per share is intended to offset the effects of equity grants of options and restricted stock.

Cash flow from operations for the first quarter of 2008 was $2.1 million compared to $4.4 million in 2007. The decrease for the quarter was the timing of billings, collections, and estimated tax payments. Cash and short-term investments as of March 31 were $1.5 million.

I'll now turn back to you, Mike, for additional discussion.

Thank you, Pat. As Pat outlined, total Company revenues was up 10% which was lower than anticipated and was delayed -- driven by a delay until the later half of this year for several projects within our payer solutions division. As a result, payer solutions was below budgeted revenue for the quarter.

Net new contracts for the quarter, first quarter of 2008 were $1.8 million, roughly half our 2007 quarterly average. A large number of contracts were signed in December 2007, resulting in fourth quarter net new contracts of $5.5 million, far exceeding our quarterly averages. First quarter net new sales has brought that more in line and in fact net new contracts for the month of April were very strong at $1.2 million.

Sales have been especially strong in January through April for subscription based products, including our improvements products, healthcare Market Guide, and the Governance Institute. To this point, while we're one-third of the way through the year, the Governance Instituted sales to date are equal to two-thirds of its annual 2007 sales number.

Enhanced sales performance for the past several quarters for subscription based products contributed to a 32% increase in first quarter revenues derived from this product portfolio. As stated early 27% of the Company's total contract value of $55.6 million is now attributed to this group of high margin offerings.

Adding to this growth trend, Healthcare Market Guide started presales of its new Ticker product April 1. In only a few weeks, $655,000 of Ticker contracts have been booked. Clients upgrading to Ticker have average a 44% increase in contract value. Any number of new clients have already subscribed to the new Ticker product. Acceptance of this product while only four weeks into its launch is tracking against projections which suggest this new product will materially contribute to our overarching goal of doubling the number of Healthcare Market Guide subscribers and doubling the average subscription value. As reviewed in our last earnings call, Ticker will help smooth revenue recognition for Healthcare Market Guide.

That said, we need to work through the fact that Healthcare Market Guide sales force in this past quarter, first quarter of 2008 and second quarter of 2008 have gone from selling past additions of Healthcare Market Guide which historically have generated instantly recognizable revenue to that of selling Ticker which is deferred revenue recognized over the follow-on 12 months of the membership period. While Ticker will create a higher quality revenue stream, it may be a little rough as we work through this transition.

As previewed during our last earnings call, NRC Picker has an equally exciting new product that just rolled out this week. The NRC Picker Patient-Centered Care Institute is now a reality. This new institute, which mirrors the subscription based model of our Governance Institute is the reservoir of all NRC Picker's intellectual insight and evidence based best practice for healthcare organizations to improve patient-centered care for which each CAPS measures and now is being publicly reported.

We have chartered into the institute the top 100 NRC Picker clients, largely based on their current spending levels for NRC Picker improvement products. The response has been overwhelming among this blue chip group of referencable accounts. And now we're on about selling membership in the Patient-Centered Care Institute -- excuse me, to the balance of the 1000 organization for which NRC has a client relationship as well as the 4000 we do not.

As one can tell, we have several fronts on which we are gaining traction and, as always, Pat and I look forward to keeping you abreast of progress on these as well as our other plan products in core revenue centers for the balance of 2008 on future conference calls.

Julie, I'd like to now open the call to questions, please. Operator?

Yes?

Could you please open the call to questions at this time?

Certainly. (OPERATOR INSTRUCTIONS) Our first question comes from the line of Ryan Daniels from William Blair. Please, proceed with your question.

Good morning, guys. This is [Christina Blayshek] for Ryan this morning. Congratulations on a nice quarter.

Thank you.

I have -- just wanted to follow-up with you on the revenues during the quarter. Can you give us a little more color on that? You mentioned earlier during your prepared remarks these contracts that were -- new contracts that were signed during the quarter. And I didn't get that number. And then maybe talk a little bit more about the mix shift and movement toward more subscription-based products. Do you see this as a trend going forward? If so, are there any changes you're going to be seeing with your sales force to focus on those products?

Could you repeat the first part of the question? You were wondering what new sales were in the quarter?

I'm sorry. The number of contracts.

Oh. The number of contracts. I don't have the exact number of contracts to make up the total --

That's okay.

Perhaps we can add that going forward on the calls. In terms of the movement towards subscription based products, as you well know, that's been underway for sometime. I think the visibility against it perhaps is -- has a brighter light on it now given the number of new subscription based products that are part of that portfolio. So, consequently, the critical mass of offerings is in and of itself creating quite a bit of momentum from a contribution to revenue, contribution to sales. Our sales force, depending upon the division, are either exclusively or primarily focused on subscription based products. That would be true at the Governance Institute as well as Healthcare Market Guide. And within NRC Picker, obviously a large proportion of our revenue in the measurement side and while they continue to have that in their portfolio, more often than not, we're leading with the subscription based product, that's being referred to now as the Patient-Centered Care Institute.

