Spok Holdings Inc (SPOK) 2009 Q1 法說會逐字稿

Good morning, and welcome to the USA Mobility's First Quarter Investor Conference Call. Today's call is being recorded. On line today we have Vince Kelly, President and CEO and Tom Schilling, Chief Operating Officer and CFO.

At this time, for opening comments, I will turn the call over to Mr. Kelly. Please go ahead, sir.

Good morning. Thank you for joining us for our first quarter investor update. Before we discuss our operating results, I want to remind everyone that today's conference call may include forward-looking statements that are subject to risks and uncertainties relating to 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 2008 Form 10-K and our first quarter Form 10-Q which we expect to file on or before May 11 and related company documents filed with the Securities and Exchange Commission. Please note that USA Mobility assumes no obligation to update any forward-looking statements from past or present filings and conference calls.

Let me begin by highlighting what we believe was an extraordinarily successful first quarter for USA Mobility. Despite a very challenging economy and continued migration of customers to alternative wireless services, we have continued to operate at a high level of financial performance through a period of declining demand.

Tom will discuss our financial results in more detail in a few minutes, but I want to point out just a few of the key accomplishments we achieved in the first quarter.

Number one. We continued to experience an acceleration of our subscriber erosion in the first quarter. Based on an internal analysis however, we strongly believe the increase in our subscriber cancellations over the past several months is largely the result of the country's rising unemployment rate and weak economy. At the same time, there were several bright spots in our subscriber trends as total gross placements increased slightly from the fourth quarter, particularly in our Healthcare and Large Enterprise market segments. We look to build on those positive trends in coming quarters.

Number two. The annual rate of revenue erosion was 15.9% in the first quarter, consistent with the rate in the fourth quarter and a slight improvement from the 16.2% decline in last year's third quarter. We attribute these results to the success we've had in implementing price adjustments across all segments of our customer base.

Number three. We are very pleased with the progress we made in reducing operating expenses in the first quarter. Our operating expenses excluding depreciation, amortization, accretion and goodwill impairment declined 21.2% compared to the year ago quarter and as a percentage of revenue were at their lowest level in more than four years.

Number four. As a result of the significant reduction in operating expenses or EBITDA (earnings before interest, taxes, depreciation, amortization and accretion) for the first quarter increased to 35.9% of revenue, the highest EBITDA margin in USA Mobility's history.

Number five. One of the keys to our cost reductions in the quarter was a substantial progress made in reducing operating cost of our paging network by continuing our efforts to rationalize redundant network capacity and consolidate subscribers to our much larger go-to networks. Expense reduction included further deconstruction of transmitters and the elimination of related network cost and most notably cost savings that resulted from significantly lower site rents, which decreased 24.1% from the fourth quarter.

Number six. Most importantly for stockholders, we continue to meet our goal of generating sufficient free cash flow during the first quarter to return capital to stockholders in the form of cash distributions and stock repurchases. We produced $27.3 million in cash from operations in the quarter and we paid a regular quarterly cash distribution of $0.25 per share and a special cash distribution of $1 per share on March 31, 2009. Together these distributions represented a return of capital to our stockholders of approximately $28.5 million. Including the first quarter distributions, we have now returned $305.4 million to stockholders over the past four years. In addition, our Board of Directors yesterday declared a regular quarterly cash distribution of $0.25 per share. The distribution will be paid on June 18, 2009 to stockholders of record on May 20, 2009. The distribution will be paid as a return of capital.

Number seven. We also continued to buyback shares of the Company's common sock during the first quarter under the stock repurchase program we commenced last August. As of March 31, the company had purchased a total of approximately 4.6 million shares for $40.8 million at an average price of $8.78 per share, and had approximately $22.3 million available for additional purchases under the currently approved plan which extends to the end of 2009.

Overall, we are very pleased with our results for the first quarter. As we move forward however, we realize we continue to face additional economic uncertainty and industry challenges. In fact, it's unlikely we'll be able to sustain high cash flow margins and expense reduction rates indefinitely as subscriber and revenue trends continue to decline over time. Still I want to assure you that we are continuing to confront these challenges day in and day out and we are consistently acting in the best interest of our stockholders.

