Spok Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
October 26, 2023

There are 9 speakers on the call.

Operator

Good morning, and welcome to Spok Holdings Third Quarter 2023 Earnings Call. At this time, all participants are in a listen only mode. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Al Galgano. You may begin.

Speaker 1

Hello, everyone, and welcome to Spok Holdings Third Quarter 2023 Earnings Call. I am joined by Vince Kelly, Chief Executive Officer, Mike Wallace, President of Spok Inc. And Chief Operating Officer and Calvin Rice, Chief Financial Officer. After a brief presentation by management, we will open up the call to your questions. I want to remind everyone that today's conference call May include forward looking statements that are subject to risks and uncertainties relating to Spok's future financial and business performance.

Speaker 1

Such statements may include estimates of revenue, expenses, end income as well as other predictive statements or plans, which are dependent upon future events or conditions. These statements represent the company's estimates only on the date of this conference call and are not intended to give any assurance as to the actual future results. Spok's actual results Could differ materially from those anticipated in these forward looking statements. Although these statements are based upon assumptions that the company believes To be reasonable, they are subject to risks and uncertainties. Please review the Risk Factors section relating to our operations And the business environment, which are contained in our Q3 2023 Form 10 Q and related documents Filed with the Securities and Exchange Commission.

Speaker 1

Please note that Spok assumes no obligation to update any forward looking statements from past or present filings and conference calls. With that, I'll turn the call over to Vince.

Speaker 2

Good morning. Thank you for joining us for our Q3 2023 earnings call. I'm very pleased with how our team performed in the Q3. We are excited by the growth we are generating in terms of revenue, profitability and cash flow, and we are excited by our prospects and our outlook. Our strategic focus remains the same, that is to generate cash and return capital to our stockholders over the long term.

Speaker 2

We're accomplishing this by responsibly investing in our business to support growing revenue, while closely managing our operating expenses And capital expenditures. While the dividend level we declared when we announced our pivot in 2022 may have initially seemed high, We believe Spok has struck an excellent balance between making the necessary investments to fuel future growth, while continuing to demonstrate our prowess generating cash flow and then returning capital to our stockholders. We believe we are on a sustainable path to continue paying our quarterly dividend at these levels for the foreseeable future. Further, we believe our cash flow is on a path To grow into our current dividend level and based on our updated and increased guidance for the full year of 2023, We expect to cover at least 95% of our $1.25 annual dividend this year based on the midpoint of our adjusted EBITDA guidance less capital expenditures. Today, we'll share with you an update on how our strategic business plan is progressing in Support of this goal as well as our financial results for the quarter.

Speaker 2

I'll start by reviewing the agenda for today's call. The order will be as follows. We'll begin by reviewing our strategic focus and goals and looking at our progress against those goals. Next, I'll turn the call over to Michael Wallace, Our President and COO, who will provide a review of our operational performance for the quarter. Mike will then turn the call over to Calvin Rice, our CFO, To review our Q3 2023 financial highlights in more detail, we will then conclude our prepared remarks With our business outlook and updated financial guidance for 2023.

Speaker 2

And finally, we will then open up the call to your questions. Any discussion regarding Spok's 3rd quarter results has to start with how truly proud I am of this team and the continued growth momentum that we were able to generate in the period. That momentum continued in the 3rd quarter after our record high software operations bookings in the 2nd quarter. Our second quarter results included some new customer contracts that we had anticipated to close in the Q3. Software operations bookings are always going to be lumpy and we believe the best way to view them is over a broader window.

Speaker 2

Through the 1st 9 months of this year, Our software operations bookings are up over 38% compared to the same 9 month period in 2022. Again, we were able to grow total revenue as we achieved year over year software revenue growth of 12% for the quarter And 7.9% growth on a year to date basis. We were also able to keep wireless revenue levels consistent with the prior year quarter and Slightly up on a year to date basis. We continue our focus on expense management as adjusted operating As part of our continuing focus to manage expense levels, in September, we exercised an option for the early termination for the lease on our corporate headquarters In Alexandria, Virginia, consistent with how we have been operating since the onset of COVID-nineteen, employees of the Alexandria headquarters will continue to Calvin will provide more detail regarding the lease termination when he reviews the financial results, but the bottom line is We expect to save approximately $1,000,000 annually beginning after the conclusion of our lease in September of 2024. However, our focus on expense management as a driver to generate increased cash flow does not come at the expense of our product platform As we continue to make the necessary investments in product development, sales and marketing, customer support, professional services to support the growth of our Spok Care Connect and wireless solutions.

