SPOK - NASDAQ

Greetings and welcome to the Spok Holdings Inc. Q3 2024 Earnings Results Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Al Galgano. Thank you. You may begin.

Hello everyone and welcome to Spok Holdings third 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 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're subject to risks and uncertainties. Please review the risk factors section relating to our operations and the business environment, which are contained in our third 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.

Thank you, Al. Good afternoon, everyone. Thank you for joining us for our third quarter 2024 earnings call. I'm proud of the performance that our team was able to deliver in the third quarter as we continue to serve our customers at a high level and position Spok for strong performance in the fourth quarter and throughout 2025. We continue to make progress across the organization and believe that our strong operating platform and professional sales organization will result in solid, full year software bookings growth. As we have previously stated, we expect to achieve low-double-digit year over year software bookings growth for the full year, contributing to our strong level of software operations bookings in Q3, where 24 six-figure customer contracts doubled the amount generated in the prior quarter. Further, we are positioned strongly for 2025. We have amazing relationships with the top healthcare systems in the nation who continue to purchase from us on a regular basis. We continue to invest in and enhance our platforms consistent with what our customers are requesting and Spok's products and services are viewed as an indispensable utility by our customers leading to strong customer loyalty. Let me also take this opportunity right upfront 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. That is our primary focus. Returning capital to shareholders is our legacy. We feel good about executing a strategy we believe in and one where we have enjoyed a lot of historical success. Today, we will 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. Number one, I'll provide a review of our company performance for the quarter. Number two, Michael Wallace, our President and Chief Operating Officer will review quarterly sales and operational highlights. Number three, Calvin Rice, our Chief Financial Officer will review our Q3 financial highlights and financial guidance for 2024. And number four, I'll come back and wrap up the call and open it up for your questions. Again, as I said upfront, we're proud of what the Spok team has been able to accomplish in the third quarter and we believe we're positioned for a strong Q4. Third quarter highlights included a nearly 65% year-over-year growth in software operations bookings compared to Q3 last year, an increase in software backlog to $63.6 million up more than 19% from the prior year quarter. Continued pipeline growth in terms of both size and quality, continued strength in our professional services business with year-over-year growth of 26%, continued strong levels of adjusted EBITDA, which covered our quarterly dividend and capital expenditure requirements, a resulting increase in cash balances, which grew approximately $4 million during the quarter and will continue to build through the remainder of the year. And lastly, 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. In short, we were very pleased with our performance in the third quarter and believe that our results in the first nine months of the year provide a strong foundation for a solid fourth quarter in 2025. Cal will review the specifics later. But based on our most recent forecast, we are reiterating our previous guidance range for 2024. In the third quarter of 2024, we generated over $7.5 million of adjusted EBITDA, which more than covered $6.3 million when we returned to our stockholders. However, at the same time we increased our third quarter research and development investment by nearly $0.3 million or 10.5% on a year-over-year basis. And we believe we are on track to invest approximately $11.5 million in product research and development expenses in 2024. That represents an investment in our future and upside for solutions sales momentum. 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 $690 million to our stockholders either through our regular quarterly dividend, special dividends or share repurchases. 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, growing 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. Before I turn the call over to Mike, let me take a moment to review what I believe gives Spok its competitive advantage. As you can see from the chart today, Spok commands a strong competitive position and there are many metrics that point to the strength of our platform. There are multiple factors that have contributed to Spok’s industry leading reputation and best-in-class product offering. I'd like to take a few moments to review some of our key recent accomplishments in product research and development. We believe our work here will fuel future software revenue growth and that our extensive experience selling and operating our established communication solutions will create significant value for stockholders by maximizing revenue and cash flow generation. Our product and development teams have been hard at work executing our product roadmap deliverables. For example, we recently completed and made available upgrades and a new UI to our operator consoles, which hospitals use to efficiently process and route calls. We also launched Spok Care Connect Contact Center for Universal Interoperability. During the fourth quarter, we intend to number one, deploy upgrades to our Spok Care Connect enterprise reporting. Number two, provide enhanced dashboard services for clinical and operational alerting. Number three, expand soft phone support and SMS two way service improvements. And number four, expand HL7 standards to support a wider variety of alerting systems. We look forward to future growth opportunities as a result of this work. Earlier this month, we hosted our Connect 24 users’ conference. This year we had 233 customers registered for the virtual event. At the conference, we were able to showcase our product roadmap and our recent research and development efforts. Customer feedback was very positive and we look forward to the growth opportunities this conference created for 2025 and beyond. 