Spok Holdings, Inc. — Q3 2021 Form 10-Q
Business context and reporting period. Spok provides healthcare communications software and services, alongside wireless messaging and paging. This unaudited quarterly report covers the three and nine months ended September 30, 2021; comparisons are with the corresponding 2020 periods.
Financial performance
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Revenue | $35.9 million | $37.7 million | $107.6 million | $110.7 million |
| Operating income (loss) | $(3.6) million | $2.7 million | $(6.9) million | $1.8 million |
| Net income (loss) | $(2.5) million | $3.2 million | $(5.5) million | $2.4 million |
| Diluted EPS | $(0.13) | $0.16 | $(0.28) | $0.12 |
| Operating margin | (9.9)% | 7.2% | (6.4)% | 1.6% |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $9.5 million | $21.0 million |
Q3 wireless revenue was $19.6 million, down 5.7%; software revenue was $16.2 million, down 3.9%. For the nine months, wireless revenue fell 5.8% to $59.6 million while software revenue rose 1.2% to $48.0 million. No gross-margin figure is presented.
For the nine months, investing cash use was $11.3 million, including $8.2 million of capitalized software development; financing cash use was $9.3 million, primarily dividends and tax withholding on equity awards. Cash and cash equivalents were $37.5 million at September 30, down from $48.7 million at December 31, 2020. Short-term investments were $30.0 million, giving cash, cash equivalents and investments of $67.5 million. The company reported no debt or revolving credit facility. Current assets were $104.5 million and current liabilities $57.4 million.
Material changes versus prior periods
- Total revenue declined 4.9% in Q3 and 2.8% for the nine months. Wireless revenue continued to contract with declining paging demand; units in service remained 0.9 million, while quarterly ARPU decreased to $7.29 from $7.34.
- Operating expenses rose 12.7% in Q3 and 5.1% for the nine months, contributing to a shift from operating profit to operating loss. Higher Q3 costs included general and administrative, research and development, selling and marketing, and cost of revenue.
- Operating cash flow for the nine months decreased $11.4 million year over year. The company attributed the prior-year comparison partly to favorable working-capital movements in 2020.
- Software revenue grew modestly year to date, but Q3 operations revenue declined; management cited pandemic-related sales and implementation delays and unusually high deferred-project services revenue in Q3 2020.
Outlook, commentary and risks
- Management expected software revenue to remain affected by COVID-19 disruptions through the remainder of 2021, while anticipating gradual improvement and a return toward normal operating levels by year-end. These are expectations, not quantified revenue or earnings guidance.
- Management said operating cash flow and cash on hand should meet anticipated requirements for the foreseeable future, but expects cash to decline significantly as it invests in Spok Go while wireless revenue declines. If liquidity proves insufficient, possible actions include cutting planned capital spending, reducing or ending dividends, selling assets or seeking financing.
- Management expects wireless demand to continue declining. It expects maintenance revenue to be flat or slightly lower over time, citing churn exceeding new maintenance revenue inflows and a transition toward Spok Go and subscription offerings.
- Spok announced an unsolicited proposal to acquire all outstanding shares on August 31, 2021, and a strategic alternatives review on September 3, including a potential sale. The filing provides no outcome or transaction terms.
- A stockholder rights plan adopted September 2, 2021 has a 10% ownership trigger, or 20% for passive institutional investors, and is scheduled to expire August 31, 2022. The company warns it could discourage an unapproved change-of-control transaction.
- Other risks include pandemic-related customer and implementation disruptions, competition and secular substitution of paging technologies, execution and market adoption of Spok Go, retention of skilled personnel, and limits on further network consolidation from FCC frequency commitments. Goodwill impairment remained a future-period risk; the Q3 qualitative assessment found no triggering event.
- The board declared a subsequent quarterly dividend of $0.125 per share, approximately $2.4 million, payable December 10, 2021. The filing says future quarterly dividends remain subject to board declaration.
- The company reported no material changes to previously disclosed commitments and contingencies. It reported related-party revenue of $0.2 million in Q3 and $0.6 million for the nine months.
Key facts for investors to verify
- Progress and any outcome of the strategic alternatives review, including the unsolicited acquisition proposal and the rights plan’s implications.
- Whether Spok Go bookings, deployments and recurring subscription revenue improve enough to offset wireless declines and maintenance churn.
- Cash generation, capitalized software spending, and the sustainability of quarterly dividends as cash balances decline.
- Whether pandemic-related customer restrictions, implementation delays and hiring or retention challenges affect revenue and execution.
- Future goodwill impairment assessments and the realizability of deferred tax assets, including the reported $23.1 million valuation allowance.