Spok Holdings, Inc.
Q1 2014 Earnings Call Transcript

Published: 2 May 2014

[Operator:]

Good morning, and welcome to USA Mobility's First Quarter 2014 Investor Call. Today's call is being recorded. Online today, we have Vince Kelly, President and Chief Executive Officer; Endsley, Chief Financial Officer; MyLe Chang, Chief Accounting Officer and Controller; and Colin Balmforth, President of the company's Operation Company. At this time, for opening comments, I will turn the call over to Mr. Endsley. Please go ahead, sir.

[Shawn E. 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, which are subject to risks and uncertainties related to USA Mobility'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. USA Mobility'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 2013 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 USA Mobility assumes no obligation to update any forward-looking statements on past or present filings and conference calls. With that, I'll turn the call over to Vince.

[Vince D. 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 our business. The strong operating performance and momentum we established in the fourth quarter carried over to the first quarter, and we're off to an excellent start for the year. We met or exceeded our internal expectations for the quarter and we're on track with our financial guidance for revenue and operating expenses for the year. Key accomplishments included excellent results from both our Software and Wireless sales efforts. Software revenue increased from the year earlier quarter; while we achieved record high first quarter bookings and a near record high backlog at March 31st. Our Wireless sales efforts ended the quarter ahead of our key operating goals for total revenue, gross placements and average revenue per unit, or ARPU. Overall, we were able to meet our operating goals, strengthen our balance sheet, advance our long-term business strategy, and once again, return capital to our stockholders in the form of cash dividends. Shawn will provide a financial overview in a few minutes, but first I want to review some key results for the quarter. Number one, Software bookings for the first quarter increased 18.7% to $15.9 million from the year earlier quarter, representing the highest level of first quarter bookings in the company's history. In addition, Software revenue rose 9.9% to $15.8 million from the first quarter of 2013, while the backlog increased to $41.4 million at March 31st or just shy of the record high $43.8 million achieved last September 30th. Our pipeline of sales prospects increased substantially during the quarter, the result of outstanding work by our dedicated sales and marketing team, an increasingly diversified customer base, and wider recognition of our Software solutions. Demand for our Software solutions remains strongest in North America, specifically among hospitals where we sold solutions for critical smartphone communications, secured texting, clinical alerting, and emergency notification. We also continued to expand our international sales efforts as well as broadened our worldwide focus beyond healthcare in such market segments as public safety, hospitality, education, business, and government services. Number two, Wireless revenue erosion improved in the first quarter from the first quarter of 2013. We posted stable ARPU and an increase in total gross paid replacements in the prior quarter, a tremendous credit to our entire sales and marketing team. Number three, operating expenses, excluding depreciation, amortization and accretion, remained relatively flat for the quarter as we continued to leverage opportunities to market and sell our enterprise-wide solutions. Going forward, we will continue to efficiently manage our operating expenses. We anticipate a portion of our integration cost savings will be offset by additional investments to support our long-term growth. Number four, strong operations resulted in EBITDA, or earnings before interest, taxes, depreciation, amortization and accretion, of $12.1 million in the first quarter, representing a margin of 24.2%. As we've noted on prior earnings calls, we expect to experience some margin compression over time as the opportunities to generate expense savings decline and we invest in opportunities for long-term growth. Number five, finally, we again met our goal of generating sufficient free cash flow during the quarter to return capital to stockholders in the form of cash dividends. We paid our regularly quarterly dividend of $0.125 per share on March 28th. Over the past nine years, we've now returned a total of $420.3 million to our stockholders in cash dividends. In addition, our Board of Directors have declared our next regular quarterly dividend of $0.125 per share to be paid on June 25th. We did not make any purchases under our common stock repurchase program during the first quarter. As a result, we still have $15 million of repurchase authority remaining through the end of this year. Since the buyback program began in 2008, we have repurchased a total of 6.268,504 million shares of our common stock at an average price of $9.53 per share. I'll comment further on our capital allocation strategy in a few minutes. Overall, we're very pleased with our operating performance and progress in the first quarter and believe we're off to an excellent start in 2014. We met or exceeded the majority of key operating goals, expanded our services and geographic reach, generated significant free cash flow and returned capital to stockholders. At the same time, we continued to make significant progress towards our goal of transitioning to a company with a viable path for long-term growth. I'll comment further on our operating performance and related business activities in a few minutes, but first Shawn Endsley, our Chief Financial Officer will review financial highlights for the quarter. Shawn?

