Spok Holdings, Inc. — Q3 2015 Form 10-Q
Business context and reporting period. The unaudited quarter and nine months ended September 30, 2015. Spok provides critical-communications software, paging and wireless messaging, primarily to healthcare organizations. Wireless accounted for about 64% of Q3 revenue; software accounted for about 36%.
Key financial metrics
Amounts are in millions except per-share data and where noted.
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Revenue | $46.2 | $49.8 | $142.3 | $149.0 |
| Operating income | $6.7 | $8.1 | $18.6 | $23.5 |
| Operating margin | 14.4% | 16.2% | 13.0% | 15.8% |
| Net income | $4.2 | $4.7 | $11.5 | $13.8 |
| Diluted EPS | $0.20 | $0.21 | $0.53 | $0.63 |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $29.7 | $32.3 |
| Company-defined operating cash flow (EBITDA less capital purchases) | $8.7 | $11.0 | $24.7 | $29.8 |
- Revenue mix and change: Q3 wireless revenue fell 10.6% to $29.4 million; software revenue was nearly flat at $16.8 million. For the nine months, wireless revenue fell 10.4% to $90.3 million, while software revenue grew 7.7% to $52.0 million.
- Margins and costs: Operating margin declined in both comparison periods. Nine-month operating expenses were broadly flat overall, but cost of revenue rose 17.4%, including an $0.8 million charge for missing or obsolete inventory and higher third-party professional-services costs.
- Cash, liquidity and debt: Cash and cash equivalents were $113.4 million at September 30, 2015, versus $107.9 million at year-end 2014. Current assets were $144.3 million and current liabilities $48.3 million. The company reported no outstanding debt and no revolving credit facility.
- Cash uses: Nine-month capital expenditures were $4.5 million; cash dividends paid were $8.7 million; and common-stock purchases used $11.8 million. Cash increased $5.5 million during the period.
- Balance sheet: Total assets were $325.9 million, total liabilities $57.8 million, and stockholders’ equity $268.1 million. Current deferred revenue was $28.2 million, compared with $24.0 million at December 31, 2014.
Material changes versus prior comparable periods
- Wireless demand continued to contract: units in service were 1.192 million at September 30, 2015, down from 1.274 million a year earlier. Q3 total direct net unit loss was 1.5%; consolidated wireless ARPU was $7.82, versus $7.97 a year earlier.
- Software growth in the first nine months came from higher operations revenue and maintenance revenue. Maintenance renewal rates were 99.8% for both the quarter and nine-month period, versus 99.6% and 99.5%, respectively, in 2014.
- Software bookings fell 17.8% in Q3 and 1.3% year to date. Management attributed the decline to weaker-than-expected Asia-Pacific bookings. Software backlog was $41.6 million at quarter-end.
- Nine-month net income fell 16.8%. Operating cash flow declined by $2.6 million, reflecting higher operating cash costs partly offset by increased customer receipts.
- Cash-funded repurchases reduced shares outstanding; the company reported 21.1 million shares outstanding at September 30, 2015, compared with 22.0 million at December 31, 2014.
Outlook, commentary, risks and unusual items
- Management expects wireless revenue to continue declining as demand for one-way and two-way messaging falls; it expects software revenue to increase. It also expects future sequential annual revenue declines in line with recent trends. No numerical revenue or earnings guidance was provided.
- Management said cash on hand and expected operating cash flow should meet anticipated requirements for the foreseeable future. It stated that, if cash proves insufficient, it may reduce capital spending, dividends or repurchases, sell assets, or seek financing.
- The board declared, after quarter-end, a regular dividend of $0.125 per share and a special dividend of $0.125 per share, payable December 10, 2015; estimated total cash outlay was $5.2 million. The board also authorized a new $10 million repurchase program to begin no later than January 4, 2016, or after the existing program is completed. Management intended to return at least $26 million to shareholders during 2015 through dividends and/or repurchases.
- Nine-month severance and restructuring expense was $1.6 million, including a one-time charge primarily related to an executive departure. Cost of revenue included a one-time $0.8 million inventory charge.
- Deferred tax assets are subject to recoverability estimates: the company reported $17.1 million of estimated recoverable deferred tax assets after a $114.1 million valuation allowance. It had $308.1 million of federal net operating losses, of which $119.6 million were subject to an annual utilization limit of $6.1 million under Section 382.
- Other disclosed exposures include a $1.7 million remaining vendor network-services commitment through January 2019 and asset-retirement obligations of $7.6 million. Management reported no material change in risk factors, no material adverse effect expected from pending ordinary-course litigation, and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether wireless subscriber and ARPU declines continue, and whether software growth and maintenance renewals can offset them.
- Whether software bookings and backlog recover, particularly in Asia-Pacific, and whether backlog converts to recognized revenue on schedule.
- The sustainability of cash generation given lower operating cash flow and continuing shareholder returns; verify the timing and amount of repurchases and dividends.
- Whether the one-time inventory charge, executive-related severance, and other expense changes affect future margins or recur.
- Management’s year-end assessment of deferred-tax-asset recoverability and the practical limits on NOL utilization.
- The filing’s repurchase disclosures distinguish 707,739 shares purchased under the public program from 928,069 total shares purchased during the nine months; verify the reconciliation, including shares acquired for tax withholding.