National Research Corp (NRC) 2010 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the National Research Corporation Second 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, August 4, 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 Second 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 involved 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 Securities and Exchange Commission. With that, I'll turn it back to you, Mike.

Thank you, Pat, and, again, welcome, everyone. During the call today we have two exciting events to discuss in addition to our typical review of the quarter. These two material events include the OCS transaction, which was announced last night, and the launch of Illuminate, a new product that has been in development and testing for upwards of a year.

Speaking to the quarter itself, NRC Picker recorded new sales during the second quarter 2010, which surpassed sales levels of any quarter in the past several years. In fact, NRC Picker's 2010 year-to-date new sales stand at 83% of annual sales for all of 2009. The sales achieved, along with the OCS transaction, has driven total contract value to $72 million.

Before I continue my remarks, I'll have Pat review the financial performance of the quarter.

For the second quarter, we saw revenue growth in all business units except NRC Picker. With the best quarter of net new contracts since 2008, this was led by NRC Picker. We are projecting some positive revenue growth in NRC Picker for the balance of the year.

Revenue was $14.1 million, up 4% compared to the prior year. Operating margin was 19% with operating income at $2.7 million, down 2% over the prior year. Net income was $1.7 million, up 3%, and diluted earnings per share was $0.25, up 3%.

Growth in the revenue was again driven by double-digit revenue and operating income growth by MyInnerView and Ticker divisions. Also, operating income was impacted by combined activities of the OCS transaction expense and costs associated with the new rollout of Illuminate. Going into the third quarter, we should see net income back to the 15% of revenue range.

Ticker second quarter sales contributed to a 40% revenue growth for that division compared to the same quarter last year. This is the third quarter in a row that Ticker's quarterly revenue growth has exceeded 40%. Much of the revenue from these new clients will be recognized over the balance of the calendar year 2010 highlighting the revenue momentum and margin expansion, going forward, for this business unit.

MyInnerView additionally had double-digit revenue growth this quarter. MyInnerView's net sales for the quarter were very strong, an increase of greater than 40% compared to the second quarter of 2009 and first quarter of 2010.

In addition to the divisions just highlighted, TGI added 34 new clients this quarter compared to 12 new clients in the same quarter of 2009.

Operating expenses were $11.5 million for the quarter, up $600,000, or 5%, compared to the second quarter of 2009. This is largely the result of increases in selling, general, and administrative expenses and depreciation and amortization. Our operating margin was 19% for the quarter compared to 20% in the second quarter of 2009. Our goal is 25% operating margin, and we anticipate to be back in that range in the third quarter of 2010.

Direct expenses for the quarter were $5.9 million, or 42% of revenue, which are down from the prior year's quarter in absolute dollars. As a percent of revenue, direct expenses were down 5 percentage points driven, in part, by the increase in revenue of Ticker and TGI where we realized the margin expansion of a subscription-based model.

Going forward, we are working to expand the subscription model to be in more units, which will help maintain and improve the margin and, in the near term, we will see direct costs as a percent of revenue to be lower than the prior year.

The selling, general, and administrative expenses for the quarter were $4.5 million, or 32% of revenue. This is up $660,000 compared to the prior year, driven by the OCS transaction costs and the startup costs of Illuminate division, sales expansion largely in the NRC Picker group, and addition of several leadership positions.

With the sales expansion program continuing, the SG&A, as a percentage of revenue, were continuing to be on the higher side of our goal but should come down a percentage point or two from this quarter.

The depreciation and amortization expense for the quarter was $1.1 million, or 7.5% of revenue. The depreciation and amortization currently is expected to stay fairly flat for the balance of the year in absolute dollars, so we should get some expansion of margin as revenues grow during the balance of the year. There will be a one-time jump in depreciation and amortization with the addition of OCS. But as a percent of revenue, we should stay around 7% of revenue.

The income tax increase for the quarter was due to a higher income tax rate for 2010, expected to be 35%, up 1% over prior years.

Net income for the second quarter increased to $1.7 million, up 3% over the prior year. And for the six months ended June 30th, net income increased to $4.8 million, up 12% over the prior year.

Dilutive earnings per share for the quarter increased to $0.25, up 3% over the prior year. For the six months, dilutive earnings per share increased to $0.71, up 13% over the same period.

Cash flow from operations for the first six months of 2010 was $9.2 million. The cash balance increased to $7.2 million as of June 30, 2010. During the quarter, the Company used cash to repurchase Treasury stock in the amount of $163,000.

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

Thanks, Pat. Among the highlights is the fact that NRC Picker's growth in net new contracts cannot be overlooked. And, in fact, to me, represents a major turning point. As has been reported in the past, NRC Picker, our biggest business unit, has largely offset growth achieved by the other NRC businesses.

For example, in the second quarter 2010, the balance of NRC businesses achieved a 16% revenue, and a 77% operating income growth over second quarter 2009. As you know, operating income leveraged across this latter group of businesses is driven by their syndicated membership-based business models. If NRC Picker maintains its recent growth trends in net new contracts, the resulting increase in total contract value in the follow-on revenue being recognized, we will change the overall growth trajectory of the Company.

