National Research Corporation (NRCIB)

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National Research (NRCIB)

Q3 2013 Earnings Call

November 06, 2013 11:00 am ET

Executives

Michael D. Hays - Founder, Chief Executive Officer and Director

Kevin R. Karas - Chief Financial Officer, Principal Accounting Officer, Senior Vice President of Finance, Treasurer and Secretary

Analysts

Ryan Daniels - William Blair & Company L.L.C., Research Division

Frank Sparacino - First Analysis Securities Corporation, Research Division

Presentation

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the National Research Corporation's Third Quarter 2013 Earnings Release Conference Call. [Operator Instructions] And as a reminder, this conference is being recorded, Wednesday, November 6, 2013.

And it is now my pleasure to turn the conference over to Mr. Michael Hays. Please go ahead, sir.

Michael D. Hays

Thank you, Jason, and welcome, everyone, to National Research Corporation's third quarter conference 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?

Kevin R. Karas

Thank you, Mike. This call -- 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.

Kevin R. Karas

Thank you, Kevin, and again, welcome, everyone. Two noteworthy achievements this past quarter were record net new sales of $6.2 million as well as our surpassing the $100 million mark in total contract value. Of equal importance was the performance of our post-acute product group, which returned to positive growth in contract value through robust new sales in the quarter.

With that, Kevin, I will turn the call over to you before I take the call back and highlight some additional accomplishments. Kevin?

Kevin R. Karas

Thanks, Mike. As we mentioned on the earnings call last quarter, we'll be reviewing our results going forward both in terms of our consolidated financial performance as well as referencing the impact on our performance from the Customer Connect subsidiary that was created in June of this year.

So for the third quarter, net new sales of $6.2 million were added, which helped increase our total contract value for the third quarter to $100.6 million. Subscription-based agreements continue to represent 83% of our recurring contract value. The third quarter total contract value includes approximately $400,000 from new Customer Connect agreements, of which 100% are subscription based.

Our revenue for the third quarter was $22.4 million, an increase of 5% over the second quarter of 2012. Revenue growth for the quarter continues to be comprised entirely from organic growth, which is driven by a combination of continued gains in market share and vertical growth from cross-selling, as well as increasing contract value in our existing client base.

Third quarter results do include approximately $20,000 of revenue from Customer Connect. Our consolidated operating income for the third quarter of 2013 was $6.0 million or 27% of revenue compared to $5.6 million or 26% of revenue for the same period last year. The third quarter consolidated operating income includes $471,000 in operating losses from Customer Connect.

Operating income for the third quarter without Customer Connect was $6.4 million, which represents a 29% operating income margin and an increase in operating income of 14% over the third quarter of 2012.

Our total operating expenses for the third quarter increased by 4% from $15.7 million in 2012 to $16.4 million this year. Direct expenses increased to $9.5 million for the third quarter compared to $8.6 million for the same period in 2012. This is the result of increased variable costs related to revenue growth and higher survey volumes for subscription-based products. Our direct expenses, as a percent of revenue, were 42% for the second quarter of 2013 and are expected to be at 41% of revenue for the full year of 2013.

Our selling, general and administrative expenses increased to $6.0 million over -- or 21% -- 27% of revenue for the 3-month period ended September 30, 2013, compared to $5.8 million or 27% of revenue for the same period in 2012. The SG&A expense for the third quarter without Customer Connect was $5.7 million in 2013 or 25% of revenue.

With the incremental expenses that are projected to be incurred for Customer Connect resources, our consolidated SG&A expense is expected to be at 28% of revenue for the full year of 2013.

Depreciation and amortization expense for the third quarter 2013 was $907,000 compared to $1.1 million in the third quarter of 2012. The decrease was attributed to declining intangible asset amortization expenses. Our depreciation and amortization expense was 4% of revenue for the third quarter and is also expected to be at 4% of revenue for the full year of 2013. The provision for income taxes totaled $2.1 million for the 3-month period ending September 30, 2013, compared to $1.9 million for the same period in 2012. The effective tax rate was 35.9% for the second quarter of this year compared to an effective tax rate of 34.9% for the same period last year. Our effective tax rate is expected to average 36.5% for the full year of 2013.

Read the rest of this transcript for free on seekingalpha.com