Spok Holdings, Inc. (NASDAQ:SPOK) Q2 2022 Earnings Conference Call July 28, 2022 8:30 AM ET
Company Participants
Lisa Fortuna – Managing Director, Alpha IR Group
Vince Kelly – President & Chief Executive Officer
Mike Wallace – Chief Financial Officer & Chief Operating Officer
Conference Call Participants
Operator
Greetings, and welcome to Spok Holdings Second Quarter 2022 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded.
It is now my pleasure to introduce your host, Lisa Fortuna. Thank you. You may begin.
Lisa Fortuna
Hello, everyone, and welcome to Spok Holdings’ second 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 on 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 second quarter 2022 Form 10-Q and related documents 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.
Vince Kelly
Thank you, and good morning, everyone, and thank you for joining us this morning for our second quarter 2022 earnings call. Today, we will share with you an update on how our strategic business plan is progressing as well as our financial results for the quarter.
I will start by reviewing the agenda for today’s call. The order will be as follows: We will begin by providing an update on our strategic business plan; next, we will provide an overview of our second quarter and year-to-date 2022 results as well as our year-to-date pro forma results; then we will cover our updated guidance for 2022 as well as one-time restructuring costs related to our strategic business shift; and finally, we will wrap up and take your questions.
Since the implementation of our strategic business plan 5 months ago, we’ve been operating a cash flow business model featuring our wireless service line and our Care Connect suite software solution offerings with the goal of returning capital to shareholders. I’m happy to announce today that our strategic business plan is tracking well ahead of schedule. The streamlining of management and employee headcount that we had previously announced on February 17, is now substantially complete.
Our 60-day WARN Act notification period ended in mid-April, so we had at least 2 months in the second quarter in our new operating posture. Our operating expenses and capital expenditures are coming in favorable to our plan, and we are confident they will continue to do so in the second half.
We’ve delivered on our strategic objectives of driving revenue from our two service lines and investing in a targeted and limited manner such that we can return capital to shareholders. We expect to continue to do so. With our renewed focus on our Care Connect suite of software solutions, we’ve been able to increase year-to-date software bookings by 23% year-over-year with 32 of these deals worth over 6 figures each.
Most of this positive variance came in the second quarter as our software sales force was focused 100% on our Care Connect suite solutions with no other distractions. Additionally, our customers have reacted very positively to our plans for investing in and enhancing our contact center, alerting and mobile solutions that they already use, know and love. They’ve welcomed this news with open arms and importantly, with sales orders.
Additionally, our sales representative have been able to visit more sites in person this past quarter relative to the last 2 years, and that is having a positive effect. In short, our focus has resulted in our second quarter software bookings increasing by 51% over the same period a year-ago, and there’s plenty more in the pipeline.
And while it takes time for these bookings to complete implementation and show up in revenue, we believe this is a good leading indicator for the health of the business. And as you’ll hear the details from Mike in a couple of minutes, our wireless business continues to achieve plan with a record low unit decline. Plus, we’ve rolled out our new encrypted alphanumeric pager we have named the GenA.
Our goal here is to rejuvenate interest and reduce resistance to pagers. And while we’re in the early stages so far so good. We have approximately 2,400 units in service and growing. They’re commanding a much higher ARPU in the market due to their increased feature set that includes improved screen resolution, battery life and multiple other features, functions and benefits. Our wireless sales team is excited about this offering and our customers are, too. We expect to report further progress on this initiative as the year progresses.
You will also hear from Mike with respect to our year-to-date pro forma results, but the high level answer is, we would have generated well over $10 million in adjusted EBITDA, which is defined in the earnings release tables. This is our non-GAAP calculation of cash flow generated by the company before net working capital items in the first half of the year, assuming we had implemented the plan on January 1.
Our expectation reflected in our guidance is to achieve plan this year and continue making progress on cash flow generation and revenue stabilization into 2023 and beyond. This will take time, but we’ve gotten off to a great start. We expect to generate more cash this year than we anticipated when we announced the plan in the first quarter. And we continue to make progress building our partnership relationships and opportunities.
Subsequent to the end of the second quarter, we signed a distribution agreement within technology, a leading value-added IT distributor, driving technologies into the Pacific Asia IT channel. In technologies distribution ability to provide pre and post-sale support implementation services and a 24/7 support desk made the company a perfect distribution partner for Spok. We believe that in technology and its partner network will enhance Spok’s ability to provide meaningful outcomes for our clients in the Asia Pacific region.
Now as you know, we announced our strategic business plan in February. We increased our quarterly dividend payment by 150% from $0.125 per share to $0.3125 per share. We are returning $1.25 per share this year in dividends to our shareholders and we’re already halfway there.
Since the implementation of the plan in February, $12.7 million in cumulative capital has now been returned to Spok shareholders. This return of capital includes distributing our annual cash flow, which will continue to fund the majority of our dividend distribution going forward, supplemented by cash on our balance sheet. 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.
At this time, the company has not repurchased any shares using the Board authorized share repurchase program of up to $10 million of the company’s common stock. Along with our advisers, we will continue to evaluate our capital allocation strategy as Spok continues its transition to our strategic pivot this year and beyond.
