Spok Holdings Inc (SPOK) 2018 Q2 法說會逐字稿

Good morning, and welcome to Spok's second 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 will turn the call over to Mr. Wallace. Sir, please go ahead.

Good morning. Thank you for joining us for our second 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 related 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 Factors section relating to our operations and the business environment in which we compete contained in our 2017 Form 10-K; our second 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 please remember 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 to obtain revenue, net income, earnings per share and EBITDA results under both ASC 606 and 605 formats.

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

Thanks, Mike, and good morning. We're pleased to speak with you today regarding our second quarter operating results, and what we believe is a good start as we enter the second half of 2018. Our performance in the second quarter of 2018 was in-line with our seasonal expectations. We saw strong performance on a number of key operating measures, and sequential improvement in subscriber retention, sales bookings, backlog levels and operating expense management. We believe our year-to-date results provide a solid base and position us well as we enter the second half of the year.

Overall, we continue to generate positive EBITDA. We returned nearly $15 million of capital to our stockholders through the first half of the year in the form of dividends and share repurchases, and we enhanced our product offerings through our continued investments in our integrated communications platform, Spok Care Connect. We continue our substantial investment in our development team and are leveraging our decades of experience in critical healthcare communication to deliver a cloud-based platform that will bring the latest in communication technology to the market. As previously outlined, we believe these investments will yield significant future benefits in the form of our improved, integrated communication platform as well as higher future bookings levels, supported by our enhanced and upgraded sales team. Our teams remain on target to meet our development goals for the year.

In the first half of the year, we were particularly pleased to see software revenue on a GAAP basis grow by 11% year-over-year, with each quarter up from the prior year. Additionally, we continued to see a more than 99% renewal rate on our software maintenance contracts. Similar to our wireless revenue stream, software maintenance revenue is largely a recurring revenue stream that provides the company with a more stable revenue base. Through the first 6 months of 2018, over 80% of our revenue base is recurring in nature.

Now before I turn the call over to Mike and Hemant to provide additional details on our financial performance and operating activity in the second quarter, I want to briefly review some key results for the second quarter. First on a GAAP basis, software revenue of $17 million was up nearly 2% from the prior year quarter, and the related software backlog at June 30 was $36.3 million, up 1% from the prior quarter. Our sales team will continue to be laser-focused on generating activity throughout the remainder of the year.

Second, wireless subscriber and revenue trends continue to exceed our expectations. Spok posted solid results for wireless products and services in the second quarter. Gross pager placements of approximately 35,000 were up sharply from the prior quarter. As a result, net pager losses totaled approximately 6,000 units in the second quarter, which is down 58% from the prior quarter. We're pleased to see the continuation of these more stable trends, especially in our top-performing Healthcare segment, which comprises approximately 82% of our paging subscriber base.

Finally, in addition to our financial performance, progress was made in several other areas including product development, product strategy, and key strategic partnership agreements. During the quarter, we added more than a dozen new customers to the Spok family. Spok continues to build an industry-leading reputation. We are proud of the strong partnerships we are establishing such as the ones with Bernoulli Health and Zebra Technologies, that were outlined in our earnings release. I believe these and other strong partnerships validate the proposition that we have created for our customers.

Also last quarter, we strengthened our position as an industry thought leader at the C-suite conferences we attended, where key Spok executives made presentations and facilitated focus groups. Last month, we also enhanced our industry reputation with the release of the results of our eighth consecutive survey of mobile strategies in healthcare. Respondents to that survey include more than 300 healthcare professionals, 44% of whom were clinicians from hospitals and health systems around the country. In a few minutes, Hemant will give you a little more detail regarding the findings of that survey, and the tremendous value it brings to our organization in terms of lead generation and sales.

I'll make some additional comments on our business outlook shortly but first, Mike Wallace, our Chief Financial Officer will review the financial highlights for the quarter and after that, Hemant Goel, our President, will comment on second quarter sales and marketing activities. Mike?

