Spok Holdings, Inc.
Q3 2015 Earnings Call Transcript

Published: 30 Oct 2015

[Operator:]

Good morning and welcome to Spok's Third 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 Hemant Goel, President of the 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 third 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 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 continue to make steady progress toward our long-term business goals during the third quarter. Wireless subscriber and revenue trends continue to improve to their best levels in many years which is very gratifying given our long history as a paging carrier. However our software sales were lower than expected due in part to weaker economic conditions in certain international markets. Even so, our overall results reflected continued progress towards solidifying Spok's position as a leader in critical communication, particularly in the healthcare segment, and we remain on track in the year consistent with our previously provided financial guidance for 2015. During the quarter, we met many of our key performance objectives, enhanced our product offerings, expanded our market reach, strengthened our balance sheet, and again we turned capital to stockholders in the form of cash dividends and share repurchases. We ended the quarter with a strong software backlog in sales pipeline as well as near record low rates of paid return in wireless revenue erosion. In addition, we ended the quarter ahead of our operating goals for cash flow, expenses, operating margins, and average revenue per unit. Shawn and Hemant will provide details on our financial performance and operating activities shortly, but first I want to review some other key results for the third quarter. Number one, wireless subscriber and revenue results continue to show solid improvement. The quarterly rate of paging unit erosion improved to a near record low of 1.5% for the quarter, while the annual rate improved to 6.4% its best level in more than a decade. In addition, the annual rate of wireless revenue erosion improved to 10.6% its third best level in many years. At the same time, paging ARPU remained relatively stable primarily due to consistent results from our healthcare customer base. Overall, we were pleased to see these positive results for our paging and wireless products and services, especially in our top performing healthcare segment, which now comprises approximately 79% of our direct paging subscriber base. Number two, software revenue of $16.8 million was flat versus the year earlier quarter but increased 7.7% for the first nine months of 2015 compared to the same period of 2014. Software bookings of $16.7 million were lower than expected largely the result of slower sales in the Asia-Pacific region, which as you know, has been experiencing weaker economic conditions in recent months. These weaker international economic conditions contributed to the withdraw of bids of several key hospitality sales opportunities in Macau and delayed commitments on a few other sizeable contracts in both the Asia-Pacific and EMEA region. Note that we haven't lost business to competitors in these markets rather these markets have just taken a bit longer to evolve. On the plus side, our software backlog totaled $41.6 million at September 30, and remain near record high and our pipeline of qualified sales leads continue to grow and is larger than it was at this time last year. Consumer demand again remains strongest in North America. The U.S. healthcare bookings rose 12% from the year earlier quarter as hospitals and other healthcare organizations continued to seek more automation in advanced technology to improve their efficiencies. This included solutions for secured texting, critical smartphone communications, call center management, clinical alerting, and emergency notification. During the quarter, we also continued to widen our software focus beyond healthcare in such market segments as public safety, business, hospitality, education, and government services. Number three, consolidated operating expenses excluding depreciation, amortization, and accretion totaled $36.1 million an improvement from both the prior and year earlier quarters. As I mentioned on our last earnings call, we expect expenses will begin to trend up slightly going forward as we ramp up our new product development strategy and spending to reposition the company for long-term growth. I'll comment further on this initiative in a few minutes. Number four, consolidated EBITDA or earnings before interest taxes, depreciation, and amortization, was $10 million in the third quarter compared to $9.1 million in the second quarter. This represented an EBITDA margin of 21.8% versus 18.9% in the prior quarter consistent with our 2015 financial guidance and previous forecast. As we discussed at the beginning of the year, we implemented a margin improvement plan in January and are pleased to have made steady progress with it over the last three quarters. Number five, finally, we again generated sufficient free cash flow in the third quarter to 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 $0.125 per share. We also repurchased 502,942 shares of common stock under our stock buyback program for approximately $8.3 million. Over the past 11 years, including the December distributions, we will have returned $441.8 million to our stockholders in cash dividends and repurchased 75.9 million of common stock at an average price of $10.48 per share. I will comment further on our capital allocation strategy shortly. So while we're not pleased with our software sales performance in the third quarter, we continue to achieve many of 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 to a company with a clear path for long-term growth. I will 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 Hemant Goel, President of our Operating Company comment further on our third quarter sales and marketing initiatives. Shawn?

