Michael Hays - Founder, Chief Executive Officer Kevin Karas - Chief Financial Officer.

Jeff Garro - William Blair Viral Gandhi - Willett Peter Van Roden - Spitfire Capital.

Ladies and gentlemen, thank you for standing by. Welcome to the National Research Corporation third quarter 2014 earnings release conference call. During the presentation, all participants will be in a listen-only mode. Afterwards we will conduct a question-and-answer session. (Operator Instructions).

As a reminder, this conference is being recorded, Wednesday, November 5, 2014. I would now like to turn the conference over to Michael Hays, Chief Executive Officer. Please go ahead, sir..

Thank you, Lynn, and welcome everyone to the National Research Corporation's 2014 third quarter conference call. My name is Mike Hays, the company's CEO and joining me on the call today is Kevin Karas, our Chief Financial Officer.

Before we continue, I would ask Kevin to review conditions related to any forward-looking statements that may be made as part of today's call.

Kevin?.

Thank you, Mike. This conference call includes forward-looking statements related to the company that involve risks and uncertainties that could cause actual results or outcomes to differ materially from those currently anticipated.

These forward-looking statements are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. For further information about the facts that could affect the company's future results, please see the company's filings with the Securities and Exchange Commission. With that, I will turn it back to you, Mike..

Thank you, Kevin and again welcome everyone. Well, clearly record sales performance for which momentum has been accelerated over the past few quarters stands out as the key performance metrics of the third quarter. I want to return to sales and other news after Kevin shares his review of our third quarter financial performance.

Kevin?.

Thanks, Mike. Our net new sales of $8.1 million were added in the third quarter of 2014, which included $600,000 of net new sales for Customer Connect. Total contract value at the end of the third quarter was $103.2 million, which includes $2 million of total contract value for Customer Connect.

Revenue for the third quarter 2014 was $23.7 million, an increase of 6% over the third quarter of 2013. Revenue growth for the quarter is comprised entirely from organic growth, which was driven by a combination of continued gains of market shares and vertical growth from increasing contract value in our existing client base.

Third quarter 2014 results included $195,000 of revenue from Customer Connect. Consolidated operating income for the third quarter of 2014, which included $376,000 in operating losses from Customer Connect was $7.2 million or 30% of revenue compared to $6.0 million or 27% of revenue for the same period last year.

Operating income for the third quarter 2014 without Customer Connect losses was $7.5 million, which represents a 32% operating income margin. Total operating expenses for the third quarter increased from $16.4 million in 2013 to $16.5 million in 2014.

Direct expenses increased to $9.8 million for the third quarter 2014 compared to $9.5 million for the same period last year. Our direct expenses as a percent of revenue were 41% for the third quarter compared to 42% of revenue in the third quarter of 2013. Direct expenses are expected to average 42% of revenue for the full year in 2014.

Selling, general and administrative expenses decreased to $5.8 million or 25% of revenue for the third quarter of 2014, compared to $6 million or 27% of revenue for the same period in 2013. SG&A expense for the third quarter of 2014, without Customer Connect, was $5.4 million or 23% of revenue.

Including the incremental expenses that are projected to be incurred for Customer Connect resources and investments that we have made in strategic technologies consolidated SG&A expense is expected to average 26% of revenue for the full year of 2014.

Depreciation and amortization expense for the third quarter of 2014 was $948,000 compared to $907,000 for the third quarter of 2013. Depreciation and amortization expense was 4% of revenue for the third quarter of 2014 and is also expected to be 4% of revenue for the full year.

Our provision for income taxes totaled $2.6 million for the third quarter of 2014 compared to $2.1 million for the same period in 2013. The effective tax rate was 36% for the third quarter of 2014 compared to 35.9% for the third quarter of 2013. We expect the effective tax rate to average in the 35% to 35.5% range for the full year of 2014.

Net income for the third quarter of 2014 increased by 19% to $4.6 million compared to $3.8 million in 2013. The net income margin for the third quarter increased to 19% of revenue compared to 17% in 2013. For the third quarter of 2014, our combined non-GAAP diluted earnings per share were $0.19 compared to $0.15 for the third quarter of 2013.

With that, I will turn the call back to Mike..

Thank you, Kevin. As was also the case last quarter, our sales pipeline is strong. Demand is being driven by health organizations, placing increased value on the voice of the customer. Whether it's the need for feedback regarding the service experience or consumer preferences for healthcare brands, both needs align perfectly with our product portfolio.

In addition to growth in our experience and brand measurement offerings, as healthcare leaders face change, our Governance Institute is witnessing strong attendance at its leadership conferences. Change is also at hand for the healthcare consumer, not just healthcare leaders.

Far greater cost have shifted onto the backs of customers at a time when access to provider performance information is becoming more available. The ability to make value-based decisions is clearly changing the way consumers make decisions. The most sought-after information in this area of performance is that of individual physicians.

And to be most valuable, performance information needs to be sorted and filtered based on the person's health needs, behaviors and preferences. And knowing the customers as we do, NRC has been in the position to do so. We believe NRC has an interesting right to this space and are moving to leverage that position.

The most recent move was made just a few days ago in October with an asset purchase that created Center of Excellence in Atlanta, Georgia which will be responsible for developing novel solutions to enhance consumers' decision-making in the selection of healthcare providers.

Customer service drives brand loyalty and to that end, another recent move is the seed investment which creates an opportunity for a later acquisition of a partner company that has a unique talent matching solution that accelerates the formation of high performing care teams, as measured by the patient experience.

