National Research Corp (NRC) 2008 Q4 法說會逐字稿

Welcome to the National Research Corporation fourth-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, February 11, 2009. I would now like to turn the conference over to Michael Hays, Chief Executive Officer.

Thank you, Alex, and welcome, everyone, to National Research Corporation's year-end 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 [verily] from those currently anticipated. These forward-looking statements are made pursuant to the Safe Harbor provision of the Private Securities Litigation Reform Act of 1995. For 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 will turn it back to you, Mike.

Thank you, Pat. To commence the call today, let me say that while perhaps untrue for many companies, 2008 was a good year for National Research Corporation. Our investments in new product development made over the past few years are paying off, and contribute materially in 2008, as did our salesforce that continues to reach higher levels of per-person productivity.

We also added via merger a new revenue runway on December 19 which now places the Company as the leader in the senior care provider market. Before I add color to these and other topics, let me have Pat provide a review of our fourth-quarter and year-end financials.

Thanks, Mike. For the three months ended December 31, 2008, the Company's revenue was $12.2 million compared to $10.8 million in the same period in 2007. For the 12 months ended December 31, 2008, the Company achieved revenue of $51 million compared to $48.9 million the same period in 2007.

For the three-month period ended December 31, 2008, net income for the Company was $1.9 million or $0.28 per diluted share, and was a 16% of revenue. This compares to net income for the same period 2007 of $1.1 million or $0.16 per diluted share.

For the year ended December 31, 2008, net income for the Company was $7.4 million or $1.09 per diluted share, compared to $6.8 million or $0.98 per diluted share in the prior year. This is a 12% increase in earnings per share 2008 over 2007. The net income was 15% of revenue, which is our model.

During the fourth quarter of 2008, direct expense as a percent of revenue were 47%, the same in 2007. As we stated in the last conference call in November, we divided the salesforce for our largest business unit, NRC Picker, into two groups -- one focusing only on bringing in new clients, and the second focused exclusively on current clients. Starting in July 2008, the associated expense for the group focusing exclusively on current clients is included in the direct expense instead of SG&A.

During the fourth quarter of 2008 the selling, general and administrative costs were down in total dollars to $2.8 million compared to $3.3 million during the same period 2007. SG&A expenses for the fourth quarter of 2008 were 23% of revenue, the same as the third quarter, but down compared to 30% in 2007.

For the year ended December 31, 2008 the SG&A were 25% of revenue compared to 27% of revenue in 2007. Depreciation and amortization were 5% of revenue during the year 2008, and the same in 2007.

Cash flows from operations for the fourth quarter of 2008 was $4 million compared to $4.2 million in the same period in 2007. Cash flow from operations for the year ended December 31 was $15.1 million compared to $14.6 million for the same period of 2007.

In 2008, the cash flow from business was used to pay off the notes payable of $3.8 million; repurchase 395,558 shares of treasury stock totaling $10.1 million; purchase capital expenditures of $2.8 million; and pay dividends of $3.8 million.

Going into 2009, we expect our capital expenditures to be lower than 2008, and see continued progress in moving more of our revenue base to the higher-margin subscription-based products, which will also have a better revenue visibility.

In December 2008, the Company completed the merger of My InnerView, Inc., resulting in a new term loan of $9 million at an interest rate of 5.2%. With this last transaction completed, the Company added over 8,000 new clients, and is starting 2009 in a very strong capital structure position.

Cash and short-term investments as of December 31 were $1.1 million.

I will now turn the call back over to you, Mike.

Thank you, Pat. As I pointed out at the beginning of the call, product development was a major contributor toward 2008 list of achievements. By way of example, The Governance Institute completed the rollout of the embedded portfolio of board support benefits, resulting in a 25% plus upcharge across its entire 550-plus hospital membership base. That conversion was totally completed in the fourth quarter of 2008.

