Ladies and gentlemen, thank you for standing by. Welcome to the Second Quarter 2016 Conference Call. [Operator Instructions] As a reminder, this conference is being recorded, Wednesday, August 3, 2016. .

I would now like to turn the conference over to Michael Hays. Please go ahead. .

Thank you, Tia, and welcome, everyone, to National Research Corporation's 2016 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 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.

With our new sales over the past few quarters, we are beginning to see real movement from the most progressive healthcare organizations in the country, in how they think about their customers and the importance they're placing on customer loyalty, to drive not only fee-for-service revenue, but more progressive value-based and risk-based arrangements.

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Before commenting on how we're responding to these emerging trends, I will turn the call back over to Kevin to review our financial performance for the quarter and year-to-date.

Kevin?.

Thank you, Mike. Net new sales of $5.8 million were added in the second quarter, and those are comprised entirely of organic growth from adding new clients and increasing contract value for existing clients. .

Total contract value at the end of the second quarter of 2016 was $114 million, an increase of 8% in total contract value compared to the second quarter of 2015, after adjusting for the sale of our clinical workflow tool. .

Contract value growth was driven by new sales and consistent, strong contract renewal rates. Subscription-based revenue agreements at the end of the second quarter of 2016 represented 90% of total recurring contract value. .

Our second quarter 2016 revenue was $26.1 million, an increase of 7% over the second quarter of 2015. Revenue for the second quarter of 2016, adjusted for the sale of our clinical workflow solution grew at 9% rate over the second quarter of 2015. .

Consolidated operating income for the second quarter of 2016 was $7 million or 27% of revenue compared to $6.4 million or 26% of revenue for the same period last year. .

Our total operating expenses for the second quarter 2016 were $19.1 million compared to $18.1 million in the second quarter of 2015. Direct expenses increased to $10.7 million for the second quarter of 2016 compared to $10.4 million for the same period in 2015.

Direct expenses as a percent of revenue for the second quarter were 41% in 2016 compared to 43% in 2015. The increase in direct expenses on a dollar basis in 2016 is attributed to incremental variable costs of product expenses from revenue growth in the quarter, which were partially offset by increased efficiencies in our survey operations. .

For the full year of 2016, direct expenses are expected to be 42% of revenue. Selling, general and administrative expenses increased to $7.3 million or 28% of revenue for the second quarter 2016 compared to $6.6 million or 27% of revenue for the same period in 2015.

The increase in SG&A expenses is primarily a result of increased share-based compensation and marketing expenses. SG&A expenses are expected to be 27% of revenue for the full year 2016. .

Our depreciation and amortization expense for the second quarter increased from -- $1.1 million in 2016 compared to $1 million in 2015 as a result of increasing technology investments in 2016. Depreciation and amortization expense as a percent of revenue is expected to be 4% of revenue for the full year in 2016.

Our provision for income taxes totaled $2.5 million for the second quarter 2016 compared to $2.3 million for the same period in 2015. The effective tax rate was 35.2% for the second quarter of '16 compared to 35.7% in the second quarter of 2015.

This decrease was primarily due to the reduction in income tax expense from the early adoption of ASU 2016-09. The effective income tax rate is expected to be in the 35% to 35.5% of revenue range for the full year of 2016. .

Net income for the second quarter was $4.6 million in 2016 compared to $4.1 million in 2015. Our combined non-GAAP diluted earnings per share was $0.18 for the second quarter of 2016 compared to $0.16 in 2015. .

With that, I'll turn the call back to Mike. .

Thank you, Kevin. The increasing importance being placed on understanding and enhancing customer loyalty has been very timely for the company, given our investments over the past few years.

Bundling voice-of-the-customer use cases across service settings, thus creating enterprise wide value has shifted our product mix and expanded our margins, while most importantly, adding incremental value to our clients, clearly, a win-win. .

The outcome of more focus being placed on customer loyalty, we believe, will impact traditional spend for single-point solutions such as patient satisfaction measurement. That spend would be increasingly redeployed to more contemporary approaches to improve service quality, drive revenue and enhance customer loyalty for our client organizations. .

As this trend accelerates, we are well served by a recurring revenue business model, which drives excellent cash flows for continued investment in technology, people and growth opportunities. .

All of this will be necessary as we shift the organization to create a very different way healthcare listens and responds to what's most important to its customers. .

Tia, with that, I would like to open the call to questions, please. .

[Operator Instructions] Our first question is from the line of Rob Munnings with William Blair. .

I noticed that new sales were a bit slower year-over-year.

