SPOK - NASDAQ

Hello everyone. And welcome to Spok Holdings’ First Quarter 2025 Earnings Call. I am joined by Vince Kelly, Chief Executive Officer; Michael Wallace, 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 first quarter 2025 Form 10-K 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?

Thank you, Al, and good afternoon, everyone. And thank you for joining us for our first quarter 2025 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 outperforming our internal forecast, and we're 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 our 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. That is our job and our primary focus. Returning the capital to shareholders is our public company legacy, and we feel good about executing the strategy we believe in and that we have had a lot of historical success with. 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. The order will be as follows. We will begin by providing a review of our company performance for the quarter. I'll then turn the call over to Mike Wallace, our COO, to review some of our quarterly sales highlights. Then our CFO, Calvin Rice, will review our first quarter financial highlights and financial guidance for 2025. I will then wrap the call up and open it up for your questions. As I said up front, we're proud of what Spok has been able to deliver and accomplish in the first quarter and believe our results provide a solid springboard for the year ahead. First quarter highlights include a 4% year-over-year growth in total revenues driven by a more than 9% increase in software revenues, strong year-over-year increases in net income and adjusted EBITDA levels of 22.7% and 8.9% respectively. A near 6% year-over-year increase in software operations bookings from already strong prior year levels. A 44% increase in year-over-year professional services revenue driven by a threefold increase in the managed services category. A more than 15% increase in our software backlog and improved wireless trends as net unit churn was primarily offset by continued expansion of our wireless average revenue per unit and sales of our higher revenue encrypted HIPAA compliant alphanumeric GenA pager. And we were able to accomplish all this while continuing to invest in our products and infrastructure at levels consistent with 2024. 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, 2025, we generated over $8.2 million of adjusted EBITDA, which more than covered the $7.9 million we returned to our stockholders. However, at the same time, we maintained research and development investment at prior year levels. We're on track to invest between $11 million and $12 million in product research and development expense in 2025. 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 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 $700 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 tenets of our strategy. Those are, number one, continued investment in wireless and software solutions, number two, growing our revenue base, number three, continued discipline to 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 our stockholders. Before I turn the call over to Mike, for all of you that are new to the story, let me take a moment to review what Spok evolved into since its inception about 25 years ago. As you know, Spok started as a wireless technology communications company, and until 2011, prior to the acquisition of Amcom Software, operated solely as a telecom company with 100% of our revenues coming from that product offering. Since Spok has transformed into a global healthcare communications provider, offering both software and wireless products and solutions to customers. Given our recent focus on Spok Care Connect and our pivot about three years ago to a new strategic direction, we believe that we've transformed into one of the leading healthcare technology companies in the nation. When you look at Spok today, we're a leader in healthcare communications with a solid reputation. We maintain the largest paging network in the United States. We have a blue-chip customer base of more than 2,200 hospitals who keep buying from us. We have created a large portfolio of intellectual property via strategic R&D investments. We have generated significant shareholder value through cash flow generation, returning capital to our investors, and we have a best-in-class product offering. Spok has 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 eight of the past 10 years by Black Book Research, 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 eight consecutive years underscores our commitment to delivering critical communication technology that enhances hospital and health system communication, which ultimately enhances patient care and safety. And lastly, I want to briefly address the current uncertainty in the macroenvironment around tariffs and its impact on the healthcare industry, and Spok in particular. Based on the current landscape, we believe that neither our revenue nor our supply chain will be materially impacted. Additionally, Spok's products and solutions are viewed as an essential utility within the walls of our hospital customers. For these reasons, and coupled with our first quarter performance, we feel comfortable reiterating our guidance for the full year of 2025 that Calvin will review in detail later in the call. With that, I'll turn the call over to Mike Wallace. 