Spok Holdings, Inc. — Q1 2018 Form 10-Q
Business context and period. Spok provides healthcare and other critical-communications software and wireless messaging services, primarily in the United States. This unaudited report covers the three months ended March 31, 2018; comparisons are with Q1 2017 unless noted.
Financial performance and position
| Metric | Q1 2018 | Q1 2017 or prior date |
|---|---|---|
| Revenue | $43.1 million | $41.4 million; up 4.0% |
| Operating income | $0.75 million | $1.38 million; down 45.7% |
| Operating margin | 1.7% | 3.3% |
| Net income | $0.51 million | $0.85 million; down 40.2% |
| Diluted earnings per share | $0.03 | $0.04 |
| Cash from operating activities | $1.12 million | $3.67 million |
| Capital expenditures | $1.16 million | $2.85 million |
| Cash and cash equivalents | $101.3 million | $107.2 million at Dec. 31, 2017 |
| Total debt | None | No debt or revolving credit facility |
At March 31, current assets were $147.8 million and current liabilities were $47.4 million. Total liabilities were $56.6 million; stockholders’ equity was $291.3 million. Cash declined by $5.9 million during the quarter, reflecting $5.6 million of financing outflows, including dividends and share repurchases, and $1.2 million of investing outflows.
Changes versus the prior period
- Wireless revenue fell 6.2% to $24.3 million. Units in service declined to 1.03 million from 1.09 million, and reported ARPU decreased to $7.47 from $7.56.
- Software revenue rose 20.9% to $18.8 million as reported. The company adopted ASC 606 on January 1, 2018 using the modified retrospective method, so prior-year amounts were not restated. Excluding the accounting change, Q1 2018 revenue was $42.5 million, up 2.4%; software revenue was $18.2 million, up 16.7%.
- Operating expenses increased 5.7% to $42.4 million. Research and development rose 39.7% to $5.7 million, while service, rental and maintenance costs declined 3.9% to $7.8 million.
- Operating cash flow decreased by $2.5 million year over year, with working-capital movements—including higher accounts receivable—among the cited factors.
Outlook, commentary, and risks
- Management expects wireless demand and revenue to continue declining, citing competition from other technologies, while noting the rate of decline had moderated. Network consolidation is expected to reduce site-rent and telecommunications costs.
- The company plans to increase investment over the next one to two years in its integrated communications platform, including mobility, a unified software platform, nursing solutions, and alerting. Management warned this spending and planned staffing increases will pressure margins and operating cash flow before benefits are realized, which it says may take at least two years.
- Management expects cash on hand and operating cash flows to be adequate for anticipated requirements for the foreseeable future, but said cash may decrease significantly during the investment period. If funding is insufficient, it may reduce capital spending or dividends, refrain from resuming repurchases, sell assets, or seek financing.
- The board declared a $0.125 per-share quarterly dividend for Q1 and declared the same amount after quarter-end for payment in June 2018. A new authorization permits up to $10 million of share repurchases through 2018; the company repurchased 127,792 shares for approximately $1.9 million in Q1.
- ASC 606 increased opening retained earnings by approximately $6.4 million. The company reported that the standard accelerated some license revenue and related commission expense. The new lease standard is expected to result in potentially material right-of-use assets and lease liabilities when adopted in 2019.
- A patent-infringement lawsuit was settled for an immaterial amount and dismissed with prejudice. The filing reported no material change in risk factors. Management stated disclosure controls were effective at quarter-end.
Important facts for investors to verify
- Track wireless subscriber losses, ARPU, and whether software growth continues when separated from ASC 606 timing effects.
- Assess the effects of planned product-development spending on margins, operating cash flow, and cash balances.
- Monitor accounts receivable and working-capital trends, including the increase in unbilled receivables associated partly with ASC 606.
- Review the sustainability of dividends and the pace of share repurchases against cash needs and management’s stated investment plans.
- Follow the company’s ASC 606 judgments and the expected balance-sheet impact of adopting the lease standard.