National Research Corporation (NRC) Q4 2012 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by, and welcome to the National Research Corporation Fourth Quarter 2012 Earnings Release Conference Call. [Operator Instructions] As a reminder, this conference is being recorded, Wednesday, February 13, 2013. And I would like to turn the conference over to Mr. Michael Hays, please go ahead, sir.

Thank you, Jason, and welcome, everyone, to National Research Corporation's 2012 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; and Kevin Karas, our Chief Financial Officer. Before we continue, I'd ask Kevin to review the 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 again, welcome, everyone. The company ended the year 2012 strong, with fourth quarter new sales revenue and net income growth, all at or ahead of plan. In fact, net new sales of $5.9 million basically matched our recent quarterly goal of $6 million. Top line growth for the year was 14%, slightly below where we should've been, given below-average performance of our post-acute care group. Top line growth for the balance or 80% of our business, was 19%, or at the top end of our 15% to 20% growth goals. Changes in our post-acute group should return its performance in historical growth contributions. Even short of perfect performance, overall, 2012 represented another successful year, which continued our long and positive run. The number of clients we now serve exceeds 2,500 acute-care clients and 9,500 post-acute care providers, as well as some of the largest health plans in the country. Before I outline our focus for 2013, let me have Kevin provide a detailed review of our financial performance for the past year. Kevin?

Thank you, Mike. Net new sales of $5.9 million, as Mike mentioned, were added in the fourth quarter, resulting in total contract value of $94.5 million as of December 31, 2012. As a result of our focus over the past several years of establishing renewable recurring service arrangements with our clients, we continue to see that over 98% of our current total contract value is comprised of recurring revenue agreements. We also ended the quarter with subscription-based agreements, representing 80% of contract value compared to 73% contract value at the end of 2011. Subscription agreements also generated 80% of revenue in the fourth quarter of 2012 compared to 67% and 76% of total revenue for the full year of 2012. Looking ahead for 2013, we expect the percentage of subscription-based agreements and corresponding revenue to remain consistent, averaging at 80%. Revenue for the fourth quarter was $22 million, an increase of 15% over the fourth quarter of 2011. Revenue growth for the quarter is comprised entirely from organic growth, which is driven by a combination of continued gains in market share and vertical growth from cross-selling and increased contract value within our existing client base. Total operating expenses for the fourth quarter increased by 15% from $14.1 million in 2011 to $16.2 million in 2012. Our direct expenses increased to $9.1 million for the fourth quarter of 2012, compared to $7.2 million for the same period in 2011. This is a result of increased variable costs related to revenue growth, as well as in additional investments we continue to make in technology, research and service resources to support our strategy of empowering customer-centric healthcare across the continuum. Our direct expenses as a percent of revenue were 41% for the full year of 2012, and we expect direct expenses as a percent of revenue to average 41%, again, in 2013. Selling, general and administrative expenses increased 6% in the quarter to $6 million compared to $5.6 million for the same period in 2011. SG&A expenses decreased as a percent of revenue to 27% for the 3-month period ending December 31, 2012, from 30% for the same period in 2011 due to the leveraging of our SG&A expenses against increased revenue in 2012. SG&A expenses, as a percent of revenue, were 27% for the full year of 2012, and we expect SG&A expenses to continue to average 27% of revenue in 2013. Our depreciation and amortization expense for the fourth quarter of 2012 was $1.1 million compared to $1.3 million in the fourth quarter of 2011. This decrease is attributed to declining intangible asset amortization expenses. Depreciation and amortization expense was 5% of revenue for the full year of 2012 and is expected to decrease to 4% of revenue in 2013 due to the continued decline in amortization expense. For the full year of 2012, our operating income grew by 22% over 2011, with our operating income margin expanding from 25% in 2011 to 26% in 2012. Looking ahead to 2013, we are expecting to continue to realize expansion in our operating income margin and growth in annual operating income of at least 20% over 2012. With respect to income tax expense, our provision for income tax has totaled $2 million for the 3-month period ending December 31, 2012, compared to $1.7 million for the same period in 2011. For the full year of 2012, our effective tax rate was lower at 32.1%, primarily due to the favorable impact of credits related to state income taxes that were recognized in the second quarter of this year. Looking ahead, the effective tax rate in 2013 is expected to average 37.5% for the full year. And then net income for the fourth quarter of 2012 increased by 18% to $3.7 million compared to $3.1 million in 2011, and our diluted earnings per share for the fourth quarter increased by 15% to $0.53 compared to $0.46 a share for the same period last year. With that, I'll turn the call back to Mike.

