Spok Holdings, Inc. — Q3 2018 Form 10-Q
Business context and reporting period. Spok provides healthcare and other critical-communications software, services and wireless messaging. This unaudited quarterly report covers the three and nine months ended September 30, 2018; comparisons are with the corresponding 2017 periods. Amounts below are in millions of dollars unless noted.
Financial performance and position
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $42.5 | $43.6 | $126.2 | $127.4 |
| Operating income (loss) | $(1.2) | $3.3 | $(2.6) | $7.1 |
| Net income (loss) | $(0.5) | $3.7 | $(0.9) | $6.1 |
| Diluted EPS | $(0.02) | $0.19 | $(0.05) | $0.30 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $12.6 | $14.1 |
| Capital expenditures | Not separately provided for quarter | Not separately provided for quarter | $5.1 | $7.0 |
- Q3 operating margin was approximately (2.8)% versus 7.6% in 2017; nine-month operating margin was approximately (2.1)% versus 5.6%. These are calculated from reported operating results and revenue.
- At September 30, cash and cash equivalents were $95.2, down from $107.2 at December 31, 2017. Current assets were $139.3 and current liabilities $51.0.
- Total liabilities were $60.3; the company reported no outstanding debt and no revolving credit facility. Total stockholders’ equity was $279.1.
- Nine-month cash uses included $7.6 in dividends, $10.0 in common-stock repurchases and $1.0 for tax withholding on vested awards. Cash declined by $11.9 overall.
Material changes versus the prior comparable period
- Q3 revenue fell 2.7%; nine-month revenue fell 0.9%. Wireless revenue declined 7.4% in Q3 and 7.1% year to date, while software revenue rose 3.7% and 8.3%, respectively, as reported under the newly adopted ASC 606.
- Wireless paging revenue declined with lower demand and fewer units in service: 1.0 million units at September 30, 2018 versus 1.1 million a year earlier. Quarterly ARPU was $7.40 versus $7.48.
- Operating expenses rose 8.4% in Q3 and 7.1% year to date. Nine-month R&D expense increased 29.6%, and G&A expense increased 7.5%; service, rental and maintenance expense decreased 2.7%.
- The company adopted ASC 606 on January 1, 2018 using the modified retrospective method; prior-year amounts were not restated. Adoption increased opening retained earnings by $6.8. Management’s ASC 605 comparison shows Q3 2018 revenue of $41.0, down 6.0%, and nine-month revenue of $125.3, down 1.7%. The filing attributes part of reported software revenue growth to ASC 606 timing, including accelerated license and subscription revenue.
- Nine-month operating cash flow decreased $1.4 from 2017. The filing cites lower earnings, partly offset by working-capital movements, including higher deferred revenue.
Outlook, risks and unusual items
- Management expects wireless demand to continue declining in line with recent and historical trends, while pursuing encrypted paging, Spok Mobile and other offerings to mitigate the decline.
- Spok expects to substantially increase investment in its integrated communications platform over the next one to two years. Management says cash may decrease significantly until platform revenue begins to be realized; benefits from current development spending may take one to three years. R&D staffing and outside-service cost growth is expected to slow in 2019, but not return to historically low levels.
- Management expects cash on hand and operating cash flow to meet anticipated requirements for the foreseeable future, but says it could reduce capital spending or dividends, refrain from further repurchases, sell assets or seek financing if cash proves insufficient. The board declared a $0.125-per-share quarterly dividend in October 2018, payable December 10.
- The company expects its 2018 effective tax rate to differ from the 21% federal statutory rate due to state taxes, R&D credits, permanent differences and discrete items. Further adjustments to provisional Tax Act amounts could materially affect the tax provision.
- Asset-retirement obligations totaled $7.7, with estimated removal costs and timing changes expected to accrete the liability to $9.0. Management reported no material changes to previously disclosed commitments and contingencies; the filing gives no clear quantified exposure for legal proceedings.
- ASC 606 requires judgments about performance obligations, standalone selling prices, variable consideration and project completion estimates. The company also said the 2019 lease standard is expected to materially affect balance-sheet right-of-use assets and lease liabilities, though not materially change lease expense recognition.
Important facts for investors to verify
- How much of software revenue growth reflects underlying demand versus ASC 606 timing, and whether software project activity and renewals remain durable.
- Whether wireless subscriber losses continue to moderate, and the pace at which software and newer services can offset declining paging revenue.
- Actual development spending, cash-flow trajectory and liquidity as the company invests in its platform and continues dividends and share repurchases.
- Whether reported operating losses persist, including the effects of elevated R&D, compensation, bad-debt and outside-service costs.
- Future tax adjustments, realization of the $47.0 deferred tax asset, and the impact of the new lease standard.