Michael Hays – Chief Executive Officer and Director Kevin Karas – Chief Financial Officer, Secretary, Treasurer and Senior Vice President.

Jeffrey Garro – William Blair & Co. LLC Frank Sparacino – First Analysis Securities Corp. Dan Baldini – Managing Partner & Chief Compliance Officer, Oberon Asset Management LLC.

Ladies and gentlemen, thank you for standing by. Welcome to the National Research Corporation Second Quarter 2015 Earnings Release Conference Call. During the presentation, all participants will be in a listen-only mode. Afterwards, we'll conduct a question-and-answer session.

[Operator Instructions] As a reminder, this conference is being recorded Wednesday, August 5, 2015. I would now like to turn the conference over to Michael Hays, Chief Executive Officer. Please go ahead..

Thank you, Scott, and welcome everyone to National Research Corporation's 2015 second 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'd 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. By way of highlights this past quarter, your company continued to win more new logos and generated increased contract value among our existing installed base of healthcare providers. At the same time, we are witnessing material high retention rates.

And given this positive performance, we expect top line growth to be in the high single-digits for the balance of the year 2015, and mid double-digit revenue growth for the year 2016. With that let me return the call to Kevin to review second quarter financial results before I continue along this same theme..

Thank you, Mike. Our net new sales of $6.8 million in the second quarter of 2015 represented an increase of 64% over the net new sales in the second quarter of 2014. Our total contract value for the second quarter ended at $107.8 million and subscription-based revenue agreements represented 87% of the total contract value.

Our revenue for the second quarter of 2015 was $24.5 million, an increase of 2% over the second quarter of 2014. It was comprised of organic revenue growth, primarily from new products, offset by some reduction in revenue from health risk assessments and predictive analytics.

Consolidated operating income for the second quarter of 2015 was $6.4 million, or 26% of revenue, compared to $6.3 million, also 26% of revenue for the same period last year. Our total operating expenses for the second quarter increased from $17.7 million in 2014 to $18.1 million in 2015.

Of that, our direct expenses decreased to $10.4 million for the second quarter of 2015 compared to $10.8 million for the same period in 2014. A decrease in our data collection expense was offset by some incremental expenses totaling $468,000 related to the Digital Assent acquisition.

Direct expenses, as a percent of revenue, were 43% for the second quarter of 2015 compared to 45% of revenue in 2014. For the full year of 2015, direct expenses are expected to average 43% of revenue for the year.

Our selling, general and administrative expenses increased to $6.6 million, or 27% of revenue, for the second quarter of 2015, compared to $6 million, or 25% of revenue, in the same period last year. Incremental SG&A expenses totaling $344,000 were incurred in the second quarter related to the Digital Assent acquisition.

Consolidated SG&A expense is expected to average in 27% of revenue range for the full year of 2015. Our depreciation and amortization expense for the second quarter of 2015 was $1 million, compared to $927,000 for the second quarter of last year.

Depreciation and amortization expense was 4% of revenue for the second quarter of 2015 and is also expected to continue at 4% of revenue for the full year of 2015. Provision for income taxes totaled $2.3 million for the second quarter 2015 compared to $2.2 million for the same period in 2014.

Our effective tax rate was 35.7% for the second quarter of 2015 compared to 35.3% for the second quarter of 2014. The effective tax rate is expected to average 36% for the full year of 2015. Net income for the second quarter was $4.1 million, both in 2015 and in 2014.

And our combined non-GAAP diluted earnings per share was $0.16 a share for the second quarter, as well in both 2015 and 2014. With that, I'll turn the call back to Mike..

Thank you, Kevin. As we are all aware, reductions in contract value within the HRA and predictive analytic businesses have clearly muted top-line growth lately. However, accelerating new sales within the balance of our product portfolio has now filled that gap. Total contract value into the second quarter at $108 million, an 8% increase year-over-year.

Net new sales for the quarter contributed to this pivot, which were, as Kevin highlighted, 64% higher than second quarter of 2014. In fact, over the past 12 months, net new sales have reached $26.3 million, up 31%. Sales traction has been seen across most of our product offerings.

Our core experienced measurement products has registered major wins among the largest healthcare systems in the country over this past 12 months, validating our offerings position against our primary competitors.

Market Insights has become even more valuable to healthcare providers in a world of consumer choice and the increasing importance of providers' brands, which both factors are driving continuous sales within the Market Insights group.

