Spok Holdings, Inc.
Q4 2016 Earnings Call Transcript

Published: 1 May 2017

[Operator:]

Good morning, and welcome to the Spok's First Quarter Investor Call. Today's call is being recorded. On line today we have Vince Kelly, President and Chief Executive Officer; Michael Wallace, Chief Financial Officer; Hemant Goel, President of the Company's Operating Company; and Shawn Endsley, Chief Accounting 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 first quarter 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 2016 Form 10-K, our first 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 are pleased to speak with you today regarding our first quarter operating results and what we believe was strong quarter for Spok and a great start to 2017. During the quarter we made further progress toward our goal of transitioning Spok from a telecom-based wireless company to a software provider that delivers industry-leading unified healthcare communication solutions. We saw a strong year-over-year performance in a number of key operating measures, including software bookings and backlog levels, as well as wireless subscriber retention. We achieved these results as we increased our investment in our business by enhancing and upgrading our product development team and tools, as well as our sales infrastructure and management. As we previously outlined, we believe these investments will yield significant future benefits in the form of our improved integrated communication platform, Spok Care Connect, as well as higher future bookings levels supported by an enhanced and upgraded sales team. Overall we continued to operate profitability 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. We were particularly pleased with our strong software bookings levels as we posted the largest first quarter results in our company's history. We also set records for our highest bookings month and highest single day of software bookings. Our new logo bookings, which have historically represented in the 30% range of operations bookings were over 50% for the quarter and the average contract value of our new logo bookings which has traditionally been in the $100,000 and below range, almost doubled to just over $190,000. While one quarter does not represent a trend, we were nevertheless happy with these results. 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 a recurring revenue stream that provides the company with a more stable revenue base. Late in the quarter, we also took a major step in our transition. On March 27, we announced that Michael Wallace has joined the company as Spok's new Chief Financial Officer. He succeeds Shawn Endsley in that position, who has remained with the company and assumed the role of Chief Accounting Officer. Mike joined us from Intermedix, a global leader in healthcare revenue cycle practice management in data analytic solutions, where he was Executive Vice President and CFO since August 2013. He brings with him a proven ability to manage the finance function in a rapidly growing and changing environment, as well as implementing strategies from improving revenue and profitability. Mike is an industry veteran who brings deep experience in medical diagnostic services, software development, digital interactive marketing and regulatory compliance. I believe that Mike and the entire team will continue our commitment to Spok's core values of putting the customer first, providing solutions that matter, innovations and accountability, while managing the investments that we are making on our software solutions operating platform and infrastructure to drive profitable long-term organic growth. I'm excited to welcome Mike to Spok's management team. I'd also like to take this opportunity to thank Shawn Endsley for his dedication and loyalty to Spok. Shawn's commitment has been vital to everything this company has achieved during the time he served as CFO. However we mutually agreed that time was right to transition to CFO role that someone with deeper software industry experience. In his new role, Shawn will help us address regulatory and compliance changes, as well as tackle the many opportunities that improve the efficiency and performance on our financial platform. Now before I turn the call over to Mike and Hemant to provide details on our financial performance and operating activity, I want to briefly review some other key results for the quarter. First, bookings of $19.8 million included record highs for our first quarter in both operations and maintenance, and our related software backlog of $40.6 million at March 31 was up more than 10% from the prior-year quarter. Growing software bookings is critical to growing revenue as the delay in the time from actual sale to revenue recognition. Our sales team will continue to be laser-focused on generating activities throughout the remainder of the year. We are encouraged as bookings included sales of both new and current customers, with existing customers adding products and applications to expand their portfolio communication solutions. Customer demand remained strongest for upgrades to call center solutions, healthcare applications to increase patient safety and improved nursing workflows. We continue to see growing demand for our software solutions for smartphone communications, secure texting, emergency management and clinical alerting. Second wireless subscriber and revenue trends continued to improve. Spok posted solid results for wireless products and services in the first quarter. Gross pager placements of 28,000 and gross disconnects of 48,000 were in line with the earlier year quarter. As a result, annual net pager losses declined to an historical low of 5.4% on a 12-month trailing basis, and were 1.8% in the first quarter, in line with the prior-year quarter results. Also contributing to the slower than anticipated wireless revenue declines, was a more stable ARPU, or average revenue per unit. In the first quarter, it averaged $7.56 virtually unchanged from the prior quarter. We were pleased to see the continuation of these positive trends, especially in our top performing healthcare segments, which now comprises of approximately 80% of our paging subscriber base. And finally we generated sufficient cash flow again in the first quarter to return capital to stockholders in the form of dividends. During the quarter, the company paid cash dividends to stockholders totaling $2.6 million, $0.125 a share. We also paid the $0.25 special dividend that we declared in December of 2016 to stockholders in January 2017 that was $5.1 million. All in all, the company posted solid operating results in the first quarter and we believe this provides a strong base for 2017. 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 of the quarter. And then after that, Hemant Goel, President of our Operating Company, will comment on our first quarter sales and marketing activities. Mike?