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. Yet amidst all of the progress and continuing to create 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 for our customers. And Spok continues to build upon its strong industry reputation. In late March, we announced that for the eighth consecutive year, we earned top honors in Black Book's 2025 Survey of Healthcare Industry Clients. We are particularly proud this year as top honors came in two categories of the survey. This incredible milestone demonstrates our commitment to delivering robust and reliable technology that removes barriers to exceptional patient experiences and care. Spok received the highest honors for customer satisfaction in 12 of the 18 key performance indicators that Black Book Research measures for secure messaging and clinical communication solutions. For the new category of enterprise messaging and critical alert management solutions, Spok received the top-rated spot for individual key performance metrics such as alert accuracy and relevance, usability and adoption rate by clinicians and staff, customer support and vendor responsiveness, and impact on patient safety and clinical outcomes. Now, turning to our software operations bookings performance in the first quarter, we generated $8.2 million of bookings that included 22 six-figure customer contracts, sustaining the momentum that we saw last year. This performance included two new logo agreements, and those six-figure contracts had an average contract size that continues to grow from prior year levels. We are extremely pleased with the start to 2025. Now, let me take a few minutes to highlight a few of the customer engagements that we signed in the last quarter. The first contract was with a large Midwest health system that provides care and life-saving services to more than 100,000 patients annually. Each year, the organization also manages over 450,000 operator calls and processes over 4 million messages through its Spok system. Last quarter, we secured a three-year managed services commitment that will extend our partnership with this health system and will continue to drive value in critical communication services that are core to their mission and growth in the Midwest. This multi-year engagement includes Spok SmartSuite Console and web upgrades, our new Spok Care Connect reporting and dashboards, Spok Mobile, and Spok Messenger upgrades. Coupled with our value-added services, including solution assessment and data integrity, our platform is being extended to deliver priority alerts to clinicians using Epic Chat. This organization will continue to build out its Spok and Epic coexistence strategy to manage system-wide communication workflows. The second outstanding contract from the last quarter was with a faith-based, nonprofit healthcare network that has partnered with Spok for more than 23 years. This health system has 11 hospitals and over 28,000 employees, 4,500 physicians, and 100 physician practices and outpatient facilities. As part of the agreement, Spok will provide medical and web directory upgrades to the core system, as well as Spok's value-added services, such as data integrity and solution assessment, which will help our partner derive maximum value from their Spok solutions. Additionally, two new sites will join the enterprise and leverage the Spok platform. Lastly, Spok is excited to continue our partnership with a valued customer of almost 30 years located in the Southeast. This health system is dedicated to innovating medicine, teaching the caregivers of the future, and supporting the healthcare needs of their patients. This customer signed a three-year agreement to upgrade their existing Spok SmartSuite Console, Spok eNotify, and Spok Mobile Solutions, and will add Spok Voice Connect, Spok Care Connect Enterprise Reporting, and Spok Messenger with dashboards for SMS. Also included in this engagement are several of Spok's value-added services to assist with closer collaboration with the clinical teams. So, as you can see, Spok continues to consistently deliver effective communication solutions to hospitals and healthcare systems. Our first quarter success underscores our steadfast dedication to offering unparalleled communication solutions to our clients. We are confident that our software solutions will continue bringing positive change to healthcare institutions nationwide. I will now turn the call over to Calvin Rice, our Chief Financial Officer, to briefly review the first 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 first quarter 2025 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 operation and financial performance than we will cover on this call. Turning to our income statement, in the first quarter of 2025, GAAP net income totaled $5.2 million, or $0.25 per diluted share, up from net income of $4.2 million, or $0.21 per diluted share in 2024. For the first quarter of 2025, total GAAP revenue was $36.3 million, up more than 7% from prior quarter revenue of $33.9 million, and up nearly 4% from revenue of $34.9 million in the first quarter of 2024. Revenue for the quarter consisted of wireless revenue of $18.5 million, nearly flat for the first quarter of 2024, and software revenue of $17.8 million, up 9.2% from the prior year quarter. With respect to wireless revenue, we saw an 80-basis point decline in the trailing 12-month net unit churn to 6.4% in the first quarter of 2025, from 7.2% in the first quarter of 2024. Adding to the positive trend in net unit churn was a 4.4% year-over-year increase in the average revenue per unit, or ARPU, to $8.24. The increase in ARPU was primarily driven by the success of our prior pricing actions, 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. One of those more recent initiatives includes