National Research Corporation (NASDAQ:NRCIB) Q4 2016 Earnings Conference Call February 15, 2017 11:00 AM ET
Michael D. Hays - Founder and CEO
Kevin Karas - CFO
Robert Munnings - William Blair
Frank Sparacino - First Analysis
Ladies and gentlemen, thank you for standing by. Welcome to the National Research Corporation Fourth Quarter 2016 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, February 15, 2017.
I would now like to turn the conference over to Michael Hays, Chief Executive Officer. Please go ahead.
Michael D. Hays
Thank you, Chris, and welcome everyone to National Research Corporation's fourth quarter and year-end 2016 earnings 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 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.
Michael D. Hays
Thank you, Kevin, and again, welcome everyone. For those that have joined NRC's earnings call in the past, you are well aware that we keep our calls short and simple and allow the financial facts to communicate our performance. With that, let me turn it right back to Kevin for a review of our performance in the quarter and year-end. Kevin?
Thank you, Mike. Our net new sales of $7.1 million were added in the fourth quarter and were comprised entirely of organic growth from adding new clients and increasing contract value for existing clients. Total contract value at the end of 2016 was $119.4 million, an increase of 8% in total contract value compared to the end of 2015, with contract value growth being driven by both new sales and consistent strong renewal rates.
Healthcare system clients with agreements for multiple solutions represented 20% of our client base at the end of 2016, up from 15% at the same time last year. Subscription-based revenue agreements at the end of the fourth quarter of 2016 represented 91% of the total recurring contract value, an increase from 89% at the end of the fourth quarter of 2015.
Fourth quarter 2016 revenue was $28.4 million, an increase of 8% over the fourth quarter of 2015. Revenue for the fourth quarter of 2016, adjusted for the sale of our clinical workflow solution, grew at a 10% rate over the fourth quarter of 2015.
Our consolidated operating income for the fourth quarter of 2016 was $8.8 million, or 31% of revenue, compared to $7.7 million or 29% of revenue for the same period last year. Total operating expenses increased by 5% to $19.5 million for the fourth quarter of 2016 compared to $18.7 million in the fourth quarter of 2015.
Direct expenses increased by 4% to $11.8 million for the fourth quarter, compared to $11.4 million for the same period in 2015. Direct expenses as a percent of revenue for the fourth quarter were 42% in 2016, compared to 43% in 2015. Direct expenses were 42% of revenue for the full year in 2016 and are expected to remain at 42% of revenue for 2017. The increase in direct expenses in 2016 is attributed to incremental variable cost of product expenses from revenue growth in the quarter, partially offset by efficiencies and our survey operations.
Our selling, general and administrative expenses increased to $6.6 million for the fourth quarter of 2016, compared to $6.3 million for the same period in 2015. The increase in SG&A expenses is primarily due to increased sales management and incentive expenses. SG&A expenses were 23% of revenue for the fourth quarter of 2016 compared to 24% of revenue in 2015. SG&A expenses ended at 26% of revenue for the full year in 2016 and are expected to be in the 25% to 26% of revenue range for 2017.
Depreciation and amortization expense increased to $1.1 million for the fourth quarter of 2016 compared to $1 million in 2015. The increase in expense is the result of additional investments in our technology platform. Depreciation and amortization expenses were 4% of revenue for the full year in 2016 and are expected to remain at 4% of revenue for 2017.
Our provision for income taxes totaled $3.3 million for the fourth quarter, compared to $2.8 million for the same period in 2015. The effective tax rate was 36.4% in the fourth quarter of 2016, compared to 32.4% for the fourth quarter of 2015. The increase in effective rate is primarily due to the reversal of a capital loss valuation allowance of $300,000 in the fourth quarter of 2015. Our effective tax rate was 34.6% for the full year of 2016 and is expected to be 36% for 2017.
Net income for the fourth quarter was $5.7 million in 2016, compared to $5.9 million in 2015. Fourth quarter 2015 net income included an after-tax gain of $743,000 from the sale of our clinical workflow product. Combined non-GAAP diluted earnings per share was $0.23 for the fourth quarter of 2016, compared to $0.24 in 2015.
With that, I'll turn the call back to Mike.
Michael D. Hays
Thank you, Kevin. And as Kevin reported, net new sales improved in the fourth quarter, yet we remained behind year-over-year. We believe our increased focus on bundling our product offerings and up-selling at the enterprise-wide level combined with our more new innovative offering will continue to improve sales performance in the coming year.
As we look towards the horizon, we see a lower spend for patient satisfaction measurement as a single product offering, and redeployment of that spend to more contemporary product offerings that improve service quality, drive revenue and ensure customer loyalty for our client organizations. We also see a dynamic change or minimum uncertainty in the healthcare environment, for which we remain vigilant.
