Business context and reporting period
USA Mobility, Inc. filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2011. The filing identifies the registrant as USA Mobility, Inc.; it does not identify the company as Spok Holdings, Inc. USA Mobility operated wireless messaging and mobile services and, following its March 3, 2011 acquisition of Amcom Software, mission-critical unified communications software. Amcom is included in reported results from its acquisition date, so comparisons with 2010 are not like-for-like.
Financial performance and position
Amounts below are in millions of dollars except per-share data. Figures and percentages are based on the filing.
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Revenue | $65.2 | $59.1 | $122.5 | $121.9 |
| Operating income | $16.1 | $13.7 | $29.5 | $28.4 |
| Operating margin | 24.8% | 23.3% | 24.1% | 23.3% |
| Net income | $18.6 | $13.1 | $59.2 | $22.0 |
| Diluted EPS | $0.82 | $0.58 | $2.64 | $0.96 |
| Operating cash flow | Not separately reported by quarter | $32.8 | $39.8 |
- Revenue rose 10.3% in Q2, mainly reflecting Amcom; wireless revenue fell 11.9% to $52.1 million. For the first half, reported revenue increased 0.5%, while wireless revenue declined 14.1% to $104.6 million.
- Q2 operating margin improved year over year. First-half company-defined EBITDA was $39.3 million versus $42.4 million; operating cash flow (EBITDA less capital expenditures, a non-GAAP measure) was $35.9 million versus $40.1 million.
- Six-month net income included a $23.0 million income tax benefit, principally from a $37.2 million valuation-allowance reduction, and a $7.5 million gain on sale of narrowband PCS licenses. These items materially affect comparisons.
- Cash and equivalents were $29.5 million at June 30, down from $129.2 million at year-end 2010. Current assets were $81.8 million and current liabilities $59.6 million. Long-term debt was $37.8 million, including $11.9 million current and $25.9 million noncurrent. Debt carried a variable 5.25% rate and was secured by substantially all company assets.
- First-half operating cash flow was $32.8 million; capital expenditures were $3.4 million. Investing cash outflow was $130.0 million, including $134.2 million for the Amcom acquisition, net of cash acquired. Financing activities included $11.1 million of dividends and $14.1 million of debt repayments.
Material changes versus prior comparable period
- Amcom added a software segment, $13.1 million of Q2 revenue and $17.9 million of first-half revenue, but also acquisition-related debt, intangible assets and goodwill. Software segment operating losses were $0.6 million in Q2 and $0.2 million for the period included in the first half.
- Wireless messaging continued to contract: units in service fell to 1.779 million from 2.027 million a year earlier. Service, rental and maintenance revenue declined 12.6% in Q2 and 14.1% for the first half. Consolidated Q2 ARPU was $8.74 versus $8.87 a year earlier.
- Reported first-half cash from operations declined $7.0 million year over year. The company reduced active transmitters 16.9% and wireless headcount 20.7% year over year, helping reduce network and operating costs.
- The Amcom acquisition cost approximately $141.6 million, funded with about $117.5 million of company cash and new borrowing; the company also assumed $27.8 million of existing debt and acquired cash. Purchase-price allocation remained preliminary.
Outlook, commentary, risks and unusual items
- Management expected operating cash flow plus cash on hand to meet foreseeable cash requirements and said it planned to repay acquisition debt aggressively while continuing its dividend policy. The company declared a subsequent $0.25-per-share dividend for payment in September 2011. No numeric earnings or revenue guidance was provided.
- Management expected messaging demand and wireless revenue to continue declining. It said price increases might mitigate, but would not fully offset, pressure on ARPU and revenue; network consolidation could also disrupt service in some areas. Further wireless staffing reductions were anticipated.
- Management cited the risk of unsuccessful Amcom integration or failure to realize expected acquisition benefits. Its liquidity alternatives if cash proves inadequate include cutting capital spending or dividends, selling assets, or seeking financing, with no assurance of availability or acceptable terms.
- Debt is floating-rate, with exposure to LIBOR increases above its 1.5% floor; no interest-rate derivatives were outstanding. The company was in compliance with its financial covenants at June 30, 2011.
- The filing reported no material outstanding lawsuits or material changes to previously reported legal contingencies. A $0.6 million customer letter of credit was released in July. Management concluded disclosure controls were effective; internal controls included additional controls following the Amcom acquisition.
Important facts for investors to verify
- Confirm the filing’s registrant identity: this document is for USA Mobility, Inc., not a registrant named Spok Holdings, Inc.
- Assess wireless subscriber, service-revenue and ARPU declines against the growth, bookings and backlog of the newly acquired software business; reported periods include different ownership periods and acquisition-accounting adjustments.
- Review the quality and sustainability of first-half earnings, particularly the deferred-tax valuation-allowance release and the $7.5 million license-sale gain.
- Track cash generation, acquisition debt repayments, variable-rate exposure, covenant headroom and the capacity to sustain dividends while reducing debt.
- Monitor Amcom integration, preliminary purchase accounting, goodwill impairment exposure, and the effects of network consolidation on customer service and revenue.