National Research Corp. (NRCI) Q4 2008 Earnings Call February 11, 2009 11:00 AM ET
Michael D. Hays - Chief Executive Officer and President
Patrick E. Beans - Chief Financial Officer
Ladies and gentlemen, thank you for standing by. Welcome to the National Research Corporation Fourth Quarter 2008 Conference Call. Here in 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, February 11, 2009.
I would now like to turn the conference over to Michael Hays, Chief Executive Officer. Please go ahead, sir.
Michael D. Hays
Thank you, Alice. And welcome everyone to National Research Corporation's year-end 2008 conference call. My name is Mike Hays, the company's CEO and joining me on the call today is Pat Beans, our CFO. Before we commence our remarks, I'd 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
Thank you, Mike. This conference call includes forward-looking statements related to the company that involve risk and uncertainties that could cause actual results or outcomes to differ variedly 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 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'll turn it back to you Mike.
Michael D. Hays
Thank you, Pat. To commence the call today let me say that while perhaps untrue for many companies 2008 was a good year for National Research Corporation.
Our investments in new product development made over the past few years are paying off and contributed materially in 2008. As did our sales force that continues to retire at levels of per person productivity. We also added via merger a new revenue runway on December 19th which now places the company as the leader in the senior care provider markets. Before I add color to these and another topics let me have Pat provide a review of our fourth quarter and year-end financials. Pat?
Patrick E. Beans
Thanks Mike. For the three months end December 31, 2008 the company's revenue was $12.2 million compared to $10.8 million to the same period in 2007. For the 12 months ended December 31, 2008, the company achieved revenue of $51 million compared to $48.9 million the same period in 2007.
For the three months period ended December 3, 2008 net income for the company was $1.9 million or $0.28 per diluted share and was a 16% of revenue. This compares to net income for the same period in 2007 of $1.1 million or $0.16 per diluted share.
For the year ended December 31, 2008 net income for the company was $7.4 million or $1.09 per diluted share compared to $6.8 million or $0.98 per diluted share in the prior year. This is a 12% increase in earnings per share 2008 over 2007. The net income was 15% of revenue which is our model.
During the fourth quarter 2008 direct expenses as a percent of revenue were 47%, the same in 2007.As we stated in the last conference call in November we divided the sales force for our largest business unit NRC Picker into two groups. One focusing only on bringing in new clients and the second focuses exclusively on current clients. Starting July of 2008 the associate expense for the group focusing exclusively on current clients is included in the direct expense instead of SG&A.
During the fourth quarter 2008, the selling, general, administrative cost were down in total dollars to $2.8 million compared to $3.3 million during the same period 2007. SG&A expenses for the fourth quarter 2008 were 23% of revenue the same as of third quarter but down compared to 30% in 2007.
For the year ended December 31, 2008 the SG&A were 25% of revenue compared to 27% of revenue in 2007. Depreciation - amortization were 5% of revenue during the year 2008 and the same in 2007.
Cash flows from operations for the fourth quarter of 2008 was $4 million, compared to $4.2 million in the same period in 2007. Cash flow from operations for the year ended December 31st was $15.1 million, compared to $14.6 million for the same period in 2007.
In 2008, the cash flow from business was used to payoff the notes payable of $3.8 million. We purchased 395,558 shares of Treasury stock totaling $10.1 million. Purchased capital expenditures of $2.8 million and paid dividends of $3.8 million.
Going into 2009, we expect our capital expenditures to be lower than 2008, and see continued progress in moving more of our revenue base to the higher margin subscription based products, which will also have a better revenue visibility.
In December 2008, the company completed the merger of My InnerView Inc. resulting in a new term loan of $9 million and interest rate of 5.2%. With this last transaction completed, the company added over 8,000 new clients and are starting 2009 in a very strong capital structure position.
Cash and short-term investments as of December 31st were $1.1 million.
I'll now turn the call back over to you Mike.
