Hello, everyone, and welcome to the National Research Corporation’s Second Quarter 2022 Earnings Call. My name is Charlie and I'll be coordinating the call today. You will have the opportunity to ask your questions at the end of the presentation. I will hand over to your host, Mike Hays, CEO to begin. Mike, please go ahead..

Thank you, Charlie and welcome everyone to National Research Corporation's 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 would 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..

Thank you, Kevin. And again, welcome, everyone. The clear headline for the quarter is that Novant health, which is an integrated healthcare system, serving four states with 15 medical centers and 600 clinics, has contracted for our Human Understanding Program, being the first health system in the country able to deliver personalized care at scale.

Novant Health's adoption of the program enables care teams to understand each patient's fear and expectations and have that information accessible for their use at each interaction so that each patient is treated as a unique person. Let me now turn the call back to Kevin to review our financial performance and then open the call to your questions..

Thank you, Mike. Our growth strategy continues to focus on organic levers of increasing revenue from core offerings, including our new human understanding program, both within our existing client base, as well as adding new clients increased market share. We ended the quarter with $147.7 million in total recurring contract value or TRCV.

Our TRCV metric represents the total revenue projected under all renewable contracts for their respective next annual renewal periods assuming no upsells, downsells, price increases or cancellations measured as of the most recent quarter end. Our second quarter 2022 ending TRCV decreased by 1% over the prior year.

The decline in TRCV growth rate in 2022 was impacted by our strategy to continue to evolve our business mix as we focus on growing our digital core solutions, while at the same time discontinuing certain legacy or non-core solutions. Our June 30, 2022 core solution TRCV growth rate was 3% increase compared to June 30, 2021.

Revenue growth for the second quarter of 2022 was 2% over the second quarter of prior year.

While growth in our core offerings remained strong, our consolidated revenue growth was negatively impacted from decreases in revenue from our non-core offerings, including decreased Canadian revenue due to the upcoming enclosure of our Canadian office later this year.

Second quarter operating income declined by 6% compared to the same period in 2021, as we allocated more resources towards innovation initiatives, associate empowerment benefits, and new marketing programs.

Our second quarter 2022 direct operating expenses also increased due to salary, benefit and contracted service costs to support our clients and also to invest in workforce automation. The effective tax rate for second quarter of both 2022 and 2021 was 25%.

Net income for the second quarter of 2022 was $8.3 million compared to $8.9 million for the same period in 2021. For the first six months of 2022 revenue increased by 5% to $75.7 million compared to $71.9 million in 2021. Net income for the first six months of 2022 decreased to $16.9 million as compared to $18.2 million for the first half of 2021.

Our 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 is our preferred use of capital. The company funded $6.2 million for innovation and growth purposes in the first six months of 2022.

Next in priority is capital allocation for quarterly dividends and share repurchases. For the first six months of this year, we funded quarterly dividend payments to shareholders totaling $9.1 million and $22.2 million for share repurchases. That concludes my comments for this morning. I will now turn the call back to Mike..

Thank you, Kevin. Actually that completes all of our prepared remarks. So Charlie, I would now ask you to open the call to questions, please..

Operator:.

Willis Investment Counsel:.

Good morning. I was just curious with where your expenses were in the quarter and operating margin coming down a little bit.

Can you give us any kind of relativity on those expenses in the quarter and kind of thinking out into the future of, with this new program will potentially revenue growth kind of offset those increases and expenses? I appreciate it..

Yes, John, thanks for the question. So as we look -- look at the first half of the year, and we look ahead we have a combination of expense increases that will continue.

As we come out of COVID some of the costs related to our sort of getting back in-person, whether it be TGI Conferences or our travel and entertainment for associates, those costs will continue to be higher this year.

At the same time, I would say, our level of discretionary spending on some of the initiatives that we're talking about for innovation and growth and workforce automation, we expect those levels to decrease in the second half of the year.

So, everything being equal, we would expect to see a lower level of operating expenses because of that and some nominal margin improvement as we go through the rest of the year..

Understood. And what I'm thinking about, well, I guess kind of going back, the Voice of the Customer program you guys put in, a huge part of that was the increase in margins that came from that.

When I think about the Human Understanding Program, does that somewhat kind of fall in from a margins perspective with the Voice of the Customer program?.

It does actually. We did have a significant expansion in gross margin, given the digitization of our feedback methods, and that's what we saw occur as we rolled almost all of our business from legacy into digital. That runway has essentially been tapped.

Human Understanding Program will not necessarily increase the margins any more than what they already have been expanded to.

However, one of the benefits of the Human Understanding Program is that clients that adopted are actually increasing their contract value, meaning of all of the different products and services that we offer, they are buying the entire bundle so as to benefit from the Human Understanding Program.

So we ought to see a significant increase in total revenue at the same margins that we've experienced through the digitization of the feedback, if that makes sense.

