National Research Corp (NRC) 2010 Q4 法說會逐字稿

Ladies and gentleman, thank you for standing by. Welcome to the fourth quarter year-end 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 February 9, 2011. I would now like to turn the call over to Mr. Michael Hays, Chief Executive Officer. Please go ahead, sir.

Thank you, Operator. And welcome everyone to National Research Corporation's Year-End 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 risk and uncertainties that could cause actual results or other 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 facts that could affect the company's future results, please see the company's filings with the Securities and Exchange Commission. With that I will turn it back to you, Mike.

Thank you, Pat. To commence our remarks I would like to say that the marketplace attraction for the company's new product Illuminate and new subscription-based offerings gained traction throughout the third quarter and accelerated even more so in the fourth. Net new sales for the fourth quarter and the year overall were 80% greater than historical periods, driven largely by this momentum. In keeping with these favorable conditions, the company elected to materially increase its investment in this portfolio of offerings during the fourth quarter of 2010.

Before I continue I ask Pat to review the financials for the quarter and year-end 2010. Pat?

Revenue for the fourth quarter 2010 was $15.8 million or 15% compared to fourth quarter of 2009. Net income for the fourth quarter was $1.6 million, a decrease of 30% compared with fourth quarter of 2009 which was largely driven by purposeful investment spending in the quarter against various new product offerings. Net income for the fourth quarter was also negatively impacted by one-time expenses of $550,000 for the transaction costs related to the OCS acquisition and the previously announced shutdown of our Wausau office. There will be an additional payment of $267,000 during the first quarter of 2011 to terminate the building lease in Wausau.

Operating expenses were $13.5 million for the fourth quarter, up $3 million or 29% compared with fourth quarter of 2009. This increase is attributed to product investments, costs associated with additional revenue, SG&A and depreciation and amortization.

Our operating margin was 15% for the quarter compared to 24% in the fourth quarter of 2009.

Direct costs for the quarter were $6.3 million. This was 39% of revenue which is in line with the fourth quarter of 2009. For the year 2010 direct costs were down three percentage points, driven by the enhanced margins of our subscription-based products. We anticipate our recent investments will continue to expand margins.

The selling, general and administrative expenses for the quarter were $5.9 million or 37% of revenue. This is up $1.5 million compared to the prior year driven by costs associated with the merger of MIV and the new OCS division and the related costs of closing the Wausau office for which synergies and elimination of duplication will be realized in 2011.

The increases also include transaction costs related to the OCS acquisition; the startup costs of Illuminate division; product development costs associated with the investment of the new product upgrades; and sales expansion. SG&A as a percent of revenue will continue to be on the higher side of our model but should decrease materially from 37% in the fourth quarter to 30% by year-end 2011.

The depreciation and amortization expense for the quarter was $1.3 million or 8% of revenue. Going forward, depreciation and amortization should be 7% or less of revenue.

The income taxes for the quarter decreased to $590,000 due to the tax legislation enacted in December, extending the research and development credits for 2010 and extending the accelerated depreciation tables. Increased investments and other expenses noted above decreased taxable income for the year, moving the company's federal income tax rate to 34% instead of the expected 35%. The federal income tax rate is expected to be 35% in 2011.

Revenue for the year ending December 31, 2010 was $63.4 million, up 10%, and was comprised of 32% subscription-based contracts. Net income for the year was $8.5 million, matching the 2009 net income. Diluted earnings per share for the quarter were $0.23, down 30% compared to the prior same quarter. For the year 2010, diluted earnings per share was $1.26, equal to the year-end December 31, 2009.

Cash flow from operations for the year 2010 was $14.6 million. The cash balance at December 31 was $3.5 million.

Looking forward to 2011, we begin the year with total contract value of $75 million compared to $62 million at the start of 2010. One half of this booked revenue is now squarely made up of subscription-based contracts. We are providing guidance relative to the earnings of $1.65 per share for the period ending December 31, 2011.

Providing guidance, as you know, has not been our historical practice. However, we are aware that the investment spending discussed above accounted for all incremental income for the year 2010 and consequently visibility related to the likely returns these investments hold is warranted.