[Michael Wallace:]

Thanks, Vince, and good morning. Before I begin, I really want to express my appreciation to Vince and the board for bringing me on to Spok as Chief Financial Officer. I'm extremely happy to be here and working with an exceptional group of professionals, as I have made my way to the company during my first month. My first month has confirmed that there is not a more exciting time to join Spok. Our transformation and the investments that we are making in our systems, people and marketing programs is the right strategy to position the company to capture the long - the large market opportunity ahead of us and drive sustained long-term growth. Our team clearly recognizes and appreciates the importance of Spok's mission, which is to deliver clinical information to care teams when and where it matters most to improve patient outcomes, and I am certainly delighted to be part of it. Now let me give you a little more detail on our financial performance in the first quarter. And again I would encourage you to review our first quarter 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 Vince noted, we were pleased with our overall operating performance in the first quarter. Key drivers of our financial performance during the quarter were software maintenance renewal rates that continue to exceed 99%, coupled with a lower than anticipated levels of churn in both paging units and wireless revenue. Continued operating expense management has allowed us to mostly migrate the impacts of our planned investments in products, research and development expenses. We also continue to make steady progress toward our long-term business goals, as Vince mentioned earlier, but overall we believe we are off to a great start in 2017. This morning I will review four key areas that influenced our first quarter financial performance. They include

[Hemant Goel:]

