Good morning, and welcome to Spok's First 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. At this time, for opening comments, I will turn the call over to Mr. Wallace. Please go ahead, sir.

Good morning, and thank you for joining us for our first quarter 2019 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 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. 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 2018 Form 10-K, our first quarter 2019 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 are pleased to speak with you today regarding our first quarter operating results from what we believe is a good start for 2019. First quarter results were in line with our seasonal expectations as we saw strong year-over-year performance in a number of key operating measures, including software revenue and wireless subscriber retention. We achieved these results as we continued to invest in our business by enhancing and upgrading our product development team and tools as well as our sales infrastructure and management. As we previously outlined, we believe these investments will yield significant future benefits in the form of what we believe is a game changer for future health care communication technology, the next evolution of our first of its kind Cloud Native enterprise communications platform, Spok Care Connect. We believe our efforts will result in an industry-leading real-time Cloud Native solution that will provide hospitals the most security, agility, breadth and depth of services. In the first quarter, we continued to operate profitably and as a debt-free company while enhancing our product offerings. We executed against our capital allocation strategy by continuing to make key strategic investments in our business while returning cash to our stockholders during the quarter in the form of dividends and share repurchases. We were particularly pleased with our record high level of software revenue. Additionally, we continue to see a more than 99% renewal rate on software maintenance contracts. Similar to our wireless revenue stream, software maintenance revenue is a largely recurring revenue stream that provides the company with a more stable revenue base. In the first quarter, approximately 78% of our revenue was recurring in nature. Now before I turn the call over to Mike to provide additional details on our financial performance, I want to…

Thanks, Vince. Let me give you a little more detail on our financial performance in the first quarter. I would again encourage you to review our first quarter 2019 Form 10-Q, which we expect to file later today, as it contains far more information about our business operations and financial performance than we will cover on this call. As Vince noted, we were pleased with our overall operating performance in the first quarter. Key drivers of our financial performance during the quarter were strong levels of software services revenue, software maintenance revenue renewal rates, which continue to exceed 99%, and the lower than anticipated levels of churn in paging units and wireless revenue churn. Continued operating expense management has also allowed us to continue to absorb the impacts of our planned investments in product, research and development expenses. Overall, we believe we are off to good start in 2019. I will review 4 additional key areas which drove our first quarter financial performance. They include: one, a review of certain factors impacting first quarter revenue; two, selected items which influenced first quarter expenses; three, a brief review of the balance sheet; and finally, an update on our financial guidance for 2019. As usual, if you have specific questions about these items or any of our quarterly financial results, I will be happy to address them during the Q&A portion of this morning's call. With respect to revenue for the first quarter of 2019, total GAAP revenue was $41.8 million compared to $43.1 million in the first quarter of 2018. We were particularly pleased with our ability to generate record high levels of first quarter software revenue as well as the continued slower erosion in our wireless business. Total first quarter software revenue of $19.2 million reflected a nearly 2% increase…

Thanks, Mike. Before we open the call to your questions, I'd like to comment briefly on several items. First, I want to update you on our current capital allocation strategy. Second, I want to talk about some recent key management additions. And finally, I want to briefly review our key goals for 2019. With respect to our current capital allocation strategy, our overall goal is to achieve sustainable profitable business growth while maximizing long-term stockholder value. Towards that end, the outpatient capital remains a primary area of focus. Our multifaceted capital allocation strategy includes dividends and share repurchases as well as key strategic investments that include augmenting our product development, operating platform and infrastructure. It also includes the potential for acquisitions, as we have discussed in the past. Even now, we have not been satisfied with valuation expectations for most of the targets we have reviewed, we'll continue to explore select M&A opportunities and conduct business due diligence as appropriate. However, for now, we have concluded that the build path, while taking a bit longer, is far superior to the bypath due to our ability to create an integrated state-of-the-art Cloud Native architecture for the future that we believe will result in an industry-leading platform for clinical communications and collaboration. Additionally, as we’ve previously stated, we remain committed to paying our $0.125 per share of quarterly dividend this year and make additional share repurchases as appropriate. We'll continue to invest in our company to benefit the future and create long-term stockholder value. We're a company in transition, and our management and board believes that financial flexibility over the long term is important to the success of our strategy. We review our capital allocation posture on a quarterly basis and remain comfortable that we are striking a reasonable balance in serving…

[Operator Instructions]. Our first question comes from Ryan [technical difficulty].

Sorry, I had you on mute. Thanks for taking my questions.

Sure.

Last quarter, we talked about having about a $2.5 billion opportunity for this communication and collaboration software suite. Is that an annual subscription revenue do you think for the whole opportunity?

Hey, Ryan, it's Mike Wallace. The roughly $2.5 billion to $3 billion is on a -- if you look at it from an on-prem license type of market. It's about $1 billion if you look at it on an annual subscription basis. So depending on what multiple you get to that annual subscription revenue, you can back into what you think the size of the market is. But the sort of $2.5 billion to $3 billion on the low end that we use from a market-size standpoint is based on an on-prem perpetual license type of business model.

