Spok Holdings Inc (SPOK) 2018 Q4 法說會逐字稿

Good morning, and welcome to Spok's fourth quarter investor call. Today's call is being recorded. On line 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 would like to turn the call over to Mr. Wallace. Please go ahead, sir.

Thank you, and good morning. Thank you for joining us for our 2018 Fourth Quarter and Full Year 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 on 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 2018 Form 10-K, 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 adjustments would 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, everyone. Thanks for joining us on today's call. We're encouraged with our performance in the fourth quarter of 2018 and believe it provides a solid basis for continued improvement in 2019. We were particularly pleased with our growth in software bookings and the continued improvement in our wireless trends. Noteworthy was our performance in the second half of the year as software revenue grew nearly 10% compared to the first half of 2018, and fourth quarter sequential wireless revenue declines slowed to a record low 0.7%. These metrics give us confidence as we start the new year and launch the next evolution of our Spok Care Connect platform.

Before we get into the details of the quarter and full year, I want to underscore where we are strategically and with respect to our business plan and outlook. For the past few years, we've laid out a strategy for you, where Spok with PIVOT of a telecommunications company to a provider of software solutions with an initial primary focus on the North American health care market. That transformation included substantial investment in the evolution of our Care Connect solution, and I'm proud to report that our transformation is on track, and we continue to see the benefits from the investments in our software solutions platform.

Last October, the announcement of the introduction of that platform was well received by over 150 of our customers at our annual Connect conference. A couple of weeks ago, we've continued to build on our industry-leading reputation when we publicly launched the next evolution of the Spok Care Connect platform at the HIMSS Conference in Orlando. The announcement and our progress was incredibly well received, and we continue to receive positive feedback on it. Let me take this opportunity to thank our investors for joining us on this ongoing transformation and for your continued support. We're a company with the majority of our revenue still coming from our wireless paging base. We believe this will change over time as software revenue increases combined with our already low planned wireless revenue attrition and we move from a flat top line to a growing top and bottom line over time.

While our wireless base has slowed in its year-over-year erosion, it outperformed our forecast on a regular basis. We still believe that we'll continue to shrink over time and that we need to invest in the growth potential of our health care software initiative. However, in the near term, let me reiterate that the high yield in wireless revenue base is key to our strategic footprint in transformation as it gives us the financial flexibility to invest in our software communications solutions and has provided valuable customer relationships to leverage.

We've seen over the past few years that many physicians want smart devices and secured messaging, and it's a natural fit for them, but they also want to keep their pagers because they have long trusted them or want to separate their personal smartphone communications from their work communications arriving on a pager. Also, as you know, in a true emergency situation such as (inaudible), like what we saw from the recent devastating hurricanes last fall, or an event involving rapid deployment of First Responders, some of the networks tend to get overloaded and message delivery can fail or be interrupted. If an organization utilizes only smartphone, communications can be at risk. Pagers still work in these scenarios because we use a separate high-power simulcast network and multiple satellite control of our transmitters for redundancies. As a result of these dynamics, we believe that migration from wireless pagers will continue to occur at a slower pace than in past. So with that said, our focus is to create, sell and service industry-leading clinical communication and collaboration solutions through our Spok Care Connect platform. We believe that we are starting to see the benefits of the investments that we have made, and we believe that the investments we continue to make in our systems and people positions us well to capture a large portion of the market opportunity that we see out there.

Now turning to the 2018 fourth quarter and full year results, we were particularly pleased to see fourth quarter software bookings improve more than 20% from prior year levels and annual software bookings increased nearly 5% from prior year levels. Record low levels of wireless unit and revenue attrition also contributed to our performance. We believe these results is a direct result of the investments we've made in our sales team and infrastructure. Overall, we continue to generate FDA, enhance our product offerings and maintain the strength of our balance sheet. Our ability to continue to generate healthy cash flows allowed us to execute against our capital allocation strategy returning more than $23.6 million to our stockholders in 2018 in the forms of dividends and share repurchases. Mike and Hemant will provide details on our financial performance and operating activity shortly, but before that, I want to highlight a few key results for the 2018 fourth quarter and full year.

