Welcome to the National Research Corporation's First Quarter 2016 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, May 4, 2016.

I would now turn the conference over to Michael Hays, Chief Executive Officer. Please go ahead, sir..

Thank you, Beatrice, 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'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. As an opening statement I'd like to highlight the fact that demand for our most innovative products and services continue to accelerate in the first quarter which in part has contributed to our expanded operating margins.

For more details of our financial performance in the quarter, I'd like to turn the call back over to Kevin for more details.

Kevin?.

Thank you mike. Net new sales of $5.9 million were added in the first quarter of 2016 compared to $5 million in the first quarter of 2015. Our total contract value for the first quarter of 2016 ended at $111.3 million. Subscription-based revenue agreements represented 90% of total recurring contract value.

First quarter 2016 revenue was $27.9 million, an increase of 6% over the first quarter of 2015. Revenue for the first quarter of 2016 adjusted for the sale of our clinical workflow solution, grew at an 8% rate over the first quarter of 2015.

Consolidated operating income for the first quarter 2016 was $8 million or 29% of revenue compared to $5.8 million or 22% of revenue for the same period last year. Total operating expenses for the first quarter 2016 were $19.9 million, down from $20.4 million in the first quarter of 2015.

Direct expenses decreased to $11.5 million for the first quarter 2016 compared to $11.8 million for the same period in 2015. Direct expenses as a percent of revenue for the first quarter were 41% in 2016 compared to 45% in 2015. The decrease in direct expenses in 2016 is attributed to several factors.

First, our 2015 first quarter expenses included approximately $260,000 of incremental costs related to the Digital Ascent acquisition that were not included in 2016. Second, was an improvement in our variable cost of product driven by data collection cost efficiencies.

Finally, higher relative revenue growth rates in our higher margin offerings also contributed to overall gross margin improvement. Direct expenses are expected to be at a 42% of revenue for the full year in 2016.

Selling, general and administrative expenses decreased to $7.4 million or 26% of revenue for the first quarter 2016 compared to $7.6 million or 29% of revenue for the same period in 2015.

The decrease in SG&A expense is primarily a result of the write-off of a purchase option in the amount of $657,000 that was included in the first quarter 2015 expenses. SG&A expenses are expected to be in the 26% to 27% of revenue range for the full year in 2016.

Depreciation and amortization expense for the first quarter was $1 million, both in 2016 and 2015. Depreciation and amortization expense as a percent of revenue is expected to be approximately 3% for the full year in 2016.

Our provision for income taxes totaled $2.8 million for the first quarter 2016 compared to $2.3 million for the same period in 2015. The effective tax rate was 35.4% in the first quarter of 2016 compared to 39.8% for the first quarter 2015.

The decrease was primarily due to the unfavorable impact of a capital loss valuation allowance that was recorded in the first quarter of 2015. The effective tax rate is expected to be in the 35.5% to 36% range for the full year in 2016. Finally, net income for the first quarter was $5.2 million in 2016 compared to $3.5 million in 2015.

Combined non-GAAP diluted earnings per share was $0.21 for the first quarter 2016 compared to $0.14 in 2015. With that, I'll turn the call back to Mike..

Thank you, Kevin. The most notable trend in our business is the increasing acceptance for our product to solutions which is driving the financial performance in net new sales that Kevin reviewed with us. To that end, heavy investment continues in our strategy of creating value across the continuum at the enterprise-wide level.

Unlike others that offered point solutions to one functional buyer within healthcare system, our product portfolio cascade across multiple used cases. This point of differentiation creates tangible uniqueness unmatched by any other provider of single point solutions.

The markets adoption of this product strategy is increasingly shifting spend from the more contemporary approaches of basis satisfaction measurement to a more holistic approach of improving service quality, patient engagement, and customer loyalty which in turn drives increased revenue for our client organizations.

If this trend continues which we believe it will, the landscape of our industry will be unrecognizable in today's context in a relatively short period of time. Before I open the question for Q&A, in summary, we will continue to invest against the opportunities that change the rules and we capitalize on these emerging trends.

Beatrice, I'd like to know open to call to questions..

Thank you. [Operator Instructions] And our first question comes from the line of Parag Mannan [ph] with William Blair. Please proceed with your question..

Hey guys, thanks for taking the questions. My first one so, last quarter you mentioned the potential to stimulate growth in the HRA business by selling solutions to ACA exchange plans. Did you make any investments in sales there? And if so, have you seen any success? Thanks..

