Spok Holdings, Inc Q4 FY2020 Earnings Call

Good morning, ladies and gentlemen, and welcome to the Spok 2020 Fourth Quarter Investor Call. Today's call is being recorded. On line today, we have Vince Kelly, President and Chief Executive Officer; Mike Wallace, Chief Operating Officer and Chief Financial Officer. At this time, for opening comments, I'd like to turn the conference over to Mr. Wallace. Please go ahead, sir.

Good morning. Thank you for joining us for our 2020 fourth quarter and full year investor update. Before we discuss our operating results, 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 in which we compete contained in our 2020 Form 10-K, which we expect to file later today, 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.

Thanks, Mike, and good morning, everyone. Thank you for joining us on today's call. Before I get started today, I just want to acknowledge that we are still in the midst of a global pandemic. Many of us have been sick, lost loved ones, and have been adversely impacted by this crisis. Most of us are still waiting for a vaccine for the world to return to some sense of normalcy. The pressure and stress have fallen disproportionately on healthcare clinicians and staff. At Spok, we understand that and appreciate the sacrifices and commitment that caregivers continue to exhibit in the service of their fellow humans. We want to thank them for what they do each and every day. We were encouraged with our performance in the fourth quarter of 2020 and believe that the momentum generated by our team in the second half of the year positions Spok for sustained improvement in 2021 as we continue to market and sell our new cloud-native and integrated communications platform, Spok Go. Despite the many challenges that we encountered last year as a result of a once-in-a-century global pandemic, our team was able to stay on task and focused, breaking a 5-year record for selling new console licenses, helping our existing customers set up remote call center capability during the initial onset of COVID, and booking Spok Go deals in the second half of the year while building the pipeline into 2021. But before we get into the details of the quarter and the full year, I want to underscore where we are strategically with respect to our business plan and outlook. As we enter the new year, we believe we are poised to positively impact the healthcare landscape through our strategy of offering an integrated, cloud-native platform for mobility, clinical alerting, workflows, and contact center solutions. The Spok Go platform announced early last year was developed on the foundation of a single, best-in-class architecture built on a cloud-based, software-as-a-service or SaaS delivery model. Clearly, we were challenged with rolling out a new platform right as the pandemic struck. In fact, the timing of COVID-19 could not have been worse for our plan to introduce a new solution. However, we don't believe that changed the long-term potential for Spok Go. Sales and revenue will ramp up over time as the pandemic recedes and the vaccines are more widely distributed. Based on customer feedback and our evaluation of the competitive environment, we believe we are on track for long-term success and value creation that will reward all our constituents. The impact of COVID-19 that has had on our customers has been profound, both in terms of the stress that it has put on the doctors, nurses, and hospital administrators, as well as the financial impact that it has had on the healthcare industry in general. Already thin margins at these organizations were further challenged by shifting resources to deal with the pandemic, thus altering investment decisions. This clearly impacted not only our customers' ability to purchase but their ability to focus to even look at demos of a new platform they had never seen before. This is clearly a tough selling environment to launch a new solution. Again, we expect that to change over the course of the new year, and the good news is elective procedures have been trending back up and were between 70% to 80% of pre-pandemic levels at large hospitals in the fourth quarter. I'm particularly proud of our Spok sales team and their ability to adapt and change under these circumstances. When we kicked off 2020, there was much excitement and enthusiasm surrounding the introduction of Spok Go. Though the spread of the virus impeded the numerous customer meetings we had set up at HIMSS to introduce the product, our team was able to stay focused, booking Spok Go deals in the second half of the year and building our sales funnel and pipeline. This is quite an accomplishment when you consider our sales team is coming up on one year without being able to travel and meet with customers face-to-face. This particularly impacts our new business partners. Regardless, the momentum we have built gives us confidence looking forward, particularly with an eventual resolution to the global pandemic. We expect as the year progresses, our new platform business will continue to pick up each quarter, ending the year on a very positive footing. That being said, in 2020, our team set a new record for Spok console licenses and also helped our customers reconfigure their call centers for remote work. Our sales team also turned in strong results in government sales and channel sales as well. Over the past 3 years in tight cooperation with Amazon, Spok has developed a best-in-class AWS cloud-native architecture for the Spok Go platform. The Spok Go platform has been designed expressly for mission-critical application scalability, performance, and reliability. In addition to vetting Spok's architecture with Amazon's top architects, Spok has commissioned independent third-party experts to review and compare the Spok Go platform to Silicon Valley best practices. Spok invests for the long term, and with the Spok Go platform architecture, Spok is well positioned for the next decade in providing purpose-built, mission-critical