Mike Hays - Chief Executive Officer Kevin Karas - Chief Financial Officer.

Frank Sparacino - First Analysis.

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 Tuesday, May 2, 2018.

I'd 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 2018 first quarter 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.

Before we continue I would like to 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 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. With that I'll turn it back to you Mike..

Thanks Kevin, and again, welcome everyone. Digitizing the process for capturing patient feedback affords our clients a wide range of additional use cases which create incremental value and stickiness to our client relationships.

Over this past year we have focused almost exclusively on beginning the migration among current clients to ensure we have scale of referenceable counts as we now move to capitalize on our platform's point of sale advantages.

Late in first quarter and early here in the second quarter we had major back to back wins going head to head with two healthcare systems legacy patients patient satisfaction vendor.

The value we demonstrated even at a higher price point won these two large healthcare systems over after they had been clients of the incumbent vendor for 10 and 13 years respectively. It is early in the pivot and we remain focused on achieving scale, improving margins and aggressively capturing new logos.

For the balance of our call, Kevin has some prepared remarks regarding our 2018 first quarter, after which we'll be addressing any questions that you may have. So please feel free to enter the question queue as Kevin shares his financial performance highlights. I will now turn the call back over to Kevin..

Thank you, Mike. Our total contract value for the first quarter totaled 121.7 million or 2% growth over the same period in the prior year. Healthcare system clients with agreements for multiple solutions represented 23% of our client base at the end of the first quarter of 2018, up from 20% at the same time last year.

Subscription based revenue agreements at the end of the first quarter of 2018 represented 93% of total recurring contract value. Total contract value for our digital voice of the customer platform increased to 29.5 million compared to 14.1 million at the end of the first quarter of 2017.

First quarter of 2018 revenue was $31 million, an increase of 2% over the first quarter of 2017, comprised of organic growth from adding new clients and increasing contract value for existing clients.

First quarter revenue for our digital voice of the customer platform increased to 21% of total revenue compared to 10% of total revenue in the first quarter of 2017. Consolidated operating income for the first quarter of 2018 was 9 million or 29% of revenue compared to 10 million or 33% of revenue for the same period last year.

Total operating expenses increased by 9% to 22.1 million for the first quarter, compared to 20.3 million for the same period last year. Our direct expenses increased 3% to 12.9 million for the first quarter of 2018, compared to 12.5 million for the same period in 2017.

Direct expenses as a percent of revenue were 42% for the first quarter of 2018 and 41% for 2017.

Our direct expenses for data collection decreased in the first quarter compared to the prior year, while direct expenses from the timing of conference expenses and the allocation of resources towards customer service and information technology areas increased.

Our selling, general and administrative expenses increased to 7.9 million for the first quarter of 2018 compared to 6.7 million for the same period in 2017.

This increase in SG&A expenses is primarily due to higher software platform hosting expenses, legal and accounting fees associated with the recapitalization, fees related to implementation of the Tax Cut and Jobs Act and adoption of the new revenue standard ASC 606.

SG&A also increased due to higher salary cost partially offset by the net effect of deferring commissions and incentives due to the adoption of ASC 606. SG&A expenses were 25% of revenue for the first quarter of 2018 compared to 22% of revenue for the same period in 2017.

Depreciation and amortization expense increased to 1.3 million for the first quarter of 2018 compared to 1.1 million in 2017. This increase in expense is driven by additional investments in our technology platform. The provision for income taxes totaled 1.7 million for the first quarter of 2018 compared to 3.5 million for the same period in 2017.

The effective tax rate was 19% compared to 35% for the same period in 2017. The decrease in effective rate is primarily due to the reduction in the corporate tax rate from 35% to 21% due to the Tax Act enacted on December 22, 2017.

In addition, the company had increased tax benefits of $350,000 from the exercise of options and dividends paid to non-invested shareholders partially offset by $67,000 of additional tax expense from non-deductible recapitalization expenses. Our net income for the first quarter ended at 7.3 million in 2018 compared to 6.5 million in 2017.

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

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

Operator?.

Absolutely, sir. Ladies and gentlemen we'll now proceed to the question-and-answer session. [Operator Instructions] I have first question comes from the line of Frank Sparacino from First Analysis. Please proceed..

Hi, guys.

Maybe first in terms of the voice of the customer platform, can you help me just get an understanding of what solutions are now included in that category?.

Frank, this is Mike.

The numbers that Kevin had cited and those referenced in the press release limit the definition of the voice of the customer platform to feedback regarding patient satisfaction, there to your point reading between the lines there is a broader play there in terms of transparency and other types of feedback and uses of that feedback that we would put under more of a digital context, but specific to your question, it is a conversion of paper and pencil patient satisfaction measurement to that of a digital capture on our voice of customer platform..

Great and in terms of that conversion migration, I guess maybe two questions, one is where do you think we're at in terms of the client base? I know it's very early on, but I don't know if it's2% or 10% and then in terms of that migration, as customers move, what is the net financial impact to you particularly from a revenue and I guess margin perspective?.

Okay, we're probably 13% through the customer base on a addressable market, but we're trying to broaden that definition to your point on including packaged solutions. So I would say that we have another $50 million to $60 million worth of market that we could go after and convert. So I think that zeroes in on your first question.

On your second question which is critical most organizations have seen a cannibalization of top line revenue relative to the conversion, we haven't seen that, but we're focused pretty strong on use cases and value propositions.

So to date again albeit early as you suggested we're actually seeing a net gain in contract value among customers that go from paper and pencil to digital platform..

Great and maybe just lastly for me, you alluded to a couple big wins recently and I'm curious if you - what you would point to in terms of why you think you're - on seeding [ph] the incumbents?.

In those two cases pacifically - and the reason why we highlighted them, it was solely on the value that we delivered with a digital platform versus their historical paper and pencil patient satisfaction measurement.

So it's the right question at the right time to live in the right way and busting through kind of a legacy orientation of six months or three months look back against 50 or 60 questions that provide or simply don't have the capacity to digest and operate on.

So what we're seeing is the world has changed in other industries, it now is starting to change in healthcare, so the value proposition that we're bringing to the party I think bust through the clutter of kind of legacy relationship that those two organizations had with their previous vendor..

Thank you, Mike, very helpful..

And thank you for your question sir. [Operator Instructions] Mr. Hays it appears that there are no further questions from our audience. I'll return the presentation back to you once again to continue or for your concluding remarks..

Thank you, operator and thank you, for everyone listening on the call today. Kevin and I look forward as always to communicating our progress and updating you next quarter. Thank you again for your time..

Thank you, sir. Ladies and gentlemen that does conclude the conference call for today. We thank you all for your participation and ask that you please disconnect your lines. Thank you once again. Have a great day..