National Research Corporation Q2 2008 Earnings Call Transcript

| About: National Research (NRCIB)
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National Research Corporation (NRCI) Q2 2008 Earnings Call August 6, 2008 11:00 AM ET


Pat Beans – Chief Financial Officer

Mike Hays – Chief Executive Officer


[Wayne Devin] – Burnham Asset Management


Welcome to the National Research Corporation second uarter 2008 conference call. (Operator Instructions) I would now like to turn the conference over to Mike Hays, Chief Executive Officer.

Mike Hays

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 Beans

This conference call includes forward-looking statements related to the company that involve risks and uncertainties that could cause actual results our 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 on the facts that could affect the company’s future results please see the company’s filings with the Securities and Exchange Commission.

Mike Hays

We have several topics to discuss during the call today not the least of which is the $4.4 million in net new contracts signed in the second quarter. In fact, there’s only been one other quarter in the company’s history in which sales had surpassed this level and that was the fourth quarter 2007. As a result of strong sales this quarter total contract value increased to $58.1 million which is a 5% sequential quarterly growth over first quarter 2008. Year to date total contract value has increased 10.4% from the $52.6 million level.

Before I add color to the sales success and dive into additional topics I’d like to turn the call back to Pat for a review of the quarterly and year to date financials.

Pat Beans

We’re three months ended June 30, 2008 the company’s revenue was $11.9 million. In reviewing the mix of revenue NRC Picker was flat; Payer Solutions was down 35% driven by falling Medicare Advantage enrollment. Subscription based revenue was up 21%. For the six months ended June 30, 2008, the company achieved revenues of $25.4 million compared to $24.2 million in the same period in 2007, a 5% increase.

For the three months ended June 30, 2008, net income for the company was $1.6 million or $0.23. Net income was 13% of revenue, slightly below our model of 15%. The Healthcare Market Guide new subscription based Ticker product ended the quarter with an increase of $1.2 million of new deferred revenue. The impact of this new subscription based model from the traditional model resulted in this deferred revenue that would have historically been recognized in the second quarter.

If NRC would have receive these sales in the traditional healthcare market guide model the impact would have resulted in an additional $759,000 of net income, based on effective tax rate of 38% or an additional $0.11 per diluted share for the quarter which would have resulted in $0.34 diluted EPS.

For the six months ended June 30, 2008, net income for the company was $3.6 million or $0.52 per share compared to $33.2 million or $0.46 per share for the same period in 2007, an 11% increase in net income and a 12% increase in earnings per share.

During the second quarter 2008 direct expense as a percent were 45% compared to 44% in 2007. We continue to maintain our direct expenses within the model and should be able to improve the margin as we increase our higher margin subscription based products as a percent of total revenue.

During the second quarter 2008 the selling, general and administrative costs were the same as 2007 at $3.3 million which was 28% of revenue compared to 28% in the same quarter 2007. For the six month period ended June 30, the SG&A were 27% of revenue compared to 28% of revenue in the same period 2007.

Depreciation and amortization were 6% of revenue during the second quarter in 2008 compared to 5% in the same quarter 2007. We expect this expense to move to the lower end of model of 4.5% to 6% of revenue in 2008. Cash flow from operation for the second quarter was $5 million compared to $3.1 million in the second quarter 2007. Cash flow from operations for the six months ended June 30 was $7.2 million compared to $7.5 million in the same period 2007.

In the first six months of 2008 the company’s notes payable increased by about $250,000. During the same period the company repurchased 206,142 shares of treasury stock for $6.6 million at an average cost of $24.95 per share. Cash and short term investment at June 30 were $1.3 million.

I’ll now turn it back to Mike for additional discussion.

Mike Hays

Let me dive into some of the color on the sales success and as I mentioned several other topics I want to touch on today. Net new contracts for the second quarter for NRC Picker business unit equaled $2 million which is on track with its sales plan in becoming highly predictable. The remaining $2.4 million of net new contracts were from subscription based products being offered by Healthcare Market Guide and The Governance Institute.

Looking first at The Governance Institute, new membership sales have been very strong. In fact, for the first six months of 2008 they have surpassed all of the new membership sales of 2007. On top of bringing on new members the added Board support member benefit that as you recall was folded into current membership programs and resulted in a price increase at renewal added $1 million in incremental business year to date and will come close to that same number for the balance of the year as we move through the renewal dates for all TGI members.

The Governance Institute new medical leadership institute was a little slow out of the gate but now gaining real traction from which we will likely see increase in sales in that particular product for the remainder of the year.

For Healthcare Market Guide its new Ticker product is receiving strong market acceptance. Healthcare Market Guide sales driven by attracting new clients and the incremental price increase from upgrading current Healthcare Market Guide clients to Ticker was $1 million in the most recent quarter, a 20% increase from the first quarter 2008 and 150% increase over second quarter sales in 2007 of $370,000.

We have worked through upgrading 22% of Healthcare Market Guide current clients with the balance having renewal dates in the third quarter this year. Consequently we expect a large number of upgrades will take place by September of this year.

