Spok Holdings, Inc. — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020. Spok provides healthcare communications software and services, wireless messaging, and related solutions. The filing is unaudited. Unless noted otherwise, financial amounts below are in millions of dollars.
Financial performance
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $37.7 | $39.5 | $110.7 | $120.7 |
| Operating income (loss) | $2.7 | $(2.7) | $1.8 | $(3.6) |
| Net income (loss) | $3.2 | $(1.3) | $2.4 | $(1.3) |
| Diluted EPS | $0.16 | $(0.07) | $0.12 | $(0.07) |
- Q3 revenue declined 4.5% year over year; nine-month revenue declined 8.3%. Q3 operating margin was approximately 7.2%, versus a loss-making quarter in 2019; nine-month operating margin was approximately 1.6%. Gross margin is not separately reported in the filing.
- Wireless revenue fell 4.5% in Q3 and 4.9% year to date. Software revenue fell 4.4% in Q3 and 12.5% year to date. Within software, nine-month license revenue decreased 49.0%, and services revenue decreased 7.8%.
- Operating expenses decreased 17.0% in Q3 and 12.4% year to date. Research and development expense fell sharply, partly because $8.2 million of Spok Go development costs were capitalized during the first nine months; there were no such capitalized costs in 2019.
- Cash from operations was $21.0 million for the first nine months, compared with $10.7 million in 2019. Investing used $10.9 million and financing used $8.1 million. Cash and equivalents increased $1.9 million to $49.2 million.
- At September 30, cash and short-term investments totaled $79.2 million. Current assets were $118.6 million and current liabilities $55.9 million. Total liabilities were $74.3 million; the company reported no debt and no revolving credit facility.
- Dividends declared were $0.125 per share quarterly, or $0.375 per share for the first nine months. The board declared a further $0.125 dividend payable in December, subject to the stated record and payment dates.
Changes versus comparable periods
- Q3 returned to profitability, with net income of $3.2 million versus a $1.3 million loss in Q3 2019. Nine-month net income was $2.4 million versus a $1.3 million loss in the prior-year period.
- Revenue remained under pressure, particularly software license sales and wireless paging. Wireless units in service were 898,000, down from 955,000 a year earlier, while Q3 wireless ARPU was $7.34 versus $7.32.
- Management attributed lower software bookings and license and equipment revenue partly to COVID-19-related purchasing delays, and lower services revenue to delayed implementations. Q3 services revenue increased year over year, but nine-month services revenue declined.
- Cash from operations improved year over year, while capital allocation remained focused on dividends and investment in the business. No common shares were repurchased in Q3 2020.
Outlook, risks and unusual items
- Management said COVID-19 was delaying hospital purchasing decisions, software bookings, and on-site implementations. It expected software revenue to remain significantly affected for full-year 2020 and professional services revenue to remain below normal levels for the remainder of the year. It cited recent sequential improvement but characterized its outlook as cautious.
- The company reduced work schedules and salaries during Q2 and Q3, planned to continue a similar but reduced program in Q4 depending on operating conditions, and aimed to manage costs to offset COVID-19 cash-flow effects. Management expected operating cash flow plus available cash to meet anticipated needs for the foreseeable future.
- Spok Go, commercially available in early 2020, is central to the company’s transition toward cloud and subscription offerings. Management expects the transition of existing customers to take several years and warned that continued wireless declines and investment needs could reduce cash materially before Spok Go revenue grows. Maintenance revenue was expected to be relatively flat or slightly down.
- Remaining performance obligations were $51.7 million at September 30; approximately $38.4 million was expected to be recognized over the next 12 months.
- The CARES Act provided approximately $1.2 million of claimed employee retention credits and $1.2 million of payroll tax deferrals through September. A $1.3 million AMT credit refund was collected in Q3. Management estimated total payroll tax deferrals of $1.5–$2.5 million and employee retention credits of $1.2–$1.5 million.
- The company adopted CECL on January 1, 2020, recording a $0.4 million reduction to beginning retained earnings. Goodwill testing in Q3 found no triggering event; management noted possible future impairment charges remain subject to ongoing assessment.
- Risks include continued pandemic disruption, hospital budget and staffing constraints, delayed implementations, execution and adoption of Spok Go, continued wireless-service decline, and limits on network consolidation related to FCC frequency commitments. The filing reported no material changes to previously disclosed commitments and contingencies.
Investor verification priorities
- Track software bookings, license sales, implementation backlog conversion, and Spok Go subscriptions and customer transitions.
- Assess whether operating cash generation remains sustainable after temporary cost actions, CARES Act benefits, and changes in working capital.
- Monitor wireless subscriber losses, ARPU, network consolidation limits, and the cash implications of continued legacy-service decline.
- Review the assumptions behind capitalized software costs, expected product useful life, deferred tax asset recoverability, and goodwill impairment assessments.
- Confirm future dividend declarations and capital allocation against management’s stated investment needs and expectation that cash may decline significantly.