Spok Holdings, Inc. — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; comparative period is Q1 2015. Spok provides critical communications solutions, including paging and wireless messaging, enterprise software, secure messaging, and public safety communications. Figures below are in U.S. dollars; financial statement amounts are in thousands unless stated otherwise.
Financial performance
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Revenue | $45.4 million | $48.1 million | Down 5.7% |
| Wireless revenue | $28.2 million | $30.7 million | Down 8.2% |
| Software revenue | $17.2 million | $17.4 million | Down 1.3% |
| Operating income | $5.8 million | $6.3 million | Down 7.5% |
| Net income | $3.4 million | $3.9 million | Down 12.1% |
| Diluted EPS | $0.17 | $0.18 | Down $0.01 |
| Operating cash flow | $9.5 million | $6.4 million | Up $3.1 million |
Operating margin was approximately 12.8% versus 13.0%; net margin was approximately 7.6% versus 8.1%. The company-defined operating cash flow measure (EBITDA less property and equipment purchases) was $7.7 million, compared with $9.0 million. Capital expenditures were $1.4 million, compared with $1.0 million. Cash dividends paid were $2.6 million and share repurchases were $4.9 million.
At March 31, 2016, cash and cash equivalents were $111.9 million, total current assets were $139.8 million, and current liabilities were $45.1 million. Total liabilities were $54.6 million, and the company reported no outstanding debt or revolving credit facility. Working capital was approximately $94.8 million. Total assets were $384.7 million and stockholders’ equity was $330.1 million.
Material changes and operating trends
- Wireless revenue declined as demand for paging and messaging services continued to weaken. Units in service fell to 1.153 million from 1.230 million a year earlier; total net unit loss was 1.7% in Q1 2016 versus 2.1% in Q1 2015. Management expects wireless revenue to continue declining.
- Software operations revenue fell to $8.1 million from $9.4 million, primarily reflecting fewer and smaller projects completed. Maintenance revenue rose to $9.1 million from $8.1 million; maintenance renewal rates exceeded 99% in both periods.
- Bookings declined 14.8% to $15.1 million. Software backlog was $36.8 million at quarter end, down from $38.7 million at the start of the quarter.
- Operating expenses decreased 4.9% to $39.6 million, less than the 5.7% revenue decline. Cost of revenue fell 9.0%; selling and marketing fell 7.4%; general and administrative fell 4.5%; service, rental and maintenance was nearly flat.
- Operating cash flow improved year over year mainly because of lower payments for accrued compensation and benefits. Cash increased $0.6 million during the quarter after operating, investing, and financing activities.
Outlook, risks, and notable items
- Management expects software revenue to increase and wireless revenue to continue decreasing. It expects future sequential annual revenue to decline in line with recent trends, and indicated that ARPU could trend lower for the remainder of 2016; price increases may mitigate but not fully offset declines.
- The company reorganized its software sales staff and territories beginning in late 2015. Management said it could not predict the timing or impact of the changes on 2016 software bookings and operations revenue.
- Management expects cash on hand and operating cash flow to cover anticipated requirements for the foreseeable future. The board intended to return at least $21.0 million to shareholders in 2016 through dividends, repurchases and/or special dividends, subject to reassessment based on business and market conditions. A $0.125-per-share quarterly dividend was declared after quarter end.
- The October 2015 share-repurchase authorization runs through December 31, 2016. Spok repurchased 291,861 shares in Q1 at an average $16.76 per share; $5.1 million remained authorized at March 31.
- Key business risks include ongoing paging demand decline, software bookings and backlog conversion, and execution of the sales reorganization. Management reported no material change in previously disclosed risk factors, no material changes to commitments and contingencies, and no expected material effect from pending ordinary-course lawsuits.
- The company adopted ASU 2016-09 effective January 1, 2016, including a policy election to recognize stock award forfeitures as incurred; the reported financial statement impact was immaterial. It also retrospectively reclassified $3.8 million of 2015 employee tax-withholding payments from operating to financing cash flows.
- Deferred tax assets, net of valuation allowance, were $81.7 million. The filing describes substantial federal net operating losses and limits on use of certain losses; realization of deferred tax assets depends on future taxable income. No goodwill impairment indicators were identified at quarter end.
Important facts for investors to verify
- Whether wireless subscriber and revenue declines, and lower ARPU, continue at the rates management anticipates.
- Whether software bookings stabilize and backlog converts to recognized revenue, particularly following the sales-team reorganization.
- Whether maintenance renewals remain strong and software growth offsets declining wireless revenue.
- Cash generation, capital spending, and the sustainability of the stated 2016 shareholder-return intention and quarterly dividend.
- Developments in deferred-tax-asset realization, state and local tax accruals, and other contingencies.