As well, the balance of the Company's growth in operating metrics remains strong looking out over the balance of 2010.

Let me now turn to Illuminate, the patient outreach program for acute-care hospitals designed to facilitate service and clinical recovery within the critical 48-hour period of a patient being discharged from an acute-care hospital.

The business case is clear. Nationally, 30% of all discharge patients are readmitted to the hospital within 30 days, which represents millions of patients at an annual cost of $17 billion. CMS has cited these readmissions are a direct result of avoidable clinical events.

Today, and expanding, going forward CMS will levy financial penalties on hospitals in the form of zero reimbursement for readmitted patients meeting the CMS avoidable event definition.

In summary, Illuminate minimizes hospital readmission rates and, consequently, the uncompensated care that would have resulted. In addition to triaging patients who are at risk for readmission, Illuminate enables rapid service recovery for patients reporting less than a satisfactory experience during their hospital stay.

And a word of transparency where hospitals are required to publicly report patient experience ratings, 80% of the country's hospital boards of trustees have tightened personal financial incentives to hospital CEOs for improving their publicly reported HCAP scores.

Given this incentive, rapid service recovery has move to the center of the bull's eye for hospital CEOs. In a few words, Illuminate drives clinical and service improvement.

Creating Illuminate has not been easy. New approaches for patient outreach had to be invented. Research was undertaken to determine how to identify at-risk patients. New workflow tools, staffing assignments, and processes were needed for hospitals to deal with triaged patients. Illuminate passed these rigorous development hurdles and market tests and is now being sold to acute-care hospitals across the country.

Our go-to-market strategy includes leveraging our Governance Institute membership base of 600 hospital CEOs and, as well, embedding Illuminate into the NRC Picker product offering. We believe the addressable market for Illuminate to be in the $200 million range annually.

Illuminate application to other provider segments served by NRC, such as long term care, insurance-paid rehab, are currently being evaluated.

Today Illuminate is implemented into (inaudible) and hospitals covering 200,000 annual patient discharges and is receiving rave reviews by users. Most rewarding is the difference Illuminate is making in literally saving lives.

A case in point -- an elderly gentleman was recently discharged from the cardiac unit of a 700-bed hospital after having undergone a procedure for a pacemaker. Lucky for him that cardiac unit had implemented Illuminate. Within 48 hours of discharge, the Illuminate process identified this gentleman at risk for pacemaker failure. The at-risk patient was triaged to the emergency department where the problem was corrected. This individual, according to the hospital's clinical champion for Illuminate, is alive today largely because of their use of Illuminate. Proof points like this make the ROI decision very easy.

Turning now to the OCS transaction -- OCS represents a newfound runway in the home health and hospice markets and has a vast array of capabilities across all of NRC. At the core of the OCS transaction is a client base of home health care and hospice providers that adds $7.4 million to NRC's total contract value, which in and of itself, creates an immediately accretive transaction.

This OCS client base of 2,000 utilizes the Company's software and service offerings, which enables patient-level clinical and financial benchmarking as well as analytical models for improving revenue management, clinical outcome, cost containment, and regulatory compliance.

Given the similarities of need between home health providers and long-term care providers, direct application of the existing OCS benchmarking and analytical toolsets creates a tangible new revenue opportunity by bring this product to our 7,000 long-term care clients.

Patient satisfaction adds yet another upside to the OCS revenue stream. Recently, patient satisfaction was added to the OCS offering driven by a CMS requirement requiring home health care agencies to use and publicly report a version of the HCAPS patient satisfaction tool not unlike the requirement in place for acute-care hospitals.

Commencing October 1, 2010, over 10,000 home health care agencies will be required to use home health caps or lose a portion of their reimbursement.

As one can see, material revenue growth is likely within the OCS client base as well as from leveraging the OCS product portfolio.

In addition to the established OCS client base and products they had just spoken about, the OCS transaction has added capacity and vast capabilities to NRC as a whole, one of which is health analytics. Opportunities to establish and utilize OCS's health analytics team to create product extensions for other NRC business units, which houses massive amounts of data is intriguing.

As well, given the OCS staff of world-class developers, IT infrastructure experts and related associates with proven experience from firms of the like of Microsoft and Amazon, NRC has now added immeasurable depth to this important side of the business. In fact, this latter contribution of people will likely prove to be the most valuable aspects of the OCS organization joining the NRC family.

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

Thank you. (Operator Instructions) Ryan Daniels, William Blair.

Hi, guys, this is Andy O'Hare again for Ryan today. Just real quick, on the OCS acquisition, can you guys quantify any of those acquisition-related expenses incurred during the quarter that will likely not happen again in the following quarters?

There will still be some coming through in this third quarter. But it's in the neighborhood between $100,000 to $200,000.

Okay, thanks. And then in terms of the conversion to subscription-based pricing for Picker and MyInnerView, is that largely complete now? And just kind of as a follow-up to that, we'd like to sort of start tracking the overall percentage of revenue that you guys have under subscription-based and kind of look at that, over time.

