National Research Corp (NRC) 2011 Q2 法說會逐字稿

Ladies and gentlemen, thank you very much for standing by, and welcome to the National Research Corporation's Second Quarter 2011 Earnings Release Conference Call. During this presentation, all participants are in a listen-only mode. Afterwards, we will conduct a question-and-answer session. (Operator Instructions) As a reminder, today's conference is recorded on Wednesday, August 3, 2011.

It's now my pleasure to turn the conference over to Michael Hays, Chief Executive Officer at National Research Corporation. Please go ahead, sir.

Thank you, operator, and welcome, everyone, to National Research Corporation's second quarter 2011 conference call. My name is Mike Hays, the Company's CEO, and joining me on the call today are Pat Beans, our CFO, and Kevin Karas, our Senior Vice President of Finance.

To kick off the call today, I'm excited to announce that Kevin will take on the added responsibilities of the Company's Chief Financial Officer, effective September 1 of this year. Pat Beans will transition to the role of Senior Vice President of Corporate Development, as we refine our focus on the M&A front. Also on the call is Susan Henricks, which will be joining us today in her newly created role of President and COO of National Research Corporation.

Before I continue, I'd 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 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, Kevin, and again, welcome, everyone. As noted in our earnings release, we are experiencing accelerated demand for our entire cross-continuum product portfolio, driven largely by changes imposed by health reform.

In addition, our recently deployed strategies of bundling services and subscription-based pricing could not have happened at a better time, as confirmed by our material step-up in new sales over the past few quarters.

Before I add color to these trends and speak to the exciting addition of Susan as our President and COO, I will ask Kevin to review our second quarter financial performance. Kevin?

Thank you, Mike. The second-quarter 2011 results clearly reflect the continued strength of our value proposition in the market and the effectiveness of our sales organization. Our revenue growth trend continued to accelerate and we were able to also significantly leverage our growth in the second quarter to drive earnings.

Revenue was $18.3 million for the quarter, increasing 30% compared to the second-quarter 2010, while net income increased 40% to $2.3 million. The revenue growth for the quarter was driven by double-digit increases from every category within our portfolio. These increases are attributed to a combination of revenue from the OCS acquisition, market share growth, increased pricing from our enhanced offerings, and vertical growth in our existing client base from successful cross-selling activities.

We ended the quarter with total contract value at $78.7 million with subscription-based agreements now representing 64% of our contract value. Our sales force continued to grow during the quarter with 69 full-time sales professionals on staff as of June 30.

On the expense side, operating expenses were $13.2 million for the quarter compared to $10.4 million for the second quarter of 2010. This increase is attributed to variable costs associated with the higher revenue volumes, sales force expansion, and operating expenses added from the OCS acquisition.

Direct expenses for the quarter were 40% of revenue compared to 42% of revenue for the second quarter of 2010. This 2% improvement is driven in part by the impact of margin expansion realized from the growth in our subscription-based contract revenue.

For the remainder of the year, we expect our subscription contract revenue growth to continue to produce margin improvement over last year. For the full year of 2011, we expect direct expenses to be in the 37% range, a reduction of 2% compared to 2010.

Selling, general and administrative expenses for the quarter were $6.0 million, an increase of $1.5 million compared to the same quarter in the prior year. One-third of this increase is attributed to the SG&A expense added from the OCS business. The remaining increase is primarily due to higher business development costs relating to the expansion of the sales force, which is helping to drive the 33% increase in new sales for the quarter compared to the prior year.

For the full year, we expect SG&A expenses to be in the 31% of revenue range, an improvement of 1% compared to 2010.

The depreciation and amortization expense for the quarter was $1.2 million or 7% of revenue, which is consistent with the second quarter last year. This expense is expected to remain fairly constant for the balance of the year with the full-year expense also expected to be at 7% of revenue.

Interest expense increased during the quarter compared to the same period of 2010 as a result of the debt secured to finance the purchase of OCS in August of last year.

Second quarter income tax expense increased from $1 million in 2010 to $1.4 million in the second quarter of 2011 based on the higher earnings. The effective tax rate for the second quarter remained relatively constant with the second quarter of last year at 37%.

