Spok Holdings, Inc. — 2015 Form 10-K
Business context and reporting period. This annual report covers the fiscal year ended December 31, 2015; fourth-quarter figures are also reported. Spok provides critical communications solutions, including paging services and enterprise software, primarily to healthcare, government and large-enterprise customers. Healthcare generated 68.2% of 2015 revenue. Wireless services accounted for approximately 63% of revenue and software 37%.
Financial performance
| Metric | 2015 | 2014 | Change |
|---|---|---|---|
| Revenue | $189.6 million | $200.3 million | Down 5.3% |
| Wireless revenue | $119.0 million | $132.4 million | Down 10.1% |
| Software revenue | $70.6 million | $67.9 million | Up 4.0% |
| Operating income | $25.1 million | $28.2 million | Down 10.8% |
| Operating margin | 13.2% | 14.1% | Down 0.9 percentage points |
| Net income | $84.2 million | $20.7 million | Up; substantially affected by tax benefit |
| Cash from operations | $38.0 million | $41.6 million | Down $3.5 million |
| Company-defined operating cash flow (non-GAAP) | $32.7 million | $37.1 million | Down 12.0% |
The 2015 net income included a $57.9 million income tax benefit, primarily from a $68.4 million reduction in the deferred-tax-asset valuation allowance. Income before tax was $26.3 million, compared with $27.3 million in 2014. The reported 2015 effective tax rate was negative 220.3%; it should not be treated as indicative of recurring earnings.
Wireless subscriber units fell to 1.173 million at year-end from 1.256 million, while total direct net unit losses improved to 5.9% from 8.5%. Consolidated wireless ARPU declined to $7.83 from $7.93. Software maintenance renewals remained high at 99.7%; software bookings decreased 5.7% to $74.0 million, and year-end backlog declined 8.8% to $38.7 million.
Liquidity, capital allocation and debt
- Cash and cash equivalents were $111.3 million at December 31, 2015; current assets were $141.6 million and current liabilities $47.2 million.
- The company had no outstanding debt. Its revolving credit facility was terminated in December 2014.
- Cash from investing activities was negative $5.6 million, including $6.4 million of capital expenditures. Financing activities used $29.0 million, including $15.0 million of share repurchases and $14.0 million of cash distributions.
- 2015 cash distributions declared were $0.625 per share, including a special distribution. The board declared a further regular quarterly dividend of $0.125 per share in February 2016; management expected to continue a $0.50 annual regular dividend.
- Contractual obligations totaled $40.0 million, including $18.2 million of operating leases, $12.3 million of purchase obligations and $9.6 million of other obligations.
Material changes and management commentary
- Wireless revenue continued its multiyear decline, reflecting paging subscriber losses, competition from mobile devices and lower ARPU. Management expects wireless subscribers and revenue to keep declining and says cost reductions and network consolidation are needed to protect cash generation.
- Software growth came mainly from maintenance revenue, which increased to $34.4 million. Operations revenue slipped 2.4%, including a 13.1% decline in license revenue, and bookings fell partly because international sales grew more slowly than planned.
- Operating expenses decreased 4.4% to $164.5 million. Network rationalization reduced active transmitters 2.2% and lowered site-rent and telecommunications costs, while cost of revenue and severance expense increased.
- Management’s 2016 priorities include growing software revenue and bookings, retaining wireless subscribers, investing in an integrated communications platform, returning capital to shareholders and pursuing diversification. It did not provide specific consolidated revenue or earnings guidance in the supplied filing text.
Risks, contingencies and unusual items
- Principal risks include continued paging erosion outpacing cost reductions; service disruption during network rationalization; long and unpredictable software sales cycles; challenges in software product development and sales execution; and reliance on key staff, vendors and channel partners.
- Other exposures include FCC and FDA regulatory changes, healthcare privacy and cybersecurity risks, international expansion risks, and the possibility that future taxable income may not support realization of deferred tax assets.
- The company recorded $2.7 million of severance and restructuring expense, including about $1.8 million related to two executive departures. It also recognized $1.2 million of other income, including gains on sales of two land parcels.
- Legal proceedings arising in the ordinary course were not expected by management to have a material adverse effect. The filing reports no material off-balance-sheet arrangements. A related-party tower-site lessor generated $4.1 million of 2015 site-rent expense.
- The independent auditor gave an unqualified opinion on the financial statements and internal controls; management also concluded controls were effective at year-end.
Key facts for investors to verify
- Whether wireless subscriber, revenue and ARPU declines continue at the expected pace, and whether network consolidation preserves service quality while reducing costs.
- Whether software license sales, bookings and backlog stabilize or grow, particularly after sales-force changes and slower international bookings.
- How much reported earnings depend on the one-time deferred-tax valuation-allowance release, and whether the company can use its remaining deferred tax assets and net operating losses.
- Whether operating cash flow can sustain dividends, buybacks, investment in software development and any acquisitions as wireless revenue declines.
- The assumptions behind the $9.3 million estimated future asset-retirement obligation and the potential balance-sheet effect of forthcoming lease-accounting requirements.