Speaker 2

Our cost savings focus also does not come at the expense of our employees We'll make Spok's success a reality as we mindfully address compensation levels for all employees to be sure we are fair and competitive In a heightened inflationary environment, we look forward to continued success and believe our extensive experience Operating our established communication solutions will unlock even more efficiencies and create significant value for stockholders over time. In short, we continue to fire on all cylinders and are confident about the future as we close out 2023. Based on our performance in the Q3, we are once again increasing our guidance estimates for revenue and adjusted EBITDA generation. I want to point out we have increased our guidance each quarter this year every time we have reported. We are increasing the midpoint of our revenue and Adjusted EBITDA guidance by $1,750,000 or an additional almost 7% demonstrating our ability to generate cash.

Speaker 2

All of our increase in revenue guidance this quarter is falling to the bottom line. Calvin will go in more detail later in the call, but we expect to grow consolidated revenue for 2023 on a year over year basis for the first time in the company's history. And the low point of our revenue guidance reflects our confidence. We believe we will do so again in 2024. Before we dive into our operational highlights for the Q3, let me take this opportunity to briefly summarize our mission for those of you that may be new to our story.

Speaker 2

Our strategic goal is simple, run the business profitably, generate cash flow and return that capital to stockholders. Spok has a proud legacy of creating stockholder value through free cash flow generation, and we intend to continue this track record. Since the beginning of our strategic pivot, which started about 20 months ago, Spok has returned approximately $44,000,000 Or $2.20 per share to our stockholders in the form of our regular quarterly dividend. In fact, Since we founded this company in 2004, Spok has returned nearly $670,000,000 to our stockholders either through our regular quarterly dividend, Special dividends or share repurchases. In the Q3 of 2023, the history of returning cash to our stockholders continues As we again generated impressive levels of adjusted EBITDA and returned $6,200,000 to our stockholders, And we expect to pay dividends totaling approximately $25,000,000 in 2023 as we did in 2022.

Speaker 2

Spok remains committed to our dividend policy and returning capital to our stockholders. When you take into consideration our current cash balance, Distributions to stockholders, share repurchases, debt repayments and acquisitions, Spok has now generated more than $1,000,000,000 of free cash Since our 2,004 inception, our focus on maximizing cash over the long term supports the 4 major tenants of our strategy. And those are 1, continued investment in our wireless and software solutions 2, Stabilizing and growing our revenue base 3, disciplined expense management and 4, A stockholder friendly capital allocation plan. Going forward, we believe our extensive experience operating our established communication Solutions and world class customer base will continue to create significant value for our stockholders. Now I'll turn the call over to our President and Chief Operating Officer, Michael Wallace, who will talk about our operational accomplishments.

Speaker 2

Mike?

Speaker 3

Thanks, Vince, and good morning, and thank you all for joining us for another solid quarter of results from Spok. We are happy to report that we have continued to On our business plan, in the Q3 of 2023, we generated GAAP net income of $4,500,000 or $0.22 per diluted share, which which represents a 52% increase from net income of $2,900,000 or $0.15 per diluted share in the prior year period. We accomplished this while continuing to generate year over year 3rd quarter software operations bookings growth. Again, On a year to date basis, software operations bookings have totaled $26,000,000 up more than 38% from the prior year levels and have already surpassed our full year total for 2022. Also, total 2023 software bookings are on track to reach levels Amidst all the progress in creating a solid financial platform and stockholder friendly capital allocation strategy, We remain true to our mission of being a global leader in healthcare communications.

