Spok Holdings, Inc. — Q3 2014 Form 10-Q
Business context and period. This unaudited report covers the three and nine months ended September 30, 2014; comparisons are with the corresponding 2013 periods. The company, formerly USA Mobility, changed its name to Spok Holdings on July 8, 2014. Effective January 1, 2014, it combined its wireless and software operations into one unified communications business and one reportable segment. Prior-period figures were reclassified to conform to the new presentation.
Financial performance
Amounts below are in USD millions unless stated otherwise.
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Revenue | $49.8 | $49.7 | $149.0 | $155.1 |
| Operating income | $8.1 | $9.5 | $23.5 | $33.2 |
| Operating margin | 16.2% | 19.2% | 15.8% | 21.4% |
| Net income | $4.7 | $5.8 | $13.8 | $19.5 |
| Net margin | 9.3% | 11.6% | 9.3% | 12.6% |
| Diluted EPS | $0.21 | $0.26 | $0.63 | $0.89 |
| Cash provided by operations | Not stated separately | Not stated separately | $32.3 | $39.3 |
- Revenue mix: Q3 wireless revenue fell 11.4% to $32.9 million, while software revenue rose 34.4% to $16.9 million. For the first nine months, wireless revenue declined 11.3% to $100.7 million and software revenue increased 16.5% to $48.3 million. Total revenue was nearly flat in Q3 but down 3.9% year to date.
- Costs and earnings: Q3 operating expenses rose 3.9% to $41.7 million; operating income fell 15.3% and net income fell 19.3%. Nine-month operating expenses increased 2.9% to $125.5 million, contributing to the 29.1% decline in operating income. Higher software-related cost of sales, selling commissions, depreciation and amortization, and restructuring costs weighed on results; lower wireless network, payroll and administrative costs partly offset the increases.
- Cash flow and investment: Nine-month operating cash flow was $32.3 million, down from $39.3 million, principally reflecting lower customer receipts. Capital expenditures were $6.3 million, versus $7.8 million. The company reported its defined non-GAAP operating cash flow of $29.8 million, compared with $36.9 million; this measure is EBITDA less property and equipment purchases.
- Liquidity and debt: Cash and cash equivalents were $106.9 million at September 30, up from $89.1 million at December 31, 2013. Total liabilities were $56.9 million. There were no outstanding borrowings; the $40 million revolving facility was available, subject to a $25 million minimum liquidity threshold and reductions for letters of credit. The company was in compliance with its financial covenants.
- Other metrics: The company declared dividends of $0.125 per share each quarter, or $0.375 per share for the first nine months. Paging units in service declined to 1.274 million from 1.408 million a year earlier. Software bookings grew 17.7% in Q3 and 19.2% year to date; software backlog was $42.1 million at quarter-end.
Material changes versus prior periods
- Software growth did not fully offset continued paging declines. The year-to-date drop in wireless revenue was $12.9 million, compared with a $6.8 million increase in software revenue.
- Paging revenue declined as units fell and average revenue per unit decreased. Management reported Q3 total ARPU of $7.97, down from $8.22 a year earlier; Q3 direct net unit loss improved to 1.9% from 2.5%.
- Q3 software revenue growth reflected higher average revenue per project and maintenance revenue. Software maintenance renewal rates were 99.6% in Q3 2014 and 99.0% in Q3 2013.
- Software license, professional services and maintenance revenue recognition changed effective January 1, 2014: certain revenue is now recognized ratably over the longer of the services-delivery period or the maintenance contract term. This, together with the new single-segment presentation, affects comparability.
Outlook, risks and notable items
- Management expects paging demand and wireless revenue to continue declining for the foreseeable future, and expects future sequential annual revenue to decline in line with recent trends. It expects software revenue to increase, but provided no specific consolidated financial guidance.
- Management said cash on hand and expected operating cash flows should cover anticipated requirements for the foreseeable future. It cautioned that a cash shortfall could require lower capital spending, reduced or suspended dividends or repurchases, asset sales, or additional financing, which might not be available on acceptable terms.
- The board declared a post-quarter $0.125-per-share dividend payable December 10, 2014. It extended the repurchase program through December 31, 2015, retained $15 million of authority as of January 1, 2015, and intends to return $26 million to shareholders during 2015 through dividends and/or repurchases.
- Key business risks include ongoing substitution away from paging, declining subscribers and ARPU, and network and site costs that may not fall as quickly as wireless revenue. The filing also notes uncertainty in realizing deferred tax assets: the company reported a $119.3 million valuation allowance and approximately $345.7 million of federal NOLs, subject to Section 382 limits.
- New commitments included an $8.3 million minimum paging-device purchase commitment over three years and a $1.6 million three-year IT-services contract. The company also disclosed a $0.8 million non-recurring charge related to future billing credits in the first nine months.
- A director’s outside entity provides transmission-site leases; related site-rent expense was $3.2 million for the first nine months. Management said ordinary-course litigation was not expected to have a material adverse impact. No goodwill impairment indicators were identified at September 30.
Important facts for investors to verify
- Whether software bookings and the $42.1 million backlog convert into recognized revenue and cash, considering the revised revenue-recognition policy and contract timing.
- Whether software growth and pricing or service initiatives can offset the continuing decline in paging units, ARPU and wireless revenue.
- Whether operating cash flow remains sufficient to fund operations, capital spending and the planned shareholder returns as revenue declines.
- The assumptions supporting deferred-tax-asset recoverability and the annual goodwill impairment test scheduled for the fourth quarter.
- The terms and financial impact of purchase, IT-services and lease commitments, including the revolving credit facility’s liquidity threshold and September 2015 maturity.