[Shawn Endsley:]

Thanks, Vince. Before I discuss financial highlights for the quarter, I would again encourage you to review our third quarter Form 10-Q which we expect to file later today. That should contain much more information about our business operations and financial performance than we will be able to cover on this call. Overall, we reported a solid quarter and continued on track for meeting our long-term business goals. Steady improvement in wireless trends and lower operating expenses offset in part by lower than expected software revenue and bookings enabled us to again generate positive cash flows and maintain a strong balance sheet. This morning, I will review four key areas that influenced our third quarter financial performance they include number one factors related to revenue; number two, selected items that influenced expenses; number three, a brief review of the balance sheet, including deferred tax assets; and number four, an update on our financial guidance for 2015. If you have specific questions about these items or any of our financial results I would be glad to address them during the Q&A. First, with respect to revenue for the third quarter consolidated revenue totaled $46.2 million compared to $49.8 million for the same quarter of 2014. Software revenue of $16.8 million was essentially flat with the year earlier quarter, while wireless revenue decline 10.6% to $29.4 million. Software revenue represented 36.4% of our total revenues for the quarter compared to 34% for the third quarter of 2014 reflecting the company's continued transition to a software based business model. Software revenue for the first nine months of 2015 increased 7.7% from the same period of 2014. Third quarter software revenue included $7.9 million of operations revenue and $8.9 million of maintenance revenue. Operations revenue declined 13.2% from $9.1 million in the year ago quarter, while maintenance revenue increased 13.4%. The decrease in operations revenue was driven largely by lower license and equipment revenue and was partially offset by favorable services revenue. Lower license revenue in the third quarter as compared to the third quarter in the prior year reflected the implementation of more customer upgrades that have lower license revenue components as well as a lower average revenue for implemented projects. The decrease in equipment revenue as compared to the third quarter in 2014 reflects the weaker economic conditions the Asia-Pacific region where we sell a larger portion of hardware as part of our project implementations. The increase in maintenance revenue reflects our continuing maintenance renewal rates in excess of 99% from our installed software base as well as the increase in new name accounts with attached maintenance. I would add that maintenance revenue is an important recurring revenue stream for the high contribution margin, which when combined with our recurring paging revenue, represented approximately 83% of our total revenue for the third quarter. Wireless revenue of $29.4 million declined 2.8% from the second quarter of 2015, as the quarter-to-quarter rate of revenue erosion remain near its record low. In addition, annual wireless revenue and erosion improved to 10.6% versus 11.4% for the year earlier quarter. The strong performance by our sales teams, coupled with solid customer retention, and a stable ARPU, contributed to wireless revenue results. I would note that we have included a schedule in our news release that details the components of our software and wireless revenue. Second, turning to operating expenses, we reported consolidated operating expenses excluding depreciation, amortization, accretion, of $36.1 million for the quarter, a decrease of 3.7% from $37.5 million in the year earlier quarter. Operating expenses were favorably impacted by consolidation of our wireless and software sales forces earlier in the year which resulted in lower sales and marketing expenses and management of cost of revenue expense. Cost of revenue expense in the third quarter improved to $7.9 million from $9.1 million in the prior quarter. Cost of revenue expense declined to 17% of revenue in the third quarter from 18.3% and 19% of revenue in the first and second quarters of 2015 respectively. Cost of revenue expense reflects costs associated with the implementation of our solutions, including third-party installations, and third-party hardware and software to meet our customer commitments. As noted on previous Investor calls we increased the use of more expensive third-party implementation services and sold and delivered more third-party hardware and software in the fourth quarter of 2014 to meet customer commitments. We continue to use third-party implementation services in the first and second quarters but have continued to manage these expenses more effectively to bring our margins more in line with expectations. Still we could well continue to manage this expense closely going forward. All other operating expenses, including selling and marketing expenses, of $28.2 million either declined or were flat compared to $29.4 million in comparable expenses for the third quarter of 2014 reflecting our focused effort to manage all expenses to accommodate the changing nature of our business. With regard to headcount, full-time equivalent employees or FTEs declined slightly to 605 at September 30 versus 608 at June 30. Looking ahead, we expect recurring payroll and related expenses will reflect the level of our investments to grow software revenues and bookings and to support the company's goals for wireless revenues and infrastructure. Capital expenses for the third quarter were $1.4 million and were incurred primarily for the purchase of pagers to support our wireless customers and infrastructure for general business operations. We do not expect any significant changes to the level of our capital expense requirements through the balance of this year. Third, looking at our deferred tax assets or DTAs, we had approximately $131.2 million in DTAs at September 30, before recognition of our valuation allowance. These DTAs allow us to shelter virtually all of our regular federal taxable income, although we are required to pay a minimal amount in federal alternative minimum tax. In the fourth quarter, based on the completion of our long range planning process, and the operational and accounting circumstances of our business, we will evaluate the need for a valuation allowance and expect to adjust the valuation allowance accordingly. Turning to the balance sheet and other financial items, the company generated $29.6 million in cash from operating activities for the first nine months of 2015. We used $20.5 million or 69% of that cash to return capital to stockholders in the form of dividends and common stock repurchases with a net $3.6 million used for capital expenses. After these uses of cash, we ended the quarter with a cash balance of $113.4 million. We expect to use a portion of that cash balance in connection with our December cash dividend and special dividends as well as potential share repurchases through the balance of 2015. I would add that we continue to operate as a debt free company. Vince will comment on our overall capital allocation strategy in a few moments. Finally, with respect to our financial guidance for 2015, we are maintaining the guidance we previously provided which projects consolidated total revenue to range from $183 million to $201 million, with wireless revenue between $112 million and $122 million and software revenue between $71 million and $79 million. Consolidated operating expenses, excluding depreciation, amortization, and accretion, up $145 million to $154 million, and capital expenses to range from $5.5 million to $7.5 million. Finally, I would remind you that our projections are based on current trends and that those trends are always subject to change. With that, I will turn the call over to Hemant.

