Spok Holdings, Inc.
Q1 2015 Earnings Call Transcript

Published: 2 May 2015

[Operator:]

Good morning and welcome to Spok's first quarter investor call. Today's call is being recorded. Online today, we have Vince Kelly, President and Chief Executive Officer; Shawn Endsley, Chief Financial Officer; and Colin Balmforth, President of the Operating Company. 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 2014 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.

[Vincent Kelly:]

Thanks, Shawn, and good morning. We're pleased to speak with you today regarding our first quarter operating results and what we believe was another outstanding quarter for Spok. We made further progress toward our goal of becoming a consistently growing business and long-term provider of critical communication solutions. Our software sales momentum continues and our paging revenue decline has been slowing. We are not yet at the point where on an annual year-over-year basis our software growth overcomes our paging revenue erosion, but we are on plan and tracking with our strategy. In the first quarter of this year on a consolidated basis, we met or exceeded our internal expectations, consistent with our previously provided financial guidance for 2015. The accomplishments included strong performances from our sales team. We achieved record-high first quarter bookings, software revenue increased from the year-earlier quarter and our backlog and sales pipeline remain very strong at March 31. In addition, wireless trends continue to improve, as our annual paid return reached its best level in more than a decade, and we ended the quarter ahead of our operating goals for total revenue, gross placements and average revenue per unit. Overall, we met or exceeded the majority of our operating goals, enhanced our product offerings, expanded our market reach, strengthened our balance sheet and again returning capital to stockholders in the form of cash dividends and share repurchases. Shawn and Colin will provide details on our financial performance and operating activity shortly, but first I want to review some other key results for the first quarter. Number one, software bookings increased 4.8% to $17.7 million from the year-earlier quarter, setting a record high for first quarter bookings. Software revenue rose to 10.7% to $17.4 million from the first quarter of 2014, while the backlog totaled $40.6 million at March31. Also our pipeline of qualified sales leads continued to grow, the result of excellent work by our sales and marketing team and broader awareness of the benefits of our software solutions. Customer demand remains strongest in North America, specifically among hospitals and other healthcare organizations, seeking more automation and advanced technology to improve efficiency. This includes solution for critical smartphone communications, call center management, secure texting, clinical alerting and emergency notification. We also continue to expand our international presence during the quarter as well as widen our focus beyond healthcare in such market segments as public safety, business, hospitality, education and government services. Number two, wireless subscriber and revenue trends continue to improve. Our annual rate of paging unit erosion for the quarter improved to a record low 7.3%, while the quarterly rate improved to 2.1%. The annual and quarterly rates of wireless revenue erosion improved as well. In addition, ARPU, which is average revenue per unit, remained relatively stable versus the prior quarter, primarily due to consistent results from our healthcare segment. We were pleased to see the continuation of these positive trends, especially in our top performing healthcare segment, which now comprises approximately 78% of our direct paging subscriber base. Number three, consolidated operating expenses excluding depreciation, amortization and accretion totaled $38.1 million versus $38 million in the year earlier quarter, and improved 10.5% from the fourth quarter when we incurred an uptick in product costs. As I noted on our fourth quarter earnings call, the higher product cost involve those third-party internal professional services in connection with accelerated software installations required to meet customer commitments along with higher commissions associated with over performance and sales booking. Shawn, will review our first quarter operating expenses in greater detail in few minutes. Number four, consolidated EBITDA or earnings before interest, taxes, depreciation and amortization was $10 million in first quarter compared to $8.7 million in the fourth quarter. This represented an EBITDA margin a 20.8% versus 16.9% in the fourth quarter. We were pleased to see our EBITDA margin rebound from the prior quarter consistent with our 2015 financial guidance and the recent forecast. As discussed on our fourth quarter earnings call, we implemented a margin improvement plan in January and have made substantial progress with it today. Number five, again, we generated sufficient free cash flow in first quarter return capital to stockholders in the form of cash dividends and share repurchases. During the quarter, the company paid quarterly cash dividends to stockholders totaling $2.7 million or $12.5 per share. We also repurchased 27,467 shares of common stock under our stock buyback program for approximately $0.5 million at an average price of $16.95 per share. Over the past 11 years, we have now returned $431.1 million to our stockholders in cash dividends and repurchased $64.4 million of our common stock. I'll comment further on our capital allocation strategy shortly. All-in-all, the company posted solid operating results for the quarter. We achieved our key operating goals, generated significant free cash flow, expanded our services in geographic reach and returned capital to stockholders. We also made further progress toward our goal of transforming Spok into a company with a clear path for long term growth. I'll make some additional comments on our operating performance and business activities in a few minutes, but first Shawn Endsley, our Chief Financial Officer will review the financial highlights of the quarter. After that, Colin Balmforth, President of our operating company will comment on our first quarter sales and marketing activities. Shawn?