Thanks, Vince. Let me give you a little more detail on our financial performance in the second quarter. Now I would again encourage you to review our second quarter of 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 were pleased with our overall operating performance in the second quarter and believe that our year-to-date performance positions us to take advantage of the typically increased activity in the second half of the year.

Key drivers of our financial performance during the quarter were sustained year-over-year improvements in software operations revenue, software maintenance revenue renewal rates -- which continue to exceed 99% and continued stable levels of churn in wireless paging units.

Lastly, continued disciplined operating expense management has also allowed us to absorb the impacts of our planned investments in product research and development expenses while generating positive EBITDA. Over the next few minutes, I will review key areas which drove our second quarter financial performance. They include: one, a review of certain factors impacting second quarter revenue; two, selected items, which influenced second quarter expenses; and three, a brief review of the balance sheet. Finally, I will review 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 second quarter of 2018, total GAAP revenue was $40.6 million or $41.8 million when adjusted to exclude the adoption of ASC 606 compared to $42.3 million in the first quarter of 2017.

We were again pleased with our ability to generate a year-over-year increase in software revenue. Through the first 6 months of 2018, GAAP revenue totaled $83.7 million. Again, when adjusted to exclude the adoption of ASC 606, revenue totaled $84.3 million, up from revenue of $83.8 million in the first half of 2017, where the year-over-year increase in software revenue outpaced the erosion of our wireless revenue. Adjusted to exclude the adoption of ASC 606, total second quarter software revenue of $18.1 million reflects an 8.7% increase from the second quarter of 2017. Through the first 6 months of 2018, again adjusted to exclude the adoption of ASC 606, software revenue totaled $36.3 million, a 12.6% increase from the prior year period. This performance was driven by a 23.9% year-over-year 6-month increase in software operations revenue, coupled with a 4.8% maintenance revenue growth as we continue to refine and enhance our processes, specifically related to the implementation of our software solutions.

Also contributing to the first half performance, was a stable level of pager unit churn. As a result wireless revenue for the first half remained solid, declining only 6.9% 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 continue to 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 second quarter of 2018, we reported consolidated operating expenses, which excludes depreciation, amortization and accretion, of $40.1 million, up from $37.1 million in the year-earlier quarter. Nearly half of the anticipated $3 million increase from the year ago period was driven by higher research and development costs, reflecting our continued investment in Spok Care Connect platform.

Additionally, nearly 800,000 of the increase was driven by sales and marketing expense over the period reflecting our investments in our sales organization and our increased presence at trade shows and conferences.

In the second quarter of 2018, research and development cost totaled $6.2 million. This represents a 32.5% increase from the second quarter of 2017, down from the 39.7% year-over-year increase we saw in the first quarter. Sequentially, research and development costs were up $442,000 from the prior quarter, a sharp reduction from the $800,000 sequential increase we saw in the first quarter of 2018. We believe that this overall trend will continue as we are now past the initial portion of our investments in research and development, and those expenses should approach a more steady state level.

Our capital expenses in the second quarter were approximately $2.3 million. Through the first 6 most of 2018, capital expenses totaled $3.5 million and are in-line with the guidance we provided. 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. Through the first 6 months of the year, Spok generated approximately $4.8 million of EBITDA, or earnings before interest, taxes, depreciation and amortization, and when adjusted to exclude for the adoption of ASC 606, this along with cash on hand was used to fund the quarterly dividends of $5.2 million, and share repurchases of $9.5 million as well as capital expenses of $3.5 million. We ended the quarter with a cash balance of $94.1 million, down approximately $13.1 million from December 31, 2017.

Finally, with respect to our financial guidance for 2018, based on our performance through the first 6 most of 2018, 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 will turn the call over to our President, Hemant Goel, who'll update you on our second quarter sales and marketing activities, Hemant?

Thank you, Michael, and good morning. As you've heard, our sales and maintenance teams have been -- delivered software bookings in the second quarter of 2018 totaling $18.5 million. Second quarter performance was up 2% from the prior period, in line with our seasonal expectations. Healthcare remains a key part of our growth and primary focus, making up 89% of overall bookings in the United States for the second quarter.