[Hemant Goel:]

Thank you, Shawn, and good morning. Let me talk about sales and marketing activities. As mentioned, we saw mixed results of software sales during the third quarter. Our sales and marketing teams delivered third quarter software bookings of $16.7 million; down 20% from second quarter. However solid new customer bookings, along with a 99% maintenance renewal rates are driving healthy maintenance revenue numbers. Secure messaging remains one of our best performing solutions with sales remaining consistent with second quarter levels. In third quarter, we welcomed 30 new customers to the Spok family. Healthcare bookings overall in the U.S. are up 12% over third quarter 2014 and new customer bookings are up 140% over third quarter 2014. These are organizations that have never worked with us before and they are important part of our future growth. Consolidation amongst hospital networks continued as a national trend, creating a demand for solutions that can fit the needs of multiple interconnected facilities. This was demonstrated by several third quarter deals, including Spok's continued success, working with a hospital network with a broad national presence. Nine additional sites were closed during the third quarter with solutions that range from Console and Web, Messenger Middleware, and Spok mobile. Our customers consider us to be a true partner and place a high value on our ongoing support and training to get the most from their solutions. This trust and teamwork was evident when a prominent hospital in the Midwest came to Spok looking for heath transitioning from a legacy paging and text messaging systems to a communications enabled workflow approach. After an extensive evaluation process, the organization selected Spok's Console, Web, and Middleware solutions and also will become a significant Spok mobile customer. In addition, they will engage our consulting services team to guide them through the rollout process. This customer considered ongoing consulting to be a very important part of the success of the solution because they wanted to ensure in-depth collaboration and alignment amongst the internal teams. This was the largest six figure deal of the year. Our professional services group is constantly evolving to meet our customers' needs. As the use of mobile technology continues to grow as an integral part of healthcare workflows, our team is getting request from customers of greater guidance and expertise around developing their mobility strategies. We have responded to this need by creating a new division consulting services mobility practice. This team allows our mobility experts to provide more value including best practices guides and upcoming webinar series and a mobility strategy checklist to assist customers who are initiating or maintaining mobile communication solutions at their organizations. As mentioned earlier, Spok's ability to integrate with other systems is a key factor in customer satisfaction. A new customer in third quarter a mid-sized hospital in the Eastern U.S. reached out to Spok because their central compact system had become outdated and they were encountering reduced functionality. They needed a reliable new system with increased flexibility but they were very concerned about how a new solution would integrate with systems in other areas of the extensive hospital network. They needed a solution that could work with their existing infrastructure including third-party systems and still provide the kind of solution they require with minimal disruption. Spok was able to leverage technology already in place while enhancing functionality with a user friendly solution that also reduced costs for the organization. Nine of the 20 locations in this network use Spok and with the success of this solution, we have to add more in the future. Europe, the Middle East and Africa continue to evolve albeit slower than expected for advanced communications solutions within the healthcare vertical. We believe that the market will gain momentum in the coming years. Over in the Asia-Pacific region, sales bookings saw a downturn for the quarter as economic volatility throughout Asia heavily affected consumer spending across all industries in the region. Despite these issues Spok continued to provide middleware and hardware solutions for existing customers demonstrating that customer loyalty remains strong. Among the third quarter deals was a global cruise ship company that chose our middleware and paging solutions to replace a competitor. Strengthening the Spok brand internationally continued to be a strong focus of the company in third quarter. During this quarter, our international teams attended a number of events, most notably HIMSS AsiaPac15 in Singapore, NHS England Health and Care Innovation Expo in Manchester, England, and the Health Informatics Conference in Brisbane, Australia. All events focused on the importance of transforming healthcare through smart use of information and communications technology. These events generated encouraging opportunities for our Spok team to build regional partnerships and learn more about the specific needs of healthcare organizations worldwide. While healthcare comprises the largest percentage of our business, public safety remains an additional growth opportunity with a dedicated sales team. We saw a slowdown in our public safety business during third quarter. We will be continuing to enhance our solution offerings in the coming months. Public safety customers around the world rely on our solutions to support emergency call handling at their 911 dispatch centers and our solutions dependability has been verified with joint interoperability test command or JITC certification. While enhancing our customer experience has been a key focus for Spok this year, we have created a new position to direct these efforts. Our customer experience executive will serve as the voice of customers to our internal teams and they will focus on how customers experience all aspects of Spok. This person also leads the two customer feedback forums we launched earlier this year, the Strategic Advisory Council and Innovation Partner Alliance which have provided valuable ongoing feedback to our organization. The next Strategic Advisory Council meeting is in November and will focus on member challenges and workflows. These conversations, along with our own research, facilitate the product teams planning of the Spok roadmap. Our Innovation Partner Alliance panel brings together key technical representatives from several large healthcare customers and has been meeting regularly every other week to enhance all of these discussions and expand our customer engagement, we debuted a new line networking tool in August. This customer community network provides a place for members to connect, discuss common challenges, and submit product ideas. Before turning things back over to Vince, I want to provide an update on our marketing activities. Our marketing team continues to grow our global content development; lead generation; and event planning efforts. Ongoing investment and activities in these areas which include digital demand generation campaigns, webinars, educational debriefs, videos, and website improvements, help us drive leads and further sales to pipeline. The third quarter the amount of flows business that originated from qualified marketing leads was up 35% over third quarter last year. We also continue to expect our social reach. Quarter-over-quarter our social following has increased 8%, engagement with our audience is up 12%, and our social ads for the free trial of our secured texting solution generated more than half a million impressions. Website traffic is up 26% over third quarter 2014. Marketing is also responsible for planning and coordinating Spok's presence at a large number of Trade Shows throughout the year both domestic and international. Staff conversations at these Trade Shows resulted in an increased and qualified leads of 7% year-over-year. We look forward to improving our results throughout the rest of 2015. With that, I will pass it back to Vince. Vince?

