Spok Holdings Inc (SPOK) 2010 Q2 法說會逐字稿

Thank you for standing by everyone and welcome to USA Mobility's second quarter Investor Conference Call. Today's conference is being recorded.

Online today we have Vince Kelly, President and CEO and Tom Schilling, Chief Operating Officer and CFO.

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

Good morning. Thank you for joining us for our second quarter investor update. Before we discuss our operating results I'd like to remind everyone that today's conference call may include forward-looking statements that are subject to risks and uncertainties pertaining 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 represents 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 factor section relating to our operations in the business environment in which we compete contained in our 2009 Form 10-K, our second quarter Form 10-Q 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.

I want to start this morning by highlighting what we believe was an excellent second quarter and first half operating performance for USA Mobility.

We ended the quarter ahead of our goal for subscribers, total revenue, cash flow, and operating expenses while ARPU and recurring operating margins remained strong. Despite a very challenging economy, our sales force continued to meet the Company's plan for gross additions. We continued to provide cost effective, reliable wireless communication services to our nationwide customer base. In addition, we generated sufficient cash flow to operate profitably while returning capital to our stockholders.

Tom will discuss our financial results in more detail in a few minutes but first I want to review a few highlights of the quarter.

Number one, subscriber trends again showed improvement in the second quarter, maintaining the positive momentum from the previous two quarters. Our annual rate of subscriber erosion for the second quarter was the lowest since the third quarter of 2008 while our quarterly loss rate was the best in more than five years.

Number two, total revenues met our performance target for the quarter although the rate of revenue erosion increased slightly as paging ARPUs declined from prior periods.

Number three, we again made substantial progress in reducing operating expenses during the second quarter, consistent with our goal to manage a low cost operating structure. Operating expenses excluding depreciation and amortization and accretion were nearly 25% lower at June 30th than they were a year earlier. This accomplishment is a credit to the commitment and hard work of employees throughout the organization.

Number four, the success of our cost management efforts combined with solid revenue performance resulted in second quarter earnings before interest, taxes, depreciation, and amortization, or EBITDA, of $20.4 million. We also reported a very strong EBITDA margin of 34.6% for the quarter.

Number five, we again met our goal of generating sufficient free cash flow during the quarter to return capital to stockholders consistent with our capital allocation strategy. We produced $21.9 million in cash from operations in the second quarter, allowing us to pay a regular quarterly cash distribution of $0.25 per share on June 25, 2010. In addition, our Board of Directors yesterday declared a regular quarterly cash distribution of $0.25 per share to be paid on September 10, 2010.

Number six, we continued to repurchase the Company's common stock during the second quarter under our stock repurchase program, buying back 176,839 shares in the quarter. Since the program began in August 2008 we have repurchased a total of 5,399,809 shares of our common stock. As of June 30th, approximately 18.1 remains available for purchases under the currently approved plan which extends through the end of this year.

Overall we are very pleased with our results for the second quarter and believe we're well positioned for a solid year in 2010. At this point I'll ask Tom Schilling, COO and CFO, to review our quarterly financial results and provide additional comments on our recent operating performance. Tom?

Thanks Vince and good morning. As Vince noted we're pleased with the Company's second quarter operating performance. Improvement in subscriber churn combined with strong ARPU and lower operating and capital expenses contributed to high EBITDA margins and strong cash flow for the quarter.

We're particularly pleased with the improvement in the subscriber trends as the pace of unit erosion improved for the third straight quarter. While unit losses are still high, the positive trends in recent months have reversed the accelerating churn rate we experienced during late 2008 and throughout most of 2009.

We ended the quarter with 2,000,027 units in service, a net decrease of 72,000 units during the quarter, compared to decline of 83,000 units in the first quarter and 158,000 in the year earlier quarter.

The quarterly rate of subscriber loss improved to 3.5% from 3.8% in the prior quarter and 6% in the year earlier quarter. Our annual rate of net unit loss improved to 17.2% compared to 19.5% in the first quarter and 22.9% in the year earlier quarter.

