National Research Corp (NRC) 2011 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the National Research Corporation third-quarter 2011 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 2, 2011.

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

Thank you, Frank, and welcome, everyone, to National Research Corporation's third-quarter 2011 conference call. My name is Mike Hayes, the company's CEO. And joining me on the call today are Susan Henricks, President and Chief Operating Officer and Kevin Karas, our Chief Financial Officer.

Before we continue, 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 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 mentioned in our earnings release, I'm excited to announce that the company has just been awarded a major new contact. I want to congratulate the entire team of NRC associates that brought to life the value we have to offer which resulted in a unanimous decision to select National Research Corporation over other competitors. This win is yet another example of accelerated demand for our cross-continuum product portfolio, in part driven by the changes imposed by health reform.

Before I add color to these trends and speak to some strategic changes for the company, I will ask Kevin to review our third-quarter financial performance. Kevin?

Thank you, Mike. For the third quarter, we were able to continue our trend of double-digit revenue and earnings growth. Revenue for the quarter was $18.5 million, an increase of 16% over the third quarter of 2010. Net income for the quarter increased by 24% to $2.6 million.

Our revenue growth for the quarter was comprised of growth from the OCS acquisition, combined with organic growth from further gains in market share, increased pricing from conversion to our enhanced subscription offerings and vertical growth in our existing client base from cross-selling activities.

We ended the quarter with total contract value at $80.8 million with subscription-based agreements now representing 70% of our Total Contract Value.

Subscription agreements generated 69% of our revenue for the third quarter and on a year-to-date basis, represent 60% of our total revenue. That compares to 32% of total revenue for the full year in 2010.

Total operating expenses for the quarter were $14.3 million compared to $12.5 million for the third quarter of 2010. We were able to leverage our revenue increase for the quarter relative to operating expenses and realize a 1% improvement in our overall operating income margin over the same period last year, increasing the margin to 23% of revenue.

Direct expenses for the quarter were at 40% the revenue compared to 38% of revenue in the third quarter of 2010. On a year-to-date basis for 2011, our direct expenses have decreased to 38% of revenue compared to 39% in 2010. And for the full year 2011, we expect direct expenses to be at 37% of revenue.

Our selling, general and administrative expenses for the third quarter were $5.6 million, an increase of $300,000 compared to the same quarter in the prior year. This increase is a result of higher sales commission expense and some additional OCS expenses.

SG&A expense as a percent of revenue decreased to 30% in the third quarter compared to 33% in the third quarter 2010, reflecting the leverage we're realizing from revenue from new sales that have been generated in prior quarters.

For the full year of 2011, we expect SG&A expenses to be 31% of revenue, which is an improvement of 1% compared to 2010.

Our depreciation and amortization expense for the quarter was $1.3 million or 7% of revenue compared to $1.2 million in the third quarter of 2010. The full-year expense for 2011 is also expected to remain at 7% of revenue.

Our second-quarter income tax expense increased from $1.2 million in 2010 to $1.5 million in 2011, driven by our higher earnings. The effective tax rate for the third quarter of this year remained consistent with the third quarter of 2010 at 36%.

Diluted earnings per share increased 22%, $0.39 for the quarter compared to $0.32 in the same period of last year. And finally our cash flows from operations for the third quarter were at $6.1 million compared to $3.2 million for the third quarter of 2010. With that, I'll turn it back to you, Mike.

Thank you, Kevin.

As just reviewed, third quarter represented continued growth for the company. New sales, revenue, income, and earnings per share all were showing material growth, and fourth-quarter performance to date suggests a very nice finish to the year 2011.

Several reformulated factors are contributing to this increased growth trajectory. Two of the most important are, one, consumers are becoming more informed and central to care decisions, which drives demand for our products that help clients understand and stay close to their customers. And two, reform is shifting the health care provider business model from volume to value, where reimbursement is based upon bundled payments for services across an episode of care.

The ability of a health care system to excel at integrating and coordinating patient care within and between care settings and to remain accountable for that customer beyond the care event itself will become the deciding factor between health care organizations that flourish or fail.

In order to flourish, it is our view that the industry will increasingly shift its business to firms that help them integrate, understand, and improve the cumulative value they provide to customers across the continuum even to the point of extending the value provided outside the traditional four walls of care settings.

In order to capitalize on this opportunity, we will be evolving our strategies. As you know, over the past few years, the company has successfully bundled product offerings under our subscription-based pricing, largely designed for individual care settings. This strategy will now evolve to bundling of products more tightly within a care setting, such as acute care, as well as across care settings, for example, home health and long-term care.

Our goal is to provide our integrated health care system clients with a seamless integrated way to measure and improve performance and stay connected to their customers over time. No other organization has the capabilities and product offerings to meet this new reality of health care delivery across the continuum.

One of the first benefits of this strategy will be the enhanced ease which we can cross sell our portfolio across our current user base of 2500 acute care hospital clients and 10,000 post acute care facilities.

We believe that cross-selling momentum we have seen gain traction from the first quarter this year through and including the third quarter will accelerate.

Another benefit is gaining market share. Net new contracts have increased 36% the past four quarters over the prior same period, from an absolute dollar value of $14.2 million to $19.3 million. Subscription offerings were largely the driver of this growth. And as we bundle the value across continuum, we anticipate even greater market share acceptance, not unlikely what we saw with a large new client that clearly saw the value of a more integrated offering.

