Spok Holdings, Inc. — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019; filed August 1, 2019. Spok provides healthcare communications software and services, paging and other wireless messaging, and related support.
Financial performance and position
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Revenue | $39.5 million | $40.6 million | $81.3 million | $83.7 million |
| Operating loss | $2.0 million | $2.3 million | $0.9 million | $1.8 million |
| Net income (loss) | $(0.7) million | $(1.2) million | $0.1 million | $(0.8) million |
| Operating cash flow | Not presented quarterly | Not presented quarterly | $0.8 million | $6.0 million |
- Q2 wireless revenue was $22.1 million, down 6.5%; software revenue was $17.4 million, up 2.5%. For the first half, wireless revenue declined 6.7% to $44.7 million, while software revenue increased 2.1% to $36.6 million.
- At June 30, cash and cash equivalents were $47.8 million and short-term investments were $29.9 million, totaling $77.7 million in cash and investments. Current assets were $126.8 million and current liabilities $50.1 million.
- Spok reported no outstanding debt or revolving credit facility. Stockholders’ equity was $268.5 million.
- Six-month investing cash outflow was $28.4 million, mainly reflecting purchases of U.S. Treasury securities; financing cash outflow was $7.8 million, including dividends and share repurchases. Cash and cash equivalents decreased $35.5 million from year-end.
- Gross or operating margin percentages are not clearly provided in the filing. Operating expenses were $41.5 million in Q2 and $82.2 million in the first half.
Changes versus prior comparable periods
- Total revenue declined 2.7% in Q2 and 2.9% in the first half. Wireless paging revenue continued to fall, while software growth partly offset the decline.
- Management attributed wireless weakness to declining demand and fewer units in service: 977,000 at June 30, 2019 versus 1.024 million a year earlier. Q2 wireless ARPU decreased to $7.26 from $7.41.
- Software maintenance revenue rose 5.7% in Q2 and 6.9% for the first half; maintenance renewal rates exceeded 99%. First-half software license revenue fell 29.1%, partly offset by higher services revenue.
- First-half operating expenses fell 3.9%, with lower selling and marketing, general and administrative, and depreciation/amortization costs. Research and development expense increased 8.9%.
- Operating cash flow fell by $5.2 million year over year, to $0.8 million, with working-capital changes—including receivables and deferred revenue—contributing to the decline.
Outlook, risks, and unusual items
- No specific revenue or earnings guidance was provided. Management expects wireless demand to continue declining in line with recent and historical trends and anticipates continued investment in its integrated communications platform. It expects cash on hand to decrease significantly during the investment period, before platform revenues are realized.
- Management said available cash and expected operating cash flow should meet anticipated requirements for the foreseeable future. If cash proves insufficient, possible actions include reducing capital spending, reducing or eliminating dividends, selling assets, or seeking financing; financing availability on acceptable terms is not assured.
- Research and development investment is expected to continue; management noted the benefits may take one to three years to materialize and that these costs will weigh on margins and operating cash flow.
- Network consolidation may be constrained by minimum FCC frequency commitments. Competition and substitution by other technologies pose ongoing risks to wireless revenue.
- ASC 842 lease accounting was adopted January 1, 2019, adding approximately $17.8 million to assets and liabilities; prior periods were not restated. June 30 operating lease liabilities totaled $17.3 million.
- Asset retirement obligations were $6.8 million at June 30; estimated costs are expected to accrete to a total liability of $8.1 million, based on assumptions about transmitter removals and lease renewals.
- A director-affiliated entity received site rent of $1.8 million in the first half. The filing reported no material change in previously disclosed commitments and contingencies or risk factors.
- The board declared a $0.125-per-share quarterly dividend after quarter-end, payable September 10, 2019. The company repurchased no shares in Q2; first-half repurchases totaled 131,012 shares for $1.8 million.
Most important facts for investors to verify
- Whether continued wireless subscriber and ARPU declines outpace software and maintenance growth.
- Whether higher R&D spending produces platform revenue on the expected timeline and how it affects cash generation.
- Whether the first-half operating cash flow decline reflects temporary working-capital movements or a persistent trend.
- Cash and investment balances, dividend sustainability, and the pace of cash use against management’s investment plans.
- Assumptions underlying lease obligations and the estimated asset retirement liability, including FCC constraints on further network consolidation.