At this point, I'll ask Tom Schilling, our COO and CFO to review our first quarter financial results and provide additional comments on our recent operating performance. Tom?

Thanks Vince and good morning everyone. Before I review the operating and financial results I want to let you know that we expect to file our first quarter Form 10-Q on or before May 11. I encourage you to read the 10-Q as it offers more information on our business than we'll be able to cover on this call.

As Vince mentioned, overall we are very pleased with the first quarter results, which were largely in line with our expectations. Our continued reduction in operating expenses combined with an increase in the average revenue per unit contributed to strong cash flows and record high EBITDA margin in the quarter. The one area of disappointment was the accelerating rate of subscriber losses in the quarter. Clearly, subscriber cancellations continue to be impacted by the weak economy and rising unemployment rates nationwide. For the same reason, the pace of quarterly revenue erosion also ticked up during the quarter, although the impact was partially offset by the higher ARPU.

Unfortunately, the consensus among economic forecasts is that unemployment will continue to increase through the end of 2009. Therefore we are brazing for both subscriber and revenue trends to reflect economic trends over the next few quarters. As such we'll continue our vigilance in reducing our cost structure.

With respect to the subscriber base, we ended the quarter with 2,607,000 subscribers, a net decrease of 208,000 units during the quarter compared to a decline of 187,000 units in the fourth quarter of 2008. Our annual rate of net unit loss increased to 21.8% compared to 19.2% in the fourth quarter and 14.8% in the year earlier quarter. Healthcare continues to be our most stable market segment with the highest rate of gross placements at 3.7% and the lowest rate of net unit loss at 3.1%, a slight improvement from the 3.4% in the prior quarter. Overall, Healthcare contributed 61.4% of all gross placements in the direct channel during the quarter.

Government and Large Enterprise market segments continue to experience higher rates of net churn or net unit loss at 8.2% and 10.9% respectively, as public and private sector job losses continue to impact subscriber cancellations during the quarter.

At March 31, Healthcare represented 44.9% of our subscriber base, compared to 38.3% a year ago, while Government ended the quarter at 17.2% of our subscriber base and large enterprise at 12%. Together, the three core market segments comprised 74.1% of our customer base compared to 69.3% a year ago.

Total paging ARPU was $8.86 in the first quarter, compared to $8.71 in the fourth quarter and $8.49 in the first quarter of 2008. Higher paging ARPU in the quarter was largely a result of the price increases that we implemented in the indirect channel. We will continue to look for areas within our customer base where price adjustments can be made to better reflect the value of our products and services. First-quarter paging revenue was $72 million compared to $76 million in the fourth quarter, a 5.2% decline. The annual rate of decline was 17% in the quarter compared to 16.6% in the first quarter of 2008.

Product sales declined 10.1% to $5.3 million in the first quarter, due mostly to lower lost pager revenue. However, cellular phone sales and other revenue were essentially flat versus the prior quarter and cellular activations increased slightly from the fourth quarter.

Total revenue for the first quarter was $79.7 million compared to $84.3 million in the fourth quarter and $94.8 million in the first quarter of 2008. Revenue declined 15.9% on an annual basis in the first quarter compared to the same rate in the fourth quarter and 15% in the year ago quarter.

Turning to operating expenses, we again made excellent progress in the first quarter continuing to cut expenses faster than the rate of revenue erosion. Total operating expenses excluding depreciation, amortization, accretion, and goodwill impairment were $51.1 million, a reduction of $13.8 million or 21.2% from the first quarter of 2008.

Payroll expense, which is the Company's largest expense item, decreased 9.8% in the first quarter to $20.1 million from $22.3 million in the first quarter of 2008, although payroll expense rose slightly from the fourth quarter due to the one-time payment of the 2006 long-term incentive plan discretionary award.

