Spok Holdings, Inc. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021; comparisons are with Q1 2020 unless noted. Spok provides healthcare communications software and services, alongside wireless messaging services. Financial statements are unaudited.
Financial performance
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Wireless revenue | $20.1 million | $21.4 million | Down 5.9% |
| Software revenue | $15.9 million | $15.9 million | Up 0.2% |
| Total revenue | $36.0 million | $37.3 million | Down 3.3% |
| Operating expenses | $37.8 million | $41.4 million | Down 8.7% |
| Operating loss | $1.7 million | $4.1 million | Improved $2.4 million |
| Net loss | $2.3 million | $4.5 million | Improved $2.2 million |
| Basic and diluted loss per share | $0.12 | $0.24 | Improved $0.12 |
| Cash from operating activities | $0.7 million | $1.3 million | Down $0.6 million |
| Capitalized software development | $2.9 million | $1.7 million | Up $1.2 million |
Operating margin improved to approximately negative 4.8% from negative 11.0%; net margin improved to approximately negative 6.4% from negative 12.2%. Cash and cash equivalents were $41.6 million and short-term investments were $30.0 million at March 31, 2021, for combined liquidity of $71.6 million. The company reported no outstanding debt or revolving credit facility.
Total liabilities were $76.1 million, including $18.7 million in operating lease liabilities. Current assets were $110.3 million and current liabilities were $54.2 million. Cash and cash equivalents declined $7.1 million during the quarter. Financing cash outflow was $4.2 million, including $2.7 million of cash distributions to stockholders. A quarterly dividend of $0.125 per share was declared.
Changes and key drivers
- Wireless revenue fell $1.3 million, primarily reflecting declining demand. Paging units in service decreased from 926,000 to 874,000; reported ARPU rose slightly to $7.34 from $7.31, partly due to pass-through fees. Management expects wireless demand to continue declining.
- Software revenue was nearly flat. License revenue increased 58% to $1.5 million, while services revenue declined 4% and maintenance revenue declined 3%. Management attributed improved license sales to modestly better customer operating conditions; services were affected by reduced travel and implementation capacity.
- Operating expenses declined $3.6 million, led by lower selling and marketing, research and development, and cost of revenue. Depreciation, amortization and accretion rose $0.6 million, partly due to amortization of capitalized software development.
- Operating cash flow was lower year over year, with working-capital outflows including a $3.0 million decrease in accounts payable, accrued liabilities and other, and a $1.5 million decrease in deferred revenue.
Outlook, risks and unusual items
- COVID-19 continued to delay software sales cycles and on-site implementations. Management anticipated weaker professional services revenue in Q2 2021, with more normal operating levels potentially returning in the second half of the year; it expected lingering pandemic effects and software revenue impacts through 2021.
- Management expected annual maintenance revenue to be flat or slightly lower as legacy license bookings and maintenance inflows weaken. It aims to replace churn through Spok Go sales and migration of existing customers to cloud-based offerings over several years.
- Spok expects to invest heavily in Spok Go, and management cautioned that cash could decline significantly until related revenues materialize. It said existing cash and expected operating cash flows should cover foreseeable requirements, while noting possible responses to a shortfall could include reducing capital expenditures or dividends, selling assets, or seeking financing.
- Cost-mitigation measures included reduced work schedules, expected to continue through Q2 but not necessarily the second half; management estimated Q2 compensation savings of $0.7–$1.2 million. Equity compensation in lieu of cash was expected to save $2.0–$3.0 million for 2021, and director alternative compensation $0.3–$0.5 million.
- The company relocated its headquarters in March 2021, recording a $4.4 million right-of-use asset and lease liability. The new lease expires September 30, 2026; expected total cash payments are approximately $4.9 million.
- The $25.0 million original gross carrying amount of amortizable intangible assets became fully amortized during the quarter. A quarterly qualitative goodwill review found no triggering event, although future impairment charges remain possible.
- There were no material changes to previously reported commitments and contingencies or risk factors. Management reported effective disclosure controls and no material changes to internal control over financial reporting.
Important facts for investors to verify
- Whether Spok Go bookings, adoption and customer transitions can replace declining legacy maintenance and wireless revenue.
- Whether delayed hospital implementations and pandemic-related constraints improve as management anticipated, particularly in the second half of 2021.
- Whether cash generation can support software investment and the quarterly dividend; Q1 operating cash flow was $0.7 million against $2.7 million of cash distributions.
- The sustainability of expense reductions and the impact of software development capitalization on reported expenses, margins and cash flow.
- Future goodwill impairment assessments, realization of deferred tax assets, and the timing and amount of asset-retirement and lease obligations.