National Research Corp (NRC) 2015 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the fourth-quarter 2015 earnings release conference call. (Operator Instructions) As a reminder, this conference is being recorded Wednesday, February 10, 2016.

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

Thank you, Tia, and welcome, everyone, to National Research Corporation's fourth-quarter and year-end conference call. My name is Mike Hays, the Company's CEO, and joining me on the call today is Kevin Karas, our Chief Financial Officer.

Before we 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. Our 2015 financial performance can be summarized as strong new sales across our core portfolio of products, offset by reductions in contract value in our health risk assessments and home health offerings, which resulted in single-digit top-line revenue growth for the year 2015.

Let me have Kevin dig into the fourth-quarter and year-end results before we turn towards the year ahead. Kevin?

Thank you, Mike. Net new sales of $6.4 million were added in the fourth quarter of 2015 compared to $6.5 million in the fourth quarter of 2014. Over the most recent four quarters, our net new sales have totaled $24.1 million compared to $22 million for the previous four quarters, an increase of 10%.

Our total contract value for the fourth quarter 2015 ended at $110.2 million, which includes a decrease in contract value of approximately $2.3 million resulting from our clinical workflow product divestiture. Subscription-based agreements grew and represented 89% of our total contract value at year end.

Fourth-quarter 2015 revenue was $26.4 million, an increase of 5% over the fourth quarter of 2014. Consolidated operating income for the fourth quarter 2015 was $7.7 million or 29% of revenue compared to $6.4 million or 26% of revenue for the same period last year. Total operating expenses for the fourth quarter remained the same, at $18.7 million in both 2015 and 2014.

Direct expenses increased to $11.4 million for the fourth quarter of 2015 compared to $10.8 million for the same period in 2014, primarily attributed to increased variable direct expenses as a result of our revenue growth in the quarter. Direct expenses as a percent of revenue for the fourth quarter were 43% both in 2015 and 2014. Direct expenses for the full year of 2015 ended at 43.6% of revenue and are expected to decrease to 43% of revenue for the full year in 2016.

Our selling, general, and administrative expenses decreased to $6.3 million or 24% of revenue for the fourth quarter 2015 compared to $6.9 million or 27% of revenue for the same period in 2014. SG&A expenses were 26.8% of revenue for the full year in 2015, and they are expected to be 26% of revenue for the full year of 2016.

Depreciation and amortization expense for the fourth quarter was $1 million and represented 4% of revenue both for 2015 and for the fourth quarter of 2014. Depreciation expense as a percent of revenue is expected to continue at approximately 4% of revenue for the full year of 2016. Our other income in the fourth quarter of 2015 included a $1.1 million gain from the sale of our clinical workflow product in December.

The provision for income taxes totaled $2.8 million for the fourth quarter of 2015 compared to $2.3 million for the same period in 2014. Our effective tax rate was 32.4% in the fourth quarter compared to 35.7% in the fourth quarter of 2014. The decrease in the effective rate was due to the favorable impact of a reversal of a capital loss valuation allowance in the fourth quarter that was recorded earlier in 2015. The effective income tax rate for the full year of 2015 was 35.6% and it's expected to remain constant at 35.6% for the full year of 2016.

Net income for the fourth quarter was $5.9 million in 2015 compared to $4.1 million in 2014. And our combined non-GAAP diluted earnings per share were $0.24 in the fourth quarter of 2015 compared to $0.17 in 2014.

With that, I will turn the call back to Mike.

Thank you, Kevin. Let me make a few comments before we go to your Q&A session. Notwithstanding our single-digit top-line revenue growth for the year 2015, which we are all aware is far below our desired performance, we feel our core business is performing very well. The basic contracts value going into 2016 is largely comprised of our core product portfolio, and our exposure to our nonperforming products have been minimized.

By all indication, the market dynamics remain highly favorable for our product portfolio and as well, our offerings remain highly differentiated at point-of-sale. We are providing material capital against ensuring that that uniqueness remains far ahead of all others.

We continue to enjoy a enviable business model of recurring revenue and expanding margins, which generates material free cash flow from which we will continue to invest in our future and provide returns for our shareholders.

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

(Operator Instructions) Ryan Daniels, William Blair.

