Spok Holdings, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; comparisons are with Q1 2019. Spok provides healthcare communications software and services, including clinical communications and collaboration solutions, alongside wireless messaging services.
Key financial metrics
Amounts below are in millions of dollars unless noted. Balance-sheet figures are as of March 31, 2020.
| Metric | Q1 2020 | Q1 2019 / comparison |
|---|---|---|
| Revenue | $37.3 | $41.8; down 10.8% |
| Operating income (loss) | $(4.1) | $1.1 |
| Net income (loss) | $(4.5) | $0.7 |
| Diluted earnings (loss) per share | $(0.24) | $0.04 |
| Cash provided by operations | $1.3 | $1.2 |
| Cash and cash equivalents | $42.3 | $47.4 at Dec. 31, 2019 |
| Short-term investments | $29.9 | $29.9 at Dec. 31, 2019 |
| Total liabilities | $68.0 | $69.8 at Dec. 31, 2019 |
Cash and short-term investments totaled $72.2 million. The company reported no outstanding debt and no revolving credit facility. Operating expenses rose 1.8% to $41.4 million while revenue fell, and the operating loss was approximately 11.0% of revenue, versus operating income of approximately 2.7% of revenue in Q1 2019. The company declared a quarterly dividend of $0.125 per share.
Material changes versus Q1 2019
- Wireless revenue declined 5.4% to $21.4 million, reflecting lower demand and fewer units in service. Units in service were 926,000 versus 982,000; reported ARPU was nearly flat at $7.31 versus $7.32.
- Software revenue fell 17.1% to $15.9 million. License revenue declined 66.4% to $1.0 million; services declined 12.6% to $4.5 million; and maintenance declined 4.9% to $9.7 million.
- Operating expenses increased $0.7 million. Cost of revenue rose with additional professional-services staffing, while research and development expense fell in part because $1.7 million of Spok Go development costs qualified for capitalization.
- Cash used in investing activities was $2.6 million versus $16.1 million, including a $15.0 million maturity of short-term investments in 2020. Cash used in financing was $3.5 million, primarily for shareholder distributions.
Outlook, risks and notable items
- Management said COVID-19 was delaying software sales cycles, license and equipment deliveries, and on-site implementations. Although the impact was not material to Q1 results, management expected a significant effect on full-year 2020 software revenue. The filing does not provide a quantified revenue forecast.
- Management planned temporary reduced work schedules and salaries in Q2 and other cost controls, with a goal of offsetting COVID-19’s effect on cash flow for the remaining nine months of 2020. It said available liquidity and further cost reductions were expected to support anticipated cash needs for the foreseeable future.
- The CARES Act was expected to provide a $1.5–$3.0 million payroll-tax payment deferral, a $0.5–$1.5 million employee-retention tax credit, and accelerated collection of approximately $1.3 million in AMT credits; these were management estimates.
- COVID-19 triggered a quantitative goodwill impairment assessment. The company reported no impairment as of March 31, 2020, but noted that future impairment charges remained possible.
- Spok Go became commercially available in early 2020. Management expects continued investment in the platform and noted that benefits depend on successful adoption over time. It also expects wireless revenue to keep declining as messaging is displaced by other technologies.
- The company adopted CECL on January 1, 2020, recording a $0.365 million reduction to opening retained earnings. Commitments and contingencies were reported as having no material change from the 2019 annual report. Operating lease liabilities totaled $16.2 million.
Important facts for investors to verify
- Whether COVID-19-related delays persist or worsen, particularly for software bookings, implementations, and Spok Go adoption.
- Whether cost reductions and CARES Act benefits are realized as estimated and whether operating cash flow remains adequate.
- Whether software revenue stabilizes and development spending translates into commercial growth, while wireless declines continue.
- Whether changes in market conditions lead to a future goodwill impairment assessment charge.
- The sustainability of the quarterly dividend in light of cash balances, planned investment, and management’s expectation that cash may decrease significantly over the coming years.