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Edited Transcript of NRCIB earnings conference call or presentation 7-Aug-19 3:00pm GMT

Q2 2019 National Research Corp Earnings Call

Lincoln Sep 5, 2019 (Thomson StreetEvents) -- Edited Transcript of National Research Corp earnings conference call or presentation Wednesday, August 7, 2019 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Kevin R. Karas

National Research Corporation - Senior VP of Finance, CFO, Treasurer & Secretary

* Michael D. Hays

National Research Corporation - Founder, CEO & Director

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Conference Call Participants

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* Frank Sparacino

First Analysis Securities Corporation, Research Division - SVP

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Presentation

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Operator [1]

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Greetings, and welcome to the second quarter 2019 conference call. (Operator Instructions) As a reminder, this conference is being recorded, Wednesday, August 7, 2019.

I would now like to turn the conference over to Michael Hays, Chief Executive Officer. Please go ahead.

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Michael D. Hays, National Research Corporation - Founder, CEO & Director [2]

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Thank you, Susie, and welcome, everyone, to National Research Corporation's 2019 Second Quarter Earnings Call. My name is Mike Hays, the company's CEO. And joining me on the call today is Kevin Karas, our Chief Financial Officer.

Before we continue, I'd ask Kevin to review conditions related to any forward-looking statements that may be made as part of today's call. Kevin?

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Kevin R. Karas, National Research Corporation - Senior VP of Finance, CFO, Treasurer & Secretary [3]

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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.

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Michael D. Hays, National Research Corporation - Founder, CEO & Director [4]

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Thanks, Kevin. And again, welcome, everyone. In the second quarter, and in fact year-to-date, contract value growth in our Voice of the Customer digital platform has continued, with more current clients expanding their use of the platform, and new logo wins displacing Press Ganey adds to our marketplace footprint. The industry is realizing the value of reallocating health care systems latency. Patient satisfaction spend against higher-value offerings is creating C-suite and enterprise-wide attention.

With that, I will now turn the call over to Kevin.

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Kevin R. Karas, National Research Corporation - Senior VP of Finance, CFO, Treasurer & Secretary [5]

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Thank you, Mike. Total contract value at the end of the second quarter 2019 ended at $133.6 million, representing 7% growth over the same period in the prior year. Health care system clients with agreements for multiple solutions represents 26% of our client base at the end of the second quarter of 2019, up from 24% at the same time last year. Total contract value for our digital Voice of the Customer platform solutions increased to $84.2 million compared to $64.1 million at the end of the second quarter of 2018.

Our second quarter 2019 revenue was $31.4 million, an increase of 12% over the second quarter of 2018. Second quarter revenue for our digital Voice of the Customer platform solutions increased to 62% of our total revenue compared to 50% of our total revenue in the second quarter of 2018.

Our consolidated operating income for the second quarter of 2019 was $10.1 million or 32% of revenue compared to $7.8 million or 28% of revenue for the same period last year.

Total operating expenses of $21.3 million increased by 5% in comparison to the prior year. Direct expenses increased by 5% to $11.5 million for the second quarter of 2019 compared to $11 million for the same period in 2018. Direct expenses as a percent of revenue were 37% for the second quarter of 2019 compared to 39% in 2018. Direct expenses increased due to growth in fixed costs offset by -- partially by a decrease in variable expenses. The fixed expense increases primarily were a result of increased salary and benefit cost in the customer service and information technology areas partially offset by lower variable costs, which were down due to the continued shift in our revenue mix from legacy solutions to the Voice of the Customer platform revenue. Variable expenses -- variable direct expenses as a percent of revenue decreased to 17% for the second quarter of 2019 compared to 19% of revenue in the second quarter of 2018.

Selling, general and administrative expenses increased to $8.3 million for the second quarter of 2019 compared to $7.9 million for the same period in 2018. SG&A expenses were 26% of revenue for the second quarter in 2019 compared to 28% of revenue for the second quarter in 2018. Selling, general and administrative expenses increased in 2019 due to increased software license and platform hosting expenses, higher contracted services and additional travel costs.

Our depreciation and amortization expense increased to $1.4 million for the second quarter of 2019 compared to $1.3 million in 2018. The increase in expense is driven by additional investments in our technology platform.

Other income and expense changed from $63,000 of net other income in the second quarter of 2018 to $664,000 of net other expense in the second quarter of 2019. This change was primarily due to the increased interest expense from our new term loan that originated in April 2018, and the impact of foreign exchange rate changes on the revaluation of intercompany transactions.

