Business context and reporting period
This is USA Mobility, Inc.’s unaudited Form 10-Q for the three months ended March 31, 2012—not a filing under the name Spok Holdings, Inc. USA Mobility operated wireless messaging services and Amcom Software’s mission-critical unified communications business. The 2011 comparison includes only 29 days of Amcom results, from its March 3, 2011 acquisition, so year-over-year software comparisons are not like-for-like.
Financial and operating results
Amounts are in millions of dollars unless otherwise stated.
| Metric | Q1 2012 | Q1 2011 | Change or context |
|---|---|---|---|
| Revenue | $56.7 | $57.3 | Down 1.0%; wireless revenue fell while software revenue grew, partly reflecting the partial-period comparison in 2011 |
| Operating income | $14.3 | $13.4 | Up 6.6%; operating margin about 25.1%, versus 23.3% |
| Net income | $8.5 | $40.7 | Basic EPS $0.38 versus $1.84; comparison heavily affected by a large 2011 income tax benefit |
| Income tax expense (benefit) | $5.5 expense | $27.4 benefit | Effective rate 39.6% in 2012; 2011 included a $32.4 benefit from a valuation-allowance change |
| Operating cash flow | $15.9 | $12.7 | Up $3.3 |
| EBITDA, company-defined | $18.8 | $17.9 | Margin 33.1% versus 31.2% |
| Company-defined operating cash flow | $17.2 | $16.4 | EBITDA less capital expenditures; margin 30.4% versus 28.6% |
| Capital expenditures | $1.6 | $1.5 | 2.7% of revenue versus 2.6% |
| Cash dividends paid | $5.5 | $5.5 | $0.25 per share in each period |
At March 31, cash and cash equivalents were $37.5, down from $53.7 at year-end. Current assets were $75.6 and current liabilities $48.4. Debt was $3.25 at quarter-end, at a stated rate of 3.63%; the company repaid the remaining balance on April 6. Its $40.0 revolving facility remained in effect, with $36.7 of borrowing capacity reported at March 31 and $40.0 available after repayment.
Cash flow from investing was a $1.5 outflow, primarily capital spending; the prior-year $135.7 outflow included $134.2 for the Amcom acquisition. Financing was a $30.5 outflow, including $25.0 of debt repayment and $5.5 of dividends. Total liabilities were $61.2, down from $97.6 at December 31, 2011, primarily reflecting the debt repayment and reductions in consideration payable.
Material changes versus the prior comparable period
- Wireless service, rental and maintenance revenue declined 15.4% to $42.5. Wireless segment revenue was $44.3 versus $52.5; segment operating income improved to $14.7 from $12.9 as costs fell.
- Wireless units in service fell to 1.617 million from 1.828 million a year earlier. Consolidated ARPU decreased to $8.50 from $8.72. Management reported continued demand decline and a direct net unit loss rate of 3.0%.
- Software revenue was $12.5 versus $4.8, but the 2011 amount covers only 29 days. Software segment operating results were a $0.4 loss in Q1 2012 versus $0.5 income in the 2011 partial period. Q1 2012 software bookings were $12.4 and backlog was $23.7.
- Operating expenses declined to $42.5 from $44.0. Lower wireless site rent and telecommunications costs, and the absence of $2.9 of prior-year acquisition and integration costs, were partly offset by higher software-related costs and selling and marketing expense.
- Operating cash flow increased despite slightly lower revenue, while cash declined due chiefly to the $25.0 debt prepayment and dividends.
Outlook, risks and unusual items
- Management expected operating cash flow and cash on hand to cover foreseeable cash requirements. It cautioned that a shortfall could require lower capital spending or dividends, asset sales, or additional financing; availability and terms of financing were not assured.
- Management expected messaging demand and revenue to continue declining, with possible further ARPU pressure. Price increases could mitigate but not fully offset declines. Higher unemployment could increase cancellations.
- Network consolidation is intended to reduce site and telecommunications costs, but management warned it could disrupt service and negatively affect revenue. Active transmitters were down 11.6% year over year; further wireless staffing reductions were anticipated, while software staffing was expected to grow.
- The company reported compliance with credit-facility covenants and no material outstanding lawsuits. Goodwill was $131.0, arising from the Amcom acquisition; the filing describes annual impairment testing and interim testing when indicators arise.
- Deferred tax assets totaled $170.5 with a $115.7 valuation allowance at March 31; the estimated recoverable amount was $54.8. The company also reported approximately $485.2 of federal net operating losses at December 31, 2011, subject in part to Section 382 limits.
- A board member was also a director of a tower-site lessor; USA Mobility paid that entity $1.4 in site rent in Q1 2012, versus $2.7 in Q1 2011.
- The board declared a further $0.25-per-share quarterly dividend on May 3, 2012, expected to total approximately $5.5. The stock repurchase program was suspended during 2011, and its extension in 2012 remained under board review.
Important facts for investors to verify
- Confirm the issuer and corporate history: this filing names USA Mobility, Inc.; the filing itself does not establish the relationship to the later Spok Holdings name.
- Separate operating performance from the prior-year tax benefit when comparing net income and EPS.
- Track wireless unit losses, ARPU, pricing actions, network-consolidation progress and any service disruption.
- Assess software growth using comparable full-period results, bookings, backlog conversion, renewal rates and segment profitability; the 2011 comparison is a partial period.
- Verify post-quarter debt repayment, subsequent facility availability, dividend payments and the sustainability of cash generation amid declining wireless revenue.
- Review deferred-tax-asset recoverability, Section 382 NOL limitations, goodwill impairment indicators, and the related-party tower lease.