National Research Corporation (NRC) Q4 2011 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. Welcome to the National Research Corporation Fourth Quarter 2011 Earnings Release Conference Call. [Operator Instructions] As a reminder, this conference is being recorded, Wednesday, February 15, 2012. I would now like to turn the conference over to Michael Hays, Chief Executive Officer. Please go ahead, sir.

Thank you, Todd, and welcome, everyone, to National Research Corporation's 2011 fourth quarter and year end conference call. My name is Mike Hays, the company's CEO; and joining me on the call today is Susan Henricks, President and Chief Operating Officer; as well as Kevin Karas, our Chief Financial Officer. Before we continue, I'd like to ask Kevin to review conditions related to any 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.

Thank you, Kevin. And as noted on our earnings release, our fourth quarter financial performance was very strong and continues a long-standing trend of both top and bottom line growth for the company. These trends and opportunities that help drive our 2011 growth remain evident and robust as we enter the new year, and we envision more of the same success for the company in 2012. Before I outline our plans going forward, let me ask Kevin to review 2011 performance.

Thank you, Mike. Revenue for the fourth quarter was $19.1 million, which is an increase of 20% over the fourth quarter of 2010. Our revenue growth for the quarter is comprised entirely from organic growth, which was driven by a combination of continued gains in market share and vertical growth in our existing client base. On a year-to-date basis, revenue grew by 20% as well in 2011 over 2010. After adjusting for the impact of our 2010 OCS acquisition, our 2011 full year organic revenue growth was 12%. We anticipate that our organic revenue growth rate for 2012 will be in the 15% to 20% range for the full year. We ended the year with total contract value of $83.4 million, with subscription-based agreements now representing 73% of contract value. Subscription agreements also generated 73% of our total revenue for the fourth quarter and 63% of our total revenue on a year-to-date basis compared with 32% of total revenue for the full year in 2010. Our net new sales for 2011 increased by 22% over the prior year. In addition, we experienced a positive trend relative to improved client retention, with retention rates improving by 18% in the second half of 2011 compared to the second half of 2010. The retention improvement is a result of enhancements we have made in our service model, which increased our direct expenses in the fourth quarter and will continue to increase our direct expense as a percent of revenue in the short term as we increased staffing to support major new clients added in late 2011. Direct expenses for the fourth quarter were 38% of revenue compared to 39% of revenue in the fourth quarter of 2010. On a year-to-date basis, in 2011, direct expenses also decreased to 38% of revenue compared to 39% in 2010. Our selling, general and administrative expenses for the fourth quarter were $5.6 million compared to $5.9 million in the fourth quarter of 2010. This decrease in SG&A expenses is related to approximately $550,000 of 2010 fourth quarter expenses that did not recur in 2011. These were expenses that consisted primarily of OCS acquisition costs and the consolidation of our MIB sales and operations activities into our Lincoln location. SG&A expenses as a percent of revenue decreased to 30% in the fourth quarter of 2011 compared to 37% in the fourth quarter of 2010, reflecting both the higher 2010 expense levels and leverage of fourth quarter revenue growth from new sales. For the full year 2011, our SG&A expenses were 31% of revenue, an improvement of 1% compared to 2010. We expect to continue to leverage our revenue growth in 2012 against our SG&A expenses and to continue reduce SG&A expenses as a percent of revenue. Our total operating expenses were $14.1 million for the fourth quarter compared to $13.5 million for the fourth quarter of 2010, increasing our margin to 26% of revenue for the fourth quarter. On a year-to-date basis, we improved our operating margin to 25% of revenue. Our depreciation and amortization expense for the quarter remained level with the fourth quarter of 2010 at $1.3 million. On a year-to-date basis, our depreciation and amortization increased to $5.1 million in 2011 compared to $4.7 million in 2010 with expense both years running at 7% of revenue. We believe that the depreciation, amortization expense going into 2012 should continue at a comparable rate on a percentage-of-revenue basis. Fourth quarter income tax expense increased from $590,000 with an effective rate of 27% in 2010 to $1.7 million at an effective rate of 35% in 2011. This increase in the effective tax rate is due to higher federal and state tax rates in 2011 as well as a $156,000 reduction in income tax expense in the fourth quarter of last year for additional U.S. research and development credits and other adjustments. Net income for the quarter compared to last year nearly doubled to $3.1 million, and our diluted earnings per share for the fourth quarter also doubled to $0.46 compared to $0.23 for the same period last year. Our net income for the full year of 2011 of $11.6 million represents a 36% increase over 2010, and our net income margin increased from 13% in 2010 to 15% in 2011. Finally, our cash flows from operations for the fourth quarter were $4.1 million in 2011 compared to $2.2 million in the same quarter last year. And for the full year, our cash flows from operations grew to $18.5 million, up from $14.6 million in 2010. With that, I'll turn it back to you, Mike.

