Executive Summary / Key Takeaways

• NRC Health is undergoing a strategic transformation, investing heavily in expanding its Total Addressable Market (TAM) across patient, customer, and employee experience solutions, including integrating generative AI across its platform, aiming for double-digit revenue growth and margin expansion beyond 2024.
• Recent performance in Q1 2025 showed a 5% year-over-year revenue decrease to $33.55 million, primarily from existing client base churn, but operating margin improved to 26% due to cost controls offsetting the revenue decline.
• Total Recurring Contract Value (TRCV), a key forward indicator, saw sequential growth in Q4 2024 and Q1 2025, suggesting sales momentum is building, although year-over-year TRCV was down 4% to $134.37 million.
• Significant upfront investments in sales force expansion (up 19% since early 2023 with plans for substantial further growth), technology (including AI), and executive leadership are expected to pressure near-term sequential margins until new sales convert to revenue, likely later in 2024.
• The company maintains a solid liquidity position with access to a new Credit Agreement ($30M Revolving Loan, $110M Delayed Draw Term Loan with accordion feature), supporting strategic investments, share repurchases (new $20M program authorized), and quarterly dividends ($0.12/share declared), despite a working capital deficit.

The Human Understanding Imperative: NRC Health's Strategic Evolution

For over 40 years, National Research Corporation, operating as NRC Health, has been deeply embedded in the healthcare ecosystem, providing analytics and insights designed to measure and improve the patient and employee experience. Founded on a bedrock of healthcare-specific DNA, decades of benchmarking data, and trusted thought leadership, the company built its reputation by helping healthcare organizations understand the people they serve. This historical foundation, including the successful rollout of early solutions like their "real-time solution," established NRC Health as a key partner in the industry.

However, recent quarters leading up to late 2023 saw a period of relatively flat performance. In response, NRC Health initiated a strategic reset, recognizing the evolving demands of healthcare clients for more expansive market coverage, enhanced value-added solutions, and a greater strategic impact. This pivot is centered on a core philosophy the "Human Understanding" program, launched in Q2 2022, which seeks to move beyond point-in-time insights to foster an ongoing relationship-based understanding of each individual across their healthcare journey.

This strategic shift is not merely philosophical; it is underpinned by ambitious financial goals for the coming years: doubling the total addressable market (TAM), achieving double-digit annual revenue growth, expanding margins, and creating significant value for investors. The company believes that the combination of its historical healthcare expertise and a rapidly expanding portfolio of innovative technologies is crucial for enhancing outcomes and experiences while simultaneously improving clients' bottom lines in a market facing immense pressure from cost controls, employee retention challenges, increasing regulation, and intense competition.

Technological Edge: Powering Human Understanding with AI

At the heart of NRC Health's strategic evolution is its commitment to technological differentiation. The "Human Understanding" platform itself represents a core technological approach, designed to capture, analyze, and deliver insights based on self-reported information from patients, families, and consumers. The tangible benefit is enabling healthcare organizations to understand what matters most to each person before, during, after, and outside of clinical encounters, facilitating a longitudinal view of how life and health intersect. This deeper understanding is intended to drive personalized care and build lasting, trusting relationships, providing a critical competitive advantage in a market increasingly focused on patient loyalty and engagement.

Looking ahead, NRC Health is making significant investments in applying a generative AI overlay across all its solutions. The stated goal is to enhance care delivery and improve experiences. While specific quantifiable performance metrics for this AI integration are not yet detailed, the strategic intent is clear: to leverage AI to automate routine tasks, drive efficiencies, and accelerate the delivery of innovative solutions to clients at a "pace unmatched before." This increased IT investment, particularly in AI, is expected to continue over several quarters and is a key component of the strategy to double the TAM and generate ROI for clients through improved new customer acquisition, patient loyalty, and retention.

Navigating a Competitive Landscape

NRC Health operates in a highly competitive market characterized by established players and new entrants. Key direct competitors include large, diversified healthcare data and analytics firms like IQVIA Holdings Inc. (IQV), enterprise software giants with experience management platforms like SAP SE (SAP) via its Qualtrics acquisition, major consulting firms offering healthcare analytics services like Accenture PLC (ACN), and specialized patient experience companies like Press Ganey.

