Michael Hays - Founder and CEO Kevin Karas - CFO.

Jeff Garro - William Blair Frank Sparacino - First Analysis Securities.

Ladies and gentlemen, thank you for standing by. Welcome to the National Research Corporation Fourth Quarter 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, February 11, 2015. I would now like to turn the conference over to Michael Hays, Chief Executive Officer. Please proceed..

Thank you, Julian, and welcome everyone to National Research Corporation’s 2014 fourth quarter and year-end 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 like to 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. During this past year 2014 we experienced increased adoption of our product offerings with the most notable traction occurring during the last half of the year. That momentum continues today and the upside of the business overall feels a lot different today than even just a year ago.

I will return to this theme after Kevin covers our fourth quarter and year-end financials.

Kevin?.

Thank you Mike. Net new sales of $6.5 million were added in the fourth quarter of 2014 including $400,000 for Customer Connect. Total contract value at the end of the fourth quarter was $107 million, which includes $4 million of total contract value for Customer Connect.

Our subscription based revenue agreements represented 87% of total contract value at year-end. Revenue for the fourth quarter of 2014 was $25.1 million, an increase of 10% over the fourth quarter of 2013. Revenue growth for the quarter included $95,000 related to the Digital Assent acquisition.

The remaining revenue growth was comprised entirely of organic sources and driven by a combination of continued gains and market share and vertical growth from existing - from increasing contract value in our existing client base.

Consolidated operating income for the fourth quarter of 2014 was $6.4 million or 26% of revenue, compared to $6 million and 26% of revenue for the same period last year. Our total operating expenses for the fourth quarter increased from $16.9 million in 2013 to $18.7 million in 2014.

Our direct expenses increased to $10.8 million for the fourth quarter of 2014 compared to $9.6 million for the same period last year. Incremental direct expenses totaling $378,000 were incurred in the fourth quarter related to the Digital Assent acquisition and launch of our new reputation product offering.

Direct expenses as a percent of revenue were 43% for the fourth quarter of 2014 compared to 42% of revenue in 2013. Looking ahead to 2015 we expect to incur incremental direct expenses of approximately $400,000 per quarter for at least the first half of the year related to the reputation product offering.

For the full year of 2015 direct expenses are expected to average 42% of revenue. Selling, general and administrative expenses increased to $6.9 million or 27% of revenue for the fourth quarter of 2014, compared to $6.3 million or 28% of revenue for the same period last year.

We also incurred incremental SG&A expenses totaling $446,000 in the fourth quarter related to acquisition cost in the launch of reputation product offering.

Looking to 2015, we expect to continue to incur incremental SG&A expenses in the range of $300,000 to $400,000 per quarter for at least the first half of the year related to the reputation product offering. Consolidated SG&A expense is expected to average in the 25% to 26% of revenue range for the full year of 2015.

Depreciation and amortization expense for the fourth quarter of 2014 was $995,000 compared to $944,000 for the fourth quarter of last quarter. Depreciation and amortization expense was 4% of revenue in the fourth quarter of 2014 and is also expected to continue at 4% of revenue for the full year in 2015.

The provision for income taxes totaled $2.3 million for the fourth quarter of 2014, compared to $2.2 million for the same period last year. Our effective tax rate was 35.7% for the fourth quarter, compared to 36.6% for the fourth quarter last year.

Looking ahead, the effective tax rate is expected to average in the 35% to 36% range for the full year of 2015. Net income for the fourth quarter of 2014 increased by 9% to $4.1 million compared to $3.8 million in 2013. Our net income margin for the fourth quarter was 16% both in 2014 and 2013.

For the fourth quarter of 2014, our combined non-GAAP diluted earnings per share were $0.17 compared to $0.15 for the fourth quarter of 2013. With that, I’ll turn the call back to Mike..

Thank you, Kevin. Let me now turn to the theme of momentum we’re seeing in the market for NRC product offerings. As we discussed last quarter healthcare systems are increasingly competitive in the race to engage the customer and establish themselves as the patient’s life long brand for healthcare.

However many of the strategies being used by these systems to create brand equity are misguided. For example, too many hospitals still promote their hi-tech capabilities for treating the rigorous conditions, assuming that what matters most to the hospital’s medical staff specialist is also the lever to build the consumer preference in brand loyalty.

Consumers on the other hand are demanding that healthcare providers redefine themselves and become far savior in understanding to meeting their changing needs. Among the changing realities is the massive increase in consumer’s out of pocket cost for healthcare services.

Every day for every other product and services consumers make value based purchase decisions and healthcare is not immune anymore. Consumers are rapidly applying what they have come to expect in other service industries as they stride to compare value across healthcare providers.

And what they expect from healthcare providers is to be far more convenient and provide readily available information on quality as well as cost. 99% of consumer’s healthcare decisions are not about hi-tech for rare conditions, they are all about making important decisions to navigate and experience healthcare services in their everyday life.

Comparable air fares, trip advisor and open table created a far more empowered consumer and changed how travel is experienced and decisions are made. Consumers are demanding the same if not more robust information and tool from whomever becomes a preferred healthcare brand.

For the most progressive health systems they understand this and they are rapidly adopting comparable cost, trip advisor and open table equivalents and it is within this orbit we’re seeing our accelerated momentum for the company.

Products like market insight, connect, reputation management and picker experience offerings come together to provide a compelling platform that enable NRC clients to address these emerging consumer needs.

Take for an example, one component to the platform that patient experience measurement, today as we know well over $300 million annually is spend by hospitals in healthcare systems to collect CAPHS type patient experience data. However only 4.7% of households in the country have used it.

While CAPHS requirements have extremely high value, these regulatory mandates could be satisfied with a total annual spend of $30 million or that is redirecting $270 million of the current annual spend to more timely, relevant and accessible feedback will empower more consumers and garner greater brand equity and it is for this reason that contemporary enterprise wide feedback platforms, with a variety of used cases clearly delineated, combined with market metrics and tools to build brand loyalty are becoming highly attracted to the market.

And again that is in this area that we see the moment increasing at an increasing rate. Julian, I would now like to now turn the call over to questions..

Thank you. [Operator Instructions]. Our first question comes from the line of Jeff Garro from William Blair and Company. Your line is open. Please proceed with your question..

Good morning, guys and thanks for taking the question.

First just Kevin a housekeeping, if you could repeat the SG&A percentage that you are expecting for 2015?.

We expect to be in 25% to 26% of revenue range, Jeff..

Great, thanks.

And then another question on 2015, I want to see if you guys could provide a little more color on your revenue expectations, maybe if you can comment on what makes you end contract value a better or worse indicator of forward revenue growth this year than the past?.

Jeff this is Kevin. Typically the total contract value is a good proxy for revenue in the coming year, because that represents essentially 12 months of revenue at any point in time. So I don’t think there is anything materially different in terms of how that metric could be a predictor of revenue..

Great.

And should we expect then any kind of a typical impact from HRAs in the first quarter as the seasonality change there at all?.

That’s a good question Jeff. We don’t expect any major changes right now and that is a type of process whereby we are able to collect that data and generate the revenue based upon when we receive the files from our clients and we have very little control over that.

So what that can cause is some movement for month-to-month within the first couple of quarters or even quarter-to-quarter, but we are not expecting any material impact from shift in timing at this point..

Great.

And I was hoping for a little more commentary on the reputation product given the impact that we are going to see from that at least in the first half of next year? Maybe if you could just remind us who the target client is and what the value proposition is that you are pitching there? And maybe a little bit on what’s involved in the incremental expenses we are going to see at least for the first half of the year?.

Sure Jeff this is Mike. I will some of the value proposition questions and then Kevin could add a little more color relative to the launch expenses for the first half. The buyer is typically the Chief Marketing Officer or at least the Chief Operating Officer being the champion of the used case or the product within the healthcare systems.

Currently it seems like the largest systems in the country are the ones that are most interested in moving at the fastest rates in terms of adoption, we see that probably continuing they’re clearly are the once that are most aggressive and most focused on establishing on brand equity and loyalty among their potential customers for their current medical groups to which they purchase.

And that in really the value proposition there is a significant number of medical groups that healthcare systems have acquired and the goal to load up those practices with as many new patients as possible is the key, significant number of those decision on consumer’s part is made by searching the trip advisor equivalent and what our reputation management product does clearly is optimize search engine, put staff doctor among our clients at the top of the list and then clearly are experiencing significant increase and click through to actually booking appointments.

So it’s pretty clear ROI to revenue generation via showcasing a collective and individual profiles of their medical staff. Kevin you want to talk about first two months or first two quarter launch expenses..

Sure. So with the acquisition of Digital Assent we took on some additional infrastructure cost in [indiscernible] and Atlanta, which we think is a very advantageous add from a location standpoint, but there are some additional infrastructure SG&A cost around that.

We also brought on a team from the Digital Assent business, not a large team but we have new team of associates - really talented associates that we are excited to have on board. So we will have incremental cost for that.

And then in addition we are investing in the platform that was created by the Digital Assent team to support the reputation product. So the incremental spending there as well as in growing our sales team to take that product to market.

