Spok Holdings Inc (SPOK) 2014 Q2 法說會逐字稿

Good day and welcome to the Spok's second-quarter investor call. Today's conference is being recorded. Online today we have Vince Kelly, President and Chief Executive Officer; Shawn Endsley, Chief Financial Officer; and Colin Balmforth, President of the Company's Operating Company. At this time for opening comments I will turn the call over to Mr. Endsley. Please go ahead, sir.

Good morning. Thank you for joining us for our second quarter investor update. Before we discuss operating results, I want to remind everyone that today's conference 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 and these forward-looking statements.

Although these statements are based upon assumptions that the company believes to be reasonable, they are subject to risk and uncertainties. Please review the risk factor section relating to our operations and the business environment in which we compete contained in our 2013 Form 10-K; our second quarter Form 10-Q, which we expect to file later today; and related documents filed 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 will turn the call over to Vince.

Thanks, Shawn, and good morning. We are delighted to speak with you this morning about our second-quarter results, recent activities, and business outlook. Our second quarter results were very strong relative to our plan, and we believe we are well-positioned for the balance of the year. In addition, as you know, we announced a new corporate name, Spok earlier this month as part of a companywide rebranding strategy. We are very pleased with the successful launch and positive feedback we received to date on our new identity and logo.

Spok is proud to be a leader in critical communications for the healthcare, government, public safety, and large enterprise market segments. We deliver smart, reliable solutions to help protect the health, well-being, and safety of people around the globe. More than 125,000 organizations worldwide rely on Spok for workflow improvement, secured texting, paging services, contact center optimization, and public safety response. When communications matter, Spok delivers.

Our core values include: to put the customer first in everything we do. What we do matters. Our solutions improve communications in critical situations. We are committed to innovation and offering new solutions for future growth and we are accountable to each other, our customers, and our shareholders.

Turning to the second quarter, we set an all-time record for software bookings while software revenue increased from the year-earlier quarter. Our backlog was also near our record high at June 30. Our wireless trends improved as we ended the quarter ahead of our key operating goals for total revenue, gross placements, and pager churn. On a consolidated basis, we were able to exceed our operating goals, strengthen our balance sheet, advance our long-term business strategy, and once again return capital to stockholders in the form of cash dividends. Shawn will provide a financial overview shortly, but first I want to review some key results for the quarter.

Number one, software bookings for the second quarter increased 21.3% to a record high of $19 million from the year-earlier quarter. In addition, software revenue rose 7.4% to $15.6 million from the prior year's quarter, while backlog totaled $40.2 million at June 30. Also, our pipeline of sales prospects increased was substantially during the quarter due to the efforts of our dedicated sales and marketing team along with wider recognition of our software solutions. Demand for our software solutions remain strongest in North America, specifically among hospitals and healthcare organizations where we sold solutions for critical smartphone communications, secured texting, clinical alerting, and emergency notification to both new and existing customers. We also continued to expand our international sales efforts during the quarter, as well as broadened our worldwide focus beyond healthcare in such market segments as public safety, hospitality, education, and government services.

Number two, wireless subscriber and revenue trends also improved during the quarter. Gross pager replacements increased from the first quarter while gross disconnects decreased. Overall are quarterly rate of unit erosion improved to 2.1%, the lowest rate of net unit losses in six quarters. Also, our quarterly rate of wireless revenue erosion improved to 2.4% versus 2.6% a year earlier. These improvements in wireless trends are a credit to the talent and commitment of our entire sales team.

Number three, operating expenses, excluding depreciation, amortization, and accretion, declined 1.6% from the first quarter. Going forward we continue to manage our operating expenses as efficiently as possible; however, we may incur certain one-time expenses on occasion such as our current rebranding program as we make selective investments to support our strategy for long-term growth.

Number four, strong operating results generated EBITDA or earnings before interest, taxes, depreciation, and amortization and accretion of $11.7 million for the second quarter representing a margin of 23.9%. As I have noted on previous calls, we expect our operating margins will narrow somewhat over time as opportunities to reduce recurring expenses decline and we continue to invest in our future.

