National Research Corp (NRC) 2010 Q3 法說會逐字稿

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the National Research Corporation third 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, November 3, 2010.

I would now like to turn the conference over to Mike Hays, CEO. Please go ahead, sir.

Thank you, Todd, and welcome, everyone, to National Research Corporation's third 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'd 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 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. To begin, clearly one of the highlights of the third quarter was our record-breaking sales performance. The Company recorded $5.4 million in net new contracts for the quarter. This level of performance is especially noteworthy given we had just recorded $3.8 million in net new contracts in the second quarter, which in and of itself was the highest quarterly sales performance in the past two years. Combining these past two quarters, the Company has achieved $9.2 million in net new contracts, which now surpasses all of 2009.

Another positive event, previously announced, was the acquisition of OCS in the third quarter. Before I provide an update on the OCS integration, new product activities and other highlights, I'll have Pat review the financial performance for the quarter.

For the third quarter, we saw revenue growth in the NRC Picker US for the first time in many quarters. In addition, all the other business units except NRC Picker Canada showed increases compared to the same quarter 2009. With the two back-to-back great quarters of net new contracts, we are in the position to have increased revenue growth as these contracts convert to revenue.

Revenue was $16 million, up 18% compared to the prior year. Operating margin was 22%, with operating income at $3.5 million, an increase of 6% over the prior year. Net income was $2.1 million, up 7%, and diluted earnings per share was $0.32, up 8%.

With the exclusion of the direct transaction costs of the OCS acquisition of $187,000 for the quarter and $286,000 for the year, net income would have been $2.3 million for the quarter, or 14% of revenue, up 13%. For the year, net income would have been $7.1 million, or 15% of revenue, an increase in net income of 14%.

The increase in revenue was driven by the NRC Picker's return to positive growth compared to 2009. Adding OCS and double-digit revenue and operating growth in the Governance Institute, My InnerView and the Ticker division, operating income was impacted by the OCS transaction costs as well as costs associated with the new rollout of Illuminate.

The Governance Institute third quarter sales was a record for the division and will be recognized over the next 12 months, helping expand the margins for this division going forward. My InnerView's third quarter sales were also strong, adding to the great growth trends for the last three quarters, which has enabled the division to maintain its double-digit revenue growth for the past two quarters in a row. In addition, given subscription pricing, the average new sale is three times greater than last year.

Operating income was $12.5 million for the quarter, up $2.3 million, or 23%, compared to the third quarter of 2009. This is largely the result of increased direct costs associated with servicing the additional revenue, as well as in sales, general and administrative expense, and depreciation and amortization. Our operating margin was 22% for the quarter, compared to 24% in the third quarter of 2009. Our operating margin was up 3 percentage points compared to the second quarter of this year. Excluding the direct costs associated with the acquisition of OCS, our operating margin would have been 23% in the third quarter and 25% year to date. Our goal is 25% operating margin, and we anticipate to be back in that range for the full year of 2010.

Direct costs for the quarter was $6 million, or 38% of revenue. As a percentage of revenue, direct costs were down 3 percentage points, driven in part by an increase in revenue for Ticker, TGI and the new OCS division, where we realized a margin expansion of the subscription-based model. We will continue to work to expand our revenue base in these products that are subscription-like models, which will help maintain and improve the margins.

The selling, general and administrative expenses for the quarter were $5.3 million, or 33% of revenue. This is up $1.5 million compared to the prior year driven by costs associated with the new OCS division, additional transaction costs related to the OCS acquisition, the start-up costs of Illuminate division, sales expansion largely in the NRC Picker group, and the addition of several leadership positions. With the sales expansion program and the additional depth of leadership continuing, SG&A as a percent of revenue will continue to be on the higher side of our goal through 2010.

The depreciation and amortization expense for the quarter was $1.2 million, or 8% of revenue. Depreciation and amortization will increase by $60,000 in future quarters to report the full quarterly impact of the amortization associated with the OCS acquisition. Going forward as a percent of revenue, depreciation and amortization should be moving back down to the 7% of revenue or a little bit lower.

The year-to-date income taxes increased due to the new higher federal income tax rate for 2010, which is expected to be 35%, up 1% over the prior year.