Michael D. Hays
Thank you, Pat. As I pointed out at the beginning of the call, product development was a major contributor to our 2008 list of achievements. By way of example, the Governance Institute completed the rollout of the embedded portfolio of board support benefits, resulting in a 25% plus up charge across it's entire 550 plus hospital membership base. That conversion was totally completed in the fourth quarter of 2008.
One of the interesting lessons learned is that we do have room to increase price if we add tangible value. Given this ability we are not casting additional value propositions with TGI CO members that if they do pass the test we'll gain, additional value and additional membership fees.
During the year HealthCare Market Guide's new Ticker product converted Market Guide from a once a year third quarter deliverable into a monthly subscription based product with a 35% increase in subscription price.
Ticker now provides essentially real-time consumer feedback that measures brand equity, quantifies new hospital and healthcare system revenue opportunities, and measures marketing return on investment in order for client organizations to reduce marketing budgets to those programs that only drive share.
In addition to the revenue growth contribution provided by these two examples of new offerings, TGI and Healthcare Market Guide have broadened the number of users within a client organization. And have experienced marked increases in frequency of interaction with members and subscribers.
Member and subscriber feedback suggest greater value has been added to the relationship which we believe will help maintain or hopefully even enhance our already impressive retention rates. New product development can be a transforming event for an organization and we've clearly seen that with the Governance Institute and Healthcare Market Guide.
The transformation for TGI also includes the Medical Leadership Institute launched in 2008. The Medical Leadership Institute is helping expand TGI's reach in the hospitals and healthcare systems. And as we broaden our field of vision, large medical group practice entered the picture which all the above will leverage the same unique TGI membership base model that has proven highly successful.
New product development is also transforming other NRC business units. In fact, next week NRC Picker will commence the rollout to 1,200 client organizations in the United States and then Canada a completely different way to think about improving the patient experience.
A client feedback to-date is it all representative, we will over the course of 2009 witness a transformation within NRC Picker business unit. This will include not only how we bring value to our current client relationships but how we compete for new clients. The case in point regarding changing the competitive landscape is that we just took from our biggest competitor one of their largest clients to the tune of roughly $1 million.
Switching to our health plan offering, Payer Solutions has the unique opportunity that is unfolded in 2009 as well. Driven by thinking outside the box, Payer Solutions Group has reengineered how information we collect from Medicare advantaged members is actually gathered.
Given the resulting products evolution, we estimate gross margins of the products, are of the Payer Solutions business unit will expand by savings of $400,000 in cost of goods sold in 2009. And $1 million incremental operating income increase in 2010.
As you can tell from my comments or listening to the marketplace through the lens of new innovations bring more value to the clients in what we do and how we do it. I have to take a moment to recognize all NRC associates who are engaged in our product development activities. They're the ones that have been really behind what I have outlined for you today and will be exciting to see how 2009 builds upon their 2008 contributions.
Let me now turn my comments towards the merger with My InnerView on December 19, 2008. MIV is by far the market share and stock leader across the entire senior healthcare provider sector. My InnerView serves over 8,000 clients throughout the United States including skilled nursing facilities, home healthcare agencies, assisted and independent working organizations as well as other senior care providers.
As well MIV is the firm of record for several State Medicare pay-for-performance programs, an area of very interesting growth of State Medicaid budgets come under increased pressure. My InnerView expands NRC measurement and improvement service offerings which now can be set to cover the entire continuum of every person's healthcare needs independent of service study.
No other organization in our space offers such an all and exclusive portfolio. As more healthcare organizations integrate cradle to grave care delivery, we will create an added point of differentiation. One quick example is a large NRC Picker acute care clients that is also in the long-term care is asking us to design a program that integrates NRC Picker and MIV offerings.
The $300,000 incremental contract value is yet to be signed and perhaps it won't. But with out MIV, we would not benefit them. If this works, we will have created a much sticker relationship with one of NRC's Picker top five clients.
My InnerView will be operated as a separate business unit as it is the case with each of our business units. The co-founders Neil and Janice remain in charge and as just suggested, we have already started to capitalize on the respective resources of NRC and My InnerView.
