National Research Corp (NRC) 2008 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the National Research Corporation second 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, August 6, 2008. I would now like to turn the conference over to Mike Hays, Chief Executive Officer. Please, go ahead, sir.

Thank you, Tania, and welcome everyone to National Research Corporation's second quarter 2008 conference call. 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 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 further information on 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 back to you, Mike.

Thank you, Pat. We have several topics to discuss during the call today, not the least of which is the $4.4 million in net new contracts signed in the second quarter. In fact, there has only been one other quarter in the Company's history in which sales have surpassed this level, and that was the fourth quarter of 2007.

As a result of strong sales this quarter, total contract value increased to $58.1 million, which is a 5% sequential quarterly growth over first quarter 2008. Year-to-date total contract value has increased 10.4% from the $52.6 million level.

Before I add color to the sales success and dive into additional topics, I'd like to turn the call back to Pat for a review of the quarterly and year-to-date financials. Pat?

Thanks, Mike. For the three months ended June 30, 2008, the Company's revenue was $11.9 million. In reviewing the mix of revenue, NRC Picker was flat, Payor Solutions was down 35%, driven by falling Medicare Advantage enrollment, but subscription-based revenue was up 21%.

For the six months ended June 30, 2008, the Company achieved revenues of $25.4 million, compared to $24.2 million in the same period in 2007, a 5% increase.

For the three months ended June 30, 2008, net income for the Company was $1.6 million, or $0.23. Net income was 13% of revenues, slightly below our model of 15%.

The Healthcare Market Guide's new subscription-based Ticker product ended the quarter with an increase of $1.2 million of new deferred revenue. The impact of this new subscription-based model for -- from the traditional model resulted in this deferred revenue that would have historically been recognized in the second quarter. If NRC would have received these sales in the traditional Healthcare Market Guide model, the impact would have resulted in an additional $759,000 of net income, based on an effective tax rate of 38%, or an additional $0.11 per diluted share for the quarter, which would have resulted in $0.34 diluted EPS.

For the six months ended June 30, 2008, net income for the Company was $3.6 million, or $0.52 per share, compared to $3.2 million, or $0.46 per share for the same period in 2007, 11% increase in net income and a 12% increase in earnings per share.

During the second quarter 2008, direct expenses as a percentage of revenue were 45%, compared to 44% in 2007. We continued to maintain our direct expenses within the model and should be able to improve the margin as we increased our higher margin subscription-based products as a percent of total revenue.

During the second quarter of 2008, the selling, general and administrative costs were the same as 2007, at $3.3 million, which was 28% of revenue, compared to 28% in the same quarter of 2007. For the six month period ended June 30th, the SG&A were 27% of revenue, compared to 28% of revenue in the same period of 2007.

Depreciation and amortization were 6% of revenue during the second quarter in 2008, compared to 5% in the same quarter of 2007. We expect this expense to move to the lower end of our model of 4.5% to 6% of revenue in 2008.

Cash flow from operations for the second quarter was $5 million, compared to $3.1 million in the second quarter of 2007. Cash flow from operations for the six months ended June 30th was $7.2 million, compared to $7.5 million in the same period 2007.

In the first six months of 2008, the Company's notes payable increased by about $250,000. During that same period, the Company repurchased 266,142 shares of Treasury stock for $6.6 million at an average cost of $24.95 per share.

Cash and short term investments at June 30th were $1.3 million.

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

Thank you, Pat. Let me dive into some of the color on the sales success and, as I mentioned, several other topics I wanted to touch on today.

Net new contracts for the second quarter for our NRC Picker business unit equaled $2 million, which is on track with its sales plan and becoming highly predictable. The remaining $2.4 million of net new contracts were from subscription-based products being offered by Healthcare Market Guide and the Governance Institute.

Looking first at The Governance Institute, new membership sales have been very strong. In fact, for the first six months of 2008, they have surpassed all of the new membership sales of 2007. On top of bringing on new members, the added Board Support member benefit that, as you recall, was folded into current membership programs and resulted in a price increase at renewal, added $1 million in incremental business year-to-date and will come close to that same number for the balance of the year, as we move through the renewal dates for all TGI members.

The Governance Institute's new Medical Leadership Institute was a little slow out of the gate, but now gaining real traction from which we will likely see increase in sales in that particular product for the remainder of the year.

For Healthcare Market Guide, its new Ticker product is receiving strong market acceptance. Healthcare Market Guide sales, driven by attracting new clients and the incremental price increase from upgrading current Healthcare Market Guide clients to Ticker was $1 million in the most recent quarter, a 20% increase from the first quarter of 2008 and a 150% increase over second quarter sales in 2007 of $370,000.

We have worked through upgrading 22% of Healthcare Market Guide current clients, with the balance having renewal dates in the third quarter of this year. Consequently, we expect a large number of upgrades will take place by September of this year.

