Spok - Q1 2024

Transcript

Operator (participant)

Ladies and gentlemen, greetings and welcome to the Spok Holdings First Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star and zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Al Galgano. Please go ahead.

Al Galgano (Head of Investor Relations)

Hello everyone and welcome to Spok Holdings First Quarter 2024 Earnings Call. I am joined today 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 related to our operations and the business environment which are contained in our first quarter 2024 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 will turn the call over to Vince Kelly. Vince?

Vincent D. Kelly (President and CEO)

Thank you Al and good afternoon everyone. Thank you for joining us for our first quarter 2024 earnings call. I'm very proud of the strong performance our team was able to deliver in the first quarter and I believe these results position us well for the remainder of the year. We've gotten off to a great start and we are maintaining that momentum. 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 shareholders over the long term while responsibly investing in and growing our business.

As we've demonstrated with our performance over these last two years, 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 it in full on an annual basis. That's our job and our primary focus. Returning capital to shareholders is our legacy and we feel good about executing a strategy we believe in and that we have had a lot of historical success with. 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. The order's going to 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 Michael Wallace, our President and Chief Operating Officer, to review some of our quarterly sales highlights. Then our Chief Financial Officer Calvin Rice will review our first-quarter financial highlights and financial guidance for 2024. I'll then wrap up the call and open it up for your questions. As a set up front we're proud of what the Spok team has been able to accomplish in the first quarter and believe our results provide a solid springboard for the year ahead. First quarter highlights include a more than 5% year-over-year growth in total revenues driven by a more than 15% growth in software revenues. Strong year-over-year increases in net income and adjusted EBITDA levels. A 39% year-over-year increase in software operations bookings, Spok's second-highest first-quarter bookings level in our history.

Year-over-year growth in all categories of software revenue including maintenance, license, professional services, and hardware. Improved wireless trends as net unit churn again dropped below 2% 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 HIPAA-compliant alphanumeric GenA pager. And we were able to accomplish all this while continuing to invest in our products and infrastructure. In short I believe Spok is doing an excellent job of balancing our goal of returning cash to our stockholders with those investments in order to fuel future growth. In the first quarter of 2024 we generated over $7.5 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 first quarter research and development investment in our products by $500,000 or 18.4% on a year-over-year basis and believe we're on track to invest approximately $11 million in product research and development expenses in 2024. We believe this investment will fuel future software revenue growth and our extensive experience selling and operating our established communication solutions will create significant value for 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 more than $680 million to our stockholders even through our regular quarterly dividend, 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 over $1 billion of free cash flow. Our focus on maximizing cash over the long term supports the four major tenets of our strategy. Those are number 1, continued investment in our wireless and software solutions. Number 2, 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 selling and operating our established communication solutions and world-class customer base will create a 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 tremendous recognition that we received right at the end of the first quarter and a major accomplishment by the entire Spok team. For the seventh consecutive year in a survey of healthcare industry clients by Black Book Market Research on top-rated clinical communications platforms, Spok received the number 1 overall survey rank. We're honored by the unwavering trust our healthcare clients have placed in Spok as their go-to partner for clinical communications. The achievement of securing the top position for seven consecutive years underscores our commitment to delivering critical communication technology that enhances hospital and health system communication, which ultimately enhances patient care and safety.

The survey, Spok received the highest honors for customer satisfaction in 12 of the 18 copyrighted key performance indicators Black Book Research measures, including strategic alignment of client goals, innovation, breadth of offerings, account management support and customer care, and best of breed technology and process improvement. We're particularly honored by this recognition because the research is truly independent and unlike other rating programs, no participation or subscriber fees are involved. We believe that honors such as these are indicative of the strong industry reputation that we have built. With that, I'll turn the call over to Michael Wallace. Mike.

Michael W. Wallace (COO)

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. Yet 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 healthcare communications. We deliver clinical information to care teams when and where it matters most to improve patient outcomes as Spok enables smarter faster clinical communications to our customers. We have over 2,,200 healthcare facilities as customers representing the who's who of hospitals in the United States. We have built our solutions over many years and have long-standing, valuable customer relationships.

