Ladies and gentlemen, thank you for standing by, and welcome to the Third Quarter 2018 Conference Call. [Operator Instructions] As a reminder, this conference is being recorded Wednesday, November 7, 2018. I would now like to turn the conference over to Michael Hays, Chief Executive Officer. Please go ahead, sir..

Thank you, Malika, and welcome, everyone, to National Research Corporation's 2018 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 the company -- 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. The clear highlight of the quarter is the swelling adoption by leading health care organizations of the company's offerings, most notably our voice of the customer platform and its integrated feature of creating star ratings for health care brands, their physicians and other providers.

Well known to us all is research showing that 92% of consumers use online reviews to guide most of our ordinary day-to-day purchasing decisions.

This research also documents that 37% of consumers use online reviews as the first step in searching for a doctor, and these actual patient ratings and reviews are now trusted by consumers as much as recommendations from doctors themselves.

After Kevin shares with us his prepared remarks regarding the 2018 third quarter financial performance, I'll discuss how consumerism and online rating and reviews are changing health care choice as well as our business. With that, I will now turn the call back to Kevin..

Thank you, Mike. Total contract value for 2018 third quarter totaled $127.1 million, representing 3% growth over the same period in the prior year. Health care system clients with agreements for multiple solutions represented 24% of our client base at the end of the third quarter of 2018, up from 21% at the same time last year.

Subscription-based revenue agreements at the end of the third quarter of 2018 represented 94% of total recurring contract value. Total contract value for our digital voice of the customer platform increased to $37 million compared to $20.1 million at the end of the third quarter of 2017.

Third quarter 2018 revenue was $30 million, an increase of 4% from the third quarter of 2017 and comprised entirely of organic growth from adding new customers and increasing contract value for existing customers.

Third quarter revenue for our digital voice of the customer platform increased to 27% of total revenue compared to 15% of total revenue in the third quarter of 2017. Consolidated operating income for the third quarter of 2018 was $9.2 million or 30% of revenue compared to $7.1 million or 25% of revenue for the same period last year.

Total operating expenses decreased by 4% to $20.8 million for the third quarter of 2018 compared to $21.8 million for the same period last year. Direct expenses decreased by 4% to $11.8 million for the third quarter compared to $12.3 million for the same period in 2017.

Direct expenses as a percent of revenue were 39% through the third quarter of 2018 and 42% in 2017. Direct expenses decreased in the third quarter of 2018 compared to the same period last year as a result of lower data collection costs, partially offset by increased customer service and information technology expenses.

Selling, general and administrative expenses decreased to $7.7 million for the third quarter of 2018 compared to $8.4 million for the same period in 2017. The decrease in SG&A expenses is primarily due to $958,000 of legal and accounting fees associated with the recapitalization that were incurred in the third quarter of 2017.

SG&A expenses were 26% of revenue for the third quarter of 2018 compared to 29% of revenue for the same period of 2017. Our depreciation and amortization expense increased to $1.4 million for the third quarter of 2018 compared to $1.1 million in 2017. The increase in expense was driven by additional investments in our technology platform.

The company incurred income tax expense of $1.4 million for the third quarter of 2018 compared to $3 million for the same period of 2017. Our effective tax rate was 17% for the third quarter of 2018 compared to an effective rate of 42% 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 that was enacted on December 22, 2017.

In addition, the company had a tax benefit of $308,000 in the third quarter from a tax depreciation method change election for software development costs, and we also realized income tax benefits from the exercise of options and dividends paid to non-vested shareholders.

Net income for the third quarter was $7 million in 2018 compared to $4.2 million in 2017. With that, I'll turn the call back to Mike..

number one, the cross-selling and upsell opportunity that exists within NRC's current installed base of customers is approximately $80 million for our transparency solution portfolio; number two, transparency has enabled us to create follow-on wins for large patient-experience contracts in organizations like Bellin Health, Hackensack Meridian and Houston Methodist; and finally, the third point is transparency is providing us a unique distinction at point-of-sale, driving bundled sales at organizations like Cleveland Clinic Children's and MD Anderson.

I hope this short dialogue has showcased our new client wins in the third quarter of 2018 have exceeded all of the previous year of 2017. This completes our prepared remarks. So operator, I'd like to open the call to questions, please..

Thank you. [Operator Instructions] And our first question is from the line of Frank Sparacino with First Analysis. Please go ahead. Your line is now open,.

Hi, guys. Just two questions for me. Maybe first, point of clarification. Mike, you had mentioned 1,500 health care organizations. Is that just the cross-sell opportunity? I mean, obviously, there's a lot more health care organizations to sell to in the U.S.

Just wanted to clarify that at first?.

The way we're defining the most approachable or addressable market is roughly 1,650, of which 150 of those organizations have already become partners with NRC Health relative to transparency portfolio. So the balance of 1,500 suggests the most likely target audience for the products that we currently have.

But you're correct, there is far more health care organizations in the United States than just the next 1,500..

And can you share, just in terms of what the target criteria are in that definition?.

Any organization that has a significant spend in the area of marketing and acquisition in heavily competitive markets would be at the top of the list.

Transparency clearly creates an advantage for those organizations to steer patients that are looking for physicians to their brand of medicine and the follow-through of revenue or incremental revenue generated is fairly material.

So as you can imagine, any competitive market, that is going head to head with one another, and they're trying to capture the hearts and minds and create brand loyalty would be right at the top of the list in terms of the 1,500 most likely..

Great. And lastly, just in terms of the momentum around that part of the business, would you say it's been sort of steadily building? I don't know if we've seen some type of, maybe, inflection point and what would be driving that but just any color..

I'd over the last 4 years, since the acquisition of Digital Assent, there was quite a bit of momentum out of the gate in terms of people that were interested in the analytics and that solution. And over time, we've steadily built large number of referenceable accounts. Now I think we're seeing major health care brands at the tipping point.

So I would say, we probably are at an inflection point that has been building over the last 4 years that seems to be accelerating and at a accelerating rate as we speak..

Great. Thank you..

[Operator Instructions] And Mr. Hays, I'm showing no further question at this time..

Great. Thank you, operator, and thanks, everybody for your time today. As always, Kevin and I 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 lines..