cloud services for healthcare and public safety. In 2020, we continued to invest in Spok Go, which we believe is necessary to be best in class with an industry-leading clinical communication platform. On the software side, we continue to improve the platform and add functionality and workflows, while our team makes substantial progress on building the sales pipeline and recruiting innovation partners. On the wireless side, the team continues to exceed expectations with average revenue per unit, or ARPU, being held from both our software offering, Spok Mobile with pager, and our encrypted pagers. As you know, if you can minimize unit churn and keep ARPU levels up, it positively impacts the recurring wireless revenue stream. Spok Mobile with pagers, where we also put the pager number on our smartphone app, provides us with an extra revenue opportunity. Paging continues to be a strategic differentiator for us, and we have more plans this year to enhance that capability even further. For 2021, we're focused on hunting for new Spok Go business, converting existing customers to Spok Go, offering our clinical diagnostics plus package, to laboratory and radiology markets, and pursuing international opportunities in Australia and Canada. We will continue our efforts selling our contact center licenses as well. We also intend to capitalize on our unique wireless and software leverage in our installed customer base. Overall, the vaccine news has been positive so far. If it's accurate and the general timing is that we're all covered by mid-year, by the second half of '21, the effects of the pandemic should begin to subside, and profitability for healthcare systems should return with perhaps some additional government help along the way. This will help drive Spok sales as we continue to develop and enhance our platform. As I've highlighted, we've developed, enhanced, and are actively selling Spok Go, our fully integrated cloud-native clinical communications platform. Our plans are strengthened by our trusted partner status. Spok has over 2,200 hospitals, including all the best hospitals for U.S. News and World Report's annual ranking. Our new platforms, Spok Go, provide scalable enterprise solutions. The AWS-backed cloud architecture removes barriers and connects the entire care network for intelligent routing and escalation. We can deliver actionable clinical information to expedite communications, powerful directory and native on-call solutions. This reduces errors and wasted time, serving as one source of truth for all roles, departments, and locations with flexible and open architecture. We empower hospital staff to use the best devices for their roles, including pagers. We believe the market opportunity is large. The feedback we receive from customers and industry CIOs, as well as the historic level of annual sales made with our legacy CCS product, serves as the foundation for the market opportunity we have at Spok Go. We've looked at the market closely, including our competitors, and believe that, once recovered from the pandemic, it will more than support our strategy based on scale and needs. Our recently announced partnership with Mayo Clinic is just one more data point in support of our plan. Prior to the pandemic, the healthcare market had experienced significant change in consolidation, with COVID-19 accelerating that. Hospitals now feel tremendous pressure to reduce sub-standardized vendors, regionalize healthcare delivery, and improve profitability. We believe our strategy around Spok Go aligns perfectly with this and our vision to become the strategic partner of choice for enterprise-grade clinical communication and patient care coordination. We were particularly pleased with the sequential growth in our software revenue in the fourth quarter and sustained levels in our software revenue backlog, which continues to exceed $50 million. Additionally, the continued yearly improvement in our wireless trends, including a reduction in paging unit erosion, and the gradual slowing of wireless revenue declines, contributed to our operating performance. We believe these accomplishments are the direct result of our investments in our sales team and infrastructure, including our wireless infrastructure. Overall, we continue to enhance our product offerings and maintain the strength of our balance sheet. Our ability to generate cash allowed us to execute against our capital allocation strategy, returning nearly $10 million to our stockholders in 2020 in the form of regular quarterly dividends while growing our cash, cash equivalents, and short-term investment balances. Mike Wallace will provide details on our financial performance shortly. But before that, I want to highlight a few key results for the 2020 fourth quarter and full year. First, in the second half of the year, we saw sequential growth in software revenue in both the third and fourth quarters as second-half software revenue grew nearly 11% from first-half levels. Additionally, we saw a more than 22% increase in software bookings in the second half of the year as Spok continues to generate sales of both our legacy Care Connect solutions and our new Spok Go platform. Year-over-year performance reflected a slower-than-anticipated wireless revenue attrition rate, as annual declines were down 130 basis points from prior year levels. While the subscriber and revenue trends continue to improve in 2020, we once again exceeded our expectations for gross additions, net churn, revenue, and ARPU. Noteworthy in 2020 was the 104,000 new units that were added to our subscriber base. Second was the continued impact from focused expense management, as we continued to align spending levels with the demand we were seeing in the marketplace. We'll provide more detail in a few minutes, but adjusted operating expenses, despite continued investment in our product offerings, were down more than 6% from prior year levels. In fact, even after adding back capitalized software