National Research Corporation

Greetings and welcome to the second quarter 2020 conference call. During the presentation, all participants will be in a listen-only mode. Afterwards, you will conduct a question and answer session. At that time, if you have a question, please press the 1 followed by the 4 on your telephone. If at any time during the conference you need to reach an operator, please press the star 0. As a reminder, this conference is being recorded Wednesday, August 5, 2020. I would now like to turn the conference over to Kevin Karras, Chief Financial Officer. Please go ahead.

Thank you, Christy, and welcome, everyone, to National Research Corporation's 2020 Second Quarter Earnings Call. Again, my name is Kevin Karras, and I'm the Chief Financial Officer. Before continuing, I would like to review conditions related to any forward-looking statements that may be made as part of today's call. 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. Before reviewing second quarter 2020 performance, on behalf of all NRC associates, I would like to extend a heartfelt thank you to our customers and frontline caregivers around the world who continue to work tirelessly to save lives and keep communities safe during the COVID-19 pandemic. As we are all aware, this public health crisis continues to have an extended financial impact on many sectors of the economy, including healthcare. We have no unique perspective which would allow us to forecast the depth, duration, or specific impact on our clients or on NRC Health. Given this uncertainty, our only assumption is that the company's sales revenue and margins are unlikely to follow the growth trends of the past. Regarding our Q2 performance, Recurring contract value at the end of the second quarter of 2020 ended at $142.8 million, representing 11% growth over the same period in the prior year. Healthcare system clients with agreements for multiple solutions represented 28% of our client base at the end of second quarter of 2020, up from 26% at the same time last year. Recurring contract value for our digital voice of the customer platform solutions increased to 106.9 million compared to 82 million at the end of second quarter 2019. In response to special circumstances among clients hit hard by COVID-19, we elected to provide uncompensated services which reduced revenue without a corresponding offset in expenses and therefore also reducing operating income in Q2. All of these impacted clients have resumed compensated services as planned to date, and many have extended contract terms in recognition of the support provided by NRC Health, resulting, we believe, in a stronger long-term partnership. Second quarter revenue was $31.2 million. a decrease of 0.8% over the second quarter of 2019. Consolidated operating income for the second quarter of 2020 was 9.3 million, or 30% of revenue, compared to 10.1 million, or 32% of revenue for the same period last year. Total operating expenses of 21.9 million for the second quarter increased by 3% compared to the second quarter of 2019, total operating expenses of 21.3 million. Our direct expenses increased to 11.6 million for the second quarter of 2020, compared to 11.5 million for the second quarter of 2019. Direct expenses remained at 37% of revenue in both the second quarter of 2020 and 2019. Direct expenses increased primarily due to an increase in fixed expenses offset by a decrease in our variable expenses. Fixed expenses increased primarily due to higher salary and benefit costs and contracted services in the customer service and information technology areas offset by lower travel and meal costs due to restricted travel associated with COVID-19. Variable costs are lower due in large part to the continued shift of our revenue mix from legacy solutions to voice to the customer platform revenue. as well as decreased conference expenses due to rescheduling of events due to COVID-19. Variable direct expenses, the percentage of revenue decreased to 13% for the second quarter of 2020, compared to 17% in the second quarter of 2019. Selling general and administrative expenses increased to 8.9 million for the second quarter of 2020, compared to 8.3 million for the same period in 2019. primarily due to higher salary and benefit costs, increased software and platform hosting expenses, and additional contract services. Selling general and administrative expenses were 28% of revenue for the second quarter of 2020 compared to 26% of revenue for the second quarter of 2019. Depreciation and amortization expense was $1.4 million for both second quarter of 2020 and 2019. Other income expense changed to $718,000 of other net expense in the second quarter of 2020 compared to $664,000 of other net expense in the second quarter of 2019. The increase was primarily due to the revaluation on intercompany transactions due to changes in the foreign exchange rate. which is partially offset by decreased interest expense due to the declining balance on our term loan. The company had an income tax provision of $842,000 for the second quarter of 2020 compared to 2.1 million in 2019. The effective tax rate was 10% for the second quarter 2020 compared to 22% for the same period in 2019, primarily due to increased tax benefits in 2020 from the exercise and vesting of share-based compensation awards, partially offset by higher state income taxes, since we are now filing in more states. Net income for the second quarter of 2020 was $7.7 million, compared to $7.4 million in 2019. This completes the prepared remarks. Christy, I will now ask you to open the call to any questions.

Thank you. If you would like to register for a question today, please press the 1 followed by the 4 on your telephone. You will hear a three-tone prompt to acknowledge your request. If your question has been answered and you would like to withdraw your registration, please press the 1 followed by the 3. Once again, to ask a question, please press 1-4. Our first question comes from the line of John Lewis with Willis Investment Council. Please go ahead. Your line is open.

Good morning, Kevin. I appreciate you taking the question. I was just curious if with you guys giving complimentary services to some of your customers, are there any risks in the receivables that they may not be collected?

Yeah, thanks, John. That's a good question. You know, we did see an increase in our accounts receivable day sales outstanding at the end of the second quarter compared to our historical trends. And part of the discussions with our customers were situations where they had requested deferred payment terms or an adjustment in payment terms, which we did agree to. So in cases where we felt that was appropriate, we made that accommodation. I would say that we expect that all of the deferred or past due amounts will ultimately be collected with minimal increase in our bad debt expense. We have not seen a situation where we have customers declaring bankruptcy or anything that would give us the indication that those accounts receivable will not ultimately be collected at a rate that we historically have seen. Just going to take a little bit longer.

Right. Understood. And that makes sense. So in two more generally, could you give me any more information just in trends that may be happening in the industry? Are we moving further towards consolidation brought on by COVID? Is some of the smaller players suffer more than the bigger players? Can you give me anything there?

Sure. I think the macro trends that we've been seeing for several years continue to hold true, and potentially some acceleration with COVID. We have seen significant consolidation in the healthcare system market. More and more, it's a smaller number of large healthcare systems that provide a large percent of the care across the country. You know, I cannot say that I have significant data points over the last 60 or 90 days where there's been any increase in M&A. I think because providers have been so focused on just trying to, you know, prepare for COVID. But there could potentially, as a result of this, there could be some acceleration in what was already, you know, a trend of consolidation.

That makes sense. I really appreciate you taking the questions.

Okay, you're welcome.

Thank you. Once again, as a reminder, if you would like to register for a question today, please press 1-4. And there are no further questions at this time.

Okay, thank you, Christy. Just in closing, I'd say it goes without saying that COVID-19 is far from behind us. And, you know, again, our thoughts and support are with those who are on the front lines battling this pandemic. And with that, thank you for your time today. And that's the end of the call.

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