Fiscal year 2022 continues to remain a transition year for Spok given the implementation time required to execute and operationalize our strategic shift to a cash flow-focused model. Again, the good news is we’ve gotten off to a great start.
As we previously mentioned, we continue to anticipate that this transition will be completed by the end of 2022, with the majority of our rightsizing already behind us. We expect the company to be adjusted EBITDA positive going forward and will cover a significant portion of the third and fourth quarter dividends to cash flow. We will reach our full cash flow run rate by the end of 2022 as we head into 2023. As we move through this transition, we will continue to update shareholders on our progress.
Spok has an excellent track record of driving revenue from our business lines and enjoys the market leadership position in hospital call center software solutions in narrowband personal communication wireless services. We have over 2,200 health care organizations as customers, representing the who’s who of hospitals in the United States. We’ve built our solutions over many years and have long standing valuable customer relationships.
We honor and respect our customer service and providing world-class health care. We value our place in their communications ecosystem. The overwhelming majority or over 80% of our revenue is recurring in nature. We are a company with no debt, which provides us significant flexibility.
We continue to remain focused on investing and enhancing our Integrated Care Connect ecosystem in order to continue our long standing relationships with the nation’s leading health care providers. We believe these attributes combined with our dedicated and committed employee base are what allows us to generate significant cash flow into the future and return capital to our shareholders.
And with that, I will now turn the call over to Mike Wallace, our Chief Financial Officer and Chief Operating Officer, who will review our second quarter financial results. Mike?
Mike Wallace
Thanks, Vince, and good morning, everyone. I would now like to take a few minutes and provide a recap of our second quarter and year-to-date 2022 financial performance, which we reported yesterday. I encourage you to review our 10-Q when filed as it includes significantly more information about our business operations and financial performance than we will cover on this call.
For the second quarter of 2022, total GAAP revenue was $33.7 million, compared to revenue of $35.7 million in 2021. Revenue for the quarter consisted of wireless revenue of $18.7 million, which was down $5.8 million — 5.8% from $19.9 million and software revenue of $15 million, down 5.4% from $15.9 million, largely in line with our expectations.
With respect to wireless revenue, second quarter 2022 performance was driven by continued — a continued decline in pager unit churn on a year-over-year basis. In fact, the net pager decline during the trailing 12 months was 3.9%, another record low. And on a sequential basis, units and service declined by only 3,000 units or 0.4%. As a result, wireless revenue for the second quarter remains solid, declining 5.8% compared to the prior year and in the range of our expectations.
With the monthly paging revenue component of wireless, which represents 97% of overall wireless revenue, declining by only 5.2% on a year-over-year basis. The remainder of wireless revenue relates to product sales, primarily through lost pager fees, which are one-time in nature and are far less impactful to the ongoing value of this business.
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 as well as stable unit pricing or average revenue per unit, or ARPU, was $7.23 for the quarter versus $7.25 in the year ago period when adjusted for approximately $0.07 on of decline attributable to decreases in universal service fund revenue.
These fees are charged to customers based on quarterly rates set by the FCC and can fluctuate from one quarter to the next. These fees do not materially impact the bottom line as they are collected from customers to offset costs owed to the FCC. Additionally, ARPU was favorably impacted by our previously announced GenA pager, which is now in the early stages of being sold to customers. We expect that the GenA pager will be an important factor in our ability to minimize future unit churn and ARPU degradation.
On a year-to-date basis, wireless revenue saw similar dynamics to the second quarter as just discussed, declining 6.1% compared to the prior year and again in the range of our expectations. With the monthly paging revenue component of wireless declining only 5.3% on a year-over-year basis.
Turning to the second quarter software revenue. Specifically, maintenance revenue, which is the largest component of the software revenue, was $9.2 million versus $9.6 million in the same period of the prior year or 4.2% lower. As we’ve discussed in previous quarterly calls and as we continue through this pivot, with the focus being brought back to our Care Connect suite software products.
Our expectation is for maintenance revenue to be down slightly year-over-year, given gross churn and uplift levels remain consistent with prior quarters. However, with higher expected license bookings as we move through this pivot, licensing will serve to drive inflows to maintenance revenue as license bookings provide the basis for new maintenance. Professional services revenue was $3.3 million versus $4.9 million in the second quarter of 2021.
As we stated in our earnings call in February related to our 2022 financial guidance, we assumed an intentional reduction in services revenue, the way planned reduction in personnel to better align with our current backlog and to drive a higher rate of net cash flow in alignment with the strategic shift in our business plan.
And again, it’s important to remember that services has not historically driven meaningful cash flow on a standalone basis, but 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.
Lastly, license and hardware revenue was $2.5 million compared with $1.4 million in the same period of the prior year or 79% higher, as we saw higher bookings in the second quarter and a solid mix of license and hardware in those bookings. On a year-to-date basis, total GAAP revenue was $67.5 million, compared to revenue of $71.8 million in 2021.