One of the interesting lessons learned is that we do have room to increase price if we add tangible value. Given this ability, we are now tasking additional value propositions with TGI's [CEO] members, that if they do past the test, [will] gain additional value and additional membership fees.

During the year, our Healthcare Market Guide's new ticker products converted Market Guide from a once-a-year third-quarter deliverable into a monthly subscription-based product with a 35% increase in the subscription price. Ticker now provides essentially real-time consumer feedback that measures brand equity, quantifies new hospital and healthcare system revenue opportunities, and measures marketing return on investment in order for client organizations to reduce marketing budgets to those programs that only drive share.

In addition to the revenue growth contribution provided by these two examples of new offering, TGI and Healthcare Market Guide have broadened the number of users within a client organizations, and have experienced marked increases in frequency of interaction with members and subscribers.

Member and subscriber feedback suggest greater value has been added to the relationship, which we believe will help maintain or hopefully even enhance our already-impressive retention rates.

New product development can be a transforming event for an organization, and we have clearly seen with the Governance Institute and Healthcare Market Guide.

The transformation for TGI also includes the Medical Leadership Institute launched in 2008. The Medical Leadership Institute is helping expand TGI's reach into hospitals and healthcare systems. And as we broaden our field of vision, large medical group practice enters the picture, which all of the above will leverage the same unique TGI membership base model that has proven highly successful.

New product development is also transforming other NRC business units. In fact, next week, NRC Picker will commence the rollout to 1,200 client organizations in the United States and in Canada -- a completely different way to think about improving the patient experience. If client feedback to date is at all representative, we will over the course of 2009 witness a transformation within NRC Picker business unit. This will include not only how we bring value to our current client relationships, but how we compete for new clients. The case in point regarding changing the competitive landscape is that we just took from our biggest competitor one of their largest clients to the tune of roughly $1 million.

Switching to our health plan offering, Payer Solutions has the unique opportunity that has unfolded in 2009 as well. Driven by thinking outside the box, Payer Solution group has re-engineered how information we collect from Medicare Advantage members is actually gathered.

Given the resulting product evolution, we estimate gross margin of the Payer Solutions business unit will expand by savings of $400,000 in costs of goods sold in 2009 and a $1 million incremental operating income increase in 2010.

As you can tell from my comments, our listening to the marketplace through the lens of new innovations bring more value to the clients than what we do and how we do it. I have to take a moment to recognize all NRC associates who are engaged in our product development activities. They are the ones that have been really behind what I've outlined for you today, and it will be exciting to see how 2009 builds upon their 2008 contributions.

Let me now turn my comments toward the merger with My InnerView on December 19, 2008. MIV is by far the market share and thought leader across the entire senior healthcare provider sector. My InnerView serves over 800,000 clients throughout the United States, including skilled nursing facilities, home healthcare agencies, assisted and independent living organizations, as well as other senior care providers. As well, MIV is the firm of record for several state Medicare pay-per-performance programs, an area of very interesting growth as state Medicaid budgets come under increased pressure.

My InnerView expands NRC's measurement and improvement service offerings, which now can be said to cover the entire continuum of every person's healthcare needs, independent of service [setting]. No other organization in our space offers such an all-inclusive portfolio. As more healthcare organizations integrate [cradle-to-grave] care delivery, we will create an added pointed differentiation.

One quick example is the large NRC Picker acute care client that is also in the long-term care business is asking us to design a program that integrates NRC Picker and MIV offerings. The $300,000 incremental contract value has yet to be signed, and perhaps it won't. But without MIV, we would have not been at the table. If this works, we will have created a much a stickier relationship with one of NRC's Picker top five clients.

My InnerView will be operated as a separate business unit, as is the case with each of our business units. The co-founders, Neil and Janice, remain in charge. And as just suggested, we have already started to capitalize on the respective resources of NRC and My InnerView. I'm convinced NRC will continue to benefit from the different ideas and approaches of MIV, just as MIV has benefited from becoming exposed to the thinking and ideas of NRC's other business units.

