Ladies and gentlemen, thank you for standing by. Welcome to the National Research Corporation's Third Quarter 2015 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 4, 2015. I would now turn the conference over to Michael Hays, Chief Executive Officer. Please go ahead, sir..

Thank you, Julian, and welcome everyone to National Research Corporation's 2015 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'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. I have a few major events to showcase before we dig into the quarter. First off, and as previously announced Steve Jackson was promoted to President of NRC.

After almost 19 years in a variety of healthcare leadership roles, many of which directly relate to the businesses of NRC, Steve joined the Company with the responsibility of leading several of our important business units, including the formation of our Reputation offering.

Now with his role much expanded we are fortunate to benefit from Steve's positive impact across all of NRC. Another major event also leadership related, is our recent appointment of Dr. Donald Berwick to our Board of Directors.

Don, as many of you know is the foremost expert on healthcare quality improvement in the United States, in fact if not the world and Don's unmatched experience and visionary perspectives have already made a material impact on NRC's strategy.

And quite frankly that was just his first league, so far more to come and I'll keep you abreast of Don's impact to the business. Let me now return the discussion to Kevin for his review of our third quarter financial results..

Thank you, Mike. Our net new sales of $5.9 million were added in the third quarter of 2015 compared to $8.1 million in the third quarter of 2014. Over the most recent four quarters our cumulative net new sales have totaled $24.1 million compared to a total of $21.9 million over the previous four quarter which is an increase of 10%.

Our total contract value for the third quarter ended at $109.3 million and subscription-based revenue agreements represented 88% of total contract value. Our third quarter 2015 revenue was $25.2 million, an increase of 7% over the third quarter 2014.

Consolidated operating income for the third quarter of 2015 was $6.5 million or 26% of revenue compared to $7.2 million or 30% of revenue for the same period last year. Total operating expenses for the third quarter increased from $16.5 million in 2014 to $18.7 million in 2015.

Our direct expenses increased to $11 million for the third quarter of 2015 compared to $9.8 million for the same period last year.

Of that variable our direct expenses increased by approximately $700,000 over the prior year as a result of our revenue growth and we also had incremental expenses totaling $287,000 related to the Digital Assent acquisition that were incurred in the third quarter.

Direct expenses as a percent of revenue were 44% in the third quarter of this year compared to 41% of revenue in 2014. For the full year of 2015 we expect direct expenses to average 43.5% of revenue.

Our selling, general and administrative expenses increased to $6.6 million or 26% of revenue for the third quarter of 2015 compared to $5.8 million or 25% of revenue for this same period in 2014. Incremental SG&A expenses totaling $192,000 were incurred in the third quarter related to the Digital Assent acquisition.

Consolidated SG&A expense is expected to average 26.5% of revenue for the full year of 2015. Depreciation and amortization expense for the third quarter of 2015 was $1.1 million compared to $949,000 for the third quarter of 2014.

Depreciation and amortization expense was 4% of revenue for the third quarter and is also expected to continue at 4% of revenue for the full year of 2015. Our provision for income taxes totaled $2.3 million for the third quarter of 2015 compared to $2.6 million for the same period last year.

The effective tax rate was 36.2% for the third quarter of 2015 compared to 35.9% for the third quarter of 2014. The effective tax rate is expected to average 36% for the full year of 2015. Net income for the third quarter came in at $4.1 million in 2015 compared to $4.6 million in 2014.

Combined non-GAAP diluted earnings per share were $0.17 for the third quarter of 2015 compared to $0.19 in 2014. With that, I'll turn the call back to Mike..

Thank you, Kevin. I have a few simple and very brief remarks to make before we welcome your questions. First of all, I wanted to say over the past few years or so the Company has been all about changing the paradigm in which we compete and creating a higher order of value for our clients.

Shifting our orbit from the antiquated to the innovative has been driven by re-envisioning how we can make a substantial, sustainable improvement to what is most important to patients, residents and caregivers. We have done so by harnessing technology and our associates' desire to make a measurable difference in their help of consumers.

I often think back to a conversation between myself and the founders of Press Ganey, Irwin and Rod Ganey in which we all admitted on the lack of industry-wide improvement of the patient experience.

Even today after billions more have been spent on measuring and improving the patient experience, unfortunately it has not materially improved as measured by age gaps [ph]. While we all can point to selected clients that have shown meaningful improvement and on a whole NRC clients outperform all other hospitals.

We know that the change is not enough and the costs are simply too great. We are committed to changing that by not using the same approach and expecting different results. Our paradigm shift is embracing the totality of the customers' voice to drive better health.

We're doing this by repurposing and repackaging these voices in ways far grander than the simple one to two use cases. Our ability to redirect current spend and capture new spend was again evident this past quarter with this more innovative orbit resonating at point-of-sale with some of the largest players in the industry.

We are finding that organizations quite frankly are tired of wasting human and financial capital for limited improvement results. With that, Julian I'd like to turn the call to questions please..

Thank you. [Operator Instructions] And our first question today, comes from the line of Ryan Daniels from William Blair. Your line is open. Please go ahead..

Yes guys, thanks for taking the questions. Let me start with one on some of your newer product offerings, I guess I am thinking about Reputation and Connect and how that's being sold into the current installed base.