Okay. Great. Thank you for that. Moving along, I guess can we talk a little bit more about SG&A during the quarter? Any additional color? I know you mentioned that it did fall outside of your 23% to 25% guidance. Any additional color on why that happened this particular quarter?

This is Pat. And we've actually been outside the model for a few quarters. We're getting closer to being within the model, being 26%, a lot of it is to do with some of our sales expansion.

Okay. You mentioned that last quarter. Okay.

We hope by the end of the year to be real close to being back within the model.

Okay. Did you -- were there any additional hiring during the quarter as well? For sales force?

I don't think January, February, or March. We did just bring on eight new sales but that would've been subsequent to the end of the quarter. Right. That would've been May.

Alright. Thank you. And then, let's see. How much did Healthcare Market Guide contribute to revenue for the quarter?

We don't break out each individual product line from a revenue perspective.

Okay. Do you have an update on -- I don't know if you mentioned it earlier. I didn't catch it if you did. On the Community Benefits Assessment and did the launch go as planned?

That has rolled out and I think we updated that somewhat on last conference call. Sales activity against it are at plan and we continue to focus on that as part of product portfolio. That being said, given its price point and price point of Ticker and the fact that our sales people are commission based, the lion's share of cold calling activity, as you might imagine, this last quarter, compared against -- since April 1 has been against the Ticker product.

Okay. Great. Thank you. That's all I have for now.

Thanks.

(OPERATOR INSTRUCTIONS) Our next question comes from the line of Andrew Weiner from Burnham Asset Management. Please, proceed with your question.

Good morning, Mike and Pat.

Good morning.

Mike, you talked about some delay in payer solution projects. Can you quantify the impact of those delays on quarterly revenue and to what extent do you have visibility on those projects being delivered this year?

Sure. Be happy to. Paired solutions was right at $1 million under budgeted revenue for Q1 and it will be somewhere in that neighborhood, I think, for Q2. Is that right, Pat? The budgeted amount?

That's correct.

It really is single project, I guess I should say multiple projects with a single client based upon a state or several state Medicaid contracts that this particular payer won. But the rollout of that particular program for those states as it relates at least to our component of the project has been delayed till first part of third quarter. The contract itself is really not what I would call truly recurring. A certain portion of it will be but the majority is more of a one-time shot which will, based on our current visibility anyway, be accomplished here in the last six months of 2008. So, they should be back at annual budget from a revenue perspective by yearend.

Okay. And that, if I understand that correctly, so that would be like they were short by $1 million or they did $1 million?

They were short by $1 million.

Okay. So basically there's $2 million of makeup revenue in the back half of the year?

Yes. It's probably about $1.8 million to $2 million.

Okay. Relative to plan. So, alright. I guess the second, that still would've put you about the roughly, I guess, somewhere in the 16%, 17% growth for the quarter which is, I think, still below your sort of long-term goal or model.

Right.

Can you talk a little bit about what you're thinking as far as achieving those goals and sort of what needs to be done?

First of all, I wouldn't necessarily take the solution budgeted shortfall as an excuse. We're still comparing that 10% to our goal of 20% which I guess more than anything magnifies your question. I think the thing we're going to have to work through and I don't know that we really have the math figured out yet is going to be the conversion of Healthcare Market Guide to the Ticker product.

In first and second quarter, traditionally, we focus pretty heavily on selling the previous year's addition which is released, as you know, in the third quarter of each year. So the data's fresh and it gives us a pretty good selling opportunity to garner new clients. We're changing the focus 100% now to sell Ticker. So the revenue that would've been recognized in a particular quarter for past addition sales is really going to be energy to sell Ticker which has a deferred revenue one-twelfth over the follow on membership period. Or one-twelfth the month for the follow on year.

I think the question becomes how many Ticker clients -- either current clients can we upgrade and-or how many new Ticker clients can we sell and how many of those does it take to offset what would've been recognizable revenue from previous additions. So, we roughly are getting around 3500 to 4000 per month worth of recognizable revenue for each Ticker client and past year additions are around 2500. So, if you kind of do the math, you need six Ticker sales to offset one previous addition sale. I don't know, Andrew, how that's going to work out. It's increasing but whether or not we can really have those lines cross all in Q2 and show actually incrementalness to the Healthcare Market Guide contribution to revenue. I don't know. But clearly, we're not backing off our 20% growth aspiration at all. It's just a matter of when those lines cross and when we get ahead of where we would've been.

