National Research Corp (NRC) 2011 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the First Quarter 2011 Earnings Release Conference Call. (OPERATOR INSTRUCTIONS) As a reminder, this conference is being recorded Wednesday, May 4, 2011.

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

Thank you, Sean, and welcome, everyone, to National Research Corporation's First Quarter 2011 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, and Kevin Karas, Senior Vice President of Finance. Before we commence our remarks, I would ask Kevin to review conditions related to any forward-looking statements that may be made as part of today's call. Kevin?

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 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, Kevin, and again, welcome, everyone. As reported last evening, the Company's first quarter performance set a number of records, including revenue, income, and earnings per share. In addition, we witnessed continued traction, with net new sales accelerating from $2.2 million to $4.2 million quarter over quarter.

As important, if not more so, during the first quarter 2011, a flurry of announcements from the Department of Health and Human Services and the Centers for Medicare and Medicaid Services made crystal clear the magnitude of the financial penalties and public reporting requirements that are now part of the new world under health reform.

Before I outline these rules that now have been made clear, and how each relates to NRC, I will ask Pat to review our first quarter financials. Pat?

Thank you, Mike. The first quarter 2011 results clearly reflect the positive impact of the investments we made in 2010 to drive future growth and revenue and earnings. We continued growth in our total contract value and the revenue trends and we strengthened our earnings trend by returning to double-digit growth in net income.

Revenue was $19.8 million, increasing 14% compared to the first quarter of 2010. Net income increased 10% to $3.5 million, and diluted earnings per share were $0.51, up 9%. Revenue growth was driven by double-digit increases in both NRC Picker US and NRC Picker Canada. As we reported in the third quarter of 2010, the NRC Picker US revenue trend has returned to positive growth, and now has increased to double-digit growth for the first quarter, driven by continued market acceptance of the subscription-based offerings.

Another key factor in the quarter was a shift in the timing of revenue for the payer solution business. A lower percent of the payer solution revenue was realized in the first quarter of 2011 compared to 2010. This resulted in shifting of revenue between periods, moving about $620,000 from the first quarter into the second quarter of 2011.

Our exceptional growth in net new contracts was driven largely by NRC Picker US, with both [TGI] and the MIV OCS also contributing significantly in driving the combined growth rate to 92% for the first quarter. This high level of new sales early in the year under our subscription model provides an opportunity to realize a significant amount of revenue in the current fiscal year.

Our conversion to subscription-based contracts also continues on a positive trend, with revenues from them comprising 49% of our total revenue in the first quarter of 2011, compared to 40% for the fourth quarter of 2010. Subscription-based contracts also represented 57% of total contract value as of March 31, 2011, compared to 49% at December 31, 2010.

These positive results in net new growth and conversion to subscription-based contracts has helped drive a 24% increase in total contract value, which grew to $76.6 million by the end of the first quarter.

Operating expenses were $14 million for the quarter, an increase of $1.2 million, or 17%, compared with the first quarter of 2010. This increase is attributed primarily to the variable costs associated with the higher revenue, sales force expansion, and operating expenses added from the OCS acquisition. During the quarter, we also incurred $260,000 in expense associated with closing the Wausau office.

Our operating income margin was 29% for the quarter, compared to 31% in the first quarter of 2010. Without the Wausau closing expense, our operating income margin for the quarter would have been 30%.

Direct expenses for the quarter were $6.8 million, compared to $6.5 million for the first quarter of 2010. As a percent of revenue, direct expense decreased by 3 percentage points, driven in part by the impact of margin expansion realized by the growth in subscription-based contract revenue. Going forward, we expect our percent of subscription contract revenue to continue to grow and further improve the margin.

Over the remaining of the year, we will expect to see direct expenses as a percent of revenue to be higher than the first quarter based on historical trends. For the full year, we expert direct expenses to be in the 37% range, a reduction of 2% compared to 2010.

Selling, general, and administrative expenses for the quarter were $6.1 million, or 31% of revenue, up $1.6 million compared with prior year. One-third of this increase is attributed to the SG&A expenses added from the OCS business. The Wausau office closure also contributed to the increase.

Business development costs related to the expansion for the sales force increased in the quarter, helping to drive the 92% increase in net new contracts for the quarter compared to the prior year. With the sales expansion program continuing, we expect SG&A expenses to continue to be in the 31% range of revenue for the remainder of the year.

The depreciation and amortization expenses for the quarter were $1.2 million, or 6% of revenue. This is currently expected to be fairly flat for the balance of the year in absolute dollars. Going forward, depreciation and amortization should be around 7% or less of revenue.