I'm convinced NRC will continue to benefit from the different ideas and approaches of MIV just as MIV has benefited from becoming exposed to the thinking and ideas of NRC's other business units.
As we move into 2009, we do so with a book-to-contract value of over $60 million, a number that suggests a 20% revenue growth in 2009. To this number I look forward to adding our historical net new sales number of $12 million plus. The foundation outlined above provides a great start to 2009.
While the economy has created material barriers for many firms, as stated last quarter and as continues to be the case this quarter, we've seen no material impact to our business. That said, we have seen reduced travel budgets among several clients and consequently we look at our conference attendance to be lower in 2009.
In fact, what we are really doing this year is to bring our conference to our clients. If we can find this and another ways to capitalize on the downturn by providing greater value to client organizations, we will continue to do so. As you know, healthcare budgets have always been tight, and delivering intangible value has always been the key.
In closing our book business combined with our planned new product rollout and our proven strength on the sales front, provide an intriguing opportunity for us in 2009.
Operator, I'd now like to open the call for questions please.
Thank you. (Operator Instructions). And our first question comes from the line of Christina Blacksheek (ph) with William Blair. Please proceed with your question.
Good morning. Congratulations on a nice quarter.
I wanted to get a little bit more color on 2009 guidance. I got some for regarding revenue growth for the year, now you had mentioned that we can expect up to 20% annual revenue growth. Given the new Healthcare Market Guide product and the transition towards recognizing revenue over a full year period. Do you expect there to be any seasonality during the year for revenue growth, or should we assume that the annual revenue growth will kind of ramp up steadily throughout the year?
This is Mike. Let me try to attack both parts of the question. First of all, we don't give guidance, so if I came across in the prepared script as quantifying guidance for 2009, I'd rather not.
We do have $60 million worth or 61 I guess number is million dollars worth of book contract which if we get all that done, we'll represent 20% growth. Our desired growth is 20% to 25%, 20% would be good, hopefully to that contract value you can add net new sales. But please don't take that as guidance, it's just where we said today.
And in terms of Healthcare Market Guide, the Ticker product which is a monthly subscription based product that has ratably recognized revenue each month in equal proportion that does level out the seasonality that we historically had.
However, third quarter does still have not nearly to the proportions as historically but does still have a spike in third quarter for those clients that have not converted to the monthly developable and rather for whatever reason retain their annual subscription. So it is smoother but it's not perfectly flat for Healthcare Market Guide.
Okay, that's helpful. Do you have an updated percentage of those who have converted or do you anticipate that a 100% overtime will convert or is that they will have to?
Well, we want to do what our client say. So we don't want to put anybody in position where they either have to convert it or lose them as a subscriber. So two-thirds, I think is a number that has convertible, one-third hasn't there is a group of clients here in the first quarter of 2009 that will have their first opportunity to convert.
As you may recall Ticker was rolled out in Q2 of 2008. So we do have I think its 14 clients and first quarter they will have their first opportunity to convert I don't know what that number will be.
But I anticipate that there always will remain a certain number of clients that for whatever reason an annual deliverable actually is the value proposition that make sense for them.
Sure, now that makes sense. Okay, great. And then can you provide a breakout of total dollar amount of revenues from new contracts during the quarter?
We had net new contracts of $3 million. How much of that, that's net new sales in the quarter.
We haven't historically broken out the amount of revenue in a particular quarter that was derived from new sales in that quarter, if that's the question and may be I'm reading more into it.
Yes, may be just on what was from, I know you've provided this in the past may be what was some Picker sales, Healthcare Market Guide or Governance Institute?
I do not have those numbers in front of me, but it would be pretty evenly mixed with NRC Picker having the largest proportion of the total of $3 million in net new business.
Okay, okay, great. And then I guess moving on to your recent merger with My InnerView I guess your commentary in your prepared remarks were helpful in our understanding of what attracted you to the business. Can you provide... I know you just indicated that you are not going to provide guidance for 2009 but do you have any sense for what type of annual revenue the company will contribute in '09, is it going to be some more to the $7.3 million in '08?
