National Research Corporation (NRC) CEO Michael Hays on Q1 2022 Results - Earnings Call Transcript

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National Research Corporation (NASDAQ:NRC) Q1 2022 Earnings Conference Call May 4, 2022 11:00 AM ET

Company Participants

Michael Hays - Chief Executive Officer

Kevin Karas - Chief Financial Officer

Conference Call Participants

George D'Angelo - Alpine Peaks Capital

Operator

Hello, everyone, and welcome to the National Research Corporation First Quarter 2022 Earnings Call. My name is Seb, and I'll be your operator. [Operator Instructions] I will now hand the floor over to Mike Hays. Please go ahead.

Michael Hays

Thank you, Seb, and welcome everyone to National Research Corporation's 2022 First Quarter 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 would ask Kevin to review conditions related to any forward-looking statements that may be made as part of today's call. Kevin?

Kevin Karas

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 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 Hays

Thanks, Kevin. And again, welcome, everyone. By way of sharing a few highlights at year-end 2021, we publicly announced the launch of NRC Health's Human Understanding Program, which enables health systems, our partners to deliver personalized care at scale. This past quarter, large numbers of current and prospective clients previewed and scrutinized the program. I must say I've never witnessed such absolute alignment with any product offering, confirming at least to me, we are definitely on the right path.

However, achieving personalized care at scale will not be instantaneous for any client organization, rather accomplished by measured deployment of the program over time, perhaps mirroring the adoption trends we experienced with our digital Voice of the Customer offering years ago. Our Human Understanding Program is an integrated offering comprised of most of our historical point solutions, with a much elevated mission-driven aspiration, that being to enable each partner organization to treat each patient as unique.

Knowing how to capture what matters most to patients is our DNA. Delivering that insight to empower personalized interaction for care teams at each interaction draws upon our expanded capabilities, which include delivering data across workflows and processes for care teams to optimize personal in action with patients based upon this new found insight about that person.

With that, I will turn the call over to Kevin to review our financial performance, and we will then open the call to your questions. Kevin?

Kevin Karas

Thank you, Mike. Our growth strategy continues to focus on organic growth levers of increasing revenue from our core offerings, including our new Human Understanding Program within our existing client base as well as adding new clients to increase market share.

Revenue growth for the first quarter of 2022 was 8% over the first quarter of 2021. First quarter operating income declined by 3% compared to the same period in 2021 as we allocated more resources towards innovation initiatives and our associate empowerment benefits.

Our first quarter 2022 direct operating expenses also increased from costs related to hosting additional and in-person conferences this year. We ended the quarter with $147.6 million in total recurring contract value or TRCV. Our TRCV metric represents the total revenue projected under all renewable contracts for their respective next annual renewal periods, assuming no upsells, downsells, price increases or cancellations, with that being measured as of the most recent quarter end. Our first quarter 2022 ending TRCV decreased by 1% over the prior year.

The decline in TRCV growth rate was impacted by our strategy to continue to evolve our business mix as we focus on growing our digital core solutions while at the same time eliminating certain legacy or noncore solutions. Our adjusted 2022 TRCV growth rate without those eliminations was 2% increase.

Net income for the first quarter of 2022 was $8.5 million compared to $9.2 million for the same period in 2021. The lower net income was due to a decrease in operating income as well as increases in our effective tax rate. The effective tax rate for the first quarter of 2022 increased to 25% compared to 21% for the same period in 2021, mainly due to decreased tax benefits from the exercise of share-based compensation awards and higher state income taxes.

Cash flow from operations was $8.3 million in the first quarter of 2022, down from $14.4 million in 2021. The company ended the quarter with a cash balance of $47.3 million, up from $43.5 million in the first quarter of 2021.

The company's Board of Directors has established priorities for capital allocation with funding of innovation and growth investments, including both M&A activity as well as internal projects, as the preferred use of capital. The company funded $3.1 million for innovation and growth purposes in the first quarter of 2022.

Next in priority is capital allocation for quarterly dividends and share repurchases. In the first quarter of 2022, we paid $3.3 million in quarterly dividends to shareholders and $6.7 million for share repurchases.

That concludes my comments for this morning, and I'll now turn the call back to Mike.