Number five, finally we again our goal of generating sufficient free cash flow during the quarter to return capital to stockholders in the form of cash dividends. We paid our regular quarterly dividend of $0.125 per share on June 25 and have now returned a total of $423 million to our stockholders in cash dividends over the past 10 years. Also, our Board of Directors has declared our next quarterly dividend of $0.125 per share to be paid on September 10.

During the quarter we did not make any additional purchases under our stock repurchase program. As result we still have $15 million of repurchase authority remaining through the end of this year. I will comment further on our capital allocation strategy in a few minutes.

Overall, we were pleased with our operating performance and progress in the second quarter and believe we are well-positioned for a solid second half of the year. We met or exceeded the majority of our key operating goals, expanded our services and geographic reach, generated significant free cash flow, and returned capital stock orders. At the same time, we continue to make significant progress toward our long-term goal of structuring the company for sustainable growth. I will comment further on our operating performance and related business activities in a few minutes, but first Shawn Endsley, our Chief Financial Officer, will review financial highlights of the quarter. Shawn?

Thanks, Vince. Before I review our financial highlights for the quarter, I would again encourage you to review our second quarter Form 10-Q, which we expect to file later today, since it contains for more information about our business operations and financial performance than we will cover on this call.

As Vince noted, our operating performance for the second quarter was consistent with our previously announced financial guidance for 2014. Strong wireless and software revenue combined with continued expense management contributed to solid cash flow, EBITDA, and operating margins. Overall, we believe this was another quarter of solid results as we continue to transition our corporate business model to focus on global, critical communications.

I plan to limit my comments this morning to four areas that may be of interest to you. They include number one, a review of how we now report certain items in our financial statements following the consolidation of our business operations earlier this year. Number two, an update on how software revenue reported for the second quarter was impacted by the internal control remediation process we completed in 2013. Number three, a review of selected items impacting our statement of income. And number four, a brief review of the balance sheet and other key financial items in the second quarter. If you have specific questions about any of these issues or related financial matters, I would be glad to address them during the Q&A.

With respect to how we report certain resorts in our financial statements in 2014, following the consolidation of our wireless and software businesses on January 1, we will report only one operating segment, our consolidated operations. However, we will continue to break out revenue for wireless and software. As previously noted, our business operations are now unified under one company with a single brand identity. We believe this operating structure, one integrated salesforce, one set of overhead, and one platform for future acquisitions not only eliminates operational redundancies but maximizes the opportunities for us to pursue profitable revenue growth.

With regard to software revenue, we reported $15.6 million in software revenue for the second quarter, up from $14.5 million in the year-earlier quarter, but down slightly from $15.8 million for the first quarter of 2014. As I mentioned during our first quarter investor update in May, there are two one-time events that contributed to the slight decline in quarter-to-quarter software revenue. First, we recognized approximately $1 million in software revenue in the first quarter for two large projects, both of which were larger than our usual project size and favorably benefited our first quarter software operations revenue.

Second, our internal control remediation process which was completed in 2013 require that we differ a certain software revenue recognition until the completion of the professional service period relating to software arrangements, which effectively satisfied all the terms of our contract. The process also provided us with the ability to reliably estimate the service periods, which allows us to recognize revenue from those accounts on a ratable basis. The net effects was to delay our ability to recognize certain software revenue into 2014. Going forward however, we expect the remediation process will not impact software operations revenue in the third or fourth quarters.

In short, due to the remediation process, software revenue results were somewhat uneven over the first two quarters of the year. Therefore, we believe a more accurate way to look at those results is on a year-to-date basis, where total software revenue increased to $31.3 million for the first six months of 2014 from $28.8 million in the first half of 2013 or an increase of 8.7%.

With regard to selected items impacting our statement of income in the second quarter, we incurred approximately a $0.5 million in one-time expenses for our rebranding efforts. These expenses are included in selling and marketing expenses in our statement of income.