First, continued demand for our software solutions and wireless services resulted in consolidated revenue of $159.5 million for 2018, down approximately 1% from the prior year, but sharply, a sharply slower decline in the nearly 5% reduction we saw in 2017. Year-over-year performance was driven in large part by consistent annual levels of software revenue as we continue to invest in our industry-leading clinical communication and collaboration platform, Spok Care Connect and slower-than-anticipated attrition of our wireless revenue. Sustained annual levels of software revenue are due in large part to a continuing trend of very strong renewal rates on software maintenance contracts. Our pipeline of marketing qualified sales leads also remained strong. Demand for our solutions remains strongest in North American market, specifically among hospitals and other health care organizations where we sold solutions for smartphone communications, call center management, secure texting, clinical learning and emergency notification to both new and existing customers.

Next, wireless subscriber and revenue trends continue to improve in 2018 as we again exceeded our expectations for growth additions, net unit churn, revenue and average revenue per unit, or ARPU. Our year-over-year rate of paging unit erosion was slower than 2017 levels as the net number of units lost during the year totaled 57,000, down 8% from the prior year. Our year-over-year rate of wireless revenue erosion was 6.8% for 2018, a 90 basis point improvement from the prior year and a sharp reduction from the double-digit decline we saw prior to 2016. We were especially pleased to see these positive trends continue on our top-performing health care segment, our best-performing market segment in the fourth quarter, the highest rate of gross placements and the lowest rate of unit disconnects.

Third, consolidated operating expenses, which exclude depreciation, amortization, accretion and impairment, were up less than 9% from 2017 and were at the midpoint of the guidance that we had provided at the beginning of the year. Noteworthy was that our team was able to achieve this performance as we saw a nearly 31% increase in product research and development expenses over the same period in order to support our investment in the Spok Care Connect platform. Mike will review details in a few minutes, but essentially the lower year-over-year operating expenses reflected a cost structure that is fully aligned with the demand levels we saw during the year. We continue to manage operating expenses closely, and the efficiencies we have been able to implement across our cost structure provide a solid financial platform as we continue to make investments in areas that support our strategy for long-term growth.

Finally, in 2018, we returned more than $23.6 million to our stockholders, in line with prior year totals. In 2018, we continued to remain focused on returning value to our shareholders through our capital allocation strategy, which I'll talk about later in the call.

Overall, we are pleased with our operating performance in the fourth quarter and the company's substantial progress in 2018. We met or exceeded our expectations on a number of key operating measures, and we achieved these results as we continue to make key strategic investments in our business. However, we had many other accomplishments in addition to our financial performance. I'll call out a few of those for you.

We announced key strategic partnerships with companies such as Zebra, Spectralink and Bernoulli. Our management were keynote speakers at numerous C-suite conferences. We received recognition as the #1 provider of secured communications by Black Book Market Research, and we continue to provide solutions and services to all of the U.S. News & World Report best adult and children's hospitals. Our team intends to carry this momentum throughout 2019 to stimulate long-term growth.

I'll have additional comments on our 2019 outlook and strategy in a few minutes, but first Mike Wallace, our Chief Financial Officer, will review financial highlights for the quarter and then Hemant Goel, President of our operating company, will provide more detail on bookings, trends, our new Care Connect cloud platform and some large customer wins. Mike?

Thanks, Vince. Before I review our financial highlights for the fourth quarter and full year 2018, I would again encourage you to review our 2018 Form 10-K, which, again, 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 conference call.

As Vince noted, we were pleased with our overall operating performance for the fourth quarter and full year of 2018, along with the progress we made toward meeting our long-term business goals, a 7.4% increase year-over-year in software revenue and record-low attrition of wireless revenue combined with continuously focused expense management to generate approximately $10 million in net cash provided by operating activities in 2018. Spok was able to achieve this performance as we continued to return cash back to our shareholders in the form of dividends and share repurchases and invest in our business for the long term.