Speaker 3

We deliver clinical information to care teams When and where it matters most to improve patient outcomes as Spok enables smarter, faster clinical communications for our customers. And importantly, we continue to maintain our reputation as a thought leader in the healthcare communication space. Now Let me take a couple of minutes to tell you about 2 recent events that underscore our industry leading reputation. First, earlier this month, we released The results of Spok's 13th Annual Survey on Communications and Healthcare. This year, more than 150 executives, physicians, Nurses, IT personnel and contact center representatives responded with input about the state of communication at their respective organizations.

Speaker 3

The survey results unveiled 3 major takeaways. 1st, unified communication across the organization is essential for modern healthcare. Healthcare leaders want a unified communication platform that integrates features such as secure messaging, on call scheduling, clinical alerting and mass communications. One that is a centralized approach rather than one that is siloed, all of which Spok provide. 2nd, addressing burnout across the organization from clinicians to IT personnel is imperative.

Speaker 3

Although, we have seen a positive shift on this front, as about 2 thirds of respondents noted their organizations are trying to tackle work related stress and burnout. And lastly, diversity in communication devices remains relevant. Healthcare organizations recognize the importance of versatile communication devices, whether that Smartphones, Wi Fi Phones or Encrypted Pagers. Despite the challenges hospitals and healthcare systems face, we realize that effective and efficient Communication is crucial for improving patient safety and outcomes and mitigating the risk of clinician burnout. While budget and resource constraints remain the biggest challenge for healthcare leaders when considering new technology, the quality and safety of patient care remains paramount.

Speaker 3

The same week we released the survey results, Spok hosted in our annual user conference, Connect. We held the event again this year on a virtual basis and had over 150 attendees representing nearly 100 organizations. The event included presentations by both our management teams and our customers as well as breakout roundtable discussions and general Q and A sessions. Based on the feedback we received and the amount of customer participation in our group chat, questions and forums, We believe this was the most successful virtual customer event we have ever hosted, and we are proud of the unparalleled reputation we have still within the market that we serve and want to take this opportunity to thank our customers for their loyalty and their support. Spok has over 2,200 healthcare facilities as customers, representing the who's who of hospitals in the United States.

Speaker 3

We have built our solutions over many years and have long standing valuable customer relationships. This is an amazing and valuable asset for this company. These hospitals buy from us regularly and renew maintenance at a high level. Despite the record $14,000,000 of software operations bookings in 2nd quarter that saw several large deals pulled forward that were anticipated to close in the second half of twenty twenty three. Our team was still able to generate year over year growth in software operations bookings for the Q3.

Speaker 3

Included in this quarter's bookings were 11 new The first was with 1 of the largest non profit integrated academic healthcare systems in the United States. Another with a large university medical system in the Northeast and the final with a leading cancer center hospital in the Northeast. The First Health System boasts over 27,000 employees across 14 hospitals and leverages the Spok Care Connect platform For answering over 200,000 monthly operator calls, sending over 35,000 pages per month and managing over 120,000 on call assignments each month. We are delighted to announce today that our multiyear engagement with this health system includes Spok SmartSuite upgrades, Unlimited SmartSuite console licenses, extended Spok Mobile usage for all of the organization's almost 4,000 users, 1 of the largest deployments of Spok Mobile in the country and additional Spok professional services for small engagements outside of the identified upgrades. And as an existing Spok customer, the health system also opted for a variety of Spok's value added services, including data integrity, workflow analysis and organizational change management.

Speaker 3

These value added services help this partner derive maximum value Looking ahead, we're excited about the prospects of expanding Spok Mobile and implementing Spok SmartSuite in other locations within this organization. Spok boasts a remarkable history of delivering efficient communication solutions to healthcare facilities. Another of our standout customer contracts last quarter It was with a leading academic teaching hospital with over 900 beds and almost 10,000 employees across its campus. This 5 year engagement with Spok was for enterprise consolidation across multiple facilities on Spok SmartSuite, Spok's Messenger and Speech Solutions as well as Spok's value added service solution assessment. Finally, we executed another 5 year engagement with 1 of the world's most respective comprehensive cancer centers with over 500 inpatient beds And over 5,500 attending physicians and nurses.