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 strong quarter and we made tremendous progress in a number of key areas and as we say, each quarter, while we continue to progress in building a solid financial platform and shareholder friendly capital allocation strategy, we remain true to our mission of being a global leader in healthcare communications. At the end of the day, our mission is to 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. One of our great assets is our 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 cultivated these longstanding 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 us significant flexibility. In the third quarter, our 10.4 million of software operations bookings included 24 six figure contracts doubling our second quarter performance for that metric and sustaining the momentum that we saw last year. Additionally, 16 of the customer contracts we signed this quarter were multi-year engagements. Now let me take a few minutes to highlight a few of the customer engagements that we signed in the third quarter. The first is with a large and prestigious Northeastern health system that Spok has partnered with for over 20 years. The organization operates 14 hospitals with almost 40,000 employees. This is the initial phase of a longer term vision standardizing five disparate Spok Care Connect instances onto Spok Smart Suite for Phase 1. In addition to an upgrade of the core platform, the project includes additional Smart Suite console test licenses, value-added services to ensure successful transitions for those facilities not using Smart Console along with addressing various technical initiatives and requirements of this customer. When Phase 1 is completed, this standardized enterprise system will allow each location to maintain current individual facility specific workflows. These three phases include expansion to other hospitals not using Spok software, so they too can use Spok for their patient care endeavors. The second contract is with a health system that has been with Spok for over 24 years. This East Coast academic health system operates across seven hospitals with the workforce exceeding 15,000 employees. They own the Spok Care Connect platform unlimited enterprise licenses to initiate nearly 400,000 codes annually, dispatching approximately 1 billion messages or pages and oversee nearly 650 on call groups per year. This is our second multiyear engagement with them, which includes Spok Smart Suite console licenses and upgrades, Spok e.Notify, Spok Messenger and Spok Mobile usage for the organization's 6,500 licenses. As an existing Spok customer, they also opted for 3 value added services: data integrity, solution assessment, and workflow analysis, which will help our partner derive maximum value from their Spok solutions. Lastly in the quarter, we secured another outstanding multi-year engagement with a customer that's the third largest non-profit integrated health system in the United States. They have a footprint across six states in the Southeast, U.S. and upper Midwest. They are committed to improving affordability and access to quality care. This multi-year engagement was focused on enhancing their consolidated Spok Care Connect platform that currently supports 21 hospitals across Illinois and Wisconsin. The Spok system is relied on for all switchboard operations, including the initiation of codes and emergency procedures. Our system is also leveraged as the enterprise directory with access to on-call schedules. As an existing Spok customer, this project will introduce modernization to the user interface, enhanced architecture and continued support of the PBX strategy and roadmap. 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 hurricanes Helene and Milton. The storms heavily impacted Florida's coastlines as well as into Georgia, South Carolina and North Carolina as it relates to Hurricane Helene. A number of our transmitters were down and our team of techs quickly mobilized into action. Our team was able to get transmitters impacted from the storm quickly back online and we experienced minimal customer escalations. It is the responsiveness and customer support that our team demonstrates every day that has gained us the industry leading reputation that Vince spoke about, and makes our wireless business such 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 third 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 third quarter 2024 financial performance, which we reported today. I encourage you to review our 10-Q 1 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 third quarter of 2024, GAAP net income totaled $3.7 million or $0.18 per diluted share compared to net income of $4.5 million or $0.22 per diluted share in the third quarter of 2023. In the third quarter of 2024, total GAAP revenue was $34.9 million compared to total revenue of $35.4 million