Turning to the balance sheet and other financial items, the company generated $10.5 million in cash during the second quarter from operating activities and ended the quarter with a cash balance of $97 million. We expect to use a portion of the cash in connection with quarterly cash dividends as well as potential share repurchases over the balance of 2014. I would also note that we continue to have no debt outstanding and our existing credit facility remains in place, unused, and provides us with approximately $40 million in borrowing capacity for acquisitions or related investment opportunities.

With regard to other financial items, we currently have gross deferred tax assets of $143.2 million with an offsetting valuation allowance of $119.3 million. The availability of these deferred tax assets ensures that we will pay minimal federal income taxes for the foreseeable future. Ignoring the valuation allowance, these deferred tax assets would allow us to shelter approximately $363 million of taxable income. The availability of these favorable tax attributes is a consideration as we evaluate acquisitions and other opportunities to invest for internal growth.

Finally, with respect to our financial expectations, we are maintaining the previously announced financial guidance for full-year 2014 that we provided in March. To reiterate that guidance, we currently expect total revenue to range from $183 million to $201 million; operating expenses excluding depreciation, amortization, and accretion, to range from $147 million to $156 million; and capital expenses to range from $7 million to $9 million. Finally, I would remind you once again that our projections are based on current trends and that those trends are always subject to change.

With that, I will turn it back over to Vince.

Thanks, Shawn. Before we take your questions, I want to comment briefly on several other items that may be of interest. First, provide some additional perspective on our recently announced corporate name change and rebranding program. Second, briefly update our current capital allocation strategy. And third review our business outlook over the balance of the year.

With respect to our recent name change to Spok, which we announced on July 8, we are very excited about this new chapter in our Company's history. As many of you know, the paging side of our business formally known as USA Mobility Wireless, and the software side formally known as Amcom Software both have strong and respected brands in the respective markets. Indeed both of these entities were the product of numerous mergers and acquisitions over the years. However, each was associated with a specific product line, mostly pagers and operator consoles. And neither reflected the evolving global focus of what the Company truly representative marketplace today -- an integrated provider of critical communications on a worldwide basis.

As we thought about this internally over the past year, we concluded that we needed a brand identity that would reflect our singular mission as well as one that would be easily recognized and respected by customers in both domestic and international markets. Additionally, we wanted to assure them that we now provide a number of technologies, not just one or two, that are specifically designed to improve their communication challenges. In short, we wanted to make sure that all customers and potential customers clearly understood what we do and how our products and services could improve the workflow activity in operating results.

We think our new name, Spok, effectively depicts many elements of our current business and long-term goals. Like the spokes of a wheel, the name suggests movement, strength, reliability, and speed, as well as an integral part of a smoothly functioning whole. The name Spok also conveys the concept of a completed communication which after all is the heart of our business.

Turning to our capital allocation strategy, we continue to evaluate all options for deploying capital with a dual goal of achieving sustainable business growth while also maximizing long-term stockholder value. Among those options, as previously discussed, are potential software-related acquisitions that could expand the depth and breadth of our current applications and service capabilities.

Toward that end, the Board and management continue to evaluate the various acquisition opportunities. Although we have identified a handful of candidates that meet some of our stated criteria, to date, we have not, should teach a target in which we believe is a reasonable value. Nonetheless, we continue to evaluate viable candidates and we believe will find the right strategic fit for us at some point. In the meantime, we will remain disciplined in our approach.

As for other uses of capital, we expect to continue paying our quarterly dividend of $0.125 per share or $0.50 annually for the foreseeable future based on our current projections or operating cash flow. We believe the current dividend rate provides an appropriate yield on our common stock. Also with respect to our share repurchase program, we may buy back additional shares of our common stock from time to time depending on the stock price and market conditions.

Finally, I would note that the Board may consider additional options for deploying capital going forward recognizing that the Company continues to generate strong operating cash flow with a cash balance of just under $100 million at June 30. Those options might include special dividends and further share repurchases, balanced with opportunities to invest in product development where we see opportunities to serve our customers with unique solutions to serve their critical communication needs.