As we move into 2009, we do so with a booked contract value of over $60 million, a number that suggests a 20% revenue growth in 2009. To this number, I look forward to adding our historical net new sales number of $12 million plus. The foundation outlined above provides a great start to 2009.

While the economy has created material barriers for many firms, as stated last quarter, and as continues to be the case this quarter, we see no material impact to our business.

That said, we have seen reduced travel among several clients and consequently we look at our conference attendance to be lower in 2009. In fact, what we're really doing this year is to bring our conference to our clients. If we can find this and other ways to capitalize on the downturn by providing greater value through client organizations, we will continue to do so. As you know, healthcare budgets have always been tight, and delivering tangible value has always been key.

In closing, our book of business combined with our [claim] product rollout and our proven strength on the sales front provide an intriguing opportunity for us in 2009.

Operator, I would now like to open the call for questions, please.

(Operator Instructions). Kristina Blaschek, William Blair.

Good morning. Congratulations on a nice quarter. I wanted to get a little bit more color on 2009 guidance. I guess regarding revenue growth for the year, you had mentioned that we could expect up to 20% annual revenue growth. Given the new Healthcare Market Guide product and the transition towards recognizing revenue over a full year period, do you expect there to be any seasonality during the year for revenue growth, or should we assume that the annual revenue growth will kind of ramp up steadily throughout the year?

Let me try to attack both parts of the question. First of all, we don't give guidance. So if I came across in the prepared script as quantifying guidance for 2009, I'd rather not. We do have $60 million worth of -- or $61 million, I guess, the number is -- worth of booked contract which, if we get all of that done, will represent 20% growth. Our desired growth is 20 to 25%. 20% would be good. Hopefully to that contract value, we can add net new sales. But please don't take that as guidance. It's just where we sit today.

Sure.

In terms of Healthcare Market Guide, the ticker product, which is a monthly subscription-based product that had ratably recognized revenue each month in equal proportions does level out the seasonality that we historically had. However, third quarter does still have -- not nearly to the proportions as historically, but does still have a spike in third quarter for those clients that have not converted to the monthly deliverable, and rather for whatever reason, retained their annual subscription. So it is smoother but it is not perfectly flat for Healthcare Market Guide.

Okay, that is helpful. Do you have an updated percentage of those who have converted, or do you anticipate that 100% over time will convert, or that they will have to?

We want to do what our clients say. So we don't want to put anybody in a position where they either have to convert or we lose them as a subscriber.

So two-thirds, I think, is the number that has converted. One-third hasn't. There's a group of clients here in the first quarter of 2009 that will have their first opportunity to convert. As you may recall, ticker was rolled out in Q2 of 2008. So we do have -- I think it's 14 clients in first quarter that will have their first opportunity to convert -- I don't know what that number will be.

But I anticipate that there always will remain a certain number of clients that, for whatever reason, an annual deliverable actually is the value proposition that makes sense for them.

No, that makes sense. Okay, great. And then can you provide a breakout of total dollar amount of revenues from new contracts during the quarter?

We had net new contracts of $3 million. How much of that that -- that's net new sales in the quarter. We haven't historically broken out the amount of revenue in a particular quarter that was derived from new sales in that quarter, if that's the question -- or maybe I am reading more into it?

Yes, maybe just what was from -- I know you have provided this in the past -- maybe what was from Picker sales, Healthcare Market Guide, or Governance Institute?

I do not have those numbers in front of me, but it would be pretty evenly mixed, with NRC Picker having the largest proportion of the total of $3 million in net new business.

Okay. And then, I guess, moving onto your recent merger with My InnerView. I guess your commentary and your prepared remarks were helpful in our understanding of what attracted you to the business. Can you provide -- I know -- you just indicated that you're not going to provide guidance for 2009. But do you have any sense for what type of annual revenues the Company will contribute in '09? Is it going to be similar to the $7.3 million in '08?

