Spok Holdings, Inc.
Q3 2016 Earnings Call Transcript

Published: 30 Oct 2016

[Operator:]

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

[Shawn Endsley:]

Good morning. Thank you for joining us for our third quarter 2016 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 factor section relating to our operations and the business environment in which we compete contained in our 2015 Form 10-K, our third quarter 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. With that, I’ll turn the call over to Vince.

[Vince Kelly:]

Thanks Shawn, and good morning. We’re pleased to speak with you today regarding our third quarter operating results and what we believe was another solid performance for Spok. Once again, we made tremendous progress as we continue our transition from a telecom-based wireless company to a best-in-class software provider with the goal of delivering industry-leading unified critical communication solutions. I have more to say on that as well as our business outlook in a couple of minutes. With respect to the third quarter, we saw strong performance in a number of key operating areas and year-over-year improvements in bookings, software revenue levels, and operating cash flow generation. Noteworthy in the third quarter was a strong net income performance that was driven by EBITDA margins in excess of 20%. Our performance in the third quarter was consistent with our expectations in the seasonal trends we typically experienced during the year. We were particularly pleased to see nearly double-digit growth on both the sequential and year-over-year basis. The software bookings improved more than 11% from the prior year and our backlog levels remain consistent with the prior quarter. While our paging units in wireless revenue continue to decline as expected, we are very pleased by a much slower than anticipated rate of quarterly and year-over-year reductions. Overall, we continue to operate profitably, enhance our product offerings and further strengthen our balance sheet. Our ability to continue to generate healthy cash flow has allowed us to execute against our capital allocation strategy and the commitment we’ve made to return $21 million to our shareholders in 2016. And we were able to accomplish this while adding more than $5 million to our cash balance. Shawn and Hemant will provide details on our financial performance and operating activity shortly, but before that, I want to highlight a few key results for the third quarter. First, software bookings of $18.7 million in the third quarter included $10.2 million of maintenance renewals, a record high. Our software backlog levels were also strong and remained consistent with the prior quarter. Bookings included sales to both new and current customers with existing customers adding products and applications to expand their portfolio of communication solutions. Customer demand remained strongest for upgrades to call center solutions, healthcare applications to increase patient safety, and improved nursing workflows. Also our pipeline of qualified sales leads continue to grow both in terms of quality and size, the result of excellent work by our sales and marketing team to broaden awareness of the benefits of our software solutions. Spok continues to focus on building an industry-leading reputation that is generating activity and momentum at the conferences we attend. Second, wireless subscriber and revenue trends continue to be better than anticipated. Our annual rate of paging unit erosion for the quarter remained consistent with the prior period of 5.7%, while the quarterly rate of 1.8% was also consistent with the prior period. Consolidated EBITDA or Earnings Before Interest, Taxes, and Depreciation and Amortization was $9.3 million or slightly more than 20% of revenue in the third quarter. However, as I’ll explain in a few minutes, we expect margin levels to fluctuate over time, reflecting our accelerated level of investment and our aggressive hiring programs in the areas of product development staffs. With that being said, long-term, we are focused on transitioning to a sustainable and profitable growth model. And finally, we again generated sufficient free cash flow in the third quarter to execute against the commitment we made to return $21 million capital to our stockholders in 2015 in the form of cash dividends and share repurchases. During the quarter, the Company paid cash dividends to stockholders totaling $2.6 million, or $0.125 per share. We also repurchased nearly 14,000 shares of common stock under our stock buyback program. I’ll comment further on our capital allocation strategy later in the call. Before I turn it over to Shawn to review our financial performance for the third quarter in more detail, let me briefly summarize for you the investments that we made during 2016, in order to establish a framework for our 2017 guidance, which we will provide when we report fourth quarter earnings in February. Spok is committed to investments that will support our strategy to deliver our industry-leading unified critical communications platform, Spok Care Connect in order to drive long-term stockholder value. Throughout 2016, our focus has been to invest in the people, technology and marketing program that will enable the future success of our strategy. A key element of executing on our strategy has been the investment in our team of professionals that manage, develop, enhance and sell our critical communications platform. In 2016, we’ve enhanced our employee base by hiring Don Soucy, an experienced executive as Executive Vice President of Sales; Dr. Nat’e Guyton, our Chief Nursing Officer; Dr. Andrew Mellin, Medical Doctor, our Chief Medical Officer; 31 product development specialists and staff and multiple upgrades throughout our sales and operations teams. And while we’ve enhanced our human resources, we’ve also invested in technology to support our operations in the development of our solutions including; number one, implementing a new software tool to manage our development activities, number two, building a new virtual computing environment for the development quality assurance teams, number three, implementing an online documentation and knowledge management system, number four, upgrading our CTI capabilities to interface some multiple PBX software systems, number five, creating a new telephony lab to support these development efforts, number six, upgrading computer technology and related equipment for our development staff. We’ve also invested in our sales, support and back office operations and our goals have been to increase not only our effectiveness but our efficiency. Towards that end, we’ve number one, initiated implementation efforts for a new sales coding tool, number two, initiated implementation efforts for a new enterprise resource planning system, number three, enhanced our CRM environment to better support our sales operations and technical support function, number four, expand the Sandbox environment for both our support and professional services team and number five, continued upgrades in other in-house support of hardware and software systems. And our marketing team has been busy as well. We’ve attended numerous tradeshows and conferences and the results from our attendance at enhance our industry’s annual conference were extremely rewarding with over 90 customer meetings, 59 qualified leads, millions of dollars of pipeline expansion in multiple closed deals. So in general, we focused our spending to support our development efforts, but also to increase our efficiency, effectiveness and sales opportunities. So I hope this gives you a sense of what’s been going on in Spok in 2016 behind just the numbers. I’ll make additional comments on our plans for 2017 and our business outlook in a few minutes, but first, Shawn Endsley, our Chief Financial Officer will review the financial highlights for the quarter and after that, Hemant Goel, our President will comment further on our third quarter operating, sales and marketing activities. Shawn?

