National Research Corp (NRC) 2009 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the National Research Corporation's Second Quarter 2009 Conference Call. (Operator instructions.) As a reminder, this conference is being recorded Wednesday, August 5, 2009.

I would now like to turn the conference over to Mr. Michael Hays, Chief Executive Officer at National Research Corporation. Please go ahead, sir.

Thank you, Frank, and welcome, everyone, to National Research Corporation's Second Quarter 2009 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 risk 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 Provision of the Private Securities Litigation Reform Act of 1995. For further information about the facts that could affect the company's future results, see the company's filings with the Securities and Exchange Commission.

With that, I'll turn it back to you, Mike.

Thank you, Pat.

As mentioned in the earnings release, second quarter financial performance was mixed. Revenue growth in the 14% range, while below aspirations, is better perhaps than other firms. On the other hand, producing incremental revenue with no added contribution to the bottom line is, in my view, extremely poor performance. Year-to-date 2009 growth rates in the 20% range for both top and bottom line is positive, yet should provide there's no place to hide regarding the need to consistently achieve our stated net income goal of 15%.

Before I review plans now in place to achieve these income goals, let me first turn the call back to Pat for his review of the second quarter and year-to-date financials. Pat?

Thanks, Mike.

For the three months ended June 30, 2009, the company's revenue was $13.6 million, up 14.2%, compared to $11.9 million in the same period in 2008. For the six months ended June 30, 2009, the company achieved revenues of $30.3 million compared to $25.4 million during the same period in 2008, a 19.6% increase.

For the three months ended June 30, 2009, net income for the company was $1.6 million, or $0.24 per diluted share, compared to $0.23 per diluted share in the same quarter last year. As Mike suggested, our net income was far below our targets. Several changes have already been made, which will move net income back to the 15% of revenue. Mike will review these plans with your during this call. For the six months ended June 30, 2009, net income for the company was $4.3 million, or $0.63 per share, compared to $3.6 million, or $0.52 per share, for the same period in 2008, a 19% increase in net income and a 21% increase in earnings per share.

During the second quarter of 2009, direct expenses as a percent of revenue were 46% compared to 28% in 2008. 46% is higher than our model for the quarter but within the range at 45% for the six months ended June 30, 2009.

During the second quarter of 2009, the selling, general and administrative costs were $3.7 million compared to $3.3 million in the same quarter 2008. SG&A expenses for the quarter were 27% of revenue compared to 28% in the same quarter 2008. For the six months ended June 30, 2009, the SG&A was 25% of revenue, again down when compared to 27% in the same period in 2008.

Depreciation and amortization were 7% of revenue during the second quarter of 2009 compared to 6% in the same quarter of 2008. We expected this expense to be in this range or lower for the balance of 2009, due in part to the acquisition of My InnerView at the end of 2008.

Cash flow from operations for the six months ended June 30, 2009, was $7.6 million compared to $7.1 million for the same period in 2008. During the first six months of 2009, the company paid down notes payable by $4.1 million. Cash and short-term investments as of June 30, 2009, were $404,000.

I'll turn the call back to Mike for additional discussion.

Thank you, Pat.

Focusing first on the expense side of the second quarter performance, two issues accounted for this poor performance. One, we did not watch expenses as well as we've always done. With each business unit showing various growth patterns, we did not always allocate resources correctly. We have now doubled up on our attention and are now pouring gasoline on units where we are making the greatest return, adjusting the cost structure of business units that should be producing more leverage and holding back where today is not the right day for an investment.

The second and primary driver of lower margins in the second quarter was a result of our newly acquired business unit, My InnerView, whose cost structure is too great in general and became magnified in the second quarter during which revenue is seasonably lower than other quarters. I've assigned Joe Carmichael to the task of working with the My InnerView management team to right-size the cost structure and ensure appropriate degrees of flexibility to achieve superior performance each and every quarter. In July, $600,000 of cost were extracted and additional changes are yet to take place.

In summary, regarding the expenses between the right cost structure in place at My InnerView and with the mindful allocation of monetary resources, I'm comfortable now we can more consistently achieve our profit margins, and of equal importance, optimize our top-line growth.

Focusing on top-line performance for the second quarter, NRC Picker showed the same trends for the second quarter as were registered in the first quarter of 2009, that being flat to down. Payer Solutions, which showed a massive jump in revenue in the first quarter, ended the second quarter slightly down year-over-year. The Governance Institute, however, reversed its negative first quarter performance to a positive topline growth in the second quarter.

