Business context and reporting period
Spok Holdings, Inc. provides wireless paging and critical-communications software, primarily to healthcare organizations. This Form 10-K reports the fiscal year ended December 31, 2016; quarterly figures below identify the fourth quarter where relevant. Amounts are in U.S. dollars.
Financial performance and position
| Metric | FY 2016 | FY 2015 | Change |
|---|---|---|---|
| Revenue | $179.6 million | $189.6 million | Down 5.3% |
| Wireless revenue | $109.6 million | $119.0 million | Down 7.9% |
| Software revenue | $70.0 million | $70.6 million | Down 0.9% |
| Operating income | $22.2 million | $25.1 million | Down 11.7% |
| Operating margin | 12.3% | 13.2% | Down 0.9 percentage points |
| Net income | $14.0 million | $80.2 million | Prior year included a large tax benefit |
| Diluted EPS | $0.68 | $3.74 | Prior year included a large tax benefit |
| Cash from operating activities | $37.5 million | $41.8 million | Down $4.4 million |
| Company-defined operating cash flow | $28.9 million | $32.7 million | Down 11.7% |
- Fourth-quarter 2016 revenue was $44.2 million, operating income $4.7 million, net income $3.0 million and diluted EPS $0.15. Fourth-quarter 2015 revenue was $47.3 million and operating income $6.6 million; net income of $68.7 million included a substantial tax benefit.
- Cash and cash equivalents were $125.8 million at year-end, versus $111.3 million a year earlier. Current assets were $155.9 million and current liabilities $56.3 million (a derived current ratio of approximately 2.8).
- No debt was outstanding. Total liabilities were $66.0 million; deferred revenue accounted for $29.9 million of that amount. Stockholders’ equity was $322.1 million.
- Capital expenditures were $6.3 million; investing cash outflow was $6.3 million and financing cash outflow was $16.7 million. Company-defined operating cash flow is a non-GAAP measure: EBITDA less purchases of property and equipment.
- Revenue mix continued shifting toward software: maintenance revenue rose 7.7% to $37.1 million, while software operations revenue fell 9.1% to $32.9 million. Software maintenance renewal rates exceeded 99%.
Material changes versus the prior comparable period
- Wireless revenue fell $9.4 million, reflecting ongoing paging demand and subscriber declines. Units in service decreased to 1.111 million from 1.173 million; the annual net unit loss rate improved to 5.3% from 6.6%.
- Software revenue edged lower as operations revenue declined, partly offset by maintenance growth. Total bookings were nearly flat at $73.9 million, but operations and new maintenance orders fell 12.9% to $33.6 million. Year-end backlog was $38.3 million, versus $38.7 million.
- Operating expenses declined 4.3% to $157.4 million, while research and development expense increased 31.0% to $13.5 million. The expense figures include depreciation, amortization and accretion.
- Net income comparison is distorted by the 2015 $64.2 million favorable reduction in the deferred-tax valuation allowance. FY 2015 was also revised downward by $4.0 million for an immaterial prior-period tax misstatement; the correction did not affect cash flows.
Outlook, management commentary, risks and unusual items
- Management expects wireless revenue to continue declining and software revenue to increase, but provided no quantified revenue or earnings guidance. It expects to substantially increase product development investment over the next two to three years; management cautioned that this will pressure margins and operating cash flow before benefits are realized.
- Spok plans to develop its integrated Spok Care Connect communications platform and said it intended to hire up to 60 employees, primarily in software development and supporting functions. The company identified software bookings and revenue growth, wireless revenue retention, platform development, and expense management as 2017 priorities.
- The company expected to pay regular dividends of $0.125 per share quarterly in 2017, subject to board declaration. A $0.25-per-share special dividend declared in December 2016 was paid in January 2017. The prior share-repurchase authority expired December 31, 2016 and was not renewed for 2017.
- Management said operating cash flow and cash on hand should meet anticipated requirements for the foreseeable future, while noting that cash could decline significantly during the platform investment period. If cash becomes insufficient, dividends could be reduced or eliminated, planned investment cut, or financing or asset sales pursued.
- Key risks include continued paging erosion outpacing cost reductions; execution, market acceptance and staffing for Care Connect; long software sales cycles; network-rationalization disruption; competition and technology shifts; customer, data-security and cyber risks; and FCC, FDA and healthcare regulation.
- The 2015 tax benefit and 2016 tax expense are unusual comparability items. In 2016, the company eliminated a $50.0 million valuation allowance against deferred tax assets after reassessing recoverability, with no impact on 2016 tax expense or net income. It reported $125.7 million of federal net operating loss carryforwards, beginning to expire in 2025.
- Contractual obligations included $17.2 million of operating lease commitments and $4.0 million of remaining minimum pager-purchase commitments. A January 2017 patent-infringement lawsuit was settled for an immaterial amount. No impairment of goodwill or intangible assets was recorded in 2016.
- Grant Thornton issued unqualified opinions on the financial statements and internal control over financial reporting; management also concluded disclosure controls were effective.
Important facts for investors to verify
- Whether wireless subscriber and revenue declines can be offset by software growth, and whether planned cost reductions preserve positive cash flow.
- Progress in operations bookings, Care Connect development and deployment, and whether increased R&D spending converts into durable revenue and margins.
- The assumptions supporting deferred-tax-asset recoverability, particularly the forecast of future taxable income and available net operating losses.
- Cash use for dividends, platform investment, leases and other commitments, and the board’s future dividend and repurchase decisions.
- Potential effects of the new revenue-recognition and lease-accounting standards, which management expected could materially affect reported balances or revenue timing.