National Research Corporation (NRC) Q3 2023 Earnings Report, Transcript and Summary

Hello, everyone, and welcome to the National Research Corporation Third Quarter 2023 Earnings Call. My name is Charlie and I’ll be coordinating the call today. [Operator Instructions] I’ll now hand over to our host, Kevin Karas, Chief Financial Officer, to begin. Kevin, please go ahead.

Thank you, Charlie, and welcome, everyone, to National Research Corporation’s 2023 Third Quarter Earnings Call. My name is Kevin Karas, the company’s CFO. And joining me today on the call is Linda Stacy, our Vice President of Finance. Before we continue, I would ask Linda to review conditions related to any forward-looking statements that may be made as a part of today’s call. Linda?

Thank you, Kevin. 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, Kevin.

Thanks, Linda. This quarter was a good start on our plan to accelerate revenue growth and expand margins over the coming quarters. We’ve seen sales and margin improving sequentially the past 2 quarters with only partial implementation of the plan. I will cover 3 topics to set the stage for where we’re headed before Linda covers the financial metrics. First, new sales. NRC Health is a leader in helping health care providers improve their patient experience on an individualized basis using decades of benchmarking and our unique ability to translate data into actionable advice. Our Human Understanding Program released in the second quarter of 2022 has become widely accepted in the market with 91 health care provider systems adopting human understanding 18% of which were from new logos. Our contract value growth for the Human Understanding Program adoption by existing clients is averaging 13%, which is in line with the results we saw from the successful rollout of our real-time solution several years ago. And these results so far have been without the benefit of a fully developed sales force. To capitalize on the growing demand, the size of our sales force has been increased by 19% since the beginning of the year, and we expect to continue to add experienced personnel in this area. The expansion of sales and marketing resources has been successful in building our sales pipeline and producing 2 consecutive quarters of double-digit sales growth compared to prior year. We expect to see the results of these efforts flow through to revenue and TRCV in future periods. Second is margin expansion while increasing our sales force, we have reduced the number of non-sales personnel. On a net basis, we have decreased the full-time equivalent number of associates by 11% at the end of the third quarter of 2023 compared to the end of third quarter of 2022. Most of that decrease occurred during the third quarter of 2023, and the related cost reduction has not yet been fully reflected. We expect to see the results of these efforts in revenue per associate and operating margin in future periods. Thirdly, we are highly cognizant of our clients’ desire for solutions across multiple patient, customer and employee experiences. With our continued product development and partner alliances, we are expanding our product offerings to take advantage of a much larger existing total addressable market while gaining market share in our core patient experience market. With that, let me turn the call back to Linda to review our financial performance and then open the call to any questions.

Thank you, Kevin. Revenue for the third quarter of 2023 increased slightly compared to the third quarter of 2022. We ended the quarter with $144.3 million in TRCV. Our TRCV metric represents the total revenue projected under all renewable contracts for their expected next annual renewal periods, assuming no upsell, down sell, price increases or cancellations measured at the most recent quarter end. Operating income decreased by 10% for the third quarter of 2023 compared to the third quarter of 2022, primarily due to growth in certain costs exceeding revenue growth. Increased investments were made in marketing expenses of $343,000 -- excuse me, to expand brand recognition to support sales development and additional cybersecurity and other software services of $292,000. In addition, we incurred $661,000 of expense and nonrecurring state tax incentive adjustments. Effective tax rate in the third quarter of 2023 was 22% compared to 23% in 2022, primarily due to a lower state income taxes of $313,000, partially offset by decreased tax benefits of $138,000 from the exercise of share-based compensation awards. Operating margin grew by 8.3%, over the second quarter of 2023 due to revenue growth outpacing operating expense growth. The workforce reductions and other cost alignment changes implemented during the quarter will enable continued margin improvement in future quarters. The company remains well positioned to execute the entire range of capital allocation alternatives, including funding for innovation and growth investments, shareholder dividends and share repurchases. At September 30, 2023, the company had approximately $20 million in net debt and $25 million available on the line of credit after funding $3.7 million for innovation and growth $27.5 million for dividend payments and $310,000 for share repurchases in the third quarter. That concludes my comments for this morning. I’ll now turn the call back to you, Kevin.

Thank you, Linda. This completes our prepared remarks. So Charlie, I will now ask you to open the call to any questions.

Well, thank you for your time today. We look forward to sharing our results again next quarter.

Ladies and gentlemen, this concludes today’s call. Thank you for joining. You may now disconnect your lines.