Spok Holdings, Inc. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017. Financial statements are unaudited. Spok provides healthcare and other critical-communications software and services, alongside wireless paging and messaging; healthcare generated 72.9% of quarterly revenue.
Financial performance and position
| Metric | Q1 2017 | Q1 2016 / comparison |
|---|---|---|
| Revenue | $41.4 million | $45.4 million; down 8.7% |
| Wireless revenue | $25.9 million | $28.2 million; down 8.2% |
| Software revenue | $15.6 million | $17.2 million; down 9.5% |
| Operating income and margin | $1.4 million; 3.3% | $5.8 million; 12.8% |
| Net income and diluted EPS | $0.9 million; $0.04 | $3.4 million; $0.17 |
| Operating cash flow | $3.7 million | $9.5 million |
| Capital expenditures | $2.9 million | $1.4 million |
Total operating expenses were $40.1 million, up 1.2% from $39.6 million. Research and development rose 41.2% to $4.1 million, and general and administrative expense rose 11.5% to $11.7 million. Lower cost of revenue, selling and marketing, and service, rental and maintenance expenses partly offset those increases.
At March 31, cash and cash equivalents were $118.9 million, down from $125.8 million at December 31, 2016. Total assets were $381.3 million and total liabilities were $59.9 million. The company reported no debt and no revolving credit facility. Q1 cash distributions to stockholders were $7.7 million. The declared dividend was $0.125 per share; the period’s cash payments included a previously declared special dividend.
Material changes and operating indicators
- Wireless revenue continued to face declining demand: units in service fell to 1.091 million from 1.153 million a year earlier, while total ARPU declined to $7.56 from $7.77. Management expects wireless revenue and ARPU to keep declining; price increases may mitigate, but not fully offset, the trend.
- Software revenue declined as fewer and smaller projects were completed. Maintenance revenue increased to $9.5 million from $9.1 million, with renewal rates above 99%.
- Bookings increased 31.0% year over year to $19.8 million; operations and new-maintenance bookings rose 68.0%. Software backlog was $40.6 million at quarter-end. Management cautioned that unusually large deals drove the bookings increase and it does not expect similarly large year-over-year gains for the rest of 2017.
- Adjusted operating cash flow, a company-defined non-GAAP measure, was $1.8 million versus $7.7 million. The reported decrease in operating cash flow was attributed mainly to lower net income and deferred tax expense, as well as working-capital changes.
Outlook, risks, and notable items
- Management expects overall revenue to decline in line with recent trends, with software revenue anticipated to increase and wireless revenue expected to continue decreasing.
- Spok plans to substantially increase investment in its integrated communications platform over the next two to three years. Management expects higher research and development staffing and expense to affect margins and operating cash flow before benefits emerge, potentially several years later. It also expects cash to decrease significantly during this investment period.
- Management believes cash on hand and expected operating cash flow should meet anticipated requirements for the foreseeable future. The board expected regular quarterly dividends of $0.125 per share in 2017, subject to declaration, and authorized up to $10 million of share repurchases through year-end.
- The company expects adoption of the new revenue standard in 2018 using the modified retrospective method. Management anticipates a material impact, particularly for software licenses, which it currently expects generally to recognize at shipment, subject to contract terms. The filing also says adoption of the new lease standard may result in material right-of-use assets and lease liabilities.
- Asset-retirement obligations totaled $7.7 million; management estimated the related liability could accrete to $9.0 million based on transmitter removals and lease assumptions. A patent-infringement lawsuit was settled for an immaterial amount. The company reported no material changes to previously disclosed commitments and contingencies.
- A director serves on the board of an entity that leases transmitter sites to Spok; Spok incurred $1.0 million in site rent expense to that entity in each of Q1 2017 and Q1 2016. Management reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether software bookings and the $40.6 million backlog convert into recognized revenue on expected schedules, particularly given management’s caution about Q1’s unusually large deals.
- Whether wireless subscriber losses and ARPU declines continue, and whether pricing or newer offerings can offset the resulting revenue pressure.
- The pace and returns of planned platform and research investment, including effects on future operating margins, cash flow, and cash balances.
- The sustainability of dividends and repurchases relative to operating cash generation and planned investment.
- The eventual financial effects of the 2018 revenue-standard adoption and the lease-standard adoption; management’s estimates may change as its assessments progress.