Our balance sheet remains strong with a cash, cash equivalent and short-term investments balance of $87.3 million at December 31, 2018, and we continue to operate as a debt-free company. We believe this provides a solid financial platform and are well positioned to execute against our long-term goals in 2019 and beyond.

In the interest of time today, I will not review our fourth quarter and full year 2018 income statement on a line-by-line basis since much of that information is contained in our news release schedules and SEC filings. However, to the extent you have specific questions about our quarterly financial results, I would be glad to address them during the Q&A portion of this call. Rather, I want to focus instead this morning on 4 specific areas. These include revenue, operating expenses, a brief review of our balance sheet and our financial guidance for 2019.

With respect to revenue in the fourth quarter of 2018, total revenue of $43.3 million was in line with the prior year quarter and up from $42.5 million in the third quarter of 2018. Total fourth quarter software revenue reflected increases from the prior quarter and the fourth quarter of 2017 by approximately 5% for both periods as we recorded record levels of software operations revenue and sustained maintenance revenue levels. The record level of software operations revenue reflects our continued focused on our Professional Services with maintenance renewal rates up approximately 99% as well.

Wireless revenue for the fourth quarter remained solid, declining by a record low of 0.7% from the prior quarter. Noteworthy, in the second half of 2018, wireless revenue erosion slowed to a historical low of 3.3%. This result reflected another impressive performance by our sales team to, again, generate significant wireless gross additions while minimizing churn and maintaining stable unit pricing.

Turning to operating expenses. For the full year 2018, operating expenses, excluding depreciation, amortization and accretion, totaled $161.9 million versus $148 million -- $148.8 million in the prior year. This primarily reflects the increased level of investment in our Spok Care Connect platform. For the full year 2018, operating expenses increased approximately $13 million or 9% from prior year levels. This was driven by a planned increase in annual R&D expenses of $5.8 million on a year-over-year basis as well as a $4 million increase in cost of revenue resulting from the 7.4% increase in year-over-year software revenue. Additional sales and marketing expense of $1.7 million reflects the increased presence at industry trade shows and activities surrounding the launch and the evolution of our Care Connect platform.

Depreciation, amortization and accretion decreased in both the fourth quarter and full year 2018 compared to the same periods in 2017, primarily due to the lower amortization expense associated with our intangible assets. As you may remember, due to our rebranding in 2014, we have revised the amortization period for the intangible assets associated with the Amcom acquisition, which resulted an increased amortization expense in that year.

Turning to capital expenses. In the fourth quarter of 2018, they were approximately $0.8 million and were incurred primarily for the purchase of pagers and infrastructure to support our wireless customers. For the full year, capital expenses totaled $5.9 million, down from $9.2 million in 2017 reflecting the decreased capital needs to support the Spok Care Connect platform development. We believe we are past the major portion of our CapEx requirements to support our strategy, and that level should generally remain flat over time.

Taking a look at our deferred tax assets, or DTAs. We had approximately $46.5 million in DTAs at year-end, down $1.2 million from the prior year-end level. The DTAs consist primarily of net operating losses, which will expire in the years 2025 through 2029. Based on the availability of these DTAs, we do not expect to pay a significant amount in federal income taxes for the foreseeable future as these DTAs allow us to shelter virtually all of our regular federal taxable income.

With respect to our financial guidance for 2019, as is typical of our fourth quarter earnings release, we have included an additional schedule detailing the components of our annual guidance for this year. Included in that guidance are Spok's expectations for software and wireless revenue generation in 2019. We expect total revenue to range from $156 million to $174 million. Included in that total, we anticipate software revenue to comprise $75 million to $85 million. Also, we expect the operating expenses, excluding depreciation, amortization and accretion, to range from $155 million to $165 million and capital expenses to range from $3 million to $7 million. 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 the call over to Hemant Goel who will update you on our fourth quarter sales and marketing activities. Hemant?

Thank you, Michael, and good morning. On today's call, I'll start by reviewing software bookings for the fourth quarter. I'll then update you on our software development progress. I'll give you some details on 2 key customer wins, recap the success of our wireless efforts and provide an update on the Professional Services team. I'll conclude my remarks with a few comments on our marketing initiatives before turning the call back over to Vince.