TGI, as you know, serves 600 CEOs and 11,000 Trustees of the nation's hospitals and seems to be a good gauge of how the economy must be playing out for our clients. The CEOs and Boards are the first to pull back as they did in the second half of 2008, and may be the first to loosen up, as we have seen in the last month or so of the second quarter. If this is an accurate indicator, the industry is beginning to behave in a more optimistic manner.

Despite, however, the headwinds circling within the healthcare sector, My InnerView showed revenue growth again in the second quarter, as did our Healthcare Market Guide business unit. Healthcare Market Guide's success in upgrading its annual subscription to the new monthly subscription product continues. Since product launch, Healthcare Market Guide has converted well over half of its members to Ticker, which provides monthly refreshes of the voice of the customer in 150 or so markets across the country.

While Ticker upgrades are positive and continue to push for 100%, it does represent deferred revenue for the follow-on 12-month period, revenue that would otherwise have been recognized at point of purchase. With Ticker as its platform, Healthcare Market Guide is now in the process of testing additional add-on options, which capitalize on Ticker being a system of ongoing tracking of consumer behaviors.

Another trend showing improvement in the second quarter was net new sales, which are up 15% over the first quarter 2009. The actual dollar amount of net new sales being $1.8 million is still only half our historical average in net new sales, yet clearly trending in a positive direction. Total contract value stands at roughly $59 million and has not changed much in the past 90 days.

On the new product front, TGI tested Board Portal, which failed its market test due to cutbacks in software expenditures. We will likely retest that product idea at a later time. Several other products will move through the market tests in August. In addition, thinking about product development, we have brought on two additional senior associates to round out our product development team.

Before I open the call to questions, let me mention that on the sales front, we have added to the newly created My InnerView sales team in the last quarter, and NRC Picker has added sales associates to its outside sales group in the second quarter, as well.

Frank, I would now like to open the call for questions and answers, please.

(Operator instructions.) Adam Fisher, Burnham.

Hi. How are you?

Hello, Adam.

Can you talk a little bit more about kind of your outlook for the second half revenue growth? There's a bunch of moving parts. We'll have My InnerView I think for a year, and the Market Guide I think will have almost annualized the change to subscription. And it sounds like things that were weak in the first half are starting to pick up. Can you just talk -- do you think we're going to get back to kind of our growth rate goals in the second half?

Well I'm happy with our year-to-date growth at 20%, although, coming out of the first quarter in the 30-odd or 24 to 30-odd percent range, we kind of diluted that. So I think we'll stay in the 20% clearly, hopefully north of that. Our view is that My InnerView will continue to show growth quarter-over-quarter, simply because we've pitted a strong sales team against it, which historically that particular company had not.

Healthcare Market Guide I think will continue its growth pattern. We will start to come around to the full year-on-year revenue from the Ticker deferred portion, which clearly will add as well. That said, we even this quarter, are still converting classic clients, the annual product, to Ticker. But nevertheless, that will continue to be a positive growth.

I think TGI, if it's an indicator of budgets in general, looks like things may be turning around for them. The number of CEOs that withdraw has decreased considerably. It seems like conference attendance and some of the travel budgets perhaps aren't as strong, or excuse me, as tight as they used to be. Within our client our organizations, we're seeing some increased volumes in terms of surgery. They still have the bad debt component obviously, and their foundation portfolios were hit pretty hard. But, if anything is kind of a bright light at the end of the tunnel, I think it's some of the things that we're hearing from the TGI CEO side of the picture.

NRC Picker is flat to down. I think it's going to take probably the rest of the year to really ramp that back up. Its budgets for various projects got cut back significantly, probably in the area of 10-odd percent. While some of those are growing back, it's not just automatic that the phone call comes in when budgets get -- or cost controls get taken away. So I think that's probably where we are.

NRC Picker Canada should grow continually over the course of the year. It had a fairly good first and second quarter. Third and fourth should actually bump up a little more, given some new contracts.

So all-in-all, I think the real anchor on the top-line growth today is NRC Picker US. It takes a lot of the other divisions, as you know, to have some pretty significant growth to pick that larger revenue stream out of the hole, but we did so in second quarter, even with NRC Picker showing a reduction. So if we get any movement, even back to flat, from NRC Picker, I think we could be clearly back up to where we were on top-line growth rates in Q1.

Okay. What's the share like in NRC Picker? Are we gaining share from our largest competitor? I know we had a couple of large wins earlier.

I don't know over the last 90 days whether I've really been focused on that. We have brought in some new sales, but largely offset by clients holding back on a particular project or two. I know for a fact, other organizations that are competitors, are witnessing exactly the same, in fact, some even to a greater degree than what we are. So I don't know in the last 90 days whether I've really calculated the share shift. I'm going to assume there wasn't any.

