Spok Holdings, Inc. — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023. Spok provides healthcare communications and collaboration software and wireless messaging services, primarily in the United States. Figures below are in U.S. dollars; financial-statement amounts are in millions unless noted.
Financial performance
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Revenue | $36.5 | $33.7 | $69.6 | $67.5 |
| Operating income (loss) | $6.2 | $2.4 | $10.9 | $(6.3) |
| Net income (loss) | $4.7 | $1.9 | $7.9 | $(5.3) |
| Diluted EPS | $0.23 | $0.10 | $0.39 | $(0.27) |
| Operating margin | 17.0% | 7.2% | 15.7% | (9.3)% |
- Q2 wireless revenue was $18.9 million, up 0.9%; software revenue was $17.6 million, up 17.2%. For the first half, wireless revenue rose 1.0% and software revenue rose 5.8%.
- Q2 operating expenses fell 3.4% to $30.2 million. First-half expenses fell 20.4% to $58.7 million, largely reflecting lower restructuring, research and development, general and administrative, and other costs.
- First-half operating cash flow was $11.2 million, versus cash used of $5.9 million in the prior-year period. Investing used $1.8 million; financing used $14.3 million, primarily for stockholder distributions. Cash declined $4.9 million from year-end to $30.9 million.
- At June 30, cash was $30.9 million; current assets were $64.5 million and current liabilities were $49.3 million. Spok reported no outstanding debt and no revolving credit facility. Lease liabilities were $14.2 million on the balance sheet; contractual operating-lease obligations were reported as $16.5 million.
- Cash dividends declared were $0.3125 per share in Q2 and $0.625 per share for the first half. The board declared another $0.3125-per-share dividend in July, expected to require approximately $6.2 million for common shares.
Changes and management commentary
- Revenue growth was led by software operations revenue, up 45.9% in Q2, including higher license, professional-services, and hardware revenue. Maintenance revenue declined 0.9% in Q2 and 2.0% for the first half.
- Wireless growth was supported by price increases and higher Universal Service Fees, offset by declining subscriber units. Units in service remained approximately 0.8 million year over year; Q2 ARPU increased to $7.53 from $7.23. Management expects wireless demand to continue declining as customers shift to competing technologies.
- Management said maintenance churn remains relatively stable but new maintenance revenue is not expected to fully offset churn; annual maintenance revenue is likely to decline slightly until product enhancements improve retention and add revenue.
- The 2022 plan to discontinue Spok Go and reduce costs was completed in Q4 2022, eliminating 176 positions. Management continues to prioritize cost control, cash generation, and returns to stockholders. It expects operating cash flow and cash on hand to meet anticipated short- and long-term requirements, but gave no specific revenue or earnings guidance.
- In July, Spok paid eligible employees $3.2 million for accrued paid time off. A flexible-time-off policy is expected to save an estimated $0.4 million to $0.6 million annually.
Risks, contingencies, and unusual items
- Spok revised prior-period financial information for an immaterial error: deferred revenue had been understated by approximately $1.0 million due to a 2018 software-revenue error related to implementation of a financial system. The company concluded the adjustments were not material to prior annual or interim periods.
- Management identified no goodwill impairment triggering event in its Q2 qualitative assessment, but said future impairment charges remain possible.
- Cash deposits, mostly at financial institutions and largely above insured limits, could be affected by an institution failure. Spok also notes that network consolidation savings may become more limited as it approaches minimum FCC frequency commitments.
- The company reported no material changes to previously disclosed commitments and contingencies or risk factors. It reported effective disclosure controls as of June 30, 2023.
Important facts for investors to verify
- Whether software bookings and implementations can sustain growth, and whether maintenance revenue stabilizes as management expects.
- The pace of wireless subscriber attrition and the extent to which pricing and new offerings offset unit losses.
- Cash generation after dividends, the continuing affordability of the dividend, and the impact of the $3.2 million July PTO payment.
- Potential goodwill impairment, network-rationalization limits, and exposure to uninsured cash deposits.
- The effects and presentation of the deferred-revenue revision in the relevant prior-period financial information.