Our sales and maintenance teams delivered software bookings in the fourth quarter of 2018 totaling $23.1 million. Fourth quarter performance was up 7% from $21.6 million in the previous quarter and increased more than 20% from prior year quarter. Our maintenance revenue renewal rate remains strong at 99%.

Health care remains a key part of our growth and primary focus, making up 96% of overall software bookings in the U.S. for the fourth quarter. We completed 29 6-figure health care deals, including 3 with customers who have never worked with us before. During the quarter, we added 17 new health care customers to more than 1,900 hospitals and health systems that rely on Spok solutions.

Our software development team exceeded expectation on the fourth quarter, delivering the first phase of the next evolution of Spok Care Connect. As Vince mentioned earlier, we believe our Cloud Native platform is a game-changer in health care communication. I'd like to discuss the distinction between Cloud Native, which we're developing at Spok and cloud-hosted, which is what many of our competitors are doing. To take further advantage of cloud technology, we're collaborating with Amazon Web Services to build up software from the ground up. We're not simply hosting our existing software in the cloud, but designing a complete cloud services solution, which will give those customers the most in security, maturity and breadth and depth of services with a real-time cloud-based communication solution. Our Cloud Native platform will integrate with our existing software as we continue to provide our customers with solutions to help them solve of their biggest communication challenges. We have a clear road map for providing our more than 1,900 health care customer support for the solutions they rely on today and guidance for taking advantage of simplified product installation, configuration and customer self-service capabilities a Cloud Native architecture will provide. We believe that the power to automate clinical workflows is what set Spok apart from our competition providing real-time, actionable information to support Care team collaboration and help improve patient outcomes.

To ensure this, we have worked closely with our innovation partners to guarantee the Spok Care Connect, streamlines communication to let the clinicians focus on what they do best, taking care of patients. Two of our innovation projects have successfully deployed our Cloud Native solution and are already expanding its use throughout their organizations. Confidence in our organization's direction was apparent in our fourth quarter sales in bookings. The deal logic continues to grow and our partner alliance have strengthened, offers further indication that we are moving our enterprise solutions in the right direction.

One of the 6-figures deals during the quarter was with a 284-bed private hospital lease cost, already a Spok contact second wireless customer, this organization expanded its business through a partnership with antenna technology partners, Spectralink. A solid relationship with the customer and a strategic partnership with Spectralink resulted in this extensive expansion of services. The partnership organization is already engaged in how to expand its Spok solutions in conjunction with Spectralink health care grade mobile devices to support additional clinical workflows and patient outcomes. The combined solutions will deliver clinical information and updates from systems such as nurse call, patient monitoring and many others, along with clinical teams, team members to reach one another within seconds of a critical alert. This improves overall workflow, staff productivity and the comfort and safety of everyone in the facility.

One of the new customers we brought onboard during the fourth quarter of 2018 was a 184-bed hospital in the East Coast that was looking for secure messaging for its Care teams. Although Spok Mobile was a more expensive solution than some of our competitors, the customer saw the long-term value of our enterprise solution. In particular, the hospitals were in the process of emerging with a larger facility that was already a Spok customer. The fact that our solution would allow them to immediately communicate with other facilities within their IDN made Spok the perfect solution for them. Another notable aspect of this agreement is that the customer made the decision in a much shorter time frame than our typical sales cycle. We see this as validation to our reputation, broad customer base, and more than 1,900 hospitals and health systems enterprise solution position us well for the future.

Our wireless team continued to deliver positive sales results in the fourth quarter and several new health care facilities to the Spok customer base. With more than a million subscribers on Spok paging network, paging is still a relevant communication solution. In fact, our wireless customers sent an average of 105 million messages each month. Spok has continued to invest in its paging network to increase reliability and value for our customers.

