Spok Holdings, Inc.
Q2 2021 Earnings Call Transcript

Published: 1 Aug 2021

[Operator:]

Good morning and welcome to Spok’s 2021 Second Quarter Investor Call. Today’s call is being recorded. On line today, we have Vince Kelly, President and Chief Executive Officer and Mike Wallace, Chief Operating Officer and Chief Financial Officer. At this time, for opening comments, I will turn the call over to Mr. Wallace. Please go ahead, sir.

[Mike Wallace:]

For 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.

[Vince Kelly:]

Thanks, Mike and good morning everyone. I hope all of you, your families, and friends are and remain safe during these unprecedented times, especially as we continue to navigate the challenges presented by COVID-19 and the Delta variant. At Spok, we continue to take this situation very seriously and are ensuring that our employees are getting vaccinated to secure a safe work environment. As always, we want to thank our customers, many of whom are on the frontline fighting this virus and saving lives. We are forever grateful for their sacrifice. We are entering the second half of the year with an improved outlook based on important progress made over the second quarter in several key performance areas. Overall, we saw software revenue increase from prior year levels, continued improvement in wireless retention trends, particularly the significant increase in our year-over-year pager placements and continued expense management that resulted in sequential declines in many expense categories. However, our second quarter results also demonstrate continuation of the very challenging selling environment we are operating in as a result of the COVID-19 pandemic and the related impact on our customers’ budgets and ability to focus on new projects. While we are certainly not satisfied with the level of software revenue bookings in the second quarter, we believe that the pandemic and its after effects on hospital financial health and resources had a large impact on our second quarter performance. We remain encouraged by the size and quality of our pipeline software deals for the second half of 2021 and believe that we will see improvement in this area over the course of the remaining two quarters. We have developed the company with a strong operational foundation built on three pillars. First is our best-in-class paging network, the largest in the United States that continues to generate strong results. Next is our Spok Care Connect suite of products with a viable maintenance revenue stream, contributes just under $10 million per quarter. Last is our new subscription-based cloud data platform, Spok Go.

[Mike Wallace:]

Thanks, Vince. I will provide certain details of our financial performance in the second quarter, but I would again encourage you to review our second quarter 2021 Form 10-Q, which we expect to file later today as it contains far more information about our business operations and financial performance than we will cover on this call. As Vince noted, progress was made in several key performance areas, with software revenue up more than 8% from prior year levels, albeit as compared to the lower revenue levels in 2020 due to the pandemic, continued improvement in wireless trends and continued expense management. However, our second quarter results demonstrate the continuation of a challenging selling environment we are operating in as the COVID-19 pandemic continues to impact our customers and their budgets. While not satisfied with the level of software bookings in the second quarter, we remain encouraged by the size and quality of the pipeline of software deals for the second half of 2021 and believe that activity will accelerate in the second half. As a result, we are confident in reiterating the financial guidance that we provided last quarter. In the balance of my comments, I will review key areas which drove our second quarter financial performance. They include, first, a review of certain factors impacting second quarter revenue; second, selected items which influenced second quarter expenses; and lastly, a brief review of the balance sheet. As usual, if you have specific questions about these items or any of our quarterly financial results, I will be happy to address them during the Q&A portion of this morning’s call. With respect to revenue for the second quarter of 2021, total GAAP revenue was $35.7 million, unchanged from total revenue in the second quarter of 2020. For the first 6 months of 2020, GAAP revenue totaled $71.8 million compared to revenue of $73 million in the first half of 2020. With respect to wireless revenue, first half performance was driven by a lower level of pager unit churn on a year-over-year basis. In fact, the net pager decline in the second quarter averaged 0.6%, another record low. As a result, wireless revenue in the first half of 2021 remained solid, declining only 5.9% from the prior year stable unit pricing.

[Vince Kelly:]

Thanks, Mike. Before we open the call up for questions, I’d like to comment briefly on a couple of items

[Operator:]

Thank you. And our first question comes from Ryan Vardeman with Palogic. Please go ahead.

[Ryan Vardeman:]

Hi, guys. As you start selling existing customers transitions from the legacy platform to Spok Go, what do the selling efforts look like? And what sort of maintenance revenue to Spok Go subscription revenue per year does that typically look like?

