NRC

Business Context and Reporting Period

Company: National Research Corporation (NRC Health)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2008
Business Overview: NRC Health provides survey-based performance measurement, analysis, tracking, and governance education services to the healthcare industry in the U.S. and Canada. Primary services include renewable performance tracking, custom research, and subscription-based educational services.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue: Revenue for the three months ended September 30, 2008, decreased 3.5% to $13.5 million compared to $14.0 million in the prior year period. This decline was partially due to the deferral of $636,000 in revenue related to the new "Ticker" subscription product. For the nine-month period, revenue increased 1.9% to $38.8 million.
• Expenses: Direct expenses increased 11.3% in the quarter and 6.6% for the nine months. This was primarily driven by a change in the business model where salaries and benefits for client service staff were reclassified from Selling, General, and Administrative (SG&A) to Direct Expenses. Consequently, SG&A expenses decreased 5.8% in the quarter.
• Profitability: Operating income decreased 23.2% in the quarter and 5.6% for the nine months compared to the prior year. Net income per share (diluted) declined from $0.36 to $0.29 for the quarter and from $0.82 to $0.81 for the nine months.
• Liquidity: Cash and cash equivalents decreased significantly from $3.36 million at year-end 2007 to $677,108 at September 30, 2008. This reduction was due to share repurchases ($7.4 million) and debt prepayments.
• Working Capital: The company reported a working capital deficiency of $6.9 million, an increase from a $322,000 deficiency in the prior year. This was largely due to a $4.8 million increase in "billings in excess of revenue earned" (deferred revenue).

Guidance, Outlook, and Risks

• Debt Status: As of September 30, 2008, total debt was $239,000. The company repaid the remainder of this debt in October 2008. The revolving credit facility was renewed in July 2008 with a limit of $6.5 million.
• Capital Allocation: The company continues a stock repurchase program. As of September 30, 2008, 394,465 shares remained available for purchase under the current authorization.
• Outlook: Management believes growth will be driven by increased demand for performance measurement services due to public reporting programs. Capital expenditures are expected to be funded by operating cash flow.
• Risks: Key risks include the ability to retain a limited number of key clients, non-renewal of performance tracking contracts, intense market competition, and potential business downturns in the healthcare industry.

Investor Verification Checklist

• Revenue Recognition Timing: Verify the impact of the $636,000 deferred revenue from the new "Ticker" product on future quarters.
• Expense Reclassification: Confirm the sustainability of the shift in expense classification from SG&A to Direct Expenses and its effect on gross margin analysis.
• Working Capital Deficiency: Assess the company's ability to manage the $6.9 million working capital deficiency, which is driven by high deferred revenue balances.
• Cash Position: Monitor the low cash balance ($677k) relative to the recent debt repayment and share buyback activities.
• Client Concentration: Review the dependency on key clients given the risk factor regarding client retention and contract renewals.