Spok Holdings, Inc.
Q3 2018 Earnings Call Transcript

Published: 25 Oct 2018

[Operator:]

Good morning. Welcome to Spok's Third Quarter Investor Call. Today's call is being recorded. On the line today, we have Vince Kelly, Vice President and Chief Executive Officer; Mike Wallace, Chief Financial Officer; and Hemant Goel, President of Spok's operating company. At this time, for opening remarks, I'll turn the call over to Mr. Wallace. Please go ahead, sir.

[Michael Wallace:]

Good morning, and thank you for joining us for our third quarter 2018 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 upon 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 the business environment in which we compete contained in our 2017 Form 10-K; our third quarter 2018 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 1, 2018, Spok adopted Accounting Standards Codification, ASC 606, Revenue from Contracts with Customers, using the modified retrospective method applied to those contracts, which were not completed as of January 1, 2018. Unless otherwise stated, results for reporting periods beginning after January 1, 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 to obtain 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.

[Vincent Kelly:]

Thank you, Mike, and good morning. We're pleased to speak with you today regarding our third quarter operating results. We believe our performance and recent sales trends provide momentum as we finish 2018 strong and head into the new year. While we always strive to do better, our third quarter results are encouraging as we saw strong performance in a number of key operating measures with a sequential and year-over-year improvements. In a few moments, I'll provide more color on our performance then our Chief Financial Officer, Mike Wallace, and our Operating President, Hemant Goel, will provide more detail on our financial performance and operating results. However, before we begin, let me take a couple of minutes to talk about a tragedy that recently impacted the entire Spok community. It was a great sadness that we announce the unexpected passing of Tom Saine in an airplane accident. He was our Chief Information Officer. The entire Spok family mourns the loss of our dear friend. During his tenure at Spok, we've benefited greatly from Tom's expertise as well as his dedication and commitment. He greatly contributed to this organization and was instrumental in our transformation. On behalf of the entire Spok team, I'd like to offer our deepest sympathies to the Saine family during this difficult time. Okay. Now I'll provide a brief overview of our results for the quarter and the nine months of 2018. Overall, in the third quarter, we saw sequential total revenue growth as growth in software revenue outpaced plan wireless revenue attrition. Spok also continued to generate positive EBITDA and has returned $17.6 million of capital to our stockholders through the first nine months of this year in the form of dividends and share repurchases. We also enhanced our product offerings through our continued investments in our integrated communication platform, Spok Care Connect. We continued our substantial investment in our development team and are leveraging our decades of experience in critical health care communication to deliver a cloud-based platform that will bring the latest in communication technology to the market. Our team remains on target to meet our development goals for the year. A couple of weeks ago, we were excited to welcome more than 150 attendees to Connect 18, Spok's annual user conference for customers and health care professionals. There, we brought together some of the industry's leading innovators who are pushing the boundaries to advance and improve health care communications. We were particularly pleased to showcase what we believe is a game changer in health care communication technology, the next generation of the Spok Care Connect platform. The excitement level was high and the receptivity we got from our customers was extremely encouraging. Through the first nine months of the year, we were very pleased to see software revenue, on a GAAP basis, grow by more than 8% year-over-year, with each quarter up from the prior year. Additionally, we continued to see a more than 99% revenue renewal rate on software maintenance contracts. Similar to our wireless revenue stream, software maintenance revenue is a largely recurring revenue stream that provides the company with a more stable revenue base. Through the first nine months of 2018, approximately 80% of our revenue is recurring in nature. Now before I turn the call over to Mike and Hemant to provide additional details on our financial performance and operating activity in the third quarter, I want to briefly review some key results. First, on a GAAP basis, software revenue of $19.2 million was up nearly 13.2% from the prior quarter and up nearly 2.7% from the prior year. Software bookings for the 2018 third quarter were $21.6 million, an increase of 16.7% and 17.7%, respectively, from the second quarter of 2018 the prior year quarter. Third quarter bookings include a $10.8 million of record operations bookings, and our related software backlog at September 30 was $36.4 million, up slightly from the prior quarter. Our sales team will continue to be laser-focused on generating activity through the remainder of the year and into 2019. However, we believe these results demonstrate momentum, and we are confident in generating long-term growth. Second, wireless subscriber and revenue trends continue to exceed our expectations. Spok posted solid results for wireless products and services in the third quarter. While the net decline in paging units totaled 25,000 units and was up from the prior quarter, ARPU, or average revenue per unit, was stable with the prior quarter. As a result, quarterly wireless revenue was down a record low of only 1.7% from the prior quarter. We were pleased to see the continuation of these stabilizing trends, especially in our top-performing Healthcare segment, which comprises approximately 82% of our paging subscriber base. Finally, in addition, to our financial performance, progress was made in several other key areas, including product development, sales strategy and strategic partnership agreements. During the quarter, we added more than two dozen new customers to the Spok family. Hemant will review this in more detail later, but I'm pleased to report that one of those was a 7-figure deal for a large health care network and another included multiple integrations with a large government entity. Spok also continues to build an industry-leading reputation, providing best-in-class support to our customers. I'd like to take a moment to talk about the recent devastations, resulting from Hurricanes Florence and Michael this year, and Spok's role in supporting health care institutions in the affected regions. Our thoughts and prayers go out to anyone impacted by these storms. While both storms left a path of destruction, resulting from the rain and flooding, our network held up extremely well. Due to the simulcast nature of our network, high-power transmitters and Spok's best-in-class engineering team, we were virtually 100% functional. Once again, this was not the case with mobile phone networks. I'm proud of our engineering and customer service teams who reached out to customers in advance of these storms and for the reliable network and communications that we provide to our customers during these catastrophic events. I'll make some additional comments on our business outlook shortly, 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 third quarter sales and operating activities. Mike?

