National Research Corporation

Good morning, welcome to today's National Research Corporation fourth quarter 2021 earnings conference call. My name is Candice and I will be your moderator for today's call. All lines will be muted during the presentation portion of the call with an opportunity for question and answer at the end. If you would like to ask a question you press start followed by one on your telephone keypad. I would now like to pass the conference over to our host Mike Hayes CEO of National Research Corporations. Mike, please go ahead.

Thank you, Candace, and welcome, everyone, to National Research Corporation's 2021 fourth quarter and year-end conference call. My name is Mike Hayes, the company's CEO, and joining me on the call today is Kevin Karras, 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?

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.

Thanks, Kevin, and again, welcome, everyone. My remarks today center on sharing the evolution of NRC Health's strategic direction with a focus on our future trajectory. The foundation of our growth strategy builds upon our past work digitizing, the collection of patient feedback, which, as you are aware, shortens cycle times in delivering insights to our clients and represents the views of far greater number of patients. These innovations from legacy approaches to capturing customer feedback have driven increased retention and spin from current clients and new logo wins against press gaining. To this foundation, of digitizing the measurement of experience of a person's past healthcare encounters, NRC Health has added the capability and capacity to have a dialogue with patients before the healthcare visit to understand their preferences, fears, and expectations for their upcoming appointment. Armed with this understanding, care teams can personalize care delivery, resulting in each patient being treated as a unique person. Uniqueness is an important outcome of healthcare delivery, given consumers cite healthcare as the most consequential, personal, and expensive of all services. And given such, we know from national studies, 87% of consumers in the United States expect personalized care. We have branded our ability to enable the delivery of personalized care for all patients as our human understanding program. The business case is basic. Delivering personalized care improves clinical outcomes, reduces costs, and creates lasting patient-provider relationships. All healthcare organizations, of course, are aware of this business need and strive to better understand those that they serve so as to treat each patient uniquely. To this end, some healthcare systems are doing better than others. In fact, we have benchmarked every major healthcare organization in the 200 largest U.S. markets, and performance ranges from 0% of patients feeling they were treated as unique to a few select organizations where 100% of patients report everyone in the organization did so. Net promoter scores were 82, an amazingly high NPS, And patients were 12 times more likely to be a promoter of these top performing health systems. At the lower end of the range, we documented an extremely low MPS of negative 50. In these lower performing health systems, patients were 13 times more likely to be a detractor of that brand. These benchmarks reconfirm the need for improvement and magnify the value of NRC's offerings. which is to enable partner organizations to treat every patient as unique. The Human Understanding Program enables personalization by pushing relevant and contextual patient information to our partner organization's workflow tools, which ensures the right care team member has the right information at the right time to make each interaction with the patient smarter and personalized. Furthermore, Patients' fears, preferences, and expectations are routinely updated and appended to that person's lifetime record, creating an even more robust, ever-evolving motion picture of every individual. The impact is notable in client organizations that have deployed our human understanding program. These client organizations have enabled personalized care delivery at scale, improved care coordination, and patient engagement has become more effective. In essence, the person has been treated by all in all interactions as unique. With that, I would now turn the call back over to Kevin.

Thank you, Mike. I am pleased to report solid fourth quarter results and the continuation of our strong performance for the year as we continue to achieve double-digit revenue and operating income growth. Our 2021 annual revenue growth of 11% represented our highest annual growth rate since 2012. We also increased 2021 full-year operating income by 18% over 2020 and increased operating margin to 34%, up from 32% in 2020. We ended 2021 with $150.9 million in total recurring contract value, or TRCV, TRCV represents 12 months of revenue from our current client contracts, which are essentially all fixed price subscription agreements. Our 2021 ending TRCV increased by 4% over the prior year compared to an annual increase of 6% in 2020. The decline in TRCV growth rate in 2021 was impacted by our strategy to continue to evolve our business mix as we focus on growing are digital core solutions, while at the same time eliminating certain legacy or non-core solutions. Decisions we made to eliminate certain legacy offerings over the next year for our Canadian and insurance payer markets resulted in a decrease to TRCV of $4.2 million. With that, our adjusted 2021 TRCV growth rate without those eliminations was 7%. The combination of higher growth rates from our digital core offerings and elimination of certain non-core offerings increased TRCV for our digital core solutions to represent 85% of total recurring contract value at the end of 2021, up from 57% at the end of 2018. Again, our growth strategy continues to focus on organic growth levers of increasing revenue, from our core offerings within our existing client base, as well as adding new clients to increase market share. With respect to our existing client base, we saw a continued increase in our client retention rate, as well as an increase in clients utilizing multiple solutions, up to 32% from a level of 28% at the beginning of the year. While this increase was very positive, we still have a significant addressable market opportunity within our client base for increased penetration and growth. Our new sales declined from 29.5 million in 2020 to 22 million in 2021, which we believe was primarily attributed to fewer new sales opportunities related to the continued impact of COVID for our clients. Operating income grew over the prior year by 26% and 18%, respectively, for the fourth quarter and the full year of 2021. As we generate revenue growth, the efficiencies inherent in our subscription model continue to drive operating leverage and margin improvements, a hallmark of our financial performance. We also benefited from focus and discipline in managing our cost structure in 2021. Net income for the fourth quarter and the full year of 2021 increased by 17% and 1%, respectively, over the same periods in 2020. The lower net income increase relative to the increase in operating income was due to changes in our effective tax rate. The effective tax rate for both the fourth quarter and year end of 2021 increased to 23%. That's compared to 17% and 10% respectively for the same periods in 2020, mainly due to decreased tax benefits from the exercise and vesting of share based compensation rewards and from higher state income taxes in 2021. Our annual cash flow from operations was $46.3 million in 2021 compared to $40.6 million in 2020. an increase of 14%. The company ended 2021 with a cash balance of $54.4 million, up from $34.7 million at the end of 2020. The company's board of directors has established priorities for capital allocation with funding of innovation and growth investments, including both M&A activity as well as internal projects as our preferred use of capital. The company funded $7.6 million for innovation and growth purposes in 2021. Next in priority in capital allocation is for quarterly dividends and share repurchases. In 2021, we paid $9.2 million in quarterly dividends to shareholders and $4.6 million for share repurchases. That concludes my comments for this morning. I'll now turn the call back to Mike.