Thank you, Mike, and good morning. During the first quarter of 2017, our sales and marketing team delivered software bookings of $19.8 million. This is up 31% year-over-year. Our forward momentum is building and our strategy is resonating with our customers. Market recognition and appreciation for the value of our enterprise healthcare communications platform is increasing, demonstrated by the level of conversations we have with customers and prospects, the volume of activity we see on our websites, and most notably, by the stories behind our quarterly bookings. Maintenance renewal rates remained strong at 99% and we welcomed 2,000 new Spok customers to the Spok family primarily in the healthcare and government sectors. Healthcare remains a key part of our growth, comprising 77% of overall bookings in the United States for the first quarter, while much of that business represents customers who are expanding their enterprise communications and adding more of our services and solutions, 40% in the first quarter came from new hospitals and health systems that have never worked with us before. These organizations joined a prestigious list of customers that includes all of U.S. News & World Report's 2016-2017 Best Hospitals Honor Roll. These 20 adult hospitals and 11 children's hospitals rely on our solutions to help them provide the best care. Our solutions continue to resonate with all segments of the market. Among our new customers this quarter, is a large health system with multiple hospitals around the country. This customer is looking to enhance care team coordination with HIPAA-compliant communications, while maintaining the flexibility to send messages to a variety of staff devices, including pagers, smartphones and Wi-Fi phones. This health system also wants to support communications on a centralized platform that can meet high performance availability and reliability requirements. After completing a thorough market evaluation, this customer selected us because Spok Care Connect is the only proven solution in the market today that can meet all of these expectations. Another one of our new healthcare customers in first quarter is a small regional hospital is the Western United States with a world-class reputation in orthopedics. This customer wants to unify their multiple communication technologies into a single consolidated platform. Working with Spok, they plan to simplify their on-call scheduling methods, streamline cold call processes and increased contacts and efficiency by reducing or eliminating many manual tasks. They will also standardize their myriad of messaging technologies and promote a single secured solution to improve care team communications. Secured workflow is on top of mind for many hospitals in the U.S. and we are seeing an overall rising demand for messaging solutions. For example, a large health system customer in the Eastern United States was looking to enhance the security of hospital communications for staff who use their personal mobile devices, while improving the workflows and efficiencies for clinicians and patients. This customer already relies on us to support their contact center emergency notification processes and secure text messaging for many of their solutions. With positive feedback from their doctors currently using our secure messaging solution, this customer is expanding it across the enterprise to all clinical and many non-clinical staff and support patient care. We continue to see utilization of mobile devices and solutions vary by roles within our customer environments. In fact in a recent survey with CHIME that we will publish in the coming weeks, CIOs reported that their top reason for using pagers is appropriateness of the device for specific employee groups or departments. In addition to a secure messaging solution, this customer is adding thousands of encrypted pagers to their solution mix to help ensure no protected health information is sent accidentally to an unsecured device. All few of these examples are six-figure deals that demonstrate the strategic enterprise level investments hospitals are making to capture the value that our unified healthcare communication platforms makes possible. Healthcare comprises the largest percentage of our business, while public safety remains an important part of our strategic plan. Public safety customers around the word rely on our solutions to support critical communications, as well as emergency call handling at the 911 dispatch centers. Our largest deal of the quarter came from a public safety coalition in the Southern United States that has been a paging customer for over 15 years. This coalition of agencies wants to expand the capabilities of their communication among all personnel regardless of whether they have a pager. The customer needs a messaging solution that can send individual or group messages, emergency notifications, and keep all contact information in a centralized directory. This customer also wants to accomplish these goals with a single vendor. Spok is the only company that would meet all of these needs. Often organization purchase a Spok solution with a highly skilled professional services groups that gets to work delivering an exceptional experience and setting the customer on for success. For example, in first quarter, these experts helped a large hospital in Southeastern United States implement emergency and notification as secure messaging capabilities. Our services team offered continual guidance to this customer during clinical workflow design, data collection, planning and change management activities promote end-user adoption. Equally important, our team helped this hospital identify the measurable criteria that will be used to evaluate the success of their project at decreasing average don't took [ph] a long time for patients, improving user satisfaction scores and reducing IT costs. Overall satisfaction scores for our professional services group continued to trend upward, and 93% of customers rate our services as good or excellent. That defines to the exceptional caliber of this team. Before turning things back over to Vince, I want to provide an update on our marketing activities. Our marketing team is responsible for expanding our global content and web development, lead generation and event planning efforts. Ongoing investment and the activities in these areas help us drive leads and fill the sales pipeline. A highly visible example is our new website that launched in January. This was a year-long project for the team and includes changes to improve our visibility in searches, provide a better experience on mobile devices and further promotes our Spok Care Connect story. These effects are proving to be effective and already we have seen a 17% increase in traffic in the first two months following the site launch, which has been driven largely by stronger rankings of search engines. Marketing is also responsible for planning and coordinating Spok's presence at large number of trade shows throughout the year. There were two notable shows for us in the first quarter. HIMSS is one of the largest healthcare conferences in the United States and a great opportunity for us to demonstrate our capabilities. This year in Orlando, we increased our engagement with clinical audiences by demonstrating the powerful integrations and clinical context for providers. Our solution was featured in the Interoperability Showcase, as well at the booth presentations by our Chief Medical Officer and Chief Nursing Officer. Two customers also joined us to share their success stories with visitors on our booth. Our media coverage following this event more than doubled over last year and our conversations with those visiting our both have reached new levels of strategic vision for enterprise-wide complications on hospitals. The qualified leads identified from this show increased by 25% over 2016. We also felt the growth of our brand recognition at AONE, a show we attend in Baltimore at the end of the March that attracts nursing executives from all around the country. Our Chief Nursing Officer led conversations of our clinical workflows at the show, including a focus group to encourage in-depth discussion with key members of this audience. She has been showing how Spok and health nurses improved communication and workflows and our message is resonating. We had multiple people stop by the booth to share with us hospital solutions were making a difference at their hospital. Lastly from marketing, our social reach has shown significant growth. Year-over-year, our following has increased by 80%, engagement with our audience such as likes, retweets and comments is up 117% and unique views of our Spokwise Healthcare blog grew by 17%. Looking forward, we expect continued market demand for integrated communications, especially in healthcare. As mentioned on our last call, investments in research and development are ongoing. We are hiring skilled professionals in our Minnesota locations to help us accelerate product development and meet the demand for Spok Care Connect and to enhance our solutions for clinical workflow improvements and better patient care, and our customers are reinforcing that enterprise-wide communication platform fulfils the need and is the right strategy for Spok. With that, I'll pass it back to Vince.