So I don't see margins increasing, but the increase in revenue that we gain from the Human Understanding Program should be brought into the books at the same, maybe slightly elevated margins, if there's some leverage ability on just fundamental increase in revenue..

Understood, thank you so much for the commentary..

Operator:.

George D'Angelo:.

Alpine:.

Hey guys.

Just to follow up on John's question, the Novant Health Human Understanding, can you describe the differences both from a functional perspective and then as well as financially versus, you know, I'm not sure if this was a new customer or an existing customer of the Human Understanding versus whatever was happening before with that client?.

Sure. Novant has been a longstanding customer of ours, which speaks perhaps why they adopted the program so quickly. We have quite a history with them in terms of providing service.

We're not really disclosing the financial information on a client by client basis, but the economics were such that Novant purchased the additional products that we had in our portfolio that they historically had not purchased.

And the Human Understanding Program took the information that we collect from each patient and distributes it into their workflow, so as each care team member can access that information at point of care delivery.

So it's increased value to Novant and it's increased revenue to NRC, but it was a current client that expanded their relationship by buying the balance of our product with the overlay of the Human Understanding Program, which provided that information to more caregivers within their system..

Got you.

In terms of Novant specifically, is there a reason besides the fact that it sounds like they have been a longstanding customer based on their business, that Human Understanding made more sense for them to jump on early or was it just an organization that likes to try out new things?.

The readiness of that organization in adopting new things is pretty traditional, so that didn't necessarily surprise us.

I think the tipping point at Novant quite frankly and the other ones that are unfolding is that the mission of most healthcare organization is to treat each patient as a unique person and personalize the care that is being delivered.

And Novant, as long as other healthcare systems have always professed that that's the reason and the underlying driver of their mission, but they've never really been able to perform that at scale. And Novant’s Board is very focused on treating each person is unique. So we fit in clearly with the driver of their mission and this helped enable it.

That no doubt had impact in consolidating or condensing the decision cycle. So long way to say it was a happy customer that wanted to purchase more to drive the purpose of their business..

That's great.

I know you guys have disclosed this in the past, but would you be able to give some color on quarterly net new sales?.

We don't have that in front of us right at the moment, but we can sure follow up or add that to our next call notes..

Okay, that would be great.

And could you provide any updates on the sales force and changes that you've been making in that area?.

Sales force is expanding. We're a little slow out of the gate, in my opinion, and getting back at it post-COVID. The markets are clearly wide open, so it's nothing to do with hesitancy on the market's ability to have meetings or desire meetings or want to talk about new and different services. It's really controllable upon our side.

I think we're slow out of the gate and accelerating back to previous level of activity, sales level of activities. So we're aggressively moving on that front as we speak..

Got you.

And, and incentives for the sales force, do you guys think that you have that positioned correctly at this point or is there still more changes that you might be making?.

I’m not real sure, you ask any individual sales associate and of course we don't have it right yet. But to your point on a more serious fashion we have 10 team based incentives and that has really worked out well.

So everybody's rowing in the same direction and the days are really gone where one individual Rainmaker closes a deal, it really takes a village.

And so I think our team based incentive program is actually empowering greater success if you wish across the team than we had historically it had with individual performance only, or individual incentives only..

Okay. That's helpful.

And then on share repurchases, I saw that you authorized the buyback and did quite a bit of share repurchases last quarter and can you just kind of talk about how you and the Board think about that going forward?.

Yes, it's very simple. We use equity grants as part of leadership compensation, and it's always been a longstanding philosophy or view that that equity grant should not dilute current shareholders. And we routinely purchased in the market enough to neutralize any impact from those grants.

And for several years, we just never went into the market and repurchased because we felt the price was a little high, quite frankly. Now that the price is quite low, in my opinion, we're back in the market trying to neutralize our historical dilution created by equity grants.

So the real message is we're not in the market to know what the price should or shouldn't be. We're not in the market to buy back stock for the heck of buying back stock. It's really purposeful against minimizing or neutralizing any impacted dilution on current shareholders as a result of equity grants to leadership..

Got you.

And just thinking about where the price of the stock is today and buybacks, is that something that the Board is still comfortable with moving forward with, or just trying to think about modeling out the company going forward?.

We authorized, or the board authorized 2.5 million shares. I think we're left 2 million out of the 2.5 million is left. Kevin, is that right? Okay. So of the 2.5 we've repurchased roughly 500,000. There's another 2 million to be repurchased at whatever we think the appropriate price points will be.

Given the volume of trading, that will take an elongated period of time, so I wouldn't look for anything magical over any particular quarter, but hopefully we'll get through that reauthorization over some period of years..

Got you. All right, thanks a lot, guys. I appreciate the call..

Thank you..

Thank you, George. At this time we have no further questions. So I'll hand back over to Mike Hays for any closing remarks..

Thank you, Charlie. And thank you everyone for your time today. Kevin and I look forward to providing updates on the rollout of the Human Understanding Program again next quarter. Again, thank you..

Thank you for joining today's call. You may now disconnect your lines..