Spok Q2 2024 Earnings Call Transcript

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July 24, 2024

There are 6 speakers on the call.

Operator

Greetings, and welcome to the Spok Holdings Q4 I'm sorry, Q2 twenty twenty four Earnings Results Call. At this time, all participants are in a listen only mode. A brief question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Al Galgano, Investor Relations.

Operator

Thank you, Al. You may begin.

Speaker 1

Hello, everyone, and welcome to Spok Holdings' 2nd quarter 2024 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. 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. Such statements may include estimates of revenue, expenses and income as well as other predictive statements or plans, which are dependent upon future events or conditions.

Speaker 1

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 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 Q2 2024 Form 10 Q and related documents filed with the Securities and Exchange Commission. Please note that Spok assumes no obligation to update any forward looking statements from past or present filings and conference calls.

Speaker 1

With that, I'll turn the call over to Vince.

Speaker 2

Good afternoon, everyone, thank you for joining us for our Q2 2024 earnings call. I'm proud of the performance our team was able to deliver in the Q2. We made tremendous progress in several key areas and believe that our solid operating platform will generate a successful second half of the year leading to full year software bookings growth relative to 2023. As I mentioned in our press release, we started the Q3 off very strong. Software sales are always going to be lumpy, but our trajectory over 12 months is up into the right.

Speaker 2

As we entered the quarter, we need the year over year comparable is going to be tough as the Q2 of 2023 included many performance records, in particular, single sales contract was almost 4,000,000 dollars However, positive takeaways from where we sit moving into the Q3 include: number 1, we don't have a lot of competition in our core healthcare contact center space. Number 2, we have amazing relationships with the top healthcare systems in the nation who continue to purchase from us on a regular basis. Number 3, we continue to invest in and enhance our platforms consistent with what our customers are requesting. Number 4, in many respects, we are viewed as an indispensable utility. And number 5, we're very comfortable with our full year guidance.

Speaker 2

Let me also take this opportunity right upfront to remind everyone that our mission remains solidly unchanged. That is to generate cash and return capital to our shareholders over the long term, while responsibly investing in and growing our business. As we've demonstrated through our performance since our strategic pivot more than 2 years ago, we believe we are on a sustainable path to doing so and that our cash flow is on the path to grow into our current dividend level and cover it in full on an annual basis. That is our primary focus. Returning capital to shareholders is our legacy and we feel good about executing the strategy we believe in and that we've had a lot of success with historically.

Speaker 2

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. I'll start by reviewing the agenda for today's call and the order will be as follows. We'll begin by providing a review of our company performance for the quarter. I'll then turn the call over to Mike Wallace, our President and Chief Operating Officer, to review some of our quarterly sales and operational highlights. Then our Chief Financial Officer, Calvin Rice, will review our Q2 financial highlights and financial guidance for 2024.

Speaker 2

And I'll come back and wrap up the call and open it up for your questions. As I said upfront, we're proud of what the Spok team has been able to accomplish in the 2nd quarter that we are positioned for a strong second half. 2nd quarter highlights include a more than 10% growth in 2nd quarter software operations bookings from the impressive production levels in the Q1, continued strong levels of adjusted EBITDA, which covered our quarterly dividend and capital expenditure requirements, continued pipeline work providing confidence in our network, the resulting increase in cash balances, which we believe hit its low point in the Q1 and will continue to build through the remainder of the year. Healthy levels of software maintenance and continued growth in our services business that bolstered software revenue in the Q2, improved wireless trends as net unit churn dropped below 1% in the 2nd quarter, down significantly from the prior quarter. Continued expansion of our wireless average revenue per unit further reflecting the impact of prior pricing actions and sales of our encrypted HIPAA compliant alphanumeric Gen A pager and continued discipline in expense management as the decline in our overall year over year operating expenses was accomplished while still making the necessary investments in product research and development to fuel future growth.

Speaker 2

In short, we were very pleased with our performance in the second quarter and believe that our results in the first half of the year provide a solid springboard for the second half of twenty twenty four. We maintain our optimism for the year and we are reiterating our guidance estimates for revenue and adjusted EBITDA in 2024. In the Q2 of 2024, we generated over $7,000,000 of adjusted EBITDA, which more than covered the $6,300,000 we returned to our stockholders. However, at the same time, we increased our Q2 research and development investment by $300,000 or 11.3 percent on a year over year basis and believe we're on track to invest approximately $11,500,000 in product research and development expenses in 2024. We believe this investment will fuel future software revenue growth and that our extensive experience selling and operating our established communication solutions will create significant value for our stockholders by maximizing revenue and cash flow generation.

