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| 8-K - NATIONAL RESEARCH CORP | v192368_8-k.htm |
| EX-99.1 - NATIONAL RESEARCH CORP | v192368_ex99-1.htm |
Mike:
Thank
you, ___________, and welcome everyone to National Research Corporation’s second
quarter 2010 conference call. My name is Mike Hays, the Company’s
CEO, and joining me on the call today is Pat Beans our Chief Financial
Officer.
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.
Pat:
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.
Mike:
Thank
you, Pat.
During
the call today, we have two exciting events to discuss in addition to our
typical review of the quarter. These two material events include the
OCS transaction, which was announced last night, and the launch of Illuminate, a
new product that has been in development and testing for upwards of a
year. Speaking to the quarter itself, NRC Picker recorded new sales
during the second quarter 2010 which surpassed sales levels of any quarter in
the past several years. In fact, NRC Picker’s 2010 year-to-date new
sales stand at 83% of annual sales for all of 2009. This sales
achievement, along with the OCS transaction, has driven Total Contract Value to
$72 million.
Before
I continue my remarks, I will have Pat review the financial performance of the
quarter.
Pat
For
the second quarter, we saw revenue growth in all Business Units except NRC
Picker. With the best quarter of net new contracts since 2008 led by
NRC Picker, we are projecting some positive revenue growth for NRC Picker for
the balance of the year. Revenue was $14.1 million, up 4% compared to
the prior year. Operating margin was 19% with operating income at
$2.7 million, down 2% over the prior year. Net income was $1.7
million, up 3%, and diluted earnings per share were $0.25, up 3%.
Growth
in revenue was again driven by double-digit revenue and operating income growth
by My InnerView and Ticker divisions. Also, operating income was
impacted by combined activities of the OCS transaction expense and costs
associated with the new rollout of Illuminate. Going into the third
quarter, we should see net income back to the 15% of revenue range.
Ticker’s
second quarter sales contributed to a 40% revenue growth for that division
compared to the same quarter last year. This is the third quarter in
a row that Ticker’s quarterly revenue growth has exceeded 40%. Much
of the revenue from these new clients will be recognized over the balance of the
calendar year 2010, highlighting the revenue momentum and margin expansion going
forward for this business unit.
My
InnerView additionally had double-digit revenue growth this
quarter. My InnerView’s new sales for the quarter were very strong,
an increase of greater than 70% compared to the second quarter 2009 and first
quarter of 2010.
In
addition to the divisions just highlighted, TGI added 34 new clients this
quarter compared to 12 new clients in the same quarter 2009.
Operating
expenses were $11.5 million for the quarter, up $600,000, or 5%, compared to the
second quarter 2009. This is largely the result of increases in
selling, general and administrative expenses and depreciation and
amortization. Our operating margin was 19% for the quarter, compared
to 20% in the second quarter of 2009. Our goal is 25% operating
margin and we anticipate it to be back in that range in the third quarter of
2010.
Direct
costs for the quarter were $5.9 million, or 42% of revenue, which are down from
the prior year’s quarter in absolute dollars. As a percent of
revenue, direct expenses were down five percentage points, driven in part by the
increases in revenue of Ticker and TGI where we realized the margin expansion of
a subscription-based model. Going forward, we are working to expand
the subscription model to be in more units which will help maintain and improve
the margin and, in the near term, we would see direct costs as a percent of
revenue to be lower than the prior year.
The
selling, general and administrative expenses for the quarter were $4.5 million
or 32% of revenue. This is up $660,000 compared to the prior year,
driven by the OCS transaction cost, the start-up cost of the Illuminate
division, sales expansion largely in the NRC Picker group, and the addition of
several leadership positions. With the sales expansion program
continuing, the SG&A as a percent of revenue will continue to be on the
higher side of our goal, but should come down a percentage point or two from
this quarter.
The
depreciation and amortization expense for the quarter was $1.1 million, or 7.5%
of revenue. The depreciation and amortization currently is expected
to stay fairly flat for the balance of the year in absolute dollars, so we
should get some expansion of margin as revenue grows during the balance of the
year. There will be a one-time jump in depreciation and amortization
with the addition of OCS, but as a percent of revenue, we should stay around 7%
of revenue.
The
income tax increase for the quarter was due to a new higher federal income tax
rate for 2010 expected to be 35%, up 1% over prior years.
Net
income for the second quarter increased to $1.7 million, up 3% over the prior
year, and for the six months ended June 30, net income increased to $4.8
million, up 12% over the prior year.
Diluted
earnings per share for the quarter increased to $0.25, up 3% over the prior
year. For the six months, diluted earnings per share increased to
$0.71, up 13% over the same period.
Cash
flow from operations for the first six months of 2010 was $9.2
million. The cash balance increased by $7.2 million as of June 30,
2010. During the quarter, the company used cash to repurchase
treasury stock in the amount of $163,000.
With
that, I’ll turn it back to you, Mike.
Mike
Thanks,
Pat.
