Spok Holdings, Inc. — Q2 2017 Form 10-Q
Reporting period: Three and six months ended June 30, 2017. Spok provides wireless messaging and enterprise communications software, with healthcare its largest market.
Financial performance
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Revenue | $42.3 million | $44.6 million | $83.8 million | $90.0 million |
| Operating income | $2.4 million | $5.6 million | $3.8 million | $11.4 million |
| Net income | $1.5 million | $3.5 million | $2.4 million | $6.9 million |
| Diluted EPS | $0.07 | $0.17 | $0.11 | $0.33 |
| Operating margin | 5.7% | 12.6% | 4.5% | 12.7% |
- Q2 revenue declined 5.2%; wireless revenue fell 8.0%, while software revenue was nearly flat, down 0.5%. First-half revenue declined 6.9%, with wireless down 8.1% and software down 5.1%.
- Profitability weakened as operating expenses rose 3.6% in Q2 and 2.6% for the first half, despite lower revenue. Research and development and general and administrative costs increased; selling and marketing and service, rental and maintenance costs declined.
- Cash from operations was $6.7 million for the first half, versus $19.9 million a year earlier. Capital expenditures were $5.2 million, producing approximately $1.5 million of operating cash flow after those expenditures.
- Cash and equivalents were $107.2 million at June 30, down from $125.8 million at year-end 2016. The company reported no debt and no revolving credit facility. Current assets were $140.9 million and current liabilities $50.5 million.
- Financing cash outflows totaled $20.1 million, including $10.2 million in dividends and $9.9 million in net share repurchases. The company completed its $10 million repurchase authorization, buying 572,550 shares at an average $17.47. Equity dividends declared were $0.25 per share for the first half.
Business trends and management outlook
- Wireless demand continued to decline: units in service fell to 1.086 million from 1.144 million a year earlier, and total Q2 net unit losses were 0.4%. Management expects wireless revenue to keep decreasing for the foreseeable future, citing market demand and the shift toward broadband alternatives.
- Management expects software revenue to increase over time, but Q2 software operations revenue fell 7.9%; maintenance revenue rose 5.6%, supported by renewal rates above 99%. Total bookings increased 1.7% in Q2 and 14.3% in the first half; software backlog was $43.5 million at quarter-end.
- Spok plans to substantially increase investment in its integrated communications platform over the next two to three years. Management warned that additional development staffing will pressure margins and operating cash flow before benefits are realized, potentially for several years. It expects cash to decline significantly during this investment period, while stating that cash and operating cash flow should cover anticipated needs for the foreseeable future.
- Management expects 2017 quarterly dividends of $0.125 per share, subject to board approval. A $0.125 dividend declared July 26 was scheduled for payment September 8, 2017.
Risks, contingencies, and notable items
- The filing reports no material change in previously disclosed commitments, contingencies, or risk factors. Spok said pending ordinary-course lawsuits were not expected to have a material adverse impact.
- Asset retirement obligations, mainly for transmitter removal, totaled $7.7 million at June 30; management estimates the liability will accrete to $9.0 million, assuming leases continue to be renewed to the projected removal date.
- Adoption of the new revenue standard is planned for January 1, 2018 using the modified retrospective method. Spok expects a material effect on deferred revenue and retained earnings and a material ongoing revenue-recognition impact, particularly for software licenses. The lease standard, effective in 2019, is expected to create potentially material right-of-use assets and lease liabilities.
- The company revised comparative EPS and weighted-average share calculations after determining unvested RSUs were not dilutive; it concluded the correction was immaterial to prior periods.
- Spok disclosed related-party site rent of $1.0 million in Q2 and $2.0 million for the first half, paid to an entity whose director also serves on Spok’s board.
Important facts for investors to verify
- Whether software bookings and the $43.5 million backlog convert into revenue on schedule, and whether maintenance renewals remain above 99%.
- The pace of wireless subscriber and revenue declines, and whether network consolidation can offset associated cost pressures.
- Actual spending, staffing growth, cash-flow effects, and timing of benefits from the next-generation platform investment.
- The cash and dividend implications of continued investment, future repurchases, and the anticipated revenue-standard transition.