an increase in the price that we charge our customers for pagers that are not returned when service is discontinued. This increase went into effect in February, and we believe this should lead to an annualized benefit of at least $1 million going forward as a result of this initiative. These revenues are recorded as product sales under our wireless revenue. Turning to first quarter software revenue, maintenance revenue totaled $9.1 million and was down slightly from the prior year quarter by approximately 2.1%. New maintenance revenue was down slightly in 2025 as a result of license sales. While first quarter bookings were strong, as has been highlighted, it will take several quarters for us to grow new maintenance revenue back to a point where we can return to revenue growth. In the near term, we expect to be in line or slightly below prior year results. As previously mentioned, growth in professional services revenue was a key driver in the growth of software revenue in the first quarter of 2025. Professional services revenue of $5.8 million in the first quarter of 2025 was up nearly 44% from revenue of $4 million in the first quarter of 2024. We are seeing further sustained improvement in our resource utilization, delivering on our internal initiatives to better align total resources with our backlog and driving a higher rate of margin and net cash flow. Managed services have evolved into a significant component of our professional services revenue. In the first quarter, managed services revenue totaled $1.3 million or 22.7% of total professional services revenue. This is up more than 7% from prior quarter revenue of $1.2 million and up more than 180% from revenue of $0.5 million in the first quarter of 2024. License and hardware revenue totaled nearly $3 million and was in line with the same period of 2024, consistent with the strong levels of software operations bookings we continue to see. First quarter adjusted operating expenses, which excludes depreciation, accretion, and severance and restructuring costs, totaled $29.4 million in the first quarter compared to $28.5 million in the prior year period. While year-over-year expenses were up $0.8 million, most of the increase was driven by selling and marketing expense, primarily to a greater presence at this year's HIMSS conference, additional personnel, and costs directly related to the more than 9% increase in software revenue. Technology operations continue to benefit from network rationalization and cost reductions as we look to minimize the impact of unit churn. General and administrative costs were generally in line apart from timing variances and severance and restructuring no longer includes amortization of the New York lease which ended in the fourth quarter last year. Adjusted EBITDA totaled $8.2 million, a nearly 9% increase from adjusted EBITDA in the same quarter of 2024. This is a reflection of our strong top line results to begin the year. I'd also like to address our cash balances, which were just under $20 million at the end of the first quarter. Consistent with prior years, our cash balances declined in the first quarter because of typical working capital needs, including things like the payment of our short-term incentive plans, prepaid annual renewals of technology contracts, et cetera. Additionally, first quarter cash flow financing activities are typically higher than in the three remaining quarters of the year, reflecting payments on the company's long-term incentive plans. However, we anticipate cash balances will generally grow through the remainder of the year given those needs are behind us. Based on our current outlook, we anticipate annual free cash flow in the range of $24 million to $28 million and expect to exit 2025 with cash balances between $23 million and $27 million. Moving on to guidance for 2025, we have provided estimates for revenue and adjusted EBITDA. As a reminder, the figures I'm going to discuss today are included in our guidance table in the earnings release. We have begun 2025 on very positive footing and no doubt our solid performance in the first quarter of 2025 might lead many to impute a higher level of performance than is reflected by the midpoints of our current financial guidance ranges. However, like many of our peers, as Vince noted earlier, we believe that given the current uncertainty in the macroeconomic environment and its potential impact on the healthcare industry, it is more prudent to maintain a position of guarded optimism until we have greater visibility on the year. As a result, we are reiterating our guidance estimates for revenue and adjusted EBITDA generation for this year. In 2025, we expect total revenue to range from $134 million to $142 million. The midpoint of our guidance reflects consolidated revenue generally in line with 2024 results but with a higher mix of software revenue, while the high end of our guidance reflects nearly 3% annual growth. Included in the 2025 guidance, we expect wireless revenue to range between $69 million to $72 million. Software revenue is expected to range from $65 million to $70 million in 2025, with the midpoint implying total software revenue growth of more than 5% and more than 9% annual growth at the high end of the guidance range. Lastly, our adjusted EBITDA guidance for 2025 is $27.5 million to $32.5 million. The midpoint reflects minor improvement over 2024, while the high end represents over 10% growth, largely expected to be driven by a greater mix of higher margin software license bookings. With that said, I will now turn the call back over to Vince.

