National Research Corp (NRC) 2012 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the second-quarter 2012 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, August 8, 2012.

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

Thank you, Mary, and welcome, everyone, to National Research Corporation's 2012 second-quarter 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 we have discussed in the past, the statement empowering customer-centric healthcare across the continuum represents a vastly expanded strategy for NRC. I am excited to say the market's appetite for our product portfolio continues to accelerate.

New sales this past quarter were $6 million, the same sales numbers booked in quarter four of 2011, which at the time you will recall represented a Company record. This pace of new sales performance combined with enhanced renewal rates has now driven total contract value to $89 million.

Before we drive into this and other drivers of the business, let me have Kevin review our second-quarter financial performance.

Thank you, Mike. Revenue for the second quarter was $20.6 million, an increase of 13% over the second quarter of 2011. Revenue growth for the quarter was comprised entirely from organic growth, which was driven by a combination of continued gains in market share and vertical growth from cross-selling and increasing contract value in our existing client base.

As Mike suggested, the net new sales of $6 million were added, resulting in total contract value of $89.2 million as of June 30, 2012. As a result of our focus over the past several years of establishing renewable, recurring service arrangements with our clients, over 98% of that current total contract value is comprised of annual recurring revenue agreements.

We also ended the quarter with subscription-based agreements representing 75% of contract value, compared to 64% of contract value at the end of the second quarter of 2011. Subscription agreements also generated 75% of total revenue for the second quarter of 2012 and on a year-to-date basis represent 71% of our total revenue in 2012.

Total operating expenses for the second quarter increased by 6%, from $14.5 million in 2011 to $15.4 million in 2012. Within that, direct expenses increased to $8.6 million for the second quarter this year compared to $7.3 million for the same period in 2011.

This increase is a result of increased variable costs related to our revenue growth as well as additional investments in technology research and service resources to support our strategy of empowering customer-centric healthcare across the continuum. Direct expenses as a percent of revenue are expected to be at an average of 40% for the full year of 2012.

SG&A expenses decreased 7% to $5.6 million for the quarter ending June 30, 2012, compared to $6 million for the same period in 2011. Our selling, general, and administrative expenses decreased as a percentage of revenue to 27% compared to 33% for the same period in 2011 due to the leveraging of those expenses against our increased revenue growth. Our SG&A expenses as a percent of revenue are expected to be at an average of 28% for the full year 2012.

Our depreciation and amortization expense remained consistent at $1.2 million for the second quarters both in 2011 and 2012. And our depreciation and amortization expense is expected to remain at the 6% of revenue range for the full year in 2012.

The provision for income taxes totaled $1.2 million for the three-month period ending June 30, 2012, compared to $1.4 million for the second quarter in 2011. Our effective tax rate of 22.9% for second-quarter 2012 is lower than the 36.8% rate in the same period of 2011, primarily due to a reduction of state income taxes reducing current balances by $45,000, as well as an adjustment to deferred income taxes for $575,000 related to legislative changes. The effective tax rate for the remainder of 2012 is expected to be back in the 36.5% range.

Our net income for the second quarter of 2012 increased by 69% to $3.9 million compared to $2.3 million in 2011. And our diluted earnings per share for the second quarter increased by 67% to $0.57 per share compared to $0.34 for the same period last year. With that, I'll turn the call back to Mike.

Thank you, Kevin. As you can see we had a great quarter financially, driven by increased new business being generated as well as enhanced renewal rates, and clearly increased tailwinds associated with our product portfolio. At this point in time I would like to have Susan provide a few examples of where the new business is coming from. Susan?

Thanks, Mike. New sales for the quarter were derived from provider types and segments across the continuum, including children's hospitals; academic medical centers; national and regional healthcare systems, including for-profit and not-for-profit; as well as post-acute service providers. In addition, we expanded the spend from payer organizations.

Products purchased also varied and included offerings across our entire product portfolio, including consumer preference and brand equity; patient experience; health risk assessments; and Illuminate, our care transitions product.

