Spok Holdings, Inc. — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015. Spok provides paging services and critical-communications software, with healthcare its largest market. Unless otherwise noted, amounts are in U.S. dollars.
Financial results and position
- Revenue: $48.1 million, down 4.0% from $50.1 million. Wireless revenue fell 10.7% to $30.7 million; software revenue rose 10.7% to $17.4 million.
- Profit and margins: Operating income was $6.3 million, down from $8.1 million; operating margin was 13.0% versus 16.1%. Net income was $3.9 million ($0.18 per diluted share), versus $4.9 million ($0.22); net margin was 8.1% versus 9.8%.
- Cash flow: Operating cash flow was $2.6 million, down from $7.8 million. Capital expenditures were $1.0 million, compared with $2.6 million. Company-defined operating cash flow, a non-GAAP measure (EBITDA less capital expenditures), was $9.0 million versus $9.5 million.
- Liquidity and debt: Cash and cash equivalents were $105.6 million at quarter-end, down from $107.9 million at year-end. Current assets were $140.1 million and current liabilities $44.0 million. The company had no outstanding debt and had terminated its revolving credit facility in December 2014.
- Capital returns: The company paid $3.4 million in dividends and repurchased $0.5 million of common stock during the quarter. The declared quarterly dividend was $0.125 per share. The board intended to return a total of $26.0 million to shareholders during 2015 through dividends and/or repurchases.
Material changes versus Q1 2014
- Paging units in service declined to 1.23 million from 1.33 million a year earlier. Wireless revenue decreased as demand and subscriber numbers continued to fall; consolidated paging ARPU also declined to $7.91 from $8.11.
- Software growth partly offset the wireless decline. Software bookings increased 4.8% to $17.7 million, and software backlog was $40.6 million at quarter-end. Maintenance renewal rates were 99.7%, versus 99.4%.
- Operating expenses were nearly flat overall, but cost of revenue rose 29.5% to $8.8 million, reflecting product mix, higher equipment costs, and third-party services for software implementations. Lower service, rental and maintenance and general and administrative costs partly offset this increase.
- Operating cash flow fell by $5.2 million. Cash paid for operating costs increased, including a one-time $3.8 million tax-related payment associated with issuance of shares under the 2011 LTIP.
Outlook, risks, and unusual items
- Management expected wireless messaging demand to keep declining and anticipated future sequential annual revenue declines. It said price increases could mitigate, but not fully offset, expected declines in ARPU and revenue.
- Management expected software revenue to increase as wireless revenue continued to decrease. Network rationalization was intended to reduce transmitter-site and telecommunications costs; management anticipated further telecommunications expense reductions during the remainder of 2015.
- Management stated that cash on hand and anticipated operating cash flows should cover requirements for the foreseeable future. It cautioned that a shortfall could require lower capital spending, reduced or suspended shareholder returns, asset sales, or outside financing.
- The company reported $22.2 million of estimated recoverable deferred tax assets after a $114.1 million valuation allowance. Management cited continuing revenue and taxable-income declines as limiting realization of the full deferred tax assets. Federal NOLs were approximately $308.6 million, including $44.3 million subject to Section 382 limits.
- There were no goodwill impairment indicators at March 31, 2015, and no material changes to previously reported commitments and contingencies. The company said routine pending lawsuits were not expected to have a material adverse impact. A director’s outside entity received $1.0 million in site rent during the quarter, consistent with Q1 2014.
- The filing described ASU 2014-09 on revenue recognition as under evaluation; the company had not selected a transition method. The filing noted a proposed, not finalized, delay to the standard’s effective date.
Important facts for investors to verify
- Whether software bookings and backlog convert to recognized revenue while implementation costs and cost of revenue remain elevated.
- Whether subscriber losses, pricing, and customer mix continue to pressure wireless revenue and ARPU, and whether software growth can offset that decline.
- The drivers and recurrence of operating cash flow volatility, particularly working-capital movements and tax-related payments.
- The sustainability of planned dividends and repurchases relative to cash generation and the stated $26.0 million shareholder-return intention.
- Future evidence supporting realization of deferred tax assets, and any changes to the valuation allowance or NOL limitations.