Gross placements decreased slightly to 72,000 in the quarter from 76,000 in the prior quarter. However, disconnects declined to 144,000 from 159,000 in the prior quarter.

Healthcare continues to be our most stable market segment with the highest rate of gross placements and the lowest rate of net unit losses. At the quarter the gross placement rate for healthcare improved to 4% compared to 3.5% in the prior quarter while the net unit loss rate was 0.8% versus 1.4% in the previous quarter, reaching the lowest level since the second quarter of 2007.

Healthcare accounted for over 70% of all gross additions during the quarter ended June 30th and accounts for 56.1% of our total subscriber base compared to 49.8% a year earlier.

Total paging ARPU was $8.87 for the second quarter compared to $9.00 for the first quarter and $8.96 in the second quarter of 2009. Despite the modest decline in ARPU we're pleased that the overall pricing levels remained relatively steady given the challenging economy over the past year and our continued customer base migration towards larger customers with lower ARPU.

Paging revenue for the second quarter was $54.9 million, a decrease of 5.1% from $57.8 million in the first quarter. The annual rate of decline was 19.3% in the second quarter compared to 19.7% in the prior quarter.

Product sales declined 18.6% to $2.7 million in the second quarter from the prior quarter due mostly to lower lost pager revenue resulting from the improvement in disconnect rates.

Cellular phone sales declined 11.9% from the prior quarter. Other revenue was essentially flat with the first quarter.

Total revenue for the second quarter was $59.1 million compared to $62.8 million in the first quarter and $75.1 million in the second quarter of 2009. The quarterly rate of revenue erosion declined to 5.8% compared to 4% in the prior quarter and 5.7% in the year earlier quarter. Revenue declined 21.3% on an annual basis in the second quarter compared to 21.2% in the first quarter and 18.4% in the second quarter of 2009.

We continued to reduce operating expenses in the second quarter at a faster pace than the rate of revenue decline on both a quarterly and annual basis. Total operating expenses excluding depreciation, amortization, and accretion were $38.7 million, a reduction of $12.5 million or 24.4% from the year earlier quarter.

Second quarter operating expenses declined 5.3% from the first quarter and represented 65.4% of revenue compared to 68.1% for the second quarter of 2009.

Payroll expense, the Company's largest expense item, decreased 16.1% in the second quarter to $15.2 million from $18.2 million in the same quarter a year ago. Headcount at June 30th was 599 full time equivalent employees, a reduction of 15.8% from 711 a year earlier. Going forward, we will continue to adjust our staffing levels as necessary to meet, to best meet our current and anticipated business needs and customer requirements.

Site rent expenses, our second largest operating expense, declined 8.8% to $8.3 million in the second quarter versus the prior quarter and 19% from the year earlier quarter. Site rent reduction reflects continued progress on our network rationalization program including deconstructing sites, renegotiating site leases, and moving to less costly sites.

At June 30th we operated 6,319 active transmitters compared to 7,123 at yearend 2009. We have reduced the number of paid active transmitters to 3,892 at June 30th from 4,601 at December 31, 2009, a 15.4% reduction. Customer provided sites which have no associated rent cost now represent over 38% of our active transmitters.

Beyond payroll and site rent, all other expenses totaled $15.1 million in the second quarter compared to $16.1 million in the first quarter and $22.8 million in the year earlier quarter, a year over year reduction of 33.5%. Please note that the second quarter of 2009 expenses included a $4 million litigation settlement charge. Adjusting for that non-recurring cost, all other expenses declined 19.7% from the year earlier quarter.

EBITDA for the quarter was $20.4 million compared to $22 million in the first quarter and $24 million in the second quarter of 2009. EBITDA margin was 34.6% compared to 35% in the prior quarter and 31.9% in the year earlier quarter. A schedule reconciling operating income to EBITDA has been included with our earnings release.

Capital expenses were $563,000.00 compared to $1.7 million for the first quarter and $4.4 million in the second quarter of 2009. The unusually low capital expense in the quarter and year to date is a result of fewer pager device purchases. We refurbish and reuse pager devices returned to us by canceling customers. Given the large subscriber churn experienced during late 2008 and throughout 2009, our inventory of used equipment has increased and reduced our need for additional purchases. We do expect new pager device purchases to return to more normal levels in the third and fourth quarters and that is reflected in our revised guidance.