[Vince Kelly:]

Thanks 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 current capital allocation strategy, and second, I want to review our key goals and business outlook for 2017. With respect to our current capital allocation strategy, our overall goal is to achieve sustainable profitable business growth while maximizing long-term stockholder value. Toward 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 includes 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 have not been satisfied with valuation expectations for most of the targets we have reviewed, we continue to explore M&A opportunities and conduct business due diligence. Yesterday, our board authorized a $10 million share repurchase basket for the balance of 2017. Also as we have previously stated, we are committed to continue paying our $0.125 per share quarterly dividend this year while we aggressively increased our investments in our company to benefit the future and create long-term stockholder value. We are a company in transition and management and our board believes that financial flexibility in the long-term is important to the success of the strategy. We review our capital allocation posture on a quarterly basis and remain comfortable that we are striking a reasonable balance and serving the longer term interest of shareholders. We will continue to evaluate our capital allocation strategies and communicate our plans to you with respect to dividends, 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 investments have positioned us well for a successful 2017. In order to take advantage of the large opportunity in our chosen markets, our business goals for the year are simple and straightforward. They include; accelerating the development of our products and services, building a stronger infrastructure, aligning resources and focusing where most needed and increasing Spok's long-term growth potential. We'll do all this with the ultimate goal of creating long-term stockholder value fulfilling our commitments. Ramping up, Spok continues to build an industry-leading reputation. 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 those values and beliefs. 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. Then after that we'll take additional questions if time allows. Operator?

[Operator:]

[Operator Instructions]. And we'll go first to Steven Mcintyre with Braeside Capital.

[Steven Mcintyre:]

Hi guys. Could you help me walk me through scenario? Let's say we get to the end of '18 and the suite of largely built out and valuations are still crazy. How do you guys think about the cash in that standpoint? Is there still other stuff outside the suite that you're interested in, or just maybe think about how the capital allocation might change once the suite is built out if we don't get an acquisition opportunity in that time?

[Vince Kelly:]

One of the things, Steve, that happened this quarter, one of our sales people came to us and he had gotten a big six-figure deal and said, look at this, they bought everything from us. We went right down and said one, two, three, four, five, every single thing we offered, he bought in the platform in our Care Connect suite, and Hemant commented on what was into our product teams and we need to come up with something else because if we've got these large customers and we've got this blue-chip customer base, we need to add functionality to our suite. So there is a number of things we can do to do that, Steve. One of them would be an acquisition. And again, I think you've known us long enough to know that we are not going to be crazy about valuations that don't make sense in multiples that are in the stratosphere, simply multiples of revenue and the companies are losing money. But another way to do it would be to do another project catapult internally, do some more investments. But we wouldn't do that until we see successful with the first investments, so we look at this on a quarterly basis. We talk about it longer term but we look at it on a quarterly basis. Now for this quarter, we decided that we continue the dividend. We instituted a $10 million basket for share repurchases and we'll review that as we go forward. Our goal right now is to be successful prosecuting the business plan that we have right now and delivering on that business plan. And then in the future, if we are successful with that, I think there would be other opportunities to leverage that success and create even more opportunity for bookings and profitability over the long-term.