Before I open the call for questions, I would like to welcome all new associates that joined NRC in the third quarter.

To further provide perspective as to the level of talent we are attracting, let me highlight Heather Dawson and Paul Cooper.

Heather joined National Research Corporation Canada as Vice President of Service and Operations. Heather adds great health care experience to the NRC team, given her positions with the Health Council of Canada and the Canadian Institute for Health Information, among other health care providers and associations.

Paul Cooper has relocated to our home office in Lincoln, Nebraska, to join NRC as Vice President, Application Development. Paul has a wealth of experience that will clearly enhance how technology enables NRC product offerings after having done the same for many years at Garmin International. Welcome Heather, Paul, and all other new associates. Frank, I would now like to open the call to questions.

(Operator Instructions). Ryan Daniels, William Blair.

Good morning. It's Kristina Blaschek for Ryan today.

I guess to start, can you share with us some more color on the large health care system client that was awarded to you in October? I guess specifically, if you could share any details about the competitive process and whether or not this customer previously used services from one of your competitors, that would be really helpful.

Well clearly it was a hotly contested contract. And I don't know exactly, but I know of several major competitors that were at the table of both the incumbent as well as other organizations such as ours that had not done historical work with them.

Okay, great. That's helpful.

And then I guess moving on to like maybe more kind of bigger picture, can you talk about HCAHPS and the growth from that? Is it still growing or are you starting to see some tapering back of it? Just curious about any color you can share.

I think growth relative to HCAHPS within the acute care setting has pretty much leveled out. Most all hospitals that are going to do it are doing it. And the growth we saw from those that were doing it internal have migrated to outsourcing. So I doubt whether there is material increase in size and market relative to HCAHPS within the acute care hospital setting.

That said, the standardization of CAHPS experience measurement across other care settings has accelerated. As you know, approximately a year ago, a little over a year ago, home health CAHPS was mandated, and that increased significantly the spend against measuring patient experience among home health care agencies.

We anticipate that the CAHPS type standard experience measurement would also migrate to medical groups and possibly even long-term care. So within the acute care setting, I think it's pretty well taken its run. But within other care settings, it's just beginning.

Okay, great. That's really helpful. And then I guess one final question. As part of your growth strategy, can you maybe talk a little bit about acquisitions or investments in firms providing product services or technologies that complement NRC? And how big of a part of your growth story are acquisitions or investments to you guys?

Well, as we have stated before, acquisitions are the third leg of the stool, albeit a distant third. Acquisition of new clients in terms of gaining market share and increasing spend within our current installed base are number one and two.

When we do come upon a particular organization that fits well and enhances the value we can provide our clients, we clearly pursue that. We will actively review and look at organizations and products and services on an ongoing basis.

That said, there is nothing in the works as we speak today. But it will remain a distant third in terms of levers that we can pull to drive our growth.

Okay, that makes sense. Thanks for all the color today. Congratulations on a nice quarter.

Frank Sparacino, First Analysis.

Mike, maybe to start on the large contract, can you just share the primary driver for that contract in terms of what area, what products, really drove that decision? And then also, I assume there were multiple products being sold into that account, but any more detail would be helpful.

Frank, this is Mike. It was a bundled offering and did touch upon products and services we have across the continuum as well as within and outside the patient experience measurement aspect to include physician, employee, discharge, etc.

I can't speak for the client, but from our lens, clearly, the value proposition of bundling all those together, albeit at a fairly aggressive price point, meaning we didn't win it on price, created exponential value in comparison to any individual other competitor that can only offer one part of that pie. So I think it's the aggregation of the products and services and the cumulative value that represent it.

Okay. And then in terms of the comment around the cross sell momentum from Q1 to Q3, is there anything you can share from a quantitative perspective?

Yes, Frank, this is Kevin. On a year-to-date basis, what we are tracking is our number of clients that are engaged with us in more than one product, on multiple products. And that number of clients has grown year to date by 38%. So, we are seeing some solid growth in that portion of our client base that is going from one product to more than one product.

Okay. And maybe lastly, just from a contract value perspective, if I look at the 8% year-over-year growth, can you shed some color on how that growth sort of varies by the different product segments categories, to get a sense, what has particular strength or any particular weakness in the quarter?

I don't have that in front of me, Frank, so I don't know if I can speak to it specifically, but there was growth across all product or applications. NRC Picker and -- probably lead the pack, I would guess. Kevin, is that true?

Yes. It would have had the strongest.

But all came right behind that, so I don't have those exact numbers, but I think it's a collective portfolio.

In fact, on a going-forward basis, I think you can see where that question is going to become harder and harder to answer where we -- or as we start to incorporate our various applications into one integrated offering.

Sure. And I apologize, one last thing I just realized. In terms -- and maybe I missed this, Kevin, but in terms of the guidance for the year, the $165 million, is that unchanged or where are we at today?

Well, Frank, we still expect to meet or exceed that guidance that we established earlier in the year, so that's where we are today.

Great. Thank you, guys.

(Operator Instructions). Mr. Hays, there are no further questions at this time.

Thank you, Frank, and thank you, everyone, for your time today. We look forward to addressing our performance for the year end on our next earnings conference call. Thank you very much for your time.

Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and have a great day, everybody.