development costs, product research and development expenses in 2020 were down slightly from prior year levels. As a result, we generated nearly $5.7 million of adjusted EBITDA in 2020, consistent with 2019 levels. We were also able to grow our cash, cash equivalents, and short-term investment balances from the prior year-end levels, even after capital expenditures and paying our quarterly dividend. Overall, given the challenges posed by the pandemic while rolling out a new cloud-native platform, we are pleased with our operating performance in the fourth quarter and the company's substantial progress in 2020. We met or exceeded our expectations on a number of key operating measures, and we achieved these results while making key strategic investments in our business. In addition to our financial performance, progress was made in several other areas, including product development, sales strategy, and key strategic partnership agreements. During the quarter, we completed more than 24 new 6-figure installations of Spok solutions for our customers. Of those, 5 were new logo deals. Also included in the quarter totals were 3 new Spok Go deals. Let me highlight a couple of the new 6-figure deals for you. First, a Spok Go purchase by a 3-hospital Massachusetts health system with more than 860 beds, 4,800 employees, and 1,000 affiliated physicians. This premier Spok customer has multiple solutions, including Spok Smart Console, Smart Web, Smart Speech, and Messenger, and has been a Spok partner for more than 20 years. The customer has optimized its use of Spok solutions over the years, including consolidating their telemetry hub from 3 disparate locations to 1. The organization had a goal of moving all secure communications for their entire health system to Spok. Spok Go will allow them to achieve this goal and have all communications system-wide on a unified platform for all providers and staff. That means more efficiency and faster response to patients. The other deal I'd like to highlight for you is one of the largest and most comprehensive providers of health-related services in the greater Baltimore region. The organization has more than 13,000 employees, 1,800 staffed beds, and more than 2,600 affiliated physicians. They are a premier Spok customer with multiple solutions, including Spok operator console software, enterprise web directory, on-call scheduling, Spok Mobile, alarm integration, and code paging. They have been a Spok software and wireless partner for more than 12 years. Spok solutions are currently present in 3 of their hospitals through the region and will expand into a fourth as part of the Q4 upgrade. The project goal is to consolidate their call centers to support an enterprise-wide call center and expand on alarms monitoring. By positioning Spok as a true enterprise strategic partner that aligns with the organization's infrastructure consolidation and application standardization, we were able to complete an enterprise upgrade to Spok Care Connect 1.9. These are just a couple of examples of our activity level in Q4. And finally, we had 2 big management organizational goals this year, and they're continuing into 2021. The first was to put a product lead in place to work with our engineering leadership team to manage Spok's portfolio of solutions through a market-driven approach, consequently driving value for customers in the company. This has been accomplished with the addition in late November of Kristen Lalowski as Spok's Chief Product Officer. Kristen brings over 20 years of experience in healthcare and health IT, specifically in the areas of nursing, product management, marketing, operations, sales, and client services. She'll play a key role in executing our long-term strategy as we continue to support hospitals and health systems with reliable communication solutions. The second major goal is ongoing, and that is to further improve our go-to-market strategy. We are in the midst of a complex pivot from a traditional communications company, historically selling premise-based point solutions targeting communications managers, to a clinical communications company selling highly integrated SaaS solutions targeting C-suite executives and purchasing committees with a focus on deep clinical expertise. We continue to bring in the clinical talent necessary to be successful in this transition. We've been moving in that direction, and we'll continue to focus on it this year with urgency. In 2020, Spok continued to build an industry-leading reputation in the marketplace. Here's a brief overview of some of our accomplishments in this area. First, for the full year 2020, we completed more than 79 new 6-figure deals, primarily in the healthcare and government sectors. During the second half of the year, we completed 5 new Spok Go deals, and the momentum continues into 2021. Next, Spok received recognition as the #1 secure communications platform for hospitals and health systems by Black Book Market Research for the fourth quarter. Also, we continue to provide solutions to all of the U.S. News & World Report Best Adult and Children's Hospitals. Next, in the late summer, Spok earned system and organizational control SOC 2 Type 2 compliance for Spok Go solutions, along with Spok paging solutions. And finally, in October, we welcomed more than 600 attendees to Connect 20 Virtual, our company's annual user conference for healthcare professionals. The virtual event provided healthcare clinicians, IT experts, and C-suite executives a chance to learn from one another about the future of care team communication and share insights about how the COVID-19 pandemic has changed how they use health IT. We intend to carry this momentum forward into 2021 to stimulate long-term growth. I'll have additional comments on our 2021 outlook and capital allocation strategies in a few minutes. But first, Michael Wallace, our Chief Financial Officer and Chief Operating Officer, will review the financial highlights for the quarter. Mike?