Is there anything in particular in the end market? Or is that mostly just timing?.

I'd say it's mostly timing, and we had a very large sale come in on a comparable quarter period. So we're seeing actually the pipeline increase and take rates improve. So if anything, I would suggest timing. .

Okay, great. That's very helpful. And then, looking at the gross margin, I know you guys came in above target there.

Is that mostly just mix shift? Or is there something more specific going on?.

Rob, this is Kevin. It's both. We have some cost reductions in some of our direct costs related to postage, some rate decreases this year, which have helped along with a shift in mix. So it's sum of both. .

Okay. Great.

And then, would you be able to get give us an updated number of clients with more than one offering? And I guess, maybe talk a little bit about the aggregate cross-sell opportunity you guys are seeing in the existing base?.

Rob, this is Kevin again. From a pure measurement standpoint, we track the number of clients that have acquired more than one product offering from us. So that as a percent of our total client base still represents approximately 15% of our clients that have acquired more than one product. It's growing.

And I think as Mike mentioned on the last call, we're bundling more of our products and moving in the direction of some product unification. That metric is a little less comparable over a longitudinal period of time.

But to answer to your direct question, it still represents somewhere in the 15% to 20% from our client base that have more than one product. .

Our next question is from the line of Frank Sparacino with First Analysis. .

I was hoping you could just give some color. If we look at the 4 major solution areas that you have, experience, market insights, transparency and governance.

Maybe, just give some color around how those different areas are performing?.

This is Mike, Frank. The silo-ness of the way that you are categorizing the product offering is becoming a little harder on a go-forward basis to split apart.

The reason being is we're taking -- with the exception of governance, we're taking a very aggressive tact on taking market insights, which is the voice of the customer relative to brand, behavior and needs in the marketplace along with our measurement products, which is in and about the experience in a service setting as well as transparency in reputation management and bundling that together into a single offering.

So it's very rare, hoping never, but very rare, I'm sure that point-of-sale we are introducing in an integrated package with bundled pricing.

So all that to say, is the take rate on any individual product we aren't necessary focused on, so I would look at our overall growth in contract value attributed to the bundles, all of which represent some component, if not all, of our historical offerings. .

And along those lines, Mike, I would assume the average deal for a new client has been increasing, I don't know if you have any metrics around the relative increase today versus a year ago?.

I mean, it definitely is. We're seeing contract values in a bundled fashion upwards of 20% to 40% over what they may have represented on a single-point solution sale. So there's marked improvement or increase in the depth and breadth of the relationship, which results in obviously, greater recurring contract value. .

And if we look at net new sales this year.

Would you expect, I mean, based on the pipeline that on a year-over-year basis, '16 versus '15 that we'll see growth?.

Yes, I believe, we will. We're seeing some pretty interesting traction again in and around the volume proposition when we bundle our products and services together. So historically, any particular sales endeavor for a single-point solution, say patient satisfaction alone, went up against some fairly embedded competitors.

Whereas, in the bundled offering, the competitive landscape is very different. So hopefully, that will shake loose and create more market share shifts than we've seen historically, perhaps even over the last few years. So long way to answer your question, but yes, we would see that improvement continue through the back half of the year and into 2017. .

And then, maybe, lastly, just Mike, I'd be curious on some of the anecdotes of conversations with the hospital and health systems. As you talk about moving that traditional spend into new areas.

How they are thinking about in terms of -- I assume it's not dollar for dollar, but just where you think people are at in those conversations along transformation?.

Well, it is healthcare, so it's slow. But the majority of new wins that we're getting would be reflective of an attitude at the C-suite level of trying to find additional use cases of the data to which they are already collecting.

So if you can imagine, an organization that embarks on patient experience, measurement and uses it in a historical or traditional fashion to look at nursing an improvement in terms of service quality, now they are saying when we're spending this money, why we can't use it for driving the top line of our company? Why can't we use it to increase loyalty? Why can't we use it to better the service experience for that same patient next time they have an interaction with our brand.

So really what we're seeing is if we're going to spend the money, why don't we get multiple uses to leverage that investment? And when you get to that type of dialogue, it's really the intersection of real-time data over the continuum over all service settings, that are creating an exponential value proposition.

So in summary, it's really we're spending the money, why not, get greater use? And why not look at things other than only service quality improvement. .

[Operator Instructions] It looks like we have no further questions unless Mr. Sparacino has more questions. All right. I'll turn the call back over to you. .

Thank you, Tia. And again, thank you, everyone, for your time today. Kevin and I, as always, 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 line..