Interest expense increased by $72,000 during the quarter compared to the same period in 2010 due to the purchase of OCS in August of 2010.

First quarter net income tax expense decreased from $2.1 million in 2010 to $2 million in 2011 as the first quarter effective tax rate declined from 40% to 37%. The reduction in effective tax rate for the first quarter is attributed to the impacts of additional deferred tax expense that was recorded in 2010 and additional tax credits recorded in 2011.

Net income for the first quarter was $3.5 million, an increase of 10% over 2010, which set a new Company record for quarterly net income. In reviewing first quarter performance, we note that the impact of the Wausau location closure expense, combined with the margin impact of the delayed payer solution revenue, would have increased the first quarter net income to $3.9 million, a 23% increase over the first quarter of 2010.

Dilutive earnings per share increased to $0.51 for the quarter, up 9% over the same period.

Cash flow from operations for the first quarter of 2011 was $3.9 million. Based upon first quarter results and the current trends of the business, we continue to estimate 2011 earnings per share at $1.65 on a fully diluted basis.

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

Thanks, Pat. As just reviewed by Pat, a number of very positive trends are continuing, if not accelerating, for the Company, not the least of which is our transformation to an exclusively subscription-based business model. This transformation will continue to allow us to add customer value and corresponding price increases, resulting in accelerated top-line growth and expanded margins.

As well, subscription-based price increase seamless symmetry between each of our business units' products, which materially enhances the ease of which we can cross-sell our portfolio across the current user base of 2500 acute care hospitals and 10,000 post-acute care facilities.

Turning now to other events in the first quarter, the clarity provided by the recent announcements regarding healthcare reform helped define and make tangible the new world for providers across the continuum of care. Within these new rules, the following parameters, as they relate to NRC product offerings, were codified.

CMS outlined the new hospital value-based purchasing program in which $850 million in Medicare payments will be withheld from hospitals, of which 30% or more can be earned back based on hospitals' performance on HCAHPS, the national standard patient experience survey. This directly aligns with our largest core offering of measuring and improving the patient experience and clearly creates an ROI story.

Another announcement was around the new patient-centered medical home standards that have been now released, which places greater emphasis on patient feedback and in fact connects patient feedback to physician compensation. While patients' satisfaction with their physician has always been a revenue runway for the Company, this action materially increases the size of that market segment.

As well, effective October 1, 2012, the Hospital Readmission Reduction Program kicks in, with a potential 1% payment reduction, growing to 2%, then 3%, in the following years, all tied to avoidable readmissions. Illuminate was created with this likely event becoming law, which it now is.

The above recent announcements are really on top of requirements that have already been enacted as well as the additional performance measurement and improvement requirements that have yet to be announced, all of which tie healthcare providers to financial rewards for improving quality or payment reductions for lesser quality.

It is important to note that while 1% to 3% of revenue may not seem like a big financial hit, for most providers, 3% of revenue represents 100% of net income.

For additional information on these and other drivers of our business, I would point you to First Analysis, which initiated coverage on National Research this past Friday. Frank's report, in my opinion, did a wonderful job of summarizing, in investment terms, aspects of healthcare reform that oftentimes can create a confusing landscape. In its simplest terms, almost every aspect of healthcare reform elevates transparency and the need for quality improvement, which are the exact levers that drive demand for NRC products.

The broader, and often not-understood, dynamic under health reform is the power of the NRC franchise across the continuum of care and the importance of interconnectivity between each provider setting. Take, for an example, that the Department of Health and Human Services released, in March 2011, its national quality improvement strategy entitled Ensuring Persons and Family-Centered Care, which highlights measuring and improving the patient's integrated experience of care across the continuum. Offering integration of measurement across the care continuum requires a unique set of expertise and market position.

Today, NRC is the market share leader in six of its business units, and No. 2 in the seventh. This footprint across the entire continuum of care from cradle to grave is highly unique and places us in an inevitable position to capitalize on the needs of integrated measurement and improvement, to understand care transition and continuity, and, most importantly, to maximize healthcare providers' bundled payments, which are a fundamental pillar under health reform.

Before I open the call for questions, I'd like to welcome all new associates that joined NRC in the first quarter, which, when combined with more than 250 other associates, will help us capitalize on the opportunities that are unfolding.

Perhaps two great examples of the level of talent we are attracting today are Maria [Markeson], who joined Ticker; and Jennifer Bolen, who started with Illuminate. Maria joins NRC from Minneapolis, where she was COO of a healthcare startup, driving its revenue from zero to $85 billion in a short period of time. Jen has a wealth of experience, from Vice-President of Nursing positions on the provider side to the International Healthcare Practice leader at the Juran Institute. I welcome Maria and Jen as well as all other associates to the family of the 250 others that are with us today.

