Vince Kelly - President and CEO Mike Wallace - CFO Hemant Goel - President, Operating Company

Good morning, and welcome to Spok's Third Quarter Investor Call. Today's call is being recorded. On line today, we have Vince Kelly, President and Chief Executive Officer; Mike Wallace, Chief Financial Officer; and Hemant Goel, President of Spok's Operating Company. At this time, for opening comments, I will turn the call over to Mr. Wallace. Please go ahead, sir.

Thank you, and good morning. Thank you for joining us for our third quarter 2017 investor update. Before we discuss our operating results, I want to remind everyone that today's conference call may include forward-looking statements that are subject to risks and uncertainties related 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. 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 on 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 in which we compete contained in our 2016 Form 10-K. Our third quarter Form 10-Q, which we expect to file later today; 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. With that, I'll turn the call over to Vince.

Thanks, Mike, and good morning. We're pleased to speak with you today regarding our third quarter operating results and what we believe was a solid performance for Spok. We are seeing the benefits from investments that we are making to enhance and upgrade our product development team and tools as well as our sales infrastructure and management. We believe these investments will yield significant future benefits with respect to our integrated communications platform, Spok Care Connect and our overall growth potential. During the quarter, we saw strong performance in a number of key operating metrics, including revenue growth, cash flow and expense management. We also made further progress towards transitioning Spok to a long-term growth model by delivering industry leading clinical communications solutions, noteworthy in the third quarter, with a more than 3% increase in total revenue from the prior quarter, as our software revenue growth outpaced the less-than-anticipated decline in our wireless revenue. This represents the second consecutive quarter of total revenue growth for Spok this year. Also in the third quarter, cash flow generation allowed us to execute against our capital allocation strategy while adding to our cash balances. The third quarter revenue was up more than 11% from the prior quarter as a result of a 25% increase in operations revenue and a more than 99% revenue renewal rate on maintenance contracts. Maintenance revenue of $9.7 million was up slightly from the prior quarter and more than 4% from the prior year. Similar to Spok's wireless revenue stream, software maintenance revenue is a recurring revenue stream that provides the company with a more stable revenue base. This quarter, nearly 80% of our revenue streams were recurring in nature. This strong revenue base provides us with the ability to make key investments on our business to enhance long-term…

Thanks, Vince. Before I review our financial highlights for the third quarter, I would as always, encourage you to review our third quarter Form 10-Q, which we expect to file later today, since it contains far more information about our business, operations and financial performance than we will cover on this conference call. As Vince noted, we were pleased with our overall operating performance for the third quarter and are confident in the momentum that our team is building as we finish the year. In addition to the substantial progress we made toward meeting our long-term business goals, we saw a solid sequential and year-over-year improvement in a number of key operating metrics. Revenue contribution from both software and wireless, combined with focused expense management, helped increase our quarterly operating cash flow, EBITDA and operating margins, as we continue to invest in our business for long-term growth. We also maintained an already strong balance sheet and continue to operate as a debt free company at quarter end. In the interest of time today, I will not review our third quarter performance on a line by line basis, since much of that information is contained in our news release, schedules and federal filings. If you have any specific questions about our quarterly financial results, I would be glad to address those during the Q&A portion of this call. Instead, I would like to focus this morning on four key areas that I feel will give a better idea of the drivers of our third quarter performance. These include revenue generation, expense management, balance sheet items, and finally, our financial guidance for the remainder of 2017. With respect to revenue for the third quarter, total revenue was $43.6 million, up more than 3% from the prior quarter. As Vince pointed out, this…

Thank you, Mike, and good morning. As previously outlined, our sales and marketing team delivered software bookings in the third quarter totaling $18.3 million. This performance was in line with prior year levels. Our momentum continues, and we believe our strategy is resonating with customers. Market recognition for the value of our enterprise healthcare communications platform is increasing, demonstrated by the level of conversations we have with customers and prospects, the volume of activity we see on our website, and most notably, by the stories behind our quarterly bookings. During the quarter, we welcomed nearly 20 new customers to the Spok family, primarily in the healthcare sector. Healthcare remains a key part of our growth and primary focus, comprising nearly 88% of overall bookings in the US for third quarter. Nearly a quarter of that business came from new hospitals and health systems that have never worked with us before. Among our new customers this quarter is a regional health system in Southern Canada. This customer has chosen Spok to replace manual on call scheduling processes and multiple disconnected applications in the contact center with an integrated communication platform. Their vision is a single solution with real-time information and single quick call transfers, getting staff subservice access to schedules and helping call agents provide a more efficient and streamlined service. This customer has selected Spok because of interoperability with other solution providers and our proven reputation for delivering value at other hospitals and health systems in the area. I'd also like to take a couple of minutes to highlight how one of our healthcare customer is improving its patient care coordination and performance metrics substantially using the Spok Care Connect platform. Our mid-size, Mid-Atlantic community hospital with over 3,000 employees and serving more than 1.5 million patients a year has…

Thank you, Hemant. Before we open the call up for your questions, I'd like to comment briefly on a couple of items. First, I want to update you on our capital allocation strategy and I also want to review our key goals and business outlook for 2017. With respect to our current capital allocation strategy, our overall goal is to achieve sustainable business growth while maximizing long-term stockholder value through our multifaceted capital allocation strategy that includes returning cash to our stockholders, key strategic investments to improve our operating platform and infrastructure and potential acquisitions that could provide additional revenue streams and broaden our portfolio of solutions. We expect to continue paying our quarterly dividend of $0.125 per share, $0.50 annually, for the foreseeable future. Through the first three quarters of 2017, Spok has returned approximately $23 million to our stockholders, including a special dividend that was declared in December of 2016 and paid in January of 2017. Next, as part of our capital allocation strategy, we're continuing our investments in product strategy and development where we believe we can generate attractive returns for stockholders as we pivot to a growth model in our software solution sales. As usual, we continue to maintain ample liquidity to support our working capital needs. Last, as we have previously outlined, while we remain open to the possibility of an acquisition, we've not yet executed for a variety of reasons. However, we continue to review candidates that could be a good fit for our platform and solution portfolio. We remain disciplined in our approach to ensure that any acquisition demonstrates both the synergistic and strategic value for Spok and is accretive in the short term. In the meantime, we will continue to weigh increases in our internal R&D expenditures against M&A opportunities. Finally, with regard to our key goals and business outlook, we believe our year-to-date performance and the momentum that we have generated positions us well for the fourth quarter and 2018. In order to take advantage of the large opportunity in our chosen markets, our business goals are simple and straightforward: number one, accelerating development of our products and services; number two, building a stronger infrastructure; number three, aligning resources and focus where most needed; and number four, increasing Spok's long-term growth potential. Wrapping up. Spok continues to build an industry-leading reputation. We remain committed to our core values of putting the customer first, providing solutions that matter, innovation and accountability. We believe our past results and future plans reflect those values and beliefs. At this point, I'll ask the operator to open the call up for your questions. [Operator Instructions]

[Operator Instructions]

Okay. Look, it doesn't look like there's any questions. And I know we had a bit of an unusual release this quarter and that we put our earnings results out Tuesday night instead of Wednesday night, the night before we talked to you. So we did answer some questions yesterday that were fairly generic questions. So I appreciate everybody's participation today. I appreciate any questions you want to get to me or Mike or Hemant with a follow-up. And look, we look forward to speaking with you again after we release our fourth quarter earnings in the first quarter of next year. Everyone, have a great day and a great fourth quarter. Let's all finish strong. Thank you.

This concludes today's call. Thank you for your participation. You may now disconnect