Let
me highlight the fact that NRC Picker’s growth in net new contracts cannot be
over looked and, to me, represents a major turning point. As has been
reported in the past, NRC Picker, our biggest business unit, has largely offset
growth achieved by the other NRC businesses. For example, in the
second quarter 2010, the balance of NRC businesses achieved a 16% revenue and a
77% operating income growth over the second quarter 2009. As you
know, operating income leveraged across this latter group of businesses is
driven by their syndicated-based business models. If NRC Picker
maintains its recent growth trends in net new contracts, the resulting increase
in total contract value will change the overall growth trajectory of the
company. The balance of the company’s growth and operating metrics
remain strong looking out over the balance of 2010.
Let
me now turn to Illuminate, a patient outreach program for acute-care hospitals,
designed to facilitate service and clinical recovery within the critical 48
hours of a patient being discharged from the acute-care hospital.
The
business case is clear—nationally, 30% of all discharged patients are readmitted
to the hospital within 30 days which represents millions of patients at an
annual cost of $17 billion. CMS has cited these readmissions are the
direct result of avoidable clinical events. Today, and expanding
going forward, CMS will levy financial penalties in the form of zero
reimbursement for readmitted patients meeting CMS avoidable event
definition. In summary, Illuminate minimizes hospitals readmission
rates and consequently, the uncompensated care that would have
resulted.
In
addition to triaging patients who are at-risk for readmission, Illuminate
enables rapid service recovery for patients reporting less-than a satisfactory
experience during their hospital stay. In a world of transparency
where hospitals are required to publicly report patient experience ratings, 80%
of the country’s hospital boards of trustees have tied personal financial
incentives to the CEO for improving their HCAHPS scores. Given this incentive,
rapid service recovery has moved to the center of the bullseye for hospital
CEOs. In a few words, Illuminate drives clinical and service
improvement.
Creating
Illuminate has not been easy. New approaches for patient outreach had
to be invented. Research was undertaken to determine how to identify
at-risk patients. New work flow tools, staffing assignments and
processes were needed for hospitals to deal with triaged
patients. Illuminate passed these rigorous development hurdles and
market tests and is now being sold to acute-care hospitals across the
country.
Our
go-to market strategies include leveraging The Governance Institute’s membership
base of 600 hospital CEOs and embedding Illuminate into the NRC Picker product
offering. We believe the addressable market for Illuminate to be in
the $200 million range annually. Illuminate’s application to other
provider segments served by NRC, like long-term care and short-stay, are
currently being evaluated.
Today,
Illuminate is implemented and at work in hospitals covering 200,000 annual
patient discharges and is receiving rave review by users. Most
rewarding is the difference Illuminate is making by literally saving
lives. A case in point. An elderly gentleman was recently
discharged from the cardiac unit of a 700 bed hospital after having undergone a
pacemaker procedure. Lucky for him, that cardiac unit had implemented
Illuminate. Within 48 hours of discharge, the Illuminate process
identified the gentleman was at-risk for pacemaker failure. The
at-risk patient was triaged to the emergency department where the problem was
corrected. This individual, according to the hospital’s clinical
champion for Illuminate, is alive today largely because of their use of
Illuminate. Proof points like this make the ROI decision
easy.
Turning
now to the OCS transaction, OCS represents a new-found runway in the home health
and hospice markets and adds a vast array capability across all of
NRC. At the core of the OCS transaction is a client base of home
healthcare and hospice providers that adds $7.4 million to NRC’s total contract
value, which in and of itself, creates an immediately accretive
transaction.
This
OCS client base of 2,000, utilizes the company’s software as service offerings,
which enables patient-level clinical and financial benchmarking as well as
analytical models for improving revenue management, clinical outcomes, cost
containment and regulatory compliance.
Give
the similarities of need between of home healthcare providers and long-term care
providers, direct application of the existing OCS benchmarking and analytical
toolsets creates a tangible new revenue opportunity by bringing this product to
our 7,000 long-term care clients.
Patient
satisfaction adds yet another upside to the OCS revenue
stream. Recently, patient satisfaction was added to the OCS offerings
driven by CMS requiring home healthcare agencies to use and publicly report a
version of the HCAHPS patient satisfaction tool, not unlike the requirement in
place for acute-care hospitals. Commencing October 1, 2010, over
10,000 home healthcare agencies will be required to field Home Health CAHPS or
lose a portion of their reimbursement.
As
one can see, material revenue growth is likely within the OCS client base, as
well as from the leverage of the OCS product portfolio.
In
addition to the established OCS client base and products I have just spoken
about, the OCS transaction has added capacity and vast capabilities to NRC as a
whole, one of which is health analytics. Opportunities to establish
and utilize the health analytics team from OCS to create product extensions for
other NRC business units which house massive amounts of data is
intriguing. As well, given the OCS staff of world-class developers,
IT infrastructure experts and related associates with proven experiences from
the likes of Microsoft and Amazon, NRC has now added immeasurable depth to this
important side of the business. In fact, this latter contribution of
people will likely prove to be the most valuable aspect of the OCS organization
joining the NRC family.
Operator,
I would now like to open the call to questions, please.
Closing
Statement
Thank
you for your time today. Pat and I look forward to speaking with you
again next quarter.