In closing, while we will not set sale records every quarter, forward momentum across our current offerings is clear. This combined with new to world solutions for healthcare leaders and customers will continue to drive topline growth, which we anticipate be outpaced in 2015. Thank you. Lynn, I would now like to open the call to questions..

Certainly, thank you. (Operator Instructions). The first question comes from the line of Jeff Garro with William Blair. Please go ahead..

Good morning, guys, and thanks for taking the questions. I want to ask a little bit about the two acquisitions that you referenced in the press release and talked about it a little bit today.

I guess, first I just want to see how these mesh with the Customer Connect investments that you made to-date?.

They are really separate and distinct from the Customer Connect investment.

Although there is some synergies across our entire product portfolio, I would characterize the first investment that I spoke to on the call today, more in line with market insights and reputation and brand management and the second option, relative to caregiver optimization or caregiver team optimization is more synergistic with the Picker Institute..

Great. That's helpful.

And then maybe you could discuss for both them, why these particular assets and why these particular technology? Why Atlanta for the Center of Excellence? What made these investments more attractive than anything else that you guys could acquire or invest in?.

Well, the target list of possible partnerships or acquisitions is long, so these are two or perhaps others that we have taken a look at. These came to fruition a little bit quicker perhaps than others. But to your point of why these two, the first one relative to consumer decision-making, we feel, is critical.

We find within market insights that consumers are accessing performance information in an ever-increasing way.

In particular in and around the performance of individual physicians and given the fact that consumers are paying more out of pocket for healthcare, they are starting to purchase services in this arena of healthcare region not unlike they to do in other refill environments.

So we saw our rights and the brand and reputation management coincide with some unique technologies that this organization in Atlanta brought to the table.

Relative to the other, we feel that healthcare organizations, frontline caregivers drive bedside manner and bedside manner drives H-CAPHS scores in the higher one does on H-CAPHS is publicly reported, patient experience measures, the greater value-based purchasing and brand equity that accrues back to that organization.

So one could take a look and say, well, let's only hire the best caregivers in the world, which of course would be ideal but very hard to do. The technology that we are working on now has the ability to take current staff and optimize the team configuration to result in the highest H-CAPHS scores as they deepen the variable to which we are measuring.

And again our organization and Picker Institute stands for the improvement of the patient experience and we think that without changes in the workflow and bringing more to healthcare delivery systems, we can optimize the current talent set in a way that creates a pretty nice ROI for our client organizations..

That's great. I also wanted to ask if you could provide any of the transaction or financing details and beyond the color that you gave on SG&A expense for the remainder of the year.

How should we think about accretion or dilution from these deals?.

Jeff, this is Kevin. We haven't disclosed any of the details yet. There will be some more information forthcoming on the investment, the actual amount of the investment.

In terms of impact on future operations we have, at least through 2014, taken into account the impact in our expense margins, as I pointed out, where we will see an additional increase in our SG&A expenses with those expected to be at 26% in the year.

So we have factored that in through the end of the year and we will have more information later that we will be disclosing around the details of the investments..

Sounds good. So one last one here and I will jump back in the queue, but Mike, you referenced a long list of possibilities or opportunities.

So I was curious how you guys are thinking about M&A and uses of cash going forward?.

Sure. Well, M&A has always been kind of the third pillar of our growth strategy. We focus on increasing market share and increasing spend among current installed base. And any distant third lever is that of acquisitions or M&QA activity. So we are highly opportunistic.

We are not very acquisitive, but when we do run across something that fits very well, we jump on it quickly. So as we sort through the list that's in front of us, the vast majority are very easy no's and for the few that really do fit, we will move on them pretty quickly.

But I would not look at acquisitions as any key driver of our growth strategy that's more important than organic growth and market share and increasing same store sales..

Thank you. (Operator Instructions). The next question comes from the line of Viral Gandhi with Willett. Please go ahead..

Hi. Thanks for taking the question.

Following up on the gentleman's question before on planned use of cash, has been any changes in management's negative thinking on the reinstituting the dividend in 2015?.

There has not been any change previously announced. We talked about reinstituting dividends in 2015 and as of today, there has not been change in that particular thought process..

Great. For forecasting purposes, should we assume full-year of dividends or kind of announcement towards the back half, I know it (inaudible) with the Board, but just any additional color, if you are able to share any would be appreciated..

You are exactly correct. Dividends are at the discretion of the Board of Directors on a quarterly basis. So we never have and I would not assume that we would make any commitment for dividends in perpetuity. We will look at each individual quarter and depending on where collectively we think the best use of capital is, we will deploy it to that end..

Got it. Thank you..

Thank you. (inaudible). The next question comes from the line of Peter Van Roden with Spitfire Capital. Please go ahead..

Hi, guys..

Hello..

Just a quick question on growth. So you guys had a very strong quarter on the net new sales side.

Do you think this helps you get back to kind of that double-digit revenue growth that you always been wanting to target?.

I think so. Obviously with the recurring revenue nature of our business, any net new business we add at the top of the funnel, builds that total recurring contract value. And that doesn't, in their revenue day one get ratably over the course of the contract year.

So coming into fourth quarter and in particular strong sales coming into 2015, I would assume that our ability to increase topline growth rate into the mid-double digits should be far more attainable than without net new sales growth rate. So a long way to say yes..

Thank you. (Operator Instructions). And it appears, at this time, that there are no further questions on the phone lines..

Thank you, Lynn, and thank you again everyone for your time today. Kevin and I, as usual, will look forward to reporting our progress again next quarter. Thank you. Have a great day..

Thank you. Ladies and gentlemen that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines. Thank you and have a good day..