The company's income tax expense was $2.1 million for the second quarter of 2019 compared to $129,000 income tax benefit in the second quarter of 2018. The effective tax rate was 22% for the second quarter of 2019 compared to an effective tax rate benefit of 2% for the same period in 2018. The increase in the effective rate is primarily due to the impact from the income tax benefits from the recapitalization for accelerated vesting of restricted stock and settlement of stock options as well as additional tax benefits from the exercise of options and dividends paid to nonvested shareholders in 2018.

Net income for the second quarter was $7.4 million in 2019 compared to $7.9 million in 2018.

With that, I'll turn the call back to Mike.

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Michael D. Hays, National Research Corporation - Founder, CEO & Director [6]

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Thank you, Kevin. As Kevin just reviewed with us, financial performance in the second quarter was very strong. Perhaps the clearest metric is the Voice of the Customer platform revenue that increased 38% year-over-year showing accelerated migration from the legacy paper-and-pencil business to the digital near-time feedback platform. A recent new win just early in this third quarter is a classic example of the tangible points of differentiation that is being created by NRC Health Voice of the Customer platform. A large health care system selected NRC Health for its Voice of the Customer platform head-to-head against Press Ganey's legacy approach. While wins against Press Ganey are more and more common, this new client is noticeable in that it represents the largest contract value win for the company this year.

This completes our prepared remarks. So operator, I'd now ask that you open the call to questions, please.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question coming from the line of Frank Sparacino with First Analysis.

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Frank Sparacino, First Analysis Securities Corporation, Research Division - SVP [2]

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I had a question just from a macro standpoint. I know NRC has been out in front leading the charge in terms of modernizing HCAHPS. And I'm curious where the client base is today in the U.S. And then, do you think -- I'm not sure how important is for CMS to -- there's been talk, obviously, they are going to move and make some changes, but that may take some time, and I don't know if the industry is sort of waiting for that or will continue to move ahead of CMS. Just any thoughts around those dynamics.

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Michael D. Hays, National Research Corporation - Founder, CEO & Director [3]

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There are some changes being discussed with CMS, you're aware of, were alluded to. Time table for those, I really don't have any visibility against. Traditionally, CMS has moved in a fairly slow pace. So I would assume that would continue. I think there is -- if you split and look at the trend lines, I would assume that more of a multimodal data collection method would be approved by CMS for their CAHPS program, but I thought that would happen some time ago and it hasn't, but I would assume that would be one of the ideas or thoughts that they may be considering.

I think, in general, the industry is pretty dissatisfied with HCAHPS. There is this static set of questions that are being measured and have been measured for now coming up to a decade. There is little, if any, movement on those measures and a lot of our verbatim comments that we get back from feedback systems are suggesting that there is new and different kind of smoke and fire on horizon that is not being measured by the static HCAHPS questions. So I think it's an important point of comparison and public reporting, but I'm not sure it's living up to its aspirations relative to an improvement tool. I'm not sure if that gets, Frank, at your entire question, but those are some thoughts.

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Frank Sparacino, First Analysis Securities Corporation, Research Division - SVP [4]

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No. That's helpful. And maybe just following up. I'm not sure where you guys stand in terms of the existing base you have. How many of those have migrated to the digital Voice of the Customer platform? But maybe that be the first part. And then secondly, for the clients who are moving and reallocating the spend, have you seen the overall spend sort of stay flat, grow? And if it's growing, to have any sense, to what extent?

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Michael D. Hays, National Research Corporation - Founder, CEO & Director [5]

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Sure. The migration of our current plans to the digital platform is roughly 2/3. So 2/3 of the contract value is now on digital platform versus the paper and pencil. I doubt whether it will ever reach 100%. In some cases, that relates back to some of the data collection methodologies that are required for the CAHPS program. So I would say if we get to 90%, that's probably fully loaded so to speak.

In terms of the average spend per client once they migrate, it actually is increasing slightly and that is primarily because the feedback is so instantaneous rather than to wait for several weeks for aggregated results on what happened last week, they're getting feedback today on what happened yesterday. And as a result of that, they're broadening the service settings in areas within their organization that they got feedback and that drives increased spend. I don't have the exact percentage increase, but it probably be the low single digits as we look at it right now and probably will expand or increase over time.

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Operator [6]

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(Operator Instructions) Mr. Hays, there are no further questions at this time. I will turn the call back to you.

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Michael D. Hays, National Research Corporation - Founder, CEO & Director [7]

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Thank you, Susie, and thanks everybody for listening in on our call today. Kevin and I look forward to reporting our progress next quarter. Thank you.

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Operator [8]

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Thank you. That does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your line.