Spok Q1 2023 Earnings Call Transcript

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May 4, 2023

Key Takeaways

  • Spok reported GAAP net income of $3.1 million in Q1 2023, a turnaround from a $7.2 million loss a year earlier, on stable revenue of $33.2 million.
  • Wireless revenue grew to $19 million in Q1, up 1% year-over-year and sequentially, with average revenue per unit rising nearly 5% due to pricing actions and new pager sales.
  • Cost discipline and completed restructuring drove a year-over-year reduction in adjusted operating expenses to $27.2 million, delivering $6.9 million of positive adjusted EBITDA compared to a $2.1 million loss in Q1 2022.
  • Management raised its 2023 guidance, increasing total revenue expectations to $131 million–$137.5 million and adjusted EBITDA to $24.5 million–$26.5 million.
  • Spok returned $6.9 million to shareholders via dividends in Q1, maintaining its quarterly dividend policy and targeting approximately $25 million of dividends for the full year while marking nearly $1 billion of cumulative free cash flow generated since inception.
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Earnings Conference Call
Spok Q1 2023
00:00 / 00:00

There are 4 speakers on the call.

Operator

Good morning, and welcome to Spok Holdings First Quarter 2023 Earnings Call. At this time, all participants are in a listen only mode. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Al Galgano. You may begin.

Speaker 1

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 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.

Speaker 1

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 Q1 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.

Speaker 1

With that, I'll turn the call over to Vince.

Speaker 2

Good morning, everyone, and thank you for joining us for our Q1 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 dividend 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 in doing so.

Speaker 2

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 I'll then turn the call over to Calvin to review our Q1 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.

Speaker 2

I'd like to invite all of you to our Investor Day program, which will be starting shortly after this call at 10 am 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 and A during the Investor Day program. Please visit the Investor Relations section of our website to access that webcast.

Operator

We're proud of what

Speaker 2

the Smoke team has been able to accomplish in the Q1 and believe that these results position us well for the remainder of the year as we continue to 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, 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 Q1 revenue on both a sequential and year over year basis and further minimized Unit churn.

Speaker 2

Average revenue per unit or ARPU was also up on both the sequential and year over year basis. More than half of the nearly 5% annual growth in ARPU in the Q1 reflects the impact of pricing actions 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 Q1, 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 Q1 that drove the first part of that goal.

Speaker 2

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 $25,000,000 to our stockholders through our regular quarterly dividend. In fact, since 2004, Spok has returned a total of nearly $655,000,000 to our stockholders, due to our regular quarterly dividends, special dividends for share repurchases. In 2023, this history of returning cash to our stockholders continued as We generated $6,900,000 of adjusted EBITDA and returned $6,900,000 to our stockholders in the form of our regular quarterly dividend, And we expect to pay dividends totaling approximately $25,000,000 in 2023.

Speaker 2

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, Spokus generated nearly $1,000,000,000 of free cash flow since our inception, and we anticipate that we will exceed that threshold this quarter. Our focus on maximizing cash flow over the long term supports the 4 major tenants of our strategy. Those are number 1, Continued investment in our wireless and software solutions number 2, stabilizing and then growing our revenue base Number 3, continued disciplined expense management and number 4, a stockholder friendly capital allocation plan. Going forward, we believe our extensive experience operating our established communication solutions and world class customer base Create significant value for our shareholders by maximizing revenue and further cash flow generation.

Speaker 2

In early 2022, we announced a new strategic business plan that set a priority on maximizing cash flow with the goal of returning capital towards shareholders. As Part of that strategic pivot, we made the tough decision to discontinue the development and sale of Spok Go and eliminate all associated costs. However, part of that plan also included continuing to invest in our wireless and contact center software solutions in a disciplined manner. We 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 I'm happy to report that we have continued to execute on our business plan.

Speaker 2

And in the Q1 of 2023, We generated GAAP net income of $3,100,000 or $0.15 per diluted share, a sharp reversal from the net loss of $7,200,000 or $0.37 We accomplished this while increasing Q1 2023 software operations looking by nearly 9% from the prior year period and generating wireless revenue growth on both a sequential and year over year basis. Amidst 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 Spok enables smarter, faster clinical communications for our customers. We have over 2,200 healthcare facilities 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. This is coupled with the financial strength that over 84% of our recurring revenue Our revenue is reoccurring 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.

Speaker 2

In the Q1, our $5,700,000 of software operations bookings included 15 new 6 figure customer contracts, Sustaining the momentum that we saw in the second half of last year, this new six figure contract included 4 new logo customers We're pleased with this start to 2023, especially in light of the time of several contracts We had anticipated to close in the Q1 and that have now closed in the 1st few weeks of Q2. 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's solution experts also demonstrated the power of Spok Care Connect Healthcare Communications Platform At the HIMSS 2023 conference, attendees learned how Spok solutions improved provider care and communications At more than 2,200 hospitals worldwide.

Speaker 2

We also featured our new evolution of speech technology, Spoke Voice Connect. Spok VoiceConnect is still on the latest interactive speech technologies using interactive voice response to allow hospital contact center To offload a portion of routine calls with a user friendly experience that enables callers to speak to their requests instead of keying in responses. The system listens to the response, finds the information and connects the call, freeing operators time to support more complex higher value customer needs As well as manage periods of high call volume for being short staffed, Spok VoiceConnect also includes new reporting capabilities To provide insights into system usage, areas for improvement and how to optimize the system to better serve spoke 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.

Speaker 2

Now that said, I'd like to turn the call over to our Chief Financial Officer, Calvin Rice. Calvin?

Speaker 3

Thanks, Vince, and good morning, everyone. I would now like to take a few minutes and provide a recap of our Q1 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 Financial performance that we will cover on this call. Turning to our income statement. In the Q1 of 2023, GAAP net income totaled $3,100,000 or $0.15 per diluted share compared to a net loss of $7,200,000 or $0.37 per diluted share in 2022.

Speaker 3

For the Q1 of 2023, total GAAP revenue was $33,200,000 in line with the prior quarter and compared to revenue of $33,800,000 in the Q1 of 2022. Revenue for the quarter consisted of wireless revenue of $19,000,000 which was up $200,000 or 1% from the prior year and software revenue of $14,200,000 down 5.5% from last year, in line with our expectations. With respect to wireless revenue, Q1 2023 totaled $19,000,000 Up on both the sequential and year over year basis, while we continue to see improvement in net unit churn declined 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 one to one 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.

Speaker 3

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 Gen A 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 Q1 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 and service, We are hopeful that our focus on pricing and other initiatives like the Gen A 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 Q1 software revenue.

Speaker 3

Maintenance revenue totaled $8,900,000 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 As we continue to make progress on our product roadmap with Spok AirConnect, we expect bookings will continue to grow in The coming years and 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 $3,200,000 versus $3,300,000 in the Q1 of 2022.

Speaker 3

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 $2,000,000 compared with $2,400,000 in the same period of the prior year. 1st quarter adjusted operating expenses, which excludes depreciation, amortization and accretion and severance and restructuring costs Totaled $27,200,000 in the Q1 compared to $37,100,000 in the prior year period. While the Q1 benefited from the timing of approximately $500,000 to $1,000,000 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 $6,900,000 compared with a negative $2,100,000 in the same quarter of 2022 and reflects the progress made to date with our strategic pivot.

Speaker 3

Finally, I'd like to take a few minutes to outline our revised financial guidance 2023. Based on our performance in the Q1 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 $131,000,000 to 137,500,000 A $1,500,000 increase from the previous guidance midpoint. Included in the revised guidance, We expect wireless revenue to range between $73,000,000 to $75,500,000 a $1,250,000 increase from the previous guidance midpoint As we expect recent trends will continue to improve as I discussed earlier.

Speaker 3

Software revenue is expected to range from 58,000,000 $62,000,000 with the midpoint implying total software revenue representing a small increase from the midpoint of the prior guidance. Based on improving trends and our performance in the Q1, our revised adjusted EBITDA guidance for 2023 is $24,500,000 to $26,500,000 a $500,000 increase from the previous guidance midpoint. With that said, I will now turn the call back over to Vince.

Speaker 2

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 and 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.

Speaker 2

We appreciate your support and interest in Spok, And we look forward to updating everyone again next quarter when we report Q2 2023 results in July.

Operator

You may disconnect your lines and have a wonderful day.

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