Spok Holdings Inc (SPOK) 2018 Q1 法說會逐字稿

Good morning, and welcome to Spok's first quarter investor call. Today's call is being recorded. Online today, we have Vince Kelly, President and Chief Executive Officer; Mike Wallace, Chief Financial Officer; and Hemant Goel, President of Spok's operating company.

At this time for opening comments, I'll turn the call over to Mr. Wallace. Please go ahead, sir.

Good morning. Thank you for joining us for our First Quarter 2018 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 Spok's future financial and business performance. Such statements may include estimates of revenue, expenses and income as well as other predictive statements or plans, which are dependent upon future events or conditions.

These statements represent the company's estimates only on the date of this conference call and are not intended to give any assurance as to actual future results.

Spok's actual results could differ materially from those anticipated in these forward-looking statements. Although these statements are based upon assumptions that the company believes to be reasonable, they are subject to risks and uncertainties. Please review the Risk Factor section relating to our operations and the business environment in which we compete contained in our 2017 Form 10-K, our first quarter 2018 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.

Also on January 1, 2018, Spok adopted accounting standards codification, ASC 606, Revenue from Contracts with Customers using the modified retrospective method applied to those contracts, which were not completed as of January 1, 2018. Unless otherwise stated, results for reporting periods beginning after January 1, 2018, are presented under ASC 606 while prior period amounts have not been adjusted and continue to be reported in accordance with the company's historic accounting under ASC 605. Please refer to the tables provided in yesterday's press release containing revenue, net income, earnings per share and EBITDA results under both ASC 605 and 605 -- 606 and 605 formats.

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

Thank you, Mike, and good morning. We're pleased to speak with you today regarding our first quarter operating results and what we believe is a good start to 2018.

First quarter results were in line with our seasonal expectations as we saw strong year-over-year performance in a number of key operating measures, including software revenue and average deal size as well as wireless subscriber retention. We achieved these results as we continue to invest in our business by enhancing and upgrading our product development team and tools as well as our sales infrastructure and management.

As we had previously outlined, we believe these investments will yield significant future benefits in the form of our improved integrated communications platform, Spok Care Connect, as well as higher future bookings levels supported by our enhanced and upgraded sales team.

Overall, we continue to operate profitably and as a debt-free company while enhancing our product offerings. We executed against our capital allocation strategy by continuing to make key strategic investments in our business while returning cash to our stockholders during the quarter in the form of dividends and share repurchases.

In the first quarter, we were particularly pleased to see total revenue grow more than 2% on a year-over-year basis. This performance was driven primarily by software revenue growth of nearly 17% from the first quarter of last year. Additionally, we continue to see a more than 99% renewal rate on software maintenance contracts. Similar to our wireless revenue stream, software maintenance revenue is largely recurring revenue and that provides the company with a more stable revenue base.

Now before I turn the call over to Mike and Hemant to provide additional details on our financial performance and operating activity, I want to briefly review some key results for the first quarter.

First, software revenue of $18.8 million included record highs for our first quarter in operations revenue, and our related software backlog at March 31 was up more than 5% from the prior year quarter. Our sales team will continue to be laser-focused on generating activity throughout the remainder of the year. We are encouraged as bookings included sales to both new and current customers with existing customers adding products and applications to expand our portfolio of communication solutions.

Second, wireless subscriber and revenue trends continued to improve. Spok posted solid results for wireless products and services in the first quarter. Gross pager placements of 25,000 and gross disconnects of 44,000 were in line with the year earlier quarter. As a result, net pager losses were 1.8% in the first quarter, unchanged from the prior year quarter results.

Wireless revenue decline in the first quarter was 1.3%, nearly half of the year earlier decline. Contributing to slower-than-anticipated wireless revenue decline was a more stable ARPU or average revenue per unit. In the first quarter, it averaged $7.47, up slightly from the prior quarter. We were pleased to see the continuation of these positive trends, especially in our top performing Healthcare segment, which now comprises approximately 80% of our paging subscriber base.

