Spok Holdings, Inc quarterly report, Q3 FY2012

USA Mobility, Inc. — Form 10-Q Summary

Entity note: The supplied filing is for USA Mobility, Inc., for the quarter ended September 30, 2012—not a filing under the name Spok Holdings, Inc. Verify the issuer and corporate-name history before attributing these results to Spok.

Business context and reporting period

USA Mobility provided wireless messaging and related services through its Wireless segment and mission-critical unified communications software through Amcom, its Software segment. The filing reports Q3 and the nine months ended September 30, 2012, with comparisons to 2011. The 2011 Software comparison covers results only from Amcom’s March 3, 2011 acquisition date and is affected by acquisition-accounting adjustments.

Financial performance

Amounts below are in millions of dollars unless stated otherwise.

Q3 operating margin was approximately 23.7% versus 26.3%; nine-month operating margin was approximately 24.5% versus 24.9%. Q3 net margin was approximately 14.6% versus 17.0%. Nine-month net income fell sharply in part because 2011 included a large income-tax benefit; the 2011 period also included a $7.5 million gain on the sale of narrowband PCS licenses.

• Revenue mix and segments: Q3 Wireless revenue declined 14.6% to $41.4 million; Software revenue grew 5.8% to $13.7 million. For nine months, Wireless revenue fell 16.1% to $128.5 million, while Software revenue rose to $39.3 million from $30.8 million; the periods are not fully comparable because of the 2011 acquisition date.
• Cash, liquidity and debt: Cash was $49.5 million at September 30, down from $53.7 million at December 31, 2011. The company had no debt after repaying $3.3 million on April 6, 2012. Its revolving facility provided approximately $40.0 million of borrowing capacity, subject to a $25.0 million minimum-liquidity threshold and letters of credit. It reported compliance with financial covenants.
• Cash uses and capital spending: Nine-month capital expenditures were $7.1 million; dividends paid were $13.8 million. The company repurchased 434,982 shares in Q3 for about $4.9 million, with approximately $20.1 million of repurchase authority remaining at quarter-end. Cash decreased by $4.1 million during the nine months.
• Balance sheet: Total assets were $314.3 million, total liabilities $54.5 million, and stockholders’ equity $259.8 million at September 30. Goodwill was $132.8 million and net amortizable intangible assets were $35.3 million.
• Taxes: Nine-month income-tax expense was $16.3 million versus a $18.0 million benefit in 2011. Deferred tax assets were $160.7 million before a $115.7 million valuation allowance, leaving an estimated recoverable amount of $45.0 million.

Material changes versus the prior comparable period

• Wireless messaging units in service declined to 1.546 million from 1.721 million year over year. Q3 direct net unit loss was 2.2%; consolidated ARPU declined to $8.36 from $8.59.
• Wireless service, rental and maintenance revenue fell 13.5% in Q3. Management attributed the decline to lower messaging demand, subscriber losses and lower ARPU.
• Cost reductions partly offset revenue declines: nine-month service, rental and maintenance expenses fell 12.4%, including lower network site-rent and telecommunications costs following network rationalization.
• Software maintenance revenue increased, while nine-month software operations revenue was affected by a prior-year significant sale and acquisition-accounting adjustments. Software bookings were $43.2 million for nine months, and reported backlog was $26.4 million at September 30.
• Nine-month operating cash flow declined $8.1 million. Cash received from customers was down $19.9 million, partly offset by lower operating payments.

Outlook, risks, contingencies and unusual items

• Management expected messaging demand and related revenue to continue declining, and anticipated future revenues would decline in line with recent trends. It said pricing actions might mitigate, but not fully offset, lower ARPU and revenue. No specific numerical earnings or revenue guidance was provided.
• Network consolidation may reduce costs but could disrupt service and adversely affect revenue. Management also cited economic weakness and unemployment as potential drivers of subscriber cancellations, and government budget constraints and migration to smartphones as ongoing challenges.
• Management believed operating cash flow and cash on hand should cover foreseeable requirements. If not, it could cut capital spending, dividends or repurchases, sell assets, or seek additional financing; availability and terms of further financing were not assured.
• The board reduced the quarterly dividend from $0.25 to $0.125 per share in July 2012. A $0.125 dividend was declared November 1, 2012, payable December 7.
• A Maryland lawsuit seeks $21.0 million jointly and severally in connection with a 2009 vehicle accident. The company said it was fully insured, the insurer had assumed the defense, mediation discussions were underway, and any settlement was not expected to materially affect financial condition or results.
• Goodwill, all attributed to Software, was subject to an annual fourth-quarter impairment test. The company was still evaluating purchase-price and fair-value adjustments for the 2012 IMCO asset acquisition.
• The company reported related-party payments for wireless site rent and customer-support services. It also identified a three-year, $0.5 million managed-hosting contract.

Important facts for investors to verify

• Confirm that USA Mobility is the intended issuer and establish the relationship, if any, to Spok Holdings.
• Track wireless subscriber losses, disconnect rates, ARPU and the pace of revenue decline against management’s expectations.
• Assess whether Software growth, bookings and backlog convert into recognized revenue and operating profitability; Software reported an operating loss in both comparison periods.
• Review cash generation after dividends, repurchases and capital expenditures, and the revolving facility’s liquidity conditions and letters of credit.
• Examine the deferred-tax-asset valuation assumptions, future goodwill impairment testing and final accounting for the IMCO acquisition.
• Confirm the status and insurance coverage of the $21.0 million lawsuit and monitor network-consolidation service impacts.