Thank you, Kevin. Regarding our focus on a going-forward basis, the company has recently updated our strategic plan. And in doing so, diligently reviewed where healthcare is heading and how we as an organization can bring the most value to what will increasingly become a customer-driven service environment. The statement "empowering customer-centric healthcare across the continuum" sums up our refined strategy that has been adopted as our guiding light. Customer-centricness opens a materially larger space for the company by defining our addressable market and product portfolio as going beyond the 4 walls of the hospital and other provider settings and only when a patient receives care. The currently unfolding battlefield is all about providers and payors attracting, managing and engaging the customer for life. Beyond measuring and improving the service experience, our client organizations want tools and insights to become the provider of choice for all health related needs of a customer, as well as the customers' immediate and extended family. As accountable care organization and other forms of provider partnerships compete for serving defined populations, reimbursement will require a very different business model. One in which keeping customers out of the hospital becomes the most important metric of success. Under this paradigm shift, it's simply a losing proposition if providers don't understand the attitudes, preferences, behaviors and loyalty of customers and arm themselves with tools and analytics for a customer relationship management. NRC has grown up understanding what's most important to patients. Extending its patient base insight to profiling the customer outside the 4 walls of the hospital, as we do with Healthcare Market Guide and health risks assessments, for an example, creates added insights for clients, which represents exponential value for them and in turn, material revenue increases for us. Today, only 15% of our revenue is generated from information products focused on the customer outside of a provider setting. Our intent is clear, to largely invent a new and broader space which will expand the category opportunities for the company by an estimated fivefold. I'd like to welcome all new associates that joined in our sea in the fourth quarter. And to that end, let me have Susan Henricks highlight 2 of our associates, Craig Page and Joe Morales. Susan?

Thank you, Mike. Craig Page has joined National Research Corporation as our Chief Information Officer. Craig held IT leadership positions with Boeing Computer Services, Citibank and most recently, with First Data Corporation as the Senior Vice President and Managing Director, Global Enterprise, Data Center Services. Further extending our leadership in IT, Joe Morales joined National Research Corporation as Vice President of Systems Engineering. Joe comes to us after a successful career that started at Lockheed Martin and most recently, with VMware as the Director of Global Network and Telecom. Welcome, Craig, Joe, and all of our newer NRC Associates. And back to you, Mike.

Thank you, Susan. Before I open the call for questions, I'd like to take a moment and highlight a personal stock transaction that will be reported in the coming days, which showed the movement of approximately 500,000 shares into various trusts. This has been, for those who have followed my estate planning process, a program that was set forth 2 years ago and has finally accumulated or ended up in a transaction that will be reported here again in the next couple of days. Todd, I'd like to open the call to questions at this point.

[Operator Instructions] Our first question comes from the line of Ryan Daniels with William Blair.

It's Andy O'Hara in for Ryan today. So on the last couple of calls, you've given the growth in clients using multiple products. Do you have that for the quarter or for the year?

Yes, Andy, this is Kevin. On a year-to-date basis, through Q3, we had noted that we had a 30% increase and now through the year end, our clients that are adding multiple products for the year has increased by 52%.

Okay. Excellent. And then just have a couple of bigger-picture questions. So can you just talk a little bit about the outlook for the HCAHPS survey business for 2012? It sound like you guys had some success in the home health CAHPS. Is that continuing to accelerate? And then any other CAHPS areas that you guys are seeing good traction in will be helpful as well.

This is Mike. The CAHPS program for acute care hospitals, as I believe we reported last quarter, has essentially leveled out. All those that are participating in the hospital CAHPS are, in fact, doing so. Home health CAHPS is pretty mature at this point as well in so much as the majority of home healthcare agencies have adopted that particular program over the course of the last year, to which NRC has significant share against that market. And from a going-forward basis, group CAHPS or position level CAHPS is now just starting to unfold and in the total scheme of things, I would assume that the group CAHPS, as it's been referred to as, will have significant upside even more so than what we saw within the hospital or within the home health marketplace.

Okay, excellent. And then, I guess, specifically, what are you guys hearing from your hospital partners as the key strategic issues for 2012? I know you guys have sort of more generally talked about the shift towards value-base reimbursement, but are there specific issues for 2012 that they're focusing on?

Well, value-base purchasing clearly is here now. So all organizations are focused on how to maximize or better yet, not leave any money on the table. So clearly, that's front and center. From a government standpoint, it's access to capital on physician hospital relations. As you might imagine, once providers start trading partnerships across the continuum, that brings physicians to the forefront and how hospitals in the acute care world manage and deal with, that physician relation is critical and key. Even broader based than that alluded to in my comments on customer centric healthcare across the continuum in an ever-increasing way, healthcare providers are trying to understand how they teeter between the 2 business models. One of which is historical and legacy, whereas keeping the beds full is all about what they do to just exactly the opposite and that is, how do I keep our customers out of the hospital? And I think that latter paradigm shift will become really the key focus for healthcare over the next 3 to 5 years.

