Business context and reporting period
Spok Holdings, Inc. provides healthcare communications software and services, including clinical communications solutions and wireless messaging. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2021, compared with the corresponding 2020 periods.
Financial performance and position
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Revenue | $35.7m | $35.7m | $71.8m | $73.0m |
| Operating income (loss) | $(1.6)m | $3.2m | $(3.3)m | $(0.9)m |
| Net income (loss) | $(0.7)m | $3.8m | $(3.0)m | $(0.8)m |
| Operating margin | (4.5)% | 8.8% | (4.7)% | (1.3)% |
| Operating cash flow | Not separately presented | $3.9m | $6.5m |
Q2 wireless revenue declined 5.8% to $19.9m, while software revenue rose 8.2% to $15.9m. For the first half, wireless revenue fell 5.9% to $40.0m and software revenue increased 4.1% to $31.8m. Gross margin is not separately stated in the filing.
At June 30, 2021, cash and cash equivalents were $38.1m and short-term investments were $30.0m, totaling $68.1m. Current assets were $105.2m and current liabilities $52.5m. Total assets were $269.2m, total liabilities $74.2m, and stockholders’ equity $195.0m. The company reported no outstanding debt or revolving credit facility.
Six-month investing cash outflow was $7.8m, including $5.6m of capitalized software development; financing cash outflow was $6.7m, primarily dividends and tax withholding on equity awards. Cash declined $10.6m to $38.1m. Cash dividends declared were $0.125 per share quarterly, or $0.25 per share for the first half.
Material changes versus the prior comparable period
- Q2 revenue was nearly flat year over year, but operating results shifted from $3.2m income to a $1.6m loss. Operating expenses increased 14.6% to $37.3m, notably research and development (+55.3%) and selling and marketing (+30.0%).
- First-half revenue decreased 1.7%, while operating loss widened to $3.3m. Operating cash flow declined by $2.6m to $3.9m.
- Software operations revenue improved, including higher license and services revenue, while wireless revenue continued its secular decline. Q2 software services revenue rose 27.6%; first-half maintenance revenue declined 0.8%.
- Capitalized software development was $5.6m in the first half, versus $5.3m in 2020. Software amortization increased as previously capitalized development costs began amortizing in 2020.
Outlook, management commentary, risks and unusual items
- Management expected software revenue to remain affected by COVID-19 disruptions through the rest of 2021, but anticipated continued sequential improvement and was cautiously optimistic about a return to normal operating levels by year-end. Hospital access restrictions and renewed virus-case increases could delay implementation work and purchasing.
- Management expects wireless demand to continue declining. It anticipates maintenance revenue will be relatively flat or slightly down as legacy license sales weaken and customers transition toward Spok Go and subscription offerings.
- The company plans to continue substantial investment in Spok Go. Management warned that cash could decline significantly before Spok Go revenue is realized; adoption is expected to develop gradually over several years.
- Management expected operating cash flow and cash on hand to meet foreseeable requirements and stated that cost measures could support positive cash flow for the rest of 2021. If cash proves insufficient, potential responses include reducing capital spending or dividends, selling assets, or seeking financing; none is assured to be sufficient or available on acceptable terms.
- COVID-related measures included reduced work schedules, equity compensation in place of cash, and non-employee directors electing equity-based compensation. Reduced schedules generated $1.8m of first-half compensation savings; equity in lieu of cash compensation generated $1.2m of first-half cash savings. The reduced-work-schedule program was discontinued for the second half of 2021.
- The board declared a $0.125-per-share dividend after quarter-end, payable September 10, 2021. Future dividends remain subject to board declaration.
- Goodwill review found no impairment triggering event in Q2, but the company noted potential for future impairment charges. The net deferred tax asset was $26.0m and the valuation allowance was $23.1m.
- The filing reported no material change in previously disclosed commitments and contingencies or risk factors. Disclosure controls were deemed effective, with no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Whether software bookings, implementation activity, and Spok Go adoption improve enough to offset continued wireless declines and legacy maintenance churn.
- Whether operating expense growth and ongoing software investment can be managed without further deterioration in profitability and operating cash flow.
- Cash usage, future dividend declarations, and the company’s ability to fund operations and investment from available liquidity.
- Potential goodwill impairment and recoverability of deferred tax assets, including the effect of future profitability assumptions.
- COVID-19 effects on hospital purchasing and on-site implementation access, as well as the effect of any renewed restrictions or case increases.