Sean, I would like to open the call to questions at this point.

Thank you. (OPERATOR INSTRUCTIONS) Ryan Daniels, William Blair.

Hi, guys. It's Andy O'Hara, in for Ryan today. A couple of quick questions here. In terms of your sales force realignment and expansion, can you guys maybe give some update there? Is this still happening or is that realignment pretty much complete at this point?

This is Mike. We continue sales expansion. Today I believe the number is 62 quota-carrying sales associates across all business units. And almost without exception, each individual business unit will continue to recruit, train, and add to its direct sales force, whether that be in the mid-market, national, or in other areas. So it will continue.

Okay, excellent; that's helpful. And then, can you just give us an update on the cross-selling efforts in the Company? And then specifically, if you have any percentages of customers who are using one product versus two or three or more, that would be really helpful.

I don't have the exact percentages with me, and it remains an untapped opportunity. We do have a group that is cross-business units that are integrating product and service and value propositions, and they had some significant wins, both in quarter four as well as quarter one, and that will continue. But I haven't quantified it in terms of the exact percentage of clients that do work with one or more of the respective business units.

Okay, excellent. And then, just one last one. Could you guys give us an update on the OCS technology and how that's being integrated into other products throughout the Company?

I can give you a little bit of lens into that. We did combine OCS and MIV in more of a post-acute care division, for lack of a better word. One of the primary reasons is the similarity of need between the home health marketplace and its standard data set and a similar but not exact standard data set within the long-term care industry. And that work is underway as we speak. We haven't launched the product yet into the long-term care setting, but anticipate that we will.

As well, we're taking the development group that essentially was housed within OCS and migrating that group to a corporate platform context to -- which has helped and will continue to transfer a much higher level of technological expertise across all of our business units. So that's going well.

All right, excellent. Thanks a lot, guys.

(OPERATOR INSTRUCTIONS) Frank Sparacino, First Analysis.

Hi, guys. Pat, could you elaborate a little bit more on the delay this quarter within the Fair Solutions business?

Okay. With Fair Solution, that's where we get the data from the insurance [guys who do] the health risk assessment, and the delays in getting those records and getting the product out, which normally would have happened in the first quarter, came in late and it's being completed as we speak.

Okay, thank you. And then Mike, on the VBP side, I'm curious if you're starting to see already, now that the rules are final, more a sense of urgency on the part of hospitals or is it too early to get a sense as to what the reaction is from the marketplace?

Well, I think across the market the reactions perhaps could be put into two different buckets -- one group that is providing public comment, suggesting why value-based purchasing should be uniquely defined for them. And there's a group, perhaps smaller in number of facilities, that are getting on about it.

And clearly, within our more sophisticated clients within our user base and more sophisticated clients across the industry, they're on top of it right now. So it is a routine process today that they will ask for a calculation of how much dollars are at risk across the various dimensions of HCAHPS and to quantify that in dollar terms and to work on improving those domains that would give them the greater return on investment.

So those conversations are far more routine today than they were even 60 days ago. But unfortunately, health care lags and it will be, perhaps, some time before the entire industry wakes up to the reality.

Good. Thank you again.

(OPERATOR INSTRUCTIONS) Frank Sparacino, First Analysis.

Hi, guys -- maybe one more question to throw in. Any update you can provide with respect to Illuminate would be helpful. Thanks.

Illuminate continues to go well, although we aren't breaking out exact numbers for that, Frank, neither in terms of new sales or revenue. It's a new product, we're first to market. The barriers to entry are not where we want them to be, so consequently we want to continue to drive the success a little bit under the radar at this point.

And Mike, can I follow up on that? In terms of the barriers to entry not being where you want them to be, can you be any more specific around that or not at this time?

Well, I think it really suggests just a classic barrier-to-entry issue. Until there's a significant number of referencable accounts and a large user base, anyone could come in and tout they're doing what we do. We clearly have a differentiated product that has market traction but we would much rather have a moat around the business that is bigger than what it is today.

I understand. Thank you.

And Mr. Hays, as it appears to be no further questions at this time, I will turn the call back to you. Please continue with your presentation or closing remarks.

Thank you, Sean. And in closing, I just want to thank everybody for their time today, and Pat, Kevin, and I look forward to speaking to you again next quarter. Thank you.

Ladies and gentlemen, that does conclude today's conference call. We thank you for your participation and ask that you please disconnect your lines.