Our next question comes from the line of Frank Sparacino with First Analysis.

Mike, I just want to follow-up on a comment you made in respect to the HCAHPS market. When you talk about leveling out, does that mean you're seeing flash-type growth or what do you mean exactly?

I'm sorry. Frank, you broke up at the last part of your question.

I was just curious in your comments in terms of leveling out what that means with respect to HCAHPS market from a growth perspective.

Okay. The leveling out really is me communicating that all hospitals that should be doing CAHPS are doing CAHPS. So, whereas over the initial introduction, there was 19% of the marketplace that measured patient satisfaction internally. The vast majority of that has converted to outsourcing. So I believe that most all hospitals are doing whatever it is they need to do. So I don't see any incremental spend against just meeting the minimum HCAHPS requirement.

Good. And the sense from a replacement activity perspective, I mean, how is that market right now with HCAHPS?

Well, HCAHPS, as you know, Frank, represents a relatively small portion of most if not all of our client contracts. So anytime we win a new piece of business clearly, it incorporates a small component of HCAHPS compliance work. But the things that we did as a significant driver of a revenue growth in kind of a replacement market, we really look at the broader relationship for the total relationship with new organizations.

Okay. And maybe just last question on HCAHPS. When you look at the overall growth of the business next year, 15% to 20%, do you think the HCAHPS business grows in line with that or where relative to the overall growth do you think it is?

HCAHPS as it relates to the acute-care market will be far south from the 15% to 20% organic growth. Home health CAHPS will be slightly lower than that organic growth rate of 15% to 20%. And physician level CAHPS will be materially higher than even the top end of that range. So going forward within 2012, I would suggest that the medical groups' physician-level-CAHPS-based satisfaction with their physician will create a fairly significant growth within the CAHPS category.

Okay. Good. And then just last on that subject is when you look at the physician surveys, I assume a lot of that is coming through the hospitals you're working with today and their physician groups, perhaps the affiliated groups as well. But is there any particular sort of strategy for getting that business, Mike?

You're correct. There's around 52% of hospitals and they're now employed or contracted with an acute-care hospital, which is up significantly from the past and we assume that, that will continue in that trend. So the vast majority of our business today is really physician CAHPS related work in and around acute-care hospitals that have purchased or contracted or aligned themselves with particular physician practices. We do have a separate sidebar sales activity that goes against independent physician groups and that represents significant revenue for us as well. But over time, I would imagine that healthcare providers will consolidate along that continuum and that will include physician groups as well.

[Operator Instructions] We do have a follow-up question from the line of Frank Sparacino with First Analysis.

I just want to go back to, Mike, I think, your comment around only 15% sort of data products outside the customer setting. I'm just wondering if you can just be more specific perhaps on some of the initiatives or areas that you guys are looking at for growth.

I'd be happy to. The 15% really represents our health risk assessment and our healthcare market guide revenue streams, which again constitutes approximately 15% of the company's total revenue stream. Our initiatives are really pretty simple but fairly aspirational and that is to connect all of our different data products together to create a longitudinal perspective of the patient over time. And those data collection and analytical products really connect data that we collect in and about the patient while they're in the hospital, as well as in and about that patient or customer and their family members when they are outside of the provider setting. So if one could imagine having an individual patient that we collect information regarding their service experience, once they depart the hospital, we collect information relative to their discharge process. But to carry that on and create a profile of that patient that is now a customer in the free market relative to the preference, behaviors and loyalty that, that individual and their family members have towards that particular branded provider to which they had been a patient, is really what we're trying to do. So for acute-care hospitals, for an example, the goal going forward is to capture that defined population and ensure that there is a provider of choice for all of the health needs. And any leakage that, that brand of medicine has, where their customers are going elsewhere, provides or creates a significant risk. So we want to captivate the customer to better understand what the healthcare organization has to offer and provide the healthcare organization the ability to continue to be engaged with their patient or customer population.

Good. And lastly, Kevin, it's for you. Just to be clear, when I look at 2012, we have revenue guidance so to speak, 15% to 20% type growth. From a margin and EPS perspective, I just want to be clear what the targets, if any are, for 2012?

This is Kevin. We are not providing any earnings guidance for 2012. So right now, we're comfortable with our revenue estimate, and that's what we're providing right now as far as guidance.

We have no further questions at this time. I'll now turn the conference back to you.

Thank you, Todd. I'd like to thank everyone for their time today. And as usual, the 3 of us look forward to communicating our progress again next quarter. Thank you.

Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and ask you please disconnect your lines. Have a great rest of the day, everyone.