Spok Holdings, Inc. — 2018 Form 10-K
Business context and reporting period. This annual report covers the fiscal year ended December 31, 2018; the filing also reports fourth-quarter results. Spok provides paging and clinical communications software, services, and support, primarily to U.S. healthcare organizations. Healthcare customers generated approximately 77.9% of 2018 revenue. The company is transitioning toward software as paging demand declines.
Financial performance
| Metric | 2018 | 2017 |
|---|---|---|
| Revenue | $169.5 million | $171.2 million |
| Wireless revenue | $94.3 million | $101.2 million |
| Software revenue | $75.2 million | $70.0 million |
| Operating income (loss) | ($3.2 million) | $10.7 million |
| Net income (loss) | ($1.5 million) | ($15.3 million) |
| Operating cash flow | $10.3 million | $15.5 million |
| Cash and cash equivalents | $83.3 million | $103.2 million |
| Short-term investments | $4.0 million | $4.0 million |
2018 operating margin was approximately negative 1.9%, versus positive 6.3% in 2017. Operating expenses rose 7.6% to $172.6 million, including a 30.8% increase in research and development expense to $24.5 million. Net cash used in investing activities was $5.8 million and net cash used in financing activities was $24.3 million. The company had no outstanding borrowings at year-end. Current assets were $131.0 million and current liabilities were $44.9 million.
Fourth-quarter 2018 revenue was $43.3 million, operating income was $0.1 million, and net income was $0.2 million; diluted earnings per share were $0.01. Fourth-quarter 2017 included a $24.2 million deferred-tax-asset write-off related to the 2017 Tax Act and had a net loss of approximately $21.4 million.
Material changes and notable items
- Total revenue declined 1.0% in 2018, an improvement on the 4.7% decline in 2017. Wireless revenue fell 6.8%; management said this was the lowest wireless revenue erosion rate in five years. Wireless units in service declined to 992,000 from 1.049 million, and average revenue per user decreased to $7.39 from $7.51.
- Software revenue increased 7.4%, led by operations revenue growth. Maintenance renewal rates exceeded 99% in each of 2016–2018.
- ASC 606 was adopted on January 1, 2018 using the modified retrospective method. Reported 2018 software revenue was $75.2 million; on the prior ASC 605 basis it would have been $73.3 million, and total revenue would have been $167.5 million. Adoption increased opening retained earnings by $6.8 million. Comparisons with prior periods are therefore not fully on the same accounting basis.
- Operating cash flow fell $5.2 million year over year. Cash and cash equivalents declined by $19.8 million during 2018, reflecting operating, investing, and shareholder-return cash uses.
- The company declared $10.1 million in dividends and repurchased 929,116 shares for $13.4 million during 2018. The board indicated an expectation of quarterly dividends of $0.125 per share in 2019, subject to declaration, and extended repurchase authority through December 31, 2019.
Outlook, risks, and contingencies
- No numerical revenue or earnings guidance was provided. Management expects wireless subscribers and revenue to continue declining, while prioritizing software revenue and bookings and investment in the Spok Care Connect platform.
- Management expects research and development expense growth to slow in 2019, but says the benefits of development spending may not be realized for one to three years. Network rationalization savings are also expected to slow as the company approaches FCC minimum frequency commitments.
- Management believes cash on hand and operating cash flow should cover anticipated requirements for the foreseeable future, but expects cash to decrease significantly over the next two to three years as platform investment continues amid declining wireless revenue. If cash is insufficient, dividends or planned spending could be reduced, and additional financing or asset sales might be considered.
- Key risks include faster-than-expected paging erosion, inability to reduce wireless costs in line with declining revenue, execution and market acceptance of the integrated software platform, long software sales cycles, competition, healthcare customer budgets, network reliability, cybersecurity and privacy, and FCC, FDA, and healthcare regulation.
- Operating lease obligations totaled $20.2 million, including $6.7 million due within one year. The company reported no material change in previously disclosed legal contingencies and believes pending lawsuits will not materially affect its financial position or results. Legal and other expenses related to a previously reported lawsuit contributed to 2018 other expense.
- The company recorded no goodwill or long-lived asset impairment in 2018. It reported $83.9 million of federal net operating losses available to offset future taxable income, subject to applicable limitations; management concluded its deferred tax assets were more likely than not to be realized.
Important facts for investors to verify
- Whether software growth and bookings can offset continued paging revenue and subscriber declines, including the sustainability of maintenance renewals.
- How ASC 606 affected reported revenue, earnings, deferred revenue, and commission costs, and how comparable results look on a consistent accounting basis.
- Whether cash generation can support platform investment, lease commitments, dividends, and repurchases as network rationalization savings slow.
- Progress, costs, customer adoption, and expected timing of benefits from Spok Care Connect development.
- The development and potential financial impact of the reported lawsuit, and the company’s ability to manage cybersecurity, privacy, regulatory, and network-service risks.
- The quarterly results include a $771,000 cost-of-revenue adjustment identified in the fourth quarter and allocated to the first three quarters; verify the adjusted quarterly figures when assessing trends.