Third, again, we continued our track record of returning capital to stockholders in the form of dividends and share repurchases. During the quarter, the company paid cash dividends to stockholders totaling $2.8 million or $0.125 per share. We also repurchased $1.9 million of our common stock under our $10 million authorization that we announced last quarter.

Finally, in addition to our financial performance, progress was made in several other areas, including product development, sales strategy and key strategic partnership agreements. During the quarter, we added approximately a dozen new customers to the Spok family.

Spok continues to build an industry-leading reputation and is generating sales momentum at conferences we attend. Thus far, in 2018, we have generated tremendous activity from trade shows to position Spok as a thought leader in our industry.

At the American Organization for Nurse Executives, AONE, conference earlier this month, our Chief Nursing Officer hosted a focus group to discuss using mobile strategies to drive clinical innovation. We also continue to benefit from the leads generated at the 2018 HIMSS Annual Conference that we attended in late February.

Our sales team will maintain the momentum generated at these conferences and trade shows throughout 2018. The combination of Spok's strong teams, solid financial base and broad depth of our products and services positions us to capture the opportunity in the health care sector to stimulate sustainable growth.

I'll make some additional comments on our business outlook in a few minutes, but, first, Mike Wallace, our Chief Financial Officer, will review the financial highlights for the quarter. After that, Hemant Goel, President of our operating company, will comment on a first quarter sales and marketing activities. Mike?

Thanks, Vince. Let me give you a little more detail on our financial performance in the first quarter. I would again encourage you to review our first quarter 2018 Form 10-Q, which we expect to file later today as it contains far more information about our business operations and financial performance than we will cover on this call as well as specific revenue comparisons between ASC 606 and ASC 605.

As Vince noted, we are pleased with our overall operating performance in the first quarter. Key drivers of our financial performance during the quarter were strong year-over-year software operations revenue, software maintenance revenue renewal rates, which continue to exceed 99%, coupled with the lower-than-anticipated levels of churn in both paging units and wireless revenue. Continued operating expense management has allowed us to continue to absorb the impacts of our planned investments and product research and development expenses. Overall, we believe we are off to a strong start in 2018.

I will review 4 additional key areas, which drove our first quarter financial performance. They include: one, a review of certain factors impacting first quarter revenue; two, selected items, which influenced first quarter expenses; three, a brief review of the balance sheet; and finally, an update on our financial guidance for 2018.

As usual, if you have specific questions about these items or any of our quarterly financial results, I will be happy to address them during the Q&A portion of this morning's call.

With respect to revenue. For the first quarter of 2018, total GAAP revenue was $43.1 million or $42.5 million when adjusted to exclude the adoption of ASC 606 compared to $41.4 million in the first quarter of 2017 or up 2.4%.

We were particularly pleased with our ability to generate strong year-over-year increases in software revenue as well as continued slower erosion in our wireless business.

Adjusted to exclude the adoption of ASC 606, total first quarter software revenue of $42.5 million reflected an increase from the previous quarter by 17%, with both software operations revenue as well as maintenance revenue growing by 36% and 5%, respectively, as we continue to refine and enhance our processes, specifically related to the implementation of our software solutions.

Additionally, as Vince noted, maintenance revenue continues to increase, reflecting our maintenance revenue renewal rates in excess of 99% from our installed software solution base in providing a reliable and reoccurring revenue and cash flow stream.

Wireless revenue for the first quarter remained solid, declining only 6.7% from the prior year. This continued performance in our wireless business is being driven by the combination of solid gross additions, minimization of churn with existing customers and maintaining stable unit pricing.

Turning to operating expenses. We maintain our focus on creating efficiencies in our expense base in order to offset some of the planned increases in our product research and development category.

During the first quarter, we reported consolidated operating expenses, which excludes depreciation, amortization and accretion of $39.7 million, up from $36.8 million in the year earlier quarter. The anticipated $2.9 million increase over the year ago period was driven primarily by a $1.6 million increase in research and development costs, reflecting our continued investment in our Spok Care Connect platform and a $600,000 increase in sales and marketing expense.