Great. And so is your 2019 expectation still on the no bookings for the Care Connect platform? Or are you expecting bookings this month?

We're going to be selling the Care Connect platform in the second half of this year. We have our big summer sales conference in July, mid-July. We're prepping all sales reps at that conference for that who will be selling it in the middle of the year. But I don't expect significant revenue in 2019 from that. We'll get some bookings. But in terms of revenue, I'm expecting that we'll start seeing revenue coming in 2020 for that, Ryan.

Great. And then in your prepared remarks, could you double click on some examples of the progress you've made in each product development and sales strategy?

Yes. We're actually going to give a demo of that and quite a lot of detail at our May 15 Investor Day. And I think I saw that you're signed up for that. So I think we'll probably just defer to that after about three weeks, and we'll show you guys where we are with that.

Okay. And then the dozen new customers to the Spok family, what products did they purchase?

They purchased a variety of products. I mean our primary product that we've sold historically has been our contact center solutions as well as our mobile solutions. But they also buy our learning solution, which is messenger. Many of them do the whole suite. So it's a combination of those but primarily contact center and mobile.

Right. Thank you very much. Good luck.

Our next question comes from Ben Natter with Kent Lake.

Hi. I just wanted to ask about kind of what the outlook looks like for further operating expense or R&D or sales and marketing investment as you move through the rest of this year.

Yes. I mean we've taken our R&D expense, as you can imagine, up quite a bit over the last couple of years. We're at a level right now where I think we're pretty comfortable that, that thing is going to be relatively stable going forward. In other words, it's not going to be growing like it's been growing in the past. Yes, I think we had -- a few years ago, we're only spending about $13.5 million a year or so on R&D. And in 2017, that went up to over $18 million. And in 2018, it was up over $24 million. And now we do not foresee increases like that. We brought on the staff we needed to bring on. We're actually making ourselves more efficient now in that area going forward. We're doing some outsourcing and consolidating some outsourcing opportunities. We've confirmed it has got a very good reputation and some of our leadership on the technology side have worked with in the past. So you're going to see that line item stabilize, and it will stay about where it is as we complete the Care Connect cloud-based infrastructure platform.

Okay. So I mean, it seems like your -- if you just annualize your operating or your sort of expense base, it seems like you're…

I think you're spot on.

What about -- I mean, so look, to what degree customers or sales cycles being impacted by Care Connect? I know you had perhaps one of the softest billings quarters you've had in a number of years. Is that related at all to customers saying I want to wait for the new platform?

No, it's actually not. We had a big quarter in the fourth quarter. What tends to happen is the first quarter from a seasonal perspective tends to be a little bit light. We've got a really nice pipeline for the second quarter. We just landed a very large seven-figure deal that I might have referenced that in my prepared comments, just another very large seven-figure deal and sales people have given us a very good solid pipeline for the balance of the quarter and for the rest of the year. So I don't think you'll see that affect things as much. The rollout of our Care Connect platform in the cloud-based platform is going to take place over time, and it's really not going to start until the second half of this year. People aren't saying no because some of the upgrades and the technology that we're selling now are necessary in order to move to the cloud for our prospective CCS version 1.9 that we're selling out there right now. So I don't think it's going to hurt us at all. As a matter of fact, that might even help us.

Got it. So there's no pause or anything. It's just pure -- so you'll continue to be selling both platforms in the second half or just...

Oh, yes. Oh, absolutely. Yes. No, like Mike said, I think he reiterated our guidance. We're comfortable with our guidance.

Okay. And just one other question. I mean what has driven the sort of -- you had some increases in your accounts receivable over the last few years. What's primarily driven that?

Yes. I mean a part of it is the hospital sector is certainly slowing down in their payments these days. That's one. Second, we are selling a set of, which is a good thing, larger and more complex deals that tends to in some cases, stretch out the payment terms that we have historically been seeing a number of years ago. So all of those things -- and we have been increasing bookings not at the pace we would like but certainly increasing them over the years. So they all play into a function of AR increasing a bit.

Mike, excuse me. When did we -- I know at some point, we did a reclass too where we pulled credits out of AR, and it tended to bump up AR and intended to bump up AR and pump up AP. Was that in the first quarter?

Yes. So in the first quarter, there was about $2 million of credits that we reclassed into accounts payable. So if you actually look at our balance sheet, you'll see that accounts payable increased about $2 million. So…

That’s a one-thing…

That's a one-time thing, so that pushed up AR about $2 million.

Okay. Well, great. Thank you.

Thank you, Ben. From CFO, May 15 to Manhattan.

I’m in San Francisco. You’re guys are going to webcast there, right?

You can download.

Okay.

[Operator Instructions].

Operator, I don't see any more calls in the queue. So we'll go ahead and wrap up. I just want to thank everyone for joining us this morning, and we look forward to speaking with you again in May at our Investor Day if you can make it and after we release our second quarter results, of course, again in July. Thanks for joining us and, everyone, have a great day.

Thank you, everyone. This concludes today's teleconference. You may now disconnect.