[Shawn Endsley:]

Thanks, Vince. Before I review our financial highlights for the third quarter of 2016, I would again encourage you to review our third quarter Form 10-Q, which we expect to file later today. Since it contains far more information about our business operations and financial performance than we will cover on this conference call. As Vince noted, we were pleased with our overall operating performance for the third quarter and we remained focused on executing against our business plan, continued expense management and financial discipline have allowed us to invest in our business for the long-term growth. Our ability to align our expense base with the market demand we are seeing and drive high renewal rates in our recurring revenue categories helps both maintain operating cash flow and operating margins in the quarter. In addition to the substantial progress we made for meeting our long-term business goals, we saw sequential and year-over-year improvement in a number of key operating metrics. Revenue contribution from both software and wireless combined with focused expense management helped maintain our operating cash flow, EBITDA and operating margins for the quarter, as we continue to invest in our business for long-term growth. We also added to our already strong balance sheet and continue to operate as a debt-free company at quarter end. In the interest of time today, I will not review our third quarter performance on a line by line basis, since much of that information is contained in our news release schedules and federal filings. If you ask specific questions about our quarterly financial results, I would be glad to address those during the Q&A portion of this call. Instead, I would like to focus this morning on several key areas that I feel will give you a better idea of the drivers of our third quarter performance. These include a review of certain factors that impacted third quarter revenue and expenses, a brief review of certain balance sheet items and finally, our financial guidance for 2016. With respect to revenue for the third quarter, total revenue was $45.4 million, an increase from revenue levels in the prior quarter. Third quarter revenue performance resulted primarily from higher software services revenue due to the number and size of projects completed in the third quarter and a continued lower-than-anticipated rate of paging unit erosion that favorably impacted wireless revenue. We were particularly pleased to see both sequential and year-over-year growth in software revenue. Total third quarter software revenue of $18.4 million was up in excess of 9% from the prior quarter and year totals. As I’ve noted on previous calls, our software operations revenue is now generally recognized on a ratable basis and totaled $9.1 million in the third quarter, up nearly 20% from $7.6 million in the prior quarter. Maintenance revenue, the other component of software revenue was $9.3 million in the third quarter and grew on both a sequential and year-over-year basis. The increase reflects our continuing maintenance renewal rates in excess of 99% from our installed software solution base. Our Software operations revenue is dependent on the timing of implementation of our projects and can vary from quarter-to-quarter depending upon customer requirements. Wireless revenue continues to exceed expectations as we saw quarterly pager unit erosion in line with prior period total. As a result, wireless revenue totaled just over $27 million, down slightly less than 3% from the prior quarter. Given the continuing shift that is occurring in our revenue base from wireless to software solutions, this wireless revenue retention reflected another strong performance by our sales team to again generate significant wireless gross additions, while minimizing churn and maintaining stable unit pricing. Please note that the financial tables that we included in the earnings release include an additional schedule detailing the components of our software and wireless revenue. Turning to operating expenses, we reported consolidated operating expenses excluding depreciation, amortization, accretion of $36.1 million in the third quarter. Third quarter operating expense totals were unchanged from the year earlier quarter, and in line with $35.8 million in the prior quarter as we continue to manage our expenses to meet the changing needs of our business. Operating expense reductions have not come at the expense of our business operations. As Vince pointed out, we invested to enhance and upgrade our product development team and tools, our sales infrastructure and management and supporting technology for efficient operations. In order to support our increased spend in product research and development in 2016, the most significant expense improvements can be attributed to a decline in the cost of revenue as we implement greater efficiencies in our operating platform. In 2015, we also focused our expense management initiative to rebound the use of the third party services and have used internal implementation employees to manage this cost. Turning to headcount. We continue to adjust our employee levels to meet anticipated demand levels as well as the changing requirements of our business, including investments in our product development staff. Our full-time equivalent employees, or FTEs, were 598 at September 30, 2016 versus 600 FTEs at December 31, 2015, and 605 FTEs at September 30, 2015. These employee levels will continue to change as we execute against our business plan and enhance our product development and strategy staff. Our capital expenses in the third quarter of 2016 were approximately $1.4 million and were incurred primarily for the purchase of pagers and infrastructure to support our wireless customers. Through the first nine months of the year, capital expenses totaled approximately $4.4 million, and we are tracking with the capital expense range that we laid out at the beginning of the year. Turning to the balance sheet and other financial items, the Company generated approximately $29.4 million in cash from operating activities through the first nine months of 2016. Of that amount, Spok returned nearly half to our stockholders in the form of cash dividends and share repurchases. Approximately 15% was used to purchase property and equipment, and the remaining $11.1 million has been retained for future use as part of the September 30, 2016 cash balance of $122.5 million. We expect to use a portion of that cash in connection with quarterly cash dividends, as well as potential share repurchases in the remainder of 2016. We exited the quarter with no debt outstanding and continue to operate as a debt-free company. Vince will comment further on our capital allocation strategy shortly. Finally, with respect to our financial guidance for 2016, based on our performance in the third quarter, we are maintaining our 2016 guidance ranges that includes, total revenue to range from $174 million to $192 million, our operating expenses excluding depreciation, amortization and accretion to range from $153 million to $159 million, and capital expenditures to range from $6 million to $8 million. I would remind you once again that our projections are based on current trends and that those trends are always subject to change. We look forward to presenting our expectations for 2017 when we report fourth quarter financial performance in February. With that, I will turn the call over to Hemant Goel, who will update you on our third quarter sales and marketing activities. Hemant?