NRC Health differentiates itself through its deep, healthcare-specific DNA and its integrated "Human Understanding" approach that spans patient, customer, and employee experiences. While larger competitors like IQVIA and SAP may possess greater scale, broader data repositories, and potentially faster data processing speeds due to massive AI investments (IQVIA's platforms reportedly offer 20-25% greater speed, SAP 30% faster for large datasets), NRC Health focuses on its niche expertise and integrated insights. NRC's tools are cited as enabling 15-20% faster data processing for real-time insights in its specific domain, albeit potentially at a higher upfront cost than some alternatives. Its healthcare-focused optimization is suggested to lead to 20% lower operating costs per unit in its core patient experience tools compared to broader enterprise solutions.

Against Press Ganey, a direct competitor in patient experience surveys, NRC Health positions its relationship-based "Human Understanding" as a more holistic approach compared to point-in-time feedback. NRC's integrated ecosystem, which includes brand loyalty tracking, is a differentiator not typically offered by Press Ganey. NRC Health's strong brand and reported high customer NPS (75 in Q4 2023) contribute to customer loyalty, with retention rates cited around 85% for renewable contracts. This contrasts with the potentially more standardized, lower-cost approach of some competitors.

Financially, NRC Health's latest TTM gross profit margin of 59.18% and operating profit margin of 24.79% are competitive, though some larger software players like SAP (73% gross margin) demonstrate higher profitability at scale. NRC's Return on Equity (ROE) of 63% in 2023 significantly outpaced peers, although its latest TTM ROE is 79%, indicating strong capital efficiency, albeit influenced by its debt structure. The company's ability to win large, broad-based RFPs, such as the recent Advocate Health contract (now its largest client), underscores its capability to compete effectively based on the breadth of its solutions, deep healthcare knowledge, and demonstrated value.

However, NRC Health faces vulnerabilities due to its smaller scale compared to global giants, which can lead to higher operating costs (estimated 10-15% higher) and potentially slower technological integration speed in certain areas compared to the massive R&D budgets of companies like SAP and IQVIA. Indirect competitors offering cheaper, less feature-rich tools also pose a risk of market share erosion, potentially impacting revenue growth and profitability. Regulatory barriers, particularly around data privacy, while favoring established players, are also more effectively navigated by larger, globally resourced organizations.

Strategic Execution and Recent Performance

To execute its ambitious growth plan, NRC Health has undertaken significant operational changes. The sales force has been aggressively expanded, increasing by 19% since the beginning of 2023, with plans for substantial further growth over the next 2-3 years. This expansion has already yielded results, contributing to a sales pipeline exceeding $100 million and producing two consecutive quarters of double-digit new sales growth compared to the prior year in late 2023. Recurring new sales were up 18% in Q4 2023 compared to Q4 2022.

Concurrently, the company has focused on driving efficiencies, reducing non-sales personnel headcount by a net 11% by the end of Q3 2023 and implementing automation. These efforts contributed to a 10% increase in revenue per FTE in 2023 and sequential operating margin expansion in the latter half of 2023. Recent organizational changes have placed key functions under new leadership, including revenue, service, and product/technology teams, signaling a focus on accelerating decision-making and streamlining processes under a theme of "now." The appointment of Trent Green as the new CEO, effective June 1, 2025, brings over 25 years of healthcare leadership experience, expected to further accelerate the strategic plan.

The financial results for the first quarter of 2025 reflect this transition period. Revenue decreased by 5.0% to $33.55 million compared to $35.31 million in Q1 2024. This was primarily attributed to a $2.1 million decrease in recurring revenue from the existing client base, partially offset by a $0.35 million increase from new clients. Total Recurring Contract Value (TRCV), a measure of future recurring revenue, was $134.37 million at March 31, 2025, down 4.0% from $139.55 million at March 31, 2024. However, TRCV did increase sequentially from December 31, 2024, which management views as a positive indicator of building sales momentum, albeit with a lag before it fully impacts reported revenue.

Operating expenses decreased in Q1 2025, with direct expenses falling 6% to $13.06 million and selling, general, and administrative expenses dropping 8% to $10.36 million. These decreases were driven by workforce reductions, automation, and lower marketing/legal/accounting fees. Depreciation and amortization increased 7% to $1.54 million, reflecting investments in software and intangible amortization from the Nobl Health acquisition in 2024. Despite the revenue decline, operating income decreased only slightly by 2% to $8.60 million, and operating margin improved to 26% from 25% in Q1 2024, demonstrating the impact of cost control initiatives.

