Mike Hays - CEO Kevin Karas - CFO.

Rob Munnings - William Blair.

Ladies and gentlemen, thank you for standing by. Welcome to the Fourth Quarter 2017 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] And as a reminder, this conference is being recorded Wednesday, February 14, 2018.

I'd now like to turn it over to Mr. Michael Hays, Chief Executive Officer. Please go ahead sir..

Thank you, operator, and welcome everyone to National Research Corporation's 2017 fourth quarter and year-end earnings call. My name is Mike Hays, the company's CEO. And joining me on the call today is Kevin Karas, our Chief Financial Officer.

I would now like to ask Kevin to review with us conditions regarding 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 companies 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 Exchange Commission.

Mike?.

Thanks Kevin, and again, welcome everyone. For our call today, Kevin has some prepared remarks regarding our 2017 fourth quarter and year-end performance after which we will be going directly to questions that you may have. So please feel free to enter the question queue as Kevin shares our financial performance highlights.

Kevin?.

Thanks Mike. Total contract value at the end of fourth quarter totaled $125.1 million representing 5% growth over the same period last year. Healthcare system clients with agreements for multiple solutions represented 22% of our client base at the end of the fourth quarter of 2017, up from 20% at the same time last year.

Subscription based revenue agreements at the end of the fourth quarter of 2017 represented 93% of the total recurring contract value. Fourth quarter 2017 revenue was $29.9 million, an increase of 5% over the fourth quarter of 2016 and was comprised entirely of organic growth from adding new clients and increasing contract value for existing clients.

Consolidated operating income for the fourth quarter of 2017 was $8.7 million or 29% of revenue compared with $8.8 million or 31% of revenue for the same period last year. Total operating expenses increased by 9% to $21.2 million for the fourth quarter of 2017 compared to $19.5 million for the same period last year.

Direct expenses increased by 4% to $12.4 million for the fourth quarter of 2017 up from $11.8 million for the same period in 2016. Direct expenses as a percent of revenue decreased slightly to 41% of revenue for the fourth quarter of 2017 compared to 42% in 2016.

Our variable direct expenses as a percent of revenue decreased compared to last year as incremental variable cost of product expenses from revenue growth in the quarter were offset by decreased expenses from changes in data collection methodologies.

At the same time, our fixed direct expenses increased as additional resources were allocated for client services. Selling, general and administrative expenses increased to $7.7 million for the fourth quarter of 2017 compared to $6.6 million for the same period last year.

SG&A expenses in 2017 increased primarily due to higher salary and benefit costs of $662,000 and $391,000 of additional expenses associated with the proposed recapitalization. SG&A expenses were 26% of revenue in the fourth quarter of 2017 compared to 23% of revenue for the same period last year.

Our depreciation and amortization expense increased to $1.2 million for the fourth quarter of 2017 compared to $1.1 million for the same period in 2016 mainly due to increased depreciation from additional software investments. Depreciation and amortization expenses were 4% of revenue for the fourth quarter of 2017.

Our provision for income taxes totaled $2.1 million for the fourth quarter of 2017 compared to $3.3 million for the same period in 2016. Our effective tax rate was 25% for the fourth quarter of 2017 compared to 36% for the same period in 2016.

The decrease in effective rate was primarily due to a net tax benefit of $1.1 million for the initial estimated impact of the U.S. Tax Cuts and Jobs Act of 2017. And our recent decision to repatriate certain foreign earnings. This Tax Act adjustment was partially offset by some non-deductible recapitalization expenses.

We continue to analyze the impact of the Tax Act that will make adjustments as we complete our analysis in 2018. Net income for the fourth quarter was $6.5 million in 2017 compared to $5.7 million in 2016.

Diluted earnings per share increased to $0.25 for Class A shares and $0.90 for Class B shares for the quarter ended December 31, 2017 up from $0.23 for Class A shares and $0.83 for Class B shares for the same quarter last year. With that I'll turn the call back to Mike..

Thank you, Kevin. This completes our prepared remarks. So I now ask the operator to open the call to questions please..

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

Hey guys. Thanks for taking the questions.

In talking to your hospital clients what are you kind of seeing as their major CapEx priorities in 2018? Is there something that stands out or is there anything that's different from last year?.

This is Mike. I will take a shot and Kevin feel free to add in. I think it's pretty much the same. Obviously, the margins are compressing has been the case in healthcare for decade. So anything that showcases efficiencies is right at the top of the list.

So systems, workflow related activity, I think would be number one anything that could reduce the labor and cost of delivering care at the bedside from the inpatient side. And there's a lot of technology in and around access relative to the outpatient world that I think that trend has probably been well-established for some period of time..

Okay, great. Thank you. That's very helpful. And then, I guess my next question this week a competitor of yours announced an acquisition of a major patient experience business.

I'm just curious how this might impact you guys or the market as a whole?.

I don't know that there's really any impact. It seems like from what I know about it to be a fair deal. We don't run into health streams that often, but they are a fine organization and do great work and I'm sure that [any] [ph] organization will be equally capable of serving those clients..

Okay. Great. Thank you very much. That's all for me..

[Operator Instructions] We got no questions queued up..

Okay. Thank you everyone for your time today. And as always Kevin and I look forward to reporting our progress next quarter again. Thank you..

Ladies and gentlemen that will conclude the conference call for today. We thank you for your participation and you can now disconnect your line..