At the end of 2018, we completed our long-term project to replace all Glenayre paging terminals, the standard for paging carrier since the late 1980s, with new technology that supports off-the-shelf server hardware and modern operating systems and interfaces. Spok owns the intellectual property from Glenayre, so we are the only paging carrier capable of using the state-of-the-art hardware, which serves as the backbone of the paging network. These new paging terminals provide a highly reliable platform that will take Spok paging into the future. And our team is committed to supporting paging for a fullness type of ability for as long as our customers demand it.

With the introduction of a cloud data platform and evolution to a Software-as-a-Service basis -- business, our Professional Services group continues to evaluate our product delivery methodology. The fourth quarter saw a tremendous progress on a SaaS operational readiness service model, which we are preparing to implement. We are making ongoing improvements with the backlog conversions. The number of projects we closed in Q4 was up 12% over the prior quarter. Project profitability continues to be in line with our goals, and we are seeing an increase in our billable utilization for our services team, a trend we expect to continue.

Before turning things back over to Vince, I want to provide a brief update on our recent marketing activities. During the fourth quarter, we participated in 3 C level events: CHIME CIO Fall Forum, CNO exchange and aging health care. These events contribute to our brand recognition due to our sales pipeline and help us forge relationships with health care leaders across the country. As Vince mentioned, we recently participated in HIMSS '19 in Orlando. A Spok Care Connect announcement at the start of a trade show generated a lot of interest in Spok, including drawing nearly 500 health care leaders to our booth to learn more. We were also a representative this year in one of the education sessions. University of Utah Health presenting surviving sepsis, how health ID saves one life per week. The session, which was presented to a full house included a discussion of how Spok solution support Utah's clinical workflows and help them realize a 20% reduction in mortality rate for patients who develop sepsis as well as a 10% reduction in length of stay and total direct cost for the system. At HIMSS, Spok also participated in the Interoperability Showcase, which attracted more than 11,000 attendees, a new record according to HIMSS, and many large hospital and health systems sent groups of leaders to throw the showcase together. During the Interoperability Showcase, technology leaders showed specific use case of how systems exchange and use data in realtime to improve caring outcomes. Spok has taken on a key role in the HIMSS Interoperability Showcase for more than 10 years. Each year, we expand our footprint as other vendors look to us as a leader in delivering Care critical information to the nation's health systems.

In conclusion, 2018 was a better year of achievement for Spok. The introduction of our cloud data, Spok Care Connect, helps further solidify our platform vision, and our ongoing investment in our enterprise health care communication platform is propelling us forward. We will continue to provide leading-edge technology that supports our customers' evolution to real-time health systems to secure our technology that makes Care collaboration easier.

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

Thank you, Hemant. Okay, with respect to our key goals and business outlook, let me take a few moments to outline our strategy. As I mentioned in my opening comments, about 3 years ago, we embarked on a transformation that was a title shift in our strategic direction for health care, our largest customer segment. The strategy, PIVOT, is a 5-year plan that signals a very intentional move from offering our customers point solutions or single product solutions or call center software, alarm management and secure messaging to offering them a cloud-based single integrated clinical communication and collaboration platform called Spok Care Connect.

As we've previously outlined, our decision to make the shift and focus on Spok Care Connect platform resulted for many reasons, including customer needs as our health care customers were telling us they needed a more unified approach to communications across their enterprise, the large market potential and opportunity as we further penetrate the multibillion dollar health care IT communications market, business simplification as we've been offering their customers too many different products and multiple versions on several different platforms and competitive positioning as we concluded that no one else offers a single integrated platform for health care communications. Listening to what our customers had been telling us and as a result of our work with our innovation partners, at the HIMSS '19 Conference, we were proud to introduce the next generation of our Spok Care Connect platform. Our core foundation of clinical communication is strong, and we are proud of the work our employees have done in support of this mission. We've accomplished so much together since we became Spok. We are laser-focused on making Spok Care Connect the leading clinical communication and collaboration platform for the health care industry.