in the prior year period. Revenue for the quarter consisted of wireless revenue of $18.3 million and software revenue of $16.6 million compared to $19 million and $16.5 million in the prior year respectively. With respect to wireless revenue, we did see a bump in quarterly net unit churn. Unit churn can be lumpy from one quarter to the next, so we don't place a significant emphasis on what happens in a single quarter. There were several large contracts we had anticipated this quarter that moved into the fourth quarter from a timing perspective. Had we brought those in, net churn rate would've been much lower and we still expect to lock those down by end of year. With that said, third quarter churn was slightly higher than anticipated. We now expect full year churn to range from 4.5% to 6%, slightly behind the 4$ to 5% we had previously mentioned, and still within the rates we have seen in the last several years. ARPU increased $0.36 cents or 4.7% from the prior year, primarily driven by the continued impact of pricing action undertaken in late 2023 and again in 2024. While we believe the demand for our wireless services will continue to decline on a secular basis has reflected in declining pager units and service, we are hopeful that our focus on pricing and new product offerings will continue to further offset revenue loss through pager unit decline. Turning to third quarter software revenue, professional services revenue of $4.8 million was up 26.1% from the prior year period, reflecting the sharp increase in software operations bookings as previously discussed. We have also seen managed services performed very well. For the quarter managed services comprise roughly 20% of our professional services revenue and grew by almost 133% from the prior year period. As I had mentioned previously, we are excited about the prospects of this growing service offering. As you may remember, this is a service offering within our professional services that is typically bundled with maintenance and sold like a subscription renewal. While managed services are likely to be cost prohibitive to our smaller customers, they have been well received by our medium and large customers who desire more predictability in their annual budgeting and throughout the upgrade lifecycle process. We believe that over time this business will generate higher margins in relation to our traditional fixed bid engagements. Beyond this, it also provides us with a more predictable and measurable revenue stream. License and hardware revenue totaled $2.4 million in the third quarter of 2024 compared to $3.2 million in the same period of 2023. And finally, third quarter maintenance revenue of $9.3 million was essentially flat to the prior year. Adjusted operating expenses which exclude depreciation, accretion and severance and restructuring cost totaled $28.5 million for the third quarter compared to $27.9 million in the prior year period. Year-over-year, cost of revenue increased primarily due to the aforementioned increase in professional service bookings and the related hiring to support those services. Research and development costs continue to remain higher to support the ongoing investment in our product platform as we had previously discussed and remain on target to finish the year at approximately $11.5 million as we have previously mentioned. General and administrative costs effectively from one-time items vary from one quarter to the next. These were partly offset by lower costs in technology operations, as we continue to manage those costs in relation to our declining wireless revenues. Adjusted EBITDA in the third quarter totaled $7.5 million as compared to $8.4 million in the prior year period yet up $0.5 million from the prior quarter. We were pleased with our third quarter results and believed our robust pipeline and the momentum that has been building over the course of 2024 has us positioned to end the year strong. More on financial guidance in a minute. We ended the third quarter with $27.8 million in cash, which grew from $23.9 million in the second quarter. Based on our current outlook, we continue to 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 nine months of the year and with the confidence in our fourth quarter performance, we are reiterating the guidance ranges for revenue and adjusted EBITDA for 2024.For the full 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. Finally, we expect 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, and thank you, Mike. We believe we're strongly positioned to grow our franchise value while returning capital to our stockholders. We have a long-term organic growth engine in our software solutions through Spok Care Connect, where we continue to invest. We maintain a strong source of recurring revenue in our wireless service line. We run the largest paging offering in the world. It continues to function during natural disasters like hurricanes when other communications technology fails. Our customers appreciate that we have integrated paging with our software operations. We have enhanced our paging platform and brought new modern secure user devices to market in order to serve our core healthcare customer base. We believe with these two assets going for us, we can continue to pay our recurring dividend for the foreseeable future and our best financial results are ahead of us. And we appreciate your interest in Spok, and we look forward to updating everyone again next quarter when we report our fourth quarter, results and provide guidance for 2025 in late February.Thank you for joining us this morning and have a great day. Operator, you may now open the line up to questions.