Thanks, Vince. Before I review our financial highlights for the fourth quarter and full year 2020, I would again encourage you to review our 2020 Form 10-K, which we expect to file later today, since it contains significantly more information about our business operations and financial performance than we will cover on this call. As Vince noted, 2020 was a challenging year for Spok from both a management and operational perspective as we continue to feel the profound impact that the global pandemic has had on our business and our customers. However, we believe that the operating environment continues to strengthen, and we were generally pleased with our overall performance in the fourth quarter as it clearly demonstrates the continued improvement from the first half of last year. As such, we believe that Spok's performance over the last 2 quarters of 2020 provides us with momentum as we head into the new year. While we are not satisfied with revenue levels last year, significant progress has been made in meeting our long-term business goals. Sustained levels of software revenue in the second half of 2020 and continued record low attrition of wireless revenue, combined with continued focus on expense management, resulted in net cash provided by operating activities of $26.2 million. This was partially offset by investing activities of $14.8 million, specifically for capital expenditures and capitalized software development costs during the year. Spok was able to achieve this performance as we continue to return cash to our shareholders in the form of quarterly dividends of $9.8 million while also investing in our business for long-term growth. Our balance sheet remains strong with a cash, cash equivalents, and short-term investment balance of $78.7 million at December 31, 2020, and we continue to operate as a debt-free company. We believe this provides us a solid financial platform as Spok is well-positioned to execute against our long-term goals in 2021 and beyond. In the interest of time, I will not review our fourth quarter and full year 2020 income statement on a line-by-line basis since much of that information is contained in our earnings release tables and SEC filings. However, to the extent you have specific questions about our quarterly financial results, I would be glad to address them during the Q&A portion of this call. Rather, I want to focus this morning on 4 specific areas. These include revenue, operating expenses, a brief review of our balance sheet, and our financial guidance for 2021. With respect to revenue in the fourth quarter of 2020, total revenue of $37.5 million was in line with the prior quarter and down from $39.5 million in the fourth quarter of 2019. Full-year 2020 revenue of $148.2 million was down 7.6% from revenue of $160.3 million in 2019. However, nearly 40% of the year-over-year decline was due to the expected erosion of the wireless revenue portfolio with the balance due to the impacts of the pandemic on our software business. Looking at software revenue, total fourth quarter revenue of $17.2 million showed continued sequential improvement and was up from revenue of $16.9 million in the prior quarter and slightly lower than the revenue of $17.9 million in the fourth quarter of 2019. The decrease in software revenue for the quarter on a year-over-year basis was primarily due to lower license and associated equipment revenue. This was a result of lower software operations bookings and the mix of those bookings being more heavily skewed towards professional services. On average, professional services are recognized over 6 to 12 months as work is performed, whereas license bookings are generally recognized in the same period they are sold. And equipment bookings are recognized several months thereafter, both upon transfer of control to the customer. Regarding professional services revenue, again almost exclusively related to our legacy products, revenue was slightly down compared to the fourth quarter of last year but increased steadily during 2020 as our ability to access our hospital customers to perform implementations was impacted by COVID restrictions and travel prohibitions, primarily in the second and third quarters. However, we have been pleased by our team's ability to adapt and determine methods to deploy our solutions almost entirely on a remote basis at this point. Lastly, software revenue in the fourth quarter was supported by maintenance revenue of $9.9 million. This included approximately $250,000 of catch-up revenue discussed in last quarter's earnings call from a government renewal that was delayed, driving an approximately 4% increase in revenue compared to the quarterly average in the first 3 quarters of 2020. Maintenance continues to provide a foundation under our legacy software business and is significant to maintain as we ultimately transition existing customers of our legacy products to Spok Go over the next several years. For the full year 2020, we saw the same dynamics just mentioned play out with respect to software revenue. We saw significant improvements in all categories of software revenue during the second half of 2020 as compared to the first half and the onset of the pandemic. However, we were not fully operating at pre-pandemic levels during the fourth quarter of 2020 and fully expect to see some level of continued impact from the pandemic as we enter 2021. Also included in software revenue in the fourth quarter, albeit small, was $41,000 in subscription revenue from our cloud-native Spok Go platform with bookings of $255,000 in total contract value, or TCV, with annual recurring revenue, or ARR, of $55,000 and an average contract life of 2.3 years. In aggregate, Spok Go bookings for 2020 were $1.1 million in TCV with ARR of nearly $300,000 and an average contract life of approximately 2.7 years. In conjunction with our Spok Go transactions, the company provides minor implementation services by our professional services group, especially when compared to our legacy on-premise business model, and that is included in the respective total contract value. Wireless revenue for the fourth quarter remained strong, declining by only 2.5% from the prior quarter, and for the full year, wireless revenue was down a record low 5.2% from 2019. These results reflect another impressive performance by our sales team to generate wireless gross additions