So, as mentioned earlier, net income for the second quarter came in at $2.3 million or an increase of 40% over last year. Diluted earnings per share increased for the quarter to $0.34 compared to $0.25 in the same period last year. And cash flows from operations in the second quarter of 2011 were $4.2 million. Based on our year-to-date results and the current trends in the business, we continue to estimate the 2011 full-year earnings per share at $1.65 on a fully diluted basis.

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

Thank you, Kevin. As reviewed by Kevin, we had a very good quarter and a number of very positive trends are continuing, if not accelerating, for the Company.

Subscription-based contracts comprised 62% of second quarter's revenue, up from 49% in the first quarter of this year. One benefit of our subscription offering is the pricing symmetry it provides between each of our products, which enhances the ease to which we can cross-sell our portfolio across our current installed base of 2,500 acute care hospital clients and over 10,000 post-acute care facilities.

We spoke to this in the first quarter and I'm happy to say in the second quarter, we have seen cross-selling accelerate. In addition, we will roll out, importantly in the third quarter, an enterprise solution group to capture even more of the revenue upside among our current installed base of clients.

Net new contracts reached $5 million in the second quarter, an increase of 21% over the first quarter of 2011, and as Kevin suggested, a 33% increase year-over-year.

Our approach to value-based purchasing, the attractiveness to prospects of our capacity to serve the needs across the entire continuum of care in our subscription base and bundled offerings are providing a key point of differentiation at point of sale. Each of these strategies continues to add momentum.

As many of you are aware for the largest sector of the economy that being healthcare, to shift business models from volume-based to value-based [creates] unprecedented change for the industry and then the resulting opportunities of course for our Company.

While this shift is just beginning and will evolve over the foreseeable future, its approach has been very visible to us for years. And as many of you know, we saw this trend coming and is focused on attracting the leadership talent necessary to more fully capitalize on these now addressable opportunities.

The capstone event to this journey is the addition of Susan to our leadership team as President and COO. By brief background, Susan is an innovative leader with exceptional experience in managing data, information services, direct marketing and technology companies.

With world-class experiences from environments including Presidential roles in businesses of First Data Corporation, the Directory business of RR Donnelley, and also her leadership at Metromail Corporation, Susan is clearly ready to help drive our growth.

Susan, could I ask you to introduce yourself and say a few words, please.

Hi, good morning. This is Susan Henricks and thank you for that kind words Mike. I've now been with NRC for five weeks and I'm even more excited about being part of the organization. And as you've heard from both Mike and Kevin, NRC is poised for growth. I look forward to speaking with you again in the future.

Thank you, Susan. Before I open the call for your questions, I'd like to welcome all new associates that have joined National Research Corporation in the second quarter.

In addition to Susan, we have a stable of talent that is really robust. And to just

add one additional point of reference, I'd like to highlight [Feria Bacchus], which is now on the NRC Picker Canada team.

Feria joined NRC most recently from Sodexo Canada, where she held the position of Vice President in Business Development and Marketing, a very similar role that she will lead the NRC Picker business unit towards. So welcome, Feria.

This talent, when combined with the other 325 associates, will ensure that we have the opportunities to - or have the ability to capitalizing on the opportunities that lie in front of us.

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

(Operator Instructions) Frank Sparacino, First Analysis.

Hi, guys. Maybe first, just a follow-up on the last comment in terms of headcount, it looks like on a sequential basis up pretty healthy about 50 people. Just wondering what the plan is for the remainder of the year in terms of hiring?

Pat, do you want to take that?

Yes. Frank, this is Pat Beans. And the number that Mike has given out here, the 325, that includes full-time associates and part-time associates as opposed to FTEs. And so the headcount is not quite that high. It is not that high.

Okay. And, maybe, shifting gears just from a high-level perspective. I'd be curious on your conversations with the client base as it relates to what's happening in DC. Obviously, there were some significant cuts from a reimbursement perspective within the skilled nursing and I think will be cuts across Medicare and Medicaid as well. But just curious the conversations you're having with your clients and how they are sort of reacting or adapting to that?

