Spok Holdings Inc
NASDAQ:SPOK
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Spok Holdings Inc
Earnings Call Analysis
Summary
Q2-2024
Spok Holdings reported a robust second quarter for 2024, attributing their success to strong software sales and strategic investments. Despite tough year-over-year comparisons, the company remains confident in renewed growth for the rest of the year. CEO Vince Kelly highlighted their unique position in the healthcare contact center market, strong customer relationships, and ongoing platform enhancements. The company reaffirms its commitment to generating cash and returning capital to shareholders, maintaining a positive full-year outlook, and ensuring dividends are covered through growing cash flow.
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Greetings, and welcome to the Spok Holdings Q2 2024 Earnings Results Call. [Operator Instructions] As a reminder, this conference is being recorded.
It is now my pleasure to introduce your host, Al Galgano, Investor Relations. Thank you, Al. You may begin.
Hello, everyone, and welcome to Spok Holdings Second Quarter 2024 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.
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, which are contained in our second quarter 2024 and 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 afternoon, everyone, and thank you for joining us for our second quarter 2024 earnings call. I'm proud of the performance our team was able to deliver in the second quarter. We made tremendous progress in several key areas and believe that our solid operating platform will generate a successful second half of the year, leading to full year software bookings growth relative to 2023.
As I mentioned in our press release, we started the third quarter off very strong. Software sales are always going to be lumpy, but our trajectory over 12 months is up and to the right. As we ended the quarter, we knew the year-over-year comparable was going to be tough as the second quarter of 2023 included many performance records, in particular, single sales contract worth almost $4 million.
However, positive takeaways from where we sit moving into the third quarter include: number one, we don't have a lot of competition in our core health care contact center space. Number two, we have amazing relationships with the top health care systems in the nation to continue to purchase on a regular basis. Number three, we continue to invest in and enhance our platforms consistent with what our customers are requesting. Number four, in many respects, we are viewed as an indispensable utility. And number five, we're very comfortable with our full year guidance.
Let me also take this opportunity right up front to remind everyone that our mission remains solidly unchanged. That is to generate cash and return capital to our shareholders over the long term while responsibly investing in and growing our business. As we've demonstrated through our performance since our strategic pivot more than 2 years ago, we believe we are on a sustainable path to doing so and that our cash flow is on a path to grow into our current dividend level and cover in full on an annual basis. That is our primary focus. Returning capital to shareholders is our legacy and we feel good about executing a strategy we believe in, and that we've had a lot of success with historically.
Today, we'll 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, and the order will be as follows: we'll begin by providing a review of our company performance for the quarter. I'll then turn the call over to Mike Wallace, our President and Chief Operating Officer, to review some of our quarterly sales and operational highlights, then our Chief Financial Officer, Calvin Rice, will review our second quarter financial highlights and financial guidance for 2024. And I'll come back and wrap up the call and open it up for your questions.
As a set up front, we thought of what the Spok team has been able to accomplish in the second quarter and we are positioned for a strong second half. Second quarter highlights include a more than 10% growth in second quarter software operations bookings from the impressive production levels in the first quarter, continued strong levels of adjusted EBITDA, which covered our quarterly dividend and capital expenditure requirements, continued pipeline growth providing confidence in our network. The resulting increase in cash balances, which we believe hit its low point in the first quarter and will continue to build through the remainder of the year.
Healthy levels of software maintenance and continued growth in our services business that bolsters software revenue in the second quarter. Improved wireless trends as net unit churn dropped below 1% in the second quarter down significantly from the prior quarter. Continued expansion of our wireless average revenue per unit further reflecting the impact of prior pricing actions and sales of our encrypted PIFA compliant alphanumeric Gene pager and continued discipline in expense management as a decline in our overall year-over-year operating expenses was accomplished while still making the necessary investments in product research and development to fuel future growth.
In short, we were very pleased with our performance in the second quarter and believe that our results in the first half of the year provide a solid springboard for the second half. We maintain our optimism for the year, and we are reiterating our guidance estimates for revenue and adjusted EBITDA in 2024.
