Michael Hays - CEO Kevin Karas - CFO.

Ryan Daniels - William Blair Frank Sparacino - First Analysis Peter van Roden - Spitfire Cap.

Ladies and gentlemen, thank you for standing by. Welcome to the First Quarter 2015 Earnings Release Conference Call. During the presentation, all participants will be in a listen-only mode. And afterwards we will conduct a question-and-answer session. [Operator Instructions] As a reminder, this conference is being recorded, Friday, May 8, 2015.

It’s now my pleasure to turn the conference over to Chief Executive Officer, Mr. Michael Hays. Please go ahead sir..

Thank you, Donny and welcome everyone to National Research Corporation’s 2015 first 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 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’ll turn it back to you, Mike..

Thank you, Kevin and again welcome everyone. We ended the quarter having achieved a 25,000 physician milestone for our reputation management offering and also surpassed the 2 million Connect Outreach mark suggesting that Consumer-Centric Healthcare is clearly driving the adoption of our most innovative offerings.

I’ll return the call to Kevin at this point in time and review some of the trends that we’re seeing after we hear about our first quarter results.

Kevin?.

Thank you, Mike. Net new sales of $5 million were added in the first quarter of 2015 which represents a 52% increase over the net new sales of first quarter 2014. Our total contract value for the first quarter ended at $105.8 million and subscription based revenue agreements represented 86% of our total contract value.

Revenue for the first quarter of 2015 was $26.3 million, an increase of 1% over the first quarter of 2014. Organic revenue growth from net new contracts for the quarter was offset primarily by significant reduction revenue from lower health risk assessment volumes as well as the impact from 2014 contract value reductions.

Our consolidated operating income for the first quarter of 2015 was $5.8 million or 22% of revenue compared to $8.4 million or 32% of revenue for the same period last year. Total operating expenses for the first quarter increased from $17.6 million in 2014 to $20.4 million in 2015.

Direct expenses increased to $11.8 million for the first quarter of 2015 compared to $10.3 million for the same period in 2014, in addition to the increased survey volumes and conference costs, incremental direct expenses totaling $564,000 were incurred in the first quarter related to the Digital Assent acquisition.

Direct expenses as a percent of revenue were 45% for the first quarter of 2015 compared to 40% of revenue last year. For the full year of 2015, direct expenses are expected to average 43% of revenue.

Selling, general and administrative expenses increased to $7.6 million or 29% of revenue for the first quarter of 2015 compared to $6.4 million or 24% of revenue for the same period in 2014.

The $657,000 expense was recorded in the first quarter as a result of our decision not to exercise the purchase option that was executed in 2014 for a potential acquisition. Incremental SG&A expenses totaling $397,000 were also incurred in the first quarter related to the Digital Assent acquisition.

Consolidated SG&A expense is expected to average in the 25% to 26% revenue range for the full year of 2015. Depreciation and amortization expense for the first quarter 2015 was $1,015,000 compared to $935,000 for the first quarter of 2014.

Depreciation and amortization expense was 4% of revenue for the first quarter is also expected to continue 4% revenue for the full year of 2015. Our provision for income taxes totaled $2.3 million for the first quarter of 2015 compared to $2.9 million for the same period last year.

Our effective tax rate was 39.8% in the first quarter of 2015 compared to 34.6% for the first quarter of 2014.

The effective tax rate for the first quarter of this year increased due to recording of a capital valuation allowance relative to the expense of the purchase option is previously mentioned, our effective tax rate is expected to average 36% for the full year of 2015.

Net income for the first quarter of 2015 decreased to $3.5 million from $5.5 million in 2014 and for the first quarter, our combined non-GAAP diluted earnings per share were $0.14 per share compared to $0.22 per share for the first quarter of 2014. With that, I’ll turn the call back to Mike..

Thank you, Kevin. For organizations like ours of champion consumer centric healthcare movement it is rewarding that the world has now clearly changed. The CEO of the prestigious clinic reflecting on how they listen to their customers set I’m sure that our current system will not continue to work for our patients and probably not for us.

For leading healthcare organizations capturing the voice of the customer is more relevant in timely manner, it’s viewed as a competitive advantage. And when such feedback is used to celebrate highly regarded physicians, the organization and care providers all have been now newly informed consumers win.

In today’s world, customer's digital interaction shapes brand preferences and represents the vast majority of information gathering for their informed decision making. Yesterday, the traditional methods of informing patients and providing quality transparency are not working.

A case and point approximately 10 years ago the first public report of patients experience was taking shape. And for all that efforts benefits which are many, only 5% of households in America have accessed the data and patient satisfaction has only improved 4%.

It has been estimated that over $300,000 is spent annually to fuel this national scorecard of hospital patient experience and as you can see the ROI is weak, redeploying this spend against contemporary enterprise wide feedback systems like Connect as our growing number of NRC clients provides relevant and timely information.