So with that as background and with respect to our 2019 guidance, this year, we continue our commitment in investing to address near-term opportunities and to achieve long-term organic growth. We believe these investments are critical in supporting our strategy to deliver our industry-leading clinical communication and collaboration platform, Spok Care Connect, interact long-term stockholder value. However, what we believe that we need to continue investing in our future, we have completed the bulk of our investments as we lost the evolution of our Spok Care Connect platform. For that reason, we are holding our 2019 guidance range for consolidated operating expenses essentially flat to the guidance range we provided for 2018.

As a backdrop, in 2016, R&D expenses totaled approximately $13.5 million, an increase of nearly 1/3 from prior year levels. In 2017, R&D expenses totaled $18.7 million, an increase of nearly 40% from 2016. And in 2018, R&D expenses totaled $24.5 million, an increase of 31% from 2017. We believe that R&D expense increases will continue to slow in 2019 and approach a more steady-state level. Included in the expense guidance range that Mike outlined a few minutes ago, in 2019, we anticipate R&D expenses will continue to increase in 2018 levels, although at a much slower pace, and will primarily be offset by expense reductions in other categories.

And finally, with respect to our capital allocation strategy. Our overall goal has been to achieve sustainable business growth while maximizing long-term stockholder value to our multi-faceted capital allocation strategy that has included dividends and share repurchases, key strategic investments to improve our operating platform and infrastructure and drive long-term organic growth, potential acquisitions that could provide additional revenue streams and are accretive to earnings.

For 2019, we're committed to continuing to pay our $0.125 per share quarterly dividend. Our existing share repurchase plan remains in effect. We will continue to evaluate our capital allocation strategy on a quarterly basis and communicate our plans to you with respect to dividends, share repurchases and other uses of capital each quarter when we report earnings.

Finally, we believe it is important to give our investors a closer look at what we've been investing in over the past 3 years. So in May, we will be running an Investor Day program in New York that will showcase our Care Connect platform. After a presentation from management, we'll be providing a product demo similar to what was presented at HIMSS '19 as well as customer testimonials. If you're interested in attending this event, please contact Al Galgano for details. His contact information is in the Investor Relations section of our website.

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

Operator?

(Operator Instructions) We'll go first to the line of Ryan Vardeman from Palogic.

What are the success criteria as it relates to investment that we're making in Spok Care Connect 2.0 in 2019 and beyond?

The success criteria in 2019 is embedded in the guidance range we gave for revenue and for operating expenses and for capital expenditures, which then you can imply our cash flow. But we're not going to see a lot of benefit or push on the upside or the top line in 2019 from this Care Connect platform. We continue to develop it, and we'll certainly be selling more of it by end of the year. You'll see more in 2020 and certainly a lot more in 2021. And next year when we report our fourth quarter earnings, we'll give you the guidance for 2020 and we'll do the similar thing in 2021. We don't provide multiyear guidance. So hopefully, that answers your question. But what we're trying to do, Ryan, and I think I've had this discussion, is tap what we see is a very large total adjustable market in clinical communications. We've seen from [Bartner] that they have estimated, it's anywhere from $2.5 billion to $4 billion. We've done some of our own estimates, but we'll share those with you when we see you in May. And we agree with that kind of range, we only need to access a little bit of that to make this a very, very good ROI for our shareholders and have a very good outcome here, and we think it's entirely doable. We're on track. The company is executing. Our pipeline of qualified sales leads is up significantly right now from where it was a year ago. We got a lot of good things going on here, our research and development people are executing and we've got momentum. So yes, I think these investments, although they were a hard thing from a company that was a traditional telecom company to make this PIVOT, they're paying off and they're going to continue to pay off. Thanks for your question.

Yes. Let me -- the follow-up, I guess, to that would be then in 2019 as it relates to your guidance. What sort of embedded annual to recurring revenue from the Spok 2.0 platform is embedded in that revenue guidance kind of on an exit run rate? Let me understand, you gave me a whole lot of revenue. But bookings and kind of contracts, what would be embedded in that guidance on an exit rate?

