Spok Holdings, Inc quarterly report, Q2 FY2015

Spok Holdings, Inc. — Q2 2015 Form 10-Q

Reporting period: Quarter and six months ended June 30, 2015. Financial statements are unaudited. Spok provides critical-communications software and services, paging and wireless messaging, with healthcare its largest market.

Financial performance and position

• Revenue mix: Q2 wireless revenue fell 9.8% to $30.2 million, while software revenue rose 13.9% to $17.7 million. For the first half, wireless declined 10.3% to $60.9 million and software increased 12.3% to $35.2 million.
• Cash flow: First-half operating cash flow under GAAP was $21.7 million, versus $18.4 million a year earlier. Capital expenditures were $3.0 million, versus $5.0 million. Company-defined operating cash flow (EBITDA less property and equipment purchases) was $16.1 million, down from $18.8 million.
• Liquidity and debt: Cash and cash equivalents were $117.1 million at June 30, up from $107.9 million at year-end 2014. Current assets were $149.5 million and current liabilities $51.9 million. The company reported no outstanding debt or revolving credit facility.
• Capital returns: First-half cash dividends paid were $6.1 million; common-stock purchases used $3.5 million. The board intended to return $26.0 million to stockholders in 2015 through dividends, repurchases and/or special dividends. A quarterly dividend of $0.125 per share was declared July 28, payable September 10, 2015.

Material changes and management commentary

• Paging demand and units in service continued to decline: total units were 1.211 million at June 30, 2015, down from 1.299 million a year earlier. Management expects messaging demand and wireless revenue to keep declining for the foreseeable future.
• Software growth reflected more implementations, higher project revenue and strong maintenance renewals. Renewal rates were 99.8% for Q2 and 99.7% for the first half. Software bookings rose 10.9% in Q2 and 8.0% in the first half year over year; backlog was $43.5 million at June 30.
• Management expects future sequential annual revenue to decline in line with recent trends. Price increases may mitigate, but are not expected to fully offset, falling wireless ARPU and revenue. No specific earnings or revenue guidance was provided.
• Operating costs included a one-time $0.8 million charge for missing or obsolete inventory and $1.5 million of severance and restructuring expense, primarily related to an executive’s departure. Cost of revenue also rose with software implementation activity and third-party services.
• Network consolidation reduced active transmitters by 3.2% year over year and contributed to lower site-rent and telecommunications costs. Management expects further telecommunications savings as consolidation continues through the remainder of 2015.
• Management said available cash and anticipated operating cash flows should meet requirements for the foreseeable future, while noting that lower cash generation could lead to reductions in capital spending, dividends or repurchases, asset sales, or a search for outside financing.

Risks, contingencies and other notable items

• The business faces continued paging substitution and declining subscriber demand; larger customers also tend to have lower per-unit pricing. Healthcare customers face reimbursement and financial pressures.
• The company held $20.0 million of estimated recoverable deferred tax assets after a $114.1 million valuation allowance, and reported approximately $308.6 million of federal net operating losses, subject to applicable limitations.
• Goodwill was $133.0 million; management reported no impairment indicators as of June 30, 2015. The company is evaluating the forthcoming revenue-recognition standard and had not selected a transition method.
• There were no material changes in previously reported commitments and contingencies. The company said ordinary-course lawsuits were not expected to have a material adverse impact. A related-party entity provided transmitter-site leases; rent expense was $2.0 million for the first half of 2015.
• Management concluded disclosure controls were effective as of June 30, 2015; no material change in internal control over financial reporting was reported.

Important facts for investors to verify

• Whether software growth, bookings and backlog convert to recognized revenue and sustain margins as implementation costs rise.
• The pace of paging-unit losses, wireless ARPU declines and network-consolidation savings relative to the fixed costs of the paging infrastructure.
• The recurring versus one-time portions of increased cost of revenue, including the $0.8 million inventory charge, and the $1.5 million restructuring charge.
• Cash generation and the sustainability of the planned $26.0 million 2015 stockholder return amid declining revenue and continued dividends and repurchases.
• Recoverability and timing of deferred tax assets and use of federal NOLs, as well as any changes in impairment assessments or contingencies.