New business in the quarter was a mix of new client wins against competitors such as Avatar, HealthStream and Press Ganey, with the balance being additional spend from current clients. For example, over $300,000 was from a new children's hospital client. NRC was chosen because of our Picker patient experience tool's direct alignment with CAHPS and the number of pediatric hospitals we work with.

Over $600,000 was from academic medical centers. In the academic world, NRC was chosen this quarter for products including Picker patient experience and Illuminate.

In the post-acute market, $530,000 in new business was booked from several assisted-living and nursing-home facilities, primarily for resident and family experience.

Large healthcare systems selected NRC in the quarter for patient experience and Ticker for a contract value of $850,000. In addition, a for-profit system purchased Illuminate for $145,000.

From the payer perspective this quarter we brought in $600,000 in new business, primarily to handle health risk assessments. I hope these examples have been helpful; and, Mike, I will now turn the call back to you.

Thank you, Susan. Very helpful. Thanks again.

As one can see from the examples Susan has just walked through, our ability to expand market share and cross-sell our installed base additional substitution-based products is working. In fact, average recurring annual spend for our acute-care clients that purchase more than one NRC product now stands at $207,000 annually, while clients that only purchase one offering averages $48,000. This fourfold increase or the simple math points to a minimum upside of $111 million for current products among current acute-care clients.

We also continued to deepen our footprint across the continuum and expand our share in the payer market. Both of these facts helped build a strong base for Customer Connect. Customer Connect, as we have touched on in the past calls, is the outcome of repurposing many of our current offerings to create a longitudinal lifetime profile of an individual, a robust profile of self-reported outcomes such as our patient experience toolset, which relates to care delivery, but also activities of daily living while that customer is now at home.

All of this brings greater visibility to providers about their customers which has never before been possible. As our clients take on more financial risk and seek to capture value-based purchasing dollars and avoid readmission penalties, they can never know too much about their customers.

Operator, now I would like to open the call to questions, please.

(Operator Instructions) Ryan Daniels, William Blair.

Yes, good morning, everyone. Thanks for taking my questions. Let me ask the first one just on some of the details you provided on the quarterly sales to the various entities in various types of products or service offerings.

Can you speak to traditionally how long it takes from making the sale before that revenue will actually show up in the income statement? I assume it varies by product, so you can either say on average or maybe go through some of the products and give us a view there.

Ryan, this is Mike. The best way to think about all new business that comes in is that we will recognize revenue ratably over the course of that annual contract, which on average will suggest that 50% of a year's worth of new business is recognized in that particular year.

So in the first quarter, as you might imagine, we have three additional quarters on which to recognize; so 75%-plus of that contract in Q1 would be recognized in that current calendar year. And then the subsequent ratability of revenue recognition would decrease proportionately for the subsequent quarters.

Okay.

So use a number of 50% and you will be within the ballpark.

So these are contracts. It's not like they might have been sold but they are not going to start until the end of the third quarter or during the fourth quarter. They typically -- once they are sold, they're going to start pretty quickly?

Yes, there might be some, but that would be a rare occurrence. Usually they start upon contract sign. There may be a little bit of a setup time, but essentially they are current period.

Okay. Yes, that is what I wanted to clarify. Then maybe one for either you or Kevin. Obviously, great sales. Some of that may have been later than originally anticipated. I'm curious if you think if your revenue outlook for the year -- if the sales have come heavier in the second quarter, does that bring you down towards the 15% level versus 15% to 20% guidance you were thinking about? Is that a fair way to think of it?

I would say so, yes.

Okay. Then two maybe more broader ones. You highlighted Illuminate both on the call and in the press release. I am curious in a couple regards there.

Number one, what does the pipeline look like heading into the value-based purchasing initiative? I know you talked about that as a way to improve HCAHPS scores and satisfaction.

And then number two, you also talked about the need to enhance it a little bit more from an IT perspective on the avoiding readmission front, to also help with that. So could we get an update on both of those fronts?

Sure, this is Mike again. Illuminate has taken off, as you can see, a fourfold increase in contract value over the course of the last 12 months with a disproportionate amount of that more recently than earlier. As you suggested, the product originally was intended to deal with avoidable readmission solely. But we found a byproduct or what is actually becoming a primary product benefit, that being value-based purchasing and increasing the publicly reported CAHPS scores.

