National Research Corp (NRC) 2010 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the National Research Corporation First Quarter 2010 Earnings Release 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 5th, 2010.

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

Thank you, Myra, and welcome everyone to National Research Corporation's first quarter 2010 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 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 about the facts that could affect the company's future results, please see the company's filings with the Security and Exchange Commission.

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

Thank you, Pat. Notwithstanding modest overall revenue growth, we had a good first quarter. Sales head count is up, margins are very healthy, several new products are in the verge of rollout, and we again this quarter attracted additional top talent. All of the above have materially broadened our bandwidth for growth.

Before I continue my remarks, I will have Pat review the financial performance for the first quarter. Pat?

Thank you, Mike. The first quarter results clearly show the power that our syndicated and membership-based business can deliver to the bottom line by driving the margins. Revenue was $17.4 million, up 4% compared to the prior year. Operating margin was 31% with operating income of $5.3 million, up 22% over the prior year. Net income was $3.1 million, up 18%, and diluted earnings per share were $0.47, up 21%.

The growth was driven by double-digit revenue and operating income growth in the Governance Institute and the Ticker division. Also growth and the operating income was driven in part by the My InnerView division as we benefitted from the past expense reductions.

Ticker's great first quarter sales contributed to a 56% revenue growth for the division compared to the same quarter last year. This is the second quarter in a row that Ticker quarterly revenue growth has exceeded 50%. Much of the revenue from these new clients will be recognized over the balance of the calendar year of 2010, highlighting the revenue momentum and margin expansion going forward for this division.

TGI had additional double-digit growth this quarter. TGI's new sales for the quarter were very strong, an increase of greater than 30% compared to the first quarter 2009. The attendance at TGI conferences is now exceeding that of the 2008 conferences. In addition to the divisions just highlighted, NRC Picker added 14 and MIV added 3 new sales associates during the first quarter. Historically, we've had material increases in new business generation when sales head count has increased. We are looking forward to this trend repeating itself.

Operating expenses were $12 million for the quarter, down $400,000 or 3% compared to the first quarter of 2009. This is largely a result of decreases in direct expenses. Our operating margin was 31% for the quarter compared to 26% in the first quarter 2009. Our goal is 25% operating margin.

Direct costs for the quarter were $6.5 million or 37% of revenue, which is down from the prior year's first quarter in absolute dollars. As a percentage of revenue, direct costs were down 6 percentage points driven in part by the increase in revenue of the Ticker and TGI, where we realized the margin expansion of a subscription-based model. In addition, direct costs were down due to the One group's utilization of alternative survey methodology and the balance of the business have lower direct cost.

Going forward, we will be working to expand the subscription model to more units, which will help maintain and improve the margin and in the near term we would see direct cost as a percentage of revenue to be lower than the prior year, a bit up, 1 or 2 percentage points, compared to the first quarter.

The selling, general and administrative expenses for the quarter were $4.5 million or 26% of revenue. This is up $500,000 compared to the prior year, 50% of which is driven by sales expansion largely in the NRC Picker group, but also in the Ticker, the TGI and MIV divisions. During the quarter, we added and totaled 20 new business development associates. With the sales expansion program continuing, the SG&A as a percent of revenue will continue to be on the higher side of our goal.

The depreciation and amortization expenses for the quarter were $1.1 million or 6% of revenue. The depreciation and amortization will continue -- is expected to stay fairly flat for the balance of the year in absolute dollars.

Interest expense decreased $40,000 in the quarter compared to the same period in 2009. This will continue to decrease as we pay down the term loan.

The income taxes increased for the quarter to $2.1 million due to both higher income, but also a new higher federal income tax rate for 2010, which is expected to be 35%, up 1% over prior years. With the new higher rate, we also adjusted all of our deferred tax assets and liabilities this quarter, applying the new increased tax rate, create an additional tax expense of $152,000. Income tax as a percentage of revenue will be slightly lower going forward compared to this first quarter of 2010.

Net income for the first quarter increased to $3.1 million, up 18% and set a new company record. Diluted earnings per share increased to $0.47 for the quarter, up 21% over the prior year's quarter. Cash flow from operations for the first quarter of 2010 was $6.3 million. The cash balance increased by $3.7 million as of March 31, 2010.

During the quarter, the company had paid an additional $300,000 on the term loan and used cash to repurchase traded stock in the amount of $236,000. The company may or may not in future quarters make additional payments on the term loan or repurchase shares of stock.

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

Thanks, Pat. Syndicated and membership-based business models as we all know are extremely attractive. Ticker and the Governance Institute both with largely fixed cost of goods sold have the ability to drive exceptional margins once the tipping point of the expense coverage is reached.

TGI is just now returning to a more normal growth, yet we will have some variability in revenue quarter-to-quarter. That said, in periods like the first quarter, a modest 10% increase in revenue for TGI can drive 50% increase in its margin.

Ticker has largely completed the convergence from an annual product delivery with associated revenue spikes to a membership model with greater revenue visibility. In addition, Ticker has been extremely successful in gaining market share with its new offering at far higher price points. With another 30% top line increase, Ticker can double margins from quarter one's performance. Starting in the last half of 2010, we are likely to see that division at that pace.