This is Mike, Frank. You're right, skilled nursing and also home health had some new news relative to reduction and reimbursement. I think the long-term care was down 11.1%. And as you also suggested Medicare and Medicaid face no doubt additional reductions over the course of the next few years prior to the onslaught of the 26 odd million new customers that will be paying. But our perspective and even for a lot of our client [look, the seatback] has been is healthcare has always operated on relatively narrow margins. And they always seem to make it work out. I don't really see this announcement as anything different than what we have seen in my career over the last 30 years. So, you're right, there are some new announcement relative to reduction and reimbursement. I think that's just kind of the new normal. And we'll look forward to the 26 million new customers that will be paying customers here in 2014, as I'm sure most of our clients will.

And I'll ask one more just before jumping back in the queue. But I think Mike you talked about a new group, enterprise solutions group launching in Q3, just hoping you could provide a little bit more detail around that.

We feel that one of our greatest upside opportunities, Frank, is to maximize the opportunity within our current installed base. We have 2,500 acute care hospitals, many of those acute care facilities also have home care businesses and home health businesses. We're probably one of the only organizations that I am aware of that deal with the entire continuum.

So, it just makes perfect sense now that we've bundled and integrated a lot of our services into more of a common theme or a common value proposition is to get on about increasing our penetration amongst our current installed base. So, we have two individuals and more likely to be additional ones going forward that are very senior individuals within the organization that will take ownership of a portfolio of our largest client organizations that also represent largest upside, and bring together the assets and capabilities of our entire organization against those upside or against those opportunities that have significant upside.

As you know, Frank, and as others that are following us, we haven't focused as much on maximizing cross-selling across the continuum, but we're really seeing an upside opportunity just this last quarter for an example, we have 19% more - increased by 19% the number of clients that do work with one or more of our divisions. So we want to step that up, formalize it, move on about it, and have that be a clear revenue runway on a going-forward basis.

And just to follow up that Mike, it sounds like those true-ups you have are really more of a sort of a strategic account model where they have a designated list of clients that are calling out. Is that the right way to think about it?

That's exactly the way to think about it.

Okay. Thank you, guys.

Thank you.

Andrew O'Hara, William Blair & Company.

Hi, guys, this is Andy O'Hara, in for Ryan Daniels today. Just a quick follow-up to your last comment about the 19% increase in clients working with one or more division, where does that overall percentage [spend] of clients working with one or more division?

It's still relatively small single-digit. So, 19% increase of the small base is pretty easy to do it. But we hope to move that up into even greater numbers, but it is a relatively small number. The biggest or greatest traction that we saw in this past quarter was additional current clients taking on the Illuminate product. And so that gave us a bump over what we saw in the first quarter.

Okay, that's helpful. And then, it looks like you guys are obviously doing a really good job of increasing the subscription base revenue, you mentioned that it's now about 64% of total contract value. How high do you guys think that number can go and kind of over what time period?

Pat, do you want to take that?

I think looking at that probably up into the 80% arena area, there is a few products that don't really totally have a subscription model with them especially in our Payer Solution Group, so, probably about -- around 80%.

Okay. That's helpful. And then over roughly what time period do you think you guys will be able to hit that 80%.

It's really hard to say. Of course, the lags are due to ones that stretch out the longest, but I would say that through the course of next year, we ought to have worked through the lion's share of the client base.

Kay. That's helpful. And I guess just one more question with sort of all the healthcare reform initiative that have been announced in over the last several months, now that providers have sort of gotten a chance to digest some of them. Is the RFP process changing at all among providers?

Great question. There clearly is a shift and I would say each of the C-Suites in especially the acute care side of the world, they're scratching their head on how to ensure the value-based purchasing goes in their favor.

And as you might recall, on value-based purchasing, there is a whole back of $850 million by CMS that acute care hospitals have the opportunity to win back, if you want to look at it that way, both in terms of clinical improvement and improvement on the patient experience, which carriers about 30% of the total equation.

So, what we are seeing that there is clearly a shift in change is all about what can you as an organization do, not so much about the measurement in the patient experience, but the improvement of the patient's experience, which is really where the [win back] comes from in terms of reimbursement.

So there is an increased focus at point of sale on improving credentials and then around improving the hospital score on the national standard that being HCAHPS. So it is shifting and I think you will see a large proportion of hospitals that now can quantify what they have at risk, focus on wanting to improve it more so than ever before.

Do you think this is causing the sales cycle to lengthen at all as some of these providers kind of look at multiple solutions, capture that money, or I guess any color on the timing dynamic there would be helpful?