Speaker 2

As I mentioned, Spok has a proud legacy of creating stockholder value through free cash flow generation and we intend to continue this track record. In fact, over the last 20 years, Focus returned a total of nearly $690,000,000 to our stockholders either through our regular quarterly dividend, special dividends or share repurchases. When you take into consideration our current cash balance, distributions to stockholders, share repurchases, debt repayments and acquisitions, since our inception Spok has generated more than $1,000,000,000 of free cash flow. Our focus on maximizing cash over the long term supports the 4 major tenants of our strategy. Those are: number 1, continued investment in our wireless and software solutions number 2, grow our revenue base number 3, continued disciplined expense management and number 4, a stockholder friendly capital allocation plan.

Speaker 2

Going forward, we believe our extensive experience selling and operating our established communication solutions and world class customer base will create significant value for stockholders through solid revenue growth, disciplined expense management and further cash flow generation. Before I turn the call over to Mike, let me take a moment to review what I think is a noteworthy milestone for our team. Earlier this month, we announced that our organization had passed the 10 year anniversary of the renaming of the company to Spok. As you know, in 2014, we completed the integration of our acquisition of Amcom Software, creating a single cohesive business and Spok was born. Spok expanded on the strong legacy of our predecessor companies to solve critical communications challenges that help hospitals and health systems improve patient outcomes and support public safety when seconds count and lives are at stake.

Speaker 2

Over the past several decades, Spok's talented and experienced team has consolidated the paging industry and combined the power of paging with communication software to make a groundbreaking impact in our industry. We continue to invest in our communications platforms, enhancing our solutions and delivering exceptional products to our customers. Today, Spok is a leader in healthcare communications, maintains the largest phasing network in the United States, has a blue chip customer base of more than 2,200 hospitals, has created a large portfolio of intellectual property via strategic R and D investments, has generated significant shareholder value through cash flow creation and returning capital to our investors and is a pioneer in healthcare communications with a best in class product offering. We've built an industry leading reputation over the years. Under the Spok banner, we are recognized as the top clinical communications platform in our industry for 7 of the past 10 years since we fully integrated our company.

Speaker 2

We are honored by the unwavering trust our healthcare clients placed in Spok as their go to partner for clinical communications. The achievement of securing the top position for 7 consecutive years underscores our commitment to delivering critical communication technology that enhances hospital and health system communication, which ultimately enhances patient care and safety. Further supporting this claim is our recent announcement that for over a decade, nearly every hospital named to U. S. News and World Reports best hospital honor roll relies on Spok Solutions.

Speaker 2

For the 20242025 honor roll, we were pleased to announce that 17 of the 20 adult hospitals on that list use folks' industry leading secure healthcare solutions to facilitate care collaboration and support exceptional patient care. Last year, we were also pleased to announce that 7 out of 10 children's hospitals on the Honor Roll ESMOKE solutions and we anticipate similar participation with 2024 2025 list is published in a few weeks. Finally, before turning it over to Mike, I want to share with you that Spok and our related solutions were unaffected by the recent worldwide CrowdStrike outage. While many of our customers are impacted in their internal systems, Spok was available to help and support them throughout the outage. With that, I'll turn the call over to Mike.

Speaker 3

Thanks, Vince, and thank you everyone for joining us this afternoon. As Vince pointed out, it was a very strong quarter and we made tremendous progress in a number of key performance areas. Yet amidst all the progress in continuing to build a solid financial platform and shareholder friendly capital allocation strategy, we remain true to our mission of being a global leader in healthcare communications. It is important to remember, we deliver clinical information to care teams when and where it As Vince noted, we have over 2,200 healthcare facilities as customers, representing the who's who of hospitals in the United States. We have built our solutions over many years and have long standing valuable customer relationships.

Speaker 3

This is coupled with the financial strength that more than 80% of our revenue reoccurring in nature and we are a company with no debt, which provides a significant flexibility. In the Q2, our $8,700,000 of software operations bookings included 18 6 figure and 1 7 figure customer contracts, sustaining the momentum that we saw last year. Most impressively, 2nd quarter software operations bookings included 14 multiyear engagements and those 6 7 figure contracts had an average contract size that was up nearly 14% in the prior quarter. So we are extremely pleased with the 1st 6 months of 2024. Now let me take a few minutes to highlight a couple of the customer engagements that we signed in the Q2.