Thank you, Kevin. As Kevin suggested in his remarks, our plan for 2013, for which we are well underway, is to continue, if not enhance, our organic growth rates. In addition, we have a parallel track focused on highly selective acquisitions. The organic side of the growth plan is based upon our prudent successes over the past many years, which include increasing market share, cross-selling and enhanced client retention. We will also aggressively introduce new product offerings to further monetize our current installed client base. Regarding these new products, we believe we are fortunate in that our shift to a subscription based client relationships, established over the years and now representing 80% of contract value, allows us to quickly introduce new products by bundling the new offerings into a client's current subscription with a corresponding increase in annual fees. This go-to market approach is in sharp contrast to consuming our sales force selling capacity by focusing on single new applications one at a time. When we use this go-to market strategy in the next 45 days to roll out 2 new products, one new product is our Call Tracker, a unique web-based workflow tool used to standardize and bring accountability for patient outreach call activity when such calls are being executed in-house by client staff, which, of course, is typical for a certain number or type of discharge patients. NRC Call Tracker is a seamless extension of our turn key discharge call program focused on avoidable readmission management, and given such, ensures that as a client staff resources compress, which is likely, we can seamlessly upgrade that client from Call Tracker only to our broader discharge solution set. Call Tracker is also a very important strategic enabler for our next-generation Customer Connect product line. As part of Call Tracker installation, the company gains enhanced client connectivity, resulting in 100% of a client organization's patient encounters and the accompanying data being fed essentially real time to our application. This direct connection will vastly enhance the ability for Customer Connect products to touch each and every patient, becoming truly an enterprise-wide platform for lifetime customer engagement. The second new product that is rolling now across key segments of our current installed base of clients is our Point of Care mobile app. Improving patient experience over time via process improvement is one thing. Solving the service problem at Point of Care is quite another. Real-time service recovery has been a mainstay for most service organizations, and now our clients can join that generation. Our Point of Care application enables clinical and executive leadership of our provider clients with tools and program wrapper. Two, among other benefits, optimized branding [ph] efforts, immediate service recovery, which all focus on increasing value-based purchasing rewards. Our Point of Care offering is also a simple example of our broader Customer Connect strategy of attracting a customer longitudinally for life, which can now begin even before discharge. As clients have told us, a robust profile of self-reported outcomes, such as patient experiences related to care delivery, combined with the customer's activity of the living, brings greater visibility to our clients, relative to the risk that they know bear, which has never been before possible. This insight and deeper understanding of the customer is now a requirement, given the change in healthcare business models. Jason, I would now like to open the call to questions. Operator?

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

Let me start with a quick one on the post-acute weakness. You mentioned that, that lagged the broader core business which is up about 19%. So if my math is right, that clearly had negative growth for the year. And I'm curious if that was due to market share losses or if it's just retention issues with clients, new products being delayed, any other color you could give us there about what happened, and then maybe what you're going to do over 2013 to help improve those operations?

Well, essentially flat versus walking backwards, Ryan, I think there was around $200,000 difference in total revenue, 2012 over 2011 -- or excuse me, 2011 over 2012. So it's really just flat. We made up for any backdoor loss that is traditional in our business with new sales. So I don't believe we shifted market share in any regard. It really had more of an impact of just changing the focus and attention that we have on that particular segment of the business. And right now, that's being rebalanced, so we ought to see a return to historical performance.

Okay. And does that tie into some of the stuff you're doing with following the patient, maybe post discharge? Obviously, a lot of the patients are moving into post-acute care out of the hospital. Do you think that will allow you to branch out and provide some new solutions in the post-acute care market as well to provide that continuum of care coordination?