Speaker 3

This contract was for new licenses and upgrades across multiple facilities on Spok SmartSuite, e Notify and our Messenger solutions as well as the solution assessment value added service. Our 3rd quarter success continues to showcase our commitment to providing unmatched communication solutions to our clients and we are confident that our software solutions will continue to drive positive change for healthcare institutions While we are certainly pleased with the continued momentum that we saw in the 3rd quarter, Coupled with the historic level of 2nd quarter software operations bookings, as we have noted in previous quarterly earnings calls, We believe it is more appropriate to look at software operations bookings on a calendar year basis. While of course, we spend a great deal of time analyzing on a contract by contract basis. When assessing overall performance of our software operations bookings, a full year basis Better normalizes both positive and negative timing anomalies that can arise out of the sales cycle. We believe looking at growth And software operations bookings over an annual period is more reflective of the momentum that we are generating and is most appropriate for investors as well.

Speaker 3

With that said, we now expect 2023 year over year software operations bookings growth in percentage terms To be in the upper teens to low 20s for the full year. With that, I'd like to turn the call over to our Chief Financial Officer, Calvin Rice.

Speaker 4

Calvin? Thanks, Mike, and good morning, everyone. I would now like to take a few minutes and provide a recap of our Q3 2023 financial performance, which we reported yesterday. I encourage you to review our 10 Q when filed as it includes significantly more information About our business operations and financial performance than we will cover on this call. Turning to our income statement.

Speaker 4

In the Q3 of 2023, GAAP net income totaled $4,500,000 or $0.22 per diluted share compared to net income of $2,900,000 or 0 point 15 For the Q3 of 2023, total GAAP revenue was $35,400,000 compared to revenue of $33,700,000 in the Q3 of 2022. Revenue for the quarter consisted of wireless revenue of $19,000,000 which was essentially flat to revenue of 19.1 in the prior year period and software revenue of $16,500,000 up 12% from last year, reflecting the significant year over year increase in professional services revenue, driven by the significant increase in bookings and related backlog of professional With respect to wireless revenue, 3rd quarter performance continues to be primarily driven by improvement in average revenue per unit or ARPU, which saw growth of $0.19 on a quarterly basis year over year. This improvement is largely the result of additional pricing actions taken in September of 2023. These pricing actions will be fully reflected in our 4th quarter results, and we corresponding increase of $0.15 to $0.19 in ARPU in relation to the $7.59 Realized in the Q3, all things being equal. Net unit churn continues to remain at historically low levels as net units in service declined by roughly 4.7% from the prior year period.

Speaker 4

While we believe the demand for our wireless services will continue to decline on a secular basis as reflected in declining pager units and service. We are hopeful that our focus on pricing and other initiatives Like the Gen A pager, we'll continue to further offset revenue lost through pager unit decline. This is further in our updated financial guidance, which I will walk through shortly. Turning to software revenue in the Q3. License revenue of 2,400,000 was up by more than 12% from the Q3 of 2022.

Speaker 4

Maintenance revenue totaled $9,400,000 and it was up from revenue of $9,200,000 in the prior year quarter. As we have discussed in previous quarterly calls, as we continue to make progress On our product roadmap with Spok Care Connect, we expect bookings will continue to grow in the coming years and maintenance revenue along with it. Given the nature of maintenance revenue, higher license sales will work through revenue on a lagging basis. So we look first to Stabilizing that revenue decline, which we believe we are close to accomplishing and then beginning to grow it. Professional services revenue was a healthy $3,800,000 versus $2,800,000 in the Q3 of Delivering on our internal initiatives to better align total resources with our backlog and driving a higher rate of net cash flow.

Speaker 4

We have been hiring service professionals in the second half of twenty twenty three to meet our current backlog needs, and we expect that to continue throughout 24 to meet anticipated sales demand. 3rd quarter adjusted operating expenses, which excludes depreciation, Amortization and accretion and severance and restructuring costs totaled $27,900,000 representing no change from the prior year period. Increases in research and development were largely timing in nature, with reductions in technology operations driven by our normal practice Cost reduction in relationship to declining wireless revenues. Increases in selling costs, which primarily relate to commissions and higher French costs, We're more than offset by savings in G and A, which continues to see year over year benefit from our cost saving initiatives. As we look at the Q4 and into 2024, we foresee a need for additional sales resources and would expect sales and marketing costs will continue to marginally increase as a result.

