Spok Holdings, Inc. (NASDAQ:SPOK) Q1 2023 Earnings Call Transcript May 5, 2023
Al Galgano: Hello, everyone, and welcome to Spok Holdings First Quarter 2023 Earnings Call. I am joined by Vince Kelly, Chief Executive Officer; Mike Wallace, President of Spok Inc. and Chief Operating Officer; and Calvin Rice, Chief Financial Officer. Please be advised that, on today’s call we will not be taking any questions after management’s prepared remarks, as we will be hosting our Investor Day program subsequent to this earnings call. During the Investor Day program, there will be ample opportunity for questions from both the in-person participants and the webcast listeners. I also 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 2023 Form 10-Q, 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.
Vince Kelly: Good morning, everyone, and thank you for joining us for our First Quarter 2023 Earnings Call. I want to remind everyone that, our mission is to generate cash and return capital to our shareholders over the long term. We believe we are on a sustainable path to doing so, and believe we can pay our quarterly dividends at these levels for the foreseeable future. Further, we believe our cash flow is on a path to grow into our current dividend level and eventually cover it in full. That is our job and our primary focus. Returning the capital to shareholders has been our legacy, and we feel good about getting back to our roots and doing so. Today, we will share with you an update on how our strategic business plan is progressing in support of this goal 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 a review of our operational performance for the quarter and full year. I’ll then turn the call over to Calvin to review our first quarter 2023 financial highlights and performance. We will then conclude our prepared remarks with our business outlook and financial guidance for 2023 and then we’ll wrap up the call. I’d like to invite all of you to our Investor Day program, which will be starting shortly after this call at 10:00 a.m. Central. In the interest of time, we’ll not be taking any questions on this morning’s earnings call, but as Al mentioned earlier there’ll be ample opportunity for live Q&A during the Investor Day program. Please visit the Investor Relations section of our website to access that webcast.
We’re proud of what the scope team has been able to accomplish in the first quarter and believe that these results position us well for the remainder of the year as we continue to execute on our focus on generating cash and returning capital to stockholders. Last quarter, we made tremendous progress in several key performance areas including wireless trends software bookings and backlog levels as well as expense management as we continue to see operating expenses decline on both a sequential and year-over-year basis. We were able to accomplish this while investing in our Spok Care Connect, and wireless solutions. I’m particularly pleased with our performance in wireless. For the first time in several years, we grew our first quarter revenue on both a sequential and year-over-year basis and further minimize unit churn.
Average revenue per unit or ARPU was also up on both a sequential and year-over-year basis. More than half of the nearly 5% annual growth in ARPU in the first quarter reflects the impact of pricing actions taken in late 2022 and to a lesser extent sales of our new GenA pager. We look forward to continued success for the remainder of the year. While Calvin will go into more detail later in the call, let me briefly say that based on our confidence and the strong performance we saw in the first quarter we are increasing our financial guidance for 2023, reflecting increased revenue and adjusted EBITDA expectations. Our strategic goal is simple: run the business profitably and generate cash flow. But before I review some of the key highlights from the first quarter that drove the first part of that goal, let me take a few minutes to address the second part of the goal, which is to generate cash flow.
As I mentioned, Spok has a proud legacy of creating stockholder value through free cash flow generation and we intend to continue this track record. Last year Spok returned $25 million to our stockholders through our regular quarterly dividend. In fact since 2004, Spok has returned a total of nearly $655 million to our stockholders due to our regular quarterly dividends, special dividends or share repurchases. In 2023, this history of returning cash to our stockholders continued as we generated $6.9 million of adjusted EBITDA and returned $6.9 million to our stockholders in the form of our regular quarterly dividend and we expect to pay dividends totaling approximately $25 million in 2023. Spok remains committed to our dividend policy in returning capital to our stockholders.
When you take into consideration our current cash balance, distributions to stockholders and share repurchases, debt repayments and acquisitions, Spok has generated nearly $1 billion of free cash flow since our inception and we anticipate that we will see that threshold this quarter. Our focus on maximizing cash flow in the long-term supports the four major tenets of our strategy. Those are number one, continued investment in our wireless and software solutions; number two, stabilizing and then growing our revenue base; number three, continued disciplined expense management; and number four, a stockholder friendly capital allocation plan. Going forward, we believe our extensive experience operating our established communication solutions and world-class customer base will create significant value for our shareholders by maximizing revenue and further cash flow generation.