Absolutely. And that's -- you just hit the nail on the head in terms of our additional -- or refocusing on the post-acute care business. Those providers are very aggressive and looking at their strategic opportunities to take advantage of marketing their products and services to the acute-care world, as well as looking very, very different in how they manage their patient population. So you will see Customer Connect reaching out to our post-acute care client base and providing them tools to track longitudinally across the continuum to which they compete in, and hopefully, create added insight and added value for the products and services that they provide upstream to their partner organizations.

Okay, perfect, makes a lot of sense. And then looking at the new products, I think we're a little bit familiar with the mobile app but the Call Tracker, is that going to be sold kind of in the bundle with Illuminate, such that you have more of a real-time and immediate post-discharge call back for patient satisfaction improvement, as well as help with lowering readmissions, whereas, the Call Tracker will be more of a sustained outreach over the 30-day period or so to ensure that readmissions are lower? Just kind of any color on how those 2 will work together.

Call Tracker, clearly, is a workflow product that could be extended beyond the initial discharge call to cover that 30-day period. The biggest difference between Illuminate, which is the discharge call solution that is outsourced to us that we provide as a service on behalf of our clients, call Tracker is a workflow tool that is used by the clients inside their 4 walls. So essentially, what we have found is that there are a certain number of client organizations that desire their staff nurses to call patients, either a certain type of patient that has, perhaps, a very high acuity level and they want to touch that person in person, so to speak, and/or a particular unit that desires to take on discharge calls within their own objectives. So heretofore, the client organizations really didn't have a tool to track whether or not that call activity was happening or how to manage and standardize that. So think of Call Tracker as a tool or an offering that allows organizations to conduct Illuminate in-house where Illuminate, by definition, has historically been our product where we provide that service to the client.

Okay, perfect. Very helpful. And then I'll ask one more and hop off. Some interesting commentary about your ability under a subscription model to bundle more offerings into an existing service and then increase fees. Can you give us a little bit of color, maybe on the typical increase per customer that you might see as you bundle more value-added solutions into an existing program?

Sure. It varies depending on the feature set that we are bundling together. The more incremental features that we bundle, of course, the higher the corresponding increase in annual subscriptions. But typically, we have seen at the low end anywhere from a 5% increase in annual subscription, if there is a fairly modest and single-focused application added. The price increase that we will be looking at now, given Call Tracker and Point of Care, is going somewhere in the neighborhood of 15%. And those are probably the book ends, 5% to 15%.

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

I just wanted to follow up on the Point of Care mobile application. Mike, could you just sort of clarify exactly what you mean when you talk about service recovery?

Sure. Typically, while a person is in an acute care hospital bed, so to speak, there are certain experiences they have. And heretofore, that particular patient has been able to report those, if you wish, via survey mechanisms, post discharge. What the industry really should focus on, of course, is solving that problem before the person goes home. So there is a concept that is widely used in the healthcare world called rounding, where executive leadership and clinical leadership will essentially go room-to-room, if you wish, and pose a series of questions and observe a series of things that, hopefully, uncover service infractions. Well, given the fact that we survey these patients after discharge, we know exactly what's likely to have gone wrong while they're laying in that bed. So if we can standardize the inquiry of that rounder to probe issues that have a high probability of being a service infraction that also have the ability to be resolved prior to discharge, then one could realize a happier patient being discharged. Once that person is happier, the service has actually been rectified. Once they get the HCAHPS survey, their scores are higher, the client organization results in improved transparency of scores being reported and value-based purchasing increases. So it's really all about serving the patient and solving the issue before discharge, and then having the positive ramification of that happier patient downstream.

[Operator Instructions]

Jason, before we close, Frank, did the question that you had get answered or did you have another one?

Frank has already disconnected.

We can go ahead and close the call then if there's no further questions, Jason.

There are no further questions at this time.

Okay. Thank you, everyone, for your time today. And Kevin, Susan and I look forward to reporting our progress next quarter. Thank you.

Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and ask you that you please disconnect your line.