Business context and reporting period
The supplied filing is USA Mobility, Inc.’s unaudited Form 10-Q for the quarter and six months ended June 30, 2012—not a filing under the name Spok Holdings, Inc. USA Mobility operated wireless messaging and mobile services and, through Amcom, mission-critical unified communications software. Comparisons below are with 2011; the software business was acquired in March 2011, so some year-over-year comparisons are not like-for-like.
Financial performance and position
Amounts are in millions of dollars unless noted.
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Revenue | $56.0 | $65.2 | $112.7 | $122.5 |
| Operating income | $13.8 | $16.2 | $28.1 | $29.5 |
| Net income | $8.4 | $18.6 | $16.9 | $59.2 |
| Diluted EPS | $0.37 | $0.82 | $0.75 | $2.64 |
| Operating cash flow, as defined by company | $15.5 | $19.6 | $32.7 | $36.0 |
| Net cash provided by operating activities | Not stated for quarter | Not stated for quarter | $33.8 | $32.8 |
Q2 operating margin was approximately 24.7%, versus 24.8% a year earlier. For the first six months, operating margin was approximately 24.9%, versus 24.1%. Company-defined EBITDA was $18.4 million in Q2 and $37.2 million for the first half; this non-GAAP measure should not be treated as cash flow.
At June 30, cash and cash equivalents were $41.0 million, down from $53.7 million at year-end 2011. Current assets were $79.8 million and current liabilities $50.2 million. Total liabilities were $59.4 million, including no outstanding debt; USA Mobility had repaid the remaining $3.3 million under its credit facility on April 6. The facility remained available for up to $40 million, subject to a $25 million minimum-liquidity threshold and financial covenants, which the company reported it was meeting. Six-month capital expenditures were $4.4 million and cash dividends paid were $11.1 million.
Material changes versus comparable periods
- Q2 revenue fell 14.1%; first-half revenue fell 8.0%. Wireless revenue declined to $42.8 million in Q2 from $52.1 million, reflecting fewer messaging subscribers and lower average revenue per unit. Software revenue was nearly flat in Q2 at $13.2 million; first-half software revenue rose to $25.6 million from $17.9 million, but the 2011 period included results only after the March acquisition date.
- Wireless units in service declined to 1.583 million at June 30, 2012 from 1.779 million a year earlier. Consolidated wireless ARPU was $8.45, compared with $8.74. The company attributed sequential ARPU pressure partly to a greater mix of large, lower-priced customers.
- Q2 net income declined by more than half. The prior-year quarter included a $7.5 million gain on sale of narrowband PCS licenses. First-half 2011 also included a substantial deferred-tax valuation-allowance benefit; 2012 recorded $11.3 million of income tax expense versus a $23.0 million tax benefit in the prior-year first half.
- Cost reductions partly offset the wireless revenue decline: Q2 operating expenses fell 14.1%, including lower site-rent and telecommunications costs from network consolidation. First-half operating expenses fell 9.2%.
- First-half operating cash flow rose slightly to $33.8 million from $32.8 million, as lower operating cash payments largely offset reduced customer receipts. Cash declined primarily because of debt repayment and dividends.
- In Q2 the company acquired certain IMCO Technologies assets and technology for $3.0 million, recording $1.6 million of goodwill and $1.5 million of amortizable intangibles. Purchase-price allocation remained subject to adjustment.
Outlook, risks, contingencies, and unusual items
- Management expected messaging demand and wireless revenue to continue declining. It anticipated further wireless staffing reductions and network consolidation, while expecting software staffing increases to support growth. Consolidation could disrupt service in some areas and adversely affect revenue.
- Management said cash on hand and operating cash flow should cover foreseeable requirements, but warned that a shortfall could lead to lower capital spending, reduced or eliminated dividends or repurchases, asset sales, or additional financing. The filing did not provide specific revenue or earnings guidance.
- After quarter-end, the board reduced the quarterly dividend from $0.25 to $0.125 per share and declared a $0.125 dividend payable September 7, 2012. It also authorized up to $25 million of share repurchases through December 31, 2013, at management’s discretion.
- A lawsuit filed in June seeks $21 million relating to a 2009 vehicle accident involving an employee. The company said it was fully insured, the insurer had assumed the defense, and it did not expect a material financial impact.
- The company reported $49.5 million of estimated recoverable deferred tax assets against $165.3 million of total deferred tax assets and a $115.8 million valuation allowance. Realization depends on future taxable income and related assumptions.
- Other commitments included a three-year managed hosting contract for $0.5 million. The company stated that pending ordinary-course lawsuits were not expected to have a material adverse impact.
Important facts for investors to verify
- Confirm the issuer: the filing identifies USA Mobility, Inc., despite the request metadata naming Spok Holdings, Inc.
- Assess the pace of wireless subscriber and ARPU declines, and whether network consolidation can reduce costs without service disruption or further customer losses.
- Evaluate software bookings, backlog ($25.4 million at June 30), maintenance renewals, and the comparability of reported growth given the acquisition accounting and partial-period 2011 results.
- Review cash needs against dividends, the discretionary repurchase authorization, capital spending, and the credit facility’s liquidity threshold and covenants.
- Consider the sustainability of reported earnings and tax assets, especially the prior-year license-sale gain and tax benefit, the deferred-tax valuation allowance, and the pending insured litigation.