Moving from the subscription-based products to our Payor Solution business unit, which, as you recall, offers federally-required health risk assessments for Medicare Advantage enrollees, actually had a 35% decline in revenue for the second quarter. Medicare Advantage enrollment, to which this unit's revenue is tied, failed sharply. In addition, the most recent congressional override of President Bush's veto regarding restructuring the Medicare Advantage Program, in our opinion, will likely drive lower Medicare Advantage enrollment for the balance of the year.

We expect Payor Solution revenue for the remainder of the year to be about $700,000, compared to $1.2 million for the last half of 2007.

The last business unit I'd like to review is NRC Picker. As mentioned earlier, net new contracts matched plan and continue to be driven by demand for our improvement products that seamlessly connect with our measurement. HCAHPS, as we had anticipated, is the catalyst for this need to improve the patient experience.

During the second quarter we made several changes that have the sole intent to materially increase the growth rate of this business unit. The market clearly exists and addressing that opportunity in a more focused way will help us capture it.

First of all, we have divided our sales force into two groups, one focused only on bringing on new clients and the second focused exclusively on current clients. This material change is to address an analysis we conducted of our current client base, which showed clearly a $15 million upside opportunity, if we increase our penetration of NRC Picker products across all NRC Picker clients.

In order to achieve greater penetration, we now have a group of sales associates aligned with this goal, without the distraction of having to cover both clients and prospects. The second group, the new business development team, now has that same luxury of focus, which is 100% dedicated on bringing in new clients.

Organization-wide we've also made another change. That change has to do with the role of Joe Carmichael. Joe is now heading up a much expanded effort to strategically connect each business unit's clients to each other business unit's products. We have a very limited number of clients that purchase from all three hospital-focused business units. A modest increase in this overlap will result in a significant pool of incremental revenue for the Company.

Just to highlight the magnitude of the upside, consider the fact that 80% of all NRC clients do business with only one NRC business unit. Hospitals that only do business with one business unit have an average contract value of $33,000. Hospitals doing work with two of our three units spend $133,000 and the clients that work with all three have an average annual spend of $334,000. Today we have only 20 healthcare systems that work with TGI, Healthcare Market Guide and NRC Picker. If we capture just another 20, it would add $6 million in incremental revenue.

I have taken on some of Joe's previous responsibilities to provide him the time to move this effort forward in a very meaningful way. As well, Jason Rau and Helen Hrdy, both long-standing NRC associates, have moved in to key leadership roles in the NRC Picker business unit.

In closing, let me touch on our new product development pipeline. The pipeline continues to be robust and two products are coming close to being completed. One is for The Governance Institute and the other for Healthcare Market Guide.

The Governance Institute is completing market testing of a new offering that can be sold as a standalone product to non-TGI members, as well as bundled with new TGI membership sales. In addition, and as was the case with the added Board Support deliverables, we may elect to embed this new product into current membership relationships at the renewal time as well. We will announce the details of this new product during our next earnings call.

Healthcare Market Guide is also wrapping up the final aspects of a new offering to be launched October 26th. During our next call, I will as well outline the projections for that new offering.

Operator, at this time, I'd like to open the call for questions, please.

(OPERATOR INSTRUCTIONS) And we do have a question from the line of [Wayne Devon] of Burnham Asset Management. Please go ahead, sir.

Hey, guys. A couple of questions. Your growth in deferred revenue, when will this show up in reported revenues?

Wayne, this is Pat. It will be showing up ratably over twelve months. So, it will, between now and next May or June.

May or June. Perfect. Okay, a couple of more, real quick. Annualized revenue is about 80% of contract revenue. When will that spread close? Can you just go into that a little bit?

I'm not sure we caught all the question. You broke up a little bit towards the end.

Okay. So, annualized revenue is 80% of contract revenue. Can you just discuss when that spread will close?

Hopefully if we are selling more contracts, the contract value will increase faster than the annualized revenue. We will have a small spike of revenue in the third quarter from some of the traditional market guides that will help close that gap.

Perfect.

The goal would always be to have total contract value increasing as we move to a higher mix of subscription-based revenues. So, I guess theoretically the gap may never close.

Right. Right, right. And, so obviously you're optimistic about the Picker growth. Can you just talk about why basically, some early signs, or what you're seeing?

Well, I don't think that we were focused correctly on the sales side. We weren't penetrating existing clients nearly to the degree that we could and now are. So, the market opportunity is clearly there. I just think we had the sales force aligned in not quite the most optimum way. And now we've broken that into two groups, as I mentioned, one focused exclusively with clients and tapping into increasing our penetration of that portfolio of product and service across all of our current NRC Picker clients rather than --

Are you seeing relatively- - I'm sorry.

- - just on the new business.

Okay. Have you seen any early signs, yet? Or it's- -

This change literally took place in the last 30 days. So, the alignment's done. Every client is assigned to an inside sales person and those people are literally on the road Monday through Friday visiting. So, I think it's a little too early to tell, but the opportunity we know is there, because we quantified it. Now we just have to go collect it.

Perfect. Thank you very much.

(OPERATOR INSTRUCTIONS) And we have no further questions at this time.

Thank you, operator. And thank you all for joining us on the call today. And as always Pat and I look forward to providing you more color on progress during our next conference call. Thank you very much.

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