Greetings and welcome to the National Research Corporation Third Quarter 2019 Conference Call. During the presentation, all participants will be in a listen-only mode. Afterwards, we'll conduct a question-and-answer session.

[Operator Instructions] As a reminder, this conference is being recorded today Wednesday November 6, 2019.I would now like to turn the conference over to Michael Hays, Chief Executive Officer. Please go ahead..

Thank you Nelson and welcome everyone to National Research Corporation's 2019 Third 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'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..

Thanks Kevin and again welcome everyone. The highlight of the third quarter was clearly our accelerated sales momentum which actually set a new, net new sales record of $10 million. This record was comprised of a number of new clients that were referenceable wins including one if not the largest client of PRC.

And now in the early days of the fourth quarter this momentum continues with us winning over one if not the most prestigious clients of press gaining.I will add some additional comments after Kevin shares with us details of the financial performance in the quarter.

Kevin?.

Thank you, Mike. Total contract value at the end of the third quarter of 2019 ended at $140.5 million representing 11% growth over the same period in the prior year. Health care system clients with agreements for multiple solutions represented 27% of our client base at the end of the third quarter of 2019 up from 24% at the same time last year.

Total contract value for our digital Voice of the Customer platform solutions increased to $93 million compared to $69.8 million at the end of the third quarter of 2018.Third quarter 2019 revenue was $32.5 million an increase of 8% over the third quarter of 2018.

Third quarter revenue for our digital Voice of the Customer platform solutions increased to 64% of our total revenue compared to 51% of total revenue in the third quarter of 2018.

Our consolidated operating income for the third quarter of 2019 was $10.2 million or 31% of revenue compared to $9.2 million also 31% of revenue for the same period last year.Total operating expenses of $22.2 million for the quarter increased by 7% in comparison to prior year.

Direct expenses increased by 3% to $12.1 million for the third quarter of 2019 compared to $11.8 million for the same period in 2018. Direct expenses as a percent of revenue were 37% in the third quarter of 2019 compared to 39% in 2018.

Direct expenses increased due to growth in fixed costs partially offset by a decrease in our variable expenses.Fixed expenses increased primarily as a result of higher salary benefit costs in the customer service and information technology areas partially offset by lower variable costs due to, in large part to the continued shift in our revenue mix from legacy solutions to Voice of the customer platform revenue.

Variable direct expenses as percent of revenue decrease to 17% for the third quarter of 2019, compared to 20% in the third quarter 2018.

Selling general and administrative expenses increased to $8.7 million in the third quarter of 2019 compared to $7.7 million for the same period in 2018.SG&A expenses were 27% of revenue for the third quarter of 2019 compared to 26% of revenue for the third quarter of 2018.

Selling general and administrative expenses increased in 2019 due to increased salary and benefit costs legal and accounting expenses software license and platform hosting expense and marketing expenses which were partially offset by lower contracted services.

Our depreciation and amortization expense was $1.4 million for the third quarter of both 2019 and 2018.

Other income and expense changed from $783000 of net other expense in the third quarter of 2018 to $410000 in the third quarter of 2019.The decrease in other expense was primarily due to revaluation on intercompany transactions due to changes in the foreign exchange rate.

The company's income tax expense was $1.7 million for the third quarter of 2019 compared to $1.4 million in 2018 and the effective tax rate was 17% for both third quarter of 2019 and 2018. Net income for the third quarter was $8.1 million in 2019 compared to $7 million in 2018.With that I'll turn the call back to Mike..

first converting current clients to the VoC platform; second winning new logos from PRC and Press Ganey; and third capitalizing on Voice of the Customer installed base by adding value in additional use cases on the platform resulting in increased average contract value per partner. All of these 3 levers are working well.

This completes our prepared remarks.So Nelson I'd like now to turn the question to, call the questions please?.

[Operator Instructions] Our first question comes from the line of Frank Sparacino with First Analysis. Please proceed..

Hi, guys. Mike I think I understand you just talked about 3 things there at the end. The first 2 are pretty clear in terms of converting existing customer winning logos.

Could you maybe expand a little bit more on the last point you're making and a little bit more specific in terms of additional products or services you're selling into the base?.

Sure. So let's first start with existing offerings that historically have been sold as point solutions that we are now incorporating as an integrated use case if you wish into the platform.

Probably the most clear example and one Frank you'd be familiar with is our transitions calls whereas a stand-alone product offering we'd work with organizations to reach out to discharge patients and identify risk factors both from a service or clinical standpoint so as to manage readmissions.Rather than to think about that as a separate stand-alone point solutions what happens if one would simply look at it and say, hey we're just asking a different set of questions at a different point in time along the experience and can that not be an added benefit or use case across all users of the Voice of the Customer platform? So there would be a way that rather than look at it as a separate stand-alone point solutions can we not tell a broader story that's enterprise-wide?Let's skip now perhaps to another example that is outside of a current offering and that would be service recovery.

So if we interview or have outreached millions and millions of customers at healthcare systems and a certain proportion of those have some service violation why is it that we cannot have some immediate first-line reaction to help solve or attempt to solve or satisfy that particular complaint?So there's really no reason why we have to stop our value proposition at simply saying the oil light is blinking can we not help them understand how to solve that and maybe provide some solutions as part of an integrated package? So there's a continuum from additional feedback at different points along the continuum or through the experience all the way through helping the organization understand when the feedback comes what can we do about it..

That's helpful. Maybe secondly given the success you're having in the marketplace today. I'm curious how competitors are responding in the sales cycles that you're in..

Well as we often tell ourselves every deal is firstly a fierce battle. So there is no easy street and there's no easy button but we are becoming more and more comfortable with the value and the story that we're telling shows tangible differences between our 2 primary competitors that being PRC and Press Ganey. The reactions are very, very different.

Press Ganey's in a particular orientation of more consulting and safety in some areas to which I think are important for healthcare organizations but simply not in the train in which we compete.In the areas that we do overlap with Press Ganey I think the legacy system of paper and pencil and their form of digital feedback is antiquated in comparison to what we offer and that's showing a point-of-sale that's just being far more robust.

So we clearly have an advantage in terms of the direction we're going. We clearly have advantage in terms of the product offering and there's almost becoming a network effect that's creating a moat around our clients and more and more organizations that are working with PRC and Press Ganey who want to join that club..

Great. And maybe lastly just Mike or Kevin. I'd be curious if you could comment on the macro environment whether you're seeing any impact on IT or operating budgets. Obviously some of the big changes this quarter putting some weak numbers in terms of volumes and other metrics.

So any thoughts there?.

Hi. Frank this is Kevin. Yes absolutely. I mean that is a very prominent theme in the market where healthcare systems are very focused on efficiency and prioritizing their spend. So that issue comes up very frequently whether it's with prospects or with existing customers.

And I think we've been very successful in demonstrating our value proposition to be able to demonstrate an ROI that continues to prioritize the spend supporting our relationship with those customers and being able to demonstrate that to prospects. But it is definitely a challenge.

I mean it's, every organization is looking very hard at how to cut costs and it's just something we have to work through with them in the process. And so far I think we've been pretty successful in that..

Thank you. Congratulations on the great results..

[Operator Instructions] I am showing no further questions at this time..

Great. Thank you Neil and thank you everyone for your time today. We look forward to reporting our progress next quarter. Thank you..

That does conclude the conference call. We thank you for your participation and ask that you please disconnect your line..