Speaker 3

The first is a 3 year agreement with a 3 hospital, 1200 bed health system located in the southwestern part of the United States. As an Epic Forward organization, this organization plans to use as many Epic modules as possible. However, the organization immediately this gap to its unified communication strategy and identified Spok as a strong, stable vendor that offers a unified platform that works well with Epic. Focused on improving patient safety and provider satisfaction, their CEO and CIO tasked their unified communications team to standardize and simplify their environment across the health system. Spok Care Connect, our fully integrated healthcare communication platform, will be used for operator services, enterprise wide web directory, on call scheduling, medical and safety code procedures, nurse call and patient monitoring notifications as well as secure code messaging and paging.

Speaker 3

Through this multi year commitment, this organization also opted in the benefit from manage professional services, multiple value added services and annual maintenance and support. The second customer agreement I'd like to highlight was with the only British overseas territory in the North Atlantic Ocean. This 350 bed hospital with approximately 1800 employees serves over 64,000 visitors annually. Spok has been their critical communication partner since 2014 and they leverage the full Spoke Care Connect suite of products. Spoke Care Connect is used for the hospital's operator services, enterprise wide web directory, on call scheduling, Spoke E Notify for incident management and Spoke Mobile for medical and safety code procedures and secure code messaging.

Speaker 3

Similar to the contract previously discussed, this multiyear engagement also included managed professional services, multiple value added services and the annual maintenance and support. On a final note, I'd like to give recognition to our wireless team and their ability to quickly jump into action to mitigate the impact of the recent Hurricane Barrow. The storm came onshore the morning of July 8 with 75 mile an hour winds and much higher gusts. Luckily, the storm was moving quickly headed north where it weakened. While there was less isolated flooding, a number of our transmitters were down and our team of techs quickly mobilized into action.

Speaker 3

Our team was able to quickly get those transmitters back online and we experienced no customer escalations. It is a responsiveness and customer support that our Spok team demonstrates every day that has gained us the industry leading reputation that Vince spoke about and makes our wireless business an incredible franchise. I'd like to thank our team for their efforts and dedication to creating strong customer loyalty for Spok. I will now turn the call over to Calvin Rice, our Chief Financial Officer, to briefly review the Q2 financial performance.

Speaker 4

Calvin? Thanks, Mike, and good afternoon, everyone. I would now like to take a few minutes and provide a recap of our Q2 2024 financial performance, which we reported today. 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 Q2 of 2024, GAAP net income totaled $3,400,000 or $0.17 per diluted share compared to net income of 4,700,000 dollars or $0.23 per diluted share in 2023. In the Q2 of 2024, total GAAP revenue was $34,000,000 compared to total revenue of 30 $6,500,000 in the prior year. Revenue for the quarter consisted of wireless revenue of $18,300,000 and software revenue of $15,700,000 compared to $18,900,000 $17,600,000 in the prior year, respectively. With respect to wireless revenue, we saw significant improvement in quarterly net unit churn for the 2nd quarter in a row at 0.8%, down from 1.6% in the prior quarter. ARPU increased $0.31 or 4.1 percent from the prior year, primarily driven by continued pricing actions undertaken in late 2023 and to a lesser extent continued sales of our new Gen A pager.

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 in service, we are hopeful that our focus on pricing and other initiatives like the Gen A pager will continue to further offset revenue lost through pager unit decline. Turning to 2nd quarter software revenue. License and hardware revenue totaled $2,000,000 in the Q2 of 2024 compared to $4,600,000 in the same period of 2023. As Vince previously touched on, in the Q2 of 2023, we sold the largest single contract in Spok's history worth almost $4,000,000 including license revenue of nearly $1,800,000 of which the majority would have fallen to the bottom line. In addition to this, we were able to pull forward a number of sales from the 3rd and 4th quarters in 2023, leading to a highly successful quarter.