[Shawn Endsley:]

Thanks, Vince. Before I discuss the financial highlights for the first quarter, I would again encourage you to review our first quarter Form 10-Q, which we'd 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 are pleased with our overall operating performance for the first quarter, increased software revenue and bookings compared to the year earlier quarter coupled with improving wireless trends enabled us to maintain positive cash flows and a strong balance sheet. We also continue to make steady progress toward our long-term business goals. Overall, we believe we are off to a very good start to 2015. This morning I will review four key areas that influenced our first quarter financial performance. They include

[Colin Balmforth:]

Thank you, Shawn, and good morning. The first quarter was a positive start to the New Year. Our sales and marketing teams helped us close Q1 with a record first quarter software bookings of $17.7 million. As mentioned earlier, this represents a 4.8% increase over Q1 in 2014, and includes a 99.7% renewal rate for maintenance. A testament to the value our customers place in our support services and ongoing product developments. The trust these long-term customers place is us is further demonstrated when they return to Spok for upgrades to their existing applications, when they add new products and expanded portfolios of communication solutions. For example, a large health system in the Southern U.S. needed to give the switchboard operators of several of their locations, a call accounting solution to track call volumes and operator performance metrics. Already a customer for our paging solution, this healthcare provider selected our console solution, because of the strength of our existing partnership, the dependability of our solutions and the functionality that will help them grow. Another large West Coast health system, a long time customer of our console, paging and encrypted texting solutions is consolidating multiple datacenter locations into a single site. With the complexity of this type of project, they hired our consulting services team to work with them, as they define infrastructure requirements and begin planning this larger undertaking. In addition, a mid-sized hospital on the East Coast purchased our web directory and on-call solutions to support their existing Spok console and paging products. This customer has outgrown the in-house tools developed for these functions and needed an alternative quickly, because operators were tasked with handling a larger volume of requests on top of their daily responsibilities. They selected Spok to take advantage of the integration with their existing infrastructure and further enhance their call center processes. We've seen a lot of momentum so far this year for mobile solutions. One such example is a large health system in the west, which has been expanding communication capabilities for their physicians and their enterprise. Late last year, this customer purchased Spok Mobile, our encrypted texting application for their physician community. And in Q1 they chose to upgrade their licensing agreement and purchased Spok Mobile enterprise for more than 40,000 clinicians throughout their institution to improve provider communications, care team collaborations and the delivery of patient care. This customer also invest in redundant systems for testing and managing deployment, suitable for complex enterprise environment. As of January 1, our sales workforce has been fully integrated. No longer do we operate in the center of wireless and software sales functions. This change was made to align a relationship engagement model of our company with the needs of our customers. And in Q1 not only did we achieve record software bookings, as mentioned; we also exceeded our net paging placement goals, affording us favorability against our paging units and service target, which also contributed to a solid revenue performance for the quarter. I've also talked before about our five pillars for growth. They represent Spok's strategy for meeting our long-range objectives. And I would like to update you on our progress in each area. Our first pillar is the mid-market healthcare space, which includes hospitals with 200 to 600 beds. We are proud to work with many large, well-known healthcare systems and facilities, including all 17 hospitals on the U.S. News Best Hospitals Honor Roll. We continue to see the mid-market as a growth opportunity for new customers, who recognize the value of our integrated communication solutions. An example of a new mid-market customer is a general medical and surgical hospital in the south that selected Spok to meet a number of business needs. They are looking to improve the on-call process for surgeons, and replace several other paper based and manual processes across the organization. This new customer seeks more automation and advanced technology to enhance their efficiency as well as improve staff and patient satisfaction. Spok's console and web solutions will help them achieve these goals. The international pillar, we continue to expand our presence in key global markets. Clinical alerting, mobility support and call center efficiencies were the most sought after solution areas for us overseas in the first quarter. Four of our international bookings for the first quarter came from hospitals looking to streamline their notification processes for patient monitoring and clinical alerts. Another notable deal is a mid-sized hospital in Australia. The purchase of Spok Operator Console, Spok Mobile and our critical test results management