Moving from the subscription based products to our Payer Solutions business unit which as you recall offers federally required health risk assessments for Medicare Advantage enrollees, actually had a 35% decline in revenue for the second quarter. Medicare Advantage enrollment to which this unit’s revenue is tied slowed sharply.

In addition, the most recent Congressional override of President Bush’s veto regarding restructuring the Medicare Advantage program in our opinion will likely drive lower Medicare Advantage enrollment for the balance of the year. We expect Payer Solutions revenue for the remainder of the year to be about $700,000 compared to $1.2 million for the last half of 2007.

The last business unit I’d like to review is NRC Picker. As mentioned earlier net new contracts matched plan and continued to be driven by demand for our improvement products that seamlessly connect with our measurement. HCAHPS as we had anticipated is the catalyst for this need to improve the patient experience.

During the second quarter we made several changes that have the sole intent to materially increase the growth rate of this business unit. The market clearly exists and addressing that opportunity in a more focused way will help us capture it. First of all we have divided our sales force into two groups. One focused only on bringing on new clients and the second focused exclusively on current clients.

This material change is to address an analysis we conducted of our current client base which showed clearly a $15 million upside opportunity if we increase our penetration of NRC Picker products across all NRC Picker clients. In order to achieve greater penetration we now have a group of sales associates aligned with this goal without the distraction of having to cover both clients and prospects. The second group, the new business development team now has that same luxury of focus which is 100% dedicated on bringing in new clients.

Organization wide we also made another change. That change has to do with the role of Joe Carmichael. Joe is now heading a much expanded effort to strategically connect each business unit’s clients to each others business unit’s products. We have a very limited number of clients that purchase from all three hospital focused business units. A modest increase in this overlap will result in a significant pool of incremental revenue for the company.

Just to highlight the magnitude of the upside consider the fact that 80% of all NRC clients do business with only one NRC business unit. Hospitals that only do business with one business unit have an average contract value of $33,000. Hospitals doing work with two of our three units spend $133,000. The clients that work with all three have an average annual spend of $334,000.

Today we have only 20 healthcare systems that work with TGI, Healthcare Market Guide and NRC Picker. If we capture just another 20 it would add $6 million in incremental revenue. I’ve taken on some of Joe’s previous responsibilities to provide him the time to move this effort forward in a very meaningful way. As well, Jason Rall and Helen Hrdy, both long standing industry associates have moved into key leadership roles in the NRC Picker business unit.

In closing, let me touch on our new product development pipeline. The pipeline continues to be robust and two products are coming close to being completed. One is for The Governance Institute and other for Healthcare Market Guide. The Governance Institute is completing market testing of a new offering that can be sold as a stand alone product to non-TGI members as well as bundled with new TGI membership sales.

In addition and as was the case with the added Board support deliverables we may elect to embed this new product into current membership relationships at the renewal time as well. We will announce the details of this new product during our next earnings call. Healthcare Market Guide is also wrapping up the final aspects of a new offering to be launched October 26. During our next call I will as well outline the projections for that new offering.

At this time I’d like to open the call for questions.

Question-and-Answer Session


(Operator Instructions) Your first question comes from [Wayne Devin] – Burnham Asset Management.

[Wayne Devin] – Burnham Asset Management

Your growth in deferred revenue when will this show up in reported revenues?

Pat Beans

It will be shown up over 12 months so it will between now and next May or June.

[Wayne Devin] – Burnham Asset Management

Annualized revenue is about 80% of contract revenue when will that spread close, can you go into that a little bit?

Pat Beans

Hopefully is we are selling more contracts, the contract value will increase faster than the annualized revenue. We will have a small spike of revenue in the third quarter from some of the traditional market guides that will help close that gap.

Mike Hays

Our goal would always be to have total contract value increasing as we move to a higher mix of subscription based revenue. Theoretically the gap may never close.

[Wayne Devin] – Burnham Asset Management

Obviously you’re optimistic about the Picker growth could you talk about why basically some early signs of what you’re seeing.

Mike Hays

I don’t think that we’re focused correctly on the sales side. We weren’t penetrating existing client really to the degree that we could and now are. The market opportunity is clearly there I just think we had the sales force aligned in not quite the most optimum way. Now we book that into two groups as I mentioned one focused exclusively with clients and tapping into increasing our penetration of that portfolio across service across all of our current NRC Picker clients. Another group is on the new business.

[Wayne Devin] – Burnham Asset Management

Have you seen any early signs yet?

Mike Hays

This change literally took place in the last 30 days so the alignment is done, every client is assigned to an inside sales person and those people are literally on the road Monday through Friday visiting. I think it’s a little too early to tell but the opportunity we know is good we quantified it now we just have to go collect it.


We have no further questions at this time.

Mike Hays

Thank you all for joining us on the call today and as always Pat and I look forward to providing you more color on progress during our next conference call. Thank you very much.

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