Spok Holdings, Inc annual report, FY2013

Business context and reporting period

This is USA Mobility, Inc.’s Form 10-K for the fiscal year ended December 31, 2013, filed March 11, 2014. Although the request identifies Spok Holdings, the filing itself is for USA Mobility; it describes a wireless messaging business and Amcom software business, with Amcom merged into USA Mobility Wireless effective January 1, 2014. The company reported results for wireless and software segments in 2013.

• Wireless provided 71% of consolidated revenue; software provided 29%. Healthcare was the largest end market.
• Wireless paging units in service declined to 1.376 million from 1.515 million. Management expects continued subscriber and wireless revenue erosion.

Financial performance and position

Operating cash flow less capital expenditures was approximately $40.0 million in 2013, down from $62.9 million in 2012. The company’s non-GAAP OCF measure was $50.3 million; it is defined as EBITDA less capital expenditures and differs from cash flow from operations less capex. Current assets were $120.2 million and current liabilities $46.8 million at year-end, a current ratio of approximately 2.6. The $40 million revolving facility had no borrowings and approximately $40 million of available capacity, subject to agreement terms and a minimum liquidity threshold.

Material changes versus prior periods

• Total revenue fell 4.5% year over year. Wireless revenue declined 11.3% to $149.4 million, while software revenue rose 17.6% to $60.3 million.
• Wireless units in service fell 9.2%; direct ARPU declined to $8.34 from $8.53. Wireless operating income fell to $45.1 million from $53.3 million.
• Software operations revenue increased to $60.3 million from $51.3 million. Operations revenue rose 27.9%, maintenance revenue 7.4%, and bookings 3.5% to $63.5 million. Maintenance renewal rates were 99.1%. Software operating income improved to $0.4 million from a $7.6 million loss; year-end backlog was $40.2 million.
• Operating expenses declined 2.1% to $164.3 million, with lower wireless network and staffing costs partly offset by higher software selling and marketing expenses.
• Cash from operations declined by $22.4 million, primarily due to lower customer receipts and higher payroll payments. Cash distributions paid fell to $12.3 million from $16.5 million.
• 2012 included a $3.4 million software intangible impairment; 2013 had no impairment charge. The 2011 comparison included a $7.5 million gain on sale of narrowband licenses and a substantial income-tax benefit, making 2011 net income unusually high.

Outlook, risks, contingencies, and unusual items

• For 2014, management prioritized software revenue and bookings growth, retaining wireless subscribers and revenue, returning capital to stockholders, and diversifying for long-term growth. It expected software investment and staffing increases, continued wireless cost reductions, and further network consolidation.
• Management expected to continue a quarterly dividend of $0.125 per share ($0.50 annualized) and retained discretion to repurchase shares under a program extended through December 31, 2014. No program repurchases were made in 2013; authority was reset to $15 million for 2014.
• Key risks include accelerating paging subscriber and revenue declines, inability to reduce costs as revenue falls, disruption or customer-service effects from integrating the businesses and rationalizing networks, lengthy and unpredictable software sales cycles, and competition and technology change.
• Additional exposures include software revenue recognition and FDA requirements, healthcare privacy and cybersecurity, dependence on key personnel and paging-equipment suppliers, acquisition integration, and realization of deferred tax assets. The company reported $28.9 million of net deferred tax assets and a $119.3 million valuation allowance; future realization depends on taxable income and tax rules.
• Contractual obligations totaled $35.4 million, including $23.0 million of operating leases. Asset-retirement liabilities were $8.0 million, primarily for transmitter removal. Management said ordinary-course litigation was not expected to have a material adverse effect.
• The company reported that a material weakness in software revenue-recognition controls identified in 2012 was remediated during 2013. Management and the auditor concluded internal control over financial reporting was effective at December 31, 2013; the auditor issued unqualified opinions on the financial statements and internal controls.
• A fourth-quarter 2013 change in the estimated useful life of the final transmitter asset tranche, extending it from 2017 to 2018, reduced fourth-quarter depreciation by approximately $0.1 million.

Important facts for investors to verify

• Whether software bookings, backlog conversion, maintenance renewals, and software profitability support management’s growth objectives.
• The pace of wireless subscriber and revenue decline, and whether cost reductions and network rationalization preserve cash generation and service reliability.
• Cash-flow sustainability: 2013 operating cash flow fell materially, despite higher reported net income and year-end cash.
• Whether dividends and potential repurchases remain supportable given operating cash flow, capital needs, credit-facility restrictions, and future integration costs.
• The assumptions behind deferred-tax-asset recoverability, goodwill valuation, and transmitter retirement liabilities.
• That the filing’s issuer is USA Mobility, Inc. and that the stated reporting period is the full year ended December 31, 2013, not a standalone fourth-quarter filing.