In the second quarter of 2024, we generated over $7 million of adjusted EBITDA, which more than covered the $6.3 million we returned to our stockholders. However, at the same time, we increased our second quarter research and development investment by $0.3 million or 11.3% on a year-over-year basis and believe we're on track to invest approximately $11.5 million in product research and development expenses in 2024. We believe this investment will fuel future software revenue growth and that our extensive experience selling and operating of our established communications solutions will create significant value for our stockholders by maximizing revenue and cash flow generation.
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. In fact, over the last 20 years, Spok has returned a total of nearly $690 million to our stockholders either through our regular quarterly dividends, special dividends or share repurchases. When you take into consideration our current cash balance, distributions to stockholders, share repurchases, debt repayments and acquisitions since our inception, Spok has generated more than $1 billion of free cash flow.
Our focus on maximizing cash over the long term supports the 4 major tenets of our strategy. Those are: number one, continued investment in our wireless and software solutions; number two, grow 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 selling and operating our established communications solutions and world-class customer base will create significant value for stockholders through solid revenue growth, disciplined expense management and further cash flow generation.
Before I turn the call over to Mike, let me take a moment to review what I think is a noteworthy milestone for our team. Earlier this month, we announced that our organization had passed the 10-year anniversary of the renaming of the company to Spok. As you know, in 2014, we completed the integration of our acquisition of AMCOM Software creating a single cohesive business and Spok with Warn. Spok expanded on the strong legacy of our predecessor companies to solve critical communications challenges that help hospitals and health systems improve patient outcomes and support public safety when seconds count and lives are at stake.
Over the past several decades, Spok's talented and experienced team has consolidated the paging industry and combine the power of paging with communication software to make a groundbreaking impact in our industry. We continue to invest in our communications platforms, enhancing our solutions and delivering exceptional products to our customers.
Today, Spok as a leader in health care communications, maintains the largest paging network in the United States, as a blue-chip customer base of more than 2,200 hospitals has created a large portfolio of intellectual property via strategic R&D investments, has generated significant shareholder value through cash flow creation and returning capital to our investors and as a pioneer in health care communications with a best-in-class product offering.
We've built an industry-leading reputation over the years. Under the Spok banner, we are recognized as the top clinical communications platform in our industry for 7 of the past 10 years since we fully integrated our company. We are honored by the unwavering trust our health care clients place in Spok as their go-to partner for clinical communications. The achievement of securing the top position for 7 consecutive years underscores our commitment to delivering critical communication technology that enhances hospital and health system communication, which ultimately enhances patient care and safety.
Further supporting this claim is our recent announcement that for over a decade, nearly every hospital named a U.S. News & World Report's best hospital honor relies on Spok solutions. For the 2024 and 2025 on honor, we were pleased to announce 17 of the 20 hospitals on that list use Spok's industry-leading secure health care solutions to facilitate care collaboration and support exceptional patient care.
Last year, we were also pleased to announce that 7 out of 10 children's hospitals on the honor role use Spok solutions, and we anticipate similar participation when the 2024 and 2025 list is published in a few weeks. Finally, before turning it over to Mike, I want to share with you that Spok in our related solutions were unaffected by the recent worldwide CrowdStrike outage. While many of our customers are impacted in their internal systems Spok was available to help and support them throughout the outage. With that, I'll turn the call over to Mike.
Thanks, Vince, and thank you, everyone, for joining us this afternoon. As Vince pointed out, it was a very strong quarter, and we made tremendous progress in a number of key performance areas. We have missed all the progress and continuing to build 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. It is important to remember, we deliver clinical information to care teams when and where it matters most to improve patient outcomes as Spok enables smarter, faster clinical communications for our customers.
As Vince noted, we have over 2,200 health care facilities as customers were representing the who's who of hospitals in the United States. We have built our solution over many years and have long-standing valuable customer relationships. This is coupled with the financial strength that more than 80% of our revenue is reoccurring in nature, and we are a company with no debt which provides significant flexibility.
In the second quarter, our $8.7 million of software operations bookings included 18 6-figure and 1 7-figure customer contracts, sustaining the momentum that we saw last year. Most impressively, second quarter software operations bookings included 14 multiyear engagements. And those 6- and 7-figure contracts had an average contract size that was up nearly 14% in the prior quarter. So we are extremely pleased with the first 6 months of 2024.