The Governance Institute new memberships are up 50% year-to-date over the first half of 2014 and contract value of our reputation offering has increased four-fold over its contract value at acquisition, which, as you know, was in the fourth quarter of 2014. As well, the Connect platform has performed very well.

In fact, in July of 2015, just this last month, we acquired an additional 40% of the equity of the Connect Group, bringing NRC's ownership to 90%.

Accelerating the repurchase of equity ahead of plan was done in order to capitalize on the unique capabilities that have been uncovered within the Connect platform for use cases beyond Connect transitions only. Integration of the Connect platform provides even more compelling value, benefiting NRC's clients, both existing and new.

In addition to the point of sale advantage the Connect platform provides, material reduction and direct expenses will be realized in each Connect platform deployment.

We anticipate, with these additional use cases for Connect, combined with the current strength of new sales across the balance of our product portfolio, we will continue to drive total contract value growth at an increasing rate.

Adding to our positive outlook are client retention rates that have improved materially, returning historical levels, which, as you know, has a multiplying positive impact on revenue growth rates going forward. The client service teams are doing especially well. Our new product teams are at full speed as well.

With several new products being considered based upon market's request, we will likely add incremental products, bringing enterprise-wide value to our clients in the year 2016.

Scott, I would like to now open the call to questions, please?.

Thank you, ladies and gentlemen. If you like to register a question [Operator Instructions] One moment please for our first question. And our first question is from Jeff Garro with William Blair & Company. Please proceed..

Good morning, guys. Thanks for taking the questions.

I wanted to ask, what's driving the new logo wins and what products are they purchasing?.

This is Mike. I can give you a little bit of color on that. It really is a combination of our product portfolio. We're bringing together assorted products into more of an enterprise-wide integrated value proposition. And I think that it gives us incredible points of differentiation against any competitor that could only offer one of those offerings.

So, in each of the cases that I can think of where we won major business, the entire portfolio has been seen as differentiated vis-à-vis any of the other competitors that were at the bakeoff..

Great, great. Then maybe a follow-up and just trying to dive a little further into what's driving your expectation for double-digit revenue growth in 2016. You mentioned the client retention is strong and we just talked about some new logo wins and contract value increasing.

I guess, maybe following up on your comments that the enterprise-wide value is really taking hold, could you describe trends with contract value per client?.

Average contract value is increasing against our installed base, primarily as a result of selling our new products such as Reputation and Connect into that current installed client base. So we are seeing average spend per client increase.

I don't have the exact numbers in front of me, but in addition to that we are winning significant business that is new to the organization..

Great, great. And then maybe from an end-market perspective, where you're seeing that accelerating contract value growth that would drive double-digit revenue growth.

Is it all from the acute care space, or are you having strength in the post-acute space or anywhere else?.

Well, when I talk about an integrated product offering, we are in fact bundling together products that suit not only acute but also post-acute. So, you take a large integrated healthcare system, for an example, more often than not they have business in each service setting across the continuum.

So, it would be collective growth among both, not necessarily just long-term or just acute but rather across the continuum itself..

Understood. And one last one from me. You talked about new products in 2016 helping to drive some of the growth you've discussed.

So, I'm curious if you give us kind of any preview on what exactly clients are asking for and also what type of incremental investments are going to be required to deliver those price or if it's more of an M&A type mindset to deliver new products quickly by 2016?.

More than likely it'd be a combination of organic as well as M&A activity. That'd be relatively small tuck-in type acquisitions versus any kind of major bet-the-farm type acquisition. On the other side, the organic from ground-up build products will also happen. So, I'd see there's a mix.

I'd rather not get into details in terms of the adjacencies to current products that we're trying to build out, but we will have several, no doubt, within the year 2016 that will just add to the growth. We'll put more product against our current installed base..

Great. Thanks for taking the questions, guys..

Our next question is from Frank Sparacino with First Analysis. Please proceed..

Hi, Mike. Hi, Kevin. Nice job on the quarter. I had a couple of questions.

First is, on the retention rates, can you just may be give a little bit more detail as to why you think those are returning to historical levels and better levels?.

I'm going to have Kevin jumped into it as well. From my perspective, it really is a return to our historical strong retention or growth or renewal rates. So, as you know, we had some significant backdoor loss within the predictive analytics and HRA business, which really kind of drugged down our top line growth.

