Spok Holdings, Inc. — Q2 2014 Form 10-Q
Business context and period. This unaudited report covers the quarter and six months ended June 30, 2014. The company changed its name from USA Mobility, Inc. to Spok Holdings, Inc. on July 8, 2014. Effective January 1, 2014, it combined wireless and software operations under one management structure and reported a single unified communications segment.
Financial performance
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Revenue | $49.1 million | $52.3 million | $99.2 million | $105.4 million |
| Operating income | $7.4 million | $11.9 million | $15.5 million | $23.6 million |
| Net income | $4.3 million | $6.8 million | $9.2 million | $13.8 million |
| Diluted EPS | $0.19 | $0.31 | $0.42 | $0.63 |
- Q2 operating margin was approximately 15.0%, versus 22.8% a year earlier; net margin was approximately 8.7%, versus 13.1%. For the six-month periods, operating margin was approximately 15.6% versus 22.4%, and net margin 9.3% versus 13.0%.
- Wireless revenue fell 11.3% year over year in both Q2 and the first half, to $33.5 million and $67.9 million, respectively. Paging units in service declined to 1.299 million from 1.445 million year over year; management expects demand to continue declining.
- Software revenue increased 7.4% in Q2 to $15.6 million and 8.7% for the first half to $31.3 million. Software bookings rose 21.3% in Q2 and 20.1% in the first half; reported software backlog was $40.2 million at June 30. Maintenance renewal rates were 99.5% in Q2 and 99.5% for the first half.
- For the first six months, GAAP operating cash flow was $18.4 million, down from $23.1 million. Capital expenditures were $5.0 million; dividends paid were $5.4 million. The company’s defined non-GAAP operating cash flow (EBITDA less capital expenditures) was $18.8 million, versus $26.0 million.
- Cash and cash equivalents were $97.0 million at June 30, up from $89.1 million at year-end. Total liabilities were $55.5 million; the company reported no outstanding borrowings. Its revolving facility provided approximately $40 million of capacity, subject to a $25 million minimum-liquidity threshold and other terms; the company reported covenant compliance.
- The board declared a $0.125-per-share quarterly dividend on July 30, payable September 10, 2014. The filing reports no material change to risk factors from the 2013 annual report.
Changes, outlook, and risks
- Revenue declined 6.1% in Q2 and 5.9% in the first half as software growth did not offset wireless declines. Operating income fell 38.1% in Q2 and 34.6% in the first half. Selling and marketing costs rose 19.0% in Q2 and 16.2% in the first half, including increased software sales commissions and rebranding-related advertising.
- Management expects wireless revenue to keep declining and said it expects future sequential annual revenue to decline in line with recent trends. It anticipates lower ARPU absent pricing actions; price increases could mitigate, but not fully offset, expected revenue declines. Network consolidation is expected to continue reducing related costs. No specific quantified earnings or revenue guidance is provided.
- Management cited continuing customer migration to alternative communications solutions and delayed purchasing and implementation decisions as factors limiting realization of deferred tax assets. At June 30, net deferred tax assets were $23.9 million after a $119.3 million valuation allowance.
- First-half operating cash flow was pressured by lower customer receipts and higher accounts receivable. The filing also identifies a $0.7 million non-recurring charge related to future billing credits. New commitments included $8.3 million of paging-device purchases over three years and $1.6 million for IT services over three years. Related-party site rent expense was $2.1 million for the first half.
- Other identified exposures include ongoing paging subscriber losses, the fixed costs of network infrastructure, the recoverability of deferred tax assets, and floating-rate exposure if the credit facility is drawn. Management stated that existing cash and expected operating cash flows should meet anticipated requirements for the foreseeable future.
Investor verification priorities
- Track wireless unit losses and ARPU against software growth, bookings, backlog, and maintenance renewals.
- Assess whether lower revenue can be offset by cost reductions, network rationalization, and disciplined selling and marketing spending.
- Monitor cash conversion and receivables, dividend sustainability, and compliance with the revolving facility’s liquidity and covenant requirements.
- Review the assumptions supporting deferred tax asset recoverability and the valuation allowance, as well as the billing-credit charge and new contractual commitments.
- Confirm the effect of the 2014 operating-segment reorganization and prior-period reclassifications when comparing reported results.