[Steven Mcintyre:]

Okay. And if I could just ask one follow-up. On the bookings, obviously this quarter was pretty strong, and if you look in the past there will be a strong quarter and sometimes there was [indiscernible], how do you think about that over the next couple of quarters going into '18 in terms of having the really strong bookings quarter-after-quarter? What changes - is it the suite or what makes it more consistent?

[Vince Kelly:]

Yes, so here is the thing. We don't really give like guidance on bookings, and bookings in any software company are always going to be lumpy. Some companies not even report their quarterly bookings. They just wait till the end of the year and report it all at once. We do. What we did today is we reiterated our guidance for 2017, our revenue guidance, our operating expenses, our CapEx. Embedded within that guidance is our expectations for bookings, so when we sit around and we do our management report and we report to the board like we did yesterday and we look at our latest thinking forecast. Right now we are showing that we are making our plan this year, and in fact in some cases we are doing better than our plan this year. And so that means that you can't have a big quarter of bookings and a smaller quarter of bookings and then a big quarter of bookings or maybe you could have three quarters that are fairly equal. When you're doing these pipelines and you're looking at some of these larger deals, particularly the six-figure deals, they take longer. You're going to committees, you're meeting with CIOs, you're meeting with CFOs and they can take longer and then sometimes, all of a sudden, you can have a bunch hit [ph], and then sometimes you could be a little dry on. I will tell you that when we go through the pipeline with our sales team now compared to, say, how we did it a year ago and we are looking at the size of the deals, there is a market difference in the size of the deals in the pipeline. Now we are seeing multiple, multiple - we looked yesterday pagers for large deals whereas in the past you'd have a couple six-figure deals and then there would be 70,000, 60,000, 50,000 and add-on type things. So as we pivoted to the suite approach, we're training our people to sell the enterprise suite. We are recruiting and hiring sales management and sales talent who are comfortable in that environment talking to the suites, going in there and doing the buyer process map and getting to the right folks, we are seeing larger deals populate in that pipeline. That's a good news. Bad news is sometimes larger deals just take a little bit longer to bring in but you're more effective when you do larger deals with software company and so that's what the goal is. So hopefully that helps you. It's not - bookings in software are never going to be - it's not like the paging business where things are recurring and you can incrementally up or down each month. It's always going to be a little bit lucky but we consider all of that within our forecast and within our guidance. Any other questions?

[Operator:]

[Operator Instructions]. We'll go next to Peter Klein with HighTower.

[Peter Klein:]

Hi guys. Just quick question. I heard a mention of a interaction with a company. Was it Shine [ph] or did I miss the name?

[Hemant Goel:]

CHIME.

[Peter Klein:]

S-C-H...

[Hemant Goel:]

It's CHIME. It stands for College for Healthcare Information Management Executives.

[Peter Klein:]

I'm sorry, great. Thank you very much.

[Vince Kelly:]

Yes, so it's a forum for essentially CIOs and healthcare to get together.

[Hemant Goel:]

CIOs from the healthcare organizations.

[Peter Klein:]

Thanks very much.

[Vince Kelly:]

Sure.

[Vince Kelly:]

Okay, if there is no other questions in the queue, then we are going to wrap up. Thank you very much everyone for joining us this morning. We look forward to speaking with you again when we release our second quarter results, which will be in July. And everybody have a great day. Thank you.

[Operator:]

This does conclude today's conference. We thank you for your participation.