Michael Hays

At this point in time, operator, we'd like to turn the call -- or open the call, excuse me, to questions from the group. Thank you.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions]

We have a question from George D'Angelo from Alpine Peaks Capital. Please go ahead.

George D'Angelo

Hey, good morning, guys.

Michael Hays

Good morning.

George D'Angelo

I was just wondering about the first quarter profitability levels. Were those investments and higher expenses more one-time, or are these profitability levels that it would make sense to annualize going forward?

Kevin Karas

Yes, hi, George. This is Kevin. So, there are 2 pieces to that. One is our conference expenses, which those can change quarter-to-quarter, year-to-year based on timing of conferences, so that shifted some of the expense we may have seen in later periods into Q1. We're also going to be spending more going forward as we reopen our conferences from being virtual only to being hybrid. So, -- so that increase is a little of both. We'll see some increase for future conferences, but a good piece of that was timing, which won't recur as we moved some conferences in the first quarter.

The innovation and associate empowerment investments, that really occurs quarter-to-quarter. I mean those are decisions we make to -- as we generate additional operating income kind of in line with our capital allocation strategy, where we want to approve some incremental spending on innovation around our offerings as well as our -- some enhancements we made to our employee or associate benefit program. So, again, there's a mix in there. Some of those are going to be timing. Going forward, quarter-to-quarter, it will really depend on decisions we make around how to allocate our capital and incremental operating income.

George D'Angelo

All right, that's helpful. And then, the 8% growth rate in Q1, is that a good indicator for where you expect growth to be for the rest of the year?

Kevin Karas

Well, George, we typically do not give guidance on revenue growth. So, I don't really have a direct answer for that question. I think we -- a lot of that will depend on what happens with our sales and retention quarter-to-quarter. So, we don't really have an estimate or any kind of future growth rate that we have to share right now.

George D'Angelo

Okay, that's fair. I guess the reason I ask is because it seems like based on the total recurring contract value, I would have expected a lower growth rate. And so I'm just trying to understand why the sales growth was coming in higher than I would have thought.

Kevin Karas

To some degree, when you look at our business model, as we grow contract value, the revenue growth tends to follow. So, there is a time lag between changes we see in contract value and how that rolls through revenue in a lot of cases. So, it's not necessarily going to line up every quarter with contract value growth. So, I think that's part of what you're seeing right now.

George D'Angelo

Got it. And just one more, if I can, could you describe some of the conversations that you're having with customers about human understanding? And are there any specific customer types or categories that are getting more traction than others?

Michael Hays

Sure, George, this is Mike. The feedback that we're gaining actually is fairly universal and cuts across a multitude of customer segments, large, small, highly integrated health care systems as well as individual community hospitals. So, size and complexity does not seem to be determining factors to the acceptance of the program.

Most organizations, as you may know, have within their mission statement, something about individualizing care to each individual to which they serve. And those words, of course, differ depending on the organization, but given the fact that human understanding is a fundamental philosophy baked into most every health care organization's mission. I think the adoption or the organization is embracing the philosophy is universal. I think the adoption, however, may be by segment, right? So you find some organizations that are simply more ready to deploy personalized care at scale. They may, in fact, have different characteristics that we will learn about going forward. But the acceptance to the philosophy and them embracing our product offering is uniquely universal.

George D'Angelo

And in those conversations, it might be too early, but in terms of pricing of the new offerings, has there been any update you can provide us?

Michael Hays

I don't have any specific. I mean our goal is to get double-digit top line growth rates, and this program will, assuming successful deployment and implementation, this will check that box. So, we would look for a significant double-digit increase from current contract value amongst those organizations that purchase and deploy the program over whatever period of time that happens to take. So, it's -- the strategy is part and parcel of our aspirations to increase our top line growth rate.

George D'Angelo

Thanks lot, guys.

Operator

[Operator Instructions] It appears we have no further questions on the call. So, I'll hand the floor back to you.

Michael Hays

Thank you, Operator, and thank you all for your time today listening to Kevin and I's earnings call. We'll look forward to reporting our progress again next quarter. Thank you again.

Operator

This concludes today's conference. Thank you all very much for joining. You may now disconnect your lines.

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