Speaker 4

These resources will support our robust sales pipeline and generate additional sales activity as we look to extend the sales success we have achieved over the last 2 years. Also, while we are on the topic of operating expenses, Let me briefly add some detail to Vince's prior comments regarding the early termination of our lease of the Alexandria headquarters building. In September 2023, we exercised an early termination option for the lease of our corporate headquarters in Alexandria, Virginia. The lease will now end 2 years early on September 30, 2024. As a result of the early termination, We paid a one time termination fee of $700,000 reflected in our cash balances as of September 30, 2023.

Speaker 4

The termination fee and remaining lease costs will be amortized to severance and restructuring through September 30, 2024. Thereafter, We expect to save approximately $1,000,000 annually as a result of this decision. And as Vince mentioned previously, a portion of this benefit We'll go towards offsetting salary increases expected in the Q4. In light of our strong financial performance and the heightened inflationary environment we have all been experiencing, we believe it's important that we take care of the people that make these results a reality. These increases will be company wide based on certain qualifications at all levels below senior management.

Speaker 4

Additionally, it's important that we take care of our employees to ensure we can compete in what is still a highly competitive market. The company anticipates relocation of its headquarters to the existing corporate location in Plano, Texas and does not expect material costs to be incurred as a result of this change. Approximately 30 employees will be impacted as a result of this decision. As Vince pointed out, these employees will formally transition to remote work. We see no risk related to this transition and expect no issues given this has largely been our posture since early 2020.

Speaker 4

While this decision was not made lightly, the company expects to benefit greatly from significant cash savings, greater flexibility for our employees And higher levels of productivity we have seen from the pre existing work from home posture. Lastly, as Vince pointed out earlier in the call, adjusted EBITDA Was a near record $8,400,000 in the 3rd quarter, up nearly 25% from $6,700,000 in the same quarter of 2022, reflecting the progress made to date with our strategic pivot. In fact, through the 1st 9 months of 2023, Adjusted EBITDA has totaled nearly $24,000,000 up nearly 156% from the prior year period. Our performance in the 1st 9 months of 2023 in terms of strengthening software operations bookings, robust backlog levels, Improvement in wireless trends and strong adjusted EBITDA has led us to again increase our expectations across all categories for the full year. As a reminder, the figures I'm going to discuss today are included in our guidance table and the earnings release.

Speaker 4

In 2023, we now expect total revenue to be in the range of $136,250,000 to $139,250,000 A $1,750,000 increase from the previous guidance midpoint. More importantly, as Vince pointed out, this represents the first time in the company's history that we expect to Consolidated revenue from the prior year and the low end of our guidance reflects that with a 3.5% annual growth rate at the high end of our revised guidance. Included in the revised guidance, we expect wireless revenue to range between $75,250,000 to $76,250,000 A $750,000 increase from the previous guidance midpoint as we expect recent trends will continue to improve as I discussed earlier. Software revenue is expected to range from $61,000,000 to $63,000,000 with a midpoint implying total software revenue growth of more than 5% from prior year levels. Lastly, based on these improving trends and our performance in the Q3, our revised adjusted EBITDA guidance for 2023 is $27,500,000 to $29,000,000 a $1,750,000 increase or almost 7% from the previous guidance midpoint.

Speaker 4

With that said, I will now turn the call back over to Vince.

Speaker 2

Thank you, Calvin. Before we open up the call to your questions, let me just reiterate how proud I am of the entire Spok team and their ability to maintain the momentum and generate further growth despite coming off a record second quarter that shattered all performance metrics. It is their efforts which gave us the confidence to increase guidance yet again and we believe will provide the springboard to take us into an even Stronger 2024. I'd also like to thank our stockholders for their continued support and want to assure you That our primary focus remains on generating cash and increasing stockholder value. We're committed to our current dividend and capital allocation policy.