[Vince Kelly:]

Thank you, Hemant. Before we take your questions, I want to comment briefly on several items that may be of interest. First, is I want to update you on our current capital allocation strategy. Second, brief you on our product development initiatives. And third, provide more details about our Investor Meeting coming up next week in New York. With respect to our overall capital allocation strategy, our goal remains to achieve sustainable business growth, while maximizing long-term stockholder value. We plan to do this by operating profitably, returning capital to our shareholders, and investing in our business through product development, market expansion, and potentially accretive acquisitions. We continue to expect paying our quarterly dividend of $0.125 per share or $0.50 annually for the foreseeable future based on our current projections for operating cash flow. Also we may buyback additional shares of our common stock from time to time under our share repurchase program, depending on the share price and market conditions. Approximately $3.2 million remains authorized for purchase under our 2015 buyback plan. Yesterday, our Board approved an extension of our repurchase program to December 31, 2015, and reset the repurchase authority in the amount of $10 million to begin the earlier of January 4 of the completion of the existing 2015 repurchase plan. Including the regular quarterly dividends, and special dividends announced yesterday, payable in December, we remain on track to fulfill our previously announced goal of returning at least $26 million in capital to our shareholders in 2015. Turning to our product development initiatives, which I outlined for you on our previous earnings call, we've taken additional steps in recent months to further refine the concept and review it with our Board. As you recall, we are undertaking this initiative significantly upgrade our product solutions offerings and related development spending over the next several years in order to secure and enhance our leadership position in the market for unified critical communication solutions. We developed a plan after completing a thorough evaluation in this space and how it will likely evolve over time. We concluded it was essential for us to launch this initiative and do so as quickly as possible. The principal takeaway from our market analysis, as I previously noted, are that number one, our customers are looking for a unified critical communication solution; number two, we believe our investments in such solutions will lead to significantly higher rates of consolidated revenue growth. We believe that this is an area with strong potential that will allow us to leverage our sales teams, multiple solutions offerings, and existing customer relationships. Moreover, we concluded that internal investment would most likely be significantly more attractive than tuck-in acquisitions that in recent times have come with high valuations and inferior prospects for growth and no profitability. As noted previously, we've evaluated more than 70 software companies as potential acquisition candidates over the past few years but have yet to identify one that meets our criteria on price, profitability, and potential for accelerating growth. We plan to discuss this evolving market, our product development initiative, and our spending plan in much greater detail at our Investor Meeting next week in New York. However it's clear from our research that the market for unified communications, and workflow collaboration solutions, which is what Spok delivers, will grow steadily over the next decade especially within the rapidly evolving healthcare segment. Current trends are all driving a need to coordinate workflow activities among various departments and systems within and outside hospitals. As a result, the emerging landscape will require communication solutions that include voice, text, media, as well as the fully integrated and compatible with the electronic medical record and clinical systems. Technology used in this evolving market is also undergoing significant change. While existing solutions such as paging and Wi-Fi devices will continue