[Hemant Goel:]

Thank you, Shawn, and good morning. During the third quarter of this year, our sales and marketing team delivered software bookings of $18.7 million. This represents an 11.4% increase over the third quarter in 2015, and it includes a consistently high maintenance renewal rate in excess of 99%. We also welcomed more than 2,000 new customers to the Spok family, primarily in the healthcare and government sectors. I want to start by adding to Vince’s comments about our Spok Care Connect platform. He mentioned our ongoing investment and product development to create the industry leading critical communications platform for our customers. This integrated solution suite is resonating with our customers. Our sales pipeline has expanded 16.4% since mid-January and our global average pipeline deal size has gone 12.3% over this time last year. As anticipated, the increase in size and complexity for this offering is stretching the amount the time it takes to close some of these deals. We expect to increase our momentum as our unique platform gains more traction in the market. To illustrate this point, I want to highlight a health system in the Northeast. A customer for nearly a decade, this system uses different technologies across their multiple hospitals and clinics. After adding another hospital to the system, they approached Spok to integrate the new facilities, contact center capabilities with the rest of the network. While we are helping this customer with their immediate need to support the new contact center, an emergency response solution, this deal sparked a conversation about long-term goals. This customer is excited that we offer the capability to unify communication across their entire organization, including full backup systems and is currently becoming more educated on how we can help them address their challenges. Another customer, a healthcare network in the Southeast, returned to us in the third quarter to upgrade the software products for the contact center and expand on their current capabilities, including features that support their answering services. During discussions, they were pleased to discover all that Spok has to offer and that many of their care coordination challenges can be improved with a single solution. Discussions are ongoing with this network following a six-figure contact center upgrade deal. These are just two examples of the numerous conversations that have happened when hospitals have learned about the level of unification Spok Care Connect makes possible. Healthcare remains an important part of our growth and is our largest segment, comprising 75% of overall bookings in the U.S. for third quarter. We are actively pursuing new customer accounts to expand our market presence in nearly one-fifth of our third quarter healthcare bookings for hospitals and health systems that have never worked with us before. Among the new customers joining Spok in third quarter is a privately-owned hospital in the South. This facility looking for a contact center solution was referred to Spok by another hospital that has been very pleased with our products and services. This organization would not only rely on Spok to support their contact center communications, but they have also begun inquiring about additional opportunities to enhance their communications infrastructure. This hospital selected us for their console platform because of the highly favorable referral and they recognized Spok as a long-term partner in the efforts to build out their clinical communications infrastructure. I also want to highlight one more healthcare deal from third quarter, a large health network on the West Coast, a long time Spok customer is upgrading a key piece of the telephone systems’ infrastructure and they’re consolidating their PBX Systems. This project is vital for the functioning of all phone communications across the multi-site organization from patient rooms to physician offices and from facility alarms to critical codes. This upgrade requires careful, coordinated work to ensure success. Our highly skilled project managers will work closely with this customer and the additional vendors involved in the project to ensure service continuity for this customer, and all of the integrations with their phone system during the transition. This seven figure deal was our