In addition to our product related investments, we believe 2011 earnings will benefit from having a full year of operating income from the OCS compared to only five months in 2010. This OCS benefit along with the product investments made in 2010 provide us with the visibility earnings growth of 30% plus. We do not intend to provide quarterly earnings guidance nor revenue guidance.

As we announced in the press release, the company's Board of Directors declared an increased quarterly dividend of $0.22 per share, up from the $0.19 per share.

With that, I will turn it back to you Mike.

Thanks Pat. While we purposely accelerated investment spending, we did not do so lightly. Our surefootedness in moving forward with these investments was found in the success we have experienced over the past two years with the Ticker product.

Two years ago, as you will recall, we converted Ticker from a once-a-year deliverable to a subscription offering comprised of a far more robust set of deliverables and resulting value. The results over the past two years are clear. Ticker revenue is up 83% adding $3.3 million in incremental revenue and a corresponding $2.4 million increase in operating income. Client retention is up. Market share increased. And new sales for the Ticker product continue into 2011 on a similar pace.

Building on what we proved to be possible by [readmitting] the Ticker product, we have now duplicated this strategy across NRC Picker and My InnerView. Moving from the industry's historical business model of project-based transactional priced offerings, we have created, tested and rolled out subscription based offerings with vast enhancements to its deliverables and materially higher price points.

Well, we also adopted this and leveraged this strategy to reinvent the Governance Institute which now also has a far more robust set of offerings at a far greater price point. The soft launch of these offerings earlier in 2010 ramped up in the third quarter and hit full stride in quarter four.

Even though we are at the beginning of upgrading current members and gaining new market share, the numbers are impressive. We are experiencing increased spend by current members of 20% to 40% depending upon the business unit which has resulted in increased member contract value of $4.1 million from the approximately one-fifth of client organizations that have cycled through the upgrade window.

Greater acceptance of these enhanced offerings by the marketplace at large also is showing traction. Overall net new sales across this portfolio are up 88% for the last half of 2010 compared to the first six months of 2010 without such enhancements.

To provide yet another perspective of the market's acceptance of this portfolio, consider that subscription-based products comprise 32% of the company's annual revenue, 40% of the fourth quarter's revenue, and at year-end 49% of total contract value. Looking at NRC Picker only, 1% of its fourth quarter revenue was truly subscription-based and yet at year-end 35% of its contract value is now subscription-based contracts.

As was the case with Ticker, it took a little over a year to cycle through the entire client base and we anticipate a similar timeframe in client take rates, albeit against a vastly larger monetary base. Ticker contract value at the commencement of its conversion was around $4 million compared to the starting contract value of $45 million in aggregate for NRC Picker, MIV and the Governance Institute.

Illuminate as well is benefiting from fourth quarter 2010 investments. Operating income losses for Illuminate for the year ending December 31, 2010 were close to $700,000. And we anticipate losses to continue into the first portion of 2011 as we continue to heavily invest.

As I have suggested and again witnessed in the fourth quarter, Illuminate is the right product addressing a key business problem and our timing has proven correct. Given the competitive nature and stage of where we are with the Illuminate rollout, I have elected not to add color nor quantify its ramp up. It is now all about execution and one of our proven leaders, Ginny Martin, who steered the Ticker success, is leading the Illuminate team.

Speaking of leadership, we have as an organization added a large number of associates to our leadership ranks over the last few years and we continue to systematically add top talent to a variety of positions. To that end I am happy to announce Kevin Karas joined NRC in the fourth quarter as Senior Vice President of Finance. Kevin brings a wealth of experience to the company having most recently been CFO at Lifetouch, the largest company of its kind with 700 photography studios across the nation with annual revenues of $1 billion. Kevin started his career at Ernst & Young and as well held positions at two prominent healthcare organizations both in finance and operations.

Moving into 2011, healthcare will continue to evolve and adapt in response to healthcare reform. Value-based purchasing, public reporting of patient experience and quality, a higher bar for governance and reduction in reimbursement including avoidable readmissions will cascade across the continuum of care. NRC is the only firm doing what we do across the entire continuum and given such we have a strong foundation. We believe this market position, combined with our offerings and our talent suggests a very strong 2011.

At this time, Operator, I would like to open the call to questions please.

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

Hi guys, this is Andy O'Hara in for Ryan today. Just first on the SG&A front, obviously it was a little higher this quarter than most people expected. You had mentioned that by year-end 2011 it would be down to about 30% of revenue. Is that going to be for full year 30% of revenue or probably just in fourth quarter of next year?