Adding use cases to these feedbacks such as NRC Transparency Solutions is proving to be a winning combination.

Leading organization setting the new standard for more informed and empower consumers include Intermountain Healthcare, Cedars-Sinai, and Cleveland Clinic as well Sentra a very prestigious organization and very progressive is a classic example of an organization that has shifted traditional patient experience spend to Connect and has benefited proposed real time feedback from 75,000 customers in 90 days five times more feedback for the same budget.

This level of connectivity to the voice of the customers unmatched in healthcare, in total 2.4 million customers have been touched by Connect, which in our view is most innovative feedback platform in the industry.

Of course the real benefit is much broader than our Connect and Transparency Solution and far more important in only converting traditional spend.

The customer represents the most powerful force in healthcare over the next decade empowering the customer and their care providers with relevant and timely knowledge clearly will improve choice, improve outcomes all at a lower cost. Donny I would now like to open the call to questions please..

[Operator Instructions] Our first question comes from the line of Ryan Daniels with William Blair. Your line is open. Please proceed..

Yes thanks for taking the question guys.

Kevin one quick housekeeping, can you go over the tax rate again for the full year?.

Yes. So we’re expecting a full year effective rate of 36%..

36 okay great and then can you talk a little bit more about some of the 2014 contract value reductions I guess I’m curious if there is any specific kind of product portfolio that was hitting that reduction?.

The reduction related to that Ryan it was a cross multiple categories and just really timing of contract losses and we had more that affected Q1 relative to losses and down sales that we experienced in 2014.

And then the way that that translate into the revenue shortfall, the biggest impact was from our health risk assessment business where we saw significant reduction in volumes and revenue, we also saw volume reductions in our Canadian business didn’t lose any clients.

There have been changes in survey patterns in Canada at least for effective first quarter and then in addition to that, we also saw a decrease related to the continued decline in the exchange rate for our Canadian business..

Okay.

That’s helpful and then last one maybe Mike just a little bit more detail on Connect obviously you spent some time in your prepared comments talking about the scale you’ve reached there and some of the advantages to clients can you talk a little bit more detail about how that really differs from some of the traditional CAHPS survey work that is done post discharge with patients maybe what more you’re doing in detail with Connect and then how you still meet the CAHPS requirements to submit the government on top of what you’re doing with the Connect platform, thank you..

Be happy to first of all let me be clear that we are very supportive of the CAHPS program and Ryan in particularly you’re well aware of the fact that we were instrumental in helping CMS launch that but we do believe and still support the program.

The fundamental difference between the regulatory requirements of roughly 27 questions being asked both discharge at least in the in-patient side, but that information largely collected by paper and pencil delays or has a latency to it in terms of when the organization gets that information back.

So the fundamental difference between the regulatory CAHPS programs in most all service settings in Connect is the timeliness of the information is literally real time and the relevance of the information is for shorter number of items or questions being asked to customer, so when we combine the fact that we can get instant feedback to a physician relative to a patient that has literally just walked out of the office on the three items that made the most difference and are most controllable by that individual physician that powers improvement immediately.

So that’s fundamentally just a very different approach both have their place, one is a standardized survey that compare and contrast organizations across the country and highly relevant valued based purchasing. The other is all about empowering the provider and the customer to have a more real time interchange on the service experience..

And you’re providing that phone based so that’s a call directly to the patient kind of in a real time basis then you aggregate that data and get it back to the customer very quickly, is that the way to think about it?.

Partially it’s not necessarily single, it’s multimodal. So whatever the preferences are of that customer in terms of how they wanted to be contacted whether it’s the IVR, text, phonecall. So it is multi-mode which clearly represents then a physician patient population to a greater degree than relying on anyone mode of communication.

And the unit of analysis is largely the individual customer versus an aggregate looking at a particular nursing unit or the organization in totality. We’re really trying to provide the ability to listen to each customer real time..

Okay.

And then I guess just the final follow up, so it’s pretty clear that this is being sold on top of the CAHPS surveys that you’re doing, this would be completely incremental to the all the work you’re doing there right?.

Actually the way we view it is redeployment of lot of the current spend.

So if one could imagine let's having to meet the regulatory requirement by virtue of interviewing a certain segment of patients through the traditional CAHPS protocol we will do that and we will redeploy roughly the other 90% of spend against a more contemporary relevant feedback system.

So I think the first thing you’ll see is a massive shift at current spend and then I think as you see the enterprise wide feedback program kind of cross multiple service settings and we’ll try to expand this thing for the total category..

Okay.

So in effect they may have been spending more directly in CAHPS surveys but they’ll go to what the regulatory minimum is for value based purchasing and reporting needs and then reallocate those dollars to Connect to get more the real time data that’s the way I should think about it?.

That’s exactly how we’re positioning in it. Correct..