largest for the quarter and a testament to the caliber of our professional services team. The highly skilled professional services group is an important part of our long-term strategic direction to give our customers an exceptional experience and set them up for success. Project profitability and satisfaction scores with our continually improving processes have both increased by double digit percentages. The expertise this team has in mobility and consulting services is having a positive impact on our customer and user community, and we are seeing a 24% growth in our consulting services, the business since the first quarter of this year. In one recent engagement, our consultants worked with the regional hub system in the Southeast to help expand their complementary deployment of pagers and mobile devices. Our experts partnered with a customer to deploy the solution and educate and train end users. Spok exceeded customer expectations for the number of users successfully registered and actively using the technology. Looking at customers and prospects outside of the U.S., international bookings in third quarter were below our expectations despite numerous paging deals in our focal geographies. We continue to face economic headwinds in the EMEA, and APAC regions. In the Asia-Pacific region, there remains a lot of interest in clinical messaging, especially critical test results management and our critical communication platform. This is evidenced by strong attendance at our recent, in-person seminar delivering critical results in healthcare. Speakers included a senior research fellow and Australian Institute of Health Innovation and the head of the radiology department in St. Georgia Hospital. A customer using our solution to improve their test results reporting process. Outside of healthcare in this geography, the teams converted solid opportunities to bookings in the hospitality sector, one of our largest deals of the quarter, a resort and casino in Eastern Asia will be using Spok to support their gaming and hotel guest operations as well as their IT and security operations. Though not a hospital, this customer recognized the value of Spok’s integrated suite of communications technology and will be relying on us to help them provide exceptional services to guests from the gaming floor to their overnight accommodations. Before turning things back over to Vince, I would want to provide an update on our marketing activities. Our marketing team is responsible for expanding our global content development, lead generation and event planning efforts. Ongoing investments and activities in these areas which include digital demand generation campaigns, webinars, educational eBriefs, videos and website improvements help us drive leads and build our reputation as a top leader in the industry. Marketing is also responsible for planning and coordinating Spok’s presence in a large number of trade shows throughout the year. In third quarter, Spok participated in several events for both healthcare and public safety as well as hosted the last of our regional Spok customer conferences in Chicago. Throughout all four of our regional conferences this year, 100% of attendee survey responses rated our conference as very good or excellent demonstrating the value our customers place on these events. Our social media reach is continuing to grow and our social following has increased 15% quarter-over-quarter. In third quarter, we also published the results of our annual mobility strategies and healthcare survey, in addition to helping us generate leads. This paper is also a strong brand building piece and has already been cited in several prominent healthcare publications and further establishes us as an expert and industry top leader in the healthcare communications space. Looking forward, we expect strong market demand for integrated critical communications, especially in healthcare. As Vince mentioned, we are making investments in research and development to further enhance our critical communications with collaboration solutions. This includes adding Dr. Andrew Mellin as Chief Medical Officer and Dr. Nat’e Guyton as Chief Nursing Officer. These skilled clinicians will help us continue to enhance the solutions for the clinical workflow improvements and better patients care. With that, I’ll pass it over to Vince.