Thank you, 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 are strongly positioned to grow our franchise while returning capital to our shareholders. We have a long-term organic growth engine in our software solutions through Spoke Care Connect, and we maintain a source of strong recurring revenue in our wireless service line. We run the largest paging company 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 these two assets going for us, our best financial results are ahead of Spok 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 for joining us this morning. Operator, you may now open the call up to questions.

[Operator Instructions] First question here is from Anderson Schock from B. Riley.

Hey, thanks for taking the questions, and congratulations on a really strong quarter. So, first, you signed 22 six-figure customer contracts in the first quarter. I guess, is there any seasonality with the larger seven-figure contracts that we should be thinking about? I know you signed seven in the fourth quarter last year.

There's really not. We've noticed a good trend so far this year. We signed more in March than we signed in February than we signed in January, so certainly been trending in the right direction so far in the second quarter, it's looking pretty good, too. So, no seasonality. We've not seen any type of tariff-related or economic slowdown-related pressure on our customers. They're buying at a healthy rate.

Okay, got it. And then, it was a really strong quarter for wireless product revenue. I guess, what drove this, and should we expect to see this continue, or will this return to the historic around $600,000 to $700,000 range per quarter?

Hey, Anderson. This is Calvin. Yes, so, I mentioned a little bit about that in the prepared remarks, specifically with the initiative around increasing the prices of our disconnect fees. So, when a customer disconnects a pager and the units are not returned to us, they are charged for those units, and we increase that pricing in the first quarter. And so, most of that benefit you're seeing there is specifically from that, and we do expect, on an annualized basis, to get a benefit of about $1 million. So, I would expect to see probably about $250,000 a quarter higher, relatively speaking, go forward.

Okay, that's really helpful. And then, on gross margin, so gross margin improved to 80%. I guess, what drove this, and should we expect to see this continue at this level through the year?

Yes, so, the gross margin is going to fluctuate depending upon we had a really strong revenue quarter. So that's going to be the primary driver there. The cost side of the equation was relatively similar to what we've seen. And so you might get a blip up or down just based on a strong quarter like this, but I wouldn't expect the overall dynamics to really be changing much from what we've seen.

Okay, got it. And then, software backlog, up about 15% year-over-year. I guess, what's the conversion timeline for this, and I guess, how will this impact the revenue recognition through the year?

Yes, I mean, most of the backlog, Anderson, this is Mike, about half of it is going to be services, and the other half is going to be maintenance. So the maintenance component will generally kind of run through over a one-year period. And then, I would say, on the services part, you're looking at probably like 9 to 12 months, generally speaking, that you run through that, maybe 9 to 15 months or so. That's kind of the usual transmission time as we go through that backlog.

Next question is from George Melas from MKH Management.

Great, thank you. Good afternoon. Congratulations on a great start to the year. A few quick questions. Vince, you talked about the HIMSS conference on the last quarter, and I think it was in March. Just wanted to see what was your experience there, and what did you see that maybe you found surprising, or how was the reception for the new products that you guys are putting out?

