Spok Holdings, Inc. — Q1 2019 Form 10-Q
Business context and period. Spok provides healthcare communications software and services, wireless messaging, and related solutions. This unaudited report covers the three months ended March 31, 2019, compared with Q1 2018. Amounts below are in U.S. dollars; financial statement amounts are in millions unless noted.
Financial performance and position
| Metric | Q1 2019 | Q1 2018 / comparison |
|---|---|---|
| Total revenue | $41.8 million | $43.1 million; down 3.1% |
| Wireless revenue | $22.6 million | $24.3 million; down 6.8% |
| Software revenue | $19.2 million | $18.8 million; up 1.6% |
| Operating income | $1.1 million | $0.6 million |
| Net income | $0.7 million | $0.3 million |
| Operating margin | 2.7% | 1.4% |
| Net margin | 1.8% | 0.8% |
| Cash from operations | $1.2 million | $0.9 million |
| Cash and cash equivalents | $62.9 million | $83.3 million at Dec. 31, 2018 |
| Short-term investments | $18.9 million | $4.0 million at Dec. 31, 2018 |
| Total debt | None | No revolving credit facility |
Cash plus short-term investments totaled $81.8 million at quarter-end, down from $87.3 million at year-end. Cash declined $20.4 million, principally reflecting $14.8 million spent purchasing U.S. Treasury securities, alongside operating and financing cash outflows. Current assets were $128.6 million and current liabilities $50.6 million. The company declared a $0.125 per-share dividend for Q1 and repurchased 131,012 shares for $1.8 million under its repurchase program.
Changes versus the prior comparable period
- Wireless revenue fell $1.7 million as demand weakened: units in service declined to 982,000 from 1.03 million and quarterly ARPU decreased to $7.32 from $7.47.
- Software revenue grew $0.3 million. Maintenance revenue rose 8.2% and services revenue rose 27.9%, while license revenue fell 35.1%.
- Operating expenses decreased 4.4% to $40.6 million. Lower general and administrative costs, selling and marketing costs, and depreciation, amortization and accretion more than offset higher research and development expense.
- Net income increased to $0.7 million from $0.3 million. Operating income nearly doubled, while interest income also increased.
- Operating cash flow improved modestly to $1.2 million. Working-capital movements were affected by adoption of the new lease accounting standard.
Outlook, risks, and unusual items
- Management expects wireless demand to continue declining, although it said the decline has slowed compared with historical trends. Management also expects wireless revenue to face continued substitution by competing technologies.
- Spok plans to continue investing substantially in its integrated communications platform. Management said development costs will weigh on margins and operating cash flow, with benefits not expected for one to three years; it expects staffing and outside-service cost growth to slow during 2019.
- Management stated that operating cash flow and cash on hand should cover anticipated requirements for the foreseeable future. It also cautioned that cash could decrease significantly as the company invests and wireless revenue declines. The board expected quarterly dividends of $0.125 per share for 2019, subject to declaration.
- Network consolidation may be constrained by minimum FCC frequency commitments. The company reported 3,909 active transmitters, down 2.2% year over year.
- Adoption of ASC 842 on January 1, 2019 added approximately $17.4 million to assets and liabilities; prior-year amounts were not restated. At March 31, operating lease liabilities totaled $17.5 million.
- A director also serves as a director of an entity leasing transmission tower sites to Spok. Rent expense paid to that entity was $0.9 million in each of Q1 2019 and Q1 2018.
- The filing reported no material changes to previously disclosed commitments and contingencies or risk factors. Disclosure controls were assessed as effective, and no material change in internal control was reported.
Important facts for investors to verify
- Whether software growth and maintenance renewals can offset ongoing wireless subscriber and ARPU declines.
- The pace and returns of platform development spending, including the timing of benefits and its effect on margins and cash generation.
- Cash use, including treasury investment purchases, dividends, and share repurchases, and management’s liquidity expectations.
- Whether FCC frequency requirements limit further network consolidation and related cost savings.
- The financial implications of operating leases and the related-party tower-site arrangements.