Ladies and gentlemen, thank you for standing by. Welcome to the Third 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, November 2, 2016.

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

Thank you, operator, and welcome everyone to National Research Corporation's 2016 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. For those that have joined NRC earnings calls previously, you are aware we keep our calls short and simple, allowing the financial facts to communicate our performance. I'd like to now turn the call over to Kevin to provide us those facts for the quarter and year-to-date..

Thank you, Mike. Our net new sales of $5.2 million were added in the third quarter and were comprised entirely of organic growth from adding new clients and increasing contract value for existing clients.

Total contract value at the end of the third quarter of 2016 was $115.2 million, an increase of 8% in total contract compared to the end of third quarter of 2015, after adjusting for the sale of our clinical workflow tool. Contract value growth was driven by both new sales and consistent strong contract renewal rates.

Healthcare system clients, with agreements for multiple solutions, represented 18% of our client base, up from 14% at the same time last year. Subscription-based revenue agreements at the end of the third quarter of 2016 represented 91% of total recurring contract value, which is an increase from 88% at the end of the third quarter of 2015.

Third quarter 2016 revenue was $27 million, an increase of 7% over the third quarter of 2015. Revenue for the third quarter of 2016, adjusted for the sale of our clinical workflow solution, grew at a 10% rate over the third quarter of 2015.

Our consolidated operating income for the third quarter of 2016 was $7.3 million, or 27% of revenue, compared to $6.5 million, or 26% of revenue for the same period last year. Total operating expenses increased by 5% to $19.7 million to the third quarter of 2016 compared to $18.7 million in the third quarter of 2015.

Our direct expenses increased by 4% to $11.5 million for the third quarter of 2016, compared to $11 million for the same period last year. Direct expenses as a percent of revenue for the third quarter were 42% in 2016, compared to 44% in 2015.

The increase in direct expenses in 2016 is attributed to incremental variable cost of product expenses driven by revenue growth in the quarter, which was partially offset by increased efficiencies and survey operations. For the full-year of 2016, direct expenses are expected to be 42% of revenue.

Selling, general and administrative expenses, increased to $7.1 million for the third quarter of 2016, compared to $6.6 million for the same period in 2015. The increase in SG&A expense is primarily due to increased sales management and marketing expenses.

SG&A expenses were 26% of revenue both in the third quarter of 2016 and 2015, and are expected to be in the 26% to 27% of revenue range for the full-year in 2016. Depreciation and amortization expense remained at $1.1 million for both the third quarters of 2016 and 2015.

Depreciation and amortization expense as a percent of revenue has been at 4%, and is expected to remain at 4% of revenue, for the full-year of 2016. The provision for income taxes totaled $2.6 million for the third quarter of 2016, compared to $2.3 million for the same period in 2015.

The effective tax rate was 35.3% for the third quarter of 2016 compared to 36.2% for the third quarter last year. The decrease in effective rate is due to lower state income tax expenses and reduction in income tax expense from the adoption of ASU 2016-09 in the second quarter of 2016.

The effective income tax rate is expected to be 35% for the full-year in 2016. Our net income for the third quarter was $4.7 million in 2016, compared to $4.1 million in 2015, and combined non-GAAP diluted earnings per share was $0.19 for the third quarter in 2016, compared to $0.17 in 2015. With that, I'll turn the call back to Mike..

Thank you, Kevin. Let me make a few brief remarks before we open it up to your questions. As Kevin noted, our growth rates both top and bottom line are improving. Net new sales however remained behind last year, which is clearly not the plan.

To address this, we are increasing our focus on bundling our product offering and up-selling at the enterprise-wide level, heading we believe to where the puck is heading. This action is shifting our product mix and expanding our margins, while most importantly, adding value to our partners, clearly a win-win.

As we look towards the horizon, we see lower spend for patient satisfaction measurement as a single product offering and a redeployment of that spend to more contemporary product offerings that improve service quality, drive revenue and ensure 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 and technology, people and other 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. Operator, with that, I would like to open the call to questions..

Thank you. [Operator Instructions]. And the first question is from the line of Rob Munnings with William Blair. Please go ahead..

Hi guys. Thanks for taking the questions. I guess could you start off by talking a little bit about customer reception to the bundled product offerings? Thanks..

Sure. I think it varies depending upon the client or prospect organization.