[Michael Wallace:]

Thanks, Vince. Let me give you a little more detail on our financial performance in the third quarter. I would again encourage you to review our third 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 than we will cover on this call, as well as specific revenue comparisons between ASC 606 and ASC 605. As Vince noted, we were pleased with our overall operating performance in the third quarter and believe these results clearly demonstrate momentum as we complete 2018 and position ourselves for next year. Key drivers of our financial performance during the quarter were sustained year-over-year improvements in software operations revenue; software maintenance revenue renewal rates, which continue to exceed 99%; and stable ARPU or average revenue per unit rates, which resulted in historically low wireless revenue attrition. Lastly, continued disciplined operating expense management has also allowed us to absorb the impacts of our planned investments in product, research and develop expenses, while continuing to generate positive EBITDA. Over the next few minutes, I will review key areas which drove our third quarter financial performance. They include

[Hemant Goel:]

Thank you, Mike, and good morning. As you've heard, our sales, maintenance teams delivered software bookings in the third quarter of 2018, totaling $21.6 million. Third quarter performance was up 16.7% from $18.5 million in the previous quarter and showed a 17.7% increase from the prior year quarter. As Vince stated, our maintenance renewal rate remains strong at more than 99%. Health care remains a key part of our growth and primary focus, making up 90% of overall software bookings in the U.S. for the third quarter. During the quarter, we completed 22 6-figure health care deals, including 11 with customers who have never worked with us before. In total, we added 14 health care software customers to the more than 1,900 hospitals that use Spok solutions. For the sixth consecutive year, we are proud to announce that our customers include all 30 adult and children's health organizations on the current U.S News & World Report Best Hospitals Honor Roll. During the third quarter, we closed a $1.2 million deal with a large medical center that has facilities in Minnesota, Wisconsin, Arizona and Florida. The customer already uses Spok solutions to audit systems and use Spok as a critical communication partner in their overall enterprise strategy. They are now adding more than 50 hospital switchboard consoles to manage patient inquiries, direct cold calls and streamline enterprise-wide communication procedures. They are also leveraging Spok nurse call alarm integration middleware to route messages directly to clinicians. During the third quarter, we also had great success selling into the Veterans Administration, booking more than $2 million in sales. Part of that was a major 7-figure deal with a region that includes eight VA hospital locations. Our solution in these hospitals addresses a pervasive problem throughout the country

[Vincent Kelly:]

Thank you, Hemant. Before we open the call up for your questions, I'd like to comment briefly on a couple items. First, I want to update you on our current capital allocation strategy, and second, I want to review our key goals and business outlook for the remainder of 2018. With respect to our current capital allocation strategy, our overall goal is to achieve sustainable, profitable business growth, while maximizing long-term stockholder value. Towards that end, the allocation of capital remains a primary area of focus. Our multifaceted capital allocation strategy includes dividends and share repurchases as well as key strategic investments that include augmenting our product development, operating platform and infrastructure. Our strategy also includes the potential for acquisitions that are both strategic in nature and that are accretive to earnings. We're a company in a transition and believe that financial flexibility over the long term is important to the success of our strategy. Spok is laser-focused on delivering the next generation of our software platform, and we believe that our cloud-based and fully integrated communications platform will be a game changer in our chosen markets. As I said at the start of this call, I'm happy to report that we're on track with our development efforts and rollout plans, and look forward to taking advantage of what we believe is a large market opportunity for our technology. Our capital allocation policy for the remainder of the year includes our recurring quarterly dividend of $0.125 per share and capital investments in our business. We remain debt-free, we will continue to evaluate our capital allocation strategy, and we'll communicate our plans to you each quarter when we report earnings. Finally, with regard to our key goals and business outlook, we believe our activities and investments thus far have positioned us to be successful in the fourth quarter and 2019. Our business goals for the year remain unchanged. They include accelerating the development of our products and services, building a stronger infrastructure, aligning our resources and focusing where most needed, and driving software revenue growth while managing wireless revenue declines. We look forward to laying out our financial guidance for 2019 when we report fourth quarter and full year results in February. At this point, I'll ask the operator to open the call up for your questions. We'd ask you to limit your initial questions to one and a follow-up, and then after that, we'll take additional questions as time allows. Operator?

[Vincent Kelly:]

Okay. Well, while we have a large list of people participating, we don't have any questions, so I just want to thank everybody for participating this morning. We look forward to speaking with you again after we release our fourth quarter and full year results in February. We'll be providing guidance for 2019 then. In the meantime, everyone, have a strong balance of the year, like we're going to, and have a great day. Thank you.

[Operator:]

Thank you. Ladies and gentlemen, again, that does conclude today's conference. Thank you all again for your participation. You may now disconnect.