Spok Holdings, Inc. — Q2 2016 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2016. Spok provides critical communications solutions, including paging, secure messaging, workflow software and public-safety communications, with healthcare its largest market. Financial statements are unaudited.
Financial performance and position
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Revenue | $44.6 million | $48.0 million | $90.0 million | $96.1 million |
| Operating income | $5.6 million | $5.6 million | $11.4 million | $11.9 million |
| Net income | $3.5 million | $3.4 million | $6.9 million | $7.3 million |
| Diluted EPS | $0.17 | $0.16 | $0.33 | $0.33 |
| Operating cash flow | Not presented for quarter | Not presented for quarter | $19.9 million | $25.5 million |
- Revenue fell 7.0% in Q2 and 6.3% in the first half. Wireless revenue declined 7.8% and 8.0%, respectively; software revenue declined 5.5% and 3.4%.
- Q2 operating margin was approximately 12.6%, versus 11.7% a year earlier; first-half operating margin was approximately 12.7%, versus 12.4%. Operating income was nearly flat in Q2 as lower expenses offset lower revenue.
- First-half operating cash flow fell to $19.9 million. The comparison is affected by a $3.8 million retrospective reclassification of 2015 employee tax-withholding payments from operating to financing activities; on the comparable basis described by management, operating cash flow declined about $1.8 million, mainly due to higher accounts receivable.
- Cash and cash equivalents were $117.1 million at June 30, 2016, up from $111.3 million at year-end. Total liabilities were $57.9 million, primarily deferred revenue and operating liabilities. The company reported no debt and no revolving credit facility.
- First-half capital spending was $3.0 million. Cash dividends paid were $5.2 million and share repurchases were $6.0 million. The company declared a further $0.125-per-share quarterly dividend after quarter-end.
Changes and operating trends
- Wireless demand continued to contract: units in service were 1.144 million, down 67,000 from a year earlier. Q2 total net unit loss was 0.8%; total ARPU was $7.71 versus $7.86 a year earlier.
- Software maintenance revenue rose in both reported periods, with renewal rates above 99%. However, software operations revenue declined as fewer and smaller projects were completed. Bookings fell 4.6% in Q2 and 9.3% in the first half; software backlog was $39.5 million at June 30.
- Cost of revenue declined, partly because of lower third-party software sales and implementation costs. Service, rental and maintenance expense increased, including higher product-development staffing costs. The company had 597 FTEs, down 1.8% year over year, and 4,184 active transmitters, down 2.5%.
Outlook, risks and notable items
- Management expects overall revenue to decline in line with recent trends: wireless revenue is expected to continue declining, while software revenue is anticipated to increase. It expects wireless ARPU to trend lower through the remainder of 2016; price increases may mitigate, but not fully offset, expected declines.
- Management cited long-term decline in paging demand and the shift toward broadband technology as key business pressures. The timing and impact of the sales-staff and territory reorganization on software bookings and revenue remain uncertain.
- The company is investing in mobility, a unified software platform, nursing solutions and alerting, and expects related staffing and payroll costs to increase. Network consolidation is intended to reduce transmitter-site and telecommunications costs.
- Management said cash on hand and anticipated operating cash flow should meet foreseeable requirements. The board intended to return at least $21 million to stockholders during 2016 through dividends, repurchases and/or special dividends, subject to business and market conditions.
- No material changes to previously disclosed commitments or contingencies were reported, and the company said pending ordinary-course lawsuits were not expected to have a material adverse impact. A director-related entity received approximately $2.0 million in site rent during the first half.
- Adoption of the new revenue-recognition standard is planned for 2018; management was evaluating its impact and expected the modified-retrospective approach could affect deferred revenue and retained earnings. The company also expects lease-standard adoption to add potentially material right-of-use assets and lease liabilities.
Important facts for investors to verify
- Whether the declining paging base and ARPU are being offset by software growth, and whether software bookings and the $39.5 million backlog convert to recognized revenue.
- Cash generation and working-capital trends, especially accounts receivable, alongside the company’s dividend and repurchase commitments.
- Execution and costs of the sales reorganization, product-development investment and network rationalization.
- Future recoverability of deferred tax assets: the balance-sheet amount was $79.6 million net of a $45.8 million valuation allowance; federal NOLs were approximately $272.1 million, including $35.0 million subject to Section 382 limits.
- Potential effects of the revenue-recognition and lease accounting standards, and developments in tax accruals, litigation or other contingencies.