Each organization, as you know, is going through quite a transformation and depending upon what strategies are on their plates, they may look at bundles A, B and C versus X, Y and Z, but nevertheless they are looking for cumulative value and moving away from point solutions to something that’s more enterprise-wide and gives them a direct line of sight on a better return on their investment for our products.

So it is quite a bit - it’s varied depending upon what the organization is focusing on. But I think without exception, the message is resonating well and it's creating points of differentiation for us at point of sale..

Okay, great.

And then also - I know you mentioned it little bit earlier, but what kind of success are you guys having selling to organizations that span the entire healthcare continuum?.

Well, as you know, we're one of the few organizations that have product and penetration across the continuum and have a cradle-to-grave type orientation. So as organizations move from being solely in the bed business to something that is optimizing the site-of-care for lower cost care delivery, it plays into our hands.

So it's a strategy to which we saw coming some years ago and that's why we either through organic or through acquisitions built up our capabilities and competencies to serve the continuum. So that is happening. It's continuing. And quite frankly, it's an asset of ours..

All right, great. Thank you. That's all for me..

The next question is from the line of Frank Sparacino with First Analysis. Please go ahead..

Hi guys. Kevin, I just wanted to go back to just want to make sure I understand the figures you threw out, the 18% versus the 14%.

What that references again?.

Hi Frank. What we are looking at is across our healthcare system clients, as you know, we have essentially four product categories or solution categories; through experience, transparency, governance and market insights.

so looking at clients that have agreements with us for more than one of those solutions or multiple solutions across those categories, the number of those health system clients as a percent of our total client base that had agreements for multiple solutions. So that is really the measurement that we’re tracking.

We are seeing that increase from 14% of our client base to 18% of our client base that we not have agreements for multiple solutions..

Great. That's helpful.

Can you give us a sense maybe year-to-date, Mike or Kevin, in terms of the new sales that you’ve closed, roughly what percentage is new versus expansion with the existing base?.

Sure. It’s roughly 50/50. Any particular quarter it might run 60/40, but over any elongated period of time we end up with half of our new business from new logos and half from broader relationships with existing client organizations. And that would be true for this year as well..

Good.

And can you just talk about - obviously the net new sales are behind plan, but what the environment is like, Mike or Kevin? I mean, if you look at just sort of broadly speaking, anyone sign to healthcare providers whether it's The Advisory Board, even some of the clinical vendors like Cerner, Athena and all having a difficult time putting up sales and growth.

And just curious what you see in terms of willingness for providing to spend money right now?.

It's a good question, Frank, we debate it internal, as you might imagine every day. I think we can always look at the marketplace and blame them, and clearly today there is greater pressure on health organizations to save dollars with a greater ROI.

They are all going through massive amounts of transformation relative to different payment models and trying to work filling the beds while tearing down the bedcover. So we are all familiar with the anarchy in the industry. But I think that explains maybe 20%.

I think the other 80% is just poor execution on our part, and we can't really control the markets and we can only control what we can do internally. And we are doubling down on some of the sales basics which I think we got away from, and that in and of itself will return, I believe.

Net new sales trends to the positive side of the ledger, but there is no doubt that there are a different selling environment. But we can't walk away and say that's the reason we have to succeed in light of this changes we’ve succeeded in the light of change over the last 35 years. So in summary, 80% execution, 20% market..

Great. Maybe lastly, just as you look at 2017, I don’t know to what extent you want to - or plan to give any type of guidance. But we should be expecting the top line to continue to grow.

I'm not sure what type of rates, given how this year shakes out in new sales, but any thoughts just around ‘17 and kind of the longer term growth outlook?.

As you know, we don't give guidance. So I’ll try to avoid that but give you some direction. We do see continual attraction by bundling our products and services together at an enterprise-wide level.

And as Kevin noted, we are seeing an increasing percent of our client base opting for multiple solutions when they are woven together in a higher value store. I assume that will continue. If it does, I think we'll see continued top line growth. Bracking it between X percent and Y percent, I quite frankly have no idea.

So as long as it's up into the right, we're happy..

Great. Thank you, Mike. Thank you, Kevin..

[Operator Instructions]. One moment please for the next question. There are no other questions at this time. Please continue with your presentation or closing remarks..

Thank you, operator. And I'd like to welcome - or excuse me, thank everyone for joining our call today. And Kevin and I look forward to joining you with our progress for next quarter at our earnings call that will be coming up. Thank you very much..

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