There was roughly $7.3 million worth of revenue that My InnerView did in the calendar year 2008 of which there was a week or so on our books. But adding together the total, My InnerView is about $7.3 million, is that right Pat?
We will see growth, so we hope to see growth out of that business unit. And as we stated before, our aspiration is somewhere in the neighborhood of a 20%, 25% growth rate. Quite frankly we wouldn't have been all that interested in My InnerView unless we could have described a similar growth rate to that business unit. So they would be in the same ballpark of expectations that we have for the balance of companies.
Okay, great. And then, just one final question on the broader economic environment. I know you had indicated it's not necessarily impacting your current business, but have you seen any impacts that may be has changed since November. I know the environment continues to be challenging, so how it's impacting your sales process to potential new clients? Have you seen any pushback or delays from clients that may have potentially signed up for your products or services before, and now are tending to delay it a little while?
We do track the average days to a decision, and we have not seen that change. We have seen our client organizations witness various layoffs putting capital projects on hold and delaying if you wish, purchase of expensive medical equipment.
So the whole capital purchase cycle we've seen, clearly being upsetting. It seems as though the area that most of our businesses are in, that being the delivery of care side of the shop, nurses, patient care from a layoff perspective and from a budget cut perspective and evidently from our services as well has been more contained and immune.
So to answer your question is we haven't seen nearly the deterioration and I know some other organizations have had. But I think it might be the space that we reside within the healthcare organization versus a physical plant capital expenditure medical equipment.
That's helpful color. And thank you. That's all I have today.
(Operator Instructions). Mr. Hays we have queued up no further questions at this time. We do have a question just registered from the line of Andrew Lennon with Lennon Asset Management (ph). Please proceed with your question.
Thank you. Hi, good morning.
Good morning, Andrew (ph).
Can you talk a little bit, you said your hope would be to a sort of meet your sort of annual rate of $12 million of net new sales. Can you put may be that in context of, it sounds like you have a number of new products that you seem reasonably excited about as well as obviously you'll now be adding the My InnerView's sales funnel that you will to that number.
How much of sort of, you're targeting $12 million given perhaps an expectation of some improved sales force productivity is offset by some generic view that may be the economy will impact you or on perhaps getting less conference attendance if that's built into the number?
It's a good question. Our net new contracts for this year and in 2009 was $15 million. So we're using that word $12 million which really represents a historical average versus the most recent calendar year success rate. Let's say it was temperate to a certain degree.
As we look out and other organizations are having problems, we wonder if will, we haven't yet as I said we'll keep a close eye to the different metrics. But if we can get in the $12 million to $15 million net new business range this year driven by current performance increased productivity, the pipeline of My InnerView and new products.
I don't think that would be a home run, we got to be north of that. Given the additional layers of activity or opportunity we have on top of what we've historically been able to deliver. But I guess I am calculating it in a more conservative perspective.
Okay. And Mike then trying to sort of do the math a little bit, but using the $12 million number and given the largely subscription nature of our business, with the expectation that somewhere between 40% and 50% of that number would assuming sort of a ratable sales process over the year add to your $61 million out of backlog if you will?
Exactly, we look at when we estimate out and try to do our forecast internally, we take 50% of net new sales and assume that comes in ratably over the course of the year and half of that will convert to recognizable revenue. So it's exactly the percentage we use 50%.
Okay. And then if I look at the $61 million, since the net new sales number actually includes cancellations, would the negative impact to get off that $61 million that you're coming into the year with only be projects that for some reason are not cancelled but perhaps aren't completed within the year. Is that sort of the risk to that number?
My guess it would be two risks, one is a project elongates in terms of its time horizon although in our business that doesn't happen often. For an example, we have the TGI membership that is 12 months, it's 12 months and Market Guide is a 12 month subscription. So most of our projects it would be difficult to extend the term although I am sure it could happen for an example in NRC Picker's business.
