National Research Corp (NRC) 2009 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the third quarter 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, November 4, 2009.

It is now my pleasure to introduce Michael Hays, Chief Executive Officer. You may go ahead sir.

Thank you and welcome everyone to National Research Corporation's third-quarter 2009 conference call. My name is Mike Hayes, the company's CEO, and joining me on the call today is Pat Beans, our Chief Financial Officer.

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.

This conference call includes forward-looking statements related to the company that involves 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 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.

My opening remarks during last quarter's earning call highlighted our poor bottom-line performance, having seen net income fall to 12% of revenue. I'm pleased to report today we have improved net income as we said we would. Third quarter net income improved by about $400,000, a 20% gain over second quarter, resulting in a 15% net income margin which achieved our goal.

During the third quarter our attention was equally pitted against achieving higher levels of new sales. Again, I'm pleased to report in the third quarter we generated $3.0 million in net new sales compared to $1.7 million in the second quarter and $1.5 million in net new sales the first quarter of 2009.

Let me now turn the call back to Pat for his review of our third quarter and year to date financials.

For the three months ended September 30, 2009 the company's revenue was $13.5 million, flat compared to $13.5 million during the same period in 2008. In reviewing the mix of revenue, NRC Picker Canada and My InnerView registered strong revenue growth in the quarter, while NRC Picker US mirrored its past two quarters of lower revenue.

Healthcare Market Guide's third-quarter revenue was lower quarter over quarter, which was anticipated given its new Ticker product for which revenue is recognized monthly over the subscription period rather than largely in the third quarter, as been the case before the Ticker product rollout.

Ticker has proven highly successful. We have created far greater member value, which has driven higher renewal rates and more new members. Ticker has also smoothed the division's revenue across quarters. In fact, Healthcare Market Guide's fourth-quarter revenue is forecasted to grow 40% to 50% over the fourth quarter 2008.

For the nine months ended September 30, 2009 the company achieved revenues of $43.9 million compared to $38.8 million during the same period in 2008, a 13% increase.

For the three months ended September 30, 2009, net income for the company was $2 million or $0.30 per diluted share compared to $0.29 per diluted share in the same quarter last year.

Net income's margin as a percent of revenue for the third quarter was 15%, up from the 12% in the second quarter 2009. Additional benefits from this margin expansion should be seen in the fourth quarter of 2009 and throughout 2010.

For the nine months ended September 30, 2009, net income for the company was $6.3 million or $0.93 per diluted share compared to $5.6 million or $0.81 per diluted share in the same period of 2008, a 13% increase in net income and a 15% increase in earnings per share.

The Healthcare Market Guide's new subscription-based Ticker product, which started in May of 2008, has now completed four full quarters since the last traditional annual delivery of the Healthcare Market Guide. Deferred revenue from those clients converting from the annual deliverable to the new subscription-based product during the third quarter of 2009 would have resulted in an additional $0.02 per diluted share of net income, an increase of 11% when compared to the same period in 2008.

During the third quarter of 2009, direct expenses as a percent of revenue were 40% compared to 49% in 2008, largely the result of the Healthcare Market Guide's change in product mix. Direct expenses as a percent of revenue should stay below our model of 45% for the balance of the year.

During the third quarter of 2009, the selling, general and administrative costs were $3.9 million compared to $3.1 million during the same period of 2008. SG&A expense for this quarter was 29% of revenue compared to 23% in the same quarter of 2008.

For the nine-month period ended September 30, 2009 and 2008, the SG&A was at the same 26% of revenue.

Depreciation and amortization were 7% of revenue during the third quarter 2009 compared to 5% in the same quarter of 2008. We would expect this expense to continue to be in this range for the balance of 2009 due to the acquisition of My InnerView at the end of 2008.

Cash flow from operations for the nine months ended September 30, 2009 was $10.3 million compared to $11.1 million in the same period in 2008.

During the first nine months of 2009 the company paid down notes payable by $4.4 million.