And that really is the tailwind we are seeing for that product. We have not retooled it to address the avoidable readmissions in a stronger proof point basis as of yet, but are working on that.

So we would see that today in the current pipeline in any way being on the value-based purchasing side as its benefit, versus the avoidable readmissions. But it is building significantly.

Okay, very helpful color. Then maybe the last one, just remind us. It sounds like renewals also were quite strong during the period.

I am curious what the average term of the renewal is. I know some of your peers in the industry -- and it looks like they're going from a one-year renewal to a multi-year renewal. I am curious if you've debated that internally and what the average renewal term is, if it is one year or more than that. Thanks.

Hi, Ryan. This is Kevin. Most of our agreements have traditionally been annual agreements with an annual anniversary date or renewal. We are moving to multi-year agreements. I don't have an exact breakdown of the average age of our complete base, but more and more we are moving to multi-year agreements.

But as you know in our current contract value we always count 12 months' worth of revenue. So even though (multiple speakers) we've got more and more multi-year agreements, the majority are still annual, but that multi-year is a direction we are moving.

Okay, perfect. Very helpful color; and congrats again on the very strong sales in the quarter.

Frank Sparacino, First Analysis.

Hi, guys. Susan, I just want to go back to your comments and maybe Kevin and Mike as well, just around the mix between the new business versus existing clients. I don't know if you can give us a better sense as to what that mix is in the current quarter, and if that's any different than what you have seen historically or what you expect going forward.

You know, it's probably pretty close to historical rates of 50-50.

There is really no reason to assume that would change anything based on what we know.

Right.

Okay. Then, Mike or Kevin, just on -- I think the statistic you threw out around the $207,000, I just want to understand that figure again, if you could just define that for me.

Frank, this is Kevin. So within our acute-care client base we have multiple products. And of the clients that are buying more than one product, their average contract value in the amount of business that we do with them each year is $207,000.

For the clients that are only purchasing one product the average contract value is the $48,000. So that is the distinction, where we see as clients move into that multi-product category, there is a significant increase in the book of business with that client.

Okay. Can you just talk about the way the salesforce is aligned today in terms of trying to increase that wallet share within the base versus new activity?

The salesforce that we currently have and pretty much historically has followed this suit -- is that the sales associates are responsible both in terms of new logos as well as increasing share of wallet among current installed base. The mix of business, as Susan suggested, is roughly 50-50; might be 60-40 in a particular quarter.

The orientation of the sales associates is that their commission is based on the incremental increase over price of current contract spend. So they are incentivized to focus on cross-selling and upselling current clients multiple products.

That traditionally happens at renewal, although it is not limited to that particular time frame. But disproportionately in and around an annual account review will be a set of needs assessments and inquiries to the client organization to better understand how they are solving business problems outside of whatever our current offering is that they are purchasing. Hopefully that leads to dialog and a sale, or an upgrade, or cross-sell to that current client.

Parallel to that, within that geographic area to which the sales associate is focused on, they routinely are traveling to that geographic territory and knocking on doors of new organizations.

Great. Maybe lastly, Mike, when you look at the net new sales this quarter and the strength there, are there certain things you would attribute that to? I mean, in terms of the new messaging and perhaps how the employees have responded to that and the message resonating with the client base as well, is there anything you would specifically cite in there?

I would like to think it is all about new messaging. But we just rolled that out so my best guess is that will take yet another lifetime to get established.

I think that the real power is coming through the tenure and increased sales productivity of the sales associates. So of the 68 sales associates that we currently have, 23 of those individuals are from zero to 12 months in terms of tenure, that average far less sales productivity than those that are in each of the other subsequent 12-month buckets.

So if you simply age our sales associates' tenure, the increased experience that they have with the organization, with the industry, and with our products clearly is paying off handsomely. So I think that the messaging and Customer Connect and the longitudinal profile of the individual customer will help provide a basis on which an overall or overarching sales pitch can be communicated. I think it really is the skills of our sales associates that's doing the heavy lifting today.