Speaker 4

We did not expect to replicate the same quarterly success this year just given the quarterly timing of our sales expectations for 2024. However, I would like to point out that Vince also mentioned the expectation of bookings growth on a full year basis, and we expect that to translate to a stronger second half in terms of license and hardware revenues on a comparable basis. Professional services revenue was a healthy $4,300,000 versus $3,800,000 in the Q2 of 2023, up nearly 12% from the prior year period and over 17% for the first half. Much of this continued to be driven by an increase in personnel over the last 12 months. As I have mentioned in previous earnings calls, we expect an ongoing need to increase services personnel to match the pace of growth and professional services backlog as our software operations bookings continue to expand.

Speaker 4

We've also seen managed services perform very well. This is something we briefly touched on in the past, but as sales of this service has grown, we believe some additional discussion and details may be useful to investors. This is a service offering within our professional services that is typically bundled with maintenance and sold like a renewal. This service offering provides customers with all necessary implementation and training services for any spoke software products they own over their multi year term, which is typically 3 years. This provides the customer with a known cost over that term and avoid sales delays we have faced in the when upgrades were made available, but they were not accounted for in the customer's fiscal budget.

Speaker 4

While managed services are likely to be cost prohibitive to our smaller customers, we are excited about the opportunity given that revenue is more predictable, being evenly amortized over the term and in our limited experience has seen higher margins in relation to our traditional fixed bid engagements. Over the next several quarters, I expect we'll begin to provide additional details to investors with regards to managed services on a more regular basis. Adjusted operating expenses, which excludes depreciation, accretion and severance and restructuring costs totaled $28,100,000 for the 2nd quarter compared to $28,900,000 in the prior year period. We incurred a one time benefit of approximately $900,000 in selling and marketing. Excluding this one time benefit, adjusted operating expenses would have generally in line with the prior year period.

Speaker 4

While we have historically amortized the majority of our commissions expense in proportion to the related revenue, there has always been a small indirect component that has been expensed as incurred under an ASC 606 practical expedient. With the significant growth of multiyear engagements, commissions relating to revenue extending beyond a 12 month period has also grown. While these amounts are not currently material to our financial statements, going forward these costs will be expensed in alignment with our related revenue counterpart in the same manner as the majority of our commissions have been. Year over year, cost of revenue increased primarily due to the aforementioned hiring and services, as did research and development costs to support the ongoing investment in our product platform. These were generally offset by lower technology operations as we continue to manage costs in relation to our declining wireless revenues and general and administrative costs, which benefited from favorable bad debt and savings from the cancellation of our Virginia lease.

Speaker 4

As a reminder, the expenses related to our Virginia lease will continue to impact severance and restructuring costs through the end of September, at which point we'll start seeing actual cash savings. Adjusted EBITDA in the 2nd quarter totaled $7,000,000 as compared to 8,500,000 dollars in the prior year period. This dynamic is more a reflection of the highly successful Q2 we had in 2023, stemming from strong bookings that led to significant license revenue. Our Q2 results in 2024 are generally in line with our expectations for the year, and we believe our robust pipeline has us positioned for a strong second half. We'll go on financial guidance in a minute.

Speaker 4

We ended the Q2 with $23,900,000 in cash, which grew from $23,300,000 in the Q1. Based on our current outlook, we anticipate annual free cash flow in the range of $25,000,000 to $27,000,000 and expect to exit 2024 with cash balances between $28,000,000 $30,000,000 dollars On a final note, as you have probably already seen in today's press release, based on our performance in the first half of the year, we are reiterating our financial guidance for 2024. This year, we expect total revenue to range from $136,000,000 to $144,000,000 with wireless revenue ranging between $72,000,000 to $75,000,000 and software revenue ranging between $64,000,000 to $69,000,000 and adjusted EBITDA to range from $27,500,000 to 32,500,000 dollars With that said, I will now turn the call back over to Vince.

Speaker 2

Thank you, Calvin. I'd like to again point out how proud I am with the strong performance our team was able to deliver in the Q2 and again believe these results position us well for the remainder of the year. We believe we are strongly and we and we maintain a source of strong recurring revenue in our wireless service line. We run the largest paging offering in the world integrated with our software operations and we've enhanced our paging platform and user devices to serve our core healthcare customer base. We believe with these 2 assets going for us, our best financial results are ahead of us and Spok's future is bright.