Cash and short-term investments as of September 30, 2009 were $1.5 million compared to $1.1 million as of December 31, 2008.

I will now turn it back to Mike for some additional discussion.

As reported, net new sales for the quarter saw a marked improvement period over period and a dramatic increase over just the past 90 days. While all business units are showing sales improvement, NRC Picker's third-quarter new sales increased the most over second quarter 2009 and is building on a positive trend from the first quarter of the year.

Given the relative size of our NRC Picker unit compared to others, NRC Picker's performance, if poor, can lower the company's overall performance, which has been the case in the year 2009 to date. Consequently it's material to see headwinds subside. NRC Picker is experiencing more new contracts, more clients increasing their current contract value than in the recent quarters, which to us suggests a return to growing the business may be at hand.

Given this changing tide, we are now moving forward with a sales expansion plan for the NRC Picker business unit. As you may recall, 18 months ago we shifted the majority of our sales associates in the NRC Picker business units to the client side of the business. Over the past 18 months this group of associates, joined by NRC Picker's associates in the service and other areas, have improved our service model and have worked on at the new reporting deliverable, that being a catalyst. These efforts in all likelihood stemmed what may have been an even sharper decline in the business unit's contract value.

Our return to growing the top line under this announced sales expansion plan will not simply redeploy our service-oriented sales associates back to the new sales. Rather, we will be adding a completely incremental group of associates, resulting in far more feet on the street focused solely on new business generation. Sales expansion historically has worked very well across all divisions, generating millions in incremental revenue. We are confident this past success will play out yet again for NRC Picker.

In addition to building the larger sales team, NRC Picker has added talent and depth in other areas and will continue to do so. Recently, senior-level associates have been added in research, product development, client service, and IT.

The most recent addition to NRC Picker's leadership team is Sarah Worth, who will help lead our client facing associates to an even more robust client engagement strategies based on her years of work with Ritz-Carlton.

The additional talent being acquired is not limited to NRC Picker, nor is it limited in time. We've clearly placed our foot on the path of adding additional leadership across the company and will continue to do so.

While not without its associated costs, diversity in ideas and experiences from a variety of fields accelerates growth. We have first-hand proof, and in fact many of you have watched this unfold. When Ginny Martin joined our organization as President of Healthcare Market Guide division, a.k.a. Ticker, status quo instantly became a yesterday mindset. Ticker will likely end the year registering revenue growth of 40% and operating income growth exceeding 200%. Ginny has built a team of driven associates both from within and outside of National Research. The results speak for themselves.

In fact, I won't be surprised if the Ticker growth trajectory accelerates with the additional -- addition of Tom, who joins the Ticker division as of yesterday with more than 12 years of experience leading a fast-paced sales team.

The tide seems to be turning for The Governance Institute as well. For the first time this year, TGI out-paced sales reported for comparable 2008 quarters. New sales were up 65% third quarter compared to second quarter of this year.

To help accelerate this trend, we will begin repackaging TGI content and its delivery tailored to segments of the market for which TGI penetration has been weak. Experience has shown that large and complex hospital systems are more likely to join TGI and will pay far more for membership if content is delivered in keeping with their unique needs and governance structures.

Before I open the call for your questions, let me complete my remarks by saying the sales momentum is also ramping up at My InnerView. In addition, within the My InnerView business unit, Christine Peterson joined the team as National Accounts Executive. Christine brings to the company a wealth of experience in long-term care and national accounts from Novartis.

Operator, I would now like to open the call to the Q&A portion.

(Operator Instructions). Ryan Daniels, William Blair.

It's Kristina Blaschek for Ryan today. Can we start with -- can you guys talk a little bit more about expense control that took place during the third quarter? It was -- and we saw a nice decrease in the direct expenses as a percentage of revenue. So if you could provide some color on any specific measures that were taken to improve margins from the second quarter, that would be helpful. And any thoughts on what we can expect going forward, if it's just going to be under the 45% level for just Q4, or any thoughts on 2010 as well.

