Spok Holdings, Inc. — 2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017. This is an annual filing; fourth-quarter figures are included below for context and are unaudited.
Business context
Spok provides paging and critical-communications software and services, primarily to U.S. healthcare organizations. Wireless messaging remained its largest revenue source, while the company invested in Spok Care Connect, an integrated communications and workflow platform. Healthcare customers generated 74.6% of revenue; no customer accounted for more than 10%.
Key financial metrics
| Metric | 2017 | 2016 | Change |
|---|---|---|---|
| Revenue | $171.2 million | $179.6 million | Down 4.7% |
| Wireless revenue | $101.2 million | $109.6 million | Down 7.7% |
| Software revenue | $70.0 million | $70.0 million | Essentially flat |
| Operating expenses | $160.5 million | $157.4 million | Up 1.9% |
| Operating income | $10.7 million | $22.2 million | Down 51.7% |
| Net income (loss) | $(15.3) million | $14.0 million | Loss in 2017 |
| Operating cash flow | $15.6 million | $37.5 million | Down $21.9 million |
| Cash and cash equivalents | $107.2 million | $125.8 million | Down $18.7 million |
| Long-term debt | None | None | No outstanding borrowings |
Operating margin was approximately 6.3%, versus 12.3% in 2016. The 2017 net loss primarily reflects a provisional $24.2 million tax expense from remeasuring deferred tax assets after the U.S. corporate tax-rate reduction. Fourth-quarter revenue was $43.8 million, operating income $3.6 million, and net loss $21.4 million; fourth-quarter 2016 revenue was $44.2 million, operating income $4.7 million, and net income $3.0 million.
Year-end current assets were $146.9 million and current liabilities $50.9 million. Cash flow from investing activities was $(9.2) million, primarily reflecting property and equipment purchases; financing cash outflow was $25.0 million, including $15.2 million in cash distributions and $10.0 million in share repurchases. The company reported $13.2 million of adjusted operating cash flow, a company-defined non-GAAP measure.
Material changes versus prior periods
- Wireless revenue declined 7.7%, reflecting continued subscriber erosion: units in service fell to 1.049 million from 1.111 million, and ARPU decreased to $7.51 from $7.67.
- Software revenue was flat overall. Maintenance revenue rose 4.3% to $38.7 million, while operations revenue declined 4.8% to $31.3 million. Maintenance renewal rates exceeded 99%.
- Research and development expense increased 38.9% to $18.7 million as Spok expanded investment in its integrated platform. General and administrative expense increased 10.7% to $47.4 million.
- Operating cash flow fell substantially, and cash declined despite positive operating cash generation, reflecting investment and shareholder distributions.
Outlook, risks and unusual items
- Management expects wireless subscribers and revenue to continue declining. It identified wireless revenue, software revenue and bookings, operating and capital expenditures, and product development activities as 2018 performance priorities.
- Spok expects research and development spending to remain a focus in 2018, with costs potentially leveling off; management noted development benefits may not materialize for at least two years. It expects cash balances to decline significantly while funding platform development and anticipates available cash and operating cash flow will cover foreseeable needs.
- The company expected to pay a quarterly dividend of $0.125 per share in 2018, subject to board declaration. The board also renewed a share-repurchase authorization of up to $10 million through December 31, 2018.
- The 2017 Tax Act produced a provisional $24.2 million tax expense; the company had not completed its tax accounting analysis and could adjust the estimate. It reported $47.7 million of net deferred tax assets and approximately $106.1 million of net operating loss carryforwards.
- Spok expected adoption of the new revenue standard in 2018 to increase opening retained earnings by an estimated $4 million to $7 million, with an offsetting deferred-revenue decrease estimated at $4 million to $6 million and the remainder relating to prepaid commissions. Estimates remained subject to review.
- GroupChatter, LLC filed a patent-infringement complaint in February 2018 alleging infringement of four U.S. patents. Spok said it would defend the claims; the outcome was uncertain, and management did not believe the matter would materially affect financial condition.
- Key risks include sustained paging erosion, ability to reduce costs, execution and market acceptance of Spok Care Connect, long software sales cycles, competition, network reliability, cybersecurity and privacy, and healthcare-sector spending. The filing reported effective disclosure controls and internal control over financial reporting, with unqualified auditor opinions.
Important facts for investors to verify
- Whether software bookings and revenue growth can offset ongoing wireless declines, and whether backlog of $42.3 million converts as expected (all but $6.9 million was expected to be delivered or completed in 2018).
- Whether operating cash flow and cost reductions can support platform investment, dividends and repurchases as cash balances decline.
- Final accounting effects of the 2017 Tax Act and the 2018 revenue-standard adoption, including any changes to reported estimates.
- Progress, costs, customer adoption and delivery timing for Spok Care Connect, along with the effect of development spending on margins.
- Developments in the GroupChatter patent case and any material cybersecurity, privacy, regulatory or network-service incidents.