[Shawn E. Endsley:]

Thanks, Vince. Before I review our financial highlights for the quarter, I would again encourage you to review our first quarter Form 10-Q, which we expect to file later today, since it contains far more information about our business operations and financial performance than we will cover on this call. As Vince noted, we were pleased with our operating performance for the first quarter. Results were consistent with our previously announced financial guidance for 2014. Overall, we believe we're off to a good start for the year. I will limit my comments this morning to three key financial areas that may be of interest to you. They include, number one, an explanation of how we will report certain items in our P&L in 2014 now that we operate as a consolidated company. Number two, a review of Software revenue in the first quarter and for the remainder of 2014. And number three, an update on the balance sheet at March 31st, including our deferred tax assets. And we expect you have specific questions about any of these issues or related financial matters, we would be glad to address them during the Q&A. With respect to how we will report certain results in our statement of income in 2014 following the consolidation of our Wireless and Software businesses on January 1st, we will only report one operating segment, our consolidated operations. We will continue to report separate Wireless and Software revenue. As we've noted in previous calls, we recognize that maintaining two separate businesses could be detracting from the long-range goal of creating stockholder value based on the ultimate growth potential of our technology solutions and operations. We undertook an internal reorganization designed to unify two business operations under one brand identity and establish one company dedicated to operational excellence, customer focus, and creative problem solving. This approach maximizes favorable attributes and eliminates redundancies to affect one integrated sales force, one set of overhead, and one platform for future acquisitions and to focus on profitable revenue growth. With respect to our Software revenue in the first quarter and the remainder of 2014, I want to note that in the first quarter we recognized approximately $1 million for two large projects. These two projects are larger than our usual project size and favorably benefited our first quarter Software operations revenue. As I noted in our March Investor Update, our internal control remediation process provides us with the ability to reliably estimate the professional service period relating to our software arrangements. This will enable us to recognize revenue for post January 1, 2014, software arrangements radically over the estimated period of deliver to the customers. The Software arrangements ordered prior to January 1, 2014, Software operations revenue has or will generally be recognized only at project completion, as we do not have the ability to estimate the service period for these legacy orders. The number of pre-January 1, 2014, Software arrangements impacting Software operations revenue will decline throughout 2014 as these Software arrangements are successfully implemented. We expect the second quarter Software operations revenue will reflect a one-time decline on the first order levels as this transition occurs, then increases in the third and fourth quarters. Turning to the balance sheet, the company generated $7.8 million in cash during the first quarter from operating activities and ended the quarter with a cash balance of $91.6 million. We expect to use a portion of that cash in connection with quarterly cash dividends and potential share repurchases in 2014. I would also note that we continue to have no debt outstanding and our existing credit facility remains in place unused and provides us with approximately $40 million in borrowing capacity for acquisitions or related investment opportunities. I also want to point out two other elements on our balance sheet. First, we currently have approximately $145.6 million in deferred income tax assets or DTA, before recognition of our valuation allowance of $119.3 million. These DTAs allow us to shelter virtually all of our federal taxable income from cash income taxes. The DTA valuation allowance adjusts the total balance of the DTA to the amount that we expect to use in the future based on our forecast of taxable income. We will adjust the level of the valuation allowance either up or down as our expectations of taxable income change. Second, we have approximately $23.5 million in current deferred revenue. This deferred revenue will be recognized as software revenue as earned over the coming 12 months. Finally, with respect to our financial expectations, we're maintaining the previously announced financial guidance for full year 2014 that we provided in March. To reiterate that guidance, we currently expect total revenue to range from $183 million to $201 million; operating expenses excluding depreciation, amortization and accretion to range from $147 million to $156 million; and capital expenses to range from $7 million to $9 million. Finally, I would remind you once again that our projections are based on current trends and that those trends -- excuse me, are always subject to change. With that, I'll turn it back over to Vince.

[Vince D. Kelly:]

Thanks, Shawn. Before we take your questions, I want to comment briefly on several other items that may be of interest. First, provide an update on our current capital allocation strategy; second, review a recent Senior Management addition; and third, discuss our current business outlook over the balance of the year. With respect to our current capital allocation strategy, we continue to evaluate the best way to deploy our capital to both achieve sustainable business growth and maximize long-term stockholder value. As I've stated previously, one potential use of capital is for acquisitions that could expand the depth and breadth of our software applications, service capabilities and market penetration. As such, our Board and management have spent considerable time over the past few years evaluating various acquisition opportunities. While we have identified a few acquisition candidates that have met many of our stated criteria, we've not yet found what we consider to be a strategic fit at the right price. However, we continue to evaluate potential candidates and we remain optimistic. In the meantime, we will continue to stay disciplined in our approach, both in terms of fit and cost, with the hope of finding a compatible acquisition partner in the not too distant future. With regard to other uses of capital, we expect to continue paying our quarterly dividend of $0.125 per share, $0.50 annually for the foreseeable future based on our current projections for operating cash flow. We believe the current dividend rate provides an appropriate yield on our common stock and allows us to retain strategic capital for other potential needs. Also with respect to our stock buyback program, we could potentially repurchase more shares of our stock from time-to-time, depending on the stock price and market conditions. Over time, as we move closer to a business model that can sustain long-term revenue growth, we expect capital allocation will shift towards opportunities for long-term capital appreciation until the return. At the same time, we will continue to manage our balance sheet prudently by maintaining ample liquidity to support our working capital needs. As usual, we will keep you updated on all capital allocation decisions. At this point, I'll ask Colin Balmforth, President of our Operating Company, to comment briefly on our first quarter sales and marketing activities. In addition, Colin will provide an update on what we see as our principle growth drivers going forward. Colin?