Speaker 2

On a final note, I'd like to tell everybody about Spok's presentation at the upcoming Piper Sandler Healthcare Conference in New York. Look for a press release soon with the dates and timing of our presentation. We hope to see many of you there and we'll continue to look for to tell our story to the investment community and focused on investor marketing activities that we know the ultimate attraction will come as a result of our consistent and successful business execution. That concludes our prepared remarks. At this point, I'll ask the operator to open the call up for your questions.

Speaker 2

We'd ask you to limit your initial questions to 1 and a follow-up. And then after that, we'll take additional questions as time allows. Operator?

Operator

Thank you. We will now be conducting a question and answer session. Our first question comes from Eric Martinuzzi with Lake Street. Please proceed with your question.

Speaker 5

Congrats on the revenue and profitability as well as the 2nd quarter in a row now of year on year growth. I have a question regarding the price increase that you rolled in, in September. What how much was the price increase and what percentage of the Install base is this impacting?

Speaker 2

Good. Good. Good. Good

Speaker 4

morning. This is Calvin. Yes, so we rolled out a 6% price increase in September to the customer base that impacted probably somewhere between 60 To the customer base, that impacted probably somewhere between 65% 70% of that customer base, and we expect that to be fully

Speaker 5

Okay. And then I did see an uptick in churn in the 3rd quarter, you guys have been I think Q2 was 3.5%, Q1 was 3.2%, and then we saw Uptick to 4.7% in Q3. What are you expecting for churn, Kind of a range that investors can look to?

Speaker 4

Yes. So we've been very fortunate for probably the last 9 months Proceeding the Q3 in terms of the lowest churn rates on record probably over the last decade or so, and it's been a consistent decline. I would say that uptick in 3rd quarter is isolated. We don't believe it's part of any new trend. Those will Be variable from 1 quarter to the next.

Speaker 4

We'd expect to see churn anywhere in the range of probably 3.5% to 5%, give or take.

Speaker 5

Okay. And then I've noticed a disconnect between your adjusted EBITDA And the cash from ops, the adjusted EBITDA coming in at $8,400,000 and yet your cash balance Decline sequentially and the cash from ops was $3,200,000 So just walk me through the delta between The adjusted EBITDA and the cash from Rob?

Speaker 6

Yes. Eric, we had a couple of one time things in the Q3 that affected working capital. One of the things We did as we paid out all our PTO and went to a different policy. That's going to save us about $500,000 a year going forward, But we had to spend about $3,000,000 to do that. And then the other thing was the early termination on the lease.

Speaker 6

We spent about what, Calvin, dollars 750,000 buying that out. That's going to save us about $1,000,000 a year going forward. All this stuff is focused on getting the free cash flow. Those are working capital items that were both in the 3rd quarter that won't be obviously in the Q4 or the Q1 or ever again.

Speaker 5

Okay. And then lastly, just stepping back here, you're tracking to year on year growth here in 2023. I've got you Up about 2% on the year. Obviously, that's roughly flat on the wireless and up about 5% on the software side of the house. You did comment in your prepared remarks about anticipating growth in 2024 for those of us modeling out.

Speaker 5

Can you give us Kind of a range or is it too soon to talk about potential growth rates next year?

Speaker 6

Look, I mean, this is obviously the first time, Eric, that we're going to grow the company in the company's history And right now, everything is going right. We're hitting on all cylinders. When we look at our plan, we beat on total revenue, we beat on adjusted EBITDA, we're beating our guidance, we're beating your model. When we break our service lines out and look at software and wireless, we're doing the same across the board. Bookings is a huge Plus for us up 38% compared to the same 9 month period last year.

Speaker 6

The gross additions on our wireless plan are beating, Gen A sales are beating our plan, Professional services, their hours, their rate, all that's beating. Maintenance is beating plan. We're managing our operating expense, managing our CapEx. Our R and D team has made great progress. We're going to have some great things to reveal next year on the software side.

Speaker 6

Employee in Turnover is about as low as we've ever had in the company and morale is really high. So we're going to grow in 2024. We'll put Guidance out probably before the end of the year. We haven't decided on exactly when, but we've been talking about that internally. A lot of good things going on.