During the quarter, we completed 17 6-figure healthcare deals, including 3 with customers who have never worked with us before. In total, we added 9 healthcare software customers to the more than 1900 hospitals that use Spok Solutions. Those customers include all 30 adult and children's healthcare organizations on the current Best Hospitals Honor Roll by U.S. News & World Report.

During the second quarter, we closed a 7-figure deal with a large West Coast academic medical center. The 5-year deal will nearly double the organization's licenses for a mobile application going from 4,000 to 7,000 users. The customer choose Spok as an important part of its initiative to improve its clinical communications. As with many hospitals today, the customer looked first to its electronic health record vendor for communication solutions, but they found that there are limitations to what they can do with the EHR. One of the main downfalls of relying on the EHR for clinical communication and collaboration is that only clinicians can communicate with the EHR and not the full range of the healthcare team who need to work together to deliver better patient care.

Spok Care Connect is the perfect complement to these systems, allowing for delivery of the right message to the right person, on the right device, at the right time. We see this partnership as a solid endorsement that we can help hospitals leverage their major investments in their EHRs through our clinical communication and collaboration platform.

One of the new customers in the second quarter was a 260 bed Regional Medical Center in the Midwest. The hospital has been a Magnet-designated hospital by the American Nurses Credentialing Center since 2004. This national recognition indicates that the organization has the highest level of nursing standards in the industry. The 6-figure deal includes our nurse call solutions that will integrate with the hospital's existing system for patient monitoring, and routing alerts and staff assignments. The customer will also use the Spok web paging solution, replacing its in-house [bill-paging] system. The second quarter 2018 was also a solid quarter for the wireless sector exceeding all defined goals in sales, revenue and retention.

The second quarter is traditionally our strongest quarter for paging and this year was no exception. As hospitals take on medical residents and interns in April, May, and June, they are issuing them pagers. Thus the influx during this period. That's a strong indication for us that our wireless technology remains an integral part of clinical communication for our healthcare customers. Our paging base continues to remain stable and we have seen a growing interest in both our encrypted paging network as well as our secure smartphone mobile solution.

Our professional services group continues to focus on efficiencies and streamlining operations to have safe resources and deliver a more consistent experience to our customers. During the quarter, professional services completed a major installation of a 911 alerting system for a large government agency with several campuses. The situation was unique in that there were 275 data switches, a setup that potentially could have slowed data transmission and created a safety issue. Instead of rearchitecting our entire application, Spok made a smaller change to batch data switches, so communication could be completed within the 150-second time frame specified. As Vince noted, our software development team is on target to meet our development goals for the year, including the evolution of Spok Care Connect to include cloud-based solutions that will integrate with our existing software.

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 June, we released the findings of our eighth annual survey on mobile strategies in healthcare. For the third consecutive year, more than half of the survey respondents reported having a mobile strategy in place. For those organizations with a strategy, there is a strong continuous improvement feedback loop between policy owners and clinical teams when it comes to keeping mobile policies current. One of the most popular reasons for updating a policy was to address change in clinical workflows. This is in-line with our experience with healthcare customers, as we see continued growth in the number of clinicians included in the decision-making process for choosing our solutions.

The mobility survey is an important part of our annual marketing strategy. Not only does it position us as a thought leader in this area, but the survey has generated hundreds of leads, and has been cited in 9 industry publications. We also continue with a strategy to gain recognition and reputation by presenting at leading healthcare C-suite events. During the quarter, our chief nursing officer presented at the American Organization of Nurse Executives, AONE, annual meeting and our vice president of product strategy spoke at the Healthcare IT Institute and facilitated a focus group at the AMDIS Physician-Computer Connection Symposium. At all 3 events, Spok representatives focused on how an enterprise communication platform, such as Spok Care Connect, can solve many of the communication challenges hospitals face today. Our customers and potential customers believe in our strategy to deliver an enterprise healthcare communication platform. Our brand is gaining traction in the marketplace, and we expect our bookings will continue to grow. Looking forward, we anticipate continued market demand for a clinical communication and collaboration platform in healthcare.

And with that, I'll pass it back over to Vince.