Headcount at March 31 was 786, a reduction of 3.1% from the beginning of the year and down 18.8% from the 968 a year earlier. We have in the past and will continue in the future to adjust staffing levels to best meet current and anticipated business needs and customer requirements.

We made significant progress in reducing our site rent expense in the first quarter. For the quarter, site rent declined to $11.2 million, a 24.1% reduction from the $14.8 million in the fourth quarter and a 36.9% reduction from the $17.8 million in the year ago quarter. We made excellent progress over the past several months in deconstructing sites, renegotiating site leases and moving to less expensive sites. While there is still much work ahead in rationalizing our networks, we are very pleased with the progress we've made so for and expect to see further reductions in site rent throughout 2009.

EBITDA for the first quarter was $28.6 million compared to $29.8 million in the fourth quarter and $29.9 million in the first quarter of 2008. EBITDA margin increased to 35.9% in the first quarter, the highest level in our nearly five-year history and compares 35.4% in the fourth quarter and 31.6% in the year ago quarter. A schedule reconciling operating income to EBITDA has been included in our earnings release.

Capital expenses were $6.1 million in the quarter compared to $4.2 million in the fourth quarter and $4 million in the first quarter of 2008. The increase is due principally to the timing of pager device purchases.

Net income for the first quarter was $10 million or $0.43 per fully diluted share compared to a net loss of $177.8 million or $6.48 per fully diluted share for the first quarter of 2008. As many of you know, the net loss a year ago was the result of $188.2 million non-cash expense for goodwill impairment. Absent the goodwill write-down, net income in the first quarter of 2008 would have been $10.4 million or $0.38 per fully diluted share.

On April 15, the Internal Revenue Service notified us that our 2005 and 2006 Federal income tax return had been accepted as filed. All of the previously disclosed IRS audits are now closed. As a result of these closed audits, we anticipate adjusting our long-term liability for uncertain tax decisions in the second quarter of 2009. We expect that the adjustment will result in a material reduction of the liability and income tax expense of approximately $37 million.

With respect to our financial expectations for the full year 2009, we are maintaining the financial guidance we provided on March 3. To repeat that earlier guidance, we expect revenues for 2009 to range between $285 million and $295 million. Operating expenses excluding depreciation, amortization and accretion to be between $198 million and $203 million and capital expenses to range between $19 million and $21 million. I would remind you that our projections are based on current trends and that those trends are always subject to change.

With that I'll turn it back over to Vince.

Before we take your questions, I wanted to briefly address a few other items that may be of interest to investors. First, I would like to discuss some important progress we've made in our sales and marketing area during the first quarter, especially in our Healthcare market segment as well as comment on our exclusive, recently launched two-way pager, the ST902. Second, I'll update you on where we stand with the Federal Communications Commission backup power order and finally I'll comment on our upcoming annual meeting of stockholders.

Looking at our sales and marketing activities during the first quarter, we began the year with a renewed focus on our core market segments of Healthcare, Government, and Large Enterprises. These core segments represented approximately 82% of our direct subscriber base at the end of the first quarter, up slightly from the prior quarter and accounted for 75.7% of our direct paging revenue compared to 71.1% in the first quarter of 2008.

Last quarter I updated you on our plan to reorganize the company's sales and marketing operations. Our goal was to make adjustments in the phase of continued subscriber erosion, while improving sales efficiency and maintaining our base of larger accounts. Although any reorganization carries the risk of disruptions, both internally and externally, I'm pleased to report that this effort went smoothly and has already produced positive results.

Having put new field sales leadership in place in the form of two Sales Directors for our Direct business and reduce the number of District Sales Managers, we achieved our sales target progress additions in each month of the first quarter. This was a major accomplishment considering the fact that we ramped up our new organizational structure during one of the weakest economic periods in recent memory. Credit for this successful reorganization goes to our entire sales and marketing staff under the leadership of our Executive Vice President of Sales and Marketing, Jim Boso. [Due to] their combined efforts, we not only improved our selling performance, but we saved approximately $2 million in quarterly operating expenses.