[Vince Kelly:]

Thank you, Hemant. Before we open the call up for your questions, I want to comment briefly on a couple of items first. I want to update you on our key goals and business outlook and then I want to review our capital allocation strategy. With respect to our key goals and business outlook, a little over a year ago we undertook our project Catapult plan which marked a shift in our strategic direction for healthcare, our largest customer segment. Catapult was initially created as a five-year plan that signaled a very intentional move from offering our customers point solutions or single product solutions for call center software, alarm management and secure messaging to offering them a single integrated platform called Spok Care Connect. We made a decision to focus on the Spok Care Connect platform for several reasons. Number one, customer needs. Our healthcare customers were telling us they needed a more unified approach for communications across their enterprise. Number two, market opportunity. Industry analysts confirmed to us that there is a multi-billion dollar opportunity for this type of enterprise offering in our largest market, United States healthcare market. Number three, business simplification. We’ve been offering our customers too many different products in multiple versions on several different platforms and this makes supporting them effectively a challenge. We needed to simplify our product offerings to create an efficient way to develop and offer our solutions. Number four, competitive positioning. We concluded that a single integrated platform for healthcare communications, Spok Care Connect would address our customers’ needs and also create a competitive advantage for Spok. For the past year we’ve invested heavily in additional talent, resources and tools to implement our Catapult plan. We’ve recruited experts to product strategy and development, created additional work teams and devised a plan to map our existing products to the newly envisioned platform. We recruited people with experience in enterprise healthcare sales, while providing training and certification for our existing teams to increase their focus on our new approach. We’ve added clinical expertise to build on our communications legacy with the help of our loyal employees, we have made excellent progress. We also took our Spok Care Connect message to the market. Our strategy of offering a single platform, single database, and single technology that creates an enterprise solution for our healthcare customer is now been validated and endorsed by both customers and industry analysts. We’re confident we’re on the right path for our future. We have many loyal, satisfied customers and strength of the organization. This is evidenced by extremely high maintenance renewal rates or positive feedback. However, our goal is to be the best we can be in a very competitive environment and the only way we can do that is to invest on our future and take our solution set to the next level. With that in mind we revised our strategic plan for Spok which our Board of Directors has approved. This will accomplish several key objectives. It will accelerate development, build a stronger infrastructure, align resources where they’re needed most with respect to our focus, and increase our long-term growth potential. The linchpin of our strategy is our project Catapult 2.0 plan which significantly increases investments in our healthcare platform over the next five years, enabling us to address near-term challenges to achieve long-term growth. Our plan is to double down on our Catapult investments, so that we can address the significant market opportunity. We’ll continue executing on our vision to build the industry leading communications platform for healthcare, Spok Care Connect. We’ve learned a lot during 2016 and we’ve incorporated that insight into our Catapult 2.0 plan. Both our Spok leadership team and our Board of Directors feel confident that our plan is both reasonable and achievable for our success in a competitive market. Our planned investment increase in Catapult will put pressure on other parts of our business. But we believe, we will only grow stronger by marshaling our resources to support capabilities that will have the greatest impact on our long-term success. Without success in our biggest customer segment, it will be difficult to invest and grow in other segments. So we must be laser-focused on the U.S. healthcare market at this point in time. As a result, we’ve made the difficult decision to adjust our growth plans in the EMEA, APAC and public