Wireless revenue was $37.5 million compared to $40 million, reflecting net paging revenue churn in line with the trends seen in the second quarter, and year-to-date software revenue of $30 million compared to $31.8 million in the prior period. This was driven by maintenance revenue being down 3% on a year-over-year basis, professional services down 27.7% due to the intentional reduction in professional services resources to better align with backlog and which was offset by higher license revenue of 53.3%, driven by the strong bookings during the first half of the year.
Second quarter adjusted operating expenses, which excludes depreciation, amortization and accretion of $0.9 million, and severance and restructuring costs of $0.5 million, totaled $30 million in the second quarter compared to $37.4 million in 2021. And on a year-to-date basis, adjusted operating expenses were $67 million compared to $75.4 million.
As Vince mentioned earlier, the streamlining of employee and management headcount reduction is now substantially complete, and we are now in the final stages of paying the severance costs associated with our strategic business plan.
Adjusted EBITDA, which is defined in our earnings release tables and represents EBITDA before stock-based compensation expense, impairment of intangible assets, effects of capitalized software development costs and including capital expenditures is our non-GAAP calculation of cash flow generated by the company before net working capital items.
In the second quarter, adjusted EBITDA was a positive $3.7 million compared with a negative $1.5 million in the same quarter of 2021 and reflects the progress made to date with our strategic pivot. On a year-to-date basis, our adjusted EBITDA was negative $3.6 million compared to a negative $2 million in 2021.
And in a few minutes, I will walk you through our pro forma year-to-date adjusted EBITDA results which will exclude the onetime costs related to the strategic pivot. But with our strategic pivot progressing as expected, our adjusted EBITDA that we have seen over the past several quarters has begun to reverse and improve. We expect this more normalized trend to continue going forward.
Next, I would like to discuss our year-to-date pro forma impact with a negative $3.6 million in adjusted EBITDA previously mentioned. Had the strategic changes that we made and in effect as of January 1, 2022, our adjusted EBITDA would have been $14.4 million higher for the first 6 months of 2022. This $14.4 million includes severance and restructuring costs of approximately $4.9 million, costs related to personnel reductions of $6.8 million, non-payroll Spok Go costs of approximately $1.3 million, and approximately $1.4 million in other costs. Inclusive of these adjustments, our year-to-date adjusted EBITDA for the 6 months ended June 30, 2022, would have been $10.8 million.
Now turning to our guidance for full fiscal year 2022. As a reminder, the figures I’m going to discuss today are included in our guidance table in the earnings release and have been updated from the previously provided 2022 financial guidance in our February and April earnings calls.
We now expect total revenue to be in the range of $130 million to $136 million, of which we expect wireless revenue to range between $73.5 million to $75.5 million. Software revenue is expected to range from $56.5 million to $60.5 million.
We expect adjusted operating expenses for the full year of 2022 to be in the range of $123.3 million to $126.1 million, and CapEx will be in the range of $3.2 million to $3.9 million, with the majority of CapEx related to our wireless business. These changes to our 2022 guidance serve to significantly narrow the ranges previously provided and largely indicate midpoints consistent with our original guidance.
Now turning to our forecast for restructuring costs for 2022. As you can see from the slide, we’ve further lowered our range for total restructuring costs from $6.2 million to $7.5 million in the first quarter to our updated range of $6 million to $6.5 million. Breaking this down, we now expect severance and restructuring costs to be in the range of $5.5 million to $5.8 million, and contractual terminations to be in the range of $0.5 million to $0.7 million. This narrowing of the range reflects our comfort that these costs are largely behind us at this point.
With that, I will turn the call back over to Vince before Q&A. Vince?
Vince Kelly
Thanks, Mike. I’d like to end by reminding 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 longstanding relationships with the nation’s leading health care providers.
Spok has a best-in-class paging network, currently the largest in the United States, which continues to generate strong results. Additionally, Spok continues to provide a valuable and critical service to our customers, delivering information to care teams when and where it matters 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.
As reflected in our guidance, we are continuing to invest more in our legacy products as we progress through our strategic pivot. We believe this will drive future sales and upgrade opportunities and improve our results going forward in this important business line, while generating cash flow on a go-forward basis.
We have a world-class customer base and a large market share in health care 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.
This gives us confidence that we are not only on the right path forward for executing our strategic pivot, but also to maximize value for all shareholders. we believe that going forward, we will return significant cash flow to our shareholders and that our current stock valuation represents an attractive opportunity for share appreciation as well.
Now with that, I will turn the call over to the operator for Q&A. Operator?
Question-and-Answer Session
Operator
Q –
A –
Vince Kelly
Yes, I don’t see any questions in the queue. So I just — I want to wrap up by just thanking everybody for joining us today. We appreciate your support and your interest in Spok. As you can see by our results for the second quarter, we’ve gotten off to a fantastic start. We’re bullish on the second half of the year.
We think our stock represents a compelling value and you’re going to get paid a very nice yield, while you wait for appreciation, and we think appreciation will be coming. So thanks all. Have a great day, and we look forward to speaking to you again next quarter.
Operator
Thank you. This does conclude today’s teleconference. You may disconnect your lines at this time, and have a wonderful day.
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