Beyond new leadership, another important part of the reorganization was the creation of Key Account Management groups or KAMs. Their role is to maintain our largest and most important customers by providing daily support in a more personalized way than a traditional call center. Let me explain. Unlike a call center, each KAM is assigned a number of customer accounts. So rather than customer calls being routed to the next available agent, these customers can call the same person for all their needs. Much like a local sales representative, the KAM is an expert on the needs of his or her account and KAM customers can benefit from dealing routinely with one person they know and trust.

Centrally located at our Plano, Texas facility, the KAM group increased to 18 Managers in the first quarter and we expect it to expand further during 2009. As a group, they are now responsible for the ongoing support of nearly 500 of our most important accounts. In addition, they also carry specific sales responsibilities by handling inbound sales calls and conducting outbound prospecting calls. We're pleased with the performance of this group during its first full quarter and expect they will continue to expand their account list. In doing so, they will move more support activities away from our field sales representatives and allow them to focus more time on generating new revenue.

As we have pointed out for some time, we have seen a steady increase in the importance of the healthcare industry, and hospitals in particular, to our overall operating performance. Healthcare not only has the lowest churn of all customer segments, it also offers the most potential for generating new unit additions and future growth. In fact, just as hospitals are important to us, we believe our services are equally important to the hospital sector. Indeed hospitals continue to benefit from the reliability of paging for their most critical messaging needs. Today, USA Mobility's networks carry the lion's share of that messaging, providing paging service to 40% of all U.S. hospitals and 63% of major hospitals, those with 200 beds or more.

Looking ahead, we believe we are well positioned to increase our share of the Healthcare market segment. Unlike some of our competitors, we are a financially sound company with knowledgeable and experienced employees. As such healthcare decision makers can be confident that we will consistently provide them with high quality service and network support, plus we have the capacity to sustain that high level of service well into the future.

In addition, during the first quarter we initiated a program to increase our share of the overall hospital paging business by focusing on our highest rated opportunities. I can't share specific details for competitive purposes, but suffice it to say, we are pulling out all the stops in this effort. In fact, I am pleased to say we are already showing results from this new initiative. In the first quarter alone, we closed 18 new hospital accounts. I would like to briefly describe our experience in winning one of these new accounts.

In March, we were delighted to add a major Chicago-area medical center to our list of large hospital customers. The medical center is part of the largest healthcare network in Greater Chicago with over 11 hospitals and numerous clinics. As with most large hospitals, whether a customer or not, we try to maintain contact with decision makers. In this instance, it was our suite of sophisticated ancillary services for paging that formed the foundation for in-depth discussions. We also learned the hospital was not satisfied with its existing provider.

Over the next several months, our sales team in the Chicago area worked extremely hard to demonstrate our capabilities and superiority in the areas of network support, inventory management and quality control as well as our commitment to this account at an executive level. This high level of effort, combined with our organizational skills and resources, eventually allowed us to win their business including the addition of more than 3,000 new units and service. We believe this kind of concentrated and sustained sales effort along with an in depth knowledge of the industry's communications needs will lead to additional Healthcare accounts in coming quarters.

Needless to say, we expect the weak economy will continue to be a substantial hurdle for our sales team over the near-term as perspective customers, both inside and outside of Healthcare pursue their own expense control program.

Clearly, economic conditions and growing unemployment levels have forced many of our customers to reduce the number of paging units they maintain on a monthly basis. Accordingly, we make every effort to work with customers to help manage their costs. However, as other paging carriers struggle to maintain their customer bases during these difficult economic times, we have found that they are only too willing to use price reductions as their primary defense of weapon. We don't believe this is a workable short-term solution for either party, rather we see it as a sign of weakness that only makes us more confident in our ability to attract new hospitals and other business accounts over the long-term.

We also attended the healthcare industry's major annual trade show earlier this month known as HIMSS or the Healthcare Information and Management Systems Society. This again was a great opportunity for our sales and marketing team to connect with numerous healthcare IT decision makers under one roof. While overall attendance was down from last year due to economic conditions, this was still a very productive event for us. We were able to meet with a significant number of hospitals to advance the status of our relationships. We have taken a very innovative approach with our presence at this large show over the past two years, and that has been time very well spent.

