Spok Holdings, Inc. — Q2 2018 Form 10-Q
Reporting period: Three and six months ended June 30, 2018. Spok provides wireless messaging and software-based critical communications, primarily to healthcare organizations. Amounts below are in U.S. dollars; financial statement figures are unaudited.
Financial performance
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Wireless revenue | $23.7 million | $25.6 million | $47.9 million | $51.5 million |
| Software revenue | $17.0 million | $16.7 million | $35.8 million | $32.3 million |
| Total revenue | $40.6 million | $42.3 million | $83.7 million | $83.8 million |
| Operating income (loss) | $(2.2) million | $2.4 million | $(1.4) million | $3.8 million |
| Net income (loss) | $(1.0) million | $1.5 million | $(0.5) million | $2.4 million |
| Diluted earnings (loss) per share | $(0.05) | $0.07 | $(0.02) | $0.11 |
| Operating margin (approx.) | (5.3)% | 5.7% | (1.7)% | 4.5% |
For the first half, operating cash flow was $6.4 million, capital expenditures were $3.5 million, and cash dividends, share repurchases and equity-award tax withholding contributed to $15.4 million of net financing cash outflow. Cash declined $13.1 million to $94.1 million from year-end 2017. At June 30, total liabilities were $57.4 million; the company reported no debt and no revolving credit facility.
Liquidity remained substantial: current assets were $138.2 million and current liabilities were $48.1 million. Stockholders’ equity was $281.3 million. The company declared dividends of $0.25 per share during the first half and repurchased 629,574 shares for approximately $9.5 million under its 2018 program.
Changes versus the prior comparable period
- Q2 total revenue fell 4.0%; first-half revenue was essentially flat. Wireless revenue declined 7.7% in Q2 and 6.9% in the first half, while reported software revenue rose 1.7% and 11.0%, respectively.
- Higher research and development costs were a significant pressure: expense increased 32.5% in Q2 and 35.9% in the first half. Total operating expenses rose 7.2% and 6.5%, respectively, contributing to the move from operating profit to operating loss.
- Wireless units in service were 1.024 million at June 30, down from 1.086 million a year earlier; Q2 ARPU was $7.41 versus $7.52. Active transmitters declined 2.7% to 3,961.
- Software maintenance renewal rates exceeded 99%. Management attributed growth in software operations revenue to larger or more numerous projects, while network consolidation reduced service, rental and maintenance expense.
Outlook, accounting matters and risks
- Spok expects wireless demand to continue declining for the foreseeable future as customers shift to competing technologies. Management plans continued investment in mobility, a unified software platform, nursing solutions and alerting; it expects staffing and outside development costs to rise, affecting margins and operating cash flow. Benefits are not expected for at least two years.
- Management said cash on hand and anticipated operating cash flow should cover requirements for the foreseeable future, but expects cash to decrease significantly over the next one or two years, and possibly longer, while it invests in the platform and wireless revenue declines. The company may reduce capital spending or dividends, suspend repurchases, sell assets or seek financing if cash proves insufficient.
- No formal full-year revenue or earnings guidance is provided. The board expected quarterly dividends of $0.125 per share for 2018, subject to declaration; it declared a further $0.125 dividend in July.
- ASC 606 comparability: Adopted January 1, 2018 using the modified retrospective method; prior-year figures were not restated. Adoption increased opening retained earnings by $6.4 million. For comparison, management’s ASC 605 presentation shows Q2 2018 revenue of $41.8 million and net income of $36,000, versus reported ASC 606 revenue of $40.6 million and a net loss of $976,000. First-half ASC 605-basis revenue was $84.3 million and net income $368,000, versus reported revenue of $83.7 million and net loss of $465,000.
- Deferred tax assets were $46.3 million with no valuation allowance. Management noted that further analysis of the 2017 Tax Act could result in material tax adjustments. The company also expects adoption of the new lease standard in 2019 to result in potentially material right-of-use assets and lease liabilities.
- Asset retirement obligations totaled $7.6 million; estimated removal costs are expected to accrete to a total liability of $9.0 million, based on transmitter-removal assumptions and continued lease renewals. The filing reports no material changes in commitments and contingencies or risk factors from prior disclosures.
Important facts for investors to verify
- How much reported software growth and the change in earnings reflect ASC 606 timing and allocation effects versus underlying operating trends.
- Whether declining wireless subscribers and ARPU continue at the anticipated pace, and whether software project growth and maintenance renewals can offset that decline.
- How planned product-development spending affects margins, cash generation and the timing of benefits, particularly given management’s expectation of significant cash use.
- The recoverability of deferred tax assets, any further 2017 Tax Act adjustments, and the assumptions supporting transmitter-removal obligations.
- Future dividend and repurchase decisions relative to operating cash flow, cash balances and investment needs; also review the disclosed related-party tower-site leases.