However, total other expense increased significantly by 54% to $0.87 million, primarily due to a $0.29 million increase in interest expense resulting from higher borrowings under the new Credit Agreement. The effective tax rate also increased to 25% from 22%.

Liquidity and Capital Allocation

NRC Health maintains a focus on balancing strategic investments with shareholder returns. As of March 31, 2025, the company had $2.50 million in cash and cash equivalents. In February 2025, the company entered into a new Credit Agreement, providing a $30 million Revolving Loan facility and a $110 million Delayed Draw Term Loan facility with a $25 million accordion feature. As of March 31, 2025, $3.50 million was drawn on the Revolving Loan (with $26.50 million available) and $62.16 million was outstanding on the Delayed Draw Term Loan (with $47.60 million available). This new debt structure replaced previous debt and provides significant capital availability for future acquisitions, stock repurchases, capital expenditures, dividends, and working capital needs. The company was in compliance with its financial covenants under the Credit Agreement as of March 31, 2025.

Cash provided by operating activities decreased to $6.65 million in Q1 2025 from $12.04 million in Q1 2024, primarily due to changes in working capital timing. Despite a working capital deficit of $17.40 million at March 31, 2025, management believes existing liquidity sources are sufficient for foreseeable needs.

Capital allocation priorities include funding innovation and growth investments. Capital expenditures were $3.00 million in Q1 2025, mainly for computer software development and headquarters renovations. An estimated $3.70 million more is expected for renovations in 2025, funded by operating cash flow and borrowings. The company also continues to return capital to shareholders, completing its 2022 stock repurchase program in Q1 2025 and authorizing a new program in April 2025 for up to 1 million shares or $20 million. Quarterly dividends of $0.12 per share were declared and paid.

Outlook and Risks

Management's outlook reflects the current investment phase. Near-term operating income and margin are expected to increase due to ongoing revenue and cost initiatives, although this will be partially offset by significant compensation charges related to the new CEO and other executives. Other expenses, particularly interest, are expected to increase due to higher debt levels. Depreciation and amortization will likely increase slightly as renovation projects are completed and software/intangible assets are amortized.

Beyond 2024, the strategic goal is clear: to achieve double-digit revenue growth and expanded margins. This outlook is predicated on the successful execution of the strategic plan, including the expansion of the TAM through new solutions (CX, EX, AI), the conversion of the growing sales pipeline into new contracts, and the realization of efficiencies from automation and cost controls. Management anticipates a lag of a few quarters between the initial investments in sales and technology and the resulting revenue growth.

Key risks to this outlook include the possibility of client contract non-renewals, intense competition leading to price pressure, the performance of new solutions and technology (including the successful integration and adoption of AI), the ability to attract and retain key personnel (especially in sales and technology), potential failures in the IT platform or cyber-attacks, and broader economic downturns or changes in healthcare regulations that could impact client spending. The successful integration of acquired businesses, like Nobl Health, and the realization of expected synergies also pose risks.

Conclusion

NRC Health is at a critical juncture, actively transforming its business to capitalize on the growing need for comprehensive experience management solutions in the healthcare sector. After a period of relatively flat performance, the company has embarked on an ambitious strategic pivot, marked by significant investments in expanding its market reach, enhancing its technological capabilities with AI, and aggressively building its sales force. While this investment phase is expected to pressure near-term margins and revenue growth may lag initial costs, the sequential improvement in TRCV suggests that sales momentum is beginning to build.

The core investment thesis hinges on NRC Health's ability to leverage its deep healthcare DNA and differentiated "Human Understanding" approach, augmented by new AI capabilities, to capture market share and drive growth in an increasingly competitive landscape dominated by larger, more diversified players. The company's solid liquidity position and commitment to both strategic investments and shareholder returns provide a foundation for executing this plan. Success will depend on the effective conversion of its expanded pipeline, the market acceptance of its new and AI-enhanced solutions, and its ability to maintain cost discipline while investing for the future. Investors will be closely watching for sustained TRCV growth and the eventual translation of these strategic initiatives into the targeted double-digit revenue growth and margin expansion beyond 2024.