Now let me take a few minutes to highlight a couple of the customer engagements that we signed in the second quarter. The first is a 3-year agreement with a 3-hospital, 1,200-bed health system located in the Southwestern part of the United States. As an Epic forward organization, this organization plans to use as many Epic modules as possible. However, the organization immediately noticed gaps in its unified communications strategy and identified Spok as a strong, stable vendor that offers a unified platform that will focused on improving patient safety and provider satisfaction, their CEO and CIO tasks their unified communications team to standardize and simplify their environment across the health system.
Spok Care Connect, our fully integrated health care communication platform will be used for operator services, enterprise-wide web directory, on-call scheduling, medical and safety code procedures, nurse call and patient monitoring notifications as well as secure code messaging and paging. Through this multiyear coming this organization also opted in the benefit from managed professional services, multiple value-added services and annual maintenance and support.
The second customer agreement I'd like to highlight was with the only hospital on a British overseas territory in the North Atlantic Ocean. This 350-bed hospital with approximately 1,800 employees, serves over 64,000 visitors annually. Spok has been their critical communication partner since 2014, and they leverage the full Spok Care Connect suite of products. Spok Care Connect is used for the hospital's operator services, enterprise-wide web directory, on-call scheduling, Spok enotify for incident management and Spok Mobile for medical and safety code features and secure code messaging. Similar to the contract previously discussed, this multiyear engagement also included managed professional services, multiple value-added services and annual maintenance and support.
On a final note, I'd like to give recognition to our wireless team and their ability to quickly jump into action to mitigate the impact of the recent Hurricane Beryl. The storm came onshore the morning of July 8, with 75-mile an hour winds and much higher gusts. Luckily, the storm was moving quickly headed north where it weakened. While there was less isolated flooding, a number of our transmitters were down, and our team of tech quickly mobilized into action. Our team was able to quickly get those transmitters back online and we experienced no customer escalations. It is the responsiveness and customer support that our Spok team demonstrates every day that has gained as the industry-leading reputation that Vince spoke about and makes our wireless business an incredible franchise. I'd like to thank our team for their efforts and dedication to creating strong customer loyalty for Spok.
I will now turn the call over to Calvin Rice, our Chief Financial Officer, to briefly review the second quarter financial performance. Calvin?
Thanks, Mike, and good afternoon, everyone. I would now like to take a few minutes and provide a recap of our second quarter 2024 financial performance, which we reported today. I encourage you to review our 10-Q 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 second quarter of 2024, GAAP net income totaled $3.4 million or $0.17 per diluted share compared to net income of $4.7 million or $0.23 per diluted share in 2023. In the second quarter of 2024, total GAAP revenue was $34 million compared to total revenue of $36.5 million in the prior year. Revenue for the quarter consisted of wireless revenue of $18.3 million and software revenue of $15.7 million compared to $18.9 million and $17.6 million in the prior year, respectively.
With respect to wireless revenue, we saw significant improvement in quarterly net unit churn for the second quarter in a row at 0.8%, down from 1.6% in the prior quarter. ARPU increased $0.31 and or 4.1% from the prior year, primarily driven by continued pricing actions undertaken in late 2023 and to a lesser extent, continued sales of our new Gen A pager.
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 Gen A pager will continue to further offset revenue lost through pager unit decline.
Turning to second quarter software revenue. License and Hardware revenue totaled $2 million in the second quarter of 2024 compared to $4.6 million in the same period of 2023. As Vince previously touched on in the second quarter of 2023, we sold the largest single contract in Spok's history worth almost $4 million, including license revenue of nearly $1.8 million, of which the majority would have fallen to the bottom line. In addition to this, we were able to pull forward a number of sales from the third and fourth quarters in 2023, leading to a highly successful quarter. We did not expect to replicate the same quarterly success this year, just given the quarterly timing of our sales expectations for 2024. However, I would like to point out that Vince also mentioned the expectation of bookings growth on a full year basis, and we expect that to translate to a stronger second half in terms of license and hardware revenues on a comparable basis.
