National Research Corporation (NASDAQ:NRC) Q3 2022 Earnings Conference Call November 3, 2022 10:00 AM ET
Company Participants
Linda Stacy – VP, Finance
Kevin Karas – Chief Financial Officer
Conference Call Participants
George D’Angelo – Alpine Peaks Capital
Operator
Hello, and welcome to the National Research Corporation’s Third Quarter 2022 Earnings Call. My name is Bailey and I’ll be your moderator for today’s today. [Operator Instructions]
I would now like to pass the call over to Kevin Karas, Chief Financial Officer. Sir please go ahead when you are ready.
Kevin Karas
Thank you, Bailey and welcome everyone to National Research Corporation 2022 third quarter earnings call. My name is Kevin Karas, the company’s CFO, and joining me on the call today is Linda Stacy, our Vice President of Finance.
Before we continue, I would ask Linda to review conditions related to any forward-looking statements that may be made as part of today’s call. Linda?
Linda Stacy
Thank you, Kevin. 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, Kevin.
Kevin Karas
Thanks Linda. During the third quarter, we continue to see growth in the interest and adoption of our human understanding program. This program provides care teams insights to understand each patient’s fears and expectations and use that information at every interaction understand what matters most and treat each patient as unique person. Last quarter, we noted the adoption of the human understanding program by Novant Health and the focus at our annual symposium in August. The symposium event was extremely successful drawing over 500 attendees, both virtually and in person with the theme of Human Understanding Connecting through Stories.
The increased understanding and interest building throughout our client base is driving more growth in our sales pipeline, and resulted in several more client adoptions of the human understanding program in the third quarter. We’re also focused on hiring more sales associate resources to accelerate our growth and contract value with this increased interest.
Let me turn the call back over to Linda to review the financial performance and then open the call for questions.
Linda Stacy
Thank you, Kevin. We ended the third quarter with $148 million in total recurring contract value or TRCV. Our TRCV metric represents the total revenue projected under all renewable contracts for the respective next annual renewal periods assuming no upsells down sales price increases or cancellation measured as the most recent quarter end, our third quarter 2022 ending TRCV decreased by 2% 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. As of September 30 2022 our core solution TRCV growth rate was a 2% increase compared to September 30, 2021.
Revenue growth for the third quarter 2022 decrease compared to the third quarter of 2021 primarily due to a $660,000 revenue reduction from the scheduled closure of our Canadian location. Revenue in the U.S. increased 584,000, mainly from growth and the recurring revenues in our existing client base. Third quarter 2022 operating income declined by 15%, compared to the same period in 2021 as a result of slightly lower revenue and an increase in operating expenses of approximately $2 million as we continue to allocate more resources to support the long term success of the business.
Marketing expense increased by approximately $1 million in the third quarter of 2022 compared to the third quarter of 2021 to support programs, building brand awareness and sales lead generation. We believe these investments will result in driving increased interest in the human understanding program.
Associated expenses increased by approximately 700,000 in the third quarter 2022 compared to the prior year as we continue to focus on retaining and growing our talent base and supporting our most important asset that being our associates. Investments in automation initiatives resulted in an increase in expense of approximately $300,000 in the third quarter. We believe that continued automation is essential to enable our associates to better leverage their skills and add more value to our clients. Third quarter 2022 income tax expense decreased by $480,000, compared to the third quarter 2021 as a result of lower operating income. The effective tax rate in the third quarter for both 2022 and 2021 was 24%.
Net income for the third quarter 2022 was $8.3 million, compared to $9.7 million for the same period and 2021. For the first nine months of 2022 revenue increased by 3% to $113.4 million, compared to $109.7 million in 2021. Net income for the first nine months of 2022 decreased to $25.2 million compared to $27.8 million for the first nine months of 2021.
The company’s board of directors have established priorities for capital allocation with funding of innovation and growth investments including both M&A activity and internal projects as preferred use of capital. The company funded $9.3 million for innovation and growth purposes in the first nine months of 2022 in addition to quarterly dividend payments to shareholders totaling $15 million and $25.3 million for share repurchases.
That concludes my comments for this morning. I’ll now turn the call back to you, Kevin.
Kevin Karas
Thank you, Linda. This completes our prepared remarks. So Bailey, I will now ask you to open the call to any questions.
Question-and-Answer Session
Operator
Thank you. [Operator Instructions] The first question today comes from the line of George D’Angelo from Alpine Peaks Capital. Please go ahead. Your line is now open.
George D’Angelo
Hey, good morning Kevin and Linda. The press release said that revenue from human understanding grew in the quarter. And can you give us a little more information on that types of clients, upsells or new clients things like that?
Kevin Karas
Yes, we can provide some more information on that. We added or more four clients with agreements to adopt the human understanding program. Two of those were existing clients that are adding that feature to their current services and then the other two are actually new clients. So healthcare systems that are new to NRC Health that joined and are adding human understanding program to the services we will be providing for them.
George D’Angelo
And that’s really good. And so the sales force sounds like continues to expand. Can you give us an update on sales force more broadly and changes that are ongoing with the sales force?
Kevin Karas
Sure, George. The focus is on essentially increasing the number of sales associates that we have. We, I think, like a lot of companies we saw a little bit higher turnover rate over the last couple of years. And we’ve been pretty actively looking to not only backfill where we had open positions, but we’re also looking now to increasing our overall sales force as we move forward in alignment with the fact that we’re seeing an increase in the pipeline. So there are more opportunities that are there for us to follow up on and therefore we want to increase the overall number of salespeople that we have. So that’s really our focus right now.
George D’Angelo
That’s helpful. And on that pipeline, can you give us a little more color both on potential upsells of existing clients as well as new client adds.
Kevin Karas
Generally speaking at any point in time, the opportunities that are in the pipeline, are generally fairly split between upsell and cross sell opportunities of existing clients as well as opportunities for new organizations that are not currently doing business with us. So in terms of dollar amount, it’s generally fairly evenly split. And I would say that’s the case today in terms of what we’re saying and the growth that we’re seeing, as we’ve increased the number of new opportunities.
George D’Angelo
Got it. And now on expenses, it looks like they continue to try and hire this quarter. Are these discrete investments, or would you say that they’re more permanent, or at least longer lives step up to expenses?
Kevin Karas
One of the biggest increases is in our marketing expenses. And we’ve made a pretty significant investment this year, both in staff and communications that we’re doing in terms of some advertising and targeted programs that we have not done in the past. So we really believe that and we’re starting to see results already in terms of increase lead generation. So the increase in marketing spend relatively speaking that will continue going into the future. And we believe that that will pay off in terms of incremental sales and growth in contract value. Some of the other areas where we did increase spending are going to be more discrete. Some of the automation investments are really discrete investments that we’re finishing up that will pay off in the future in terms of associate productivity. But really those are more one time investments.
George D’Angelo
And are any investments, I know you guys are working on doing some work on your headquarters or any of these investments fund your P&L or is that mostly a cash flow?
Kevin Karas
At this point, the vast majority of those costs are being capitalized. We did have some expense running through the P&L in 2021 and early this year, as some renovation or demolition work was being done, but at this point, and going forward, those costs are essentially all capitalized.
George D’Angelo
Great. Thanks a lot, guys.
Kevin Karas
You’re welcome.
Operator
Thank you. [Operator Instructions] There are currently no more questions registered. At this time, I’d like to pass the conference back over to Kevin for any closing remarks.
Kevin Karas
Thank you, Bailey. I just wanted to thank everyone for their time today and say that we look forward to sharing our results again next quarter. Thank you.
Operator
That concludes today’s conference call. Thank you all for your participation. You may now disconnect your lines.
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