The bigger risk would be a particular client canceling the project within that book of business. And we clearly don't go back to clients and say you have a contract we are moving forward in there. We clearly will let them out, so that would be the biggest risk in my mind, Pat do you have any other?
No, not renewing our canceling would be the bigger issue, it wouldn't be delayed.
I think that delay would be pretty small.
In that somehow figured into the net new contracts because your... the net new contract number is assuming contracts that are not renewed. Isn't the net new number, net of new sales minus those that are not renewed?
Yes, that's new you are right.
So the larger sort of, if you view, if the net new number stays at around something healthy, the larger risk then would be a contract being pushed out in that $61 million?
Yes, that's a good point.
Okay. And secondly Pat may be you could talk a little bit about we've met our net margin goals in '08, but we have... that was despite I guess somehow as you pointed out in the press release high margin, Healthcare Guide revenue that was effectively pushed out because of the change in revenue recognition or it moved to subscription I should say, we should have a much lesser impact from that, if any in 2009. Additionally, you pointed out some potential cost savings on the Payer Solutions side. And just a generally a higher percentage of revenue coming from higher margin subscription products. How do you think about net mar... what would, how should we think about what the net margins should look like for '09?
We still are retaining or maintaining our business model of 15% net. But all of those factors that you decided do suggest that we could expand that. And if we can we will had Market Guide, had a 100% of direct revenue recognized in 2008, our margins would have balanced as you've done the math significantly higher than 15%.
The thing that we are contemplating though is to step up some expenditure in the new product development area in sales and marketing. We don't want to spend more in the capital expenditure type front, we don't think... but we may have an opportunity to get on about meeting with clients and prospects at even a more frequent basis and stepping up some sales and marketing activity given some of the new product introductions that we would like to support.
So that may consume some of that margin expansion. But clearly as an organization and as a fellow shareholder, we're moving to subscription based products to increase our margin from what historically did benefit 15% new net when we had essentially 100% or lesser percent in the subscription base business.
So we're moving there purposefully. I would hate to have everybody convert their expectations and model in 2009. But we ought to have some extra money that we can... leave on the bottom-line, pay out to share holders or invest in different clients.
And then I guess last, may be you can talk, you now have I guess six or seven months of under the realignment of the sales force into those focusing on superior new clients and those focusing on existing clients. Perhaps you can give a little bit of color on how that's going, whether... usually these things take a little while to have a positive impact, whether we should see some improved productivity as a result of this in 2009, and I think may be you can address particularly I think in the past you've talked about a big opportunity to up sell within the existing client base?
Yes, I'll give some color on that. It has been roughly six months. The first three months I think were somewhat disruptive and we clearly didn't make progress. We got back to whole that you wish in the fourth quarter and generated net new business equal to what we had in that historical basis.
Going into first quarter 2009 and subsequent quarters, I think we will see increased performance. The group that is focused on current clients have an integrated plan to cross sell and up sell each and every client. Literally each and every client has been visited one if not more times in the past six months in person by their relationship manager and have created the plan to look at the various opportunities.
We are as part of this rollout of the new product that commences next week, having the relationship managers weave into the fabric of that rollout. The ability to make tangible, the opportunities have been uncovered. So we should see a significant increase in up sales and cross sales to current clients in comparison to our historical run rates. That was the reason why we made the change and it seems like it will happen. But like to give you more color on that or the exact number, the end of first quarter in 2009.
Okay, great. Thank you.
Mr. Hays, we have no further questions at this time. I'll now turn the conference back over to you.
Okay. Thank you, operator. First of all let me thank every body for their time. I know there is a lot going on in the market into carved out half hour baker commitment thank you. As one can tell, we are moving forward on several fronts at an increasing pace. And I'll just finish by saying as I always do Pat and I look forward to keeping you abreast of our progress. And I will talk to you on our next call at the end of the Q1. Thank you.
Ladies and gentlemen, that does conclude the conference call for today. Thank you for your participation. And ask that you please disconnect your lines.
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