Okay. So, from an activity level perspective, it supported -- your feelings are there's enough activity and interest in the products to support growth rates in excess of 20%. So, it's a combination of your ability to execute and sort of the timing related to sort of the new nature of revenue recognitions?

Right. Exactly. The size of the market and the acceptance of the product through our market test as well as the roll out over the last four weeks, I think clearly supports that there's a quite a bit of opportunity. We think we can convert somewhere around 50% or 60% of the current Healthcare Market Guide clients and for the first four weeks we were averaging around a 44% increase in contract value on those upgrades. The pricing model suggests it's around 60% as a total client base, meaning we haven't gotten to some of the clients yet that will represent a greater up charge. As well, I was fairly surprised on a pleasant perspective with the number of new clients that we've been talking to for some period of time about Healthcare Market Guide in general, the Ticker feature functionality was the tipping point for them to buy. We'll know a whole lot more here by the end of second quarter. We will have been in it then for several months rather than just four weeks. I think at that point in time we'll know where those lines cross and kind of what the trajectory is.

Secondly, can you talk about -- I know the first, I guess, publicly reported data, I guess, was released in early April, I think it was. Sort of what the feedback has been post that and sort of what you're seeing from an activity level, particularly as you try to up sell sort of improvement in best practice?

Yes. The Healthcare -- each CAPS was released late March. I don't know whether you followed it as much as obviously we did but there was a lot of attention. There was articles in -- gosh. 20 or 30 or 40 different articles I read in local newspapers around the country relative to rank ordering on the front page, how hospitals fared. The surprising event more than anything was the variability between the highest and lowest groups of hospitals. It really wasn't all around one or two -- plus or minus one or two percentage points but plus or minus 20. So, there is a great deal of volatility and variability in patient-centered care around the country and that was, perhaps, quantified for the very first time here several weeks ago.

The attention it got almost instantly was at the board level. We had a tremendous number of inquiries going into our Governance Institute division, as you know, which had connectivity and membership in and around the CEO and the board. A significant number of those inquiries, of course, were passed on to our improvement group to which follow-up has already occurred and continues. So, the board got the message.

We're also seeing additional scrutiny on the part of the CEOs downstream to their staff, that being the chief nurse exec as well as other quality improvement people in the organizations with, for lack of a better word, mandate to get on about improving. And that clearly has a direct line of sight to the Patient-Centered Care Institute. It was no mistake or it wasn't ironic that the rollout of Patient-Centered Care Institute almost occurred simultaneously that event. I think just as what we saw in Wisconsin and as a study in Minneapolis showed, that publicly released data will increase the resources spent on improvement by three-fold. I think early indications of that is -- that's probably pretty good case study to generalize across most, if not all other markets.

Okay. Can you also talk about, I guess, how the price increases -- it sounds like TGI had a good quarter. The price increases that you instituted last year seem to be sticking?

Yes. We haven't backed off of them at all. It's fully baked in to all the renewals. Renewal rate has not changed. Early on we did see a little bit of slowing in receivables. But that's been corrected. I think it was more how we didn't do a very good job explaining, perhaps, why the invoice had increased. That's been taken care of and receivables seem to be back on track. Again, retention rate seems to be following historical trends. So, it seems like it worked.

Okay. And then maybe, Pat, then you could talk a little bit about your sort of 25% operating margin target. I think in past calls we've discussed the potential for your margins to sort of gravitate higher as you get larger contributions from both subscription based products like TGI and Market Guide and those seem to be growing above Company average. Given the fact that you're still hopeful of higher revenue growth and thus better leverage against the SG&A line and the greater contribution of those products, is it likely that we'll see margins sort of fall a little bit above your historical -- on an operating basis, above your historical goals?

I think for the balance of 2008, I don't know if we'd see those actually. As we work through the transition with Healthcare Market Guide and the revenue -- some of that revenue moving into 2009, I don't think we'll see the expansion beyond 25% for the balance of 2008.

Okay. But looking into 2009?

It doesn't sound like Andrew's going to let you off the hook, Pat? As you know, Andrew, Pat dislikes that kind of a question.

I think as we move that percent of the revenue moves to the subscription based, also the major net revenue will be increasing. It depends partially upon the mix. But if the mix of business is great enough on the subscription side, which has been increasing. It's a smaller pool, but it's been increasing, I think then we could look at gains and expansion of the margin.

Okay. Great. I'll let someone else ask a question. Thank you.

(OPERATOR INSTRUCTIONS) Mr. Hays, there are no other questions.

Okay. Thank you. And thank you, everyone, for the time today and as usual, Pat and I look forward to talking to you here coming up in about 90 days. 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.