Business context and reporting period
The filing is a quarterly report for the three and nine months ended September 30, 2013. The registrant named in the filing is USA Mobility, Inc. (not Spok Holdings, Inc.); investors should verify the issuer and its relationship to the requested company.
USA Mobility operated wireless messaging and mobile voice/data services and mission-critical unified communications software through its Wireless and Software segments. Healthcare was a major customer market for both segments.
Financial results and liquidity
Unless stated otherwise, amounts are in U.S. dollars; financial statement amounts below are in millions.
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Revenue | $49.7 | $55.1 | $155.1 | $167.8 |
| Operating income | $9.5 | $13.0 | $33.2 | $41.1 |
| Net income | $5.8 | $8.0 | $19.5 | $25.0 |
| Diluted EPS | $0.26 | $0.36 | $0.89 | $1.11 |
| Company-defined EBITDA | $13.4 | $17.8 | $44.7 | $55.0 |
| Company-defined operating cash flow | $10.9 | $15.1 | $36.9 | $47.8 |
Q3 operating margin was approximately 19.2% versus 23.7% a year earlier; nine-month operating margin was approximately 21.4% versus 24.5%. The company defines operating cash flow as EBITDA less capital expenditures; it is a non-GAAP measure.
For the nine months, cash from operations was $39.3 million, down $13.4 million year over year. Capital expenditures were $7.8 million. Cash increased by $21.9 million to $83.0 million; financing outflows were $9.6 million, primarily dividends. At September 30, current assets were $112.6 million and current liabilities were $50.6 million. There was no outstanding debt and the company reported approximately $40 million available under its revolving facility, which matures September 3, 2015. It was compliant with the facility’s financial covenants.
The board declared a regular $0.125-per-share dividend on November 5, 2013, payable December 10. Dividends declared for the first nine months totaled $0.375 per share.
Material changes versus the prior comparable period
- Q3 revenue fell 9.9%; nine-month revenue fell 7.6%. The decline was driven by Wireless, whose revenue fell 10.6% in Q3 and 11.6% for the nine months.
- Wireless subscriber units declined to 1.408 million from 1.546 million a year earlier. Management said demand for messaging was expected to continue declining. Q3 total Wireless ARPU was $8.22, compared with $8.36 a year earlier.
- Software revenue declined 7.8% in Q3 to $12.6 million, but increased 5.4% for the nine months to $41.5 million. Software recorded a Q3 operating loss of $1.8 million, versus a $0.3 million loss; its nine-month operating loss was $2.1 million versus $0.8 million.
- Software bookings rose 10.4% in Q3 and 9.3% for the nine months. Backlog at quarter-end was $43.8 million. Maintenance renewal rates were 99.0% for Q3 and 99.1% for the nine months.
- Operating cash flow declined year over year. Management attributed the decrease principally to lower customer receipts and higher operating cash payments, including payroll and the 2009 incentive-plan cash award.
- Cash dividends paid for the nine months were $9.6 million, compared with $13.8 million in 2012; the per-share dividend declared was $0.375 versus $0.625.
Outlook, commentary, risks and unusual items
- Management expected Wireless revenue to continue declining with subscriber losses and anticipated further Wireless staffing reductions. It planned to increase Software staffing to support growth. No specific consolidated earnings or revenue guidance was provided.
- Wireless network rationalization reduced active transmitters 4.1% year over year to 4,572. Management expected further network and telecommunications cost reductions.
- Management said cash on hand and expected operating cash flow should meet anticipated requirements for the foreseeable future. It noted that a cash shortfall could lead to reduced capital spending, dividends or repurchases, asset sales, or additional financing.
- A material weakness in revenue-recognition control design, previously associated with restatement of 2011 financial statements, had not been remediated as of September 30, 2013. Management concluded disclosure controls were not effective. Remediation measures included staffing and organizational changes, revised processes and controls, training, and standardized contracts.
- Deferred tax assets were $152.3 million gross with a $118.7 million valuation allowance, for an estimated recoverable amount of $33.6 million. Management cited continuing Wireless declines and uncertainty affecting Software customer decisions in assessing recoverability.
- The company reported no goodwill impairment indicators for the period. It said ordinary-course litigation was not expected to materially affect results or operations. The filing states that risk factors had not materially changed during the quarter.
Important facts for investors to verify
- Confirm that the 2013 USA Mobility filing is the intended issuer and determine its corporate relationship, if any, to Spok Holdings.
- Track Wireless subscriber losses, ARPU, revenue trends and the pace of network cost reductions against management’s expectations.
- Assess whether Software bookings and backlog convert into recognized revenue and improved segment profitability.
- Review operating cash flow, dividend sustainability, available revolver capacity and the effect of working-capital movements.
- Monitor remediation and independent testing of the revenue-recognition material weakness, and the recoverability assumptions for deferred tax assets.