Spok Holdings, Inc. — Q3 2017 Form 10-Q
Reporting period: Three and nine months ended September 30, 2017. Unaudited results; amounts below are in millions unless otherwise noted.
Business context
Spok provides critical communications products and services, primarily to healthcare organizations, through wireless messaging and enterprise software. Healthcare represented 78% of Q3 revenue and 75% of revenue for the first nine months. Wireless revenue was about 60% of nine-month revenue.
Financial results and liquidity
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue | $43.6 | $45.4 | $127.4 | $135.4 |
| Operating income | $3.3 | $6.0 | $7.1 | $17.5 |
| Operating margin | 7.6% | 13.3% | 5.6% | 12.9% |
| Net income | $3.7 | $4.1 | $6.1 | $11.0 |
| Net margin | 8.5% | 8.9% | 4.8% | 8.1% |
| Diluted EPS | $0.19 | $0.20 | $0.30 | $0.53 |
- Q3 wireless revenue fell 7.1% to $25.1 million; software revenue grew 1.1% to $18.5 million. For nine months, wireless revenue declined 7.8% and software revenue declined 2.9%.
- For the first nine months, operating cash flow was $14.0 million, versus $29.4 million a year earlier. Capital expenditures were $7.0 million, compared with $4.4 million. Cash used in financing was $22.6 million, including $12.7 million of dividends and $9.9 million of net share repurchases.
- Cash and equivalents were $110.1 million at September 30, down from $125.8 million at year-end 2016. Current assets were $145.7 million and current liabilities $52.0 million. Total liabilities were $61.6 million; the company reported no debt and no revolving credit facility.
- Cash dividends declared were $0.125 per share in Q3. The board declared another $0.125 quarterly dividend after quarter-end. The $10 million 2017 repurchase authorization was fully used by June 30.
Changes, outlook, and risks
- Revenue declined 3.8% in Q3 and 5.9% for the nine-month period. Wireless demand and units in service continued to fall: units in service were 1.063 million, down from 1.124 million a year earlier. Management expects wireless revenue to continue declining for the foreseeable future; it also expects lower ARPU absent price changes.
- Q3 software revenue increased modestly, supported by maintenance revenue growth; maintenance renewal rates exceeded 99%. Nine-month bookings rose 8.7% to $58.5 million, and software backlog was $46.9 million at quarter-end. Management expects software revenue to increase, but timing of implementations and conversions of bookings to revenue remain relevant.
- Research and development expense rose 37% in Q3 and 41% for nine months, reflecting increased staffing and investment in mobility, a unified software platform, nursing solutions, and alerting. Management said this investment is expected to weigh substantially on margins and operating cash flow before benefits emerge, potentially several years later.
- Management expects cash on hand to decrease significantly over the next two or three years, and possibly longer, as it invests in the integrated communications platform while wireless revenue declines. It believes cash on hand and operating cash flow should cover anticipated requirements for the foreseeable future, but notes it could cut capital spending or dividends, refrain from restarting repurchases, sell assets, or seek financing if needed.
- Adoption of the revenue standard is scheduled for January 1, 2018 using the modified retrospective method. The company expects a potentially material impact on deferred revenue or retained earnings and a material ongoing effect on revenue recognition, particularly for software licenses. The new lease standard, effective in 2019, is expected to create potentially material right-of-use assets and lease liabilities.
- Asset retirement obligations were $7.8 million at quarter-end; management estimates the liability will accrete to approximately $9.0 million, based on transmitter removal assumptions and continued lease renewals. The filing reports no material change in previously disclosed commitments and contingencies, and says ordinary-course lawsuits are not expected to have a material adverse impact.
- The Q3 effective tax rate was 4.4%, versus 34.3% a year earlier, primarily reflecting a $1.3 million research and development tax credit and lower taxable income. The company had $126 million of federal net operating losses available at January 1, 2017.
Key facts for investors to verify
- Whether wireless subscriber losses and declining ARPU continue at the reported pace, and whether software growth can offset them.
- Software bookings, backlog conversion, project timing, and the persistence of maintenance renewal rates above 99%.
- The pace and cash cost of product development, and whether the investment produces revenue and margin gains as expected.
- Operating cash flow, cash balances, and the sustainability of quarterly dividends amid declining wireless revenue and higher investment.
- The actual transition impact of the revenue standard, particularly its effects on software license revenue, deferred revenue, and retained earnings.
- The assumptions underlying the estimated transmitter-removal obligation and any material developments in legal or other contingencies.