solution, CTRM. This customer seeks to reduce the amount of time between the availability of a patient test result and when it is reviewed by the ordering physician. They also want to provide radiologists, physicians and other key stakeholders with a clear audit trail and record of events. In addition, our solution was selected to allow physicians to use their own personal mobile devices. Bring your own device or BYOD is a global topic of interest with building momentum. In the Asia-Pacific region as well as in the U.K., the webinar presentation on the 2015 Hospital Guide to BYOD policies was our most popular over the first quarter and garnered record attendance. Lastly for our international pillar, I want to mention the Arab Health, one of the largest healthcare shows in the world, took place in Dubai in January. This is our third year attending the show and our staff use the opportunity to talk with potential customers and regional partners about call center efficiencies and clinical alerting, further strengthening brand awareness of our solutions and increasing our lead generation. Under our vertical markets pillar, public safety remains a solid focus for us, with bookings up 45.7% over Q1 of last year. These customers rely on our products to support emergency call handling, at their 911 dispatch centers. Because of our solutions dependability, which is being verified by extensive testing to acquire joint interoperability test command or JITC certification, the government sector and U.S. military locations remain an important part of this growth. In fact, seven of our government affiliated sales in Q1 represented six figure deals for us. And on an overall basis, the number of six figure deals grew by 56.3% compared to Q1 2014. Our enterprise sales vertical is also experiencing significant growth. Enterprise customers are companies outside the healthcare, public safety and hospitality markets that depend on our solutions to support communications for their organization. And one example, a large airline carrier purchased our E9-1-1 product to support enhanced emergency response capabilities at their headquarters. This solution allows operators to pinpoint a precise location where a 911 call originates, down to the floor, cubicle and phone location, so responder still know where to go, even if the 911 caller cannot speak. This marquee customer wanted to improve safety for employees and visitors across the entire property portfolio. Regarding progress for our innovation pillar, we recently announced the latest enhancements to critical test results management, secured texting and mobile communication support in our Spok Care Connect suite. The suite is designed to fully integrate hospital communication workflows and support better patient care for our customers. One specific release is the Spok Device Preference Engine, DPE. This solution lets staff identify how they prefer to be reached based on factors such as time and date, on-call schedule, and the urgency of the request. Combined with updates on Spok Mobile, establishing preference rules makes connecting with clinicians easier and quicker. We've always seen a positive response to this product, for example, two hospitals in the Southwest are deploying DPE to improve their on-call communications and escalations at critical-messaging. We've also made progress regarding the two new feedback forums I mentioned in our last call. We're looking forward to the to the first meeting of our strategic advisory council made up with C-level executives, including CEOs, several CMIOs, a CTO and a CNIO from our marquee brand healthcare institutions. This group will provide input on the strategic direction for our company and we have regular meetings already scheduled through 2016. The second new forum is our innovation partner alliance. This will bring together collaborative innovation teams from our extensive customer base. The IPA is already meeting bi-monthly and has begun to offer us valuable feedback on our plans to the Spok Care Connect suite and future product enhancements. These two groups will supplement our highly successful user group, Spok Directions, which is now more than 400 members strong. Under our fifth and final pillar, mergers and acquisitions, we're still evaluating potential acquisitions adjacent to our cost base. We remain highly active and vigilant in our search. Vince will comment further on our capital allocation strategy shortly. Before that, I want to provide a brief update on our marketing activities. We continue to see a positive return from our ongoing marketing investments in digital campaigns, webinars, content development and website improvements. These activities and materials help us drive leads and fill the sales pipeline. The marketing team achieved another record growing our leads by 33.9% quarter-over-quarter and 10.2% from Q1 2014. Marketing is also responsible for coordinating Spok's presence at conferences such as Arab Health and HIMMS. In Q1, we participated in six conferences to talk about our emergency response technology with state and local government representatives, our CTRM solutions with specialists in the field of radiology, and our full solutions suite with leaders in the healthcare space. Regarding our website activity, we saw 9% growth in traffic in both the U.S. and U.K. and a 33% increase in mobile device services in the Asia Pacific region. In summary, I am very pleased with our results for the first quarter and we look forward to continuing this positive momentum through the rest of 2015. With that I will pass the call back over to Vince.

