Filing and reporting period
The supplied filing is USA Mobility, Inc.’s Form 10-K for the fiscal year ended December 31, 2011, filed February 23, 2012. It is not filed under the name Spok Holdings, Inc.; the company-name discrepancy should be confirmed. Annual figures are for the full year; fourth-quarter figures are unaudited.
USA Mobility operated wireless messaging services and, after acquiring Amcom Software on March 3, 2011, mission-critical unified communications software. For 2011, wireless and software represented 82.2% and 17.8% of consolidated revenue, respectively; software results are included only from the acquisition date.
Key financial metrics
Amounts below are in millions of dollars except per-share amounts and percentages.
| Metric | FY 2011 | FY 2010 |
|---|---|---|
| Revenue | $242.9 | $233.3 |
| Operating income | $59.7 | $57.2 |
| Operating margin | 24.6% | 24.5% |
| Net income | $88.6 | $77.9 |
| Diluted EPS | $3.94 | $3.45 |
| Cash provided by operating activities | $82.4 | $79.4 |
| Capital expenditures | $8.0 | $8.7 |
| Company-defined operating cash flow (EBITDA less capital expenditures) | $71.0 | $72.6 |
| Cash and cash equivalents at year-end | $53.7 | $129.2 |
| Current assets / current liabilities | $104.2 / $56.6 | $154.4 / $34.5 |
| Debt at year-end | $28.3 | None reported |
FY 2011 revenue includes $43.2 million from software operations (March 3–December 31). Software segment operating loss was $0.7 million; wireless segment operating income was $60.4 million. Consolidated EBITDA was $79.0 million, or 32.5% of revenue, versus $81.3 million, or 34.9%, in 2010.
Fourth-quarter 2011 revenue was $58.9 million, operating income $13.9 million, net income $18.9 million, and diluted EPS $0.84. Fourth-quarter 2010 figures were $54.6 million, $12.7 million, $40.5 million, and $1.82, respectively.
Material changes versus prior comparable period
- Reported revenue increased 4.1% year over year, primarily because of the Amcom acquisition. In the legacy wireless business, revenue fell: wireless revenue was $199.7 million versus $233.3 million in 2010, a 14.4% decrease.
- Wireless units in service declined 11.7%, from 1.889 million to 1.668 million. Wireless service, rental and maintenance revenue fell 14.4% to $189.6 million. Company-wide paging ARPU was $8.64, down from $8.84.
- Net income rose, but was substantially influenced by a $23.3 million income-tax benefit, including a $50.2 million reduction in the deferred-tax valuation allowance, and a $7.5 million gain on narrowband PCS license sales. The filing cautions that deferred-tax-asset realization depends on future taxable income.
- Operating cash flow increased to $82.4 million, while company-defined operating cash flow declined to $71.0 million from $72.6 million.
- Cash fell by $75.6 million, primarily reflecting the Amcom acquisition, for which net cash consideration was $134.3 million. Capital structure changed: year-end debt was $28.3 million, after $23.7 million of repayments during 2011.
- Cash distributions declared decreased to $1.00 per share from $2.00. The repurchase program was suspended in 2011.
Outlook, commentary, risks and unusual items
- Management expected paging revenue and subscribers to continue declining. Its 2012 priorities included reducing wireless costs through network rationalization and staffing reductions, investing in software growth, increasing software bookings, and pursuing diversification and acquisitions. No specific revenue or earnings guidance was provided.
- Management said operating cash flows and cash on hand were expected to cover foreseeable requirements, but warned that a shortfall could lead to lower capital spending, reduced or eliminated dividends or repurchases, asset sales, or additional financing.
- Software maintenance renewal rates were 99.4% in fourth-quarter 2011; reported software backlog at year-end was $23.7 million. Software sales cycles typically run 6–18 months, making bookings and revenue timing uncertain.
- On February 6, 2012, the company prepaid $25.0 million of debt; the reported remaining balance was $3.3 million at a 3.63% interest rate through April 6, 2012. A $0.25-per-share quarterly dividend was declared in February 2012. The credit agreement allowed specified dividends and repurchases subject to liquidity conditions.
- Key risks include faster-than-expected paging erosion, inability to reduce costs accordingly, service disruption from network consolidation, software sales delays or integration problems, dependence on healthcare customers, equipment-supply constraints, regulatory changes, privacy/security incidents, and inability to use deferred tax assets. Software products are subject to FDA requirements; healthcare-related data also raises privacy and compliance exposure.
- The company reported no material outstanding lawsuits at December 31, 2011. It disclosed possible exposure to contested interconnection/transit-traffic charges, $24.8 million of operating-lease obligations, and $72.2 million in total contractual obligations at year-end; the latter includes debt obligations and accrued interest before the February 2012 prepayment. A director-related entity received $7.8 million in 2011 site rent.
- Auditors issued unqualified opinions on the financial statements and internal control over financial reporting. Management also concluded disclosure controls were effective.
Important facts for investors to verify
- Confirm the issuer identity and filing period: this document names USA Mobility, Inc., not Spok Holdings, Inc.
- Separate legacy wireless performance from acquired Amcom results and account for Amcom’s partial-year inclusion when assessing growth and margins.
- Assess earnings quality by isolating the valuation-allowance benefit and license-sale gain, and evaluate assumptions supporting deferred-tax-asset recoverability.
- Verify post-year-end debt repayment, remaining borrowing availability, covenant compliance, and the liquidity impact of escrow-related obligations and dividends.
- Track subscriber losses, ARPU, network-rationalization service effects, software bookings/backlog conversion, and whether cost reductions can keep pace with wireless revenue declines.