Speaker 2

Before I open the call up for your questions, I'd like to thank our shareholders for their support during our pivot. I'd also like to thank them for their participation in our annual meeting yesterday. As we reported, each of the items of business, which included number 1, the election of 6 nominees to our Board of Directors number 2, the ratification of the appointment of Grant Thornton LLP as our independent registered public accounting firm for the year ending December 31, 2024 and number 3, a non binding advisory vote to approve 2023 named executive officer compensation or SAOM pay, all passed with an overwhelming majority. For a full review of the final voting results, please see our disclosures in our quarterly report on Form 10 Q filed with the SEC. We appreciate your interest in Spok and we look forward to updating everyone again next quarter when we report Q3 results in October.

Speaker 2

Operator, you may now open the call up to questions.

Operator

Thank you. We'll now be conducting a question and answer Thank you. Our first question is from Eric Martinuzzi with Lake Street. Please proceed with your question.

Speaker 5

Thanks for taking my questions. Congrats on a solid quarter here. Just wanted to ask about, first of all, on the software side, it looked like pretty consistent performance as far as the 2019 deals over $600,000 in Q1 and you had the 19 over 600 actually 18 over 6 and one over 7. Was that in line with your expectations going into the quarter? Because as I recall, you talked about having had a phenomenal April.

Speaker 5

Just wondering how things played out in May June.

Speaker 2

Yes, it was in line with our expectations there. We had some of the deals that had a higher component of license software in the deal slip into the Q3 and then we had one of them close almost in the very 1st week of July. But in general, it was in line. The license part has been a little bit lumpy, but we have a very large Q3 and Q4 pipeline where we think we're going to be more than offsetting the Q2 shortfall in the license there.

Speaker 5

Yes. I wanted to just kind of underline that point you just made because we're looking at software operations bookings, 16%, at least at the 6 month point, we're down 16%. Obviously, we had a big win in Q2 a year ago. Are you continuing to back that double digit growth for the full year 2024 on the software operations bookings? Absolutely.

Speaker 5

Okay. All right. And then shifting over to the wireless side, I did see the churn least quarter on quarter, 0.8%. That's terrific. On a full year basis, we're down.

Speaker 5

The churn was about 7% and that was for basically Q2 as well as the first half of twenty twenty four. What's the expectation for the back half? Is this are we looking more like 0.8% or are we going to be creeping back up based on what you see in customer behavior?

Speaker 4

Yes. Hey, Eric, this is Calvin. Yes, we were really pleased with Q2. I would say, it would be tough to continue expecting 0.8%. I mean, that's a phenomenal number.

Speaker 4

I would definitely take it if we could get it, but I'd still expect full year to be in line with what we've been saying over the last couple of quarters, that 4%, 4.5%, 5% number will probably end the year in about that full range, maybe slightly better.

Speaker 5

Okay. And then on the wireless ARPU, it wasn't a huge step down, but I did notice a sequential step down, which I thought was strange just given we've got a price increase and then we had the next gen the Gen A pagers rolling out. What's behind that? It looks like about a nickel per unit on the ARPU step down Q1 to Q2.

Speaker 4

Yes, sure. So from an ARPU perspective, we kind of look at that in 3 trunks. 1 is kind of that standard component. The other part is the kind of pass through component. And the 3rd part, albeit pretty small, is a variable component.

Speaker 4

And that's going to be based on, believe it or not, things like overcharges still. And typically, we don't see a move from 1 quarter to the next. It's going to impact ARPU on a larger scale because generally there's offsets, but really it's coming from that variable piece. So nothing to worry about from that expectation. We've got price increases going through again here similar to last year in the middle of Q3.

Speaker 4

And so we expect that to start benefiting us here in the next couple of months.

Speaker 2

Yes. We also have a couple of very large Gen A pager sale deals queuing up here for the Q3 and Q4 too and that will have a positive impact on ARPU as well.

Speaker 5

Okay. So the expectation is those sequentially higher through the remainder of the year?

Speaker 4

Yes, that's right.

Speaker 5

Okay. All right. And then last question for me. The cash was up nicely here, Q2 versus Q1. You said we finish out the year at $28,000,000 to $30,000,000 Is that correct?

Speaker 4

That is correct.

Speaker 5

Okay. All right. That's it for me. Thanks.

Speaker 2

Thanks,

Operator

Thank you. There are no further questions at this time. I would like to hand the floor back over to Vincent Kelly for any closing comments.

Speaker 2

Okay, shareholders. Thank you again very much for your support. We look forward to updating you again here at the end of next quarter in October when we report our Q3 results. Everyone have a great day and a great evening.

Operator

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.

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