[Vince Kelly:]

So the selling efforts – I’ll take that one and then Mike can take the latter. The selling efforts consist really of two pieces, Ryan. Number one, we have a new business group that we put together, and we’ve gone out and recruited people with deep clinical backgrounds in terms of sales capability, and they have a quota that’s 75% Spok Go and about 25% of our legacy software. And then we also have three operating regions, in those regions, essentially international east and west have people that are ESPs, that are enterprise sales directors, that are used to selling our existing software, and their quotas are about 75% of our legacy software and 25% Spok Go. So that’s the current structure in terms of how we go to market with that particular team. We’ve also recently conducted a study, a pricing study with an outside third-party consultant in terms of what the industry is seeing in pricing and where we need to be pricing our solutions on a per-user-per-month basis. That has been completed. We are in the process of rolling that out, and we will start seeing the benefits of that here in the second half of this year. So those are our primary areas in terms of how we’re going to market. We’re also using from our existing innovation partners, and we’re talking about Mayo Clinic here, and we’re talking about TidalHealth, etcetera, feedback from them in terms of our development, in case of the latter, specific case studies in use cases, particularly around the emergency department to help use that as a referenceable account, referenceable studies in terms of how you can improve your communications with our new platform. So that’s the primary area there. Mike, do you want to take the second half?

[Mike Wallace:]

Yes, Ryan. Good question on the Spok Go to existing customers regarding maintenance. In this case, as it relates to the deals that we announced, they did not have a great deal of maintenance. So it was a product that we had sold them from our legacy that went end of life that we were able to transition them to Spok Go, which is the perfect scenario really. But over time, as we transition the entire base, as we make that progress, I’ll actually report out on existing customers and the amount of maintenance that would, in theory, be going away by the replacement of Spok Go. But in this one case, it was very little.

[Ryan Vardeman:]

Okay. So going forward, the maintenance to Spok Go revenue kind of expectation – and we have $40 million on maintenance today. If we were to convert all of our customers to Spok go, what might we think about insofar as subscription revenue is concerned there? And then I’ve got a follow-up question.

[Mike Wallace:]

Yes. I mean that’s a big question to answer. Obviously, we have an expectation over time that the subscription revenue from Spok Go will significantly exceed what we’re getting in maintenance today. But again, I think given where we’re at today, and we don’t have that many of existing customers that have switched, we’re going to need to let that play out.

[Ryan Vardeman:]

Okay. About a year ago, you guys provided a framework by which to think about the sum of the parts, cash plus wireless business, where – stock is currently trading meaningfully below kind of the cash plus wireless business. At what point do you think operational results will give the public the confidence that you say you have that we have not spent a decade developing a software business and waste $270 million? Thanks.

[Vince Kelly:]

Thanks, Ryan. Look, nobody is more frustrated with the stock price than I am. And we look at this business and we see our wireless business exceeding every expectation that we have internally month after month, quarter after quarter doing fantastic. We think it has a very solid value, and we think it has a great future. In fact, we were talking with the hospital CIO yesterday, and he said there is a chance paging might make a comeback because of all the things that are going on in cybersecurity these days, and we have, as you know, encrypted pagers, and we will have some more news on some more products around the paging business in the second half of this year. Then we have our legacy software business. You probably saw the press release this morning. U.S. News and World Report put out its honor rolls of the top adult hospitals in the nation, the top children’s hospitals in the nation. All 30 of them are Spok customers. I mean we have a franchise there that is incredibly valuable. And now we’ve rolled out a new platform. We launched it in the middle of the pandemic. It is the worst selling environment I’ve seen for new projects in my career. We have no problem going to existing customers, selling add-on business to things they already have. They are trying to get a consensus internally right now to take on new projects. And these sales cycles often involve more than one decision-maker. Frankly, it has just been very, very difficult. The pipeline has continued to grow. We think there is great value in that. We’re not excited about what’s going on with the Delta variant right now. That’s the third piece of our business that we think has a good future. But look, we’re not on a crusade here. We’re going to look at this thing very closely as the year goes forward into next year, and we will make the best business decisions we can about what we’re going to do in the future. I think where the stock is trading right now this company is worth a lot more than where it’s trading right now. We have a situation at the end of June, where we came out. I’m sure you’re aware we came out of the Russell indices. They raised their market cap with all the stacks that have gone out there. We were underneath that bar. And with a huge institutional ownership we have, there is a lot of trading, huge spike in our volume, and we traded down on that as we traded out of a lot of those funds. Same thing happened this week with an S&P index. It’s unfortunate that there was no news from the company and then all of a sudden, huge trading and a reduction. I think – I personally think we’re worth more than where we’re trading right now. I think we’ve built a great platform. I think we have great customers with that platform. We planted our flag in Australia. We’ve planted it in Canada. Obviously, we’ve planted it here in the United States. We’ve got real customers using it, implementing it. We are frustrated with the progress there. We need to see an improvement in the environment. We need to see the hospitals opening back up, not shutting back down to get real traction there. But we’re not quitters. We’ve not given up, but we’re also not going to be, like I said, crusade on it. We’re watching this very, very closely, and we will try to make the best business decisions we can. So you’re a shareholder. You’re one of our biggest shareholders. I apologize to you where we are. It’s my responsibility. I’m going to do absolutely the best I possibly can as long as I’m here running this company to improve that situation line. And I can tell you that nobody here is satisfied with where we are.