There was roughly $7.3 million worth of revenue that My InnerView did in the calendar year 2008, of which there was a week or so on our books. But adding together, total My InnerView was about $7.3 million -- is that right, Pat?

Correct.

We will see growth, or we hope to see growth out of that business unit. And as we stated before, our aspirations are somewhere in the neighborhood of the 20%, 25% growth rate. Quite frankly, we would not have been all that interested in My InnerView unless we could have ascribed a similar growth rate to that business unit. So I think it would be in the same ballpark of expectations that we have for the balance of companies.

Okay, great. And then just one final question on the broader economic environment. I know you had it's not necessarily impacting your current business, but have you seen any impact that maybe it has changed since November? I know the environment continues to be challenging. So how it's impacting your sales process to potential new clients -- have you seen any pushback or delays from clients that may have potentially signed up for your products or services before, and now are tending to delay it a little while?

We do track the average days to a decision. And we have not seen that change. We have seen our client organizations witness various layoffs, putting capital projects on hold, and delaying, if you wish, purchase of expensive medical equipment -- so the whole capital purchase cycle we have seen -- clearly being upsetting.

It seems as though the area that most of our businesses are in, that being the delivery care side of the shop -- nurses, patient care -- from a layoff perspective and from a budget cut perspective and, evidently, from our services as well, has been more contained and immune.

So to answer your question is -- we haven't seen nearly the deterioration that I know some other organizations have had. But I think it might be the space that we reside within the healthcare organization versus physical client and capital expenditure medical equipment.

That is helpful color. Thank you. That is all I have today.

(Operator Instructions) Andrew Weiner, Burnham Asset Management.

Can you talk a little bit -- you said your hope would be to sort of meet your sort of annual rate of $12 million of net new sales. Can you put maybe that in context of -- it sounds like you have a number of new products that you seem reasonably excited about, as well as obviously, you will now be adding the My -- the [acquisition] -- My InnerView's sales funnel, if you will, to that number.

How much of sort of -- targeting $12 million, given perhaps an expectation of some improved sales force productivity, is offset by some generic view that maybe the economy will impact you, or on perhaps getting less conference attendance, if that is built into the number?

That is a good question. Our net new contracts this year [ending] 2009 was $15 million, so using that [we're] $12 million, which really represents a historical average versus the most recent calendar year success rate, does say it was tempered to a certain degree.

As we look out, and other organizations are having problems, we wonder if we will. We haven't yet, as I said, and we keep a close eye to the different metrics. But if we can get in the $12 million to $15 million net new business range this year driven by current performance, increased productivity, the pipeline of My InnerView and new product -- I don't think that would be a homerun we ought to be north of that, given the additional layers of activity or opportunity we have on top of what we historically have been able to deliver. But I guess I am couching it in a more conservative perspective.

Okay. Mike, then, trying to sort of do the math a little bit, using that $12 million number and given the largely subscription nature of our business, would the expectation that somewhere between 40% and 50% of that number would, assuming a sort of a ratable sales process over the year, add to your -- the $61 million odd of backlog, if you will?

Exactly. When we look at -- when we estimate out and tried to do our forecast internally, we take 50% of net new sales, and assume it comes in ratably over the course of the year, and half of that will convert to recognizable revenue. That is exactly the percentage we use -- 50%.

And if I look at the $61 million, since the net new sales number actually includes cancellations, would the negative impact off of that the $61 million that you're coming into the year with only be projects that for some reason are not canceled, but perhaps aren't completed within the year? Is that sort of the risk to that number?

I guess there could be two risks. One is a project elongates in terms of its time horizon, although in our business, that doesn't happen often. For an example, we have the TGI membership that is 12 months; it's 12 months, and Market Guide is a 12-month subscription. So most of our projects -- it would be difficult to extend the term, although I'm sure it could happen -- for an example, in the NRC Pickers business.