Thank you, Hemant. Before we open the call up for your questions, I'd like to comment briefly on a couple of items. First, I want to update you on our current capital allocation strategy, and second, I want to review our key goals and business outlook for the remainder of 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. To that end, the allocation of capital remains a primary area of focus. Our multifaceted capital-allocation strategy includes dividends and share repurchases as well as key strategic investments that include augmenting our product development and operating platform and infrastructure.

Our strategy also includes the potential for acquisitions that are both strategic in nature and that are accretive to earnings. We are a company in transition and believe that financial flexibility over the long term is important to the success of our strategy. Spok is laser-focused on delivering the next generation of our software platform, and we believe that our cloud-based and fully integrated communications platform will be a game changer in our chosen markets. As I said at the start of this call, I'm happy to report that we are on track with our development efforts and roll out plans, and look forward to taking advantage of what we believe is a large market opportunity for this technology. Our capital allocation policy includes occasional stock repurchases along with our recurring dividends of $0.125 per share, per quarter and capital investments in our business. We remain debt-free. We will continue to evaluate our capital allocation strategy and communicate our plans in each quarter when we report our earnings.

Finally, with regard to our key goals and business outlook, we believe our first half activities and investments have positioned us to be successful in the second half of 2018. In order to take advantage of the large opportunity in our chosen markets, our business goals for the year remained unchanged. They include: accelerating 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.

At this point, I'll ask the operator to open the call for your questions. We'd ask you to limit your initial questions to 1 and a follow-up, and then after that we'll take additional questions as time allows. Operator?

(Operator Instructions) Our first question will come from [Scott Williams] with [Village Capital Management].

This is [Ryan Scott]. We're 3 years into a 5-year investment cycle. How -- first of, how do you see the software revenue building in the back half of the year? What specific line items do you see contributing to the growth? And then for the next couple of years, what sort of -- once Spok 2.0 is fully built out, what sort of revenue growth trajectory in the software business would you be pleased with?

Well, first of all, with respect to the back half of the year, I think we just reiterated this morning that we are fine with the guidance that we gave at the beginning of the year, there has been no change in that. We will have our results post within that guidance. We typically have a better bookings experience in the back half of the year just because that's the way that the deals usually get done. So usually, you have a much stronger fourth quarter than other quarters. Sometimes the third quarter is pretty good too, depending on the government deals you bring in. Typically, [Ryan], it takes us about 2 months before you start recognizing revenue after a booking and then you recognize that ratably over about a 9-month period. So the later in the year that you generate bookings, the more it impacts the following year, and so if you have a really strong fourth quarter, that's really going to impact 2019, not 2018. But in terms of what we see for this year, we see -- we feel very comfortable with the guidance range that we gave you guys at the beginning of the year and that we just reiterated today. In terms of looking out into the future, and we don't give guidance past the current year; we've never done that in the past and we're not going to start doing that now. But obviously, we wouldn't be doing this if we didn't see a big market opportunity. We think the total addressable market out there for this type of critical communications and collaboration platform is over $2 billion. Now having said that, there's other people that have targeted the same market, and so we're going to be competing against others. We think that the cloud-based platform we're delivering, in many respects is going to be a game changer. And we think that the workflow engine and some other things and aspects that we're building into it is going to be transformative. We're very excited right now with our development partners. They are working with us on this. They're very happy with what they've seen so far. We expect to roll this out and begin introducing it conceptually and demoing it at our user conference in October, Connect 18. And we expect to be in beta by the end of the year. We expect to have some sales of this platform in 2019; you'll see much more contribution for it in 2020. So while I can't give you specific numbers, obviously we've had -- got our own forecast and we wouldn't be doing this if we didn't think it was going to be very important to our future.

(Operator Instructions) All right, gentlemen, there are currently no further questions in the queue at this time.

Okay, thank you, operator and thank you shareholders and investors for joining us this morning. We look forward to speaking with you again after we release our third quarter results in October. Everyone, have a great day.

Thank you, ladies and gentlemen. This concludes today's teleconference, and you may now disconnect.