Net income for the third quarter increased to $2.1 million, up 7% over the prior year, and for the nine months ended September 30, increased to $6.9 million, up 11% over the prior year. Diluted earnings per share for the quarter increased to $0.32, up 7% over the prior same quarter. For the nine months, diluted earnings per share increased to $1.03, up 11% over the prior same period.

Cash flow from operations for the first nine months of 2010 was $12.4 million. The cash balance as of September 30, 2010, was $3.2 million. During the quarter, the Company paid back the $1.3 million line of credit advanced to fund the working capital purchase of OCS.

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

Thank you, Pat.

I'd like to continue my review of the quarter by highlighting that NRC Picker, NRC's largest business unit, is top-line positive. In the third quarter, after experiencing flat to negative growth since the fourth quarter of 2008, NRC Picker registered a 7% revenue gain. Contributing to this turnaround has been increased feet on the street, at-front sales leadership, and the introduction of subscription-based pricing. We anticipate growth at an increasing rate within NRC Picker as subscription pricing hits full stride, as well an enhanced bundling of services to all current NRC Picker clients.

The balance of the Company's top-line growth remains strong looking out over the balance of 2010 and into 2011. With NRC Picker now providing positive top-line contribution, it's possible to again regain revenue growth in the 20%-plus range.

Let me now turn to Illuminate, our recently launched patient outreach program for acute-care hospitals, designed to facilitate service in clinical recovery within the critical 48 hours of a patient being discharged from a healthcare facility. Results from the earliest adopters are showing quantifiable increases in their patient experience, or HCAP scores, and lower readmissions, the two key business issues Illuminate was designed to positively impact. As well, the service experience among clients of Illuminate is reported as stellar.

We are rapidly resourcing the Illuminate business unit with both current NRC associates and talent from outside the organization. We anticipate headcount to be 17-plus by year-end, largely in the area of business development.

Currently, Illuminate business development associates are leveraging the 2,400 acute-care hospitals for which NRC offers services, with a heavy focus on The Governance Institute's 600 hospital CEO members.

Everything we have learned since we announced the rollout of Illuminate during our last earnings call reinforces that we're at the right spot at the right time with the right offering. Illuminate, as you know, is the outcome of a dedicated product development effort we established a few years back. That product development effort has a robust pipeline of offerings at various stages of development and tests, one of which is a much enhanced set of member benefits that will be offered by The Governance Institute. Market tests of the new TGI offering has resulted in 15 charter members who have opted for the enhanced package of member benefits at a price point equal to two times current spend. This enhanced offering will be rolled out to current TGI members first quarter 2011, and we anticipate a very high take rate across its current 600 members.

Currently, in the fourth quarter, we have commenced offering this new TGI benefit package to the roughly 2,500 non-TGI hospital members, which comprised the directly accessible market for this offering, and early indications of acceptance is positive.

My InnerView's top-line growth is benefitting from product development efforts as well. The rollout of subscription pricing, which includes a broader and more robust slate of offerings is doing well, with sales of $1.2 million to date, representing a double of average spend compared to past new contracts.

With the acquisition of OCS and its focus on the homecare segment of the post acute-care market, we have elected to combine OCS with MIV, which also serves the post acute-care market, as you know most notably in the long-term care segment. The synergies realized will result in cross-selling and bundling of their respective offerings and a reduction of costs through elimination of duplication.

To this end and within the fourth quarter, we will centralize all MIV and OCS functions in Lincoln and Seattle and eliminate the costs of the Wausau operation and other duplications. Given such, a one-time $300,000 cost will be taken in the first quarter -- or, excuse me, in the fourth quarter 2010.

Effective Monday, Jeff McDonald joined NRC as President of NRC Picker Canada. I'm excited about Jeff, who is yet another example of our continued focus to add materially to our leadership ranks. Jeff comes to NRC from LifeLabs Medical Laboratory Services, where after moving up through the ranks, most recently held the position of Senior Vice President and General Manager of a $260 million business. Jeff's experience in the Canadian healthcare market and his proven business leadership will not only contribute across all of NRC, but also change the growth trajectory of NRC Picker Canada.

Picker continues its top-line growth trends in the third quarter and, given its syndicated nature of its business model, achieved a 48% operating income and accounted for 30% of the Company's total operating income on only 13% of the Company's sales. Picker is also rolling out new benefits to its subscribers, which will likely help continue its track record of growth.

And finally, Payer Solutions' third quarter performance was above expectations. In fact, what we saw as a likely revenue decline over the course of 2010, Payer Solution is instead growth positive both top and bottom line for the quarter as well as year to date. An intriguing new Payer Solution product offering is in market test as we speak, and I look forward to reviewing those tests with you next quarter.

In summary, 18% revenue growth for the quarter is good, but not what we consider to be great. Going forward with a stable of products and massive depth of talent we now have on board, we anticipate increasing our growth rates.

With that, operator, I'd like to open the call to questions, please.

Thank you. (Operator instructions). One moment, please. And our first question comes from the line of Ryan Daniels with William Blair. Please proceed with your question.

Hi, guys. This is Andy O'Hara in for Ryan today. A couple of quick questions here. Of the $5.4 million in new contracts sold during the quarter, do you just have a rough breakdown of that between product lines?

About 50% of the $5.4 million came from NRC Picker US. Approximately $1 million of that came from TGI, which is double previous run rates. And then the balance is pretty much evenly divided across all of the other business segments.

Okay, excellent. And then last quarter, you guys mentioned that you could start providing an overall percentage of revenue that's on the subscription-based model. Do you guys happen to have that today?

We do not, I apologize, but we'll put that in the call notes next time.

Oh, okay. Thank you. And then on the Illuminate product, it looks like sales are going really well with that. How many organizations do you guys have on board as of today?

At last earnings call, we talked about four technical pilots and six paying clients. Right now, I believe the number is a total of 30 that are either up and running and-or have committed on-boarding dates through the course of the remainder of 2010.

Okay, excellent. And then just last question, your Picker sales division headcount. Where does that stand today?

I don't have the exact number, but it would be 30-plus, plus management.

Okay. All right. Thanks a lot, guys.

And our next question comes from the line of Frank Sparacino with First [Analyst]. Please proceed with your question.

Mike, I was hoping you'd go into a little bit more detail on the new TGI offerings.

Be happy to. Historically, the offerings or what we call member benefits have been fairly basic, kind of governance 101 and healthcare 101, and what we're finding is that given healthcare reform and some other dynamics that are occurring in the marketplace, the level of need, especially among large systems, is increasing at an increasing rate in terms of the ability to bring their largely volunteer board members up to speed with some of the major ramifications of reimbursement, hospital-physician relationships, accountable care organizations, etc.

So we have significantly broadened the topics and have changed the format in which much of the information is disseminated to make it more interactive and case based, and as a result of that, we're tapping into a market need that is evolving and is currently being unaddressed. So among the current TGI members that meet that definition of larger healthcare systems, we went out in a charter test and offered them this package. And when we reached the threshold of 15, it passed the test, and we'll commence rolling that out to the balance of the 600 members here at the beginning of the year.

Great. Thank you.

And our next question comes from the line of Myron Cohn with Stifel Nicolaus. Please proceed with your question.

Good morning, Mike. Illuminate -- it seems to me a very exciting product, and you're right now concentrating on acute-care hospitals. But, I mean, the whole hospital market is available to you. Do you have a timetable when you will start offering it to everybody?

Hi, Myron. This is Mike. It is an exciting product, and we are, as you stated, focused on the acute-care market segment today, largely because of our installed base, and we want to move rapidly to market and build additional barriers to entry. That said, within our other business units, MIV in the long-term care space and OCS within the home healthcare space in particular, have shown interest. We do have a pilot going in the long-term care market. We have interest within the home healthcare market, but our initial focus has been on acute care. But as you suggest, Illuminate does have application across the continuum, and we hope to maximize the opportunity not only within acute care, but across that continuum specifically.

Okay. Thank you.

(Operator instructions). Mr. Hays, it seems that we have no further questions at this time. I will now turn the conference back to you.

Thank you, Todd, and, again, thanks, everyone, for carving out some time today to hear our performance in this quarter. And as always, Pat and I look forward to speaking to you again next quarter with fourth- quarter results as well as year-end summaries. Thank you very much.

Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and ask you to please disconnect your lines. Have a great rest of the day, everyone.