Ladies and gentlemen, thank you for standing by. Welcome to the National Research Corporation second quarter 2018 conference call. During the presentation, all participants will be in a listen-only mode. And afterwards, we will conduct a question-and-answer session. [Operator Instructions]. As a reminder, this conference is being recorded Wednesday, August 8, 2018. And now I would like to turn the conference over to Michael Hays, Chief Executive Officer. Please go ahead.

Thank you Scott and welcome everyone to National Research Corporation's 2018 second 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 ask Kevin to review conditions related to any forward-looking statements that might 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, please see the company's filings with the Securities and Exchange Commission. With that, I will turn it back to you Mike.

Thanks again and welcome everyone. Let me start the call with a few comments. Last quarter, I highlighted the doubling of our contract value on our new voice of the customer digital platform. This migration of our current clients establishes an important proof point regarding the platform's advantages over legacy paper-based surveys. This attraction is not limited to our current clients In fact, we entered the first half of 2018 matching the dollar value of new client patient satisfaction wins for the entire year of 2017. With accelerating point-of-sale advantages, we now have visibility of doubling the dollar value of 2017 wins from legacy vendors within the third quarter. Market differentiation is further enhanced with our unique transparency product offering, which has experienced a 50% gain in contract value year-over-year. Creating a variety of use cases for our real time voice of customer platform, such as physicians star ratings, has increased average client contract value and stickiness. For the balance of our call today, Kevin has some prepared remarks regarding our 2018 second quarter, after which we will address any questions that you may have. So please feel free to enter the question queue, as Kevin shares financial performance highlights. I would now turn the call back to Kevin.

Thank you Mike. Our total contract value for the second quarter ended at $124.4 million, up $2.7 million over the first quarter. Total contract value of $121.7 million, representing a 2% quarterly 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 second quarter of 2018, up from 21% at the same time last year. Subscription-based revenue agreements at the end of the second quarter of 2018 represented 93% of our total recurring contract value. Total contract value for our digital voice of the customer platform increased to $33 million compared to $17.1 million at the end of the second quarter of 2017. Second quarter 2018 revenue was $28 million, a decrease of 1% from the second quarter of 2017, primarily as a result of decreases in our post-acute and governance services revenue. However, given improved sales performance and higher client retention, positive revenue growth for the third quarter of 2018 is estimated to be in the 4% to 5% range. Second quarter revenue for our digital voice of the customer platform increased to 25% of total revenue compared to 12% of total revenue in the second quarter of 2017. Consolidated operating income for the second quarter of 2018 was $7.8 million or 28% of revenue, compared to $8.5 million or 30% of revenue for the same period last year. Total operating expenses increased by 1% to $20.3 million for the second quarter 2018, compared to $20 million for the same period last year. Direct expenses decreased by 8% to $11 million for the second quarter 2018, compared to $12 million for the same period in 2017. Direct expenses as a percent of revenue were 39% for the second quarter of…

Thank you Kevin. This completes our prepared remarks. So I would ask Scott to open the call to questions, please.

[Operator Instructions]. And we have a question from Frank Sparacino with First Analysis. Please go ahead.

Hi guys. Maybe, Kevin, first for you. Just I wanted to be clear on the operating expense side of things and I guess on the SG&A, where there are some one-time expenses in the quarter. What should be the normal run rate going forward, ex those one-time items?

Hi Frank. This is Kevin. So a couple of things in the second quarter. The expenses related to the recapitalization that we incurred in the second quarter totaled approximately $650,000. So the increase compared to prior year of about $1 million, $650,000 was related to recap. I would say, the other aspect to consider is that our typical SG&A in the second quarter, historically, has been running in the 27% to 28% range. Last year, 24% was unusually low due to some credits that we had related to share-based compensation. So I think if you backed out the impact of the recapitalization expenses of $650,000 for Q2, that would give you a more normal view of our SG&A expense for the quarter and what potentially to expect going forward.

Thank you Kevin. And then maybe one other for me. Just, Mike or Kevin, in terms of the migration of the current clients to the digital VOC platform, can you just talk about, I guess, two things? One, first would be how those discussions come about? Are you simply waiting for renewal of some of the existing agreements or how aggressive are you being in terms of trying to migrate the base? And then secondly, we are at, I think, 25% today of the customer base migrating. How long do you think it takes to get to 50% or a significantly higher percentage than where we are at today?

Both good questions. The conversations we are having with clients is fairly aggressive and it's coming in two ways. One is, we are proactively reaching out to organizations helping them understand the unique benefits. The other is, clients are hearing from other clients at our conferences about what their experience is on the platform and so the client on the legacy paper-and-pencil product would reach out to us. So it's both inbound and outbound in terms of the conversations. I don't have the exact percentage, but I would guess that the vast majority of the business that is paper-and-pencil that can be converted, meaning non-caps, have either absolute contracts and/or verbal commitments to join the platform. So I would say, we are probably way north of 50% in terms of verbal and/or official commitments to transition or to migrate. And right now, it's a matter of getting them in the queue and ramping them up. So we are doing it in a logical premeditated safe way but part of it is, on our side, making sure that when the client gets set up, they have a great experience. So we have more committed that are in the pipeline to convert than what is on the system, primarily our side of the fence. The other is, there's still a few clients yet to be convinced that this is the right way to go, but I am sure that they will. I think, to hit your 50% tipping point in terms of revenue, we might be that, Kevin, what do you think, end of the year?

I think that's realistic, yes.

Okay.

That's very helpful. And then maybe just one last follow-up. When you look at the conversion, what did it look like in terms of $1 kind of legacy CV? What is that translating to on the digital VOC platform?

Right now, it's $1 turns into $1.10. And that's primarily because we are bundling additional use cases into that contract that weren't feasible under a paper-and-pencil environment. So there's multiple products that the client is purchasing or is able to purchase as a result of getting on the platform. Transparency would be the best example.

Great. Thank you.

[Operator Instructions]. And there are no further questions at this time.

Thank you Scott and thank you all for joining Kevin and I today. We look forward to reporting our progress next quarter. Thank you again.

Ladies and gentlemen, that does conclude the call for today. We thank you for your participation and ask that you please disconnect your line.