Spok Holdings, Inc. (SPOK) Q1 2022 Earnings Report, Transcript and Summary

Greetings, and welcome to Spok Holdings, Inc. Quarter One 2022 Earnings Results Conference Call. At this time, all participants are in a listen-only mode. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Lisa Fortuna. Thank you and over to you.

Hello everyone, and welcome to Spok Holdings' first quarter 2022 earnings call. I am joined by Vince Kelly, President and Chief Executive Officer; as well as Mike Wallace, Chief Financial Officer and Chief Operating 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. 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 first quarter 2022 Form 10-Q and related documents, we expect to file 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.

Thank you, and good morning, everyone, and thank you for joining us this morning for our first quarter 2022 earnings call. Today, we will share an update on our strategic business plan that was announced back in February as well as our financial results for the quarter. I'll start by reviewing the agenda for today's call. The order will be as follows: we'll begin by providing an update on our strategic business plan; next, we'll provide an overview of our first quarter 2022 results; then, we will cover our current guidance for 2022 as well as an update on our one-time restructuring costs related to our strategic business shift; and finally, we'll conclude with a wrap-up. When we last reported in February, we shared with you a significant change in our strategic business plan in terms of our pivot away from Spok Go and toward a free cash flow-focused business model, featuring our wireless service line and our Care Connect solutions suite with the goal of returning capital to shareholders. This return of capital includes distributing our annual free cash flow, which will fund the majority of our dividend distributions going forward, supplemented by cash on our balance sheet. Spok is a company with no debt, a large cash balance, significant tax assets and is now, in a positive free cash flow posture going forward. On top of that, our current dividend yield is in excess of 16% and we expect to pay the current level of dividend well into the future. Today we will share with you how it's going. I know it's only been about two months but we are performing well against our internal targets and we expect to continue delivering results within our guidance. Additionally, I'd say morale is higher than it has been in the last couple of years. Our employees and managers are seeing sales wins and momentum, which have continued into April including yet another very large contract value deal booked just yesterday. And we continue to see solid pipeline growth. Everyone knows what's at stake and what can happen if we can arrest the top line revenue erosion and grow. We're a long way from that right now but moving in the right direction. We realize there are risks, new competitive threats and other challenges to overcome, but we are encouraged by our progress in the early innings of our new plan. Today, we'll share some of those details and why they provide us optimism about the future. The wind-down of Spok Go and the related expense is on track and is largely complete. We're continuing to work closely with Spok Go customers to ensure that this transition is as smooth as possible. Certain Spok Go customers are in the process of adopting our Care Connect suite and Spok Mobile solutions as we make this transition. Additionally, the elimination of associated costs from Spok Go and the streamlining of management and employee headcount, has largely been completed. The majority of the employees impacted left the company in mid-April. I once again want to thank these employees for their many contributions and service to Spok over the years. Following the announcement of our strategic business plan pivot, we reduced the size of our Board of Directors to six members to better align the Board's size, cost and composition with the company's recently announced business strategy. As a result of the reduction in Board size, four incumbent directors will not stand for reelection at the company's 2022 Annual Meeting of Stockholders. Those directors are: Blair Butterfield, Stacia Hylton, Matthew Oristano, and Chair Royce Yudkoff. All current directors will continue to serve their full terms, which expire at the annual meeting on July 26. I'd like to sincerely thank these departing directors for their many contributions over the years. The perspectives and experience these directors have contributed has been extremely valuable and we wish them great success in their future endeavors. During the first quarter, we announced that the University of Rochester Medical Center selected Spok Care Connect to replace the medical center's existing operator console and to support its clinical communications needs at flagship Strong Memorial Hospital. The University of Rochester Medical Center will deploy Spok's Smart Console for operator services and Spok Messenger for critical connectivity and to support vast clinical response. The organization will rely on Smart Web to provide one powerful directory that will serve as a centralized source of accurate contact data for all roles across the hospital. Our secure, proven solutions will support the medical center's clinicians and staff by ensuring the information they need is delivered efficiently and accurately. We're deeply gratified to welcome the University of Rochester Medical Center to the Spok family and we will continue to explore opportunities to extend services into other areas of operation at the medical center. This new customer victory and several other large deals we have closed recently, reinforces our commitment to maximizing revenue and cash flow generation from our established Spok Care Connect suite, including Spok Mobile and our wireless service offerings, and as I mentioned, we have more in the pipeline. As a reminder, our company has an excellent track record of driving revenue from these business lines and enjoys a significant market leadership position in narrowband personal communication services and hospital call center solutions. We will continue to invest in these important and valuable franchises in order to continue our long-standing relationships with the nation's leading health care providers. Finally, we announced today in our earnings release, that Spok has concluded the strategic alternatives review process we publicly commenced on September 3, 2021. At this time, Spok has no actionable options for a sale of the company and the Board determined, it would be in the best interest of all shareholders for the company to be fully focused on executing our strategic plan as a stand-alone company. Since initiating the strategic review, the Board along with our financial and legal advisers conducted an exceptionally thorough process and reached out to and engaged with a wide range of strategic and financial parties. The Board remains fully committed to maximizing value for all shareholders. And with that, I'll now turn the call over to Michael Wallace, our Chief Financial Officer and Chief Operating Officer, who will review our first quarter financial results. Mike?

Thanks, Vince, and good morning everyone. I would like to now take a few minutes and provide a recap of our first quarter 2022 financial performance, which we reported earlier this morning. I encourage you to review our 10-Q when filed, as it contains significantly more information about our business operations and financial performance than we will cover on this call. For the first quarter of 2022, total GAAP revenue was $33.8 million compared to revenue of $36 million in 2021. Revenue for the quarter consisted of wireless revenue of $18.8 million and software revenue of $15 million. With respect to wireless revenue, first quarter 2022 revenue of $18.8 million compares to $20.1 million in 2021. This performance reflected a lower level of pager unit churn on a year-over-year basis. In fact, the net pager decline during the first quarter was 1.1%, one of our lowest quarterly declines. As we have stated previously, these continued strong trends in our wireless business are being driven by the combination of solid gross additions from our sales organization, continued minimization of churn with existing customers and maintaining stable unit pricing. Furthermore, as we progress in 2022 and 2023, we expect our new GenA pager, which was announced in late 2021, to be a significant factor in minimizing churn and maintaining average revenue per unit or ARPU. Moving on to software. Software revenue for the first quarter was $15 million, representing a 5.9% decrease from 2021. This decline was largely driven by our prior focus on Spok Go, which has now changed going forward. First quarter software maintenance revenue, the largest component of software revenue was $9.2 million versus $9.4 million in the same period of the prior year or 1.7% lower. Maintenance revenue being flat to down, continues to be in line with our expectations, given gross churn and uplift levels remaining consistent with prior quarters. Regarding our professional services revenue, which was $3.3 million versus $4.4 million in the first quarter of 2021 and as we stated in our earnings call in February related to our 2022 financial guidance, we assumed an intentional reduction in professional services revenue to better align with our current backlog and to drive a higher rate of net cash flow in alignment with the shift in our strategic business plan. And again, it's important to remember that professional services has not historically driven meaningful cash flow on a stand-alone basis, but more so has been viewed as an opportunity to expand our licensed footprint, through customer engagement, as well as to fulfill upgrade obligations under our maintenance contracts, which is critical in maintaining our existing customers. And lastly, license and hardware revenue was $2.4 million compared with $2.2 million in the same period of the prior year or 11.3% higher, as we saw a higher bookings mix of license and hardware as we begin to refocus solely on Spok Care Connect suite across the organization and begin the plan to bolster our Care Connect suite product line, through directed R&D spend. Operating expenses in the first quarter of 2022 totaled $42.5 million and includes $4.5 million in severance and restructuring costs, compared to $37.8 million in operating expenses in the first quarter of 2021. First quarter adjusted operating expenses which excludes depreciation, amortization, accretion and severance and restructuring costs and includes capitalized software development costs totaled $37.1 million, compared to $38 million in the first quarter of 2021. And it is important to remember that although we made the announcement last quarter of the pivot to our new strategic plan, the majority of ongoing payroll costs primarily related to employees no longer with us continued through mid-April due to employee notification and adherence with the Federal WARN Act. Given this performance, free cash flow, defined as the net change in cash from December 31st 2021 to March 31st 2022, excluding the payment of our dividend of $6.5 million in March was a negative $6.7 million for the first quarter of 2022, compared with a negative $4.4 million in the same quarter of 2021. Clearly those ongoing costs previously mentioned have the effect of depressing our free cash flow and we expect those to reverse going forward. As such, given the material changes pursuant to our new strategic business plan, it is important to understand the pro forma cash impact to the negative $6.7 million in free cash flow just mentioned for the first quarter. Had these strategic changes been made as of January 1st 2022, including the cash impact for terminated employees of approximately $5.5 million and non-payroll Spok Go costs of approximately $1.1 million, there would have been an incremental $6.6 million cash benefit to free cash flow in the first quarter of 2022 resulting in essentially breakeven free cash flow. And additionally from a free cash flow perspective, Spok's cash outlays for year-end accruals made in the first quarter each year for 2022 totaled approximately $5.5 million. And thus our cash balances excluding the payment of dividends historically build in the second through the fourth quarters and we expect this trend to continue. Going forward in 2023 and beyond, this first quarter dynamic will continue, albeit at reduced levels due to the lower number of employees in the company. Now turning to our guidance for 2022, as a reminder the figures I am going to discuss today are included in our guidance table, in the earnings release and are unchanged from the previously provided 2022 financial guidance given during our call in February. However, just to reiterate, we expect total revenue to be in the range of $126 million to $139.2 million, of which we expect wireless revenue to range between $71.6 million to $77 million where the midpoint reflects an annual revenue attrition rate of approximately 5.7%, when compared to 2021 consistent with our recent trends. Software revenue is expected to range from $54.4 million to $62.2 million where the midpoint reflects annual revenue attrition of approximately $5 million from 2021. We expect adjusted operating expenses for the full year of 2022 to be in the range of $118.8 million to $128.6 million and CapEx will be in the range of $3.4 million to $4.2 million as the majority of CapEx is related to our wireless business which is unchanged from previous years. As mentioned earlier, fiscal year 2022, continues to remain a transition year for Spok, given the implementation time required to execute our strategic shift to a cash flow-focused model. However, we anticipate that this transition will be completed by the end of 2022 with the majority of reductions already behind us. With that said we expect the company to be cash flow positive by the third quarter of 2022, cover the majority of the third and fourth quarter dividends through free cash flow generation and will reach the full cash flow run rate by the end of 2022, as we head into 2023. Upon the full execution of the pivot of our strategic plan, we continue to expect annualized cost savings to be between $40.3 million to $44.3 million on a pro forma basis. So as we move through this transition, we will continue to update shareholders on our progress. Also the Board, along with its Capital Allocation Committee, will continue to assess the best way to drive shareholder value from a capital allocation standpoint. Now, turning to our estimates for severance and restructuring costs for 2022 as previously provided on our call in February. As you can see from the slide, we have lowered our range of severance and restructuring costs from our initial estimates of $6.4 million to $10.2 million down to $6.2 million to $7.5 million. The reduction in the high end of the range is largely a result of our current estimates related to Spok Go, for actual terminations and exit costs which have been largely completed at this point. Also, it is important to note that while the high end of the range specifically for severance and personnel costs remain unchanged the low-end of the range has been increased. The reason for this change is the number of employees that voluntarily left the company prior to their actual termination date and thus would not have required severance payment was lower than expected. With that, I'll turn the call back over to Vince for some closing comments. Vince?