The bigger risk would be a particular client canceling a project that is in that book of business. And we clearly don't go back to clients and say, you have a contract; we're moving forward anyway. We clearly will let them out. So that would be the biggest risk in my mind. Pat, do you have any other --

Not renewing or canceling would be the bigger issue. It wouldn't be delay.

I think that delay would be pretty small.

Isn't that somehow figured into the net new contracts, because the net new contract number is -- assuming contracts that are not renewed, isn't the net new number net of new sales minus those that are not renewed?

Yes, net new -- you are right.

So the larger sort of -- if your view -- if the net new number stays at around something healthy, the larger risk then would be a contract being pushed out in that $61 million.

Yes, good point.

Okay. Secondly, Pat, maybe you could talk a little bit about -- you know, we've met our net margin goals in '08, but we have -- that was despite, I guess, some -- as you pointed out in the press release, high margin Healthcare Guide revenue that was effectively pushed out because of the change in revenue recognition or the move to subscription, I should say -- we should have a much a lesser impact from that, if any, in 2009.

Additionally, you pointed out some potential cost savings on the Payer Solutions side, and just a generally higher percentage of revenue coming from higher-margin subscription products.

How do you think about net -- how should we think about what the net margins should look like for '09?

We still are retaining or maintaining our business model of 15% net, but all of those factors that you just cited do suggest we could expand that. And if we can, we will. Had Market Guide had 100% of his revenue recognized in 2008. Our margins have managed, as -- you have done the math; significantly higher than 15%.

The thing that we are contemplating though is to step up some expenditure in the new product development areas in sales and marketing. We don't want to spend more on the capital expenditure type front. We don't think we have to. But we may have an opportunity to get on about meeting the clients and prospects at even a more frequent basis and stepping up some sales and marketing activity, given some of the new product introductions that we would like to support. So that may consume some of that margin expansion. But clearly, as an organization and as a fellow shareholder, we are moving to subscription-based products to increase our margin from what historically had been a 15% net, when we had essentially 100% or lesser percent in the subscription-based business. So we are moving there purposefully.

I would hate to have everybody convert their expectations and model in 2009. But we ought to have some extra money that we can leave on the bottom line, payout to shareholders, or invest in different ways.

And I guess lastly, Mike, maybe you could talk -- you now have, I guess, six or seven months of -- under the realignment of the sales force into those focusing purely on new clients and those focusing on existing clients. Perhaps you could give a little bit of color on how that is going, whether -- usually these things take a little while to have a positive impact -- whether we should see some improved productivity as a result of this in 2009. And I think maybe you can address -- particularly, I think in the past, you have talked about a big opportunity to upsell within the existing client base?

I will give some color on that. It has been roughly six months. The first three months, I think, were somewhat disruptive, and we clearly did not make progress. We got back to [whole], if you wish, in the fourth quarter, and generated net new business equal to what we had in that historical basis.

Going into first quarter 2009 and subsequent quarters, I think we will see increased performance. The group that is focused on current clients have an integrated plan to cross-sell and upsell each and every client. Literally, each and every client has been visited one, if not more times in the past six months in person by their relationship manager, and have created a plan to look at various opportunities.

We are as part of this rollout of the new product that commences next week having the relationship managers weave into the fabric of that rollout the ability to make tangible the opportunities [that] have been uncovered.

So we should see a significant increase in upsales and cross-sales to current clients in comparison to our historical run rates. That was the reason why we made the change, and it seems like it will happen. But I give you more color on that -- or the exact number at the end of first quarter of 2009.

Mr. Hays, we have no further questions at this time. I will now turn the conference back over to you (technical difficulty)

Thank you, operator. First of all, let me thank everybody for their time. I know there's a lot going on in the market, and to carve out a half-hour (inaudible) of commitment -- thank you. As one can tell, we're moving forward on several fronts at an increasing pace. And I will just finish by saying, as I always do, Pat and I look forward to keeping you abreast of our progress, and we will talk to you on our next call at the end of Q1. Thank you.

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