Speaker 6

I mean, our sales results Are significantly ahead of our internal plan and where they were at this time last year. Our team already this year sold 26 multiyear engagements They had a total booking value of about $15,000,000 We've got 4 of those reps over $2,500,000 And sales alone this year and last year, we had none. And our average deal size this year has doubled over 2022. It's tripled over 2021, and we've sold Over 15,000 Gen A pages this year and we're our target this year is 20,000 and we're going to do even more next year. So We're on a growth posture right now, but it's going to be disciplined from the standpoint that we still Focus on free cash flow and returning capital to shareholders.

Speaker 6

That's still our number one goal. We expect that the industry is still going to be Somewhat challenged in terms of healthcare and spending and their internal resources, what we do for our customers is almost like a utility. We're making, I think, responsible improvements to that with our investment back into our platform. I think we got a really good business model here right now. Might not grow like a rocket like some people do, but you know what, you're getting paid along the way.

Speaker 6

And so, we'll grow next year. We'll get some guidance out to you guys as soon as we can. We've let the dust settle and do some more modeling. And hopefully, we'll have Some news for you before the end of the year on what we expect for next year. But the answer is, it's going to grow.

Speaker 5

Understand. Thanks for taking my questions and good luck in Q4.

Speaker 2

Sure.

Operator

Our next question comes from Christopher Irons. Please proceed with your question.

Speaker 7

Hi, guys. Fantastic quarter. Thank you very much for everything. Just wanted to touch on a couple of things that you said last quarter and see if you can update. Last quarter, you had talked about Receiving interest, outside interest in the company, kind of unsolicited interest, wondering if there's anything new in that.

Speaker 7

In that regard, you had also talked about potentially raising the dividend at some point. I know I don't want to get ahead of And certainly don't want to line it because it was a great quarter, but I just wanted to see if you can offer an update on those two things.

Speaker 6

Yes. Let me take the second one first. The first goal was to grow into the existing dividend. At the beginning of the year, we were talking about 80% of our dividend with free cash with our adjusted EBITDA less CapEx. And Yes, we're obviously beating that significantly.

Speaker 6

I think we'll cover about, what is, 95%, Calvin, this year, of adjusted EBITDA, less CapEx. So we're not going to be burning through a lot of cash, obviously in 2024. So we're getting very, very close to that. We want to get above 100% before we Determine what we want to do with that. And frankly, I think we have time to make that decision.

Speaker 6

So I would say for $2,025.25 is probably what you should bank on. And I would say for 2025, if we were going to make Change, that's where we would be looking. So that's that. Look, your first question, we're a public company. We're for sale in the market every day.

Speaker 6

You know, where interest rates have gone and what's been kind of going on out there in the sponsor community, Yes, it's tough sledding for those guys right now. It doesn't mean we haven't got calls. We've gotten a couple of calls. We're not running a process right now. We're not for sale right now.

Speaker 6

Is there interest in the company? I can tell you absolutely there's interest in the company. A company like us that has the kind of customer base we have, Has the kind of sales results we have and throws off a ton of cash is a very rare bird in the market right now. Not many of these sponsors have an asset like this. So if they want us, come on and get us boys, but You're going to have to pay up, okay, because we got good things going on here at Spok.

Speaker 6

We got a great team, morale is really high, and we're all about executing, and we're going to execute. So if you want someone that could execute in your portfolio, maybe unlike some of the other investments, come take a look at us. But in the meantime, We're going to do what we do and we're doing it well right now and we're very pleased with our results and we're very pleased with our outlook.

Speaker 7

Yes, excellent. Thank you very much. Perfectly said.

Speaker 6

Yes, thanks.

Operator

Our next question comes from George Millis with MJH Management. Please proceed with your question.

Speaker 8

Thank you. Good morning, Vince, Mike and Calvin. Good job on the quarter again. The question is for Mike. Mike, you outlined those 3 very sizable deals that you closed in the quarter.

Speaker 8

I was not sure whether those were new customers. And on the new customer side, Who are you replacing? Are you replacing internal systems?

Speaker 6

Or are you

Speaker 8

replacing other third party software providers?

Speaker 3

Yes. Hey, George. Good to talk to you. Yes, the 3 deals that I talked about were all existing customers In this quarter, so none of those were new logo. Yes, to answer your question more broadly, When we do display somebody, a lot of times it is internal, systems that they use internally.