Yes, George, great question, and much better than what it was last year. The conference is kind of waking back. We took a different approach this year in that we sent a sales team that had to pre-qualify meetings ahead of time so that we didn't just send a bunch of people to stand at our booth and try to catch people walking down the aisle, because HIMSS is still not back to that level that it used to be pre-pandemic where you could do that and have great success. But what it is able to do is put customers together that are interested in Spok, that want to do an upgrade, and that we can set those meetings up ahead of time, and we had great success with that. They like what we're doing with the new software. They like the new UI, the look and feel. We think it helped drive a lot of good numbers here in the first quarter. It's going to drive a lot of good pipeline that we have for the second quarter, so very encouraged by it, and we're going to actually go again next year. We're going to get another booth again, because remember last year we didn't have a booth. So we spent a little bit of money this year, and I think we're going to cautiously, incrementally increase that investment next year as well.

Great, okay, good to know. On the servicing side, just the professional services are growing, and then on top of that you have the managed services. Maybe help us understand what you're doing on the professional service. Is it somewhat different than 12 months ago or 24 months ago, or is it maybe it was just a little bit more of the same?

Yes, I'll go ahead, George. It's Mike. I'll go ahead and answer that, and Calvin can fill in anything I missed, but generally speaking it's the same as far as the underlying work that we're doing, George. The biggest difference as it relates to managed services is managed services ends up being great for the customer, because over a, usually a three-year time period, they get a fixed cost. They know what their cost is going to be for all of the upgrades and work that we're going to do for them, and as opposed to kind of the traditional fixed fee time and expense that we had historically been doing, let's say, two, three, four years ago. So, as we've gone forward, one of the things we're doing from a sales perspective is really trying to drive more managed services such that it helps the customer from the standpoint of knowing what their cost is going to be. It helps us from a revenue recognition standpoint, because the revenue is ratable, and thirdly, it helps a great deal from a churn perspective, because we know we've got those customers locked in for that three-year period of time. So, at the end of the day, if we do everything right, that customer is happy, because they know their spend for those three years, and at the end of that three-year period, we renew them and essentially do the same thing over again from a pure-of-services perspective.

Okay, and the hosted revenue, is that included in managed services? Do we have a few customers at this point on hosted?

Yes, this is Calvin, George. We've got several customers. We've probably got about a dozen customers, I think, at this point on the hosted services. We're slowly making, chipping away at that. It's not included in the managed services component. We have that account for separately, but right now, we're just not breaking it out. It's just not material enough. So, slowly chipping away at that, and obviously, that's something that compounds over time, and so the long-term benefit is there.

Great. Okay, and then one last question. Mike, can you tell us a little bit about those two new logos? Are they meaningful customers? Are they customers that you've been after for a long time?

Yes, I mean, look, we know the total population of every customer in the United States that we're going after, so definitely been after them for a while. They were both two really good wins to get in the stable. It kind of falls, you've asked this question before, George, kind of in the 15% to 20% percent from a revenue, not from a revenue, from a bookings amount standpoint, and as we continue the R&D investment that Vince talked about in his prepared remarks, that's something that we are really looking forward to getting more of as we go forward. So, yes, two great wins for us on the new logo front.

Yes, and we expect to see more, George. We've created a new business development team that is doing nothing but going after new logo. They are qualifying these customers that we don't have. They know exactly what vendors those customers are using for what functionality, and we can often go in there and show them that you're spending a lot of money, and you can turn around and get Spok and save a lot of money with our integrated solution. So it just becomes a question of whether or not they can prioritize a move like that right now because they have a lot of other competing technology and projects inside these hospitals. But we're very optimistic that we're going to gain momentum and see more and more results out of this new business development group going forward. It's going to be a good thing for Spok.

Okay. Are there any big elephants in the sales pipeline? I mean, I know those are rare but just wondering.

Yes.

This concludes the question-and-answer session. I'd like to turn the floor back to Vince Kelly for any closing comments.

Thank you, everyone. We had a good quarter and a very strong quarter, and we expect to do it again in the second quarter here, and we look forward to talking to you when we report later in July. Everyone have a great day.