Just as a follow-up on the 68 figure, can you provide what it was over the last couple of quarters? Has that grown?

Do you have that, Kevin, by chance?

Yes, Frank, this is Kevin. A couple quarters back, that number was slightly lower, 64. So I think if you go back the big increase is from where it was a couple years ago, where it was actually in the 40s.

So most of the buildup was coming into this year or into the middle of last year. So we have been in the -- we were at 64 a couple quarters ago. We're at 68 right now.

Thank you, guys. Nice job.

(Operator Instructions) Ryan Daniels.

Hey, guys. Two more quick ones if I could. Number one, I am just curious with the publicity the health insurance exchanges are getting post the Supreme Court upholding of the law, is that an area where you see room for future growth for the organization, be it from health risk assessments which may be required as part of that, to also maybe working with providers and insurers to give them more information on the end-market consumer that might be buying insurance on the exchange?

Ryan, this is Mike. You hit it on the head. The upside opportunity is if the states write in similar requirements as the Feds did on Medicare Advantage, health risk assessment.

So as you might imagine a health exchange wanting to have a pretty good assessment to triage new members from in the health exchange into some intervention program to avoid the claims. And obviously they won't have the retrospective claims data to power up the analytics.

So, assuming that metric or tool is embedded, which many are starting to discuss, it clearly broadens the opportunity for health risk assessments. And we see that contracting potentially with the individual state authority.

But as you also know, some of the state exchanges are actually going to be managed by predominant health plans. So to the degree that we have a relationship with a large payer, that we do health risk assessments for their Medicare Advantage, if in fact there is a requirement in a particular health exchange for that same dynamic or same metric, theoretically one could see us being ported over to that book of business.

We are seeing that in a little bit different fashion than a health exchange, where our current Medicare Advantage payer clients are contracting with states to essentially create a managed Medicaid population for all the reasons that you can imagine, state budgets, etc., the success of Medicare Advantage.

And that health risk assessment tool has been ported over. In fact, I believe it was that situation exactly this quarter that, Susan, represented an increase in health risk assessments from the payer community; if I am not mistaken it was that environment or situation that created that opportunity. Is that right, Susan?

Yes.

Okay. So a long way to say yes.

It's very helpful color though. It seems like a big opportunity given your leadership position there.

And then the final one, I think this may have been Kevin, you mentioned it talking about the salesforce. But you referenced the term Customer Connect, and I don't know that I am familiar with that. I apologize if you have talked about it in the past.

But is that a new program to outreach with your customers or a Web-based customer portal or anything? Just any more color on that might be helpful.

Ryan, it is pretty much an internal working name that we are using, Customer Connect. Really it is repurposing current products to connect to one another to create a longitudinal profile on an individual.

So just very briefly, we do Picker patient experience type work, where we will interview an individual relative to their care experience at point-of-care. And we subsequently, again, as you know and we just discussed, do health risk assessments.

We have a product called Healthcare Market Guide, which you know well, that deals with brand equity and preference. If you can imagine the same individual having a record or a profile that has embedded within that data from every one of our products, Customer Connect will create a cumulative benefit of the provider or payer organization simply knowing more about their customer.

So it is not so much a new product as much as it is repurposing with an analytical layer on top of existing offerings. But more importantly, connecting them together to create one integrated offering versus what historically has been separate single-purpose applications.

Okay. So it's exactly what you have been talking about, as the move towards consumer-centric care. It's kind of your internal vision of creating that profile. Perfect.

To Frank's point, the terminology is not embedded, so it is our sales associates that are doing all the heavy lifting.

All right, fair enough. Thanks guys.

Thank you. Mr. Hays, I am showing no further questions at this time. I will turn the conference back to you.

Thank you. And just to summarize, let me say thanks for everybody for joining us today. We have a lot going on, and we look forward to communicating our progress next quarter. Thank you.

Thank you. Ladies and gentlemen, that concludes our conference call for today. We thank you for your participation and ask that you please disconnect your lines. Have a good day.