while minimizing churn and maintaining stable unit pricing. Our wireless business, along with the maintenance component of our legacy software business, continue to provide a cornerstone, representing, in aggregate, more than 82% of total revenue in 2020, allowing for the ongoing development efforts of the Spok Go platform. Turning to operating expenses, for the full year 2020, adjusted operating expenses, which exclude depreciation, amortization, accretion, and goodwill impairment and includes capitalized software development costs, totaled $148 million, down more than 6% from $158 million in the prior year. This performance primarily reflects increased efficiencies and expense reductions in general and administrative costs as well as the impact of employee furloughs. Year-over-year reductions in all expense categories were critical in our ability to drive positive free cash flow in an extraordinary year while continuing our Spok Go development spend at levels expected prior to the pandemic. Similar to previous years, during the fourth quarter of 2020, we performed our annual assessment of goodwill as of October 31. Based on that assessment, using a short-term moving average of our stock price and given the decline in the market value of Spok's common stock that resulted in a 52-week low in mid-October, it was determined that the carrying value of the business exceeded the estimated fair value of the company, resulting in an impairment. However, this impairment in no way reflects management's confidence in the future value of the business. This assessment is based on the company's market value as of a particular point in time. Unfortunately, that point was in October. As previously mentioned, the price of Spok's common shares hit a 52-week low. With the recent increase in Spok's market value over the past several months, had the assessment been performed using our stock prices during 2021, it is likely that no impairment would have been necessary. Additionally, in the fourth quarter, we completed our annual assessment of the recoverability of our deferred income tax assets, which represent the tax benefits of future tax deductions. This assessment is required to determine whether it is 'more likely than not' that all or some portion of the deferred income tax assets will be realized in future periods. Based on the cumulative pretax book income loss incurred by the company over the 3-year period ended December 31, 2020, albeit quite small, and the uncertainty created by COVID-19, our ability to consider our projections for future profitability and growth were significantly limited. Thus, we were required to record a valuation allowance to reduce net deferred income taxes as the realization did not meet the more likely than not criteria under the accounting guidance of ASC 740. We did not record a valuation allowance during 2019. However, given the traction we are beginning to see from sales of the Spok Go platform, our outlook continues to remain strong. We believe Spok Go is set to meet a significant need in the healthcare marketplace and will create significant value for shareholders in the coming years. For a more detailed explanation of how the estimated fair market value of the company is derived to determine the goodwill impairment charge and the criteria for creating the valuation allowance for the recoverability of the deferred tax assets, please see Notes 6 and 9 in our 2020 10-K, which, again, we expect to file later today. Nonetheless, the assessment of goodwill resulted in a $25 million non-cash impairment charge in the fourth quarter, and the valuation allowance for the deferred tax asset reduced earnings by an additional $22.1 million. Excluding the impact of these charges, which we believe is a more appropriate way to view our results since these are non-cash charges that did not result from operations, adjusted earnings per diluted share were $0.02 and $0.15 for the fourth quarter and full year 2020, respectively. Next, our capital expenditures for the fourth quarter of 2020 were approximately $0.6 million and were incurred primarily for the purchase of pagers and infrastructure to support our wireless customers. For the full year, capital expenses totaled $3.5 million, down from $4.8 million in 2019, reflecting the decreased capital needs to support the Spok Go platform development. We believe that we are past the major portion of our CapEx requirements to support our strategy and that levels should generally remain flat over time. Lastly, to our financial guidance for 2021. While there remains significant uncertainty and challenges with respect to the markets and customers we serve due to the pandemic, we have seen increasing visibility over the second half of 2020 and therefore providing guidance, as is typical with our fourth quarter earnings release, with the goal of providing investors with our views on 2021. We have included an additional schedule, detailing the components of our annual guidance for this year. Included in that guidance are Spok's expectations for software and wireless revenue generation in 2021. We expect total revenue to range from $132.2 million to $147.2 million. Included in that total, we expect software revenue to comprise $58.2 million to $67.2 million, which is consistent with 2020 levels at the midpoint of the guidance range. More than 90% of this software revenue guidance is expected to be driven by our legacy software solutions as bookings of Spok Go and the related subscription revenue continue to ramp through 2021. As our legacy on-premise bookings are replaced by Spok Go bookings in the coming years, our revenue recognition will also transition from more immediate recognition characteristics through ratable recognition over time associated with the subscription revenue model. Finally, Spok expects adjusted operating expenses, which exclude depreciation, amortization and accretion and the addition of capitalized software development costs, to range from $142.7 million to $150.7 million as compared to adjusted expenses of $148 million in 2020. Finally, we expect capital expenses to range from $2.7 million to $6.7 million. I would remind you once again that our projections are based on current trends, and those trends are always subject to change, especially as we continue to gain further insight into the potential easing from the impacts of COVID-19.

