Spok Holdings, Inc.
Q1 2018 Earnings Call Transcript

Published: 26 Apr 2018

[Operator:]

Good morning, and welcome to Spok's First Quarter Investor Call. Today's call is being recorded. On line today, we have Vince Kelly, President and Chief Executive Officer; Mike Wallace, Chief Financial Officer; and Hemant Goel, President of Spok's Operating Company. At this time, for opening comments, I will turn the call over to Mr. Wallace. Please go ahead, sir.

[Mike Wallace:]

Good morning. Thank you for joining us for our first quarter and 2017 year end investor update. Before we discuss our operating results, I want to remind everyone that today's conference call may include forward-looking statements that are subject to risks and uncertainties relating to Spok's future financial and business performance. Such statements may include estimates of revenue, expenses and income as well as other predictive statements or plans, which are dependent upon future events or conditions. These statements represent the company's estimates only on the date of this conference call and are not intended to give any assurance as to actual future results. Spok's actual results could differ materially from those anticipated in these forward-looking statements. Although these statements are based on assumptions that the company believes to be reasonable, they are subject to risks and uncertainties. Please review the Risk Factors section relating to our operations and business environment in which we compete contained in our 2016 Form 10-K, our first quarter 20018 Form 10-Q, which we expect to file later today; and related documents filed with the Securities and Exchange Commission. Please note that Spok assumes no obligation to update any forward-looking statements from past or present filings and conference calls. Also, on January 1st, 2018 Spok adopted Accounting Standards Codification, ASC 606, and revenue from contracts with customers, using the modified retrospective methods applied to those contracts which were not completed as of January 1st, 2018. Unless otherwise stated, results for reporting periods beginning after January 1st, 2018 are presented under ASC 606. While prior period amounts have not been adjusted and continue to be reported in accordance with the company's historic accounting under ASC 605. Please refer to the tables provided in yesterday's press release contain revenue, net income, earnings per share and EBITDA results under both ASC 606 and 605 formats With that, I'll turn the call over to Vince.

[Vince Kelly:]

Thank you, Mike, and good morning. We're pleased to speak with you today regarding our first quarter operating results, and what we believe is a good start to 2018. First quarter results were in line with our seasonal expectations, as we saw strong year-over-year performance in a number of key operating measures, including software revenue and average deal size, as well as wireless subscriber retention. We achieved these results as we continue to invest in our business by enhancing and upgrading our product development team and tools, as well as our sales infrastructure and management. As we have previously outlined, we believe these investments will yield significant future benefits in the form of our improved integrated communications platform, Spok Care Connect, as well as higher future bookings levels supported by our enhanced and upgraded sales team. Overall, we continue to operate profitably and as a debt-free company, while enhancing our product offerings. We executed against our capital allocation strategy by continuing to make key strategic investments in our business, while returning cash to our stockholders during the quarter in the form of dividends and share repurchases. In the first quarter, we were particularly pleased to see total revenue grow more than 2% on a year-over-year basis. This performance was driven primarily by software revenue growth of nearly 17% from the first quarter of last year. Additionally, we continue to see a more than 99% renewal rate on software maintenance contracts. Similar to our wireless revenue stream, software maintenance revenue is largely recurring revenue and that provides the company with a more stable revenue base. Now before I turn the call over to Mike and Hemant to provide additional details on our financial performance and operating activity, I want to briefly review some key results for the quarter. First, software revenue of $18.8 million included record highs for our first quarter in operations revenue and our related software backlog at March 31st was up more than 5% from the prior the year quarter. Our sales team will continue to be laser focused on generating activity throughout the remainder of the year. We are encouraged as bookings included sales to both new and current customers with existing customers adding products and applications to expand their portfolio of communication solutions. Second, wireless subscriber and revenue trends continue to improve. Spok posted solid results for wireless products and services in the first quarter. Gross page replacement for 25,000 thousand and gross disconnect of 44,000 were in line with the year earlier quarter. As a result in that pager losses were 1.8% in the first quarter, unchanged from the prior year quarter results. Wireless revenue decline in the first quarter was 1.3%, nearly half of the year earlier decline. Contributing to slower than anticipated wireless revenue decline with a more stable ARPU or Average Revenue Per Unit. In the first quarter it averaged $7.47, up slightly from the prior quarter. We were pleased to see the continuation of these positive trends especially in our top performing healthcare segment, which now comprises approximately 80% of our paging subscriber base. Third, again we continue our track record of returning capital to stockholders in the form of dividends and share repurchases. During the quarter, the company paid cash dividends to stockholders totaling $2.8 million, $0.125 per share. We also repurchased $1.9 million of our common stock under our $10 million authorization that we announced last quarter. Finally, in addition to our financial performance, progress was made in several other areas including product development, sales strategy and key strategic partnership agreements. During the quarter, we added approximately a dozen new customers to the Spok family. Spok continues to build an industry-leading reputation and its generating sales momentum at the conferences we attend. Thus far in 2018, we have generated tremendous activity from trade shows and physicians Spok as a thought leader in our industry. At the American Organization for Nurse Executives, AONE, conference earlier this month, our chief nursing officer hosted a focus group to discuss using mobile strategies to drive clinical innovation. We also continue to benefit from the leads generated at the 2018 HIMSS annual conference that we attended in late February. Our sales team will maintain the momentum generated at these conferences and trade shows throughout 2018. The combination Spok's strong team, solid financial base and broad depth of our products and services positions us to capture the opportunity in the healthcare sector, and stimulate sustainable growth. I'll make some additional comments on our business outlook in a few minutes, but first Mike Wallace, our chief financial officer will review the financial highlights for the quarter. After that, Hemant Goel, President of our Operating Company will comment on our first quarter sales and marketing activities. Mike?

