Greetings. Welcome to Spok Holdings' Fourth Quarter 2023 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator instructions] Please note, this conference is being recorded. I will now turn the conference over to Al Galgano from Investor Relations. Thank you. You may begin.

Hello, everyone, and welcome. I am joined today by Vince Kelly, Chief Executive Officer, Michael Wallace, President of Spok, Inc., and Chief Operating Officer, and Calvin Rice, Chief Financial Officer. After a brief presentation by management, we will open up the call to your questions. 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 2023 Form 10-K 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.

Thank you, Al and good afternoon. Thank you for joining us for our fourth quarter 2023 earnings call. Let me preface my comments by saying how proud I am of our Spok team and our ability to generate very impressive performance in 2023, while staying true to our mission. I'm very pleased with the momentum our team has created, and I'm excited by our prospects and outlook. Since the strategic pivot we announced about two years ago, our focus has not changed; that is to grow revenue, generate cash, and return capital to our stockholders. For 2023, it was mission accomplished. We returned $25.6 million of cash to our stockholders while more than covering that total by generating in excess of $30 million of adjusted EBITDA. We were also successful in our stated goal to grow revenue. I'm proud to report that for the first time in Spok's history, we were able to grow consolidated total revenue with revenue growth for both wireless and software. We accomplished this by responsibly investing in our business to support growing revenue, while closely managing our operating expenses and capital expenditures. While the dividend level we declared when we announced our pivot in February of 2022 may have initially seemed high, we believe Spok has struck an excellent balance between making the necessary investments to fuel future growth, while continuing to generate cash flow and returning capital to our stockholders. We believe we are on a sustainable path to continue paying our quarterly dividend at these levels for the foreseeable future and are encouraged by our prospects. Today we'll share with you an update on how our strategic business plan is progressing in support of our goals, as well as our financial results for the quarter and full year. I'll start by reviewing the…

Thanks, Vince, and good afternoon. Thank you all for joining us for what we believe is another solid quarter and full year of results from Spok. We are pleased to report that we have continued to execute on our business plan, and in 2023 we generated GAAP net income of $15.7 million, or $0.77 per diluted share, which represents a sharp increase from breakeven adjusted GAAP net income in the prior year period. As you may remember, 2022 GAAP net income included a non-recurring and non-cash benefit of $21.9 million related to the release of previously established tax valuation allowance in alignment with our projections of future taxable income prior to the announced pivot and shutting down of development and deployment of the Spok Go product. Including that benefit, 2022 GAAP net income totalled $21.9 million, or $1.9 per diluted share. Importantly, we accomplished this bottom line performance while continuing to generate software operations bookings growth, which drove revenue in 2023, as well as significantly building our professional services and maintenance backlog levels to over $56 million, which will drive revenue in future periods. On a full year basis, software operations bookings totalled more than $30 million, up 22% from prior year levels. Also, total 2023 software bookings reached levels not seen for the past four years, and continue on a trajectory of growth following our pivot almost two years ago. Amidst all the progress in creating a solid financial platform and stockholder-friendly capital allocation strategy, we remain true to our mission of being a global leader in healthcare communications. We deliver clinical information to care teams when and where it matters most to improve patient outcomes as Spok enables smarter, faster clinical communications for our customers. And importantly, we continue to maintain our reputation as a thought leader in…

Thanks, Mike, and good afternoon, everyone. I would now like to take a few minutes and provide a recap of our fourth quarter and full year 2023 financial performance, which we reported earlier today. As always, I encourage you to review our 10-K when filed, as it includes significantly more information about our business operations and financial performance that we will cover on this call. Turning to our income statement, in 2023, GAAP net income totalled $15.7 million, or $0.77 per diluted share, compared to net income of $21.9 million, or $1.09 per diluted share in 2022. As previously pointed out, 2022 net income included a non-cash benefit of $21.9 million for the release of a previously established valuation allowance for our projections of future taxable income at that time. Adjusted for this non-cash benefit, 2022 net income would have been roughly breakeven. In 2023, total GAAP revenue was $139 million, up from revenue of $134.5 million in 2022, for the first time in our company's history. Revenue for the year consisted of wireless revenue of $76 million, up slightly from revenue of $75.6 million in the prior year, and software revenue of $63.1 million, up 7% from the prior year, reflecting the significant increase in software operations bookings, as well as higher professional services revenue, driven primarily by improvements in resource utilization. With respect to wireless revenue, 2023 performance continues to be primarily driven by improvement in average revenue per unit, or ARPU, which saw growth of $0.37 on a year-over-year basis. Approximately 20% of this increase was driven by incremental pass-through taxes and fees, with the majority of growth stemming from additional pricing actions taken in September. While we did see an increase in unit churn during the second half, relative to what we've experienced over the previous…