[Vincent Kelly:]

Before we take your questions I want to comment briefly on the couple of items that maybe of interest. 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 2015. With respect to our current capital allocation strategy, our overall goal is to achieve sustainable business growth, while maximizing long-term stockholder value. Towards that end, the allocation of capital will continue to be a primary area of focus for us. As most of you know we have spent substantial time over the past few years evaluating many acquisition opportunities to enhance our portfolio of software solutions. As such, we have reserved capital for one of more such acquisitions. To date, we have not yet identified the candidate that meets our acquisition criteria primarily due to what we see as an unacceptable private market valuation expectation. None the less, we remain optimistic in continue to review viable candidates that will be a good strategic fit. However, as we've discussed in the past, we will remain disciplined in our approach. With regard to other uses of capital, we expect to continue paying our quarterly dividend of $12.5 per share or $0.50 annually for the foreseeable future based on our current projections for operating cash flow. In addition, we may buy back additional shares of our common stock from time to time into our share repurchase program depending on the stock price and market condition. As I noted earlier, we repurchased 27,467 shares of common stock during the first quarter for approximately $0.5 million. As a result approximately $14.5 million remain authorized for purchase under the buyback plan, which extends through yearend 2015. Additionally, we plan to return a total of $26 million in capital to shareholders in 2015, although the exact manner of distribution is yet to be determined along with the actual distribution dates, it will likely include some combination of regular quarterly dividends, periodically purchases of common stock, and a potential special dividend later in the year. I would note that the Board may also consider various other options for deploying capital from time-to-time. One such option given the sloppy private market M&A valuation expectations is to increase our product strategy and development spend in growth opportunities, where we believe we can generate attractive returns for shareholders. We are evaluating this opportunity in light of our planning for the 2016 calendar year and beyond. And as usual we will continue to maintain ample liquidity to support our working capital needs. Finally, with regard to our key goals and business outlook, we believe our strong first quarter has positioned us well for another successful year in 2015. As I noted on our fourth quarter earnings call, the company's business goals for the year are simple and straightforward. Number one, grow our software revenue and bookings profitably; number two, retain our wireless subscribers in revenue; number three, invest in our future, while maintaining strong operating margins; and number four, commit to acquisitions that are accretive to our business, can accelerate our revenue growth and use our valuable deferred tax assets. We'll do all of this with the goal of creating long-term shareholder value. After acquiring our software business four years ago and fully integrating it with our wireless business early last year, we are now beginning to see our integrated business operate on all cylinders. Key to maintaining this momentum will be a disciplined and balanced approach to investing in both internal and external growth. Internally, we will continue to invest in development, growth and expansion of our software solutions and services worldwide. This includes developing new products and services, expanding our sales reach both within and beyond existing market segments, extending our sales into new geographic regions and promoting our brand in key global markets. At the same time, we will continue to leverage the value of our paging and related wireless infrastructure to successfully meet the needs of our customer base, as well as support the company's ongoing cash flow and capital formation requirements. Beyond that, as I noted earlier, we will continue to explore external growth opportunities through the acquisition of companies or products that will enhance our portfolio solutions as well as potentially generate new aware avenues for sustainable growth. In summary, we're pleased with our overall results for the first quarter. We started the year on a positive note. We continue to operate the company's profitably, met our primarily performance goals, improved organizational efficiencies. In addition, we continue to expand our geographic footprint and vertical reach, made excellent progress on product development initiatives, and maintained networks and systems at a high level of reliability. We also upgraded staff in critical positions. Looking ahead, we expect to make even further progresses over the balance of the year. Towards that end, we'll aggressively execute our business plan and explore all opportunities to create additional value for our stock holders. At this point, I'll ask the operator to open the line up for your questions. We'd ask you to limit your initial questions to one and a follow-up, and after that, we'll take additional questions as time allows. Operator?