[Ryan Vardeman:]

Okay. I mean, yes. And again, I’ve been asking it for the last couple of years about quantifiable metrics by which we could judge the company on a go-forward basis, and we still don’t have any sort of framework as it relates to what we’ve been investing in, etcetera. So that continues to be a source of frustration. So, best of luck. Thank you.

[Vince Kelly:]

Thanks, Ryan.

[Operator:]

Thank you. Our next question comes from George Melas with MKH Management. Please go ahead sir.

[George Melas:]

Thank you. Good morning gentlemen. In the last call, you talked about the integration of Spok Go with your three contact center solutions. Can you update us on that and maybe give us a broader sense from a functional from an integration point of view? What would stimulate the adoption of Spok Go? Also, what would remove the barriers to adoption? Thank you.

[Vince Kelly:]

Yes, great. Absolutely. Yes. Well, two things really. If you have to look at our customer base, the existing customers that are using our existing contact center solutions, of which we have three, we have one we developed internally historically and two that we acquired over the years. We have made a ton of progress integrating those contact centers. Some of them have been in place because they are premise-based, server-based in-house solutions. Some of those have been in place over 20 years, and they have been highly customized. So when you talk about contact center integration, it’s the degree of integration that’s important because these workflows in these hospitals are built around those contact centers in the directory. And so we have delivered contact center integration, and we have a target list that is a subset of our total customer base right now, where it’s greenlight to our salespeople to go to those specific customers, pitch them on the platform and go ahead and book sales. There is another subset where we have to deliver enhanced functionality, and we’re looking at this on a road map and on a priority. And you can imagine we’re constantly trying to prioritize because we don’t want to spend a lot of development dollars for just one customer. We’ve got to do our efforts where we think we’re going to get the biggest bang for our buck. So I’d say in terms of console integration, where we want to be, ultimately, we’re probably still 4 or 5 months away from the end game there. By the end of this year, I think we will be where we want to be ultimately. There might be a few tweaks or console integration next year. There is a couple of other integrations that we’ve asked to do that are not our software with other things like some scheduling software, etcetera, that is in progress, and that is going well. I think as those integrations get complete, we will have a lot better success in terms of some of our marketing and selling results. And there is some other areas when we look across the functionality, the hospitals’ need in clinical care and communications, things like patient outreach and other things that we don’t have on the platform yet that are kind of a little bit of a different creature than exactly what we’ve done historically. And we’re looking to partner with some companies with respect to that. And those conversations have been ongoing, and we’re well down the road with them, and we will continue that. So that’s basically the main things that we have to do on our road map with respect to console integration. Mike, is there anything you want to add on that?

[Mike Wallace:]

No, I think that’s perfect.

[George Melas:]

Okay, great. Maybe I’ll sort of ask a follow-up on that. So you have three consoles. Is one of that – and what sort of the share of those three consoles within your customer base? I’m trying to understand, is the integration more complex with what – I’m just trying to get some granularity about because that seems to be important specifically for the adoption of your product.

[Vince Kelly:]

Yes, great question. Here’s the challenge. Our customer base is split about third, third, third between our medical console, our old Amcom console and a console that we call SmartSuite. Now the console that we call SmartSuite is more feature-rich. It’s a lot more complicated of a beast than the other two. So the other two are actually a little bit easier to do integration with, but we’re putting a lot more effort into doing the integration with SmartSuite, which is about third of our customers. Of course, a lot of those customers who use SmartSuite happen to be your larger health care organizations because they wanted that added functionality. So we are having to do all three. And as you can imagine, with the development team, it’s not like, hey, go integrate with a console, it’s integrate with three consoles that are based on disparate architectures, and that’s why it’s been taking us a little bit longer. Now, having said that, we’ve got our hands around it, it’s in process. And as I said, I think as we end this year, we will be in really good shape there. Hope, that’s helpful. Mike, do you want to...

[Mike Wallace:]

No. I think you explained it perfect.

[George Melas:]

Thank you very much. Appreciate it.

[Vince Kelly:]

You are very welcome.

[Operator:]

Thank you. And we have no additional questions at this time. I’ll turn the call back over to Mr. Kelly for any closing remarks.

[Vince Kelly:]

Thanks a lot for joining us this morning. We look forward to speaking with you again after we release our third quarter results in October and everyone have a great day and please stay safe and healthy.

[Operator:]

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