I know that's been a good driver of CV per account growth and I'm curious if you can give an update on those two products in particular? And then if you have it I'd be curious, what portion of your client base currently uses those? I know it is pretty small but it would nice to get a proxy there?.

Ryan, this is Mike. We don’t have the exact percentages, but to your point it would be relatively modest in comparison.

The strategy we have in terms of going against our current installed quite frankly is bundling together a series of product and services, so we typically would not go in only with Connect or only with Reputation, but rather bundling that together in a way in which the client can hopefully have greater value for the same work not greater spend.

So the real strategy is a bundled approach to weave those products and services into the current products and services that they use from the Company..

Okay and if we look at the solid growth and contract value and net new sales, do you have a feel for how much of that is actually new customers? So if we look at let's say the $24.1 million in new sales over the trailing 12 months, how much of that is kind of cross-selling or up-selling into your customer base versus Greenfield or net new opportunities?.

It runs about 50-50, 50% new logos, 50% new - for additional spend from current installed base..

Okay.

And then based on that 10% growth still feeling reasonable good about a return to double-digit growth in 2016 has that stand changed at all?.

Not at all..

And then, go ahead….

That stance has not changed, I'm sorry..

Okay, perfect. And then maybe a couple more quick ones, a little bit more detailed. I noticed on the balance sheet there is an assets held for sale line for about $1.3 million which I hadn't seen in the past.

Is that anything unique, is there something that you plan on divesting or anything in particular?.

Ryan this is Kevin. That is part of our post-acute business. There is a product that it is a software-based product that we sell into the post-acute product market that we are in discussions to potentially divest that part of the business. It is relatively small, but we are in the process of exploring possibly divesting that at this time..

Okay, that's helpful.

And then last one, I'll hop off, just on TGI obviously you’ve talked about that in the past quarters very dynamic growth, can you give us a little bit more feel for the size of the TGI membership base at this point? I guess number one and then number two are you seeing the TGI members providing you with bigger opportunities to cross-sell solutions or are you getting kind of new logos through TGI that then also allows you to sell for the core business? Thanks..

Total membership in TGI is roughly a thousand, a little over a thousand organizations. We do have incremental business from TGI members, but we would categorize that as selling into the installed base rather than a TGI member being represented as a new logo for other products and services. I'm not sure if that got to your question Ryan or not, but….

Yes.

So most of the TGI customers are kind of existing patient experience or other customers is that a way to think about it?.

Oh, I'm sorry no. Of the thousand odd organizations that are members of TGI a relatively small percentage would purchase additional products and services, but when we do sell into a TGI member additional products we would categorize that as an up-sell or additional business from a current client versus a new logo..

Okay, understood. Yes that's what I was looking for. All right thanks guys, I will hop off, I appreciate it..

[Operator Instructions] Our next question comes from the line of Frank Sparacino from First Analysis your line is now open the go-ahead..

Hi Kevin, hi Mike.

Maybe first starting with, you've had some nice wins over the last couple of months like Sutter Health and others and I'm curious Mike or Kevin, if there is kind of a consistency as you displaced some of the competitors as to what's resonating with the clients, whether it's the vision you guys have, the product, portfolio of products with Connect and Reputation, anything along those lines will be helpful?.

Frank, this is Mike. You are absolutely correct. We are thinking very differently about how we go to market with our products and services and in particular how we bundle together a value proposition and in cases like Sutter and other major wins we've had this year.

The point of differentiation seems to be the cumulative value of bringing all of our tools together into an enterprise like solution versus focusing on point solutions.

And I think the broader footprint and relationship we have with the organization again they seek cumulative value and that seems to differentiate us from our traditional or historic goal point solution competitors..

Thank you, Mike. And just following up, you know I'd be curious when you really look at the hospital reports just in terms of overall financial health and profitability it seems like, on the not for profit side and many are doing much better than they have over the last couple of years.

I'm just curious in your discussions do you feel like the overall kind of spend if favorable and also just generally speaking, the commitment on the part of the hospitals toward patient experience and the consumer side? Thanks..

Well margins are as you well know, however healthcare as you also know is always running on narrow margins. So, an improvement still is relatively still low in comparison to other industries or let's say in character [ph] organizations look at every dollar they spend on most, any and all products and services.

So I don't think ours has been any easier market, but I don't think it's any tougher. I think the fore-profits have gotten a little bit bigger hit that perhaps has created a little bit more headwind, but then after-profits seemed to be doing a little bit better.

But I do know that the margin really has ever kept us from selling in or made it any easier. I think they are looking for value and it is always a tough sell, you are always competing for somebody else that watch their money..

Okay great and lastly from me just, as you look at 2016 I'd just be curious any sort of major changes from product alignment standpoint or sort of go to market strategy, as it relates to the sales organization?.

I don't think so. I think we are finding the way we are bundling our products and services together, being very successful in increasing share against major competitors and winning some very large brand-name organizations that will become even more reference-able accounts on a go forward basis.

So, I think as long as this works we just pour more gas on it and do more of the same..

Great, thank you..

[Operator Instructions] And there are currently no further questions on the phone lines at the moment..

Thank you Julian and thank you everyone for your time today. As always Kevin and I look forward to reporting our progress again next quarter. Thanks again..

Ladies and gentlemen, that does include the conference call for today and we thank you for your participation and ask that you please disconnect your lines..