Speaker 3

There are some competitors out there that we typically displace. I obviously won't mention names. But look, the reality is we're in a position where the majority of our bookings are still to our installed base. We do have about probably 10% or 15% of our businesses new logo as I've said in previous calls. The expectation is over the next several years As we continue to execute on the plan that we've talked about from an R and D perspective and are focused again on Our on premise solution as opposed to Spokko is, as you know, being a shareholder for quite a while.

Speaker 3

And putting new things out in the market, that will allow us And George, just to add on to what Mike said, we had our

Speaker 6

And George, just to add on to what Mike said, we had our board meeting yesterday and we had some of our top sales managers in to Talk to our Board. A couple of the very large deals that we got in both our Eastern division and Western division, this year were takeaways from competitors. And when we look at our pipeline, a couple of the large deals that we have from each division in the pipeline right now Or specific takeaways from competitors. And I'm not going to name the competitors, but I will tell you the common characteristic of these takeaways Is that these competitors are offering more what you and I would refer to as point solutions and Spok offers the enterprise Sweet. So we do a lot of things.

Speaker 6

We don't have to do a specific point solution as well as a competitor to win. It's kind of the same Tactic, frankly, that Epic took years ago to consolidate the EHR space or that Microsoft took with the whole office suite that they have. If you can offer an integrated suite, you're going to save that CIO a lot of headache in the long term and then they'll sign a multiyear engagement with And you're off to the races. So our R and D budget and our focus is all about building on that strength and making that suite more powerful And more flexible and more extensible going forward. And so I think you'll see as we make progress on the roadmap in 2024 and 2025, A lot more potential in terms of new logo coming into the business right now.

Speaker 6

I think our best years, 2024 is going to be a huge transition for us in terms of our platform. Think our best years are going to be 2024 and 2025. I think we got a lot of good things in front of us. Hope that helps.

Speaker 8

Definitely. That's really interesting. And then maybe a quick question, maybe for Calvin. You've had amazing software bookings this year, especially in the Q2, but also in 3rd. How does That flow in through the P and L.

Speaker 8

I mean, is it just like I mean, I see that the maintenance revenue increased nicely. So I think that's Incredible indication of success. But how does it flow?

Speaker 4

Yes. So the direct correlation isn't going to exist Between bookings and the P and L, generally speaking, there's a significant breakout in terms of the booking mix that's within that number between license, services, Maintenance and equipment. And so, it's when we make a sale, it's going to go into our backlog. So bookings and Backlogs are really relevant and you've seen that similar growth in the backlog, which ultimately represents future revenue yet to be recognized. So that's a critical element.

Speaker 4

License and equipment are generally relatively book So those are going to be the 2 components that generally when sold are going to flow through either immediately or within the next several months From a revenue standpoint. And then the maintenance, that's going to get recognized over the contract period, which can be anywhere from 1 to typically 3 years. And then on the services front, that's generally going to be recognized as the projects are completed themselves. Those projects, typically 5 to 7 months in completion time, but it can take a couple of months to get up and running depending on resource allocation at the customer sites. And so generally speaking, we kind of look to about 12 months for those projects to flow through as well.

Speaker 8

Okay, great, great. Remind me, Software 101, I appreciate that. Thanks a lot.

Speaker 4

You're welcome.

Operator

There are no further questions at this time. I would now like to turn the floor back over to Vince Kelly for closing comments.

Speaker 6

Look, thanks everyone for your participation today. We're proud of what this company is accomplishing and we're very excited about the future. Like I said, we're going to consider when we want to put our 2024 guidance out and we'll get back to the market then. And we'll also be at the Piper Conference in New York Next month, so look forward to seeing some of you there. And we'll report our Q4 year end results in late February And talk to you there as well.

Speaker 6

And everyone have a great day, and thanks for being a supporter of Spok.

Operator

Ladies and gentlemen, thank you for your participation. This does conclude today's teleconference. You may disconnect your lines and have a wonderful day.

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Earnings Conference Call
Spok Q3 2023
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