[Operator Instructions] The first question we have is from Kyle Bauser of B. Riley.

Congrats on a really productive quarter here. So on the software operations booking side, it's a really nice step up of ’24 six figure contracts. That's versus 18 last quarter and 19 in Q1. Can you talk a little bit more about the makeup of these bookings. I know Mike talked about a few of these bigger contracts, which is great. More broadly, were they derived from existing clients, new hospitals. You talked about in the past about breaking out clients by number of beds, so like under 200 or over 600. Just kind of curious if you could provide a little bit more color around some of these big contracts.

Yes, Kyle, most of these contracts were larger customers that we have, existing customers that we have doing upgrades and in those upgrades are buying the managed services along with that. Not a ton of new logo business this quarter. There was a couple, obviously, it's going to be a big focus in ‘25 as we bring some of our new software solutions to market. But it's basically, similar to what you've seen in prior quarters.

And you've also mentioned having about 26% market share in the U.S. at least. Can you talk about how you see your reach kind of expanding in the U.S. across, I think you've talked about the 7,000 sites of care.

Yes, Kyle, it's Mike. We've talked about this before. It's kind of bifurcated when you look at the large hospitals, so over 600 beds. We touched about 50% of those customers. Now, not every one of those customers have all of our solutions. If you look and that's about 350 facilities out of the 7,000 or so in the United States, kind of the mid-tier, which is kind of 200 beds to 599 beds. Again, we touch about 30% of those customers, which again, they don't have necessarily all of our products and then the small customers, which are under 200 beds, which is the overwhelming number as far as just a nominal number, it's like 5,500 out of the 7,000 or so. We've only got about 5% of that market at the end of the day. So as we've talked about before, we're heavily skewed towards the larger, more complex over 600 bed hospitals in the United States.

And maybe switching to ARPU, so it came up nicely even above Q1 levels. Can you talk about this a little bit more? Maybe remind me what sort of steady state ARPU you're kind of targeting, or maybe how you see this trending? Is there seasonality, et cetera?

Yes, Kyle, Hey, this is Calvin. And so from an ARPU perspective to be quite frank we're targeting it as much as we can obviously balancing the churn levels and being conscious of the macro environment and everything that our customers go through. From that perspective, what really driving the ARPU function is going to be a function of the price increases, by and large that we've spoken to for the last several years. And we did another one effective September 1st. So you really only see about a month of that being reflected, there this year and certainly for the quarter. And so that will continue to roll through in the fourth quarter and beyond. That's going to be the biggest driver. And then the GenA pager is the other component that's really helping support that ARPU and comes in at about an average 250 more per unit relative to kind of our standard unit. So as we kind of proliferate those units throughout the customer base that will continue to increase and help out the ARPU function as well. So those are really the two kind of key components of ARPU and what's been driving that performance over the last several years.

And maybe just a couple quick ones. One on international and the other on October, which sounds like that's a good start. So on international, this is kind of a growth opportunity that you've talked about. Can you provide a little bit more color around maybe the size of this market and how we should think about the international contribution over the next 12 to 24 months?

Yes. Most of our international effort is focused on the APAC region. I think Australia in particular, we partnered with a company called InTechnology to penetrate that market. We're working very closely with them. We've gone to a number of trade shows with them, working with the National Health Service over there. So we have aspirations there for 2025. I don't think you'll see anything major happen in 2024, so in the balance of the year with that. But that's where our big focus is, with respect to international.

And then lastly, you mentioned October being off to a great start. Anything you can point to like software bookings or other activity you're seeing would be great.

It's off to a good start like most of our quarters. We're confident in our guidance. We're hunting a couple of wells out there. We hope to bring one, maybe two of those in by year end. It's -- those bigger deals but it's always interesting the gates you have to get through in order to get them all signed off and inked, but we're going to get them. Just a question of when. So, stay tuned.

[Operator Instructions] The next question we have is from John Dixon as a Private Investor. Please go ahead.

I just have a quick question. So I've been with you kind of throughout all this restructuring process you've been going through. And I have a question about the GenA pager and the pager churn. The decreases you're seeing in the pagers, what is that related to? If it's not being replaced by GenA pager, is it related to lower employee counts from the companies that you're with or is there another device that's taken the place in the communication system from the pager itself?

Well, over the years, what we've seen, John, is that these paging customers in these large hospitals may have 5,000 pagers and then they go for six months and now it's 40,750 pagers. It's slowly going down. We're seeing about a 4%, 4.5%, 5% churn on an annual basis on the units. And what we're doing and we're working hard on this is, we're trying to offset that with revenue-based initiatives. So we call it average revenue per unit. One is the GenA pager, which gets a couple of bucks more per month per pager. The other is some technology that we're bringing to bear and that we'll be focusing on in the first quarter of 2025 that kind of makes the pagers almost the two-way type device when you combine them up with some applications we have on the mobile device with the iPhone and the Androids. And the other thing as we've changed the compensation incentives for the wireless sales team to be revenue-focused, not unit-focused, so that they're really focused on maintaining revenue in those large accounts. There's lots of ways they can do that. We've got a couple options for them to get higher ARPU or kind of have a take or pay type contract. So we're focused on that as well, because that impacts their commission, their pocketbook and we found that's been a good driver of performance. So paging is not going to be a growth business, but it's still very much valued by these emergency service providers and healthcare. When the hurricane tore through Florida, most of the cellular telephone systems were down and our paving systems were working just fine. I think out of our 60 or so transfers we had down there, we had three or four off the air at any given time. And since we simulcast, it really has no effect on the quality of the signal in the network. So, pagers going to be around for a long time. It's not going to be a growth engine. Our software business is a growth engine and fortunately the software's growing at a faster rate than pagings declining so the company net total basis is growing and we're very profitable while we do that.