The examples cited are not abnormal. Many membership-based businesses experience margin expansion. For NRC however, we are just now seeing this occur across several business units simultaneously. While we are not yet at the tipping point each quarter for both of these business units, the benefits of such trajectory are becoming clear.

During our last earnings call, I suggested an effort is underway to convert NRC Picker US from a transactional price product to one of the membership-based offering. Market test show this is possible and work is now proceeding along that path. My InnerView also is experiencing or experimenting with the same conversion. For various reasons, NRC Picker Canada and Payer Solutions don't naturally lend themselves to a membership model and won't at this point attempt conversion. That said, over the course of the next year, we will likely see upwards of 80% of NRC's revenue based on this attractive business model.

Strategically, we're also reestablishing sales teams to first equal and then surpass historical head count levels across almost all business units. Our approach to sales expansion has proven to add incremental sales and will remove the roadblock to top line growth within NRC Picker US.

My InnerView is another business unit that is benefiting from sales expansion. MIV historically had not established a large sales force, and today with such we are seeing business generation reaching new heights. In addition to direct sales teams is a business development strategy. We are entering into channel partnerships to expand opportunities for top-line growth.

Another leg to the stool supporting growth is new product development. We are fortunate to have several experienced associates driving our product development thinking. This group is not only moving forward on new products, but also adding material enhancements to current membership programs with corresponding step ups in the membership fee. On this latter point, our thinking is simple; add more and more tangible and discrete value on a systematic cycle with increased fee structures.

Our fourth, final and most important strategy is talent. While growth strategies are easy to state, it's only great talent that can execute. Over the recent past, we have attracted several key leaders into the organization, and as a direct result, the performance of all associates has risen.

We are now well into a dedicated effort to quicken our pace of which we attract greater numbers of even higher caliber talent. These efforts are not limited to any one business unit or position. I know of no function in the organization including my own that would not benefit from added depth. We have become highly selective in who has what it takes to join NRC. The bar has been set very high and as a result you can be assured that each key hire will produce an outstanding return on the investment.

The most recent case in point is Eva. Eva joined the company bringing with her a wealth of experience and a record of proven performance. From Account Director to General Manager for a division of [Intercom], Eva led a team that increased revenue six fold in four years. More recently, Eva held P&L responsibilities for a $200 million division of a $2 billion company. At NRC, Eva starts with overall responsibilities for NRC Picker's business development, including direct sales, channel partnership, product development and marketing. I highlight Eva not as a silver bullet, but rather is a good example of key leadership talent that has been where we aspire to be.

With that, Operator, I'd like to open the call for questions.

Thank you. (Operator Instructions). Our first question comes from the line of Ryan Daniels with William Blair. Please proceed.

Hi, guys. This is Andy O'Hara in for Ryan today. First up, I was hoping if you give a rough break down of the revenue between businesses, normally you guys haven't given this, but if we would need a ballpark that would be helpful?

Andy, this is Mike. We really don't itemize out revenue by business unit, we rather look at the overall trends. In this particular quarter, the membership-based products and syndicated products of TGI and Ticker really helped drive the margin expansion, but that might change in a different quarter to different time.

Sure, sure okay. And then in terms of total recurring revenue during the quarter, can you give us a ballpark for that?

I would say 99.9% of the revenue in Q1 would have been recurring. Would that be correct, Pat. Virtually it all?

That would be correct. Payer Solution is recurring, that's more in the first five months of each year.

Great.

Sure, okay. Okay. And in terms of the Picker sales force ramp, can you give us an update on that and maybe give us the number of new client adds during the quarter for Picker?

I don't have the number of exact new number of clients in the quarter, I believe new business sales were $1 million, $1.5 million plus, so I think it was actually a little higher than that. What I do know and what I track more specifically is head count. We went from 8 to 28. So, we ended the quarter with 28 sales associates within the NRC Picker US division.

Okay, excellent. And then you guys have talked sort of more broadly about enhancements for the subscription-based models and with the switch from Picker from a transaction base to subscription base, do you guys have any specific plans for enhancements in the near term and potentially corresponding price increases?

We do have a slate of additional components or value added aspects that we are going to be folding in to the NRC Picker product offering, I would rather not get into details from a competitive standpoint about that today. But, there are all things that we do and we do well and we are currently doing for client organizations, but bundling together in a unique way is really what we are attempting to do.

Okay, excellent. And then one final question here. I believe on the last call you had mentioned that you guys were working on a new Payer Solutions product, I was hoping to get some additional details on that, what it is exactly and if you guys are still on track to launch it this quarter?

I don't recall a new product for Payer Solutions. We are perhaps what you are referencing is a conversion from a telephone-based, mail-based data collection methodology to one that has far greater leverage in terms of its direct costs that has and will continue to evolve through the Payer Solutions client base, and in fact within the first quarter represented significant contribution to reducing the overall direct expenses as a percent of sales, so that new data collection methodology is up and running and doing well.

All right, perfect. Thanks a lot guys.

Thank you. (Operator Instructions). Mr. Hays, it appears there are no further questions at this time. I will turn the conference back to you.

Thank you, Myra, and thank you everybody for today's time. As typical, Pat and I look forward to speaking to you again next quarter. Thank you again.

Thank you. Ladies and gentlemen, that concludes our conference call for today. We thank you for your participation and ask that you please disconnect your lines. Have a good day.