Okay, this is Mike. The transformation of transaction-based pricing to subscription model for NRC Picker at MRV is far from over. And, in fact, it has just recently commenced. For NRC Picker, we're starting out with packages for one segment of the market, and that is reaching probably 10% to 15% of the total market, and we will then roll out subscription-based program pricing for the balance of the marketplace here shortly. For MIV, we are rolling that out to all new clients or new prospects, as well as converting at renewal time, which is typically an annual renewal, current (inaudible). So we will see the transition from current pricing model to a subscription probably will evolve over the next 12 to 14 months.

We can't add the metric that you requested, going forward. I don't happen to have that today.

Okay, excellent, excellent. And then with this conversion to subscription-based services, do you think it's going to be easier to cross-sell products, sort of, in the sense that subscription is one of them. You guys could potentially offer discounts for adding another product to that subscription? Any color on that would -- ?

The primary strategy around subscription-based pricing is not necessarily to enable, enhance, cross-sell across divisions. It's really all about gaining greater visibility on the revenue stream within each individual business unit.

There is an initiative underway, however, largely enabled by the recent OCS transaction to have the IT systems, or kind of a common company platform, be created. And that, in and of itself, will allow just what you suggested -- that applying for the multiple business units can have a similar experience and, in fact, the attempted to or cross-sell or become aware of the other offerings within NRC.

Right, okay, excellent, excellent. And then, finally, on the Illuminate offering, can you sort of help us understand how you're coming to the $200 million market size number?

Sure, I'd be happy to. We took the combination of market research studies that we did across the industry in terms of dollars currently being spent at or against discharge planning processes as well as dollars that were currently being spent to outsource providers that were attempting to satisfy the business need. We also added to that the percent of hospitals across the country that desired to fix this particular problem. Given the percentage of the market that was interested in opting for an outsourced solution similar to Illuminate, we assigned price points to that market segment and grossed it up to -- or that's what grossed up to $200 million. So --

Okay, excellent. And then -- so that sort of initial market size based on where we are today but, say, five to 10 years from now, with health care reform really placing a lot more focus on that, I assume you guys expect that market size to really expand dramatically as the penalties for readmission become more tangible.

I would assume so. As CMS broadens the definition of classes of patients or types of patients that will not have reimbursement tied to them should they be readmitted as that definition broadens to include a greater proportion of all patients. Clearly, the economics become more important and the need and value is proportionate to that.

Okay, excellent, excellent. And then just one final one -- in terms of competitive products with the Illuminate offering, I assume those competitive products are going to be popping up more and more frequently, again, as this focus with reform sort of plays out. But in terms of the competitors that are today, do you guys have a good sense for the landscape?

We have a very good sense. There is no product currently in the market similar or even close to the capabilities of Illuminate. So we are first to market with full-scale offering. We do anticipate, as you suggest, additional competitors coming to light, over time. But our strategy on go-to-market is very, very aggressive, and we plan to establish barriers to entry to protect that first-to-market advantage. But, obviously, we are aware that others will try to jump on the bandwagon as well.

Frank Sparacino, First Analysis.

Mike, just maybe following up on Illuminate there -- just to get a little perspective in terms of what drove you guys to genesis in terms of developing that product and then just curious in terms of how many actual beta customers there were and how long the product has actually been in the market live at some of the providers?

Sure. The underlying fundamentals of Illuminate have been in and around the Company for several years. As you are aware, one of our divisions, Payer Solutions, does health risk assessments for Medicare Advantage members, which is largely assessing the risk of those individuals to be hospitalized over a 12-month period. So with that expertise and knowledge and technologies, we applied that to the business need of avoidable events or the probability of no reimbursement for those readmitted patients under the CMS definition. So we matched the current capability to a new emerging business need in the acute-care market, and we have been working through that process over the last year.

There were four technical pilots that helped us refine different aspects of the program, and there are six new paying customers that have been live, some, I'm going to say, within 30 days; some probably 75 to 90 days, so a relatively short period. So there's a total of nine or 10 organizations, some of which were operational and methodology tested, and then there are the five or six paying first customers.

And could you share the details around pricing, just average deal size? But also is it based on number of discharges? Or how do you actually price the product?

It is scaled by the size of the organization, which discharge clearly is a key component of that metric. The price points will range from a low in the neighborhood of $30,000 upwards of $1.5 million to $2 million for larger systems.

Good. And, lastly, I don't know if this will be in one of the filings, perhaps, but any more details around OCS in terms of number of employees or some of the run rate metrics associated with OCS?

Frank, this is Pat. Around OCS, the run rate of the $7.4 million in contract value is our run rate for the next 12 months without new sales. The metrics around their operating margin should be probably a little bit better than historical NRC but around NRC.

Okay, so the contract value there, Pat, is basically what's to be recognized over the next 12 months currently under contract?

Correct, yes.

(Operator Instructions) It appears there are no further questions at this time.

Thank you, Myra, and thank you, everybody, for taking the time today to join our earnings call. As usual, Pat and I look forward to speaking to you again next quarter. Thank you.

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