[Colin M. Balmforth:]

Thank you, Vince, and good morning. The first quarter was an encouraging start to the year from our sales and marketing teams. In fact, our Q1 Software bookings of $16.9 million represented a company record for the first quarter. One notable trend is that the average deal size for new logo customer accounts increased by 38% from the first quarter of 2013. We continue to see long time customers return for new solutions, highlighting their continued trust in the value of our offerings. As evidence of this, a call center and secure texting customer in Canada purchased our critical test results management solution. This hospital will leverage our system in its emergency department to send secure messages to physicians regarding patients' radiology results. In addition, a Florida hospital currently using both our Wireless and Software solutions selected us for its next-generation mobility initiatives. Key physicians were actively involved in the evaluation process for Mobile Connect and Care Connect. As these technologies support advanced workflows that enable sophisticated preference management for how physicians can be contacted at different points during the day. In addition to these solutions, the hospital purchased clinical alerting to speed clinicians' ability to respond to system-generated updates on patient status. We continue to achieve our targets for gross additions in our paging services. As I commented on our prior earnings call, we expected further progress in collaborative efforts between our sales representatives, and this resulted in six additional cross-selling and collaborative software deals during the quarter. Also on our last call, I discussed our growth drivers and the five pillars that will enable the company to meet the goals established in our long-range plan. I'd like to update you on our progress in each area. Our first pillar is the mid-market healthcare space. We already work with many well-known names in healthcare and are proud to count all 18 hospitals on U.S. News Best Hospitals Honor Roll as customers. We're in a majority of organizations with 600 beds or more. The mid-market we define as 200 to 600 beds, and the smaller market of less than 200 beds represents growth opportunity for us. Our development team continues to make progress on developing software as a service, SaaS-based capabilities for the small to mid-size market as these organizations look for ways to reduce their information technology spending while gaining effective communications capabilities. For our international pillar, we are also making good strides. In the first quarter, we closed the largest deal since USA Mobility acquired Amcom Software in March 2011. An Australian hospital selected us for clinical alerting, secure texting, and web directory. This new multi-billion dollar hospital expects to be live with our solutions later this year. In addition, an existing hospitality customer in Macau, China is undertaking an expansion project for their operation center, and we completed a large deal to provide call center solutions to its growing base of operators. For our politicals pillar, the progress is also quite strong. In fact, we had eight new public safety software deals in the first quarter, an increase from six deals in the fourth quarter of last year and from five deals in the first quarter of 2013. And as an example, three townships in New Jersey selected us to provide 911 dispatch and call-handling solutions in partnership with our phone system vendor. What's notable about this deal is that we displaced a competitive public safety system. This is a positive trend we've seen in this market over the past year and we see continued potential for our integrated public safety solutions in the municipal and government space. Regarding progress in our innovations pillar, we continue to meet regularly with the Amcom Directions user group. These loyal customers are vocal about their investment in our solutions and want to guide product evolution based on their everyday usage and challenges. By the end of Q1, the group consisted of 316 individual members, representing 175 organizations. In March, we also held an in-person meeting with our Physician Advisory Board, which includes six doctors from the U.S. and international community. The doctors enlighten the team about how technology is propelling, new workflows in hospitals, and how we can help them communicate better with today's tools. Regarding the fifth and final pillar, mergers and acquisitions, we continue to operate in an active acquisition mode as we evaluate potential targets in our adjacent space. At this point -- and as Vince previously commented on, we've not identified any targets that meet our acquisition criteria. In closing, I would like to provide some color on our marketing activities. The marketing team was productive both in generating promising leads and furthering brand awareness in several areas. In addition to leads generated by e-marketing campaigns, the website and webinars, the team attended several high profile trade shows. We met with many organizations during Arab Health in Dubai, HIMSS in Orlando and Australian Healthcare Week in Sydney. All have led to numerous positive discussions. As evidence of this, it's encouraging to see our pipeline continue to grow and we witnessed an improvement in marketing qualified leads of 27% compared to the first quarter of 2013. Further, we're making investments in our marketing Executive Leadership, for which Vince will provide some commentary. With that, I will turn it back to Vince. Vince?