Thanks, Mike. I want to remind investors as we progress through our pivot, we have a long history and track record of running this company for free cash flow and returning capital to shareholders. This gives us confidence we will be successful in the execution of our strategic pivot. Since our creation in 2004, Spok has returned $630 million of our free cash flow to stockholders through a combination of dividends and share repurchases. We will continue to do so. As I mentioned upfront, our current dividend yield is very attractive and we expect to be able to pay that level for the foreseeable future as we focus on our new plan. Capital returned to stockholders in the first quarter of 2022 totaled $6.5 million in the form of the company's regular quarterly dividend of $0.3125 per share. This is an increase of $3.8 million over the first quarter of last year reflecting the new Spok dividend policy. As always the declaration and payment of future dividends is subject to the Board's discretion and will depend on financial and legal requirements and other considerations. As a reminder, the Board has authorized a share repurchase program of up to $10 million of the company's common stock. This authorization allows the company to return additional capital to shareholders by opportunistically repurchasing the company's shares. We will continue to evaluate our capital allocation strategy as Spok transitions to our strategic pivot during 2022 and beyond. Our balance sheet continues to remain strong with the cash, cash equivalents and short-term investment balance of $46.3 million as of March 31, 2022. We continue to operate as a debt-free company. Additionally, I'd like to remind everyone that we continue to remain committed to our mission of being a strategic partner of choice for enterprise-grade clinical communications and patient care coordination. This commitment has allowed Spok to create a significant market position with long-standing relationships with the nation's leading healthcare providers. Spok has a best-in-class paging network, currently the largest in the United States, which continues to generate strong results. And we now have a new exclusive alphanumeric messaging device in our GenA pager product. Additionally Spok continues to provide a valuable and critical service to our customers delivering important information to care teams when and where it matters the most to improve patient outcomes. As previously discussed, our Spok Care Connect solutions provide a suite of products with potential for new license sales and a valuable maintenance stream. Maintenance continues to provide a foundation under our legacy software business and it's important to maintain as we quickly transition to focus on cash flow generation. Our pivot away from Spok Go and our new focus on our Care Connect suite of solutions now allows us to invest significantly more in our legacy products as reflected in our guidance. We believe this will drive future sales and upgrade opportunities and improve our results going forward in this important business line, while generating free cash flow on a go-forward basis. We have a world-class customer base and a large market share in healthcare contact center solutions and we believe this represents a significant opportunity for the future. Spok continues to demonstrate a very predictable revenue base with over 80% of our revenue being recurring in nature coming from either our legacy wireless offerings or software maintenance contracts. So in closing, I'd like to thank everyone for joining us today. We appreciate your support and interest in Spok and we look forward to updating everyone again next quarter. If you have any questions please reach out to our Investor Relations team and have a great day and please stay safe and healthy. Thank you. End of Q&A: