National Research Corp (NRC) 2014 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the first-quarter 2014 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, May 7, 2014. I would now like to turn the conference over to Michael Hays. Please go ahead, sir.

Thank you, Kelly. Welcome, everyone, to National Research Corporation's 2014 first-quarter conference call. My name is Mike Hays, the Company's CEO. Joining me on the call today is Kevin Karas, our Chief Financial Officer. Before we continue I would ask Kevin to review the conditions related to any forward-looking statements that we 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 will turn it back to you, Mike.

Thank you, Kevin. Again, welcome, everyone. As many of you know, my focus is all about top-line growth. This last quarter we were only 98% of plan. That said, it's comforting to have a business model that enabled record earnings growth on modest revenue growth. Before I continue and go into some more of those details, I will return the call to Kevin for his review of the first quarter financial performance.

Thanks, Mike. Our net new sales of $3.3 million were added in the first quarter of 2014 including $127,000 of net new sales for Customer Connect. Total contract value at the end of the first quarter was $99.4 million, which includes a $784,000 of total contract value for Customer Connect. The decrease in total contract value in the first quarter was driven by a combination of both lower net new sales and an increase in negative contract value changes. Compared to the first quarter of 2013, decrease in net new sales in 2014 was primarily in the acute care experience in health risk assessment offerings area. The decrease in new sales is attributed to timing differences related to unexpected delays in closing of certain new agreements in the first quarter of 2014, some of which have already closed in the second quarter.

The primary driver in lower contract value is really the decline in health risk assessments. While we have not experienced any lost clients, there has been significant reduction in level of overall spending in this segment due to uncertainty of legislative changes to reimbursement for the Medicare Advantage programs that these clients provide to their enrollees.

Revenue for the first quarter of 2014 was $26 million, an increase of 5% over the first quarter of 2013. Revenue growth for the quarter was comprised entirely from organic growth. First-quarter 2014 results included $123,000 of revenue from Customer Connect.

Our consolidated operating income for the first quarter of 2014 was $8.4 million or 32% of revenue compared to $7.2 million or 29% of revenue for the first period last year. The 2014 first-quarter consolidated operating income includes $331,000 in operating losses from Customer Connect. So the operating income for the first quarter without the Customer Connect losses was $8.7 million, which represents a 34% operating income margin and an increase in operating income of 21% over the first quarter of 2013. Our total operating expenses for the first quarter decreased from $17.7 million in 2013 to $17.6 million this year.

The direct expenses increased to $10.3 million for the first quarter compared to $10.2 million for the same period in 2013. Direct expenses as a percent of revenue were 40% for the first quarter of 2014, and we are expecting those to average 41.5% of revenue for the full year in 2014.

The selling, general, and administrative expenses decreased to $6.4 million or 24% of revenue for the first quarter of 2014 compared to $6.5 million or 26% of revenue for the same period in 2013. First-quarter 2013 expenses did include $335,000 of cost related to the recapitalization that we consummated in May last year. The SG&A expense for the first quarter of 2014 without Customer Connect was $6.0 million or 23% of revenue. Including the incremental expenses that are projected to be incurred for Customer Connect resources for the remainder of the year, our consolidated SG&A expense is expected to average 26% of revenue for the full year of 2014.

Our depreciation and amortization expense for the first quarter was $935,000 compared to $950,000 in the first quarter of 2013. The decrease is attributed to declining intangible amortization asset expenses. Our depreciation/amortization expense was 4% of revenue for the first quarter and is also to be expected to be approximately 4% of revenue for the full year of 2014.

Our provision for income taxes totaled $2.9 million for the first quarter of 2014 compared to $2.7 million in the same period for 2013. The effective rate for first quarter was 34.6% compared to 37.3% for the same period last year. The effective tax rate is expected to decrease to an average effective rate of 35% for the full year of 2014 as a result of reduced expense from state income taxes related to legislative changes.

The net income for the first quarter of 2014 increased 22% to $5.5 million compared to $4.5 million in the first quarter of 2013. For the first quarter of 2014 our combined non-GAAP diluted earnings per share was $0.22 compared to $0.18 for the first quarter of last year. With that, I will turn the call back to Mike.

Thank you, Kevin. Let me provide a couple quick comments before we open the call for your questions. Primarily, as we look over the next several years we see healthcare providers continuing to place increased value on the voice of the customer. Clearly, some of this attention is driven by various regulatory requirements. However, managing risk in the world of a shifting payment from volume to value requires continuous understanding the customers' health behaviors and preferences. Organizations like ours that provide innovative ways to listen to the customer, combined with analytics to predict risk and tools to engage customer so as to mitigate that risk, will be the winners in what we see as a much expanded category of spend.

The other critical component of our success will be the knowledge across the entire care continuum. As we all know, the lines defining care settings are vague. The patient journey across the various settings even for one episode of care is key to understanding healthcare from the customers' perspective. We are the only provider that I'm aware of with the material footprint across the entire continuum, which at point-of-sale positions us well on a going forward basis. This combined with additional investments in innovative and disruptive offerings like Connect suggest a very interesting set of opportunities as we look forward to next coming years.

With that, Kelly, I would like to open the call to questions.

(Operator Instructions) Jeff Garro with William Blair & Co.

I was hoping you could give a little more color on what caused the weaker net new sales and contract value result in Q1 and maybe more specifically what is driving weakness for the acute care experience.