[Mike Wallace:]

Thanks Vince. Let me give you a little more detail on our financial performance in the first quarter. I would again encourage you to review our first quarter 2018 Form 10-Q, which we expect to file later today, as it contains far more information about our business operations and financial performance. Then we will cover on this call, as well as specific revenue comparisons between ASC 606 and ASC 605. As Vince noted, we're pleased with our overall operating performance in the first quarter. Key drivers of our financial performance during that quarter were strong year-over-year software operations revenue. Software maintenance revenue renewal rates, which continue to exceed 99%, coupled with lower than anticipated levels of churn in both paging units and wireless revenue. Continued operating expense management has allowed us to continue to absorb the impacts of our planned investments in product research and development expenses. Overall, we believe we're off to a strong start in 2018. I will review four additional key areas which drive our first quarter financial performance that include one; a review of certain factors impacting first quarter revenue. Two; selected items which influence first quarter expense. Three; a brief review of the balance sheet and finally an update on our financial guidance for 2018. As usual if you've specific questions about these items or any of our quarterly financial results, I'll be happy to address them during the Q&A portion of this mornings call. With respect to the revenue, for the first quarter of 2018 total GAAP revenue was $43.1 million, or $42.5 million when adjusted to exclude adoption at ASC 606, compared to $41.4 million in the first quarter of 2017, or up 2.4%. We were particularly pleased with our ability to generate strong year-over-year increases in software revenue, as well as continued slower erosion in our wireless business. Adjusted to the exclude adoption of ASC 606, total first quarter software revenue of $42.5 million, reflecting increases from the previous quarter by 17%, with both software operations revenue, as well as maintenance revenue growing by 36% and 5% respectively, as we continue to refine and enhance our process specifically related to the implementation of our software solutions. Additionally, as Vince noted, maintenance revenue continues to increase, reflecting our maintenance revenue renewal rates in excess of 99% from our installed software solution base and providing a reliable and reoccurring revenue and cash flow stream. Wireless revenue for the first quarter remains solid declining only 6.7% from the prior quarter. This continued performance on our wireless business is being driven by the combination of solid gross additions, minimization of churn with existing customers and maintaining stable unit pricing. Turning to operating expenses, we maintain our focus on creating efficiencies in our expense base in order to offset some of the planned increases in our product research and development category. During the first quarter, we reported a consolidated operating expense, which excludes depreciation, amortization and accretion of $39.7 million, up from $36.8 million in the year earlier quarter. The anticipated $2.9 million increase over the year ago period was driven primarily by $1.6 million increase in research and development cost, reflecting our continued investment in Spok Care Connect platform and a $600,000 increase in sales and marketing expense. In the first quarter of 2018, total research and development cost total $5.7 million; this represented a nearly 40% increase from the first quarter of 2017 and $800,000 higher than the fourth quarter of 2017. The year-over-year increase reflects Spok's planned expansion and operations in Minneapolis. Early last year, we had announced at Spok would be increasing its presence there by approximately 45%, with the addition of more than 60 employees over the next two years. These key strategic investments will enhance our Spok Care Connect product, a unique healthcare communications platform which is transforming how hospitals support they care. Our capital expenses in the first quarter were approximately $1.2 million and were in line with the guidance we provided for 2018 during our year end earning conference call. Capital expenses are encouraged by mainly for the purchase of pagers, network infrastructure to support our wireless customers, as well as necessary infrastructure to support our software business. We do not expect any significant changes to the level of our capital expense requirements for the balance of 2018 and expect to be within the guidance range for the year. Turning to the balance sheet and other financial items, the company generated approximately $3.5 million of EBITDA or earnings before interest, taxes, depreciation and amortization during the first quarter of 2018. This along with cash on hand was used primarily to fund a quarterly dividend of $2.8 million, share repurchases of $1.9 million and capital expenses of $1.2 million. We ended the quarter with a cash balance of $101.3 million, down approximately $5.9 million from December 31, 2017. Finally, with respect to our financial guidance for 2018, and adjusted to exclude the adoption of ASC 606, based on our performance in the first quarter, we are maintaining the guidance we've previously provided which projects consolidated total revenue to range from $161 million to $177 million. Consolidated operating expenses excluding depreciation, amortization and accretion of $158 million to $165 million, and capital expenditures to range from $4 million to $8 million. I would remind you that our projections are based on current trends and that those trends are always subject to change. With that, I'll turn the call over to our President, Hemant Goel, who will update you on our first quarter sales and marketing activities. Hemant?