Net income for the second quarter was $13.1 million or $0.58 per fully diluted share compared to $44.7 million or $1.93 for fully diluted share for the year earlier quarter. Net income for the second quarter of 2009 included a one time income tax benefit of $37 million due to the settlement of uncertain tax positions and tax refund claims and a litigation settlement expense of $4 million. Absent those non-recurring items, net income would have been $10.1 million or $0.43 per fully diluted share.

The significant change in our second quarter income tax expense resulted from a $4.7 million decrease to our deferred tax asset valuation allowance that also reduced income tax expense. In the second quarter we reassessed the expected level of our 2010 taxable income which resulted in a reduction of the deferred tax asset valuation allowance. The corresponding reduction in income tax expense resulted in a quarterly effective income tax rate of 6% and a year to date effective income tax rate of 23.3%. Absent the reduction in income tax expense, net income would have been $8.4 million or $0.37 per fully diluted share.

As noted in our press release we expect $0.02 of our September cash distribution of $0.25 per share will be treated as a dividend distribution and the remaining $0.23 as a return of capital. I would also point out that any taxable income we generate in 2010 will be substantially offset by our tax net operation losses so we do not expect any significant cash liability for federal or state income taxes.

With respect to financial expectations for the full year 2010, we are revising the guidance provided earlier this year to tighten the revenue range and lower the expected operating and capital expenses. We now expect revenue for the full year 2010 to be between $230 million and $235 million, operating expenses excluding depreciation, amortization, and accretion to be between $156 million and $159 million, and capital expenses to be between $7 million and $9 million. I would again remind you that our projections are based on current trends and that those trends are subject to change.

With that, I'll turn the call back over to Vince.

Thanks Tom. Before we take your questions I wanted to briefly address a few other items that may be of interest.

First I'll provide a brief update on our sales and marketing activities during the second quarter. Second, I'll briefly review our current capital allocation strategy and finally, I'll comment on our long term business options as we look out over the next several years.

With respect to our selling and marketing activities in the quarter we continued to focus on providing wireless messaging solutions to our target market segments of healthcare, government, and large enterprise. These core segments represented approximately 88% of our direct subscriber base at June 30th, up from 87% at the end of 2009 and 85% in the same quarter a year ago. They also accounted for approximately 82% of our direct paging revenue in the second quarter compared to 79% in the year earlier quarter. In particular, our healthcare segment continued to be the major contributor during the quarter, generating approximately 54% of total direct paging revenue.

Again, this quarter our sales and marketing teams remained focused on the acquisition of new paging accounts. This process requires a continual effort to identify new opportunities and demonstrate the Company's superiority as a long term partner. As previously noted, the result of this hard work and dedication by our knowledgeable and experienced sales force enabled us to again meet our plan for gross additions for the quarter.

Going forward, we believe the Company's expanding range of products, services, and partnerships coupled with the sustained focus of our sales teams will help us attract an increasing number of new accounts especially in our key market segment of healthcare. Moreover, as the industry's largest service provider we believe decision makers in all our core market segments can be confident that we will meet their organization's needs because of our ability to consistently provide high quality service and network support.

During the quarter our sales and marketing teams also continued to emphasize retention of key customer accounts and a central part of this process is to continually monitor the account and evaluate potential problem areas. By relying on input from multiple sources we believe we have greatly improved our ability to identify customer concerns earlier in the process and move quickly to resolve them. We believe this added focus on maintaining and improving existing customer relationships has been a critical factor in our ability to retain a significant portion of our account base.