[Vince D. Kelly:]

Thank you, Colin. With regard to our recent senior management addition, we were delighted to welcome Donna Scott on April 14th as our Senior Vice President of Marketing. Donna is an accomplished marketing professional with more than 25 years of marketing, sales, and product management experience in the technology and healthcare industries. She joins us from McKesson Health Solutions, where she was responsible for overall marketing strategy, including sales education, product launches, brand awareness, and lead-generation campaigns for McKesson's RelayHealth. Previously, she held Executive Marketing positions at AT&T and BellSouth. Donna's principal responsibilities for USA Mobility will be to manage our global marketing strategy, specifically supporting revenue and profit growth through solutions marketing, brand enhancement, and lead-generation programs. Donna has already hit the ground running and we believe the company will benefit greatly from her proven marketing and leadership skills over time. Finally, turning to our business outlook for 2014, we're very optimistic about meeting our performance goals for this year as well as making significant progress on our long-term strategic goal of becoming a growing global provider of unified communications solutions. While overall demand for paging will continue to decline, the value of paging for critical messaging remains strong and should contribute to our cash flow and capital formation for some time to come. We expect to redeploy the majority of that capital to accelerate the development, growth, and expansion of our unified communications solutions and services worldwide. This would include expanding our integrated sales reach both within and beyond existing market segments as well as extension of our sales with the new geographic markets. In addition, as I noted earlier, we will continue to explore acquisition opportunities in the unified communications space that are accretive to our business and will accelerate our revenue growth and help utilize our valuable tax assets, all of which we believe will enhance long-term stockholder value over time. In summary, we're pleased with our overall results in the first quarter and have started the year off on a positive note. Our entire management team and operations are now integrated and working together towards common goals. We operated the company profitably, never exceeded our primary performance goals, increased organizational efficiencies, and expanded our sales capabilities and focus in many key geographic and vertical markets. We expect to make even further progress over the balance of the year. Towards that end, we will aggressively execute our business plan and simultaneously explore all opportunities to create additional value for our stockholders. At this point, I'll ask the operator to open your line up to your questions. We would ask you to limit your initial questions to one and a follow-up. After that, we'll take additional questions as time allows. Operator?

[Operator:]

Thank you. (Operator instructions) We will take our first question today from Rich Murphy from Cross River. Please go ahead. Your line is now open.

[Richard Murphy:]

How are you doing guys? I have a question on the criteria for M&A. Could you dive down a little more into that just give an idea for investors. Your criteria wasn't met, so you haven't done any M&A recently. What -- is it expenses, are you seeing deals are just pricy at this point? And then I have a follow-up.

[Vince D. Kelly:]

Yes, Rich, the short answer to your question is yes. There's a lot of deals out there that are just -- it's encouraging from the standpoint of looking at the amount of innovation and creativity and entrepreneurialism that's going on out there in America today, particularly in the healthcare space, particularly in the software and service areas around healthcare. There's a lot of opportunity out there. There's a ton of private money out there. There's a lot of funding going on and valuation expectations have been, I think, almost unreasonable. And I'm not the only person that feels that way. I've talked to some of my counterparts. I've talked to other people in the private equity world. It's just a little bit expensive and pricy out there right now. I think all these things, as you know, move in cycles and I don't think we need to be in a hurry. But we've had an issue where we've got these enormous deferred tax assets. We can shelter probably over $370 million of taxable income. We're only going to use a portion of them. So, in addition to expanding our business for long-term growth and serving our healthcare sector and our other customer segments more profitably in the future and doing an accretive acquisition, we also have that issue that we would like to take advantage of through the M&A as well. But as you know, where you buy is important, so we're not going to be in a hurry. We're going to be disciplined and that pretty much is it.

[Richard Murphy:]

And I appreciate that. As they say, the only risky asset is an overpriced asset. The other thing, on the share -- are those intertwined with the share buyback? You didn't buy shares in the past quarter I'd just like some color on how you guys view that.

[Vince D. Kelly:]

Yeah, we have a plan out there. It's a typical share repurchase plan. There's a grid associated with it. At various price points, the company would just automatically -- it's one of these fire-and-forget plans. The company would automatically purchase shares if the shares fall within the price of that grid and they just didn't in the first quarter. It's pretty simple. We can change that grid I think on a quarterly basis and the Board looks at that every quarter.

[Richard Murphy:]

Excellent. Keep up the good work, guys. Thanks.

[Vince D. Kelly:]

Thank you.

[Shawn E. Endsley:]

Thank you.

[Operator:]

(Operator instructions)

[Vince D. Kelly:]

Look, I don't see any more questions in the queue. Thank you very much for joining us this morning. We very much look forward to speaking with you after we release our second quarter results. I think we've gotten off to a great start. Thanks again and everyone have a great day.