Spok Holdings, Inc. — Q2 2020 Form 10-Q Summary
Reporting period: Three and six months ended June 30, 2020. Financial statements are unaudited. Spok provides healthcare communications software and services alongside wireless messaging services, primarily in the United States.
Financial results and position
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Revenue | $35.7m | $39.5m | $73.0m | $81.3m |
| Operating income (loss) | $3.2m | $(2.0)m | $(0.9)m | $(0.9)m |
| Net income (loss) | $3.8m | $(0.7)m | $(0.8)m | $0.1m |
| Operating margin | 8.8% | (5.0)% | (1.3)% | (1.1)% |
| Operating cash flow | Not separately provided | Not separately provided | $6.5m | $0.8m |
- Q2 diluted earnings per share were $0.20, versus a loss of $0.03 a year earlier; six-month diluted loss per share was $0.04, versus approximately breakeven in 2019.
- Q2 revenue fell 9.6% year over year. Wireless revenue decreased 4.7% and software revenue decreased 15.7%. For the first half, wireless declined 5.1% and software declined 16.4%.
- Cash and cash equivalents were $40.9m and short-term investments were $30.0m at June 30, for total cash and investments of $70.9m, down from $77.3m at year-end 2019. Current assets were $111.4m versus current liabilities of $50.9m.
- Spok reported no outstanding debt or revolving credit facility. Operating lease liabilities totaled $15.4m, including current and non-current portions.
- Six-month investing cash outflow was $7.1m, including $5.3m of capitalized software development; financing cash outflow was $5.7m, primarily distributions to stockholders. The company declared dividends of $0.125 per share each quarter.
Material changes and management commentary
- COVID-19 delayed hospital purchasing decisions, software bookings, and on-site implementation work. Management expected these disruptions to continue to affect software revenue for 2020 and said professional-services revenue would likely remain below normal for the rest of the year. Management characterized implementation delays primarily as timing shifts, with associated work remaining in backlog.
- Management implemented reduced work schedules and temporary salary reductions in Q2 and planned a similar program for Q3. It aimed to offset COVID-19’s cash-flow effects and expected to operate cash-flow positive in the second half of 2020. Management stated available cash and expected operating cash flow should meet foreseeable needs.
- Spok Go became commercially available in early 2020. The company is concentrating development on this cloud-based platform and expects to transition existing on-premise customers over several years. It cautioned that Care Connect license sales may decline and that maintenance revenue could be flat or slightly lower as customers transition to subscriptions.
- Research and development expense fell substantially partly because $5.3m of Spok Go development costs were capitalized in the first half. Management noted development costs remain significant and benefits depend on successful market adoption.
- Wireless subscribers continued to decline: units in service were 915,000 at June 30, 2020 versus 977,000 a year earlier. Management expects wireless demand to decline for the foreseeable future, though at a slower rate than historically. Average revenue per user was $7.24 versus $7.26.
- The Q2 net profit included a $0.4m income-tax benefit. The six-month period included a $0.8m net loss, despite operating cash flow of $6.5m.
- Under the CARES Act, Spok had deferred approximately $0.6m of payroll taxes and claimed approximately $0.8m in employee-retention credits through June 30. Management estimated total payroll-tax deferrals of $1.5m–$3.0m, credits of $0.8m–$1.5m, and accelerated collection of about $1.3m in AMT credits.
Risks, contingencies, and unusual items
- The duration and severity of the pandemic, hospital capacity and staffing constraints, renewed restrictions, and the pace of economic recovery make the business impact difficult to quantify. Hospital focus on COVID-19 also delayed projects and industry events that could support Spok Go sales.
- Goodwill was $124.2m. The company’s Q2 qualitative assessment found no triggering event for impairment, but it warned that future impairment charges remain possible.
- Asset-retirement obligations were $6.3m at June 30; management estimated the liability could accrete to $7.6m based on transmitter locations and assumed lease renewals. Further network consolidation may be constrained by FCC minimum frequency commitments.
- The filing reported no material changes to previously disclosed commitments and contingencies. A director-related entity received $1.8m in site-rent payments during the first half; a customer employing another director generated $0.3m of first-half revenue.
- Management said disclosure controls were effective as of June 30, 2020, with no material change in internal control over financial reporting during Q2.
Important facts for investors to verify
- Whether delayed hospital software bookings and implementations recover, and whether backlog converts to revenue and cash on the expected schedule.
- Spok Go adoption, bookings, implementation progress, and whether its subscription economics can offset declines in legacy licenses, maintenance, and wireless services.
- Whether cost reductions and CARES Act benefits support second-half cash generation, while monitoring cash and investments, dividend payments, and continued development spending.
- How wireless subscriber losses, FCC frequency requirements, and transmitter rationalization affect recurring revenue and network costs.
- Whether changing business conditions affect the recoverability of goodwill and deferred tax assets, or require recognition of impairment or valuation allowances.