Spok Holdings, Inc. — Q3 2019 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2019. Spok provides healthcare communications software and services, wireless messaging, and related solutions. Amounts below are in U.S. dollars; financial statement figures are in millions unless noted.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $39.5 | $42.5 | $120.7 | $126.2 |
| Operating loss | $(2.7) | $(1.6) | $(3.6) | $(3.3) |
| Net loss | $(1.3) | $(0.8) | $(1.3) | $(1.7) |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $10.7 | $11.9 |
- Q3 revenue declined 7.1% year over year; nine-month revenue declined 4.3%. Wireless revenue fell 6.2% and 6.5%, respectively. Software revenue fell 8.2% in Q3 and 1.5% year to date.
- Q3 operating margin was approximately (6.8%), versus (3.7%) a year earlier; nine-month operating margin was approximately (3.0%), versus (2.6%). These margins are calculated from reported revenue and operating loss.
- At September 30, cash and cash equivalents were $49.3 million and short-term investments were $29.9 million, totaling $79.2 million. Current assets were $121.2 million and current liabilities $52.2 million. Spok reported no outstanding debt or revolving credit facility.
- Cash and cash equivalents decreased $34.0 million in the first nine months, while short-term investments increased to $29.9 million from $4.0 million at year-end 2018. Investing cash outflow was $29.7 million, primarily reflecting purchases of U.S. Treasury securities; financing cash outflow was $14.9 million.
- Quarterly dividends declared were $0.125 per share; nine-month dividends were $0.375 per share. The company repurchased 401,342 shares in Q3, and its repurchase authorization was fully used by September 30.
Material changes and management commentary
- Wireless demand continues to decline, which management expects to persist for the foreseeable future. Q3 paging units in service were 955,000, down 44,000 year over year; monthly ARPU was $7.32 versus $7.40.
- Q3 software operations revenue declined, mainly because fewer licenses and hardware products were delivered. Nine-month professional services revenue increased, supported by stronger utilization and more efficient projects. Maintenance renewal rates exceeded 99% for the periods discussed.
- Research and development expense increased 25.3% in Q3 and 14.4% for the nine-month period as Spok invests in software development. Management said these investments will weigh on margins and operating cash flow before benefits are realized, which may take one to three years. Certain Care Connect development costs may begin qualifying for capitalization in late Q4 2019 or early 2020.
- Management expects cash to decline significantly while it invests in its communications platform and wireless revenue declines, but believes operating cash flow and available cash should meet anticipated needs for the foreseeable future. The board expected quarterly dividends of $0.125 per share, subject to declaration; a subsequent dividend was declared October 23, 2019.
Risks, contingencies, and unusual items
- Goodwill was tested for impairment after a Q3 share-price decline. No impairment was recorded, but carrying value exceeded estimated fair value by less than 5%. Spok planned its annual assessment for Q4 and warned that continued share-price declines could result in impairment.
- Adoption of the new lease accounting standard added approximately $17.8 million to assets and liabilities. At September 30, operating lease right-of-use assets were $16.3 million and lease liabilities totaled $17.0 million.
- A company director also serves as a director of an entity leasing transmitter sites to Spok. Related-party site rent was $0.9 million in Q3 and $2.7 million for the nine months.
- Management said there were no material changes to previously reported commitments and contingencies or risk factors. Disclosure controls were considered effective, and no material change in internal control was reported.
Investor verification priorities
- Track wireless subscriber losses, ARPU, and whether the decline moderates as management expects.
- Monitor software license and hardware deliveries, maintenance renewals, and evidence that Care Connect investment produces revenue and cash-flow benefits.
- Review the Q4 goodwill impairment assessment, especially the valuation assumptions and the narrow fair-value cushion.
- Assess cash use, investment spending, and the sustainability of dividends as wireless revenue declines; the filing provides no specific long-term revenue or earnings guidance.
- Confirm the timing and accounting treatment of any Care Connect development-cost capitalization, and monitor lease obligations and related-party tower rent.