I don't know that value-based purchasing necessarily has elongated the sales cycle. I mean, it clearly has quantified the return on investment and so the finance people are more often at the table than ever before.

And as you know, they can move to a decision fairly rapidly if the ROI obscures them in the face. I think where we are seeing the elongated sales cycle might be on some of our subscription-based [upsales] where we are bundling together services across what historically have been separate distinct budgets and all of those budgets might not have been on the same time period or cycle. And so, as we capture employee, physician, and the patient experience business from an organization, sometimes that will elongate the final contract signing to work through all of the disparate budget buckets.

But, in general, outside of the subscription, which we're creating net of the -- I don't know that value-based purchasing or health reforms has elongated this sales cycle or acute care hospitals anyway.

Okay. That's really helpful. Thanks, guys.

(Operator Instructions) Julian Allen, Spitfire Capital.

Hi, good morning. Just one quick question. In light of Pat's promotion, could you perhaps give us some context around your current acquisition priorities in terms of new sub-sectors you want to enter or product line extensions you're looking for? Thanks very much.

Hello, Julian, this is Mike. Again, Pat, weigh in on this also, but our general orientation is, as you may recall, has been to fill in any provider segments that we don't have a foothold in, kind of along that cradle to grave continuum. We have a very strong presence in the acute care, long-term care, hospice, home health not as strong as we'd like in the physician areas. So we could see acquisition are tuck-in relative to that particular provider space being interesting.

In addition to that, it's more to fill out our capabilities and capacities. So, if you think of our foothold across the continuum in the 2,500 acute care hospitals and the 10,000 post acute care facilities, there is additional spend that our clients are dealing with everyday. And for much of that spend in and around the improvement of the patient experience, we are front and center. So we would look to any value - any acquisitions that would provide incremental value to our subscription-based offerings.

So, in a generic context, that would be where we're focused, just to increase the price point of our subscription on a very predictable annual cycle as a result of adding meaningful and tangible value to what we do for our client organizations.

Pat is that [pretty up keeping] with what our mission and focus has been?

Just what we have been doing in the past.

Mr. Allen, do you have any further questions?

That's it. Thank you very much.

Frank Sparacino, First Analysis.

Hi, guys. Mike, you had mentioned Illuminate and I was curious, I know last quarter there weren't a lot of details provided. But anything you do want to share this quarter in terms of an update on that segment?

Yes, I'd be happy to. We had a very good quarter with Illuminate. It didn't take off a year ago today as fast as we thought, but clearly over the course of the last three or four months, it is accelerating and at accelerating rate. The new client contracts that we signed in the last quarter, approximately half from current clients and half from new clients, we see that mix is being healthy, and want to continue it along those lines. So, I think, you'll see a fairly significant component of our new business generation over the course of the next year or so in and around that product. It seems to be performing very, very well and the clients quite frankly love it.

And then maybe just lastly on the contract value, I just want to make sure I'm looking at this in the right context. But, year-over-year growth 9%, obviously, the new contract -- new sales figure you gave was very strong. So I'm trying to reconcile that with the contract value along with sort of retention? That's it.

There is a component with the total contract value that is non-recurring, not necessarily by design, but has an [artifact at] project related work that we might have. And so, I don't know that you can take a 100% of total contract value and do the math the way you've done it. But our backdoor loss is running around 10% on an annualized basis, so across our product lines will run anywhere from 87% to 91% retention rate and our new sales are up 22%.

Kevin, do you have anything to add to that in terms of the math to what Frank threw?

No. Frank, what was the metric that you had, a 9% change in total contract value?

Yeah. And then maybe I don't have the right figure. So I had 8.7% for this quarter versus [72] a year ago?

Yes, actually, I'm not sure, because we actually a year ago, June 30, we were at about $65 million in total contract value. So we've actually -- that's grown about 20% year-over-year.

That helps my math dramatically. Thank you.

Yes, okay. Thanks.

Thank you for your question. Mr. Hays, it appears that there are no further questions from our audience. I'll return the presentation back to you once again.

I'll just make a closing statement operator and that is I'd like to thank everybody on the call today. And as always, we look forward to reporting on our progress next quarter. Thank you.

Thank you, Mr. Hays. Ladies and gentlemen, that does conclude the conference call for today. We thank you all for your participation and ask that you please disconnect. Thank you once again. Have a wonderful day.