And then I just have one last question. Earlier in the year you guys spoke about a cloud software solution that you were building out for the smaller hospitals. And can you kind of follow-up on that? How is that going?

It's here now. It's available. I think we sold, we haven't sold a ton of them, we sold about five of them. The smaller hospitals are still a little bit slow to adopt and what we're finding is it's generally a resource type thing. You go in, you pitch it and it looks great but they don't have anybody to work on the project and get it going. So we're going to continue helping them continue working with them. What we don't want to do is go to a small hospital, small healthcare facility and end up with a big professional services engagement where we got to put staff there because they, a, they can't afford it, and b, we'd lose money on that. We are very sensitive about our professional services group. It's been increasing its profitability every year under Mike's great leadership. And so we don't want to do things that don't make sense for us financially. So we're still learning to be totally blunt about it -- about that smaller market and we expect to see improvements there in the coming year.

The next question we have is from [George Miller] of MJH Management.

Quick question on the software operations booking, it seems to be higher but also more consistent. This year first quarter was eight then was nine, now it's over 10. Help us understand not just the fact that it's growing, but the fact that it seems like it's more consistent.

[George], I think that's part coincidence because the thing about the software bookings is if you get, like we got two big whales we got on the table right now, we're trying to bring in and land. If we get one of those, it skews it in a given quarter or sometimes you get two of them in one month and then that skews it. So it has been consistent. What I can tell you is we're very comfortable. We said we'd have double-digit bookings growth this year. I think last year we did like 30.5 million in software operations bookings. That's going to increase more than 10% for this year. And we'll see something similar to that we hope maybe better when we do our guidance at the end of February for 2025.

And how does that flow through to maintenance? How long does it take to flow through maintenance? Because you've had this nice increase in bookings, but your maintenance, at least it's flat, it's not declining at all. I guess year-over-year it's up a little bit, but it should flow relatively quickly right, to maintenance.

Yes [George], this is Calvin. From a maintenance flow through perspective, obviously, it depends on what the mix of the operations bookings is in total but the maintenance starts flowing through immediately. But we obviously amortize that over the life of the contract. So when you're looking at it on a year-to-date basis, obviously, it's dependent upon when it was sold. There's a big difference if it was sold in January versus December, if you're comparing those from one year to the next. So give or take, I'd say about 6 to 12 months from the time it's booked, you're probably going to have an apples-to-apples comparison from one year to the next.

And then just maybe a very broad question from the competitive perspective, are you seeing any changes in -- are you strengthening your position now that you're really truly focused on your Care Connect Suite?

Yes, I think we're strengthening our position with respect to our traditional competition and our traditional competitor base, [George]. We've got -- when we kind of break out how we look at the business, we've got on-call scheduling type competitors and we hold the on-call schedule. We've got clinical alerting systems out there that we compete with and we do that well as well. And then you have the traditional care coordination and secure messaging competitors, not much has changed in that arena. The one place we are seeing some changes in the competitive landscape, and I think it could be a great opportunity for us, we're hard down focused on this right now. There's a lot of the customer experience, UCaaS, CCaaS type large vendors out there looking to replace incumbent PBX systems in hospitals. I think there's an opportunity to use our operator console with those systems going forward and put an AI front end on it from an operator standpoint. And I think we could have a really nice package there. So we're talking about partnering there. We're having these conversations now. So I think that's an opportunity for us.

At this time, there are no further questions. And I would like to turn the floor back over to Vince Kelly for closing comments.

Thank you all very much for your support. We look forward to speaking with you at the end of February when we release our fourth quarter results and issue our 2025 financial guidance. Everyone have a great evening.