Thank you, Mike. With respect to our key goals and business outlook, let me take a few moments to outline our outlook and strategy for 2021. As we've talked about in the past, about 5 years ago, we embarked on a transformation that shifted our strategic direction for healthcare, our largest customer segment. This strategy pivot signaled a very intentional move from offering our customers point solutions or single-product solutions for call center software, alarm management, and secure messaging to offering them a cloud-based, single, integrated communications and collaboration platform called Spok Go. Our decision to make this shift and focus on the Spok Go platform resulted from many reasons, including customer needs, as our healthcare customers were telling us they needed a more unified approach to communications across their enterprise; the large potential market opportunity, as we further penetrate the multibillion-dollar health IT communications market; business simplification, as we've been offering our customers many different products and multiple versions on several different platforms; and competitive positioning, as we concluded that no one else offered a single, integrated, cloud-native platform for healthcare communications. In many respects, 2020 was the most challenging year for Spok in our history from both a management and operational perspective. The impact that this unprecedented pandemic has had on our customers has been profound, both in terms of the stress that is put on the doctors, nurses, and hospital administrators as well as the financial impact that it has had on the healthcare industry in general. Already thin margins at these organizations were further challenged by shifting resources to deal with COVID-19, thus altering investment decisions. This has clearly impacted our customer spending priorities and their ability to focus on a new platform solution over the short term. However, we expect that to change over the course of the new year. I'm particularly proud of our Spok team and their ability to adapt and change under these circumstances. Our core foundation of clinical communications is strong. We're proud of the work our employees have done in support of this mission. We have accomplished so much together since we became Spok. We are laser-focused on making Spok Go the leading clinical communication and collaboration platform in the healthcare industry. With that as a background, and with respect to our 2021 guidance, this year we continue our commitment to investing to address near-term opportunities and to achieve long-term organic growth. We believe these investments are critical in supporting our strategy to enhance our industry-leading clinical communication and collaboration platform and drive long-term stockholder value. Included in total operating expenses, we believe that R&D expenses, excluding the impact of capitalized software development, will continue to flatten in 2021 and approach a more steady-state level. For 2021, we expect a relatively small portion of our R&D spend to be for legacy solutions and the majority to be on our new Spok Go platform, reflecting our continued investment in the future. With respect to our capital allocation strategy, our overall goal has been to achieve sustainable business growth while maximizing long-term stockholder value through our multifaceted capital allocation strategies, which has included both dividends and share repurchases, as well as key strategic investments to improve our operating platform and infrastructure in order to drive long-term organic growth. We are also open-minded to potential acquisitions and partnerships that could provide additional revenue streams. For 2021, we're committed to continue paying our $0.125 per share quarterly dividend while keeping an eye on profitability. We will continue to evaluate our capital allocation strategy on a quarterly basis and communicate our plans to you with respect to dividends, share repurchases, and other uses of capital each quarter when we report earnings. We are focused on the huge opportunity in front of us in clinical communications. From a business configuration and strategy perspective, we believe we're strongly positioned at the moment. We have created a long-term organic growth engine, Spok Go. We maintain a source of strong recurring revenue in our paid and service line. We run the largest paging offering in the world and have integrated its operations deeply with our software operations while continuing to enhance our paging platform and user devices. We believe with these two assets going for us, our best financial results are ahead of us, and Spok's future is bright. At this point, I'll ask the operator to open the call for your questions.