[Hemant Goel:]

Thank you, Michael, and good morning. As you heard, our sales and maintenance team delivered software bookings in the first quarter of 2018, totaling more than $18 million. First quarter performance was down 5.6% from the prior period, but in line with our seasonal expectation as first quarter is typically lower than the more robust fourth quarter totals. Healthcare remains a key part of our growth and primary focus, making up 89% of overall bookings in the United States for the first quarter. Nearly two-thirds of that business came from hospitals that have never worked with us before. Customer confidence in our clinical communication and collaboration platform remain strong. During the quarter, we added seven healthcare customers to the more than 1,900 hospitals that use Spok Solutions. Those customers include all 30 adult and children's health organizations on the current Best Hospitals Honor Roll by U.S. News and World Report. During the first quarter, we close one of the largest deals in our history. A Canadian health services provider sign a seven digit contract to rollout Spok Mobile to its healthcare provider throughout the province. The customer choose Spok to replace another vendor because they saw that our Care Connect platform is unique and can solve multiple challenges across different areas and departments of the health system. They added that no other vendor could provide an integrated solution providing directly details on call schedules, staff contact preferences and secure messaging. The system will leverage a newly consolidated database of 55,000 employees to support the rollout and get subscriber onboard perfectly. We close another large six figure deal during the quarter over the large East Coast Health System. They expanded the Spok console to two recently acquire hospitals in order to unify communications, processes, work flows and technology. They cited our ability to push out notification to large groups of people at one time as a key factor in their decision. The first quarter 2018 was also a solid quarter for the wireless factor, exceeding all defined goals in sales, revenue and retention. Our paging base continues to remain stable and we have been seen a growing interest in both our encrypted paging network, as well as our secured smart phone mobile solution. Throughout the quarter, we added several new customers to our account base, the most notable being in March with addition of a mid-sized West Coast based hospital, which chose Spok and encrypted pagers as a choice for secured messaging. Opting organization by Spok Solutions are highly skilled professional services group, gets to work delivering an exceptional experience and setting the customers for success. As we discussed last quarter, our new Senior Vice President for this team is working to increase efficiencies and accelerate our backlog conversion. During the first quarter, professional services had major success streamlining proof of concept installation for a large government contract. The new processes is dramatically reduced the installation time for this process -- for this customer and are laying the ground work for increased efficiencies across the organization. Perhaps, best of all, the tighter timeline help our sales efforts to secure upgrades of 55 sites for this client. Before turning things back over to Vince, I want to provide a brief update on recent marketing activities design to help us establish our brand, drive leads and fill the sales pipeline. In March, we attended HIMSS18, one of the largest gatherings of health information and technology leaders in the country. HIMSS is an important event for SPOK as it provides an opportunity for us to showcase our solutions and demonstrate our capabilities. This year was one of the most successful shows today. We increased leads from hospitals and health systems by 15% over last year, and visits to our booth by healthcare C-Suite leaders also increased significantly. Perhaps more important was the quality of the conversations we had with everyone who stop to hear a story. We saw a shift from people asking what does Spok to more in depth conversation to their prospects who said I'll be meeting to talk to you. We also continue to see increases in traffic to our website and in our social media following. In fact, we recently surpassed 10,000 followers on Twitter. We see these as strong indication that the work we're doing to solidify our brand in the healthcare, IT marketplace is working. Our customers and potential customers believe in our strategy to deliver an enterprise healthcare communication platform. Our brand is gaining traction in the marketplace and we expect our bookings will continue to grow. Looking forward, we anticipate continued market demand for our clinical communication and collaboration platform in healthcare. With that, I will pass it over to back to Vince.