In the meantime, we look at you to manage our balance sheet prudently by maintaining ample liquidity to support our working capital needs. And as usual, we will keep you updated on all capital allocation decisions. At this point I will ask Colin Balmforth, President of our Operating Company to comment briefly on our second quarter sales and marketing activities. In addition Colin will provide an update on what we see as our principal growth drivers going forward. Colin?

Thank you, Vince, and good morning. Following a strong first quarter this year, our sales and marketing teams delivered a new quarterly record for the second quarter software bookings of $19 million. Included in this figure is a 74% increase in new business for the second quarter in 2013. While we appreciate the record efforts of our sales and marketing teams, we also recognize that customer decisions and preferences can impact the timing of purchasing decisions each quarter.

Sales to existing customers remain solid. Q2 included notable upgrades for a number of our long-term call center customers. Many of them also added new applications to their solution suites, demonstrating the trust they place in our products. One example is a Southwest health system with three hospitals in more than 100 clinics that added Spok's clinical alerting. The health system seeks to increase patient safety and enhance operational efficiencies. Their decision was driven by the need to create a more comprehensive alarm management system specific to their nursing workloads.

We continue to meet our goals for gross additions in our paging services. As I have mentioned in previous calls, there are many positive collaboration efforts among the sales representatives. This cross-selling effort brought in 11 more deals during the quarter.

I've also talked before about our five pillars for growth. They represent Spok's initiatives for meeting our long range objectives and I would like to update you on our progress in each area.

Our first pillar is the mid-market healthcare space which we defined as hospitals with 200 to 600 beds. We continue to see the mid-market as a great opportunity for new customers, of which we added 12 accounts in Q2. Our development team is making progress with our software as a service SaaS capabilities that will allow us to offer hospitals in a small and midmarket space products that enhance their communications while reducing information technology cost of ownership.

In Q2, a 400-bed hospital on the East Coast added two Spok products to their portfolio and purchased additional licenses for our secured texting application. This hospital required solutions to help increase safety, quality of patient care, and staff efficiency. It is worth noting that at this institution, the clinicians were a big force behind the addition of more application licenses because of the workflow improvements the solution generates.

For the international pillar, we continue to expand our presence outside of the US. We have been hiring new talents including a regional vice president for our EMEA team. In the APAC reason, we kicked off our 2014 Mobility in Healthcare seminar series. The series has been well received and is growing in both size and reputation. Healthcare remains a strong international segment for us and strategic partnerships are an important part of that success.

A recent win includes a hospital in eastern Australia that upgraded its clinical alerting solution. Combined with the efforts of one of our global partners, this hospital not only purchased an upgrade, but it also added two new solutions to build on its messaging system and leverage key integrations between Spok and our partner solutions.

In the area of vertical markets, we have also made significant progress. Public safety has seen tremendous growth and is our fastest growing market. In Q2, we won six sizable new deals in the government sector supporting multiple US military locations. Combined with the municipal sales, we had 19 public safety software deals this last quarter, compared to eight in Q1 and three in the second quarter of last year.

In Q2, we also participated in five conferences focused specifically on the public safety sector. Our presence at these shows has generated hundreds of leads.

We are making strides under innovation pillar. Two physician executives from Stanford University have joined our physician advisory board and we are in the process recruiting a chief nursing officer to provide an additional clinical perspective. Our user group, Spok Directions, celebrates its first year anniversary this month. And the group is now 300 members strong representing 175 organizations. Both forums have provided us significant product input including direction on our mobility strategy. As a result, Spok plans to release a new suite of mobility solutions under the Spok mobile brand later this quarter. Our customers continue to add mobile products to their enterprise suites because it helps busy clinicians to do their jobs more efficiently. Sales of mobile apps are up 70.6% over Q2 last year.

Another innovative product is our test results management solution. This was recently purchased by a hospital in the Midwest where the radiology department wanted to replace their manual notification process and keep a complete audit trail of messages. One of our planning considerations includes an option for innovation expansion in our Software and Technology Development Center. We are evaluating a number of potential addressable markets, the competitive landscape, and our ability to holistically service those markets.

