Spok Holdings, Inc. (NASDAQ:SPOK) Q2 2024 Results Conference Call July 24, 2024 5:00 PM ET
Company Participants
Al Galgano - Investor Relations
Vince Kelly - Chief Executive Officer
Mike Wallace - President & Chief Operating Officer
Calvin Rice - Chief Financial Officer
Conference Call Participants
Eric Martinuzzi - Lake Street
Operator
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.
Al Galgano
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 related to our operations and the business environment, which are contained in our second 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'll turn the call over to Vince.
Vince Kelly
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've 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 moved 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, a 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 healthcare contact center space. Number two, we have amazing relationships with the top healthcare systems in the nation who continue to purchase from us 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're viewed as an indispensable utility, and number five, we're very comfortable with our full year guidance.
We 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 two 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 it 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 setup front, we part 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 work, providing confidence in our network, a 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 bolstered software revenue in the second quarter.
Improved wireless trends has 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 HIPAA-compliant alphanumeric GenA pager and continued discipline and 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 of 2024. We maintain our optimism for the year and we are reiterated 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 our established communication 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, even through our regular quarterly dividend, special dividends for share repurchases.
When you take into consideration our current cash balance distributions to stockholders, share repurchases, debt repayments and acquisitions, since our inception Spok generated more than $1 billion of free cash flow, our focus on maximizing cash over the long term supports the four major tenants 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 communication 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 the 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 was born. 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, Spok’s talented and experienced, team has consolidated the paging industry and combined 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 is a leader in healthcare communications, maintains the largest paging network in the United States, has 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 creation and returning capital to our investors. And as a pioneer in healthcare communications with the 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 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.
Further supporting this claim is our recent announcement that for over a decade, nearly every hospital named the U.S. News and World Reports best hospital honor roll relies on Spok solutions. For the 2024 and 2025 honor roll. We were pleased to announce that 17 of the 20 adult hospitals on that list youth Spok’s industry leading secure healthcare 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 roll youth 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 and our related solutions were unaffected by the recent worldwide CrowdStrike outage. While many of our customers were 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.
Mike Wallace
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. He had amidst solid progress in 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 healthcare 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 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 longstanding valuable customer relationships. This has 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 a significant flexibility.
In the second quarter, our $8.7 million of software operations bookings included 18 six figure and one 7 figure customer contracts, sustaining the momentum that we saw last year. Most impressively second quarter software operations bookings included 14 multi-year engagements and those six and seven figure contracts had an average contract size that was up nearly 14% in the prior quarter. So we are extremely pleased with the first six 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 three-year agreement with a three 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 communication strategy and identified Spok as a strong stable vendor that offers a unified platform that works well with Epic.
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 healthcare 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 multi-year commitment, this organization also opted in will 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 e-notify for incident management and Spok mobile for medical and safety code procedures and secure code messaging. Similar to the contract previously discussed, this multi-year engagement also included managed professional services, multiple value added services, and the 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 barrel. The storm came on shore the morning of July 8th 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 techs quickly mobilized into action.
Our team was able to quickly get those transmitters back online, and we experienced no customer escalations. It is a responsiveness and customer support that our Spok team demonstrates every day that has gained us 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?
Calvin Rice
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 and 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 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 GenA 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 GenA 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 history worth almost $4 million, including license revenue of nearly $1.8 million, of which the majority would've fallen to the bottom line.
In addition to this, we were able to pull forward a number of sales from a 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 services personnel to match the pace of our growth and professional services backlog, and as our software operations bookings continue to expand.
We've also seen managed services perform 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 products they own over their multi-year term, which is typically three 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 customer's 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 total $28.1 million for the second quarter compared to $28.9 million in the prior year period. We incurred a 1x benefit of approximately $0.9 million in selling and marketing.
Excluding this 1x benefit adjusted operating expenses would have generally been in line with the prior year period. While we have historically amortized the majority of our commission's expense and proportion to the related revenue, there has always been a small indirect component that has been expensed as incurred under an ASC 606 practical expedient.
With the significant growth of multi-year engagements, commissions relating to revenue extending beyond a 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 a 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 costs in technology operations as we continued to manage costs in relation to our declining wireless revenues and general and administrative costs, which benefited from favorable bad debt and savings 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 its position for a strong second half more 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 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.
Vince Kelly
Thank you, Calvin.
I'd like to again point out how proud I am of 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 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've 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.
Before I open the call up for 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 six 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 non-binding 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 a 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.
Question-and-Answer Session
Operator
[Operator Instructions] Our first question is from Eric Martinuzzi with Lake Street.
Eric Martinuzzi
Just wanted to ask about the, 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 -- actually 18 over 600,000 and one 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.
Vince Kelly
Yeah. It was in line with our expectations there. We had some of the deals that had a higher component of license software in the deal slip into the third quarter, then we had one of them close almost in the very first week of July. But in general, it's in line. The life of 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.
Eric Martinuzzi
Yeah. 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 six-month point, we're down 16%. 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?
Vince Kelly
Absolutely.
Eric Martinuzzi
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% and 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?
Calvin Rice
Yeah. Hey, Eric, this is Calvin. Yes, we were really pleased with second quarter. I would say, it would 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'd 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 will probably end the year in about that full range, maybe slightly better.
Eric Martinuzzi
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 GenA pagers rolling out. What's behind that? It looks like about a nickel per unit on the ARPU step down Q1 to Q2?
Calvin Rice
Yes, sure. So from an ARPU perspective, we kind of look at that in three trunks. 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 one 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 third quarter. And so we expect that to start benefiting us here in the next couple of months.
Vince Kelly
Yeah. We have a couple of very large GenA pager sale deals queuing up here for the third quarter and the fourth quarter too and that will have a positive impact on ARPU as well.
Eric Martinuzzi
Okay. So the expectation is those sequentially higher through the remainder of the year?
Calvin Rice
Yeah, that's right.
Eric Martinuzzi
Okay. 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?
Calvin Rice
That is correct.
Operator
[Operator Instructions] Thank you. There are no further questions at this time. I would like to hand the floor back over to Vincent Kelly for any closing comments.
Vince Kelly
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.
Operator
This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.