Professional services revenue was a healthy $4.3 million versus $3.8 million in the second quarter of 2023, up nearly 12% from the prior year period and over 17% for the first half. Much of this continued to be driven by an increase in personnel over the last 12 months. As I have mentioned in previous earnings calls, we expect an ongoing need to increase service personnel to match the pace of our growth in professional services backlog and as our software operations bookings continue to expand. We've also seen managed services performed very well. This is something we've briefly touched on in the past, but as sales of this service has grown, we believe some additional discussion and details may be useful to investors. This is a service offering within our professional services that is typically bundled with maintenance and sold like a renewal.
This service offering provides customers with all necessary implementation and training services for any Spok software product they own over their multiyear term, which is typically 3 years. This provides the customer with a known cost over that term and avoid sales delays we have faced in the past when upgrades were made available, but they were not accounted for in the customers' fiscal budget.
While managed services are likely to be cost prohibitive to our smaller customers, we are excited about the opportunity given that revenue is more predictable, being evenly amortized over the term and in our limited experience has seen higher margins in relation to our traditional fixed bid engagements. Over the next several quarters, I expect we'll begin to provide additional details to investors with regards to managed services on a more regular basis.
Adjusted operating expenses, which excludes depreciation, accretion and severance and restructuring costs totaled $28.1 million for the second quarter compared to $28.9 million in the prior year period. We incurred a onetime benefit of approximately $0.9 million in selling and marketing. Excluding this onetime benefit, adjusted operating expenses would have generally been in line with the prior year period. While we have historically amortized the majority of our commissions expense in proportion to the related revenue, there has always been a small indirect component that has been expensed as incurred under an ASC 606 practical experience. With the significant growth of multiyear engagements, commissions relating to revenue extending beyond the 12-month period has also grown. While these amounts are not currently material to our financial statements, going forward, these costs will be expensed in alignment with our related revenue counterpart in the same manner as the majority of our commissions have been.
Year-over-year, cost of revenue increased primarily due to the aforementioned hiring and services, as did research and development costs to support the ongoing investment in our product platform. These were generally offset by lower cost in technology operations as we continue to manage costs in relation to our decline in wireless revenues and general and administrative costs, which benefited from favorable bad debt from the cancellation of our Virginia lease.
As a reminder, the expenses related to our Virginia lease will continue to impact severance and restructuring costs. through the end of September, at which point we'll start seeing an actual cash savings. Adjusted EBITDA in the second quarter totaled $7 million as compared to $8.5 million in the prior year period. This dynamic is more a reflection of the highly successful second quarter we had in 2023, stemming from strong bookings that led to significant license revenue. Our second quarter results in 2024 are generally in line with our expectations for the year, and we believe our robust pipeline has us positioned for a strong second half on financial guidance in a minute.
We ended the second quarter with $23.9 million in cash, which grew from $23.3 million in the first quarter. Based on our current outlook, we anticipate the annual free cash flow in the range of $25 million to $27 million and expect to exit 2024 with cash balances between $28 million and $30 million.
On a final note, as you have probably already seen in today's press release, based on our performance in the first half of the year, we are reiterating our financial guidance for 2024. This year, we expect total revenue to range from $136 million to $144 million, with wireless revenue ranging between $72 million to $75 million and software revenue ranging between $64 million to $69 million and adjusted EBITDA to range from $27.5 million to $32.5 million.
With that said, I will now turn the call back over to Vince.
Thank you, Calvin. I'd like to again point out how proud I am with the strong performance our team was able to deliver in the second quarter and again, believe these results position us well for the remainder of the year. We believe we are strongly positioned to grow our franchise value while returning capital to stockholders. We have a long-term organic growth engine in our software solutions with Spok Care Connect, and we maintain a source of strong recurring revenue in our wireless service line. .
We won the largest paging offering in the world, integrated with our software operations and we've enhanced our paging platform and user devices to serve our core health care customer base. We believe that these 2 assets going for us, our best financial results are ahead of us and Spok's future is bright.
