Introduction

National Research Corporation, commonly known as NRC Health, is a leading provider of analytics and insights that facilitate the measurement and improvement of patient and employee experiences while also increasing patient engagement and customer loyalty for healthcare organizations in the United States. With a mission to "humanize healthcare," NRC Health supports organizations in their understanding of each person they serve, with the goal of developing lasting, trusting relationships.

History and Evolution

Established in 1981, NRC Health has a rich history of innovation and growth within the healthcare industry. The company was founded as a market research company focused on the healthcare industry, initially providing customer satisfaction surveys and market research services to hospitals and healthcare providers. Over the years, NRC Health expanded its offerings to include a wider range of data-driven analytics and insights to help its healthcare clients better understand and serve their patients.

In the early 2000s, NRC Health faced challenges as the healthcare industry underwent significant changes and consolidation. The company had to adapt its products and services to meet the evolving needs of its clients, which required investment in new technologies and analytics capabilities to provide more sophisticated insights. Despite these challenges, NRC Health was able to maintain its position as a leading provider of patient experience and satisfaction measurement services. The company leveraged its deep domain expertise in healthcare to develop new solutions, such as tools for measuring employee engagement and reputation management. These offerings helped the company diversify its revenue streams and serve its clients more comprehensively.

Current Portfolio and Capabilities

Today, NRC Health's portfolio of solutions represents a unique set of capabilities that individually and collectively provide value to its clients. The company's end-to-end offerings enable healthcare organizations to understand what matters most to each person they serve before, during, after, and outside of clinical encounters, allowing them to gain a longitudinal understanding of how life and health intersect.

Financials

NRC Health's financial performance has been solid, despite the challenges faced by the healthcare industry in recent years. In 2023, the company reported annual revenue of $148.58 million and net income of $30.97 million. The company's strong financial position is reflected in its balance sheet, which shows a current ratio of 0.67 and a debt-to-equity ratio of 0.75 as of the end of 2023.

In the third quarter of 2024, NRC Health reported revenue of $35.82 million, a decrease of 6% compared to the same period in 2023. Earnings per diluted share were $0.24, down from $0.32 in the prior-year quarter. The company's total recurring contract value, a key metric that represents the total revenue projected under all renewable contracts for their respective next annual renewal periods, stood at $131.6 million as of September 30, 2024, a decline of 9% year-over-year.

The decrease in revenue and total recurring contract value was primarily due to a lack of growth in new contracts to replace losses in the company's existing client base, particularly in non-core solutions. However, NRC Health's retention rate remained fairly consistent compared to prior years, indicating the continued value that its solutions provide to healthcare organizations.

For the nine-month period ended September 30, 2024, NRC Health's revenue decreased by 4% compared to the same period in 2023. Direct expenses increased by 1%, while selling, general, and administrative expenses decreased by 6% during this period. The company's operating margin decreased from 26% in the three-month period ended September 30, 2023 to 22% in the same period in 2024. For the nine-month period, the operating margin decreased from 26% in 2023 to 24% in 2024, primarily due to the decline in revenue exceeding the decline in operating expenses.

NRC Health's cash flow remains strong, with operating cash flow (OCF) of $38.11 million and free cash flow (FCF) of $22.33 million for the fiscal year 2023. In the most recent quarter (Q3 2024), OCF was $9.42 million and FCF was $7.83 million.

Liquidity

As of the latest reporting period, NRC Health maintained a solid liquidity position. The company had cash and cash equivalents of $6.65 million. Additionally, NRC Health has access to a $30 million revolving credit facility, of which $25 million was available, and a $75 million delayed draw term loan with $39 million available. This provides the company with ample financial flexibility to support its operations and strategic initiatives.

The company's current ratio and quick ratio both stand at 0.67, indicating that NRC Health has sufficient short-term assets to cover its short-term liabilities. The debt-to-equity ratio of 0.75, with total debt of $36.68 million and shareholders' equity of $48.95 million, suggests a balanced capital structure that does not overly rely on debt financing.

Strategic Initiatives

To address these challenges, NRC Health has been investing in strategic initiatives, including the expansion of its innovative AI-enabled products and the acquisition of Nobl Health, a provider of rounding solutions for healthcare organizations. These investments are aimed at further enhancing the company's ability to deliver comprehensive experience management solutions and strengthen its position as a trusted partner in the evolving healthcare landscape.

Market Position and Outlook

Despite the recent headwinds, NRC Health remains well-positioned to capitalize on the growing demand for data-driven insights and personalized healthcare experiences. The company's strong brand, diverse client base, and commitment to innovation position it well to navigate the ongoing changes in the healthcare industry.

The healthcare analytics and experience management industry has seen steady growth, with a compound annual growth rate (CAGR) of approximately 8% over the past 5 years. This growth is driven by healthcare providers' increasing focus on improving patient and employee engagement, which aligns well with NRC Health's core offerings.

NRC Health derives a majority of its revenues from annually renewable subscription-based service agreements with its customers. These agreements include performance measurement and improvement services, healthcare analytics, and governance education services. The company's revenue arrangements consist of four main types:

1. Subscription-based service agreements 2. One-time specified services 3. Fixed, non-subscription service agreements 4. Unit-price service agreements

This diverse range of revenue streams provides NRC Health with a stable foundation for future growth and helps mitigate risks associated with any single service offering.

Conclusion

As NRC Health continues to execute its strategic plan, investors will be closely watching the company's ability to drive revenue growth, maintain its strong profitability, and deliver long-term value for its shareholders. With its focus on humanizing healthcare and its track record of innovation, NRC Health remains a compelling investment opportunity in the dynamic healthcare technology sector. The company's strong cash flow generation, solid liquidity position, and strategic investments in AI-enabled products and acquisitions position it well to overcome current challenges and capitalize on the growing demand for healthcare analytics and experience management solutions.