This is coupled with the financial strength that over 80% of our revenue is recurring in nature, and we are a company with no debt, which provides us significant flexibility. In the first quarter, our $7.9 million of software operations bookings included 19 six-figure customer contracts, sustaining the momentum that we saw last year. Most impressively, that included 4 multi-year engagements, and those six-figure contracts had an average contract size that was up nearly 40% from the prior quarter. We are extremely pleased with this start to 2024. Let me take a few minutes to highlight a few of the customer engagements that we signed last quarter. The first health system serves more than 1.4 million patients and 200,000 health plan members, covering an extensive area of 250,000 sq mi.

This rural health organization sends over 120,000 messages and handles more than 3,000 codes per month using Spok solutions. Through this multi-year commitment, they benefit from three years of steady budgeting upgrades, a new test system, value-added services, and the flexibility to adopt upgrades as required for CTI dependencies and desired feature functionality enhancements. Next, we secured another contract with a customer who has been with Spok for almost 20 years. This customer operates across six hospitals with a workforce exceeding 10,000 employees. They use the Spok Care Connect platform to initiate nearly 400,000 codes annually dispatching approximately 6 million messages or pages and oversees nearly 3,000 on-call groups per year. Our multi-year engagement with this health system includes Spok Smart Suite upgrades, Spok Smart Suite console licenses, e.Notify, Messenger, and Spok Mobile usage for the organization's 7,000 licenses.

As an existing Spok customer, the health system also opted for two value-added services: data integrity and workflow analysis, which will help our partner derive maximum value from their Spok solutions. Another customer contract is with a long-standing Spok partner of over 20 years to support their clinical communication needs across the organization's growing enterprise. This health system covers about 80 specialties to more than 100,000 hospitalized patients, nearly 370,000 emergency room cases, and oversees approximately 3 million outpatient visits per year. As a Spok Console client, this multi-year engagement encompasses extensive use of the Spok Care Connect platform, including Spok Web Directory, Spok Mobile, encrypted paging, Spok Messenger, Spok e.Notify, and EHR ADT integration with Epic, which will expand to a new state-of-the-art facility opening next year. Additionally, this agreement includes two of our value-added services.

Last we executed a strategic three-year agreement focusing on the expansion and optimization of a customer's Spok Care Connect environment. Their flagship hospital has over 24,000 employees staffing more than 1,400 beds. Our partnership includes Medi-Call console upgrades, the expansion of the health system's all-in-one device initiative powered by Spok Mobile to a total of 2,000 users, and our AI-powered interactive voice response system Spok Voice Connect. In addition, this customer also opted for various value-added services to help them drive maximum value from our solutions. On a final note, I would also like to highlight our successful participation in the HIMSS 2024 conference in March. There we showcased our top-rated clinical communication platform. Spok solution experts also demonstrated the power of the new Spok Care Connect hosted solution and the new reporting dashboards and user capabilities of Spok Messenger.

The event attracted more than 10,000 healthcare leaders from around the globe. We were very pleased with the customer prospect and partner meetings we participated in at this year's conference. Events such as these are critical to our success as they provide a referral source for further growth to our sales pipeline. I will now turn the call over to Calvin Rice, our Chief Financial Officer, to briefly review the first quarter financial performance. Calvin.

Calvin C. Rice (CFO)

Thanks, Mike and good afternoon everyone. I would now like to take a few minutes and provide a recap of our first quarter 2024 financial performance which we reported today. 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 2024 GAAP net income totaled $4.2 million or $0.21 per diluted share compared to net income of $3.1 million or $0.15 per diluted share in 2023. For the first quarter of 2024 total GAAP revenue was $34.9 million up from prior quarter revenue of $34 million and compared to revenue of $33.2 million in the first quarter of 2023.

Revenue for the quarter consisted of wireless revenue of $18.6 million which was down 2.3% from the prior year and software revenue of $16.3 million up 15.3% from last year. With respect to wireless revenue we saw improvement in quarterly net unit churn at 1.6% in the first quarter down from 2.5% in the prior quarter and a $0.30 increase in RPU or 4% from the prior year. The increase in RPU was primarily driven by the success of our pricing actions undertaken in late 2023 and to a lesser extent continued sales of our new GenA pager.