safety market. We’ve retained, but lowered our expectations for these initiatives in the near-term and are adjusting our resources to reflect our emphasis on the U.S. healthcare market. Our success with Catapult and our Care Connect platform along with a renewed emphasis on partner sales will provide the impetus in the future for renewing growth plans for our international, government and public safety customers. Our core foundation of critical communications is strong. We’re proud of the work our employees have done in support of this mission. We’ve accomplished so much together since we became Spok. We’re laser-focused on making Spok Care Connect the leading communications platforms in the healthcare industry. Now with respect to our capital allocation strategy, our overall goal has been to achieve sustainable business growth while maximizing long-term stockholder value through our multifaceted capital allocation strategy, that’s included dividends and share repurchases, key strategic investments to improve our operating platform and infrastructure and potential acquisitions that could provide additional revenue streams and are accretive to earnings. As I’ve just discussed, we have completed a comprehensive strategic review of the critical communications market, including our view of the potential size of our addressable market, where Spok fits into that market and what we need to do in order to capture more scale and become an industry leader. Simply put, we believe the potential is large and our best path to creating long-term stockholder value is to succeed in enhancing and accelerating our Care Connect platform. We’ve now spent more than over two years, evaluating acquisition opportunities in healthcare information technology space. We are yet to find an attractive [indiscernible] that meets our criteria. While there are a lot of opportunities looking for a sale most of them are characterized by a small-scale negative cash flow and high valuation expectations. The transaction costs and integration risk are taken into consideration, we do not believe these opportunities currently make good sense for creating long-term stockholder value. And while we’ve not closed our mind to acquisitions and will continue to evaluate opportunities, we’ve concluded that the best use of our capital and management focus is to invest more aggressively in our own product research and development resources in order to accelerate our progress toward creating an industry-leading integrated enterprise solution platform and capability that capitalizes on our current solutions portfolio. So we’ll be providing guidance on our expectations for 2017 revenues, operating expenses and capital expenses when we release our fourth quarter earnings in early 2017. However, at this point let me point out that it likely will increase our R&D spend yet again in 2017 consistent with our strategy in 2016. We spent about $10 million on R&D in 2015 and this year we’ll spend about $14 million and we expect to increase our R&D spend up to an additional 50% in 2017. There will likely also be an increase in our capital expenditures next year as we ramp up equipment for this increase seen in resource investment. These increased investments will have an impact on our future cash flow margin. As part of our normal quarterly review process along with our Board and our Financial Advisors, we will be evaluating our 2017 capital allocation plan with that in mind. In 2015, we returned $26 million to shareholders in the form of dividends and share repurchases. This year, we’re committed to returning $21 million to shareholders and we plan to keep that commitment. For the fourth quarter, our current share repurchase plan stays in effect with nearly 3.8 million of authorization remaining. We will be evaluating our share repurchase basket and we’ll communicate our plans in that regard in next quarter when we also give guidance for the New Year. However, we are committed to continue paying our $0.125 per share quarterly dividend in the fourth quarter of this year and throughout 2017. So wrapping up, we remain committed to our core values of putting the customer first, providing solutions that matter, innovation and accountability. We believe our past results and future plans reflect the desires and believes consistent to the delivery of long-term shareholder value. At this point, I’ll ask the operator to open the call up to your questions and we’d ask you to limit your initial questions to one and a follow-up. Then after that we’ll take additional questions as time allows. Operator?

