Ladies and gentlemen, thank you for standing by. Welcome to the National Research Corporation Fourth Quarter and Year-End 2018 Conference Call. [Operator Instructions] As a reminder, this call is being recorded, Wednesday, February 13, 2019. I would now like to turn the call over to Mr. Michael Hays, Chief Executive Officer. Please go ahead, sir..
Thank you, Ash, and welcome, everyone, to National Research Corporation’s 2018 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.
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 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..
Thanks, Kevin, and again, welcome, everyone.
As you may have noted, last evening we announced the obtainment of an important goal that being the mix of business among current clients has shifted spin from legacy methods of experienced measurement and CAHPS compliance focus to an investment in our Voice of the Customer platform with its accompanying embedded tools, such as Transparency that drives revenue, and customer communities for coproducing care experiences.
This higher value strategic offering now accounts for $75 million of our contract value, more than half of our business and is emerging as an unmatched advantage of point of sale.
After Kevin shares with – his prepared remarks regarding our financial performance, we’ll discuss how, with most of our business now comprised of Voice of the Customer platform, we are likely to evolve. With that, I turn the call back to Kevin..
Thank you, Mike. Our total contract value at the end of the fourth quarter of 2018 totaled $131.4 million, representing 5% 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 fourth quarter of 2018, up from 22% at the same time last year. Subscription-based revenue agreements at the end of the fourth quarter of 2018 represented 95% of total recurring contract value.
Total contract value for our digital Voice of the Customer and platform solutions increased to $75 million compared to $56.6 million at the end of the fourth quarter of 2017.
Fourth quarter 2018 revenue was $30.6 million, an increase of 2.5% over the fourth quarter of 2017, comprised entirely of organic growth from adding new customers and increasing contract value for existing customers.
Our fourth quarter revenue for the digital Voice of the Customer platform solutions increased to 53% of total revenue compared to 39% of total revenue in the fourth quarter of 2017. Consolidated operating income for the fourth quarter of 2018 was $9.4 million or 31% of revenue compared to $8.7 million or 29% of revenue for the same period last year.
Our total operating expenses of $21.2 million for the quarter were flat compared to the prior year. Direct expenses decreased by 4% to $11.9 million for the fourth quarter of 2018 compared to $12.4 million for the same period in 2017. Direct expenses as a percent of revenue were 39% for the fourth quarter 2018 and 41% in 2017.
Direct expenses decreased in the fourth quarter compared to the same period last year as a result of lower data collection costs, partially offset by increased customer service and information technology investments.
Selling, General and Administrative expenses increased to $7.9 million for the fourth quarter of 2018 compared to $7.7 million for the same period in 2017. SG&A expenses were at 26% of revenue for the fourth quarter, in both, 2017 and 2018.
Depreciation and amortization expense increased to $1.5 million for the fourth quarter of 2018 compared to $1.2 million in 2017. This increase in expense is driven by additional investments in our technology platform.
The company incurred income tax expense of $1.7 million for the fourth quarter of 2018 compared to $2.1 million for the same period in 2017. Our effective tax rate was 18% for the fourth quarter in 2018 compared to an effective rate of 25% 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 in December 2017. In addition, the company had increased tax benefits of $537,000 related to the vesting and exercise of stock awards net of certain excess compensation limits.
These were partially offset by decreased tax expense last year of $1.1 million during the same quarter in 2017 due to Tax Act-related adjustments. Net income for the fourth quarter was $7.8 million in 2018 compared to $6.5 million in 2017. With that, I’ll turn the call back to Mike..
Thank you, Kevin.
The acceptance among clients to shift their historical spin for patient experienced measurement from legacy methods and highly CAHPS compliance focus to our Voice of the Customer platform in a relatively short period of time is only magnified when viewed through the lens of the more typically slow adoption rate among health care organizations in general.
This migration to Voice of the Customer platform confirms, in our opinion, the tangible ROI health systems have realized – have not realized in the legacy approach, where overall patient satisfaction improvement has barely been measurable over the last decade.
This pent-up frustration of wasted spend in the face of consumer-driven health care has created a catalyst for change. The power of engaging the customer for our clients’ brand is very powerful and ensures customer loyalty.
Case in point, just last week, a client went live and from gathering feedback from a handful of customers via legacy methods, their live rollout, within 17 hours of Voice of the Customer platform, they received 17,100 customer responses in 2,640 in-depth comments. This is really a game changer.
One understands that online ratings is the number one way consumers like you and I select positions, and that frequency and recency of customers’ feedback push our clients’ positions to the top of search.
Driving revenue for clients is one of our newfound measures of ROI and a welcomed departure for clients struggling with legacy measurement expenditures. This shifting to over half of our business being recurring revenue on the Voice of the Customer platform is a significant tipping point.
This simple fact of reaching this milestone suggest a very different allocation going forward of resources shifting from internal migration of clients to taking our advice to the customer advantages and ROI story aggressively to the wider market to win market share.
This completes our remarks, and I’d ask Ash, the operator, to open the call for questions..
Operator:.
Thank you, Ash, and thank you, everyone, for listening in today. Kevin and I look forward to reporting our progress next quarter..
Ladies and gentlemen, that does conclude the call for today. We thank you for your participation and ask that you please disconnect your lines..