Good morning, ladies and gentlemen, and welcome to the Spok 2020 Fourth Quarter Investor Call. Today's call is being recorded. On line today, we have Vince Kelly, President and Chief Executive Officer; Mike Wallace, Chief Operating Officer and Chief Financial Officer. At this time, for opening comments, I'd like to turn the conference over to Mr. Wallace. Please go ahead, sir.

Good morning. Thank you for joining us for our 2020 fourth quarter and full year 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 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 in which we compete contained in our 2020 Form 10-K, 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, everyone. Thank you for joining us on today's call. Before I get started today, I just want to acknowledge that we are still in the midst of a global pandemic. Many of us have been sick, lost loved ones, have been otherwise adversely impacted by this crisis. And most of us are still waiting for a vaccine for the world to return to some sense of normalcy. The pressure and stress have fallen disproportionately on health care clinicians and staff. At Spok, we understand that and appreciate the sacrifices and commitment that caregivers continue to exhibit in the service of their fellow humans. We want to thank them for what they do each and every day. We were encouraged with our performance in the fourth quarter of 2020 and believe that the momentum generated by our team in the second half of the year positions Spok for sustained improvement in 2021 as we continue to market and sell our new cloud-native and integrated communications platform, Spok Go. Despite the many challenges that we encountered last year,as the result of a once-in-a-century global pandemic, our team was able to stay on task and focused breaking a 5-year record for selling new console licenses, helping our existing customers set up remote call center capability during the initial onset of COVID, and booking Spok Go deals in the second half of the year while building the pipeline into 2021. But before we get into the details of the quarter and the full year, I want to underscore where we are strategically with respect to our business plan and outlook. As we enter the new year, we believe we are poised to positively impact the healthcare landscape through our strategy of offering an integrated, cloud-native platform for mobility, clinical…

Thanks, Vince. Before I review our financial highlights for the fourth quarter and full year 2020, I would again encourage you to review our 2020 Form 10-K, which we expect to file later today, since it contains significantly more information about our business operations and financial performance than we will cover on this call. As Vince noted, 2020 was a challenging year for Spok from both a management and operational perspective as we continue to feel the profound impact that the global pandemic has had on our business and our customers. However, we believe that the operating environment continues to strengthen, and we were generally pleased with our overall performance in the fourth quarter as it clearly demonstrates the continued improvement from the first half of last year. As such, we believe that Spok's performance over the last 2 quarters of 2020 provides us with momentum as we head into the new year. While we are not satisfied with revenue levels last year, significant progress is made in meeting our long-term business goals. Sustained levels of software revenue in the second half of 2020 and continued record low attrition of wireless revenue, combined with continued focus on expense management, resulted in net cash provided by operating activities of $26.2 million. This was partially offset by investing activities of $14.8 million, specifically for capital expenditures and capitalized software development costs during the year. Spok was able to achieve this performance as we continue to return cash to our shareholders in the form of quarterly dividends of $9.8 million while also investing in our business for long-term growth. Our balance sheet remains strong with a cash, cash equivalents and short-term investment balance of $78.7 million at December 31, 2020, and we continue to operate as a debt-free company. We believe this provides…

Thank you, Mike. With respect to our key goals and business outlook, let me take a few moments to outline our outlook and strategy for 2021. As we've talked about in the past, about 5 years ago, we embarked on a transformation that was a tidal shift in our strategic direction for health care, our largest customer segment. This strategy pivot signaled a very intentional move from offering our customers point solutions or single-product solutions for call center software, alarm management and secure messaging to offering them a cloud-based, single, integrated communications and collaboration platform called Spok Go. Our decision to make this shift and focus on the Spok Go platform resulted from many reasons, including customer needs, as our health care customers were telling us they needed a more unified approach to communications across their enterprise; the large potential market opportunity as we further penetrate the multibillion-dollar health IT communications market; business simplification as we've been offering our customers many different products and multiple versions on several different platforms; and competitive positioning as we concluded that no one else offered a single, integrated, cloud-native platform for health care communications. In many respects, 2020 was the most challenging year for Spok in our history from both a management and operational perspective. The impact that this unprecedented pandemic has had on our customers has been profound, both in terms of the stress that is put on the doctors, nurses and hospital administrators as well as the financial impact that it has had on the health care industry in general. Already thin margins at these organizations were further challenged by shifting resources to deal with COVID-19, thus altering investment decisions. This has clearly impacted our customer spending priorities and ability to focus on a new platform solution over the short term. However,…

[Operator Instructions]. We'll take our first question from Ryan Vardeman with Palogic.