So those are the major categories that comprise the incremental expenses that we will see for the first half of the year. As we move through the first quarter I think we’ll have better visibility to what sort of impact to what those expense levels will look like in the second half of the year. Some of those costs will recur some will go away.

And we can update as we know more on the next call..

Great that’s very helpful.

And then one final one if I could, I want to ask about Customer Connect, last quarter you guys talked about $2 million in contract value from Customer Connect that’s up to $4 million so there is a nice jump there from your net new sales discussion it wasn’t all covered by net new sales so are you seen expansion within existing accounts or new existing clients as they are just using more features or is it expanding to new facilities or new geographies, what’s causing the increased momentum there that’s not from the net new sales in the quarter?.

Good question. The primary growth in addition to net new sales or new logos is coming from the existing installed base, where they’re deploying the product across more of their healthcare facilities.

So if you take a chain for example that may have started in pilot mode in one particular market given the results that they’ve experienced they’re rolling it out across a broader number of their facilities. So increase in same store sales plus new logos are contributing to the increase in contract value..

Great, thanks again for taking the questions guys..

[Operator Instructions]. Our next question comes from the line of Frank Sparacino from First Analysis. Your line is open. Please proceed with your question..

Hi guys.

First question maybe can you remind me just in terms of how the reputation product is priced today?.

It’s on a most typically it’s on a per physician per month basis..

And can you give a sense Mike just in terms of what a typical sort of deal size would look like?.

It’s all over the board and we’re seeing the greatest interest among very large healthcare systems. So those numbers could approach $1 million, I wouldn’t say that is typical average would be somewhere one third of that..

Okay.

And then Kevin I don’t know if you want to offer just some additional color on Q4 and maybe the year in terms of the different product lines and growth rates on a year-over-year basis?.

Hey Frank, this is Kevin. We continue to see the same trend, in terms of the areas of strongest growth those continue to be our experience measurement for hospitals and physicians, which continue to grow at mid-double-digits.

Similarly our market insights product year-over-year that growth was strong in the mid double-digit range, and then the third area we continue to see double-digit growth is Connect offering.

So those continue to be the three areas of the business that are driving the strongest growth rates and now with the other product categories growing it on lower rate..

Great.

And maybe lastly, Mike I mean you touched a few areas around price and quality transparency and there is obviously a number of tools price transparency tools in the marketplace like a Castlight but really more focused on the employer self-insured side of the marketplace, but I don’t know to what extent the hospital, the health systems are really adopting tools and what tools are looking I know the payers obviously have tools that they offer themselves, but maybe your perspective on that market and then sort of how you sort of see yourself on that ecosystem?.

Okay, I think you are exactly right, most of the cost transparency is accruing at the employer end or health plan point rather down to the individual provider of healthcare system, that’s got to change and I think whether or not there are organizations like Castlight that repurpose and repackage their product to be more consumable if you wish at the individual provider level for the individual health system level, in addition to the employer I don’t know, it would make sense we are not in that business we would welcome the cost component being incorporate because it clearly is a dynamic that equals and explains value.

There are some organizations, healthcare systems that are trying to move forward with cost transparency, the difficulty as we all know as they have different contracts cut with different providers and depending upon who you are covered by has a significant impact on what you will pay.

And so the inability for them to direct the cost knowing ensure of the particular customer that’s getting into their website is the difficulty. I don’t really have a solution for that, but that really is what needs to be done.

The other side of it, which we are highly engaged in informing the consumer based on quality and experience and I think you see reputation management and the picker experience data largely reinvent in a way that we can empower customer can make more inform decisions.

The reference that I made in the call notes on this call relative to patient experience measurements with H-CAPHS I think is a classic.

So there are many values of H-CAPHS which is the standard national patient experience measurement tool and it has incredible value to value based purchasing and transparency and public reporting and we highly supportive.

However, there is probably 90% of the spend that hospitals have currently against patient satisfaction that could be repurpose and repackage to make it far more valuable to the consumer. As we all know the majority of the used case now for patient satisfaction measurement is increasing patient didn’t care inside the organization.

I think we repurpose and repackage those data invoice in which the customer can access relevant information in a far easier way.

So our strategy is pretty simple, our DNA is all about collecting self-reported information, and we want to create an integrated platform that brings together our point solutions into a cumulative value proposition that allows organizations to drive their top-line revenue through customer acquisition and engagement.

So hopefully that adds a little bit more color, Frank?.

Yes, it’s very helpful. Thank you, Mike..

[Operator Instructions] There are no further questions at the moment..

Thank you, Julian. And thanks everyone for spending a few minutes with Kevin and I today. And we look forward to reporting our progress next quarter. 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..