And over the course of the last six months, in comparison to the previous six months of 2014, backdoor loss has been 50% or less than it was prior. So, it really is working through the backdoor loss on HRA and predictive analytics.

But Kevin, maybe you have some additional insight on that?.

I think Mike is correct, Frank. The areas where we've seen the significant levels of losses, it's highly unlikely that we will see that recur going forward. So, I would agree, that's one of the primary drivers of our expectation that we will see retention improve..

Great.

And shifting gears maybe to the Digital Assent side of things, I'd just be curious, obviously the contract value is growing rapidly, but just from a competitive standpoint, who you're seeing in the existing base and level of competition that you're running into?.

Well, the space is hot and everybody is jumping in. So, I would imagine that the competitive landscape will become increasingly crowded over time. The world of reputation management and digital spend and marketing, in general, is a place where we're seeing the healthcare marketers provide more and more attention and more and more budget.

So there's no one particular competitor I could cite, but I would imagine that over time there will be a lot of people in the space.

Our focus is really not necessarily on competitors, but just focusing on bringing more and more value to our customer base, and Digital Assent really has performed amazingly well when we get it installed and the search engine optimization that it provides our client organizations and their ability to be kind of above the fold, if you wish, relative to physician searches.

So, the ROI is just off the chart relative to client organizations that have deployed the solution..

And just following up on that, Mike.

The sales cycles that you're in, I mean, are any of them uncontested with Digital Assent?.

Personally, it's hard for me to think of that, that way, simply because there is always people trying to compete for the budget dollars, but there has been some we might have been a sole source type, simply because we're far, far ahead of anybody else. All the other organizations that are talking about solutions are really vaporware.

So, at the end of the day, we more often than not kind of find ourselves standing alone, but only because we have proven performance and a proven product. But again, healthcare is competitive and everybody is after everybody else's budget, so I can't imagine at the end of the day we're not competing with a lot more people than we even realize..

And maybe lastly for me, just on Connect, could you just go into a little bit more detail, Mike, on some of the broader use cases for the product?.

Sure, I'd be happy to. Connect was built with initial used case being Connect Transitions, and that's moving along basically as planned.

What we are finding though is the ability to collect essentially near real-time feedback from patients relative to their experience, particularly in the physician arena, has disproportionate traction, meaning organizations are really seeing when they can get real-time feedback directly after appointment that is meaning to the physicians that they can actually change service quality quickly.

So, Connect does that, as you well know with Connect Transitions, and deploying that same feature functionality within our core experience base clearly has been a disruptive market force, and I think we'll continue to see big logo wins against other competitors that are not quite as innovative.

So we'll see over the next year, but it looks pretty positive..

Great. Thank you, guys..

Thank you. [Operator Instructions].

And we have a question from Daniel Baldini with Oberon Asset Management. Please proceed..

Hi. Good morning. Thanks for taking my call. So, since the last call, your largest competitor in CAHPS surveys went public, and a bunch of research reports were released by the underwriters.

And those research reports noted that due to Press Ganey's scale, they have a database of patients experience results that's supposedly larger than everyone else's, and that this size of this database gives them a great competitive advantage. And as a result, they'll continue to gain market share.

Now, I'm wondering if you could just comment generally on the value of patient experience results databases, and also how you might position yourself against a competitor, or competitors, that have larger databases?.

Good question. First of all, Press Ganey is a fine company. We compete against them routinely, and admire a lot of the things that they do. They clearly have a larger installed base. So, consequently their comparative database would be larger. At one point in time, I think that actually was an advantage of theirs.

The market is telling us, and our experience suggest that now that we have a national standard being the CAHPS, a 100% of the data for every hospital is available.

So, consequently the largest database is really not ours, nor is it Press Ganey's, nor is it any individual competitors, but rather it's CMS, the government entity that you or I or anyone can access all experience measures.

So, the day of having a user base that is larger than the next guy probably is – or we're not seeing it anyway point of sale as disrupting anything. So, again they're a fine organization, we look forward to competing with them, we look forward to winning against them but it won't be against comparative database..

Okay. Great. That was very helpful..

Thank you..

And there are no further questions registered at this time..

Thank you, Scott, and thank you everyone for taking the time to have kept in a nice share the previous quarter, and we look forward to showing you on a call for third quarter, and we'll reconvene at that time. Thank you very much..

Ladies and gentlemen, that concludes conference call for today. We thank you for your participation and ask that you please disconnect your lines..