Okay, perfect. Thank you for all the color guys..

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

Hi guys.

Mike first wanted to go back to the comment around milestone you made with Digital Assent for 25,000 physicians and just a little bit more color there, I assume that’s the number of physicians you’re now providing reputation profile for that just any more color would be helpful there?.

That’s close to correct, it’s the number of physicians that ultimately we’ll be provided the profiling information right now all of those are up and online. So that would be the total number of physicians within the organizations that have signed onto the program. And the implementation of roll out of that will progress over time..

And can you remind me how you guys get paid, what the business model is there?.

Primarily on per physician per month basis but we do have some other types of agreements depending upon the portfolio and bundle of products and services that organization purchases from National Research but you can clearly think about it larger the physician population, the more revenue..

Sure and Kevin based on the numbers I think you quoted from the expense side of things it sounds like obviously Digital Assent is still dilutive to the overall business, I’m not sure what the magnitude is though?.

Frank that’s correct, it is still dilutive and as we mentioned on last call that will continue for at least the next two quarters as we build the client base and the revenue base for that business and identify opportunities to create some scale with those incremental costs..

Okay.

And so from income statement perspective, should I think about Q1 margins here being trough and we should start to see some incremental improvements throughout the year?.

Yes there will be particularly you’ll see some improvement in the direct expense margin and as I indicated in the comments I made from our full year of 43% of direct expense and then 25% to 26% for SG&A to arrive at those four year percentages we will see some improvement in future quarters to arrive at that point..

Okay and then lastly from me just circling back Mike on Connect the sort of figures you threw out the 2 million milestone which I assume is relates to the transitions products and on the experience side I think you quoted a figure that was 75,000 but if you could just run through those again that would be helpful?.

The $2 million plus mark relative to Connect Outreach is disproportionately loaded on the Transition product, we have rolled out Connect Experience as we call it to a few organizations but it would be a minimal number in comparison to the Transition outreaches.

The 75,000 was a case example of one client converting current spend to the Connect Experience product and completing that number of customer feedback or touchpoints within a 90 day period..

Okay.

And then on the Transition side, Mike can you just how has that business sort of been ramping over the last couple of quarters and I assume, should I assume when you look at some of the work you’re doing there around re-admissions for example are there certain systems or partners you have perhaps who are doing the identification on the patient side of things and you guys are handling the outreach side?.

Not necessarily although Connect Transition is part of the is one part of the total solution for healthcare organization and I think maybe in all cases I guess it would literally be in all cases the Transition – the person using Connect Transition would have other elements to help manage the readmission risk and avoid readmissions.

So Connect Transition is clearly not a total solution. I think it’s best to say that Transitions product is embedded within a large number of organizations but rarely hasn’t been ruled out against all facilities in a major healthcare system.

So particular organization might have 20 facilities we may be in a demonstration mode in two or three of those and over time assuming there is a return on investment of course over time that product will be deployed against the balance of their facilities.

So the take rate has been one of testing and pilots and demonstrations more so than a massive roll out across system wide or enterprise wide solutions. So it’s consistent and predictable on a quarter in, quarter out basis but we have yet to see one major system deployed across all of their facilities simultaneously..

Great. Thank you guys..

Our next question comes from the line of Peter van Roden with Spitfire Cap. Your line is open. Please proceed..

Hi guys..

Hello Peter..

First question on SG&A, you mentioned that so SG&A was $7.6 million in the quarter, $650,000 was from the right end of the purchase option and then $400,000 was from Digital Assent, is the Digital Asset expense one-time or is that continuing?.

That will continue for a period of time period at least through the next two quarters, we’ll see some continued incremental cost..

Okay. Got it and then help us understand from a revenue growth perspective kind of interplay between the ramp with Digital Assent and Customer Connect and then headwinds you have from the HRA business in Canada.

How do you see those playing out over the next year or so?.

That’s a good question. From a product segment standpoint, we continue to see strong growth in our acute care experience market insights, Connect Transitions businesses being the strongest. We are seeing healthy growth in our governance and post-acute measurement businesses and the reductions have come from health risk assessment in Canada.

Over time as we ramp up a reputation pipeline and contract value base and as we continue to gain traction with Connect Experience, the impact from health risk assessment in Canada will be much less. And we also expect that we will see at some point a growth trend in Canada, we have a number of opportunities there.

So we believe that we are still within reasonable side of getting back to double digit growth on a consolidated basis possibly in the second half of this year..

Got it, okay. Thanks guys..

[Operator Instructions] And gentlemen I don't have any questions registered, so I’ll turn it back to you for your closing remarks..

Thank you, Donny. And thank you everyone that was on the call today. Kevin and I both look forward to reporting our progress next quarter. Thank you..

Ladies and gentlemen, that does conclude the conference call for today. We do thank you for your participation. And ask that you please disconnect your lines..