In the first quarter of 2018, total research and development costs totaled $5.7 million. This represented a nearly 40% increase in the first -- from the first quarter of 2017 and $800,000 higher than the fourth quarter of 2017. The year-over-year increase reflects Spok's planned expansion in our operations in Minneapolis.

Early last year, we had announced that Spok would be increasing its presence there by approximately 45% with the addition of more than 60 employees over the next 2 years. These key strategic investments will enhance our Spok Care Connect product, a unique health care communications platform, which is transforming how hospitals coordinate care.

Our capital expenses in the first quarter were approximately $1.2 million and were in line with the guidance we provided for 2018 during our year-end earnings conference call. Capital expenses are incurred primarily for the purchase of pagers, network infrastructure to support our wireless customers as well as the necessary infrastructure to support our software business. We do not expect any significant changes to the level of our capital expense requirements for the balance of 2018 and expect to be within the guidance range for the year.

Turning to the balance sheet and other financial items. The company generated approximately $3.5 of EBITDA, or earnings before interest, taxes, depreciation and amortization, during the first quarter of 2018. This, along with cash on hand, is used primarily to fund the quarterly dividend of $2.8 million, share repurchases of $1.9 million and capital expenses of $1.2 million.

We ended the quarter with a cash balance of $101.3 million, down approximately $5.9 million from December 31, 2017.

Finally, with respect to our financial guidance for 2018 and adjusted to exclude the adoption of ASC 606. Based on our performance in the first quarter, we are maintaining the guidance we previously provided, which projects consolidated total revenue to range from $161 million to $177 million; consolidated operating expenses excluding depreciation, amortization and accretion of $158 million to $165 million; and capital expenditures to range from $4 million to $8 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 the call over to our President, Hemant Goel, who will update you on our first quarter sales and marketing activities. Hemant?

Thank you, Michael, and good morning. As you heard, our sales and maintenance teams delivered software bookings in the first quarter of 2018 totaling more than $18 million. First quarter performance was down 5.6% from the prior period, but in line with our seasonal expectations as first quarter is typically lower than the more robust fourth quarter totals.

Health care remains a key part of our growth and primary focus, making up 89% of overall bookings in the United States for the first quarter. Nearly 2/3 of that business came from hospitals that have never worked with us before. Customer confidence in our clinical communication and collaboration platform remains strong.

During the quarter, we added 7 health care customers to the more than 1,900 hospitals that use Spok solutions. Those customers include all 30 adult and children's health organizations on the current Best Hospitals Honor Roll by U.S. News & World Report.

During the first quarter, we closed one of the largest deals in our history. A Canadian health services provider signed a 7-digit contract to roll out Spok Mobile to its health care providers throughout the province. The customer chose Spok to replace another vendor because they saw that our Care Connect platform is unique and can solve multiple challenges across different areas and departments of the health system. They added that no other vendor could provide an integrated solution providing directly details, on-call schedules, staff contact preferences and secure messaging. The system will leverage a newly consolidated database of 55,000 employees to support the rollout and get subscribers onboard quickly.

We closed another large 6-figure deal during the quarter with a large East Coast health system. They expanded their Spok Consult to 2 recently acquired hospitals in order to unify communications, processes, workflows and technology. They cited our ability to push out notifications to large groups of people at one time as a key factor in their decision.

The first quarter 2018 was also a solid quarter for the wireless sector, exceeding all defined goals in sales, revenue and retention. Our paging base continues to remain stable, and we have been seeing a growing interest in both our encrypted paging network as well as our secured smartphone mobile solution.

Throughout the quarter, we added several new customers to our account base. The most notable being in March with addition of a midsized West Coast-based hospital who chose Spok encrypted pagers as a choice for secured messaging.

After an organization buys Spok solutions, our highly skilled Professional Services group gets to work delivering an exceptional experience and setting the customer up for success. As we discussed last quarter, our new Senior Vice President for this team is working to increase efficiencies and accelerate our backlog conversion.