Importantly, we recorded our first I-LAND™ systems sale during the second quarter. The customer is a large hospital facility on the west coast and we continue to expect to deploy the system in the third quarter. The I-LAND™ system is USA Mobility's proprietary campus space two-way messaging solution which combines the speed of an in-house network with the broad coverage of a wide area system. We also began deployment of two beta sites at existing paging customer locations to demonstrate the system's performance capabilities. I'd also note that we're in active discussions with numerous other potential I-LAND™ accounts. We regard the I-LAND™ system as a key product for us going forward because it not only demonstrates our commitment to serving the evolving needs of our customers but it reinforces the importance of paging technology especially for those customers within the healthcare and emergency response segments.

To quickly review our current capital allocation strategy you should know that our Board Management Team remain committed to creating value for our stockholders. We have also been committed to returning capital to our stockholders. We have been true to this goal for many years and we intend to continue to pursue it.

As you will recall we began paying special cash distributions in 2005 and paid our first quarterly cash distribution in 2006. Since then we've continued to pay regular quarterly cash distributions. The Board has also declared special cash distributions from time to time. In addition, we initiated a share buyback program two years ago and have extended it several times since then.

Looking ahead, the Board will continue to review our options. As of today, given our projected cash flow we expect to continue paying quarterly cash distributions of $0.25 per share for the foreseeable future. We believe this payout continues to represent an excellent yield based on our current share price. In addition, we may consider paying special cash distributions from time to time.

With respect to extending our share repurchase program beyond this year, the Board expects to reevaluate the program later this year. Our existing program runs through December 31st. That said and notwithstanding our improved operating performance over the past few quarters, I would caution investors that our ability to return capital to stockholders will diminish over time as our revenue and subscriber base continue to contract. Therefore as we discussed on recent earnings calls, decisions regarding capital allocation will be weighed against other opportunities for creating long term shareholder value. Such opportunities could include acquisitions or related strategic approaches that might provide enhanced revenue stability and allow us to utilize our existing assets.

Finally, I wanted to take a minute to comment briefly on USA Mobility's long term business outlook as well as some of the variables Management and the Board review internally as we contemplate the future.

Since our first full year of combined operations in 2005 after the merger of the number one and number two independent paging companies, Arch and Metrocall which formed USA Mobility, our revenues have decreased from over $600 million in 2005 to approximately $230 million to $235 million estimated for this year. Each year our subscriber and revenue bases decreased and in order to stay profitable we've worked hard to reduce costs.

While we've seen significant slowdown in the rate of subscriber erosion this year we nevertheless expect that meaningful subscriber and revenue erosion will continue for the foreseeable future and our business will continue to contract. Those business facts leave us with a couple long term options going forward. First and foremost we must continue to right size our cost structure. We believe this is possible and we believe we can continue to generate robust margins well into the future. However, the absolute value of our cash flows will continue to go down as they have in the past. This means we continue as a profitable but ever smaller company.

Another option we have mentioned in the past is to acquire another company or companies with a more stable and revenue cash flow outlook. To that end we spend a lot of time looking at opportunities and will continue to do so but in a very disciplined manner. We feel we have a solid management team, mature back office systems capable of absorbing a higher workload, and valuable tax assets, all of which can be used to pursue transactions that are accretive to our stockholders and grow cash flow. All of this leads our Management Team and Board of Directors to feel evaluating alternatives makes a lot of sense.

In summary, we're very pleased with our second quarter and first half results and believe we are well positioned for a solid second half of 2010. Over the past five and a half years, USA Mobility has made tremendous progress in an extremely challenging industry. We've generated significant free cash flow, retired old debt, distributed approximately $334 million in tax free cash to our stockholders, repurchased approximately $50 million of Company stock, and currently have substantial cash on our balance sheet. Despite this progress we believe we have much more work ahead of us. As a result, you should rest assured that we are actively and aggressively pursuing all opportunities to create even greater value for our stockholders.

At this point I'll ask the Operator to open up the line for your questions. We'd 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 very much sir. The question and answer session will be conducted electronically today. (OPERATOR INSTRUCTIONS)

We'll take the first question from Will Hamilton of Granite Point Capital.

Good morning guys.

Good morning.

A question first on the transmitters account. I think you mentioned the total was about 6,319 and that 38% was the free so does it roughly come out to about 3,918 for the paid? Is that accurate?

Yes, it's, I think it's total paid active is 3,892.

