Spok Holdings, Inc Q1 FY2023 Earnings Call

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.

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 achieving this and can maintain our quarterly dividends at these levels for the foreseeable future. Furthermore, we expect our cash flow to grow into our current dividend level and eventually cover it in full. That is our primary focus. Returning capital to shareholders has been our legacy, and we are committed to that principle. Today, we will provide an update on the progress of our strategic business plan in support of this goal, along with our financial results for the quarter. I'll start by outlining the agenda for today's call. We'll begin with a review of our operational performance for the quarter and fiscal year. Then I'll pass the call to Calvin, who will discuss our first quarter 2023 financial highlights and performance. We will conclude with our business outlook and financial guidance for 2023 before wrapping up the call. I’d like to invite all of you to our Investor Day program, starting shortly after this call at 10:00 a.m. Central. For the sake of time, we will not take questions today, but there will be plenty of opportunities for live Q&A during the Investor Day program. Please visit the Investor Relations section of our website to access that webcast. We are proud of what the scope team has accomplished in the first quarter and believe that these results position us well for the remainder of the year as we continue our focus on generating cash and returning capital to shareholders. Last quarter, we made significant progress in several key areas, including wireless trends, software bookings, backlog levels, and expense management, as we saw operating expenses decline both sequentially and year-over-year. We achieved this while investing in our Spok Care Connect and wireless solutions. I am particularly pleased with our performance in wireless. For the first time in several years, we increased our first quarter revenue both sequentially and year-over-year while reducing unit churn. Average revenue per unit also rose on both bases, with more than half of the nearly 5% annual growth in ARPU reflecting pricing actions taken in late 2022 and sales of our new GenA pager. We anticipate continued success for the rest of the year. While Calvin will provide more detailed insights later in the call, I want to briefly mention that based on our strong first quarter performance, we are raising our financial guidance for 2023, which now reflects increased revenue and adjusted EBITDA expectations. Our strategic goal is straightforward: run the business profitably and generate cash flow. In terms of cash flow generation, Spok has a proud legacy of creating shareholder value, and we intend to uphold this commitment. Last year, we returned $25 million to our shareholders through regular quarterly dividends. Since 2004, we have returned nearly $655 million to our stockholders via dividends and share repurchases. In 2023, we have continued this tradition, generating $6.9 million of adjusted EBITDA and returning that amount in dividends. We expect to pay dividends totaling around $25 million this year. Spok remains committed to our dividend policy and returning capital to our shareholders. Considering our current cash balance, distributions to shareholders, share repurchases, debt repayments, and acquisitions, Spok has generated nearly $1 billion of free cash flow since inception, and we project to reach that milestone this quarter. Our focus on maximizing cash flow supports our strategy, which includes continued investment in our wireless and software solutions, stabilizing and growing our revenue base, disciplined expense management, and a shareholder-friendly capital allocation plan. Moving forward, we believe our extensive experience in communication solutions and our world-class customer base will create significant value for our shareholders through revenue maximization and enhanced cash flow generation. In early 2022, we introduced a strategic plan to prioritize maximizing cash flow and returning capital to shareholders. This included the difficult decision to discontinue the development of Spok Go and eliminate associated costs, while still investing in our wireless and contact center software solutions. We believe this will help stabilize and eventually grow our revenue and cash generation potential, maximizing our ability to return capital to shareholders in the long run. I'm pleased to report that we are executing our business plan effectively. In the first quarter of 2023, we generated GAAP net income of $3.1 million or $0.15 per diluted share, a significant turnaround from a net loss of $7.2 million or $0.37 per diluted share last year. We achieved this while increasing software operations bookings by nearly 9% from the previous year and generating growth in wireless revenue both sequentially and year-over-year. We have made notable progress in building a solid financial platform and a shareholder-friendly capital allocation strategy. Our mission remains to be a global leader in healthcare communications, delivering critical information to care teams when it matters most. To improve patient outcomes, Spok provides smarter, faster communication solutions for our customers. We serve over 2,200 healthcare facilities, representing many of the top hospitals in the United States. Our long-standing customer relationships have been built over many years, coupled with financial strength as over 84% of our revenue is recurring, and we have no debt, providing us substantial flexibility. Before turning the call over to Calvin for a deeper look at our financial performance, I want to highlight a few sales achievements from the first quarter. Our $5.7 million in software operations bookings included 15 new six-figure customer contracts, maintaining the momentum we saw in the second half of last year. This includes four new logo customers who had not previously done business with Spok. We are excited about this start to 2023, especially given the timing of some contracts we anticipated closing in the first quarter, which have now finalized in the early weeks of the second quarter. Our momentum is strong. I would also like to mention our successful participation in last month’s HIMSS conference, where we showcased our top-rated clinical communication platform. Spok solution experts demonstrated the capabilities of Spok Care Connect and Spok Voice Connect. At HIMSS 2023, attendees learned how our solutions enhance provider care and communication at more than 2,200 hospitals worldwide. We also introduced the latest evolution of our speech technologies, Spok Voice Connect, which utilizes interactive voice response to enhance hospital contact center efficiency. While the conference attendance was down compared to previous years, we were pleased with the meetings we held with customers, prospects, and partners. Such events are crucial as they serve as a referral source for further growth in our sales pipeline. Now, I would like to turn the call over to our Chief Financial Officer, 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 roadmap 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 fewer 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.

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.