So, did I hear right that 90% of the revenue projected in 2021 is going to be from the legacy solution? So, with the $58.2 million to $67.2 million in guidance, can I assume that 10% of that will be from Spok Go?

Yes. Ryan, it's Mike. You're correct. I mean it's probably a little bit more than 90%. But until the Spok Go bookings continue to ramp, and then as you're aware, with a subscription model, it will obviously take time for that revenue to make its way through the P&L. For the majority of 2021, the overwhelming amount of revenue on the software side is going to continue to come from our legacy products. So I would say that it's about 90% to 95% would come from our legacy products.

Okay. So, kind of on the low end then, if you're using 5%, maybe just under $3 million maybe of Spok Go revenues. So, I mean I'm still trying to understand what the opportunity is that you guys see. You say the outlook remains strong. What are you kind of forecasting the annual recurring revenue to be from Spok Go by the end of the year and how big is the opportunity over time?

Yes. I mean, as far as ARR is concerned, yes, we're not going to publish that at this point. I mean we're still at the very early days as it relates to Spok Go. As we continue to report each quarter and get more visibility into that, we will certainly share that with investors. Vince, do you want to take the overall opportunity question?

We've looked at a lot of data, a lot of statistics in terms of the size and the scale of the potential market. It's huge. We're not -- it's in the billions. We're not the only one going after it. Yes, there's other competitors going after it, but there's plenty to be had for all of us. We think no one has the type of solution that we have in terms of what we've created will Spok Go, and there's going to be a long-term winner. Our luck probably could not have been worse to be rolling this thing out right as the pandemic struck because it's hard to get folks' attention. We've taken a look on a number of industry consultants, and we've looked at a lot of data in terms of what hospitals and healthcare systems have focused on in 2020, in dependency of this pandemic in terms of spending, and they’ve focused on things like anesthesia and respiratory equipment, patient monitoring and vital signs equipment, medication administration, lab equipment. Where we are, health care, IT, and enterprise software is kind of fifth on the list. And of that, if you look at the amount of institutions that have delayed capital budgets are uncertain right now, that's about 47%. So, almost half of the potential market is off the field in terms of rolling out a new cloud-based platform in 2020. However, the conversations that we've had with CIOs, the conversations that we've had with innovation partners like the Mayo Clinic partner we just announced indicate that there is a big need for what we're doing. Our Board member, Dr. Bobbie Byrne, who's at Advocate Aurora, indicates there's a big need for what we're doing and what we've created. So our goal is to continue to invest in this platform, continue to manage the business well, continue to pay the dividend, and then as we come out of this pandemic grow the Spok Go sales. And when you grow those bookings, generally, you're looking at a 3-year TCV. So, you're going to be essentially amortizing that booking into revenue ratably over a 36-month period. So, it's going to have less impact on revenue in the short term than the booking will. But over time, that will build a very nice recurring revenue layer.

[Operator Instructions]. We'll take our next question from Richard Dearnley with Longport Partners.

I got distracted when you were talking about R&D, the 40-ish percent of sales R&D going forward, now that Go is a go product. Could you just talk about where your R&D is going now? And what kind of spending levels are you thinking about for '21 and then the future, please?

Mike, do you want to take that or do you want me to? I'm happy to.

Yes, yes. I'll go ahead and start off. Right now, from an R&D perspective, as we have been socializing in the last couple of years, we expect it to level off at kind of current levels, which, today, is, call it, about $27 million to $28 million on a gross basis, so not including the capitalization of software development. So the cash spending on R&D is about $27 million to $28 million. And as Vince mentioned, the majority of that, call it 75% to 80% today is being spent on Spok Go with the balance being spent on our legacy products to keep them in the marketplace until we're able to fully make the transition to Spok Go. With that said, our expectation is over the next several years, and we don't like to give guidance after this upcoming year, but we feel pretty comfortable that things will -- from an R&D perspective, we'll be fairly flat with the levels that you're seeing today. Vince, I don't know if you want to add anything else.