While we believe the demand for our wireless services will continue to decline on a secular basis as reflected in our declining pager units and services, we are hopeful that our focus on pricing and other initiatives like the GenA pager will continue to further offset revenue loss through pager unit decline. Turning to first-quarter software revenue, maintenance revenue totaled $9.3 million and was up from the prior-year quarter by approximately 3.8%. Given the nature of maintenance revenue, higher license sales will work through revenue on a lagging basis and we are beginning to see the positive impact on maintenance revenue from software operations bookings levels over the past several quarters. Professional services revenue was a healthy $4 million versus $3.2 million in the first quarter of 2023.

Much of this was driven by an increase in personnel in the second half of 2023 and continuing into the first quarter with 16 additional hires over the last nine months. As software operations bookings continue to expand we expect an ongoing need to increase services personnel to maintain pace with our growth and the professional services backlog. We generally expect new personnel to be fully billable in roughly three months from the time they are hired. So there's some margin impact in the very short term but nothing that would present a meaningful impact on a calendar year basis. License and hardware revenue totaled $3 million up from $2 million in the same period of 2023. Again this results from the strong levels of software operations bookings we continue to see.

First-quarter adjusted operating expenses which excludes depreciation accretion and severance and restructuring cost totaled $28.5 million in the first quarter compared to $27.2 million in the prior year period. While year-over-year expenses were up $1.3 million nearly half of the increase was due to the about $0.6 million increase in Spok's cost of revenue primarily due to the aforementioned hiring and services and directly related to the $2.2 million increase in software revenue. The remainder was driven by increased investment in our software products through research and development as well as selling and marketing. Adjusted EBITDA totaled $7.5 million a 9.2% increase from adjusted EBITDA in the same quarter of 2023 a reflection of our strong top-line results to begin the year.

I'd also like to address our cash balances which were just over $23 million at the end of the first quarter. As we have mentioned in the past, cash disbursements in the first quarter are traditionally the peak of what we experience in a given calendar year and this quarter was no different. Based on our current outlook, we fully expect to exit 2024 with cash balances substantially higher than where we ended the first quarter. On a final note, as you've probably already seen in today's press release, based on our performance in the first quarter we are reiterating our financial guidance for 2024.

This year we expect total revenue to range from $136 million-$144 million with wireless revenue ranging between $72 million-$75 million and software revenue ranging between $64 million-$69 million and adjusted EBITDA to range from $27.5 million-$32.5 million. With that said I will now turn the call back over to Vince.

Vincent D. Kelly (President and CEO)

Thank you very much Calvin. Before I open the call up to your questions I'd like to again point out how proud I am of the strong performance our team was able to deliver in the first quarter and believe these results position us well for the remainder of the year. We believe we're in a great spot to grow our franchise while growing while returning capital to our shareholders. We have a long-term organic growth engine in our software solutions through Spok Care Connect and we maintain a source of strong recurring revenue in our wireless service line. We run the largest paging offering in the world integrated with our software operations and we have enhanced our paging platform and user devices to serve our core healthcare customer base.

We believe with these two assets going for us, our best financial results are ahead of us, and Spok's future is bright. We appreciate your support and interest in Spok, and we look forward to updating everyone again next quarter when we report second-quarter results in July. Thank you very much for joining us, and have a great day. Operator, you may now open the call for questions.

Operator (participant)

Thank you. Ladies and gentlemen, we will now be conducting a question-and-answer session. If you would like to ask a question, please press star and one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star and two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Ladies and gentlemen, we will wait for a moment while we poll for questions. Our first question is from the line of Eric Martinuzzi with Lake Street Capital Markets. Please go ahead.

Eric Martinuzzi (Senior Research Analyst)

Hey, congratulations on a successful start to the year. I wanted to just start the questions with what jumped off the page for me was your software bookings number, that 39% growth. I know it's wrong to get too excited in any given quarter, but certainly having that $7.9 million number that was, as you said, I think second-highest quarter, second-highest Q1 in the company's history. So just, are we still—I'd kind of like to take it back out to a full-year view. Are we still looking for for double-digit growth on a full-year basis for the software bookings?