This is Kevin. Not a whole lot more to add to the comments. It really came down to delays in closing several acute care experience agreements that we were working on in Q1, again, some of which have already closed in the second quarter. And probably the bigger impact was the reduction, some negative contract value changes or down sales in our health risk assessment area combined with the fact that we really didn't generate any net new sales in the health risk assessment segment as well. So the weak new sales and the overall reduction in contract value were primarily focused in those two areas.

Got it. And then beyond the deals that were delayed and have since closed, is there anything that you can point to in the first month or so of Q2 that shows a rebound so far?

Well, I know that in terms of the case during the quarter of how contracts are signed, we are running ahead of where we normally would. So it's still early in the quarter, but so far we are running ahead of where we would expect.

Great, great. And then with the weakness you've seen in HRA-related revenue and sales, do you have the number on hand that would tell us what the quarterly revenue growth would be if we excluded HRA-related revenue from both the current and prior period?

I don't have that calculated right offhand. I do know that the growth rates that we quoted in the press release -- we really track the growth rates on a trailing 12-month basis. So those are those trailing 12 months. The HRA business was down in that period 24%. So it did have a fairly significant impact on the overall growth rate.

That's helpful. And then one last question. In Q4 you know that you had saw positive revenue growth for the post-acute segment, and I believe that was the first time revenue growth had switched over to positive for that part of the market. So, I wanted to ask if that momentum had continued at all in Q1.

The pipeline in post acute is actually up significant, even over and above where it was on Q4. The actual revenue in quarter one was up slightly, but we do see a momentum in terms of traction and growth in that particular segment increasing. So yes, the momentum continues.

Great, thanks for taking the questions, guys.

(Operator Instructions) Frank Sparacino with First Analysis.

Maybe just going back to the delays on the acute care side, it doesn't sound like you are particularly more concerned about the environment in 2014. It sounds more like typical timing delays. But I just wanted to confirm that.

Yes, I don't think there's anything from an environmental standpoint or competitive landscape perspective that has changed or have any real relevance to lower net new sales in the first quarter. So, I think the opportunity is as robust as ever.

And just going back, Mike, to, I think, you had commented on the vision in terms of predicting risk and then being able to mitigate risk. When you look at the solution set today, how much of that vision can you guys deliver on today? And what are the missing pieces?

Anything and everything about the voice of the customer we are well suited for and positioned. As you well know, we not only collect the voice of the patient relative to their experienced setting, but we have a wealth of information relative to health behaviors and preferences of the community at large. So not only about people when they are in the care setting inside of the four walls of hospital, for example, but also just the population propensity and risk that exists in any defined population, we are well equipped there.

I think adding analytics that are far more predictive is really where our clients want to be. It's not about looking in the rearview mirror and wondering what happened yesterday but rather predicting on the defined population what's going to happen tomorrow. We are bolstering our expertise in that particular area.

And then perhaps even most importantly is the fact that our client base and I think the leaders in the industry, healthcare leaders in the industry, really are tired of looking at data on individual silos when they are organized across the continuum. So this notion of a longitudinal patient journey I think really is the point of differentiation, and we are working very hard on that as we speak.

It doesn't sound like there's any real change in expectations for Connect this year, either from a revenue or expense standpoint?

No, I think we are on plan. And so far, so good. But it's early in their career. Right?

True. And just one last thing -- I think you said you are 98% of plan for the quarter from a revenue standpoint. But obviously the net new sales were much lower than expected. I assume when we look at the full year now, the health risk assessment business is going to be weaker than we expected maybe 90 days ago and that should probably be reflected in our models. Is that fair?

This is Kevin. That's a fair point, although the majority of the shortfall that -- we will see the biggest impact in Q1 because of the seasonality of that business. So there will be some impact in the other quarters but the largest impact from that reduction in health risk assessment contract value was realized in the first quarter.

Okay. Thank you, guys.

And to go back, by the way, back to Jeff's question, I did recalculate our growth rate. So the health risk assessment on a -- it's about 3% drag on our overall growth rate, if you pull that out and look at the rest of the business. [So that] 5%, it will be closer to 8%, just to go back to Jeff's point earlier.

Thank you.

Peter van Roden with Spitfire Capital.

Just a quick question -- you guys did a little bit better on the direct costs this quarter, and it looks like you expect to do better than you had thought for the full year. What have you been able to do to help that line item? And where can you see it going a couple years out?

Peter, this is Kevin. There are really three items that drove the improvement in the first quarter. The first was we did see a slightly improved mix in terms of higher percent of our revenue came from our higher-margin offerings. Specifically, market insights and Connect. That may or may not be sustainable. Again, that will depend on how our mix of revenue quarter to quarter. But those are two of our higher growth offerings right now. So that may continue.

The second is that we were able to negotiate -- we work with third-party partners to provide some of the services in our outreach, in terms of how we collect data. We were able to negotiate some significant savings, which that will be a permanent improvement in our direct expense.

And then, I think, thirdly we saw efficiencies in our survey operations area. And that did help lower our cost, improve our margin. And we think that's sustainable. So all in, we are expecting for the full year to see some improvement over last year and to be in that 41.5% range.

Okay, that's all I had. Thanks, guys.

(Operator Instructions) We have no further phone questions at this time.

Thank you, Kelly. And thank you, everybody, for taking the time to listen to our progress this past quarter. Kevin and I look forward to reporting our progress next quarter as well. Thank you.

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