USA Mobility, Inc. — Q1 2013 Form 10-Q
Filing identity: The supplied filing is for USA Mobility, Inc., for the quarter ended March 31, 2013—not a filing under the name Spok Holdings, Inc. USA Mobility provided wireless messaging and mobile services and mission-critical communications software through its Wireless and Software segments. Financial statements are unaudited. Amounts below are in millions unless otherwise stated.
Financial results and liquidity
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Revenue | $53.13 | $56.74 | Down 6.4% |
| Operating income | $11.74 | $14.26 | Down 17.7% |
| Operating margin | 22.1% | 25.1% | Down 3.0 percentage points |
| Net income | $6.93 | $8.46 | Down 18.2% |
| Diluted EPS | $0.32 | $0.37 | Down $0.05 |
| Cash from operations | $15.67 | $15.94 | Down $0.27 |
| Capital expenditures | $2.34 | $1.55 | Up $0.79 |
| Company-defined OCF | $13.21 | $17.22 | Down 23.3% |
Company-defined OCF is a non-GAAP measure: EBITDA less property and equipment purchases. Cash and cash equivalents were $71.69 at March 31, 2013, versus $61.05 at year-end 2012. Total assets were $325.82 and total liabilities $69.64. The company reported no borrowings under its $40.0 revolving credit facility, which matures September 2015, and stated it was compliant with its financial covenants. The filing says cash on hand and expected operating cash flows should meet anticipated requirements for the foreseeable future.
Changes versus the prior-year quarter
- Wireless revenue fell 12.4% to $38.78, while Software revenue rose 15.1% to $14.35. Software growth reflected higher operations revenue, including large deals; maintenance renewal rates were 98.9%, versus 99.6%.
- Wireless messaging units in service declined to 1.480 million from 1.617 million a year earlier. Management said demand for messaging was expected to keep declining. Consolidated wireless ARPU fell to $8.25 from $8.50.
- Operating expenses declined 2.6% overall, but the decrease did not offset lower revenue. Wireless operating income fell to $11.90 from $14.68; Software recorded an operating loss of $0.16, compared with a $0.42 loss.
- Quarter-end cash increased, with no debt repayment in Q1 2013; the prior-year quarter included a $25.0 debt repayment. Cash dividends paid were $2.68, versus $5.54 in Q1 2012. The declared quarterly dividend was reduced to $0.125 per share from $0.25.
Outlook, risks and notable items
- Management expected wireless revenue to continue declining in line with recent trends. It said price increases could mitigate—but not fully offset—anticipated declines in ARPU and revenue. Further wireless staffing reductions were anticipated in 2013; software staffing was expected to increase to support growth.
- Software bookings increased 14.8% year over year; reported backlog was $40.18 at March 31, 2013. Backlog comprises unrecognized customer purchase orders and is not equivalent to guaranteed future revenue.
- Material control issue: Management reported a material weakness involving the design of revenue-recognition processes. It concluded disclosure controls were not effective as of March 31, 2013; remediation was underway but the weakness had not been remediated. The weakness had previously resulted in restatements of 2011 annual and interim financial statements.
- Deferred tax assets were $159.3 gross, offset by a $118.7 valuation allowance; management cited insufficient forecast taxable income to realize all deferred tax assets. Federal NOLs were approximately $391.6, subject to limitations, including an annual $6.1 limit on specified Section 382-limited NOLs.
- The company identified continuing subscriber and revenue erosion, execution of software growth plans, and risks to access to cash held with third-party financial institutions. The revolving facility is secured by substantially all company assets and carries floating-rate exposure if drawn.
- A vehicle-accident lawsuit was settled April 19, 2013, with no income-statement impact; the company said it was fully insured. Management stated other ordinary-course lawsuits were not expected to have a material adverse impact. A director-related tower-site provider received $1.0 in rent during the quarter; a company CEO relative’s employer received $0.6 for customer-support services.
- The board declared a $0.125-per-share dividend on May 9, 2013, payable June 25, 2013. No share repurchases occurred during Q1; approximately $17.0 of repurchase authority remained.
Key facts for investors to verify
- Confirm the issuer and corporate-name history: this document identifies USA Mobility, Inc., despite the request metadata naming Spok Holdings, Inc.
- Review subsequent filings for progress and testing of remediation of the revenue-recognition material weakness, and for any related restatements or reporting changes.
- Track wireless unit losses, ARPU, network rationalization savings, and whether these offset continued revenue declines.
- Assess software bookings and backlog conversion, renewal rates, margins, and the costs of planned staffing growth.
- Monitor operating cash generation, capital expenditures, dividend sustainability, deferred-tax-asset realizability, and any draw on the revolver.