Okay. And are we laying -- I understand that times are -- budgets are tight right now. Are we starting to lay the groundwork for additional cross-sales within those businesses, so that when budgets loosen we'll have kind of laid the foundation?

Last quarter, we incentivized a group of sales people to take a hard look at cross-selling. And it was my belief at that point in time that if you add commission to a salesperson and create a line of sight for cross-selling, if it's there, they'll find it. Quite frankly, it didn't really materialize much of anything, so we're going back to the drawing board. We do have a fairly significant strategy that we -- assuming it plays out in a couple test sites -- that we'll be announcing here probably by the end of this coming quarter.

So the pure commission against sales and creating a line of sight really didn't materially increase nearly like I had hoped, so we're going back to the drawing board to see if there's another run at it.

Okay. Did the cost cuts that you're marking at My InnerView and I guess a couple -- it sounds like there's some additional ones, too. Do those kind of get you back to what we've come to expect on the margins?

Yes.

Okay. And can you just talk finally about some of the new -- you alluded to some new products, just kind of specifically some of the largest new product opportunities you're developing?

We're intrigued with taking the syndicated model of Healthcare Market Guide and cutting across other stakeholders in the healthcare world. Healthcare Market Guide right now, as you know, is focused on the voice of the consumer, but clearly there is physicians, and a tremendous amount of money is spent on physician satisfaction. There's no reason that couldn't be syndicated.

So we're looking for anything that current spend exists, to which we can introduce a different way to think about it that creates recurring leverageable revenue. That would be a good example. Whether that passes the test, of course, we don't know.

There's other products that are add-on and capitalize on Ticker being an ongoing tracking product. Ad testing and ad tracking would be an example. Again, whether that passes the test and has the magnitude of revenue that we want, we don't know yet. But we have a very large number of ideas that are in the hands of various clients trying to help us think through how to package them.

Perfect. Thanks a lot.

(Operator instructions.) Ryan Daniels, William Blair.

Hey, guys, this is Andy O'Hara in for Ryan, just a couple quick questions here. You had talked about really focusing on cost cutting initiatives here in the back half of the year. Can you give a little more color on that, maybe a breakdown into which segments you're going to focus on, and just to follow up there, whether you think you'll be able to hit that 15% net income target by maybe Q3 or Q4?

This is Mike. We really aren't cutting costs across the board. I perhaps should have been a little clearer there. The My InnerView business unit came to us over-staffed and the cost structure was inappropriate to its revenue and clearly was not flexible, given the seasonality of its business.

I don't know what each individual business unit happens to have in mind, but the cost cuts that I am talking about largely have already happened, and they've been totally limited to and focused on the My InnerView business unit. There will be some additional cuts, but those again are within the My InnerView business unit. And yes, they will get us to 15% starting now.

Starting now. Okay, I see. And I know you had mentioned in previous quarters that the challenging environment has really had a minimal impact on the business. I was wondering if you could give us an update on that and whether it's impacting your customers' days decision metric that you've given?

Days decision probably has elongated the earlier part of the second quarter, maybe the last month of the first quarter, not materially though. The bigger issue is projects that may have part of its budget cutback because there's a cost control program in play for the hospital, across the board.

The only business unit that it's really impacting in a material way, has been NRC Picker US and to a certainly degree, The Governance Institute. But The Governance Institute, in the second quarter here, seems to have turned that corner. Whether that's an anomaly or a trend, I guess we'll know in the third quarter, right?

Okay, and just one final question here. Can you give us a quick update on the Payer Solutions segment and whether it's been impacted by the Medicare Advantage membership during the quarter?

The Payer Solution group in the quarter was fine, not any real growth year-over-year, essentially flat. It had massive growth in the first quarter as a result of a stepped up Medicare Advantage enrollment, which quite frankly we didn't anticipate. For the balance of the year, we see it down. We actually saw it and forecasted it down for the entire year, but given the first quarter's contribution, we'll probably end the year in Payer Solutions at about even, which is a positive.

Going forward under health reform, of course depending on what ends up happening, we could see Medicare Advantage in some proposals being cut entirely. In others, we see that a health risk assessment is required in things such as the public option. So, we really don't know what direction it could go. It could go down significantly or it might have a new lease on life in a totally different setting. So we'll just have to wait and see what, if anything, really passes in Washington.

Okay. All right. Thanks, guys.

Mr. Hays, there are no further questions at this time. Please continue with your presentation or closing remarks.

Thank you, Frank. First of all, let me thank everybody for their time. And as always, Pat and I look forward to keeping you abreast of our progress, and we'll do so during our third quarter conference call. Thank you.

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, everybody.