Additionally, we launched a new two-way paging unit to the market at the end of the first quarter, called the ST902; the new device uses a disposable battery. It is the first of its kind in the paging industry and was the culmination of more than two years of dedicated effort and a sizeable investment in resources.

In our industry, paging units can be refurbished and redeployed to customers for many years. As a result, there has been little need for newly engineered devices. However, in working with our customers we saw the need for a new two-way pager that was powered by a common disposable AA battery. This is actually a very important requirement for many of our core customers who cannot depend on rechargeable battery power. For example, hospitals often use their pagers around the clock passing them from one shift to the next and don't want to take a pager out of service to be plugged in and recharged. In addition, many first responders require a wireless communications device for emergency situation that they can pick up and take into the field where working plug-in electrical outlets may not be available. We saw evidence of this during Hurricane Katrina in 2005 and more recently with Hurricane Ike last year.

I am pleased to note that USA Mobility worked with our vendor and funded the development of this exciting new two-way device. As such, we have a permanent exclusivity from our vendor on this new two-way pager. To our knowledge, this is the first time in many years that our industry has invested in product development and brought a new device to market. We plan to aggressively sell and market the device to our core markets this year as well as reemphasize the many benefits of two-way messaging. I believe this new offering also sends a powerful message to organizations that today rely on paging networks to carry their critical messages. It demonstrates our commitment to serve the needs of our customers as well as our willingness and capability to invest in long-term delivery of paging services.

With respect to the final court action, the FCC's backup power order, there still has been no formal action taken to vacate the order by the U.S. Court of Appeals for the DC Circuit. However, we believe the court's dismissal of the case remains a formality and while we would have expected the court to have acted by now, the delay most likely reflects the court's crowded docket and the lack of urgency surrounding the matter since it has become [new]. In short, we still expect the court to dismiss the case in due course and for the FCC under its new Chairman, once that individual has been appointed and confirmed, to possibly consider a renewed enquiry regarding backup power for certain wireless carriers. If such a proceeding were initiated, it most likely would not occur until later this year or next year at the earliest as we've noted previously.

Moreover, we hope that any new proposals involving backup power requirements would exclude paging carriers given the singular strength of our networks, which we spelled out in great detail in last year's court appeal.

Finally, with regard to our annual meeting of stockholders, the meeting will be held on May 20, 2009 at 9 A.M. Eastern Time here in Alexandria, Virginia. Given the limited number of items on the agenda however, I expect the meeting including management's remarks would be fairly brief. Nonetheless, all stockholders are welcome to attend, of course, and we will be happy to respond to any questions you might have for us at that time.

At this point, I will ask the operator to open the line up for your questions. We would ask that you limit your initial questions to one and a follow-up. After that, we'll take additional questions as time allows. Operator?

Thank you. (Operator Instructions) We'll now take our first question from Gregory Lundberg with Commresearch.

Good morning. I was wondering if you could give the ending transmitter counts and how many of those are on [customer-end sites]? Thanks.

Yes Greg, the total number of transmitters is 8,476 at the end of the quarter and of that 2,257 are on PUAs.

Perfect, thanks.

PUA stands for Private Use Agreements. Folks, in general that means we don't pay rent on a site that's on a Private Use Agreement. It's typically a hospital or a large account, that for matters of convenience for signal strength into their facility they've allowed us to place a transmitter. Since most of our transmitters are on our go-to networks that allows us to also use that transmitter to service other customers. So it's a good way to lower our overall cost of our network. Next question please.

We'll now move on to [John Noel] with Barrington.

Yes. Hi, guys.

Hi, John.

Just curious on the site rent, it had a pretty nice drop off in this quarter. Was that largely, I was wondering if you could give us some color on that, was that because a lot of the leases expired at the end of the calendar year?

