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NATIONAL RESEARCH CORP (NRC)·Q2 2019 Earnings Summary

Executive Summary

  • Q2 2019 delivered double-digit top-line growth: revenue rose 12% to $31.4M while operating income increased 31% to $10.1M; VoC platform revenue grew 38% YoY and reached 62% of total revenue .
  • EPS (diluted, common) was $0.29 vs $0.28 in Q2 2018; net income declined to $7.4M on higher effective tax rate (22%) and increased interest/FX expense despite stronger operating performance .
  • Management highlighted competitive traction, citing a head-to-head win over Press Ganey and the largest contract value win of the year early in Q3—key catalysts supporting continued momentum .
  • No formal quantitative guidance was issued; commentary focused on VoC adoption, mix shift, and margin leverage from lower variable costs .

What Went Well and What Went Wrong

  • What Went Well

    • VoC platform acceleration: revenue from VoC increased 38% YoY and rose to 62% of total revenue; total VoC contract value reached $84.2M, up from $64.1M in Q2 2018 .
    • Margin expansion: operating income rose to $10.1M (32% of revenue) from $7.8M (28%), driven by mix shift and lower variable direct costs (variable direct expenses fell to 17% of revenue vs 19% last year) .
    • Competitive wins: “A large health system selected NRC Health VoC platform head-to-head against Press Ganey’s legacy approach,” noted as the largest contract win year-to-date, reinforcing product differentiation .

  • What Went Wrong

    • Net income down YoY: despite stronger operations, net income fell to $7.4M vs $7.9M due primarily to a higher effective tax rate and increased interest/FX headwinds, flipping other income from $63K to $(664)K .
    • SG&A increase: SG&A rose to $8.3M (26% of revenue) on higher software licenses, platform hosting, contracted services, and travel costs, tempering some opex leverage .
    • No formal guidance: absence of quantitative guidance (revenue/EPS/margins) can limit near-term visibility for investors tracking forward expectations .

Financial Results

Multi-Quarter Trend (oldest → newest)

MetricQ4 2018Q1 2019Q2 2019
Revenue ($USD Millions)$30.639 $31.480 $31.414
Operating Income ($USD Millions)$9.395 $10.704 $10.149
Operating Margin %31% 34% 32%
Net Income ($USD Millions)$7.801 $8.196 $7.393
Diluted EPS (Common) ($)$0.30 $0.32 $0.29
SG&A ($USD Millions)$7.885 $7.707 $8.319
Direct Expenses ($USD Millions)$11.892 $11.654 $11.506
Depreciation & Amortization ($USD Millions)$1.467 $1.415 $1.440
Other Net (Income)/Expense ($USD Millions)$0.145 $(0.844) $(0.664)
Effective Tax Rate %18% 17% 22%
Weighted Avg Diluted Shares (Millions)25.534 25.509 25.586

YoY Comparison: Q2 2019 vs Q2 2018

MetricQ2 2018Q2 2019Change
Revenue ($USD Millions)$28.017 $31.414 +12%
Operating Income ($USD Millions)$7.756 $10.149 +31%
Operating Margin %28% 32% +400 bps
Net Income ($USD Millions)$7.948 $7.393 -7%
Diluted EPS (Common) ($)$0.28 $0.29 +$0.01
VoC Revenue Share (% of Total)50% 62% +1,200 bps

Revenue Mix (VoC share, oldest → newest)

MetricQ4 2018Q1 2019Q2 2019
VoC Revenue Share (% of Total)53% 58% 62%

KPIs (oldest → newest)

MetricQ4 2018Q1 2019Q2 2019
Net New Sales ($USD Millions)$7.6 $4.1 $6.1
Total Contract Value (TCV) ($USD Millions)$131.4 $130.1 $133.6
VoC TCV ($USD Millions)$75.0 $79.1 $84.2
Clients with Multiple Solutions (% of client base)24% 25% 26%

Guidance Changes

MetricPeriodPrevious GuidanceCurrent GuidanceChange
Formal Revenue GuidanceFY 2019None provided None provided Maintained (no guidance)
EPS GuidanceFY 2019None provided None provided Maintained (no guidance)
Margin GuidanceFY 2019None provided None provided Maintained (no guidance)
DividendsOngoingNot updated in Q2 docs Not updated in Q2 docs Maintained (no update)

Narrative: Management did not issue quantitative guidance; commentary emphasized VoC momentum and competitive wins, including the largest contract value win early in Q3 .

