Spok Holdings, Inc.
Q2 2022 Earnings Call Transcript

Published: 30 Jul 2022

[Operator:]

Greetings, and welcome to Spok Holdings Second Quarter 2022 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Lisa Fortuna. Thank you. You may begin.

[Lisa Fortuna:]

Hello, everyone, and welcome to Spok Holdings' second quarter 2022 earnings call. I am joined by Vince Kelly, President and Chief Executive Officer; as well as Mike Wallace, Chief Financial Officer and Chief Operating Officer. 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 on 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, which are contained in our second quarter 2022 Form 10-Q and related documents 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:]

Thank you, and good morning, everyone, and thank you for joining us this morning for our second quarter 2022 earnings call. Today, we will share with you an update on how our strategic business plan is progressing as well as our financial results for the quarter. I will start by reviewing the agenda for today's call. The order will be as follows

[Mike Wallace:]

Thanks, Vince, and good morning, everyone. I would now like to take a few minutes and provide a recap of our second quarter and year-to-date 2022 financial performance, which we reported yesterday. I encourage you to review our 10-Q when filed as it includes significantly more information about our business operations and financial performance than we will cover on this call. For the second quarter of 2022, total GAAP revenue was $33.7 million, compared to revenue of $35.7 million in 2021. Revenue for the quarter consisted of wireless revenue of $18.7 million, which was down $5.8 million -- 5.8% from $19.9 million and software revenue of $15 million, down 5.4% from $15.9 million, largely in line with our expectations. With respect to wireless revenue, second quarter 2022 performance was driven by continued -- a continued decline in pager unit churn on a year-over-year basis. In fact, the net pager decline during the trailing 12 months was 3.9%, another record low. And on a sequential basis, units and service declined by only 3,000 units or 0.4%. As a result, wireless revenue for the second quarter remains solid, declining 5.8% compared to the prior year and in the range of our expectations. With the monthly paging revenue component of wireless, which represents 97% of overall wireless revenue, declining by only 5.2% on a year-over-year basis. The remainder of wireless revenue relates to product sales, primarily through lost pager fees, which are one-time in nature and are far less impactful to the ongoing value of this business. These continued strong trends in our wireless business are being driven by the combination of solid gross additions from our sales organization, continued minimization of churn with existing customers as well as stable unit pricing or average revenue per unit, or ARPU, was $7.23 for the quarter versus $7.25 in the year ago period when adjusted for approximately $0.07 on of decline attributable to decreases in universal service fund revenue. These fees are charged to customers based on quarterly rates set by the FCC and can fluctuate from one quarter to the next. These fees do not materially impact the bottom line as they are collected from customers to offset costs owed to the FCC. Additionally, ARPU was favorably impacted by our previously announced GenA pager, which is now in the early stages of being sold to customers. We expect that the GenA pager will be an important factor in our ability to minimize future unit churn and ARPU degradation. On a year-to-date basis, wireless revenue saw similar dynamics to the second quarter as just discussed, declining 6.1% compared to the prior year and again in the range of our expectations. With the monthly paging revenue component of wireless declining only 5.3% on a year-over-year basis. Turning to the second quarter software revenue. Specifically, maintenance revenue, which is the largest component of the software revenue, was $9.2 million versus $9.6 million in the same period of the prior year or 4.2% lower. As we’ve discussed in previous quarterly calls and as we continue through this pivot, with the focus being brought back to our Care Connect suite software products. Our expectation is for maintenance revenue to be down slightly year-over-year, given gross churn and uplift levels remain consistent with prior quarters. However, with higher expected license bookings as we move through this pivot, licensing will serve to drive inflows to maintenance revenue as license bookings provide the basis for new maintenance. Professional services revenue was $3.3 million versus $4.9 million in the second quarter of 2021. As we stated in our earnings call in February related to our 2022 financial guidance, we assumed an intentional reduction in services revenue, the way planned reduction in personnel to better align with our current backlog and to drive a higher rate of net cash flow in alignment with the strategic shift in our business plan. And again, it's important to remember that services has not historically driven meaningful cash flow on a standalone basis, but has been viewed as an opportunity to expand our licensed footprint through customer engagement as well as to fulfill upgrade obligations under our maintenance contracts, which is critical in maintaining our existing customers. Lastly, license and hardware revenue was $2.5 million compared with $1.4 million in the same period of the prior year or 79% higher, as we saw higher bookings in the second quarter and a solid mix of license and hardware in those bookings. On a year-to-date basis, total GAAP revenue was $67.5 million, compared to revenue of $71.8 million in 2021. Wireless revenue was $37.5 million compared to $40 million, reflecting net paging revenue churn in line with the trends seen in the second quarter, and year-to-date software revenue of $30 million compared to $31.8 million in the prior period. This was driven by maintenance revenue being down 3% on a year-over-year basis, professional services down 27.7% due to the intentional reduction in professional services resources to better align with backlog and which was offset by higher license revenue of 53.3%, driven by the strong bookings during the first half of the year. Second quarter adjusted operating expenses, which excludes depreciation, amortization and accretion of $0.9 million, and severance and restructuring costs of $0.5 million, totaled $30 million in the second quarter compared to $37.4 million in 2021. And on a year-to-date basis, adjusted operating expenses were $67 million compared to $75.4 million. As Vince mentioned earlier, the streamlining of employee and management headcount reduction is now substantially complete, and we are now in the final stages of paying the severance costs associated with our strategic business plan. Adjusted EBITDA, which is defined in our earnings release tables and represents EBITDA before stock-based compensation expense, impairment of intangible assets, effects of capitalized software development costs and including capital expenditures is our non-GAAP calculation of cash flow generated by the company before net working capital items. In the second quarter, adjusted EBITDA was a positive $3.7 million compared with a negative $1.5 million in the same quarter of 2021 and reflects the progress made to date with our strategic pivot. On a year-to-date basis, our adjusted EBITDA was negative $3.6 million compared to a negative $2 million in 2021. And in a few minutes, I will walk you through our pro forma year-to-date adjusted EBITDA results which will exclude the onetime costs related to the strategic pivot. But with our strategic pivot progressing as expected, our adjusted EBITDA that we have seen over the past several quarters has begun to reverse and improve. We expect this more normalized trend to continue going forward. Next, I would like to discuss our year-to-date pro forma impact with a negative $3.6 million in adjusted EBITDA previously mentioned. Had the strategic changes that we made and in effect as of January 1, 2022, our adjusted EBITDA would have been $14.4 million higher for the first 6 months of 2022. This $14.4 million includes severance and restructuring costs of approximately $4.9 million, costs related to personnel reductions of $6.8 million, non-payroll Spok Go costs of approximately $1.3 million, and approximately $1.4 million in other costs. Inclusive of these adjustments, our year-to-date adjusted EBITDA for the 6 months ended June 30, 2022, would have been $10.8 million. Now turning to our guidance for full fiscal year 2022. As a reminder, the figures I’m going to discuss today are included in our guidance table in the earnings release and have been updated from the previously provided 2022 financial guidance in our February and April earnings calls. We now expect total revenue to be in the range of $130 million to $136 million, of which we expect wireless revenue to range between $73.5 million to $75.5 million. Software revenue is expected to range from $56.5 million to $60.5 million. We expect adjusted operating expenses for the full year of 2022 to be in the range of $123.3 million to $126.1 million, and CapEx will be in the range of $3.2 million to $3.9 million, with the majority of CapEx related to our wireless business. These changes to our 2022 guidance serve to significantly narrow the ranges previously provided and largely indicate midpoints consistent with our original guidance. Now turning to our forecast for restructuring costs for 2022. As you can see from the slide, we’ve further lowered our range for total restructuring costs from $6.2 million to $7.5 million in the first quarter to our updated range of $6 million to $6.5 million. Breaking this down, we now expect severance and restructuring costs to be in the range of $5.5 million to $5.8 million, and contractual terminations to be in the range of $0.5 million to $0.7 million. This narrowing of the range reflects our comfort that these costs are largely behind us at this point. With that, I will turn the call back over to Vince before Q&A. Vince?

[Vince Kelly:]

Thanks, Mike. I'd like to end by reminding everyone that we continue to remain committed to our mission of being a strategic partner of choice for enterprise grade, clinical communications and patient care coordination. This commitment has allowed Spok to create a significant market position with longstanding relationships with the nation's leading health care providers. Spok has a best-in-class paging network, currently the largest in the United States, which continues to generate strong results. Additionally, Spok continues to provide a valuable and critical service to our customers, delivering information to care teams when and where it matters most to improve patient outcomes. As previously discussed, our Spok Care Connect solutions provide a suite of products with potential for new license sales and a valuable maintenance stream. Maintenance continues to provide a foundation under our legacy software business, and it's important to maintain as we quickly transition to focus on cash flow generation. As reflected in our guidance, we are continuing to invest more in our legacy products as we progress through our strategic pivot. We believe this will drive future sales and upgrade opportunities and improve our results going forward in this important business line, while generating cash flow on a go-forward basis. We have a world-class customer base and a large market share in health care contact center solutions, and we believe this represents a significant opportunity for the future. Spok continues to demonstrate a very predictable revenue base with over 80% of our revenue being recurring in nature coming from either our legacy wireless offerings or software maintenance contracts. This gives us confidence that we are not only on the right path forward for executing our strategic pivot, but also to maximize value for all shareholders. we believe that going forward, we will return significant cash flow to our shareholders and that our current stock valuation represents an attractive opportunity for share appreciation as well. Now with that, I will turn the call over to the operator for Q&A. Operator?

[Operator:]

Q - A -

[Vince Kelly:]

Yes, I don't see any questions in the queue. So I just -- I want to wrap up by just thanking everybody for joining us today. We appreciate your support and your interest in Spok. As you can see by our results for the second quarter, we've gotten off to a fantastic start. We're bullish on the second half of the year. We think our stock represents a compelling value and you're going to get paid a very nice yield, while you wait for appreciation, and we think appreciation will be coming. So thanks all. Have a great day, and we look forward to speaking to you again next quarter.

[Operator:]

Thank you. This does conclude today's teleconference. You may disconnect your lines at this time, and have a wonderful day.