Thank you, Calvin. Before we open the call up to your questions, let me say again how proud I am of our entire Spok team and the results we posted for 2023. It is their efforts and dedication which provides confidence for our outlook and guidance for another strong year in 2024. We are focused on the opportunity in front of us in clinical communications. From a business configuration and strategy perspective, we believe we are strongly positioned to grow our franchise while returning capital to our shareholders. We have a long-term organic growth engine in Spok CareConnect. 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. We have enhanced our paging platform and user devices to serve our core healthcare customer base. We believe with these two assets going for us, our best financial results are ahead of us and Spok's future is bright. I'd like to take this opportunity to thank our stockholders for their continued support. I want to assure you that our primary focus remains on generating cash and increasing stockholder value. We are committed to our current dividend and capital allocation policy. I'd also like to tell everybody about a couple of events that Spok's management team will be participating in over the next few weeks. First, on Monday, February 26, this coming Monday, we'll participate in the opening Bell Ceremony for NASDAQ at their market site in Times Square. Next, on March 13, Spok will be presenting at Sidoti's Virtual Small-Cap Conference and hosting a series of one-on-one meetings with investors. I believe Spok is finally receiving recognition as a top-performing company among its peers and will continue to look for opportunities to tell our story to the investment community and focus on investor marketing activities, though we know the ultimate attraction will come as a result of our consistent and successful business execution. I believe today we've provided you an appreciation for some of the great things that are happening at Spok and the market opportunities that lay ahead of us. While we've shared our initial guidance with you for 2024, as we did in 2023, we will work to exceed those expectations and we'll update you each quarter. As I mentioned earlier in the call, we've started the year off strong and we look very much forward to speaking with you again in two months when we report our first quarter results in late April. That concludes our prepared remarks. At this point, I'll ask the operator to open the call up for your questions. We'd ask you to limit your initial questions to one and a follow-up, and after that, we'll take more questions depending on how much time we have. Operator?

Thank you. [Operator instructions]. There are no questions at this time. I would like to turn the call back over to management for closing comments. Oh, actually, we do have one now, and that is from Max Michaelis with Lake Street Capital Markets. Please proceed, sir.

Sorry about that, guys. I thought I was in the queue. Two questions from me. Nice guide, solid quarter. First one here is on software revenue for 2024. The high end of the guidance I think I see is 10%. Maybe kind of go through the software revenue. What gets us to that 10% kind of the puts and takes there?

Calvin, you want to take that?

Yes, I mean, it is going to be a similar mix to what you saw in 2023. In the last several years, I would not expect a significant change in mix. A big portion of that is going to continue to remain maintenance with those churn levels being critical. From an operational bookings perspective, it is going to be quite a bit of professional services, and that is all going to be glued together with the license component that continues to funnel in. I will say, and I will add to that, in that we have changed our software commissions plans this year to focus on new business and to focus on license, i.e. they make more for selling license and new business. As, license hits revenue much quicker than professional services, and it has got a higher margin associated with it. We are doing things in the business in terms of the drivers that will incent behavior that will yield to more profitable sales in the future. Our top seven software sales reps this past year in 2023 sold a combined $23.3 million worth of software. That compares to about $12.1 million in 2022 for the top seven sales reps. We are getting more out of each rep, and then what we are getting out of each rep is getting more profitable as we go forward. We are continuing to deliver more product upgrades and enhancements to our solutions and adding functionality, including bacon AI, into our capability with our voice products this year. That is also going to help the salespeople's job in terms of selling higher margin solutions. I think these are nice, good, conservative estimates we have given you. We are happy with these estimates, and we are going to work hard to beat them and do even better than that.

No, that is great. Then my second one is going to be, if we think about software bookings, and you mentioned there was a push-out in Q4 into Q1, I was wondering if you could quantify the amount that was actually pushed out. Then if we think about bookings for the year, I know you had mentioned you had expected bookings to be above that number of 30.1 for the year. You said you expected it to be well above that 30.1 for the year. Can we see double-digit growth out of software bookings again?

Yes, I expect we are going to see double-digit growth out of software bookings again. January was an enormous month. It is the biggest January we ever had in software bookings. You just do not know when that stuff is going to come in. We actually do a lot of work on our pipeline to try to quantify when the pipe is going to come in and when it is going to get delivered. Something can get on someone's desk and just not get signed, and then you are in a situation where you thought you had the deal and you did not get the deal. We have been working on a formula with our pipeline. Our pipeline is up to about $116 million right now. We added almost $100 million to it in the last year. We want to add up to $150 million this year. We take that pipeline and we qualify it. The deals that have been closed, essentially, just waiting to launch, we count all of those in our estimate and our projection. We have what we call deals that we qualify in the 90% category. Those are committed deals where we got all the paperwork in, but it is sitting on someone's desk. Historically, you would think you would get all of those, but you generally only get about 60% of those in that given period. We weight that by 60%. We take the deals that we consider 75% deals, and those are where we have been chosen as a vendor of choice. The bake-off has been done. We have won the bake-off. Paperwork is in process. We are exchanging red lines. We are doing contractual things. That 75% category, we only take about 35% of that. Then we have a category that is 10% to 50% that is in various stages of early completion. We generally only get about 10% of that. We add it all up and we do our best to try to zero in on exactly where we are going to come from a forecast perspective. In the fourth quarter, it just happened that some of that calculation was wrong and it slipped into January. We will continue building this algorithm. We will continue building this model and this pipeline analysis and try to get better at forecasting that in the future. We expect to have a good year this year. We expect to do a lot better than we did last year. We are already seeing that in the early returns.