It should be for the full year.

Full year.

Full year.

Okay. And then given the recent investment in your sales force, do you think you could give us an update on the sales organization, kind of specifically in terms of what teams are responsible or for what products and kind of where the overlap is in terms of selling there?

Sure, this is Mike. There is a total of around 62 quota-carrying sales associates within the organization across all business units. As you know each individual business unit has its own business development teams focused specifically on the products that they offer to the particular healthcare provider or payer to which they serve.

We have stepped up largely as a result of some work that the VP of business development within NRC Picker took on in cross selling across divisions. And Eva's work has materially increased the cross-pollination. So we have today more organizations using multiple products and services across the company than what we have. So while historically the business development teams have been fairly siloed, there is a greater amount of cross-pollination across as we speak today.

Okay and then on that, so are the individual product sales teams then kind of referring customers to a different team or how is that working exactly?

Oftentimes they will team up with the knowledge that they have of that particular client organization and introduce decision makers to the sales associates for their sister business units.

Okay and then with Picker sort of being the largest division, where is that sales force headcount right now?

I don't know for a fact, I believe it is at 32.

And then you guys had talked about in the Ticker division client retention and market share were increasing. Can you put some numbers to that?

Retention is in the high, high 80s, up probably 7 to 8 points from when the original conversion commenced two years ago. And I don't know the exact market share number but suffice to say that most every major healthcare organization in every major market is a client.

Okay that is helpful. And then can you quickly talk about in the payer solutions segment, last quarter you had mentioned there is a new product that was in market test. Can you talk a little bit about that?

There was that particular product; it failed its test so we are not going to roll it out. It had to do with the new way that CMS was scoring health plans relative to a series of different quality metrics or indicators to which would provide those that scored high a disproportionate reimbursement. CMS has added a significant additional number of metrics and the marketplace is taking that as a signal to wait and see. So we are on the sideline waiting until those regulations become more solidified.

Excellent. And then just one last one, how many organizations are using the Illuminate product today. I think you said last quarter there were around 30?

We are not providing any metrics relative to Illuminate at this time.

Alright, thanks a lot guys.

Thank you.

Our next question comes from the line of Frank Sparacino from First Analysis. Please proceed.

Hi, Mike, I think this is probably for you. Just in terms of the increase in retention rates, obviously environment (technical difficulty) is better. And I'm wondering how much improvement is the fact of retention rates, is the change in the model, too hard to earn -- what is really driving that?

Frank, you broke up a little bit; but I think the question was relative to the trend in retention rates and its contribution to the growth of the business? Operator, could you have Frank repeat the question?

Frank, your line is open. Please proceed with your question.

Hi, can you guys hear me better now?

Yes.

Yes, it was more around when you look at increasing retention rate, how much of that is really a factor of (technical difficulty) into a subscription model versus the environment today which is much more favorable for (technical difficulty) others?

I understand. Thank you for repeating that. I think it is a combination of both.

Clearly the headwind we saw in particular within NRC Picker eighteen-odd months ago ending perhaps seven, eight, nine months ago clearly affected retention rates largely in and around a decreasing contract value, not necessarily the total exit of a particular project. So that headwind clearly has subsided. And retention rates and contract value is maintaining at more historical rates.

However, we are seeing a significant contribution relative to subscription-based products and the stickiness of individual clients. And I would anticipate over the year 2011 we will actually see an increase in retention rates over and above even the improvement we have seen year-end 2011, or 2010, excuse me.

And just to follow up on that has there been any (technical difficulty) in terms of length of the contract or the pricing within the contract as the renewals are happening?

Yes, we are converting those that opt in to the upgrade largely at renewal. There is a significant increase in the price point anywhere in the neighborhood of 20% to 40%. We are extending the contract terms to multi-year where historically we have been more focused on annual commitments.

Thank you guys.

Thank you.

(Operator Instructions). And it seems there are no further questions at this time.

Thank you, Operator, and thank you everyone for joining Pat and I on the call today. As always we look forward to speaking to you again next quarter. Thank you.

Ladies and gentleman that concludes the conference call for today. We thank you for your participation and ask that you please disconnect your line.