Why don't I speak a little bit -- this is Mike -- to the margin improvement, and then I can pass it over to Pat in terms of direct expense.

In general the margin improvement was as a result of cost changes and reductions within the My InnerView business unit -- almost exclusively but not 100% so. As Pat remarked, those changes have not fully been embedded to the bottom line, consequently the fourth quarter should show some additional benefit, as well as going into the year 2010.

Pat, do you want to address the direct expense?

As far as the direct expense, two things have happened. One is the Healthcare Market Guide, a year ago we had a large amount of the costs come through, which didn't come through this year in comparison. And then also with the lower NRC Picker in the mix -- has also created a lower direct expense. I would think that for direct expense we will see it going back up a little bit. Not up to the 45% area, but probably we will see it in the 40% to 42% range, 41% to 42%.

Great. That's very helpful color. Thank you. And I was hoping we could turn to cross-selling opportunities a little bit. If you could remind us about the cross-selling opportunities NRCI has for -- more specific on how many clients does the company have today? And what percentage buy from only one division? -- if you have that available. I guess I'm trying to get a sense for what financial impact maximizing cross-divisional relationships would have to revenue.

If we could pull it off, it would have a significant impact. There's a total of 1800 client organizations that do work with one or more of the business units. And roughly 2% or 36 healthcare organizations buy from the majority. So there's a tremendous amount of fragmentation in the client base to which we are attempting various strategies to mitigate, to try to improve cross-selling. We have not been very successful to date.

Okay. Great. That's very helpful. And then one -- you may have mentioned this during your prepared remarks, but do you know what the -- let me see here -- the Healthcare Market Guide segment, what percentage of members are now on Ticker?

I don't have the exact -- I think it's around three fourths have converted to Ticker with I believe one fourth remaining on the classic product.

We probably wouldn't anticipate 100% converting; is that correct?

At some point in time we probably will sunset classic. That will be sometime in the future. So we will do what we can to accelerate conversion. But whether or not we will get 100%, I would doubt.

And then you may also have talked about it in the prepared remarks, but I think I missed it. Total recurring contract revenues during the -- as of the I guess September 30? Do you happen to have that?

Yes. It was $61 million.

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

(Operator Instructions). Julian Allen, Spitfire Capital.

Could you guys comment a little bit on what you are seeing from the new contract perspective? Obviously new contract activity has picked up considerably. Could you perhaps parse out that new contract win number by some of the various business units? In particular I'm sort of interested in your comments with respect to hospital operating budgets and the outlook or current environment for Picker US.

Sure. Be happy to. New business generation or new sales generation across the company improved. NRC Picker had the greatest improvement sequential to second quarter, followed by The Governance Institute. Those two particular business unit had seemed to be affected the greatest given some of the cost controls and budget cuts that hospitals had gone through in the last part of 2008 coming into the first part of 2009. If this is a trend, which perhaps we have yet to see or to confirm, but if the trend continues, it would suggest that budgets are changing and softening up.

We have noted anecdotally in TGI conferences that travel restrictions are being let up. We also know that hospital margins are improving slightly, although the bad debt given the unemployment is still rising. The improvement in the stock market over the last six months has improved considerably, which obviously helps the capital that hospitals have. They are returning to a certain degree towards capital improvement projects, which is a interesting and I think material event, given that was almost literally shut off towards the end of 2008.

So I think our experience within NRC Picker and The Governance Institute would suggest that clearly not back 100% by any means, but would suggest we might be at the beginning of ramping back up.

Great, thank you.

It appears we have no further questions at this time. Sir, you may proceed with your presentation or closing remarks.

I just want to say thank you to everybody on the call today, and as normal, Pat and I will look forward to speaking to you here in about 90 days regarding our year-end performance. Thank you.

Ladies and gentlemen, this 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, everyone.