At this point, I'll ask the operator to open the call for your questions.

So, did I hear right that 90% of the revenue projected in 2021 is going to be from the legacy solution? So, with the $58.2 million to $67.2 million in guidance, can I assume that 10% of that will be from Spok Go?

Yes. Ryan, it's Mike. You're correct. I mean it's probably a little bit more than 90%. But until the Spok Go bookings continue to ramp, and then, as you're aware, with a subscription model, it will obviously take time for that revenue to make its way through the P&L. For the majority of 2021, the overwhelming amount of revenue on the software side is going to continue to come from our legacy products. So I would say that it's about 90% to 95% would come from our legacy products.

Okay. So, kind of on the low end then, if you're using 5%, maybe just under $3 million of Spok Go revenues. I mean I'm still trying to understand what the opportunity is that you guys see. You say the outlook remains strong. What are you kind of forecasting the annual recurring revenue to be from Spok Go by the end of the year, and how big is the opportunity over time?

Yes. I mean, as far as ARR is concerned, yes, we're not going to publish that at this point. I mean we're still at the very early days as it relates to Spok Go. As we continue to report each quarter and get more visibility into that, we will certainly share that with investors. Vince, do you want to take the overall opportunity question?

We have analyzed extensive data and statistics regarding the potential market size, which is substantial. It is in the billions, and while there are competitors, there is ample opportunity for everyone involved. We believe our solution, Spok Go, stands out, and we anticipate a long-term winner will emerge. Unfortunately, launching during the pandemic made it challenging to capture attention. According to industry consultants, in 2020, hospitals and healthcare systems prioritized spending on anesthesia, respiratory equipment, patient monitoring, medication administration, and lab equipment, placing healthcare IT and enterprise software lower on the list. Almost 47% of institutions have postponed capital budgets or face uncertainty, which means nearly half of the potential market is not pursuing a new cloud-based platform this year. However, discussions with CIOs and our recent partnership with the Mayo Clinic suggest a significant demand for our solution. Our Board member, Dr. Bobbie Byrne from Advocate Aurora, emphasizes this need as well. Our plan is to keep investing in the platform, manage the business effectively, continue offering dividends, and grow Spok Go's sales as we move past the pandemic. When we increase bookings, we expect a three-year total contract value, which means those bookings will contribute to revenue evenly over a 36-month period, leading to a robust recurring revenue stream over time.

We will keep investing in this platform, manage the business effectively, maintain the dividend, and as we emerge from this pandemic, increase the Spok Go sales. When we increase those bookings, we typically consider a 3-year total contract value. This means that the booking will be gradually recognized as revenue over a 36-month period. Consequently, the immediate effect on revenue will be smaller than the booking itself, but over time, it will contribute to a substantial recurring revenue base.