Earnings Call Themes & Trends

TopicPrevious Mentions (Q4 2018, Q1 2019)Current Period (Q2 2019)Trend
VoC platform adoption/migrationVoC TCV surpassed $75M; VoC >50% of revenue; client acceptance driving ROI and mix shift VoC revenue +38% YoY; 62% of revenue; VoC TCV $84.2M Strengthening adoption
Competitive displacement (Press Ganey)New logo wins displacing Press Ganey; VoC advantages at point of sale Head-to-head win over Press Ganey; largest contract value win of the year Increasing competitive traction
Regulatory/HCAHPS/CMSEmphasis on CAHPS legacy limitations Industry dissatisfaction with HCAHPS; CMS changes uncertain; potential multimodal collection trend Watching regulatory evolution
Cost structure and marginsVariable direct costs down; operating margin 31% in Q4, 34% in Q1 Direct expenses % down (37% vs 39%); operating margin 32% Continued leverage from mix shift
Tax rate dynamics18% effective tax rate in Q4 17% in Q1 22% in Q2 (recap benefits waning)
Interest/FXNet other income in Q4; headwind in Q1 from term loan/FX Net other expense $(0.664)M; continued term loan/FX impact Ongoing headwind

Management Commentary

  • “The Company’s performance for the quarter was extremely strong and that momentum continues in the third quarter with the signing of the largest new client contract of the year.” — Michael D. Hays, CEO .
  • “Total contract value at the end of the second quarter 2019 ended at $133.6 million… VoC platform solutions increased to $84.2 million… Second quarter revenue… increased to 62% of total revenue compared to 50% in the second quarter of 2018.” — Kevin Karas, CFO .
  • “A large health system selected NRC Health VoC platform head-to-head against Press Ganey’s legacy approach… the largest contract value win for the Company this year.” — Michael D. Hays, CEO .
  • “Variable direct expenses as a percentage of revenue decreased to 17%… due to the continued shift in our revenue mix from legacy solutions to Voice of the Customer platform revenue.” — Kevin Karas, CFO .

Q&A Highlights

  • CMS/HCAHPS outlook: Management sees industry dissatisfaction with static HCAHPS measures; expects eventual approval of multimodal data collection but timing is uncertain given CMS’ historically slow pace .
  • Migration to digital VoC: Approximately two-thirds of contract value has migrated to the digital platform; 100% migration unlikely due to CAHPS requirements, but 90% seen as a fully loaded ceiling .
  • Client spend post-migration: Average spend per client increases slightly (low single digits) as real-time feedback broadens use across service settings and drives higher engagement .

Estimates Context

  • Wall Street consensus (S&P Global) for Q2 2019 EPS and revenue was unavailable for this request due to data access limits; therefore, no beat/miss vs consensus is provided [GetEstimates error].
  • Given strong VoC growth and margin expansion, sell-side models may reassess revenue mix and operating leverage assumptions; however, we cannot quantify revisions without consensus data .

Key Takeaways for Investors

  • VoC-driven mix shift is the core thesis: accelerating VoC adoption (62% of revenue; +38% YoY) is compressing variable costs and expanding margins—sustainable tailwind to operating performance .
  • Competitive momentum: head-to-head wins over Press Ganey, including the largest contract value win YTD, suggest share gains and stronger sales cycles; watch net new sales cadence and TCV growth .
  • Near-term headwinds: higher effective tax rate and term loan/FX pressures offset some operating gains; monitor financing costs and FX revaluation impacts on other income/expense .
  • Visibility: lack of formal guidance places emphasis on tracking mix metrics (VoC share, variable cost ratio), net new sales, and contract value to infer trajectory .
  • Trading implications: Narrative strength (VoC momentum + competitive wins) is supportive; however, absence of consensus comparison and rising tax/interest costs may temper multiple expansion near-term .
  • Medium-term thesis: Continued VoC penetration at existing clients (two-thirds migrated; room to expand to ~90% fully loaded) and cross-sell into Transparency/Care Transitions should underpin double-digit revenue growth potential and margin stability .
  • Watch regulatory developments: any CMS movement toward multimodal CAHPS could accelerate legacy-to-digital migration and reinforce NRC’s competitive moat .