With that, Chris, I'd like to open the call to questions please.
[Operator Instructions] Our first question comes from the line of Rob Munnings with William Blair. Please go ahead.
I'm looking at the large new sales this quarter. I was wondering if you could talk a little bit about contract signings, specifically with the bundled offerings, and the enterprise up-sell. Are you starting to see any movement towards the larger contract size or no, not yet?
Michael D. Hays
There were some larger contracts in the fourth quarter [indiscernible] greater than what the run rate had been over the previous three quarters. So, yes, we are seeing somewhat of an increase in the bundling, which obviously in most cases results in an average contract value. I would suggest though that some of it was timing. The $7.1 million in the fourth quarter offset a relatively low sales performance in the third quarter. So I cautioned us all on getting a little bit ahead of our ski tips in trying to annualize [indiscernible] at this point.
All right, great, thank you, that was very helpful. And then I guess my second question, what products that you have are resonating most in the market? And then second of all, are you seeing any pause in the market given the election noise?
Michael D. Hays
The second question is easy. I have no idea what's going on, [nor does it seem] [ph] like the administration. So, I won't try to forecast that. Relative to product offerings, we are seeing a larger proportion of our new contract signings to be in the area of more contemporary innovative products, so Reputation, the Connect platform which we now refer to as real-time, clearly are gaining market traction in comparison to perhaps some of the traditional legacy products that we focused on.
All right. Thanks a lot, guys. That's all for me.
[Operator Instructions] Our next question comes from the line of Frank Sparacino with First Analysis. Please go ahead.
First for me, as we look at 2017, any color around where you think the revenue growth will be given any contract value? And then also, with respect to margins, obviously Q4 was very strong. What should we expect from a margin standpoint? And do you think on the HCAHPS side, your openings, is there more efficiency beginning there, particularly maybe as that moves to more of an electronic format, but just some thoughts there?
Michael D. Hays
Kevin, you want to take the margin question? Then I'll come back on the 2017 revenue.
Yes. This is Kevin. So in terms of margin, Frank, we are projecting our direct expense – it improved in 2016 and we're expecting that to remain fairly similar going to the next year. And I think while we may see some improvement in our cost relative to the type of data collection and the methods that we are using, we are also investing in that area.
So, I think right now we're trying to be conservative in our look ahead and project consistent margins in the direct expense. We are expecting to see some improvement in our SG&A. So in total, I think it's reasonable that we could see some modest increase in our total operating income margin going in the next year.
And from a revenue growth standpoint, again, we don't typically give guidance, but our goal is always to continue to show a positive growth trend over what we are able to accomplish this year at a minimum.
Michael D. Hays
Did that cover, Frank, what you needed?
Yes, it did. And so I just want to come back to, Mike, your comment I think just around the dynamic change and kind of uncertainty in the marketplace. Has it impacted your business today?
Michael D. Hays
No, it hasn't. We really haven't seen any pullback [indiscernible] any major shifts in decisions being delayed. I think we are all kind of sitting at the edge of the chair asking ourselves the same question, and that is, will anything the administration does throw a pickup into our side of the business? And I literally don't think it's possible to predict or project. So, your guess is as good as mine as to whether or not things will become more choppy through the balance of the year, but we to date have not seen any pullback on budgets or decision timelines.
Good. And maybe lastly just for me, on the more macro question, I think Mike, you talked a little bit about in terms of the lower spend around traditional patient set moving to different areas. I'm curious as to what is maybe driving that. I know there was an article I think last month around the impact that the VBP program has had, and basically the conclusion was, they hadn't had a meaningful impact in terms of driving patient satisfaction. So, I don't know what the sites or NRC messaging and kind of pushing this reallocation of spend, what's driving it or where you think hospitals are. I assume we're still very early on.
Michael D. Hays
Yes, I think we're very early on. I think the reality that you cited on the value-based purchasing and satisfaction really hasn't increased is what we see as well. If you look back to when the HCAHPS program originally started, overall satisfaction in aggregate within the healthcare industry has not improved, and while we all would have hoped that the measurement transparency thereof would have stimulated greater improvement, sorry to say it has not. I think the industry is looking at it and challenging whether or not the methodologies and processes that we've used in the past to measure the customer are quick enough and real-time enough for them to act efficiently on improving service quality. So, our forecast or we envision a very different world on a go forward basis in terms of how the voice of the customer is captured and used for improvement, and if we are right, then it's a better world for all of us, right.
[Operator Instructions] There appears to be no questions on the phone lines at this time.
Michael D. Hays
Thank you, Chris, and thank you everyone for joining us today. As always, Kevin and I look forward to sharing our progress on our next quarterly call. 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 lines.
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