Before I open the call up to your questions, I'd like to thank our shareholders for their support during our pivot. I'd also like to thank them for their participation in our annual meeting yesterday. As we reported, each of the items of business, which included: number one, the election of 6 nominees to our Board of Directors; number two, the ratification of the appointment of Grant Thornton LLP as our independent registered public accounting firm for the year ending December 31, 2024; and number three, a nonbinding advisory vote to approve 2023 named executive officer compensation or Say on Pay, all passed with an overwhelming majority. For a full review of the final voting results, please see our disclosures in our quarterly report on Form 10-Q filed with the SEC.
We appreciate your interest in Spok, and we look forward to updating everyone again next quarter when we report third quarter results in October. Operator, you may now open the call up to questions.
[Operator Instructions] Our first question is from Eric Martinuzzi with Lake Street.
Congrats on a solid quarter here. Just wanted to ask about, first of all, on the software side, it looked like pretty consistent performance as far as the [ 19 ] deals over 600,000 in Q1, and you had the 19 over 600,000 -- actually [ 18 over 600,000 and 1 over 700,000 ], was that in line with your expectations going into the quarter? Because as I recall, you talked about having had a phenomenal April. Just wondering how things played out in May and June.
Yes. It was in line with our expectations there. We had some of the deals that had a higher component of licensed software in the deal slip into the third quarter, and then we had one of them close almost in the very first week of July. But in general, it was in line, the license part has been a little bit lumpy, but we have a very large Q3 and Q4 pipeline where we think we're going to be more than offsetting the second quarter shortfall in the license there.
Yes. I wanted to just kind of underline that point you just made because we're looking at software operations bookings 16% -- at least at the 6-month point, we're down 16%. And obviously, we had a big win in Q2 a year ago. Are you continuing to back that double-digit growth for the full year 2024 on the software operations bookings?
Absolutely.
Okay. All right. And then shifting over to the wireless side. I did see the churn at least quarter-on-quarter, 0.8%. That's terrific. On a full year basis, we're down. The churn was about 7%, that was for basically Q2 as well as the first half of 2024. What's the expectation for the back half? Is this -- are we looking more like 0.8%? Or are we going to be creeping back up based on what you see in customer behavior?
Yes. Eric, this is Calvin. Yes, we were really pleased with the second quarter. I would say it'd be tough to continue expecting 0.8%. I mean that's a phenomenal number. I would definitely take it if we could get it. But I still expect full year to be in line with what we've been saying over the last couple of quarters, that 4%, 4.5%, 5% number will probably end the year in about that full range, maybe slightly better.
Okay. And then on the wireless ARPU, it wasn't a huge step down, but I did notice a sequential step down, which I thought was strange, just given we've got -- we had a price increase and then we had we've got the next gen -- the Gen A pagers rolling out. What's behind that? It looks like about $0.05 per unit on the ARPU step down Q1 to Q2.
Yes, sure. So from an ARPU perspective, we kind of look at that in 3 chunks. One is kind of that standard component. The other part is the kind of pass-through component. And the third part, albeit pretty small is a variable component. And that's going to be based on, believe it or not, things like overcharges still. And typically, we don't see a move from 1 quarter to the next, it's going to impact ARPU on a larger scale because generally, there's offsets. But really, it's coming from that variable piece. So nothing to worry about from that expectation. We've got price increases going through again here, similar to last year in the middle of the third quarter. And so we expect that to start benefiting us here in the next couple of months.
We have a couple of very large Gen A pager sale deals teeing up here for the third quarter and the fourth quarter, too, and that will have a positive impact on ARPU as well.
Okay. So the expectation is the sequential -- sequentially higher through the remainder of the year?
Yes, that's right.
All right. And then last question for me. The cash was up nicely here Q2 versus Q1. You said we finished out the year at $28 million to $30 million. Is that correct?
That is correct.
[Operator Instructions] There are no further questions at this time. I would like to hand the floor back over to Vincent Kelly for any closing comments.
Okay, shareholders. Thank you again very much for your support. We look forward to updating you again here at the end of next quarter in October when we report our third quarter results. Everyone, have a great day and a great evening.
This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.