[Operator:]

[Operator Instructions] We'll go first to Josh Paulson from Claragh Mountain Investments.

[Josh Paulson:]

As Shawn mentioned, you guys have made a strong push for your software solutions at various conferences earlier in the year and continuing through July. Can you comment further on some of the feedback you receive from the sales team attending these conferences? In general, I'm looking for the kind of comments in three areas

[Shawn Endsley:]

Well, three questions then. The last two, the volume of qualified base and expectations has one the lead conversion, we don't disclose that information. We track it internally, but it's something we've chosen to disclose yet. In terms of just general feedback from our solutions in the marketplace, attending these conferences, obviously it's been very strong. We continue to expand our bookings on a year-over-year basis. We're very pleased with that. We're certainly ahead of plan there. We're also ahead of plan on our revenue for both our software and wireless goals and the fact that our customers are renewing our software maintenance at over 99% rate means that the solutions are extremely sticky. So we have a very broad integrated suite of software solutions. While we have some competitors on a point-to-point basis, we don't have anybody else out there right now that does the full depth and breadth of what we do and it's been very positively shown in feedbacks from customers that are attending these conferences. Colin or Hemant, I don't know if you guys want to comment on that as well.

[Colin Balmforth:]

Yes, while we don't release the actual numbers, Josh, the increase in marketing qualified leads that we've seen year-over-year has been very nice to see. And in fact, I can't share the metric for Q1 '14 to Q1 '15, we're seeing an increase of marketing qualified leads or MQLs of 33.9%. So that's a great sign. And we're getting right positive reaction at each of these events. I'll update you as a team on HIMMS for Q2, since that's in this period.

[Operator:]

And we'll take a follow-up question from Josh Paulson.

[Josh Paulson:]

Yes, just following up, you guys also mentioned your public safety sector grew significantly compared to Q1 2014. Can you comment, and maybe you can't disclose this as well, but how many customers you currently have in public safety, or at least maybe how many new accounts you added this quarter? And approximately how much is software operation revenue that accounted for?

[Vincent Kelly:]

Well, obviously, as you just pointed out, we don't disclose the breakout by customer for our software business yet. We're taking a look at the full disclosure that we make in our 10-Q and over time we'll be expanding our software disclosure, but we don't break that out yet. So I don't want to start today, because we're not prepared for that. Colin, do you want to add anything to that?

[Colin Balmforth:]

I'll just reiterate that we did see some excellent growth and that this has been a trend actually that's been occurring since, I would say, around the tail end of Q2 last year. So we've seen tremendous expansion in public safety and our E9-1-1 business in particular for Q1 this year as well.

[Operator:]

And there are no further questions at this time. End of Q&A

[Vincent Kelly:]

Well, thank you very much for joining us this morning. We look forward to speaking with you again after we release our second quarter results. Everyone have a great day.

[Operator:]

This does conclude today's conference. We thank you for your participation. You may now disconnect.