During the first quarter, Professional Services had major success streamlining a proof-of-concept installation for a large government contract. The new processes dramatically reduce the installation time for this process for this customer and are laying the groundwork for increased efficiencies across the organization. Perhaps best of all, the tighter timeline helped our sales efforts to secure upgrades of 55 sites for this client.

Before turning things back over to Vince, I want to provide a brief update on recent marketing activities designed to help us establish our brand, drive leads and fill the sales pipeline.

In March, we attended HIMSS '18, one of the largest gatherings of health information and technology leaders in the country. HIMSS is an important event for Spok as it provides an opportunity for us to showcase our solutions and demonstrate our capabilities. This year was one of the most successful shows to date. We increased leads from hospitals and health systems by 15% over last year and visits to our booth by health care C-suite leaders also increased significantly. Perhaps more important was the quality of the conversations we had with everyone who stopped to hear our story. We saw a shift from people asking what does Spok do to more in-depth conversations with prospects who said I've been meaning to talk to you. We also continued to see increases in traffic to our website and in our social media following. In fact, we recently surpassed 10,000 followers on Twitter.

We see these as strong indications that the work we're doing to solidify our brand in the health care IT marketplace is working. Our customers and potential customers believe in our strategy to deliver an enterprise health care communication platform. Our brand is getting traction in the marketplace, and we expect our bookings will continue to grow.

Looking forward, we anticipate continued market demand for clinical communication and collaboration platform in health care.

With that, I'll pass it over -- back to Vince.

Thank you, Hemant. Before we open the call up to your questions, I'd like to comment briefly on a couple items first. I want to update you on our current capital allocation strategy and I want to review our key goals and business outlook for 2018.

With respect to our current capital allocation strategy, our overall goal is to achieve sustainable profitable business growth while maximizing long-term stockholder value. Towards that end, the allocation of capital remains a primary focus. A multifaceted capital allocation strategy includes dividends and share repurchases as well as key strategic investments that include augmenting our product, development, operating platform and infrastructure. It also includes the potential for acquisitions that we -- as we have discussed in the past even though we've not been satisfied with valuation expectations for most of the targets that we've reviewed. But we continue to explore M&A opportunities and conduct business due diligence as appropriate.

As we have previously stated, we remain committed to continue paying our $0.125 per share quarterly dividend this year and make share repurchases as appropriate. We also continue to aggressively increase our investments in our company to benefit the future and create long-term stockholder value. We're a company in transition, and management and our board believes that the financial flexibility over the long term is important to the success of our strategy. We review our capital allocation posture on a quarterly basis and remain comfortable that we are striking a reasonable balance of serving the long-term interest of our stakeholders.

We will continue to evaluate our capital allocation strategy and communicate our plans to you with respect to dividends, potential share repurchases and other uses of capital each quarter when we report earnings.

Finally, with regard to our key goals and business outlook, we believe our first quarter activities and investments have positioned us well for a successful 2018. In order to take advantage of the large opportunity in our chosen markets, our business goals for the year are simple and straightforward. They include: accelerating the development of our products and services, building a stronger infrastructure, aligning resources and focusing where most needed and driving software revenue growth while managing wireless revenue declines. We'll do all of this with the ultimate goal of creating long-term stockholder value and fulfilling our commitments.

Wrapping up, Spok continues to build an industry-leading reputation. We remain committed to our core values of putting the customer first, providing solutions that matter, innovation and accountability. We believe our fast results and future plans reflect these values and beliefs.

At this point, I'll ask the operator to open the call up for your questions. (Operator Instructions) Operator?

(Operator Instructions)

Okay, operator. I'm not seeing any questions. So I just want to wrap up by saying thank you, everyone, for joining us this morning. We very much look forward to speaking with you again after we release our second quarter results in July. Everyone, have a great day.

Thank you. Ladies and gentlemen, this concludes today's event. You may now disconnect your lines and have a wonderful day.