In early 2022, we announced a new strategic business plan that set a priority on maximizing cash flow with a goal of returning capital to our shareholders. As part of that strategic pivot, we made the tough decision to discontinue the development and sales of Spok Go and eliminate all associated costs. However, part of that plan also includes continuing to invest in our wireless and contact center software solutions in a disciplined manner. We felt this was important to stabilize and then ultimately grow our revenue and cash generation potential. That’s how we’ll maximize our ability to return capital to our shareholders over the long run. I’m happy to report that we have continued to execute on our business plan. And in the first quarter of 2023, we generated GAAP net income of $3.1 million or $0.15 per diluted share, a sharp reversal from the net loss of $7.2 million or $0.37 per diluted share in the prior year period.
We accomplished this while increasing first quarter 2023 software operations booking by nearly 9% from the prior year period and generating wireless revenue growth on both a sequential and year-over-year basis. I mentioned all the progress in creating a solid financial platform and shareholder-friendly capital allocation strategy. We remain true to our mission of being a global leader in health care communications. We deliver clinical information to care teams when and where it matters most. To improve patient outcomes, Spok enables smarter, faster, clinical communications for our customers. We have over 2200 healthcare facilities of 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.
This is coupled with the financial strength that over 84% of our recurring revenue — of our revenue is recurring in nature and we are a company with no debt, which provides us significant flexibility. Before I turn the call over to Calvin to review our financial performance in more detail, I’d just like to highlight a couple of items from a sales perspective. In the first quarter, our $5.7 million of software operations bookings included 15 new six-figure customer contracts sustaining the momentum that we saw in the second half of last year. These new six-figure contracts included four new logo customers that had previously not done business with Spok. We’re pleased with this start 2023 especially in light of the time of several contracts that we had anticipated to close in the first quarter and that have now closed in the first few weeks of the second quarter.
Our momentum continues. I’d like to also highlight our successful participation in last month’s HIMSS conference. There we showcased our top-rated clinical communication platform. Spok solution experts also demonstrated the power of Spok Care Connect healthcare communications platform and Spok Voice Connect throughout the conference. At the HIMSS 2023 conference, attendees learned how Spok solutions improve provider care and communications at more than 2200 hospitals worldwide. We also featured our new evolution of speech technologies, Spok Voice Connect. Spok Voice Connect is built on the latest interactive speech technologies using interactive voice response to allow hospital contact centers to offload a portion of routine calls with the user-friendly experience that enables callers to speak their request instead of keying in responses.
The system listens to the response, finds the information and connects the calls, freeing operators’ time to support more complex higher-value customer needs as well as manage periods of high call volumes or being short staffed. Spok Voice Connect also includes new reporting capabilities to provide insights into system usage, areas for improvement and how to optimize the system to better service Spok customers. While the conference did not have the attendance we’ve seen in years past, we were pleased with the customer, prospects and partner meetings, we participated in. Events such as these are important as they provide a referral source for further growth to our sales pipeline. Now with that said, I’d like to turn the call over to our Chief Financial Officer, Calvin Rice.
Cal?
Calvin Rice: Thanks, Vince, and good morning, everyone. I would now like to take a few minutes and provide a recap for our first quarter 2023 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. Turning to our income statement. In the first quarter of 2023 GAAP net income totaled $3.1 million or $0.15 per diluted share compared to a net loss of $7.2 million or $0.37 per diluted share in 2022. For the first quarter of 2023, total GAAP revenue was $33.2 million in line with the prior quarter and compared to revenue of $33.8 million in the first quarter of 2022.
Revenue for the quarter consisted of wireless revenue of $19 million, which was up $0.2 million or 1% from the prior year and software revenue of $14.2 million, down 5.5% from last year in line with our expectations. With respect to wireless revenue, first quarter 2023 totaled $19.0 million, up on both a sequential and year-over-year basis. While we continue to see improvement in net unit churn declining to only 3.2% on a year-over-year basis, this performance was primarily driven by a $0.35 increase in ARPU or nearly 5% from the prior year. I would like to take a minute to break that down a bit further. Changes in recoverable taxes and fees, which are pass-through items and have a corresponding cost element that typically fluctuates on a roughly 1:1 basis, accounted for approximately 40% of that increase or $0.15.