[Operator:]

[Operator Instructions] And we will take our first question from Steven McIntyre. Please go ahead.

[Steven McIntyre:]

Yes. Hi guys, just a couple of questions. It seems like paging continues to be better as you talked about. Software seems to be trending kind of on the right path. Cash is up year-over-year, and even if you kind of look at what would be a little heavier Q4 spend to kind of get to the $21 million. The cash just continues to kind of power up and with valuations not coming down unfortunately, and kind of doing a more internal growth path. How do you think about the cash in terms of, perhaps being more aggressive on the stock repurchase, and the reason I ask this, I think we did maybe about 1.1 million shares last year to around high 16, 17 on the stock, and there is more cash per share, the paging is in better shape, the software is in better shape yet, I think we’re under 400,000 shares purchased this year. Just maybe kind of talk about that and maybe you just – how much cash you think you need to keep on the balance sheet if the external kind of acquisition plan seems like it’s less likely as opposed to internally growing, which I think makes sense, but probably has less overall cash needs in a big $100 million, $150 million acquisition.

[Vince Kelly:]

Steve, good question, and I would say that assuming we use the $3.8 million that’s left in the current share repurchase basket, we should end the year with north of $120 million of cash flow. You’re right. We’ve got a lot of cash there. We haven’t pulled the trigger on acquisitions, just because of the reasons I enumerated, they tend to be smaller in scale, negative cash flow, high multiple expectations, they want multiples of revenue and we just don’t think that’s a good way to create long-term term shareholder value, and we’re seeing that there is risk in some of these deals with respect to just the innovation alone. So, we’ve kind of set that aside, but we’re not giving up on it. We continue to look at things and you never know markets kind of -- they can change in the future and something might come up and we certainly have the ability to do it. We’re going to continue paying our dividend next year, but I think rather than go out and over pay for a large acquisition, we can increase our own R&D spend, we’ll add more staff, we’ll add more expertise that will certainly put a damper on our margins, we’re not going to be turn of this 20% EBITDA margins, but we think it’s a good investment for the long-term. And then, with respect to our share repurchase plan, that’s something that we talked about in our Board meeting yesterday, that’s something that the Board and our financial advisors and management are currently evaluating and our plans around that, we really want to share with you when we also share with you our 2017 guidance, which would be at the end of February in the first quarter of next year. So, I don’t have a plan for you right now other than to say we hear you loud and clear, we’re looking at that very closely, we understand that’s a big part of a capital allocation strategy for any company particularly a company like Spok.

[Steven McIntyre:]

And then just one follow-up, I mean would you agree, though, if you’re not as likely to make a big software deal and valuations take some time to come down and internally, just makes more sense, how the integration risk and all that kind of stuff. They probably does free up some more of that cash on the balance sheet than if you’d earmarked $100 million of valuations really, really low as opposed to, okay maybe here’s $10 million or $20 million more we want to spend, if you’re, if you’re building it better internally, doesn’t that give you little bit more fire power on the acquisition front, especially if Spok’s here still seem awfully cheap.

[Vince Kelly:]

I mean, mathematically you’re right.

[Steven McIntyre:]

Okay. Now, that’s just what I was getting at -- yeah, it’s good to see software and paging both kind of continuing in the right directions.

[Vince Kelly:]

Right, thank you very much Steve.

[Operator:]

We’ll take our next question from [Peter Klein]. Please go ahead.

[Unidentified Analyst:]

Hi, good morning and congratulations on another good quarter. Hey, you know, I was reviewing some of the information on the stock, and I noticed and I was surprised at this frankly. I noticed a fairly substantial short position of 600,000 shares, I’m not sure how accurate that is, but I assume it’s accurate. That seems like a lot and I don’t understand a) the bear story or the short story, a) perhaps, the shorts could be I’m saying it’s an increased dividend maybe a way to eliminate some of these short positions and I’m just wondering what you’re thinking is on that and if you even – if you understand what they’re cases or thesis, I’d appreciate knowing it.

[Vince Kelly:]

I mean, Peter, good question. I wouldn’t [indiscernible] frankly that there is a 600,000 short position on our stock and I don’t know what their thesis would be. I think we’ve got about 20.5 million shares outstanding. So, I wish I had a better answer for you, but…

[Unidentified Analyst:]

Yes, baffling. Truly baffling and I’m trying to understand the way this operates, if they have to pay the dividend to the shareholders that they are shorts – that borrowed stocks. So they’re actually costing us 3%.

[Vince Kelly:]

You know what, you just heard from me they’re going to be paying the dividend all next year too, that I mean…

[Unidentified Analyst:]

Right, yes, so interesting, but I appreciate you to keep up the good work, guys. Thank you.

[Vince Kelly:]

Thank you.

[Operator:]

[Operator Instructions] We’ll take our next question from Steven McIntyre. Please go ahead.

[Steven McIntyre:]

Hey guys one more. You guys talked about the R&D thing going from 10 to 14, I think if I heard you right, 50% to $21 million, roughly with that…

[Vince Kelly:]

I think as of now that’s not the exact number, but it’s about right.

[Steven McIntyre:]

Okay. And just question on, you guys, you seem like on the total OpEx are kind of able I know the added expenditures kind of came through the year, so you don’t see the full-annualized rate. But you’re able to kind of find some levers to offset some of that during the year as well. Do you think there’s some of that opportunity in 2017 and kind in 2018 to where, or is that number the $21 million kind of net of where you think you can find some costs that kind of help pay for some of the extra R&D spend?

[Vince Kelly:]

We have been taking the cost to a lot of other areas in the business to offset some of that R&D spend, and that’s why I think we’ll end up with a pretty good expense level for 2016 and that will benefit us starting 2017. So it won’t all be a net-net peer increase in expenses, because obviously we keep rationalizing the cost with our wireless initiatives and we have de-emphasized some of our international public safety initiatives and that gives us headcount efficiency, and we’re always and it’s just our nature, we’re always looking for efficiencies, but on a net-net basis, our expenses are still going to go up next year. I mean there is no question about it since we’re adding a lot of people. So it’s still going to go up, but yeah, we’ll look for other areas to offset, so you won’t see kind of a one for one increases in operating expenses based on what we had in R&D. But yes, you will see total expenses go up. Expenses will go up, prices will come down, but it’s still better than going up paying for acquisition somewhere in my view and we get something for it that we can use to our benefit in the future to grow this business.

[Steven McIntyre:]

You’re getting a bit of an offset on the maintenance margins that kind of renews, you’re getting a little incremental if that goes from 10 to 11, 12 over time. You are getting some benefit there?

[Vince Kelly:]

Absolutely. That’s one of the beautiful things about maintenance.

[Steven McIntyre:]

Okay. Thank you. End of Q&A

[Operator:]

[Operator Instructions]

[Shawn Endsley:]

Okay, I don’t see any more questions in the queue. So I just want to thank everyone for joining us this morning. We look forward to speaking with you again after we release our fourth quarter results in February and everyone have a great day.

[Operator:]

And this concludes today’s program. Thank you for your participation. You may now disconnect.