We have not, that is on the list to focus on in the coming year but this past quarter we have zero intention to that particular opportunity..

Okay, thank you. And then I guess one quick modeling question.

Do you have the CV related to the clinical workflow asset that was divested for the Q1 '15 period just so we can get a better view of year-over-year growth?.

Yes, this is Kevin and that contract value was approximately $2.3 million..

Okay. All right, cool, thanks. That's very helpful. And then my last question, specific to your transparency solutions, you recently mentioned $2.5 million refuse in ratings posted.

So I guess I'm curious how broad of a client base is this over and what is driving demand here? Is it early adopters or is it just pretty broad?.

There are several hundred organizations that are using our transparency solution, so it's over a fairly broad base. And that client portfolio includes very large healthcare systems as well as individual community hospitals. So I would say the adoption is one that is unilaterally being focused on by many healthcare organizations.

And it's primarily in and around providing visibility to their physicians in optimizing search engine results so as to drive revenue to the actual healthcare system.

So the trend is increasing at an increasing rate we expect to continue to have additional reviews and ratings for even a broader group of healthcare organizations in the coming quarters..

All right, thanks a lot guys. That was very helpful. That's all for me..

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

Hi guys, I was hoping if you could shed a little bit more light just in terms of the product portfolio performance this quarter in terms of some of the key products like reputation, market insight, in terms of their growth rate on a year-over-year basis?.

This is Mike, Frank. It's a little bit harder for us to do that now since we're moving it at an increasing rate to bundling the particular products and services together. Some of my opening comments and relative to the mix of our business what we're seeing both last quarter is organizations purchasing a bundle.

So we're not tracking sales on a per product-by-product basis. So actually don't have those numbers in front of me. But again more importantly, our focus over the last six months and continuing into the future is to offer bundled products and not necessarily single point solutions..

Thanks, Mike.

And having said that do you see -- I assume the average deal size has been increasing as the strategy sort of plays out, do you have any qualitative or quantitative comments around that?.

Well the average spend per client clearly is increasing simply because of the bundling the multiple used cases together under one value proposition. So we are seeing increased spend on first sale to a particular organization, as well as up-sales and cross-sales into the organization.

I don't have a specific number for that but it's quite something that we should be tracking and reporting now but I don't have that in front of me today..

Great.

And then just two more things; one, Kevin just -- the deferred revenue showed very good growth year-over-year, I just wanted to see if there was any additional color on that front? And then last for me, may be turn over to Mike, as -- we've talked about this transition over the last couple of quarters in terms of getting hospitals and think about how they spend around patient experience differently, where do you think we're at in terms of those conversations and getting hospitals to reorient themselves?.

Frank, this is Kevin. On the first part of your question around deferred revenue, the increase is favorable and really it's a matter of timing of our renewals and the percentages of those renewals and new agreements that have full-year advance payment as opposed to quarterly payments.

And so we had a bigger mix, larger mix of invoicing and new agreements and renewals with the full-year advanced payment. So that drove our deferred revenue.

And there were some corresponding increase in our accounts receivable for the quarter, so no change in our fundamental structure of payments or contract terms, just the mix and timing of those renewals and the payment terms. So that's really what drove the increased deferred revenue in the quarter.

And as far as the industry view on one spend around patient's experience, I mean Mike, I don't know if you want to comment on that?.

Sure, would be happy to. Frank I think we're at the early days there, historically has been ourselves and in fact all of our competitors have done a very good job of embedding a very long surveys in a relatively arcade data collection methodology into fabric and healthcare systems.

And I think we're at the point right now where we and the industry is starting to look at that and suggest that since a sampling with an 80-item or 60-item survey is probably a little overkill.

And that we really ought to start to move to voice of the customer platform, that's more indicative of out-of-industry solutions and provide more real-time feedback to the providers so they can actually change care protocols now rather than six weeks or six months from now.

So I think what we'll see if I had to predict roughly 90% of the patient satisfaction spend we see today being redeployed in a very different more contemporary way with the remaining 10% being used to meet the caps-related requirements. And I think we're at a very early cusp of that movement..

Thank you..

[Operator Instructions] Mr. Hays, there are no further questions at this time. I will turn the call back to you..

Thank you, operator. And thank you everyone for your time today. Kevin and I look forward to reporting our progress next quarter. Thanks, again..

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