Thank you, Kevin. We will report our partner's adoption of our human understanding program as a key growth lever in future earnings calls. As well, we would ask that you look for additional human understanding program announcements as time unfolds. This actually completes our prepared remarks, so operator, I now ask you to open the call to questions, please.

Thank you. If you would like to ask a question please press star followed by one on your telephone keypad. If for any reason you would like to remove a question it is star followed by two. Again to ask a question it is star followed by one. As a reminder if you are using a speakerphone please remember to pick up your handset before asking a question. So our first question comes in from George DeAngelo from Alpine Peaks Capital. Your line is now open. Please go ahead.

Hey, good morning, guys. Thanks for taking my question. I was just wondering, how much was the sales environment this quarter impacted by hospitals busy with Omicron?

Clearly, our partner organizations for the most part are swamped, right? So all heads down on patient care, which of course is where it should be. However, we are seeing an increased number of meetings that are being accepted and our sales level of activity is starting to increase, especially over a year ago. So I believe the markets are opening up, but clearly it's had a dampening effect over the last 18 odd months.

Got it. And would you say that, you know, as much as you can comment for the first quarter, is it, is that something you're still seeing with things kind of opening up in terms of the sales?

Yeah, I think as the COVID peak has peaked in about 40% of the population, we are seeing an increased appetite to get on about looking at different programs for voice of the customer. Clearly, we're not there in every market in the United States, as we all hope we will be soon. So, I think the trend is more on the positive side in terms of tailwinds versus headwinds.

Got it. Thanks. And if I could ask another question. So, thanks for the comments on human understanding and excited to hear about that new product. Is that going to be structured more as an option? that clients add on to existing products, or is it going to be more separate from the current offering?

It builds on the base of digitization of the collection of the voice of the customer, so it's part and parcel. One could not purchase human understanding without the baseline digital data collection, what you refer to as real-time. We will, when we reach mass deployment, which will be here in probably mid-year, I would guess. We will start versioning the rollout, meaning that it will be a embedded offering to all clients that want to take part of that in one fell swoop. The rollout strategy is not unlike what we had for our real-time product, which over the course of three years, we essentially converted the vast majority, if not all, that are going to convert to the real-time platform, I would assume that we will see a similar migration with over perhaps a three-year period. The lift from human understanding will have been realized.

Got it. And I think recently you guys had talked about, you know, pricing, and we're seeing that across the economy. Can you give a little color on conversations that you're having with your customers around pricing right now?

We haven't seen a lot of pushback. I mean, the sales environment has not been as robust as it was pre-COVID, so maybe we'll see something different on a go-forward basis. But the value of the product offerings that we have really have protected us on any cannibalization that may exist in the marketplace, given the pressures that healthcare organizations have, for example, on their labor costs. So as of right now, while every deal we get is a competitive deal, so I don't want to suggest it's by any means easy street. Price really has not been the determining factor. It's been more about the innovation we're bringing to the marketplace, and that seems to have maintained or provided some pricing power.

Thanks a lot, guys. Thank you, George.

As a reminder, if you would like to ask a question to start followed by one on your telephone keypad. There are currently no more questions waiting, so at this time I will pass the conference call over to the management team for closing remarks.

Thank you, operator, and thank you all today that have been listening on our call. We look forward to reporting progress next quarter. Again, thank you for your time.

That concludes today's conference call. Thank you for your participation. You may now disconnect your line.