Under our fifth and final pillar, mergers and acquisitions, as Vince already mentioned, we are still evaluating potential acquisitions adjacent to our core space. At this point we have not identified any targets that meet our criteria.

Finally, I want to provide a little detail on our marketing activities. Donna Scott joined our executive team in April as Senior Vice President of Marketing and helped lead the team through the successful launch of our Spok identity. During the first several days as Spok, we saw thousands of impressions across our social media platforms and gained many new followers. We've also garnered traditional media attention from a number of sources including a cover feature in the business section of the Minneapolis Star Tribune.

We continue to see a positive return our marketing investments. In addition to driving the preparations to become Spok, our team maintained ongoing e-marketing campaigns, webinars, and website improvements. In less than four weeks, from effectively zero brand recognition in the market for our new name Spok, we achieved page one success with our SEO, search engine optimization. And with respect to lead generation, marketing achieved an all-time record for identifying qualified leads in a single quarter. In Q2 leads were up 26.2% over Q2 last year and 11.6% over Q1.

Overall, I am very pleased with the results in the second quarter. We look forward to continuing this positive momentum in the second half of the year.

With that, I will pass it back over to Vince. Vince?

Thank you, Colin. Finally with regard to our business outlook for the balance of 2014, we are very optimistic about meeting our performance goals this year as well as making significant progress towards our long-term strategic of becoming a growing global provider of critical communication solutions. While the value of paging for critical messaging remains strong and should contribute to our cash on capital formation for some time to come, we expect overall demand for paging to continue to decline over time.

As a result, we will continue to redeploy the majority of our capital to accelerate the development, growth, and expansion of our critical communications solutions and services worldwide. This includes internally developing new offerings, expanding our sales reach both within and beyond existing market segments, extending our sales in the new geographic regions, and promoting our new brand Spok in key global markets.

In addition as I noted earlier, we will continue to explore acquisition opportunities in the critical communications space that can accelerate our revenue growth and help utilize our valuable tax assets.

In summary, operating results for the second quarter were strong and have positioned us well for a solid second half of the year. We have met or exceeded our primary performance goals, expanded our sales capabilities, extended our reach and keep geographic and vertical markets, strengthened our balance sheet, and continued to operate the Company profitably. Going forward, we anticipate even further progress as we aggressively execute our business plan and continue to explore all opportunities to create additional value for our stockholders.

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

(Operator Instructions) John Noell, Kensington Growth Partners

Hi, guys. I just wanted to ask, in the paging industry, are there any potential acquisitions out there that could still potentially make sense at the right price or has the industry kind of shrunk or deteriorated to the point where that wouldn't make sense almost at any price and it would just be easier for you to take their customers?

You know it is a great question and we look at it all the time. And just like any kind of M&A analysis that you do, it comes down to value. There are some other players out there. They are a lot smaller than we are. We pick up a lot of their subscribers on a monthly and a quarterly basis because frankly we operate our systems better than they do; we can afford to. You saw the big jump that we had in our gross additions in the second quarter over the first quarter. And a lot of that was takeaway. So at some point it might make sense, but, again, you have to be careful because there is a lot of complexities associated with it.

One of the issues that you have to consider is the actual technical network infrastructure of the target. Because depending on what frequencies they operate on, if you purchase that company and then you try to integrate them, you might have to end up swapping out the pagers because if you want to have a very efficient, long-term platform, kind of single SKU if you will, on a minimal number of frequencies you can't be maintaining multiple networks as the industry gets smaller.

So there are some out there. We have talked to some in the past. The valuations have it made a lot of sense for us. And so we have really approached it from the standpoint of just selling and marketing and beating them in the marketplace with our technical networks and our sales expertise.

Thank you.

(Operator Instructions).

Okay, look I don't see any more questions in the queue, and so we are going to go ahead and call it for this morning. Thank you very much for joining us. We look forward to speaking with you after we release our third-quarter results. And thanks again, everybody. Have a great day.

This now concludes the presentation. Thank you for your participation.