Vincent D. Kelly (President and CEO)

That would be yes, and it's okay to get a little bit excited, Eric.

Eric Martinuzzi (Senior Research Analyst)

Yep. As far as the pipeline goes there was this just kind of we had a confluence of large deals coming in or is there something else behind it?

Vincent D. Kelly (President and CEO)

The pipeline continues to grow. One of the things that's really happening helping us this year is we've put a lot of investment and time now since the pivot into our roadmap and we've been giving previews of our roadmap and the functionality that we're adding to our solutions to our customers and they're buying it. And our sales team is knocking the cover off the ball right now. Had a fantastic first quarter and April was phenomenal, right? So you never know what May and June and the rest of the year are going to bring but we've gotten off to it the first four months is incredibly strong compared to the first four months last year. Now having said that you'll recall that in the second quarter last year we had one big gigantic colossal $5 million deal which really bumped the second quarter numbers way up.

And so we could always get another one of those big whales. We did pull a pretty good-sized whale into April but right now just to be honest don't have a $5 million one single deal in the target and the crosshairs right now but I think we're going to end up having a pretty darn good second quarter as well.

Michael W. Wallace (COO)

Hey, Eric, it's Mike. I guess I would add one little piece of color to that. The first quarter was really positive in the area of we actually didn't have one of those really big deals. We had 19 six-figure deals and the highest deal within those 19 was about $600,000-$700,000. So we were hitting a lot of singles and doubles and triples if you will which I think portends for good things the rest of the year as we're just we're doing the basics really really well.

Eric Martinuzzi (Senior Research Analyst)

Okay. You noted in the press release the investment slight incremental R&D dollars being spent. Where are we pointing those as far as is this going to the contact center? Is there an element that's going into the wireless product? What's the incremental lift on our.

Vincent D. Kelly (President and CEO)

Primarily going to our operator console and also our alerting solution which we call Messenger which does kind of clinical alerting out there but it's a lot to do with the operator console and bringing new functionality to it.

Eric Martinuzzi (Senior Research Analyst)

Okay. Assuming this is feedback from customers and just working through a punch list?

Vincent D. Kelly (President and CEO)

Absolutely.

Eric Martinuzzi (Senior Research Analyst)

Okay. All right. And then the cash, as Calvin mentioned, you talked about it stepping down here in Q1. Q1 always being seasonally more challenging. Based on the outlook that you've got for the year, on my model I had the roughly midpoint Adjusted EBITDA of $30 million converting into around $26 million of free cash flow. Is that still in the ballpark for what you would expect on a full year basis?

Calvin C. Rice (CFO)

Yep. Yeah sure is Eric.

Eric Martinuzzi (Senior Research Analyst)

Okay. All right. And then last question. You talked about the churn being down here in Q1. That's great to see. I know on a trailing twelve months basis is really more how you like to look at it and it was around a little over 7% for the twelve-month period ending Q1. What is that expectation? The full-year outlook? What's the expectation for the full-year churn?

Calvin C. Rice (CFO)

Yeah, I would say that our expectation is consistent with what we've been saying. We saw that drop quite significantly in the first quarter. I can tell you here for the first month of the second quarter that we are very pleased with those results, and I wouldn't expect it to drop from what we saw in Q1. Still in line with what we've been saying, I expect to kind of return to the mean in the 4%-5% range on an annualized basis.

Eric Martinuzzi (Senior Research Analyst)

Got it. All right. Well, congrats and good luck in the rest of the year.

Vincent D. Kelly (President and CEO)

Thank you very much, Eric.

Operator (participant)

Thank you. Ladies and gentlemen, a reminder if you wish to ask a question please press star and one. As there are no further questions, I will now hand the conference over to Vincent Kelly for his closing comments.

Vincent D. Kelly (President and CEO)

Okay everyone. Well thank you very much for your support and for joining us this evening. It does conclude today's teleconference. We look forward to speaking with you in July when we report our second quarter numbers. Everyone have a nice evening.

Operator (participant)

Thank you. Ladies and gentlemen that concludes today's conference. Thank you for your participation. You may now disconnect your lines.