Good morning, guys. Thanks for taking the questions. Mike, just a follow-up for you on the weakness you are seeing in the health risk assessments and some of the home health business. Can you offer a little bit more color on what's driving that? I'm curious if it's anything particular to those end markets or if it's just a de-emphasis internally. That's question number one.

And then number two, maybe a little bit better feel for as we look for 2016 what portion of revenue those two areas might contribute.

Okay. Let's handle them separate, because the drivers are a little bit different between health risk assessments and the clinical workflow product within the home health sector. First, within the health risk assessment, the headwinds that we experienced actually for the past few years is a declining enrollment for Medicare Advantage.

As you may recall, our health risk assessment product is sold to payers which have Medicare Advantage contracts. And depending upon the attractiveness of the reimbursement or the rates, we'll see Medicare Advantage enrollment increase or decrease.

Over the last couple years, it has decreased amongst our client base. And because that particular side of our business is transactional -- meaning the more enrollees, the higher the revenue; the less enrollees in Medicare Advantage, the lower the revenue -- we've been on the negative side of that particular picture.

So we have lost a significant amount of previous contract value over the last couple years because of Medicare Advantage, less enrollment amongst our clients. So pretty much market condition driven by reimbursement rates for the Medicare Advantage product.

Separate and distinct from that, we've had quite a bit of headwinds in the clinical workflow product, which is one of the products within the OCS business that we purchased several years ago. While the home health CAHPS business is fairly robust, the clinical side is not nearly as such. I think part of that is it wasn't really in our DNA to understand how to maximize revenue within that particular product, and that we had divested in December.

So we are out of that business, so obviously that will be a one-time step down in terms of contract value, which Kevin alluded to. But won't provide a negative pressure on revenue growth on a go-forward basis.

Right. Ryan, and this is Kevin. So to your second part of your question, at the beginning of 2015, the non--- what we call the non-core products, meaning HRAs and the clinical workflow product, those represented 7% of our contract value. So 93% of our contract value at the beginning of 2015 was for core products.

Beginning of 2016, those non-core products represent 2%. So we go into 2016 with 98% of our beginning contract value being comprised of our -- we call our core offerings.

Okay, that's very helpful. And then it sounds like some of your plans in particular pulled back on Medicare Advantage. Have you guys looked at trying to stimulate growth in that segment by selling more to providers? I know we are seeing providers across the country start to launch these plans. So I'm curious if that's a growth avenue or if it's just not an area where you are investing sales force dollars, given the momentum in some of your other product lines.

Good question. In fact, we are taking a pretty hard look at that. The health risk assessment does provide the ability to understand risk among the defined population. So if you think about accountable care organizations and even healthcare providers that have a large number of employees within their own employment base, obviously, they have the need to understand what that capitated audience really looks like from a risk perspective.

So we are toying around with how best to take that to market. And we're also trying to figure out whether there is an HRA product or an offering for state exchanges. As you know very well, Ryan, the risk of the payers this last year, they've lost hundreds and hundreds of millions of dollars taking on newly insured individuals without having the retrospective claims data. HRAs oftentimes can provide that kind of perspective and perhaps help them intervene sooner so as to minimize the loss.

So I think there's a couple of areas that might work for HRAs, but we don't have any of that baked into our plan for 2016. But we are taking a look at it.

Okay. That's helpful. And then, Kevin, a specific question on the balance sheet. It looks like accounts payable, you know, really jumped up in the fourth quarter. I think it jumped up about 3X versus normal levels. Was there anything in particular there or was that just some timing issues?

Included in there, Ryan, it's accounts payable and accrued expenses. So the major increase is related to the accrual for the special dividend that we announced in fourth quarter that was paid in January.

Got it. Okay, that's helpful. And then one last one, just maybe big picture as well. Obviously, a good year of net new contract sales in some of the core offerings. I'm curious if there is anything in particular there that's been resonating or drove that effectively double-digit increase in net new sales. Just some more color from you there. Thanks.

Thanks, Ryan. It was really across the board. We saw positive growth in all of the products to which we define as core. So I really can't single out any one over another. It seemed to be across the board.

Okay. Thanks, guys. I'll hop in the queue.

(Operator Instructions) It looks like there are no further questions. I'll turn the call back to you.

Thank you. Let me thank everybody for their time today. And Kevin and I, as always, look forward to reporting our progress next quarter. We'll talk to you then. 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.