NRC Health (National Research Corporation) — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; unaudited. NRC Health provides analytics and insight services to healthcare organizations, primarily through annually renewable subscriptions. The filing was signed May 5, 2023.
Financial results
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Revenue | $36.5 million | $38.4 million | Down 5.1% |
| Operating income | $9.0 million | $11.7 million | Down 22.9% |
| Operating margin | 24.7% | 30.4% | Down 5.7 percentage points |
| Net income | $7.0 million | $8.5 million | Down 18.4% |
| Diluted EPS | $0.28 | $0.34 | Down $0.06 |
| Cash from operations | $7.8 million | $8.3 million | Down 6.5% |
| Capital expenditures | $3.2 million | $2.5 million | Up $0.7 million |
Cash and cash equivalents were $23.7 million at March 31, 2023, versus $25.0 million at year-end 2022. Working capital was $9.1 million, compared with $10.3 million at year-end. The filing does not report a separate gross-margin figure.
Total notes payable were $21.2 million, including $4.5 million current and $16.5 million long-term, net of issuance costs. The $21.2 million term loan carries a fixed 5% rate and is payable in monthly installments through May 2027. The $30 million revolver and $75 million delayed-draw term facility were undrawn. The company reported compliance with its financial covenants.
Material changes and management commentary
- Revenue fell $2.0 million year over year. U.S. revenue decreased $1.4 million, including lower recurring revenue from existing clients and new sales; Canadian revenue decreased $591,000 following the Canadian office closure. Management does not expect future Canadian revenue.
- Subscription revenue was $34.4 million, down from $35.4 million. Unit-price service revenue declined to $209,000 from $1.2 million, while fixed non-subscription revenue increased to $655,000 from $586,000.
- Recurring Contract Value (RCV) was $146.7 million, down 0.6% year over year. Management attributed the decline to focusing on core digital solutions and lower new sales; RCV for core digital solutions rose 1.3%. RCV is projected revenue under renewable contracts for their next annual renewal periods, assuming no upsells, downsells, price increases, or cancellations.
- Operating expenses rose 2.7% overall despite lower direct expenses. SG&A increased 10.6%, mainly reflecting $1.3 million of additional marketing initiative spending, higher sales and client-support compensation, and travel costs. Management cited lower revenue and increased marketing as the primary reasons for lower operating income and margin.
- The effective tax rate was 22.7%, versus 25.3%, primarily due to share-based compensation tax benefits and lower state income taxes.
Liquidity, outlook, risks, and unusual items
- Management believes cash, borrowing availability, and operating cash flow will meet projected capital and debt needs for the foreseeable future. Q1 operating cash flow was affected by lower net income and working-capital timing, including annual insurance and service-agreement payments.
- Management estimated remaining headquarters renovation costs of $14.5 million in 2023 and $2.9 million in 2024, expected to be funded from operating cash flows. Q1 capital spending also included software development. No formal revenue or earnings guidance is provided in the filing.
- The company paid $3.0 million in dividends during Q1 and declared another $3.0 million, paid in April. It repurchased 49,296 shares for approximately $2.0 million; 1,875,148 shares remained available under the repurchase authorization at quarter-end.
- Key disclosed risks include client non-renewals or reduced services and pricing, competition and price pressure, economic weakness, healthcare-industry consolidation or regulatory changes, personnel retention, technology or cybersecurity failures, and potential effects of COVID-19 or the Russia-Ukraine conflict. Subscription agreements are generally cancelable on short or no notice without penalty.
- Management said pending claims and litigation were not expected to materially adversely affect financial position, results, or liquidity. Gross unrecognized tax benefits were $1.7 million. Disclosure controls were deemed effective, and no material change in internal control over financial reporting was reported.
Important facts for investors to verify
- Whether the decline in existing-client recurring revenue and new sales stabilizes, and how the shift toward core digital solutions affects total RCV and reported revenue.
- Whether customer retention and renewals support revenue, given the generally short-notice cancellation terms of subscription agreements.
- Actual renovation spending and funding versus the estimated $17.4 million remaining across 2023–2024, and the resulting effect on cash and operating cash flow.
- Debt repayment, covenant compliance, and the availability and terms of credit facilities; the delayed-draw facility is restricted to permitted acquisitions or share repurchases.
- Whether marketing and growth spending produces improved sales and margins, and whether capital returns remain consistent with liquidity and credit-agreement restrictions.