Spok Holdings Inc (SPOK) 2018 Q3 法說會逐字稿

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

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

Good morning, and thank you for joining us for our third 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 Factors section relating to our operations and the business environment in which we compete contained in our 2017 Form 10-K; our third 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 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.

Thank you, Mike, and good morning. We're pleased to speak with you today regarding our third quarter operating results. We believe our performance and recent sales trends provide momentum as we finish 2018 strong and head into the new year. While we always strive to do better, our third quarter results are encouraging as we saw strong performance in a number of key operating measures with a sequential and year-over-year improvements. In a few moments, I'll provide more color on our performance then our Chief Financial Officer, Mike Wallace; and our Operating President, Hemant Goel, will provide more detail on our financial performance and operating results. However, before we begin, let me take a couple of minutes to talk about a tragedy that recently impacted the entire Spok community.

It was a great sadness that we announce the unexpected passing of Tom Saine in an airplane accident. He was our Chief Information Officer. The entire Spok family mourns the loss of our dear friend. During his tenure at Spok, we've benefited greatly from Tom's expertise as well as his dedication and commitment. He greatly contributed to this organization and was instrumental in our transformation. On behalf of the entire Spok team, I'd like to offer our deepest sympathies to the Saine family during this difficult time.

Okay. Now I'll provide a brief overview of our results for the quarter and the 9 months of 2018. Overall, in the third quarter, we saw sequential total revenue growth as growth in software revenue outpaced plan wireless revenue attrition. Spok also continued to generate positive EBITDA and has returned $17.6 million of capital to our stockholders through the first 9 months of this year in the form of dividends and share repurchases. We also enhanced our product offerings through our continued investments in our integrated communication platform, Spok Care Connect. We continued our substantial investment in our development team and are leveraging our decades of experience in critical health care communication to deliver a cloud-based platform that will bring the latest in communication technology to the market. Our team remains on target to meet our development goals for the year.

A couple of weeks ago, we were excited to welcome more than 150 attendees to Connect 18, Spok's annual user conference for customers and health care professionals. There, we brought together some of the industry's leading innovators who are pushing the boundaries to advance and improve health care communications. We were particularly pleased to showcase what we believe is a game changer in health care communication technology, the next generation of the Spok Care Connect platform. The excitement level was high and the receptivity we got from our customers was extremely encouraging.

Through the first 9 months of the year, we were very pleased to see software revenue, on a GAAP basis, grow by more than 8% year-over-year, with each quarter up from the prior year. Additionally, we continued to see a more than 99% revenue renewal rate on software maintenance contracts. Similar to our wireless revenue stream, software maintenance revenue is a largely recurring revenue stream that provides the company with a more stable revenue base. Through the first 9 months of 2018, approximately 80% of our revenue 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 third quarter, I want to briefly review some key results. First, on a GAAP basis, software revenue of $19.2 million was up nearly 13.2% from the prior quarter and up nearly 3.7% from the prior year. Software bookings for the 2018 third quarter were $21.6 million, an increase of 16.7% and 17.7%, respectively, from the second quarter of 2018 the prior year quarter. Third quarter bookings include a $10.8 million of record operations bookings, and our related software backlog at September 30 was $36.4 million, up slightly from the prior quarter. Our sales team will continue to be laser-focused on generating activity through the remainder of the year and into 2019. However, we believe these results demonstrate momentum, and we are confident in generating long-term growth.

Second, wireless subscriber and revenue trends continue to exceed our expectations. Spok posted solid results for wireless products and services in the third quarter. While the net decline in paging units totaled 25,000 units and was up from the prior quarter, ARPU, or average revenue per unit, was stable with the prior quarter. As a result, quarterly wireless revenue was down a record low of only 1.7% from the prior quarter. We were pleased to see the continuation of these stabilizing 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 key areas, including product development, sales strategy and strategic partnership agreement. During the quarter, we added more than 2 dozen new customers to the Spok family. Hemant will review this in more detail later, but I'm pleased to report that one of those was a 7-figure deal for a large health care network and another included multiple integrations with a large government entity.