Our next question is from David Wright with Henry Investment Trust. Please proceed.

Hi. Good afternoon. To follow up on Eric's questions and your comments about the sales force, can you talk a little bit about CoreConnect hosted, how that is going to ramp over the course of the year? Also, it is really interesting when you talk about the sales force, the incentives. Are you selling hosted by region, same sales force, dedicated sales force? Anything you can say?

Yes. Here are great questions. I will go in reverse order. It is a dedicated sales force we brought on just to focus on hosted. We had one up and running last year. We sold one in January. We have the paperwork for three others we are working on right now. It is starting. Understand, in that customer size stratification that Michael was walking through a little while ago, we are targeting the hosted at the very small hospitals. Some of these locations have 100 beds or less. It is not a big ticket item. It might be a $50,000 ticket. Over multiple years, it is not a $5 million ticket like we got in the second quarter of last year. They are small. They are building recurring revenue. It is wonderful from a subscription standpoint. That is a new offering for the company. It is really to allow these smaller customers that historically have not been able to afford a very expensive PBX and a very expensive premise-based solution that has multiple file servers and requires professional services to install. Is the hosted solution as robust as some of our very mature standalone solutions that are premise-based? No, but it is certainly functional for a smaller institution. We are already starting to see it start to take off.

Is it an incrementally significantly higher margin piece of business?

This is Mike. I think over time, once we have some critical mass, it should be something that is a fairly easy installation. The other thing that is interesting about this model is it is different from the revenue recognition related to our on-premise business. It is a subscription model at the end of the day. So, there is a subscription revenue stream that will come from this. As I said in my remarks, you saw that we have very, very little penetration in that small market, the under 200 beds. So, this really gives us an opportunity that we have never had before to attack them. So, this is going to take a little bit of time to roll out, but it is something that we think has legs ultimately.

[Operator instructions] Our next question is from George Melas with MKH Management. Please proceed.

Thank you, operator. So, my question -- good afternoon, guys, and great job in 2023. My question was basically exactly the same as the previous caller. So, I will try to elaborate a little bit. Maybe how many salespeople do you have that are dedicated to hosted? Do you also go through channels, or is it all going to be direct? And how do you handle the fairly high cost of sale on a percentage basis, given that it is a pretty small ticket item?

Well, first of all, we have got four sales reps essentially working on this, and we are offering this out of our Plano data center. So, we already had a data center in Plano, Texas, for the wireless service line for many years. They had put a few file servers in there, but not a very high cost operation in order to run this hosted solution. And we are marketing directly to customers. We know who the customers are that we want to target because we have that definitive database that has all 7,100 hospitals in the United States, and we have our Sales-force CRM. We know exactly what we have in terms of customers out of that database, and so it is pretty easy to target directly. And these folks are out there. They have done a number of presentations already. We have got a bunch more in the pipeline. George, this is a new offering. It is nascent. We do not have much in the way of our forecast for this right now, but it is something I think that bodes well for the future, and it is an exciting opportunity for us.

Great. And the main thing that you lead with is the console, is the directory?

Oh, yeah. The main thing we lead with is the console. We went out and did a marketing survey, and we had to pay a third party to do this for us. And we talked to large hospitals, we talked to small hospitals about brand awareness and other things. And it was really interesting because when we got to the smaller hospitals and we asked them, how likely are you to consider each of the following brands the next time you are looking for a clinical communications solution, Spoke got the top score. And this is not us conducting the survey. This is a third party. We beat Volt, we beat PerfectServe, we beat Vocera, we beat Tiger Connect, we beat Simpler, which was formerly Halo Health, and we beat Epic Chat. So we got the top score. So there is opportunity here for us, but we have to go out there and earn it. And I do not want to make promises on things until we – it is not our style to make promises on things until we have a track record and we see it. We like to report numbers that are ahead of what we have guided to. But we are all optimistic that this is going to be a good avenue for us in the future.

We have reached the end of our question and answer session. I will now turn the conference back over to management for closing comments.

Look, we really appreciate everybody's support. We appreciate you dialing in for our call today. We look forward to ringing the opening bell Monday morning. We hope you can tune in for that. And I think we really, really look forward to talking to you in about two months when we report our first quarter results. So everyone, thank you. Have a nice evening and a great day tomorrow.

Thank you. This will conclude today's conference. You may disconnect your lines at this time. And thank you for your participation.