One of the major reasons, and I don't have the quantification right here, but one of the major reasons is that we had a large master lease agreement with one of our tower companies that expired and went into the hold over period and that had been an [all you can need] agreement that wasn't being utilized as much as we would have initially envisioned. So when it went into the hold over period, instead of paying a flat rate in terms of the take-or-pay rate, it dropped to a per site rate. And so that was a significant reduction beginning January 1. But also in addition to that, we've been very aggressive at not just pursuing the Private Use Agreement but also in mitigating our overall cost by continuing to select lower cost sites out there that are not on our master lease agreement. So it's a combination of things, but it obviously bodes very well for the future and for the balance of this year.

Okay great. Thanks a lot.

(Operator Instructions). We will now move on to [Nick DeLeonardis] with Bond Street Capital.

Yes. Just a quick follow up to that question. Given the decrease in the expenses, it would seem like you are running well below the guidance that you gave for the year, is there -- I guess a easier way to ask is, is there any uptick in expenses that you would expect for the reminder of the year, that we didn't see in the first quarter?

We'll let our very conservative Chief Financial officer Mr. Schilling answer that question.

Yes Nick, I mean it's a good question. Obviously, we still have to -- if you take our run rate, we did have a couple of things that actually inflated. As I mentioned, we had a couple of things in the first quarter, the 2006 LTIP, which was a one-time pay out, but we also had some one-time benefits. When you adjust the quarter to a run rate perspective, if you just take the run rate expenses for the remainder of the year and extend them out, we would be at about $201 million, which would be close to the high-end of our range. We do expect to continue to take cost out, although I will caution based on what Vince just mentioned, with site rents, we had a contract event that gave us a very substantial savings in the first quarter, which will not be repeating. So we would expect the expenses to be coming down, but at a more level pace through the end of the year. With all that being said, as we indicated in my notes and in my earlier comments, you know, as we have seen the subscriber churn increase, we have taken steps to make sure that we can find ways to reduce costs throughout the year and may end up that we do come in under our guidance on expenses or below the range of guidance on expenses and that would be what we are pursuing right now. But at this point in time, we are not prepared to provide any additional guidance, but in the second quarter if we have an update, we'll certainly communicate that with everyone.

Fair enough. And just quick, one other question. The cash number, it's still hovering at a pretty good size. I understand that you made the special distribution in the first quarter. I think in the last call, if I recall correctly, you said there we shouldn't expect anything for the remainder of this year. Is there a kind of a comfort level that you guys would be willing to kind of bracket for what cash you would like to have on balance sheet, just for kind of operational purposes?

That comfort level would be in the $20 million or so range. And I think we said at the end of the first quarter, we ended with 65 million and it continues to grow obviously. Last quarter when we spoke to you guys, what we basically said our plan was going forward was that each year, at the beginning of the year and the first quarter of that year, we would look at special dividends, stock repurchase plans et cetera, and talk about that. And then in the other three quarters of the year we just continue to pay our recurring dividend, which technically the Board has to approve every quarter, but so far they have. We haven't changed that yet Nick, that's still the game plan right now.

Thanks.

(Operator Instructions). We'll now move on to Jim Altschul with Aviation Advisory Service.

Good morning gentlemen. I noticed in the ARPU chart that you had a significant increase in ARPU from the indirect channel, if I'm remembering -- reading it correctly, why was that?

Some rate increases that we rolled out at the beginning of 2009, which brought more uniformity to our pricing throughout our wholesale markets.

Do you see further increases in that category?

We'll -- as we said earlier in the notes or in our prepared remarks, we continue to pursue opportunities for price increases, but this was to bring a lot of smaller resellers in line with our standard wholesale rates. So, this was one of a, more a one-time kind of adjustment to a class of customers and I would not expect that type of magnitude to repeat. But we will continue to pursue rate adjustments where they are appropriate.

Thank you very much.

(Operator Instructions)

Operator, we can go ahead and cut it off. So I want to thank everybody for joining us today. We look forward to speaking with you after we release our second quarter results. Thanks again and have a great day.

Once again that does conclude today's conference. We thank you for your participation.