As a reminder, these fees are set by the FCC on a quarterly basis and can fluctuate significantly. With that said, the remaining $0.20 increase in ARPU was driven by the success of our pricing actions undertaken in late 2022 and to a lesser extent sales of our new GenA pager. Excluding the effects of recoverable taxes and fees, the improvement in ARPU was able to offset roughly 70% of our revenue lost from net unit churn during the first quarter of 2023. While we believe the demand for our wireless services will continue to decline on a secular basis as reflected in declining pager units in service, we are hopeful that our focus on pricing and other initiatives like the GenA pager will continue to further offset revenue lost through pager unit decline.
This is further reflected in our updated financial guidance, which I will walk through shortly. Turning to first quarter software revenue. Maintenance revenue totaled $8.9 million and was down from the prior year quarter by approximately 3% in line with our expectations. As we have discussed in previous quarterly calls, as we continue to reorient focus back on our Spok Care Connect software products, our expectation is for maintenance revenue to be flat to down slightly on a year-over-year basis, given gross churn and uplift levels remaining consistent with prior quarters. As we continue to make progress on our product road map with Spok Care Connect, we expect bookings will continue to grow in the coming years in maintenance revenue along with it.
Given the nature of maintenance revenue, higher license sales will work through revenue on a lagging basis. So we will look first to stabilizing that revenue decline and then begin to grow it. Professional services revenue was a healthy $3.2 million versus $3.3 million in the first quarter of 2022. We saw significant improvement in resource utilization, delivering on our internal initiatives to better align total resources with our backlog and driving a higher rate of net cash flow, despite having roughly 25 less billable resources. Lastly license and hardware revenue was $2.0 million compared with $2.4 million in the same period of the prior year. First quarter adjusted operating expenses, which excludes depreciation, amortization and accretion and severance and restructuring costs totaled $27.2 million in the first quarter compared to $37.1 million in the prior year period.
While the first quarter benefited from the timing of approximately $0.5 million to $1.0 million of expenses, which we expect to incur throughout the remainder of the year, the year-over-year decline in cost is primarily a result of our restructuring efforts undertaken early last year and completed in late 2022. And lastly, adjusted EBITDA was a positive $6.9 million compared with a negative $2.1 million in the same quarter of 2022 and reflects the progress made to-date with our strategic pivot. Finally, I’d like to take a few minutes to outline our revised financial guidance for 2023. Based on our performance in the first quarter and the strengthening software operations bookings and backlog levels along with improvement in wireless trends, we are increasing our expectations across all categories.
As a reminder, the figures I’m going to discuss today are included in our guidance table in the earnings release. In 2023, we now expect total revenue to be in the range of $131 million to $137.5 million, a $1.5 million increase from the previous guidance midpoint. Included in the revised guidance, we expect wireless revenue to range between $73 million to $75.5 million, a $1.25 million increase from the previous guidance midpoint as we expect recent trends will continue to improve, as I discussed earlier. Software revenue is expected to range from $58 million to $62 million with the midpoint implying total software revenue representing a small increase from the midpoint of the prior guidance. Based on improving trends in our performance in the first quarter, our revised adjusted EBITDA guidance for 2023 is $24.5 million to $26.5 million, a $0.5 million increase from the previous guidance midpoint.
With that said, I will now turn the call back over to Vince.
Vince Kelly: Thank you, Calvin. Again, I’d like to remind everybody that, shortly following this call we’ll be hosting our Investor Day program. The program will include presentations from myself and our broader management team as well as an opportunity for Q&A. We hope you can join us as the event will be webcast. Please go to the Investor Relations section of our website to register for the webcast. We appreciate your support and interest in Spok and we look forward to updating everyone again next quarter. We’ll move you for a second quarter 2023 results in July. Thank you for joining us this morning, and have a great day.
End of Q&A:
