Business Context and Reporting Period
Spok Holdings, Inc. provides critical communications solutions, including paging and wireless services, enterprise software, secure messaging, and public-safety communications. This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2016; comparisons are with the corresponding 2015 periods. Amounts below are in millions unless stated otherwise.
Financial Performance and Position
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Revenue | $45.4 | $46.2 | $135.4 | $142.3 |
| Operating income | $6.0 | $6.7 | $17.5 | $18.6 |
| Operating margin | 13.3% | 14.4% | 12.9% | 13.0% |
| Net income | $4.1 | $4.2 | $11.0 | $11.5 |
| Diluted EPS | $0.20 | $0.20 | $0.53 | $0.53 |
| Operating cash flow | Not reported separately for quarter | Not reported separately for quarter | $29.4 | $33.5 |
Q3 wireless revenue fell 8.0% to $27.0 million, while software revenue rose 9.1% to $18.3 million. For the nine months, wireless revenue declined 8.0% to $83.1 million and software revenue was nearly flat at $52.3 million. Software maintenance renewal rates exceeded 99%.
At September 30, cash and cash equivalents were $122.5 million, current assets $152.2 million, current liabilities $48.9 million, and total liabilities $58.7 million. The company reported no debt or revolving credit facility. Nine-month capital expenditures were $4.4 million; cash dividends paid were $7.7 million and share repurchases were $6.2 million. Cash increased $11.1 million from year-end 2015.
Material Changes Versus Prior Period
- Consolidated revenue decreased 1.8% in Q3 and 4.9% year to date, reflecting ongoing wireless declines. Total units in service fell to 1.124 million from 1.192 million a year earlier; Q3 total ARPU was $7.63 versus $7.82.
- Q3 software growth was driven by more and larger completed projects, while year-to-date software operations revenue declined. Maintenance revenue increased, supported by high renewal rates.
- Operating expenses declined 0.5% in Q3 and 4.4% year to date. Year-to-date reductions included lower cost of revenue and selling and marketing expense; service, rental and maintenance expense rose 3.4%, largely due to higher product-development staffing.
- Cash from operations was down year over year as reported. Management says the comparison reflects a $3.8 million retrospective cash-flow reclassification related to stock-compensation tax withholding; excluding that reclassification, operating cash flow declined about $0.3 million.
Outlook, Commentary, Risks and Unusual Items
- Management expects wireless demand and revenue to continue declining for the foreseeable future and expects future annual revenue to decline in line with recent trends. Software revenue is anticipated to increase, but management cautioned that sales reorganization and a shift toward integrated solutions make the timing and effect uncertain.
- Q3 total software bookings increased 11.4% year over year, but operations bookings declined 8.7%; nine-month total bookings declined 3.0%. Software backlog was $38.8 million at September 30.
- Management plans continued investment in mobility, a unified software platform, nursing solutions and alerting, and expects related staffing costs to pressure margins before benefits are realized. Network consolidation is expected to continue reducing certain telecom and site-rent costs.
- The board declared a $0.125-per-share dividend payable in December 2016. Management stated an intention to return at least $21 million to stockholders during 2016 through dividends, repurchases and/or special dividends, subject to business and market conditions. The repurchase program had $3.8 million of authority remaining at September 30 and was scheduled to run through December 31, 2016.
- In Q3, the company removed a $45.8 million valuation allowance against deferred tax assets following a court decision affecting certain NOL carryforwards. The write-off was offset against deferred tax assets and had no impact on tax expense or net income. Deferred tax assets were $77.8 million with no valuation allowance at quarter-end.
- Management considers cash and expected operating cash flow adequate for anticipated needs for the foreseeable future, but notes that a shortfall could prompt reduced capital spending, dividends or repurchases, asset sales, or outside financing. No material changes to previously disclosed commitments and contingencies were reported; routine lawsuits were not expected to have a material adverse effect.
- Other items to note: goodwill was $133.0 million with no impairment triggering events identified; a director-related entity received $2.9 million in site rent during the first nine months; disclosure controls were reported effective.
Important Facts for Investors to Verify
- Whether the continuing decline in paging units and ARPU is offset by software growth, and the pace of software bookings converting to revenue.
- Whether the Q3 software-project increase is repeatable, given management’s comment that a handful of large projects drove the quarterly result and year-to-date operations bookings were weaker.
- How product-development hiring and integrated-solution sales cycles affect operating costs, margins, backlog and cash generation.
- Whether the stated 2016 stockholder-return intention is achieved and how dividends and repurchases affect cash balances.
- The realizability and future use of deferred tax assets, and any subsequent developments in tax matters, commitments or litigation.