to exist in healthcare, they will evolve from device and hardware centric solutions to software oriented applications. Also, while multiple devices used by nurses and physicians will likely remain varied, customers will seek offerings that will bridge those platforms to provide a comprehensive healthcare solution. Today, there are a variety of vendors selling a number of point solutions as pieces of an overall communication platform. Going forward, however, we believe the key to long-term success in this space will be to offer an integrated enterprise solution that meets customers unified communications requirements, along with an emerging requirements to mobility and healthcare delivery. Fortunately Spok is already well-positioned for this evolving market with a large installed base of healthcare customers that use our communication solutions. We are also currently offering products in many of key solutions segments and thus believe we can leverage our current size and position. To protect and extend our market position however, we are convinced that we must make crucial investments now to consolidate, integrated, modernize, and extend our product portfolio for the future. I would add that we expect to continue to execute our product development initiatives while operating profitably and returning capital to our shareholders at appropriate levels. I would also note that our plan does not preclude our continued search for potential acquisitions. In fact, we intend to continue evaluating potential M&A candidates as those opportunities arise and valuations that make sense to us and are consistent with our acquisition criteria. Finally, I want to remind everyone that we'll host our 2015 Investor Meeting next week on Tuesday, November 3, in New York. The meeting is going to begin at 10

[Operator:]

Thank you. [Operator Instructions]. We will now take our first question from Steven McIntyre from Braeside Capital. Please go ahead. Your line is open.

[Steven McIntyre:]

Thanks. Hi guys how is it going?

[Vince Kelly:]

Good, Steve, fine. How are you?

[Steven McIntyre:]

Just a couple of quick questions. On the capital return, with the two dividends, I think that puts you right at 26 just looking at how much you spent through 9/30. And is that October, November, December if the stock is still attractive in your eyes, I mean, you talked about exceeding it, is that something we could probably look for?

[Vince Kelly:]

Yes, it's potential that we could buy more, we have extended the plan. We still have some left in the basket as I mentioned and we have extended the plan to basically start it, the earlier of January 4, when the existing basket runs out, it's totally possible that we would buy more in the fourth quarter.

[Steven McIntyre:]

Okay. And then one question on the software side, kind of how is Q4 shaping up? I know it's only a month in but if you kind of look at the maintenance revenues versus last year you may be have a million head start versus, I guess, you guys said 1906 or something thereabouts; do you think on the operational revenues, how do you look at it year-over-year for Q4?

[Vince Kelly:]

Generally you have a stronger fourth quarter on operational revenues because everybody is hustling to get things installed. We've got a lot in the backlog as we mentioned, I think it's over $41 million right now. We should have a good Q4. We're comfortable with the guidance that we gave at the beginning of the year from our annual results. We talked about where we would be on revenue; we talked about where we would be on operating expenses and CapEx. And then we will give guidance again in the first quarter when we report our fourth quarter numbers. But that's generally how we communicate.

[Steven McIntyre:]

Okay and just one more on the revenue side. The deferred revenue has, I think, picked up to like $29 million. How should we read that? I mean, that's kind of gone up pretty nice sequentially is that something on the maintenance side or it's up $3 million or $4 million, I think, year-over-year. Could you may be just talk about the deferred revenues?

[Vince Kelly:]

I'll let our Chief Financial Officer do that.

