Attached files
| file | filename |
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| 8-K - NATIONAL RESEARCH CORP | v210515_8-k.htm |
| EX-99.1 - NATIONAL RESEARCH CORP | v210515_ex99-1.htm |
Mike:
Thank
you, ___________, and welcome everyone to National Research Corporation’s
year-end 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.
Marketplace
attraction for the company’s new product, Illuminate, and new subscription-based
offerings gained traction throughout the third quarter and
accelerated even more so in the fourth. Net new sales for the last
quarter and the year overall were 80% greater than historical periods, driven
largely by this momentum. In keeping with these favorable conditions,
the company elected to materially increase its investments in this portfolio of
offerings during the fourth quarter 2010.
Before I
continue my remarks, I will ask Pat to review the financials for the quarter and
year-end 2010. Pat.
Pat
Revenue
for the fourth quarter 2010 was $15.8 million, up 15% compared to the fourth
quarter 2009. Net income for the fourth quarter was $1.6 million, a
decrease of 30% compared to the fourth quarter 2009, which was largely driven by
purposeful investment spending in the quarter against various new product
offerings. Net income in the fourth quarter was also negatively
impacted by one-time expenses of $550,000 for transaction costs related to the
OCS acquisition and the previously announced shut-down of our Wausau
office. There will be an additional payment of $267,000 during the
first quarter 2011 to terminate the building lease in Wausau.
Operating
expenses were $13.5 million for the fourth quarter, up $3 million or 29%
compared to the fourth quarter 2009. This increase is attributed to
product investments, costs associated with additional revenue, SG&A and
depreciation and amortization. Our operating margin was 15% for the
quarter, compared to 24% in the fourth quarter of 2009.
Direct
costs for the quarter were $6.3 million. This was 39% of revenue
which was in line with the fourth quarter 2009. For the year 2010,
direct costs were down three percentage points driven by the enhanced margins of
our subscription-based products. We anticipate our recent investments
will continue to expand margins.
The
selling, general and administrative expenses for the quarter were $5.9 million
or 37% of revenue. This is up $1.5 million compared to the prior
year, driven by costs associated with the merger of MIV and the new OCS division
and the related costs of closing the Wausau office, for which synergies and
elimination of duplication will be realized in 2011. The increase
also includes transaction costs related to the OCS acquisition, the start-up
cost of the Illuminate division, product development costs associated with the
investment of the new product upgrades, and sales expansion. SG&A
as a percentage of revenue will continue to be on the higher side of our model,
but should decrease materially from 37% in the fourth quarter 2010 to 30% in
2011.
2
The
depreciation and amortization expenses for the quarter were $1.3 million, or 8%
of revenue. Going forward, depreciation and amortization should be 7%
or less of revenue.
The
income taxes for the quarter decreased to $590,000 due to the tax legislation
enacted in December extending the research and development credits for 2010 and
extended accelerated depreciation. Increased investments and other
expenses noted above decreased taxable income for the year, moving the company’s
Federal income tax rate to 34% instead of the expected 35%. The
Federal income tax rate is expected to be 35% in 2011.
Revenue
for the year ending December 31, 2010, was $63.4 million, up 10%, and was
comprised of 32% subscription-based contracts. Net income for the
year was $8.5 million matching the 2009 net income.
Diluted
earnings per share for the quarter were $0.23, down 30% compared to the prior
year same quarter. For the year 2010, diluted earnings per share were
$1.26, equal to the year ending December 31, 2009.
Cash flow
from operations for the year 2010 was $14.6 million. The cash balance
as of December 31, 2010, was $3.5 million.
3
Looking
forward to 2011, we begin the year with total contract value at $75.0 million
compared to $62.0 million at the start of 2010. One half of this
booked revenue is now squarely made up of subscription-based
contracts.
We are
providing guidance relative to our earnings of $1.65 per share for the period
ending December 31, 2011. Providing guidance, as you know, has not
been our historical practice. However, we are well aware the
investment spending discussed above accounted for all incremental income for the
year 2010 and consequently, visibility regarding the likely returns these
investments hold is warranted. In addition to our product-related
investments, we believe 2011 earnings will benefit from having a full year of
operating income from OCS compared to only five months in 2010. This
OCS benefit, along with the product investments made in 2010, provides us
visibility to earnings growth of 30% plus. We do not intend to
provide quarterly earnings guidance nor revenue guidance.
