Spok Holdings, Inc. — 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. This is an annual filing, not a standalone fourth-quarter report; fourth-quarter results include an $8.8 million goodwill impairment charge.
Business context
Spok provides clinical communications and collaboration software, wireless messaging and paging, and related services, primarily to U.S. healthcare organizations. In 2019, wireless services generated 55% of revenue and software generated 45%. The company is transitioning toward cloud-based subscriptions and developing Spok Go.
Financial performance and position
| Metric | 2019 | 2018 |
|---|---|---|
| Revenue | $160.3 million | $169.5 million |
| Operating income (loss) | ($15.8 million) | ($3.2 million) |
| Net income (loss) | ($10.8 million) | ($1.5 million) |
| Operating cash flow | $11.7 million | $10.3 million |
| Cash and cash equivalents | $47.4 million | $83.3 million |
| Short-term investments | $29.9 million | $4.0 million |
| Total assets | $319.9 million | $327.7 million |
| Stockholders’ equity | $250.1 million | $274.6 million |
Revenue declined 5.4%. Operating margin was approximately negative 9.9% and net margin approximately negative 6.7%. These are calculated from reported results and include the goodwill impairment. Cash provided by operating activities increased by $1.4 million. Investing activities used $30.2 million, primarily reflecting purchases and maturities of U.S. Treasury securities and capital expenditures; financing activities used $17.2 million, mainly for dividends and share repurchases.
Spok had no outstanding borrowings at year-end. Current assets were $117.7 million and current liabilities $51.2 million, for a current ratio of approximately 2.3. Cash plus short-term investments totaled $77.3 million. The company declared $0.50 per share in dividends for 2019 and repurchased 532,354 shares for approximately $6.6 million; its repurchase authority was exhausted in September.
Changes versus 2018
- Wireless revenue fell 6.5% to $88.2 million. Units in service declined to 938,000 from 992,000; average revenue per user decreased to $7.34 from $7.39.
- Software revenue fell 4.1% to $72.1 million. License revenue decreased 31.4% to $9.0 million, partly offset by maintenance revenue growth of 3.3% to $40.4 million. Maintenance renewal rates exceeded 99%.
- Operating expenses rose 2.0% to $176.1 million, including the $8.8 million non-cash goodwill impairment. Excluding the impairment, expenses decreased 3.1%, according to management.
- Research and development expense rose 12.6% to $27.5 million, reflecting continued investment in Spok Go, although its growth rate slowed from 30.8% in 2018.
- Year-end cash and cash equivalents fell by $36.0 million, while short-term investments increased by $25.9 million.
Outlook, risks and unusual items
- Management expected Spok Go to be publicly released in 2020, but did not expect material revenue from it that year. Subscription revenue is recognized over contract terms, so reported revenue may lag sales. Management anticipated development costs would normalize and that some costs could qualify for capitalization beginning in early 2020.
- Management expected wireless subscribers and revenue to continue declining, while network rationalization savings were expected to slow. It also anticipated quarterly dividends of $0.125 per share in 2020, subject to board declaration.
- Management said cash on hand and expected operating cash flow should meet foreseeable requirements, but anticipated cash would decrease significantly during the next two to three years as Spok Go investment continues. It noted dividends, capital spending or buybacks could be reduced if cash proves insufficient.
- The $8.8 million goodwill impairment followed the annual fourth-quarter test; the filing states further impairment charges are possible. The impairment is non-cash.
- Key risks include continued paging erosion, competition from mobile and software providers, execution and customer adoption of Spok Go, the transition to SaaS and its effect on revenue timing, healthcare customer budgets, cybersecurity and privacy exposure, and the ability to reduce wireless costs alongside declining revenue.
- Operating lease liabilities were $17.0 million at year-end following adoption of ASC 842. Contractual operating lease obligations were $17.6 million. The company reported no material adverse impact expected from pending litigation and no outstanding debt.
Investor verification points
- Review the full financial statements and notes for cash flow, investment purchases and maturities, lease accounting, and the basis for the goodwill impairment.
- Track Spok Go release, bookings, renewals, implementation performance, revenue recognition, and development-cost capitalization.
- Monitor wireless units in service, ARPU, revenue erosion, and whether network savings keep pace with subscriber losses.
- Assess cash use, liquidity, dividend sustainability, and capital allocation after the repurchase authorization expired.
- Check subsequent filings for changes to the 2020 outlook, material contingencies, tax-asset recoverability, or cybersecurity and privacy matters.