892, okay. So if I take that number and then look at what you paid for this site expenses, it seems like the average cost per transmitter is creeping up and I was just wondering is that due to cost increases from the tower operators or is it a factor of the transmitters left that are still operating?

It's a combination of a couple things. One, as we decommission transmitters we don't always, we can't always get out of the lease obligation immediately so there is a certain amount that we're paying in lease payments that are for inactive transmitters. In addition as you think about it, as we have continued to migrate our networks towards where our customers are through the reduction in subscriber base, we tend to have more concentration in higher cost areas so some of the transmitters we take out in more rural areas are lots of times the lower priced ones. So there are a couple of dynamics there but as all the old transmitters come out for the inactive transmitters, we should see that decline in future periods.

Okay and just a question on the unit counts and returns and such, encouraging to see the sequential improvement in the disconnect rates. I was wondering if you could comment whether you think this quarter is maybe sustainable going forward now that major labor markets have stabilized. We haven't seen improvement yet and do you need to see, in your opinion, the improvement to get the placement maybe picking up or declining less quarter to quarter?

We think that the slowdown that we've seen in the gross subscriber cancellations should hold for the foreseeable future. It was accelerated in the past primarily as a result of the recession and the amount of layoffs that were taking place throughout the business segments in which we market our services and that volume of layoffs has abated and we're just not seeing the cancels that we once saw. We're not seeing a lot of hiring yet we're still able to meet our gross add targets so I think from our perspective and this is one of the reasons why you might have noticed we lightened up a little bit on our valuation allowance on our tax assets because our outlook has improved as a result of the improved subscriber retention.

Alright, thanks.

(OPERATOR INSTRUCTIONS) And we'll next move to Cross River Management's Rich Murphy.

How are you doing guys? Great disclosure on your financial statements, by the way. My question is around the M&A comment you made. What, given your low valuation, what markets are there for, is it outside the paging world? Is it, are there, where can you use this cash because I project you guys to trade at about 1.8 times enterprise value EBITDA based on my projected cash at the end of this year. So what I guess, what's cheaper than your stock or what's a good vertical for you guys?

That's obviously one of the considerations that we have. It probably would not make a lot of sense to use stock at this kind of a multiple to go out and buy something. Perhaps we'd use cash. We'd look within the paging segment which we've done and will continue to do. We'd also look in the broader communications segment as well and within some of the specific market verticals that we operate in on a daily basis and so you'd more than likely be looking at an acquisition that would use cash as opposed to stock and that's kind of number one.

Number two I think I mentioned and maybe I'll just underscore it for you a little more emphatically that we've been doing this in an extremely disciplined manner. We're just not going to go out and do a deal for the sake of doing a deal to expand the size of this Company unless we think that it makes sense for our shareholders. Given that alternative we'd rather just distribute the cash so we'll continue to look. We have looked. We've walked away from a number of opportunities because we have been very disciplined in our approach and we'll continue with our main focus which is to create value for our shareholders.

Great, and can I follow up with one follow up quick on the, on the second half guidance in the OpEx, what is going -- margins seem to be getting, your operating margin is going to go down a little bit. Is there, are the costs, can you squeeze service rental maintenance or G&A, are they going to go up as a percentage of revenue? How do I look at that second half in terms of operating margin? What category?

As we've kind of laid out for the last several years, we do expect margin compression to begin at some point and we do think that we'll have some margin compression in the latter half of this year. We've done a number of things heading into this year. Because of the strong rate of subscriber erosion that we experienced in 2009 heading into 2010 we really got ahead of a lot of our expense reduction initiatives in 2010. We do expect the expenses to not decline on a quarterly basis as they have in the last two to three quarters so we do expect in our guidance that we just issued, some margin compression at the end of the year, in the third and fourth quarters.

Okay great, thanks.

That looked like it's the last question. Is there another question?

Not at this time sir.

Okay that's the last question in the queue so I just want to thank everyone for joining us today. We look forward to speaking with you again after we release our third quarter results. Everyone have a great day.

That does conclude this conference call. Thank you all for joining us.