[Vince Kelly:]

Thank you, Hemant. Before we open the call for your questions, I'd like to comment briefly on a couple of items first. I want to update you on our current capital allocation strategy, and I want to review our key goals and business outlook for 2018. With respect to our current capital allocation strategy, our overall goals to achieve sustainable profitable business growth while maximizing long-term stockholder values. Towards the end, the allocation of capital remains a primary focus. A multi faceted capital allocation strategy includes dividends and share repurchases, as well as key strategic investments that include augmenting our product, development, operating platform and infrastructure. It also includes the potential for acquisitions as we have discussed in the past, even though we've not been satisfied with evaluation expectations from most of the target that we reviewed, but we continue to explore M&A opportunities and conduct business due diligence as appropriate. As we've previously stated, we remain committed to continue paying our $0.125 per share quarterly dividend this year and make share repurchases as appropriate. We also continue to aggressively increase our investments in our company to benefit the future and create a long-term stockholder value. We are a company in transition, and management and our Board believes with the financial flexibility over the long term is important to the success of our strategy. We review our capital allocation cost on quarterly basis and remain comfortable that we're striking a reasonable balance of serving the long-term interest of our stakeholders. We will continue to evaluate our capital allocation strategy and communicate our plans to you with respect to dividends, potential share repurchases and other uses of capital each quarter when we report earnings. Finally, with regard to our key goals and business outlook, we believe our first quarter activities and investment have positioned us well for a successful 2018. In order to take advantage of the large opportunity in our chosen markets, our business goals for the year are simple and straight forward. They include accelerating the development of our products and services, building stronger infrastructure, aligning resources and focusing where it is more needed, and driving software revenue growth while managing wireless revenue decline. We do all this with the ultimate goal of creating long-term stockholder value and fulfilling our commitment. Wrapping up, Spok continues to build an industry leading reputation. We remain committed to our core values of putting customer first, providing solutions that matter, innovation and accountability. We believe our past results and future plans reflect as values and beliefs. At this point, I'll ask the operator to open the call up for your questions. We would ask you to limit your initial questions to one and a follow up. And then after that we will take additional questions as time allows. Operator?

[Operator:]

[Operator Instructions]

[Vince Kelly:]

Okay, operator. I'm not seeing any questions. I just want to wrap up by saying thank you everyone for joining us this morning. We very much look forward to speaking with you again after we release our second quarter results in July. Everyone have a great day.

[Operator:]

Thank you, ladies and gentlemen. This concludes today's event. You may now disconnect your lines. And have a wonderful day.