You got it spot-on. I was going to say 80% to 75% of what we're spending today of that $27 million numbers on Spok Go, and the 20% to 25% is on our legacy solutions. And that will stay about there for 2021. That will change over time going forward. Obviously, more will be spent on Spok Go in the future and less on the legacy solutions as we make the transition.

Right. Okay. And is the goodwill write-off strictly a matter of the stock price?

Yes. So yes. I mean the driving factor in that analysis is the stock price. And as I stated in my prepared comments, we do that analysis each year at the end of October. That's our cadence, and that happened to be when we are at a 52-week low. Obviously, we were close, anyways. But as I said, if we looked at the share price in the first 6 weeks of this year, there likely would have been no impairment. So, I hate to be on these calls and blame anything on accounting, et cetera, but this is kind of one of the vagaries of accounting. It does not impact our view in any way, shape, or form on the outlook for the business and our projections. So...

Okay. I had thought that the goodwill was the outlook for -- I mean the impairment was related to the outlook for revenue and -- as contemplated revenue and earnings from the asset, not the stock price.

Yes. No. I mean you -- there's a number of ways you can look at goodwill impairment. That is one component of it. But the largest piece, the largest driving factor of that analysis is the share price to drive the market value as being, if you will, in a public company the most readily available determinant of value on a given date. So while your projections are a component of it, they carry far less weight than the actual share price.

[Operator Instructions]. We'll take our next question from George Melas with MKH Management.

I'm fairly new to the story, so I'd like to ask you a fairly sort of broad question which is about the legacy solutions or a number of point solutions. The Spok Go is primarily sort of a communication platform that can unify a number of its solutions on top of that. Can you talk about the transition from one to the other? How are your customers, particularly the customers that are existing legacy customers, how do they implement the communication platform and then basically use it for the various functionality of the point solutions that they already have?

Sure. Let me take that. Yes. I think I understand your question. So look we've sold 5 in the second half of 2025, 5 Spok Go solutions. Two of them were brand new. So that's obviously a much easier sale. Three of them were to legacy customers that had existing software. And what you have to do in really both cases is it's a communications platform that can do a lot of things. You can add workflows on it. It keeps on-call scheduling. You can do critical test results management. There's other workflows and service lines you can layer on to it. But you have to integrate with the platforms that are out there right now. Our legacy solutions are primarily in 3 categories. The first category would be contact center solutions, so we run the hospital call centers. The second category, our messenger solution is kind of an alerting -- clinical alerting solution. And the third category is just kind of mobile in general. Encompassing in all that is also our on-call schedule offering. So you can go to an existing customer. We can sell the Spok Go platform. We integrate that platform to a gateway with their contact center solutions. The platform replaces the critical alerting part. It replaces the on-call scheduling part. It replaces the mobile part, and we build on that into the future while integrating with their contact center solution. If they're a new customer and they're not an existing customer, then we disintegrate with what they have, whether it's their EHR, what other systems they would like to integrate with, to do their clinical communications. The biggest advantage of Spok Go is that we keep the directory, which is kind of the hospital hub, if you will, the source of truth in terms of where everybody is. So if you want to know somebody's in campus, west campus, Floor 6, Ward A, who's on-call, we keep all that data. How do they want to be reached? Do they want to be reached by a mobile phone app? Do they want to be reached on a pager, et cetera, so we keep all that data. And so that's really what the platform does, and it does that very elegantly, and it does that with the ability to scale with AWS is our partner on that. And that's different because it's cloud than the existing solutions that we sold over the years, which are legacy based, which are on-file servers that are installed in customers' data centers. I hope that helps provide some clarity.

Ladies and gentlemen, there's no further questions in the queue. I'd like to turn the call -- go ahead.

Yes. Thanks, everyone, for joining us this morning. We look forward to speaking with you again after we release our first quarter results in April. So everyone, have a great day, and stay safe.

Ladies and gentlemen, this concludes today's conference. We appreciate your participation. You may now disconnect.