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Executives

Michael D. Hays – President, Chief Executive Officer & Director

Patrick E. Beans – Chief Financial Officer, Vice President, Treasurer, Secretary & Director

Analysts

Christina [Blacksheek] – William Blair & Company.

National Research Corporation (NRCI) F3Q08 Earnings Call November 5, 2008 ET

Operator

Welcome to the National Research Corporation third quarter 2008 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 5, 2008.

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

Michael D. Hays

Welcome everyone to National Research Corporation’s third quarter 2008 conference call. My name is Mike Hays and the company’s CEO and joining me on the call today is Pat Beans, our Chief Financial Officer. Before we commence our remarks I would ask Pat to review conditions related to any forward-looking statements that may be made as part of today’s call. Pat.

Patrick E. Beans

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 provision 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 Security and Exchange Commission. With that I will turn back to you Mike.

Michael D. Hays

To kick off the call today let me say we had a good quarter both revenue and earnings came in ahead of where may have been without the increased contribution year-over-year from NRC Picker and the Governance Institute. Moving from our annual Healthcare Market Guide product which is delivered in the third quarter, to an ever increasing number of market guide clients upgrading to the ticker product has driven a portion of our market guide revenue to become reasonably recognized over the 12 month subscription period.

I am very happy to see that we can make such a positive change to the market guide product and still have a good third quarter. Before I add color to this success and dive into a few additional topics, let me turn the call back to Pat to review the quarterly and year-to-date financials.

Patrick E. Beans

For three months ending September 30, 2008, the company’s revenues were $13.5 million compared to $14 million the same period in 2007. For the nine month ending September 30, 2008, the company achieved revenues of $38.8 million compared to $38.1 million during the same period in 2007.

For the three month period ending September 30, 2008, net income from the company was $2 million or $0.29 per diluted share. Net income was 15% of revenue which is our model. For nine months ending September 30, 2008, net income for the company was $5.5 million compared to $5.7 million in the prior year. Both resulted in $0.81 per diluted share.

The Healthcare Market Guide new subscription base ticket product ended the quarter with a year-to-date increase of $2.1 million of new deferred revenue. Had these sales been from traditional healthcare market guide product it would have resulted in an additional $1.3 million of net income based on an effected tax rate of 38%, or an additional $0.18 per diluted share putting diluted EPS at $0.99 for the nine month ending September 30, 2008.

During the third quarter 2008, direct expenses as a percent of revenue were 49% compared to 43% in 2007. As we stated in the last call in August we divide our sales force in to two groups, one focusing on bringing in new clients and the second focusing exclusively on existing current clients. Starting in July, 2008 the associated expense for the sales group focusing exclusively on current clients are included in the direct expense instead of SG&A.

In addition, we had the cost of Healthcare Market Guide annual non-ticker deliverable for the last time in this quarter. During the third quarter 2008 the SG&A costs were down in total dollars to $3.1 million compared $3.2 during the same period 2007. The SG&A expense for the quarter were 23% of revenue, the same in 2007.

For the nine month period ended September 30, 2008 SG&A were 26% of revenue also the same in 2007. Depreciation and amortization were 5% of revenue in the third quarter 2008 compared to 5% in the same quarter 2007. Cash flows from operations for the third quarter was $4 million compared to $2.9 million in the same period in 2007.

Cash flows from operations for the nine months ended September 30, 2008 was $11 million compared to $10.4 million in the same period 2007. During the first nine months of 2008 the company’s notes payable decreased by $2.9 million. During the same time the company repurchased 293,686 shares of Treasury stock for $7.4 million at an average cost of $25.36 per share.

Cash and short term investments as of September 30, 2008 were $677,000. During the month of October, the company completely paid of the term loan from the May 2006 acquisition of TGI and currently has no outstanding bank debt. I’ll now turn the call back over to Mike for additional discussions.

Michael D. Hays

Let me touch on just a few points before we open the call for your questions. Net new sales for the third quarter were $2.7 million. Healthcare Market Guide contributed materially to this new sales number yet both the Governance Institute and NRC Picker added several new clients as well as upselling additional products and services to current clients.

Our sales performance for subscription based products increased 67% in the third quarter compared to a year ago. Year-to-date subscription based product sales have soared 170%. Given market demand for this portfolio of high margin products, we have and will continue to increase the size of the sales team for both Healthcare Market Guide and the Governance Institute.

Our patient experience measurement and improvement products are becoming even more important to the most senior management levels of Healthcare Organization given the new public spot light. As we forecasted, publically reporting of each half’s scores have increased resources focused against improving hospital’s performance. As value based purchasing becomes tied to improving the patient experience, we believe this trend will continue, if not accelerate.

On the economic front, we have seen no real changes on the number of days to decisions on new contracts nor have we seen any material push back to embedded price increase. As well, clients remain interested in broadening the relationship by purchasing more products and services from our company. In addition, renewal rates and accounts receivable are tracking to historical trends.

The one economic driving change that we are seeing is that it seems easier to find great talent at least in Lincoln. On our last call I reviewed our payer solution division and the declining enrolment in Medicare Advantage. I’m happy to report today that payer solution revenue has stabilized and the unit is profitable. Our new product development efforts remain a top priority for the organization and we have moved forward in enlarging the group of associates dedicated to that effort.

Several major new products across most all business units are in the final phase of market testing. We are looking forward to launching those that test out the best. Operator, I’d now like to open the call to questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Christina [Blacksheek] – William Blair & Company.

Christina [Blacksheek] – William Blair & Company.

I wanted to start off first with a question regarding the net new contracts of the $2.7 million during the quarter. Can you provide a breakout? I know last quarter you provided a breakout of net new sales based on Picker sales or Healthcare Market Guide or subscription based?

Michael D. Hays

Healthcare Market Guide net new sales for the quarter were – let me get the exact number for you here, $998,000. TGI which would be the other subscription based product is around $570,000 with the remainder in NRC Picker.

Christina [Blacksheek] – William Blair & Company.

Then for the Healthcare Market Guide, that $998,000 that’s all the new product, correct?

Michael D. Hays

Correct. [Inaudible] There may have been some of the classic annual deliverable in there.

Christina [Blacksheek] – William Blair & Company.

On the subscription base, do you have a dollar amount of what the new contracts for subscription based products was?

Michael D. Hays

I don’t have that added together. If you have another questions go ahead and ask it and I’ll get that number and before I end the call I’ll provide that.

Christina [Blacksheek] – William Blair & Company.

Moving along to the expense front, should we look at for example the uptick in direct expenses, I understand that has a lot to do with the repositioning of the sales force. Is that something in the 49% range that I should be looking at going forward?

Patrick E. Beans

No. It should be going forward combining the two groups together we should have a similar percentage but with the Healthcare Market Guide the balance of the – which is the last time we will have an annual subscription cost going through there is also part of that 49%.

Christina [Blacksheek] – William Blair & Company.

I mean is it far to say maybe coming back down towards a 45% level?

Patrick E. Beans

Yes, that would probably be correct.

Michael D. Hays

The one answer to your other question on the mix between subscription based and non-subscription based products on net new sales is roughly 55% subscription base and 45% non-subscription base.

Operator

Sir, we seem to have no questions at this moment. I’ll turn the call back to you.

Michael D. Hays

Just in closing let me thank you for your time today. We’re moving forward on several fronts and we’re trying to increase the growth rate as we do that. As always Pat and I will look forward to keeping you abreast of that progress and look forward to talking to you next earnings call.

Operator

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

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Source: National Research Corporation FQ08 (Qtr End 9/30/08) Earnings Call Transcript
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