Spok also continues to build an industry-leading reputation, providing best-in-class support to our customers. I'd like to take a moment to talk about the recent devastations, resulting from Hurricanes Florence and Michael this year, and Spok's role in supporting health care institutions in the affected regions. Our thoughts and prayers go out to anyone impacted by these storms. While both storms left a path of destruction, resulting from the rain and flooding, our network held up extremely well. Due to the simulcast nature of our network, high-power transmitters and Spok's best-in-class engineering team, we were virtually 100% functional. Once again, this was not the case with mobile phone networks. I'm proud of our engineering and customer service teams who reached out to customers in advance of these storms and for the reliable network and communications that we provide to our customers during these catastrophic events.

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. After that, Hemant Goel, President of our operating company will comment on our third quarter sales and marketing activities. Mike?

Thanks, Vince. Let me give you a little more detail on our financial performance in the third quarter. I would again encourage you to review our third 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 were pleased with our overall operating performance in the third quarter and believe these results clearly demonstrate momentum as we complete 2018 and position ourselves for next 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 stable ARPU, or average revenue per unit, rates which resulted in historically low wireless revenue attrition; lastly, continued disciplined operating expense management has also allowed us to absorb the impacts of our planned investments in product, research and develop expenses, while continuing to generate positive EBITDA.

Over the next few minutes, I will review key areas which drove our third quarter financial performance. They include: one, a review of certain factors impacting third quarter revenue; two, selected items, which influenced third quarter expenses; and three, a brief review of our balance sheet and cash flow statement. Finally, I will review our financial guidance for the remainder of 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 third quarter of 2018, total GAAP revenue was $42.5 million or $41 million when adjusted to exclude the adoption of ASC 606. This compares to $40.6 million in the second quarter of 2018 and $43.6 million in the prior year. Through the first 9 months of 2018, GAAP revenue totaled $126.2 million or $125.3 million when adjusted to exclude the adoption of ASC 606. This compares to a revenue of $127.4 million in the first 9 months of 2017.

On a GAAP basis, third quarter software revenue of $19.2 million reflected a 13.2% increase from the second quarter of 2018 and a 3.7% increase from the prior year. Through the first 9 months of 2018, software revenue totaled $55 million, an 8.3% increase from the prior year period. As such, we were pleased with our ability to generate both sequential and year-over-year increases in software revenue. This performance was driven by more than 18% year-to-date increase in software operations revenue from 2017, coupled with modest maintenance revenue growth as we continue to refine and enhance our processes specifically related to the implementation of our software solutions.

From a wireless perspective, and also contributing to the year-to-date performance, were stable levels of pager unit churn and solid ARPU rates. As a result, wireless revenue for the first 9 months remained strong, declining only 7.1% from the prior year period.

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 in sales and marketing categories. During the third quarter of 2018, we reported consolidated operating expenses, which excludes depreciation, amortization and accretion of $40.9 million, up from $40.1 million in the prior quarter and $37.5 million in the year ago period. The increase in operating expenses from the prior quarter was driven primarily by the increased cost of product associated with the $1.8 million sequential increase in total revenue as well as higher-than-expected costs associated with our self-insured health plans.

In comparison to the year ago period, operating expenses increased $3.4 million or 8.4%, largely driven by our planned research and development costs of approximately $1 million; reflecting our continued investment in our Spok Care Connect platform; and general and administrative costs of $1.6 million, primarily due to the full year investment in back-office systems as well as a noncash increase in our allowance for bad debt, driven by higher accounts receivable from a year ago and the change in methodology.

In the third quarter of 2018, research and development costs totaled $5.9 million. This represents a 19% increase from the third quarter of 2017. While up from the prior year, the rate of increase is down substantially from the 32% year-over-year increase we saw in the second quarter of 2018 and down from the nearly 40% year-over-year increase we saw in the first quarter of 2018. We believe this trend will continue as we are now past the initial portion of our investments in research and development for our next-generation software platform, and those expenses should approach a more steady-state level.

Our capital expenses in the third quarter were approximately $1.6 million. Through the first 9 months of 2018, capital expenses totaled $5.1 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 9 months of the year, Spok generated approximately $5.6 million of EBITDA, or earnings before interest, taxes, depreciation and amortization. This, along with cash on hand and working capital items, was used to fund the quarterly dividends of $7.6 million, share repurchases of $10 million and the aforementioned capital expenses of $5.1 million. We ended the quarter with a cash balance of $95.2 million, down approximately $11.9 million from December 31, 2017.

Finally, with respect to our financial guidance for 2018, based on our year-to-date performance and expectations for the fourth 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 always based on current trends 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 second quarter sales and marketing activities. Hemant?

Thank you, Mike, and good morning. As you've heard, our sales, maintenance teams delivered software bookings in the third quarter of 2018 totaling $21.6 million. Third quarter performance was up 16.7% from $18.5 million in the previous quarter and showed a 17.7% increase from the prior year quarter. As Vince stated, our maintenance renewal rate remains strong at more than 99%.

Health care remains a key part of our growth and primary focus, making up 90% of overall software bookings in the U.S. for the third quarter. During the quarter, we completed 22 6-figure health care deals, including 11 with customers who have never worked with us before. In total, we added 14 health care software customers to the more than 1,900 hospitals that use Spok solutions. For the sixth consecutive year, we are proud to announce that our customers include all 30 adult and children's health organizations on the current U.S News & World Report Best Hospitals Honor Roll.

During the third quarter, we closed a $1.2 million deal with a large medical center that has facilities in Minnesota, Wisconsin, Arizona and Florida. The customer already uses Spok solutions to audit systems and use Spok as a critical communication partner in their overall enterprise strategy. They are now adding more than 50 hospital switchboard consoles to manage patient inquiries, direct code calls and streamline enterprise-wide communication procedures. They are also leveraging Spok nurse call alarm integration middleware to route messages directly to clinicians.

During the third quarter, we also had great success selling into the Veterans Administration, booking more than $2 million in sales. Part of that was a major 7-figure deal with a region that includes 8 VA hospital locations. Our solution in this hospital addresses a pervasive problem throughout the country: patient elopement and wandering. The Spok solution automates the routing and notification from the VA's patient tracking system to advise clinical and facility staff on the device of their choice when a patient goes outside of geographical limits. We are working with the 3 additional VA facilities to improve critical communications. The Spok solution enhance workflows for Code Blue processes, critical test results automation and notification to on-call care teams, nurse call alarms for actionable events and patient tracking, all of which will improve patient outcomes.

Our partnership with Standard Communications Inc., or SCI, was one of the keys to our success in this new relationship. SCI is verified by the Service-Disabled Veteran-Owned Small Business program, providing contracting capability and focus to ensure we can deliver relevant and meaningful solutions to health care for our veterans. Our software adheres to the standards set by the VA in its Technical Reference Model, or TRM. SCI was instrumental in sponsoring us and helping us achieve TRM accreditation.

Our wireless team continued to deliver positive sales results in the third quarter, adding a number of live new health care facilities to the Spok customer base. Amongst these was a large West Coast-based health care provider who wants to improve the delivery of their critical code pages, an area where their previous vendor consistently struggled. After an extensive bidding process and through months of side-by-side comparisons, the hospital ultimately chose Spok as their new provider. They have since migrated more than 1,300 employees onto the Spok paging network. When asked what led them to their final decision, the hospital said it was Spok's ability to consistently deliver life-critical pages in an expedient manner.

In addition to the reliability and speed of our network, they are also meeting the compliance objective of protecting patient information by choosing Spok encrypted pagers for all 1,300 units. The hospital made it very clear that although lower pricing had kept them with their previous vendor, the lower price was of little value if they were risking patient safety on an unreliable system. This customer is now talking to our software teams about how to optimize staffing and patient workflow with additional Spok solutions.

Our Professional Services group continues to make great improvements in our methodology as we transform to a Software-as-a-Service business. Through aggressive cross-training and by streamlining processes, we've reduced the number of techs required for an engagement from 5 to 2. We've also improved customer education for maintaining their systems. Support and services now collaborate to include a training session at the end of implementation to help increase success and decrease issues. To further ensure smoother projects with minimal issues after go-live, we have revamped our testing criteria and realigned with our quality assurance team. All of these changes have helped us achieve a 95% customer satisfaction rating.

Our software development team continues to meet and exceed our goals for developing a cloud-based platform that will integrate with our existing software to provide solutions for the most pressing concerns in health care. From helping to reduce alarm fatigue, to lowering mortality rates, to improving patient satisfaction, Spok Care Connect provides real-time actionable information to support care team collaboration and help ensure better patient outcomes.

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. As Vince mentioned, we recently held a highly successful customer conference, Connect 18. During the third quarter, we also released the findings of our first ever survey on contact centers in health care. Nearly 400 health care professionals from around the U.S. participated in the survey. One of our key findings was that nearly half of the respondents consider their contact center to be an enterprise transformation initiative as opposed to a simply a communication function. In addition, we found that clinicians play an important role in setting the strategy for contact centers. 58% of respondents replied that clinical leaders, physicians and nurses, were involved in creating the contact center strategy for their organizations. We think these results signal that contact center roles and functions are a key part of the health system's overall strategic plan and aren't confined to communication policies and procedures. More and more, we see that contact centers are becoming an agent of change for organizations we serve.

We also continued with our strategy to gain recognition and reputation by presenting at leading health care C-suite events, including our recent participation in the Becker's Hospital Review, Annual Health IT Conference and the American Hospital Association's Leadership Summit. Our platform vision and strategy continues to gain traction. Customers believe in our strategy to fully deliver an enterprise health care communication platform and are seeking the results. One recent example is from the Bermuda Hospitals Board. Using Spok solution, the hospital has seen an 83% decrease on the time it takes to notify staff of a disaster event and has cut in half the time it takes staffers to respond to a Code Blue. We are looking forward to expanding our footprint in the health care market with a clinical communication and collaboration platform and continuing to help our customers improve patient outcomes and staff efficiency.

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 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. Towards 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, 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're a company in a 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're on track with our development efforts and rollout plans, and look forward to taking advantage of what we believe is a large market opportunity for our technology.

Our capital allocation policy for the remainder of the year includes our recurring quarterly dividend of $0.125 per share and capital investments in our business. We remain debt-free. We will continue to evaluate our capital allocation strategy, and we'll communicate our plans to you each quarter when we report earnings. Finally, with regard to our key goals and business outlook, we believe our activities and investments thus far have positioned us to be successful in the fourth quarter and 2019. Our business goals for the year remain unchanged. They include accelerating the development of our products and services, building a stronger infrastructure, aligning our resources and focusing where most needed and driving software revenue growth while managing wireless revenue declines. We look forward to laying out our financial guidance for 2019 when we report fourth quarter and full year results in February.

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

Operator?

(Operator Instructions)

Okay. Well, while we have a large list of people participating, we don't have any questions, so I just want to thank everybody for participating this morning. We look forward to speaking with you again after we release our fourth quarter and full year results in February. We'll be providing guidance for 2019 then.

In the meantime, everyone, have a strong balance of the year, like we're going to, and have a great day. Thank you.

Thank you. Ladies and gentlemen, again, that does conclude today's conference. Thank you all again for your participation. You may now disconnect.