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National Research Corporation (NASDAQ:NRC)
Q4 2019 Earnings Call
Feb 12, 2020, 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Greetings, and welcome to the Fourth Quarter 2019 Conference Call. [Operator Instructions] And as a reminder, this conference is being recorded Wednesday, February 12, 2020.

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

Michael D. Hays -- Founder and Chief Executive Officer

Thank you, Keith, and welcome everyone to National Research Corporation's 2019 fourth quarter and year end conference call. My name is Mike Hays, the Company's CEO, and joining me on the call today is Linda Stacy, our Vice President of Finance, standing in for Kevin Karas. I've also add Steve Jackson, our President to provide some prepared remarks on the performance of the business.

Before we continue, I'd ask Linda to review conditions with us related to any forward-looking statements that may be made as part of today's call. Linda.

Linda Stacy -- Vice President of Finance

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.

Michael D. Hays -- Founder and Chief Executive Officer

Thanks, Linda, and again, welcome everybody. Today, Steve Jackson, NRC's President will provide some opening remarks and then Linda will provide us some financial performance data. Steve.

Steve Jackson -- President

Thanks, Mike. As you may have noticed in last night's press release, we continue to see a favorable market response for NRC's industry-leading Voice of the Customer Platform. Thanks to support from customers, new and old, we finished the year with more than $100 million of contract value, now residing on the solution. NRC's unique capabilities and proven ability to generate significant and immediate value are the reason why leading health system, such as Partners Healthcare, Allina Health, Beaumont Health and others turn to NRC in Q4 of 2019 to accelerate their transformation. After Linda shares with us her prepared remarks regarding financial performance will discuss how our business continues to evolve.

With that, I'll now turn the call back to Linda.

Linda Stacy -- Vice President of Finance

Thank you, Steve. Total contract value at the end of the fourth quarter 2019 ended at $144.8 million, representing a 10% growth over the same period in the prior year. We had record annual net new sales of $27.7 million for 2019, up 18% over 2018. Healthcare system clients with agreements for multiple solutions represented 27% of our client base at the end of the fourth quarter of 2019, up 24% at the same time last year. Total contract value for our digital Voice of the Customer Platform solutions increased to $100.2 million compared to $76.4 million at the end of the fourth quarter of 2018.

Fourth quarter 2019 revenue was $32.6 million, an increase of 6% over the fourth quarter 2018. Fourth quarter revenue for our digital Voice of the Customer Platform solutions increased to 67% of total revenue compared to 53% of total revenue in the fourth quarter of 2018. We received notice in December 2019 that we met qualification requirements for the Nebraska Advantage LB 312 Act by meeting certain investment in full-time equivalent employee threshold in the year ended 2017. This tax incentive act allows us to get direct refund of sales tax on qualified property as well as on investment credit and employment credits that can be claimed through credits of Nebraska income tax, employment tax and sales tax on non-qualified property.

In December, we recorded cumulative adjustments for direct refunds and credits earned for the year ending December 31, 2019, which reduced operating expenses by approximately $1.9 million. Consolidated operating income for the fourth quarter 2019 was $12 million or 37% of revenue, compared to $9.4 million or 31% of revenue for the same period last year. Total operating expenses of $20.7 million for the fourth quarter 2019 decreased by 3%, compared to the prior year.

Direct expenses decreased 6% to $11.2 million for the fourth quarter 2019, compared to $11.9 million for the same period in 2018. Direct expenses as a percent of revenue were 34% in the fourth quarter 2019, compared to 39% in 2018. Direct expenses decreased primarily due to reduction in variable costs. Variable costs are lower due in a large part to the continued shift in our revenue mix from legacy solutions to Voice of the Customer Platform revenue. Variable direct expenses as a percent of revenue decreased to 16% for the fourth quarter of 2019, compared to 19% in the fourth quarter of 2018. Fixed expenses decreased slightly primarily due to state tax incentives.

Selling, general and administrative expenses increased to $8.2 million for the fourth quarter 2019, compared to $7.9 million for the same period in 2018. Selling, general and administrative expenses were 25% of revenue for the fourth quarter 2019, compared to 26% of revenue for the fourth quarter 2018. Selling, general and administrative expenses increased in 2019, primarily due to a sales tax accrual that was reported when we became aware that the state sales tax liability with both probable and able to be estimated due to sales taxes that should have been collected from customers in 2019 and certain previous years.

Depreciation and amortization expense decreased to $1.3 million for the fourth quarter 2019, compared to $1.5 million for the same period in 2018, primarily due to state tax incentives. Other income and expense changed to $597,000 of other net expense in the fourth quarter of 2019, compared to $146,000 of other net income in the fourth quarter of 2018. This increase 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 $2.7 million for the fourth quarter 2019, compared to $1.7 million in 2018. The effective tax rate was 23% for the fourth quarter 2019, compared to 18% for the same period in 2018, primarily due to decreased tax benefits from the exercise of options and dividends paid to non-vested shareholders and higher projected state taxes in the 2019 period. Net income for the fourth quarter 2019 with $8.7 million, compared to $7.8 million in 2018.

With that, I'll turn it back to Steve.

Steve Jackson -- President

Thank you, Linda. As we look to the start of 2020, on a decade, we find health system leaders confronted with growing complexity as they transition from an encounter-based to relationship-centric model of care. Paramount this change is need to better understand the response what matters most to the many constituents today's [Phonetic] organization serve, be their patients, residents, health plan members, perspective consumers, employers, employees or even physicians.

NRC's Voice of the Customer Platform provides our partners with the flexibility and agility necessary to advance their strategy at all touch points along the consumer journey. For marketers, our purpose-built solutions are illuminating key factors that define the brand's promise. For example, at Virtua Health in New Jersey, NRC's insights propelled the successful rebrand the United and organization and provided confidence to the community to healthcare through both high-tech and high touch. For digital officers, focused on expanding today's accessibility of healthcare's front door, NRC's tools are driving gains in market share and improving search engine optimization.

Last year, our customer Orlando Health reported breakthrough performance with new patient appointments being booked every nine days for physicians as a result of NRC's star ratings program. For our experience officers, each touch point is now being scanned for positive and negative segments. Coupled with NRC's dimensions of human understanding such as rate -- excuse me, age race, ethnicity and language, health systems are better able to evolve their services based on the micro segments that they serve. At Parkview Health and Fort Wayne Indiana, this micro-segmentation is resulted of more insight in 90 days than they previously gained over full calendar year.

And for population health leaders, NRC's Voice of the Customer offering can be further tailored to ask the right question at the right time. Our client Houston Methodist reported significant labor savings and improved outcomes in 2019 by being able to scan for at risk patients that may be susceptible to preventable readmission and take immediate action. Last for our time-pressed executives, dealing with today's changes, they can rest assured knowing that in the next decade ahead NRC's Voice of the Customer platform will provide a single source of experience truth regardless of where care is delivered or received.

Operator, this completes our prepared remarks. I'll now ask you open the line for questions.

Questions and Answers:

Operator

[Operator Instructions] There are no questions at this time.

Michael D. Hays -- Founder and Chief Executive Officer

Thank you, Keith. And I'd like to thank everyone for listening in today. Obviously, Steve and Linda did an excellent job in answering everybody's questions, so we'll look forward to bringing you up to date with our performance next quarter. Thank you, again.

Operator

[Operator Closing Remarks]

Duration: 10 minutes

Call participants:

Michael D. Hays -- Founder and Chief Executive Officer

Linda Stacy -- Vice President of Finance

Steve Jackson -- President

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