I got distracted when you were talking about R&D, the 40-ish percent of sales R&D going forward, now that Go is a go product. Could you just talk about where your R&D is going now? And what kind of spending levels are you thinking about for '21 and then the future, please?

Mike, do you want to take that or do you want me to? I'm happy to.

I'll start off by saying that from an R&D perspective, we expect spending to stabilize around current levels, which is approximately $27 million to $28 million in gross terms, not including the capitalization of software development. Our cash expenditure on R&D is about $27 million to $28 million. As Vince mentioned, around 75% to 80% of that is allocated to Spok Go, with the remainder directed towards our legacy products to ensure they remain viable until we can fully transition to Spok Go. Looking ahead over the next several years, while we don't typically provide guidance beyond the upcoming year, we are confident that R&D spending will remain relatively flat at the levels observed today. Vince, would you like to add anything?

You got it spot-on. I was going to say 80% to 75% of what we're spending today of that $27 million numbers on Spok Go, and the 20% to 25% is on our legacy solutions. And that will stay about there for 2021. That will change over time going forward. Obviously, more will be spent on Spok Go in the future and less on the legacy solutions as we make the transition.

Right. Okay. And is the goodwill write-off strictly a matter of the stock price?

Yes. The driving factor in that analysis is the stock price. And as I stated in my prepared comments, we do that analysis each year at the end of October. That's our cadence, and that happened to be when we were at a 52-week low. Obviously, we were close, anyway. But as I said, if we looked at the share price in the first 6 weeks of this year, there likely would have been no impairment. So, I hate to be on these calls and blame anything on accounting, et cetera, but this is kind of one of the vagaries of accounting. It does not impact our view in any way, shape, or form on the outlook for the business and our projections.

I initially believed that the impairment was tied to the expected revenue and earnings from the asset, rather than the stock price.

Yes. There are a number of ways you can look at goodwill impairment. That is one component of it. But the largest piece, the largest driving factor of that analysis is the share price to drive the market value as being, if you will, in a public company the most readily available determinant of value on a given date. While your projections are a component of it, they carry far less weight than the actual share price.

Yes. There are several ways to consider goodwill impairment. That is one aspect of it. However, the main element driving that analysis is the share price, which is the most accessible indicator of value for a public company on any specific date. Although your projections are a factor, they hold much less significance than the current share price.

I'm fairly new to the story, so I'd like to ask you a broad question, which is about the legacy solutions or a number of point solutions. The Spok Go is primarily a communication platform that can unify a number of its solutions on top of that. Can you talk about the transition from one to the other? How are your customers, particularly the customers that are existing legacy customers, implementing the communication platform and then basically using it for the various functionalities of the point solutions that they already have?

Sure. Let me address that. I believe I understand your question. In the second half of 2020, we sold five Spok Go solutions, two of which were to new customers, making those sales easier. The remaining three were to existing customers with our legacy software. In both scenarios, integration with current platforms is essential. Our legacy solutions fall into three main categories: first, contact center solutions that manage hospital call centers; second, a messenger solution for clinical alerting; and third, mobile solutions, including our on-call scheduling offering. For existing customers, we sell the Spok Go platform and integrate it with their contact center solutions, replacing the critical alerting, on-call scheduling, and mobile components while building for future needs. For new customers who are not currently using our services, we integrate with their existing systems, such as their EHR, to facilitate clinical communications. The key advantage of Spok Go is that we maintain the directory, acting as the hospital hub for accurate location and contact information. We store data on where individuals are located—such as if someone is on the west campus, Floor 6, Ward A—and their preferred contact methods, whether via a mobile app or pager. This system operates smoothly and can scale with our partner AWS, distinguishing it from our previous legacy solutions that relied on on-premise servers in customer data centers. I hope this clarifies your query.

Ladies and gentlemen, there are no further questions in the queue. I would like to continue with the call.

Yes. Thanks, everyone, for joining us this morning. We look forward to speaking with you again after we release our first quarter results in April. So everyone, have a great day, and stay safe.

Ladies and gentlemen, this concludes today's conference. We appreciate your participation. You may now disconnect.