Ryan, it's Mike Wallace. As Vince noted, the majority of 2019 is going to be from a revenue standpoint, driven by, if you will, our existing platform. What are our expectations are is that the new Care Connect platform as it begins to come online, we'll be able to begin selling that in the marketplace in the back half of this year. So any amount in 2019 will be de minimis at the end of the day, but it should provide a launching point, as Vince mentioned, for 2020.

I guess, I'll get back in the queue. I'm assuming that there's somebody else in there who got -- or would you prefer to just ask one more question from you?

Yes, I don't -- I can't see the queue. Operator, do we have anyone else because we can let Ryan ask his question if there's no one else in the queue?

Currently, we have no others in the queue. (Operator Instructions)

Okay. Ryan, go ahead.

Yes, so the service rental and maintenance ticked up meaningfully as a percentage of paging revenue. Is this a new run rate? Or what's that a function of?

No, it's more a function of a Upper B class, if you will. So it's just a function of how we have group expenses. But at the end of the day, we continue to spend a great deal of time grooming our paging network to maintain the margins that we've got in that business. So there's been no fundamental uptick in the expenses. It's really just a classification issue.

Okay. And then in the Q3 10-Q, there is an allowance for doubtful that went up a little bit. What side of business does this relate to? And does that trend continue? Or is that onetime in nature? I'm waiting to see the K later today, but...

Yes, it's -- during 2018, we put in a more mechanical calculation, if you will, from an allowance for bad debt standpoint. So we've been building that through 2018. We fundamentally don't believe it is significant in the context of our receivables, probably about 3% or so. So it's pretty much a onetime event in 2018, Ryan, of us just building what I felt was the appropriate allowance for doubtful accounts, kind of when I came onboard. But as you would expect, it's primarily on the software side of the business. The wireless business has been pretty straightforward and stable as far as customers paying. Certainly with hospitals in today's data age, depending on the financial health of those hospitals you can certainly have instances where you have some nonpayers at the end of the day. So it was primarily on the software side, i.e., through hospitals, and it's primarily a onetime event in 2018.

And directionally, how are you thinking about Professional Services next year? And what are your target margins there?

Yes. We brought in a new leader of Professional Services about 1.5 years ago. We've done a great deal of work to transition that from, if you will, sort of a kind of departmental effort to really a business, and we're finally at a stage where we're able to increase the utilization of people that we've got in that group. We've got a lot better at the outset of deals getting statements of work that are aligned with our customers. At the end of the day, the software business, obviously, your PSG business, your Professional Services Group is largely going to drive your lower margins simply because of the amount of people time embedded in that. But I would expect kind of a 30% to 40% margin in that business. And as we begin to make this evolution to the Care Connect platform, we should be able to see less time needed to implement our solutions from a Professional Services standpoint, such that a number of those expensive resources can be used more in a consultative type of manner, which would be additional revenue-producing. So we're going to a transition within PSG, as Hemant mentioned in his comments as well, and it's getting better each and every year.

That's very helpful. And I guess my final one would be is the bookings that you're seeing. How does that span across the various revenue line items, be it revenue maintenance, hardware services, licenses?

Yes, it's fundamentally at least right now with our current on-prem solution. It's a bit heavily focused as it relates to services. We're doing a lot of things internally to drive far more license revenue such that obviously it's a much higher piece of business, if you will. And then secondarily, you get a follow-on maintenance component that comes from the license revenue. But it's a transition that we're going through as we're evolving into certainly a much more sophisticated software company that our deals are being driven much more by license revenue as opposed to services. The hardware component is always going to be relatively smaller in the grand scheme of things. But as we move out into the future and what was are already beginning to see is deals where we can get a higher proportion of license revenue as opposed to the services.

Thanks for your questions, Ryan.

We have no further questions at this time. (Operator Instructions)

Okay. Well, look, operator, if there's no more questions, I just want to thank everyone for joining us this morning, and we look very much forward to speaking with you again when we release our first quarter earnings in April. And then, hopefully, we'll see many of you in May at our Investor Day. So everyone, have a great day, and thank you very much.

Thank you. And we'd like to thank everybody for their participation on today's conference. Please feel free to disconnect your lines at any time, and have a good day.