As we
announced in the press release, the company’s Board of Directors declared an
increased quarterly dividend of $0.22 per share up from $0.19 per
share.
With
that, I’ll turn it back to you, Mike.
Mike
Thanks,
Pat.
While we
purposefully accelerated investment spending, we did not do so
lightly. Our surefootedness in moving forward with these investments
was found in the success we have experienced over the past two years with the
Ticker product. Two years ago, as you will recall, we converted
Ticker from a once-a-year deliverable to a subscription offering comprised of a
far more robust set of deliverables and resulting value. The results
over the past two years are clear. Ticker revenue is up 83% adding
$3.3 million in incremental revenue and a corresponding $2.4 million increase in
operational income. Client retention is up, market share increased,
and new sales for the Ticker product continue into 2011 on a similar
pace.
4
Building
on what we proved to be possible by reinventing the Ticker product, we are now
duplicating this strategy across NRC Picker and MyInnerView. Moving
from the industry’s historical business model of project-based,
transactional-priced offerings, we have created, tested and rolled out a
subscription-based offering with vastly enhanced deliverables and a materially
higher price point. We also adapted and leveraged this strategy and
reinvented The Governance Institute, which now also has a far more robust set of
offerings with a far greater price point. A soft launch of these
offerings earlier in 2010 ramped up in the third quarter and hit full stride in
quarter four.
Even
though we are at the beginning of upgrading current members and gaining new
market share, the numbers are impressive. We are experiencing
increased spend by current members of 20-40%, resulting in increased member
contract value of $4.1 million from approximately one-fifth of client
organizations that have cycled thru the upgrade window. Greater
acceptance of these enhanced offerings by the marketplace at large also has
shown traction. Overall, net new sales across this portfolio are up
88% for the last half of 2010 compared to the first six months of the year
without such enhancements.
To
provide yet another perspective of the market’s acceptance of this portfolio,
consider that subscription-based products comprised 32% of the company’s annual
revenue, 40% of the fourth quarter’s revenue, and at year-end, 49% of contract
value. Looking at NRC Picker only, 1% of its fourth quarter revenue
was truly subscription and yet 35% of its total contract value is now
subscription-based contracts.
5
As was
the case with Ticker, it took a little over a year to cycle thru the entire
client base and we anticipate a similar timeframe and client take rates, albeit
against a vastly larger monetary base. Ticker contract value at the
commencement of its conversion was around $4.0 million compared to starting
contract value of $45.0 million in aggregate for NRC Picker, MIV and
TGI.
Illuminate,
as well, is benefiting from the fourth quarter 2010
investments. Operating income losses for Illuminate for the year
ended December 31, 2010, were close to $700,000 and we anticipate losses to
continue into the first portion of 2011 as we continue to invest
heavily. As I have suggested and again witnessed in the fourth
quarter, Illuminate is the right product addressing a key business problem and
our timing has proven correct. Given the competitive nature and the
stage of where we are with Illuminate, I have elected not to add color or
quantify its ramp up. It is now all about execution and one of our
proven leaders, Ginny Martin, who steered the Ticker success, is leading the
Illuminate team.
Speaking
of leadership, we have, as an organization, added a large number of associates
to our leadership ranks over the past few years and continue to systematically
add top talent to a variety of positions. To that end, I’m happy to
announce Kevin Karas joined NRC in the fourth quarter as Senior Vice President
of Finance. Kevin brings a wealth of experience to the company,
having most recently been CFO at Lifetouch, Inc., the largest company of its
kind with 700 photography studios across the nation with annual revenue of $1.0
billion. Kevin started his career with Ernst and Young and, as well,
held positions with two prominent healthcare organizations in both operations
and finance.
Moving
into 2011, healthcare will continue to evolve and adapt in response to
healthcare reform. Value-based purchasing, public reporting of
patient experience and quality, a higher bar for governance and reduction in
reimbursement including avoidable readmissions, will cascade across the
continuum of care. NRC is the only firm doing what we do across the
entire continuum of care and given such, we have a strong
foundation. This market position, combined with our offerings and our
talent, suggests a very strong 2011.
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.
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