[Shawn Endsley:]

Yes, our deferred revenue consists of both maintenance and operations revenues. So that we recognize out of that basically on a ratable basis, as we implement project and as the maintenance basically is incurred overtime. So, yes, I mean it's favorable. We look at that as favorable and also there is a favorable impact on our cash flow, because we collect that cash before it's recognized as revenue.

[Steven McIntyre:]

I'll sneak in one last one if I can too. On the PP&E disposal, I think it may be picked up like $600 grand in the quarter, could you may be just talk about what that was from?

[Vince Kelly:]

Normally just equipment disposal and minor things. I mean, it's nothing unusual or out of line.

[Steven McIntyre:]

Okay, I just thought -- I think it was only a couple hundred thousand through 6/30 and it seemed like it was a little bit better. I mean, it's a nice small item. I was just curious if there was one thing that led to that?

[Vince Kelly:]

Nothing, nothing unusual and we don't expect it to be of any consequence through the rest of the year.

[Operator:]

Thank you. [Operator Instructions]. We will now take our next question from Rich Murphy from Cross River. Please go ahead. Your line is open.

[Rich Murphy:]

Yes, keeping on the software, not to beat a dead horse, but the guidance that you've given assumes a pretty robust fourth quarter for software. What should I look at as a guidepost to see, that gives me a kind of -- it looks like about $19.5 million so up from $16.8 million. Just some color on that.

[Shawn Endsley:]

Yes, I mean, the guidance that we gave was for the year, right. And so, yes, we do have to have a pretty decent fourth quarter to achieve that guidance. The way we generally forecast as we get with our professional services group, we look at the projects that they're going to be installing. We go through them on a project-by-project basis and that's how we roll off our numbers and that's why we still feel good with the guidance that we gave you. Now, it's October, could a customer delay a project that we're expecting them to put in or could couple of customers delay a project, yes, but you also might have some customers that accelerate a project. So based on our view today, and based on the work we've done in professional services group blowing everything up, and based on the feedback that we've had from our sales group that's where we see. And I think if you look back, I don't have it laying in front of me, it looks like last year we had kind of a similar dynamic in the fourth quarter too because everyone is trying to get their numbers in by the end of the year.

[Rich Murphy:]

Okay, so there -- I was wondering if there's some type of seasonal aspect to the software business but --

[Vince Kelly:]

Generally fourth quarters, yes, in software is pretty good, yes.

[Rich Murphy:]

And then more of a housekeeping question, the tax, how do I look at the tax if I look at a balance sheet I see that you get probably based on the cash flow statement you get some tax cash flow coming back. Is that something we can -- is that something that we can expect for the next year, two years, when does that kind of slow down?

[Vince Kelly:]

I'm not -- I'm not following you with respect to when you said taxes.

[Rich Murphy:]

I'm sorry, we're not paying -- you said we're not paying federal taxes. So --

[Vince Kelly:]

We're paying all federal tax. We have a large net operating losses in. So we have deferred tax assets that are able to offset that income. Now, we're right in actually the flows of a process of evaluating that evaluation allowance on this deferred tax assets. And I think, may be Shawn mentioned in his comments, we're going to complete that evaluation this quarter, and we may be adjusting it. And if we do so obviously we will do that in the fourth quarter and report it in checks and balance about our fourth quarter results sometime next quarter.

[Shawn Endsley:]

Yes, in our, I think cash flow statement we do pay about $1.2 million of what we call income taxes. That is federal alternative minimum tax and basically state income taxes where certain jurisdictions do not allow us to use NOL, particularly states like Illinois and California. But we don't expect to see any uptick in that amount. They'll probably be right around that same level of payment.

[Rich Murphy:]

Okay, so like a $2.9 million in deferred income tax -- what number is -- that has nothing to do with -- is that the PGA [ph] essentially?

[Vince Kelly:]

No, that's -- that's just based on the difference between basically book and tax differences.

[Rich Murphy:]

Okay.

[Shawn Endsley:]

Differences and the tax economy.

[Vince Kelly:]

But that does not involve any cash payment on our part.

[Operator:]

Thank you. [Operator Instructions]. There are no currently no question waiting in the queue.

[Vince Kelly:]

Okay, look, folks. Thanks a lot for joining us this morning. We look forward to seeing some of you at our Investor Meeting next week in New York and to talk to all of you again after we release our fourth quarter results early next year. So everyone thank you and have a great day.

[Operator:]

Thank you. That will conclude today's conference call. Thank you for your participation ladies and gentlemen. You may now disconnect.