SPOK - NASDAQ

Ladies and gentlemen, greetings, and welcome to the Spok Holdings, Inc. Q2 2025 Earnings Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Al Galgano. You may begin.

Hello, everyone, and welcome to Spok Holdings' Second Quarter 2025 Earnings Call. I am joined by Vince Kelly, Chief Executive Officer; Mike 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 second quarter 2025 Form 10-Q and related documents filed with the Securities and Exchange Commission. Please note that Spok assumes no obligation to update any forward-looking statements from past or present filings and conference calls. With that, I'll turn the call over to Vince.

Good afternoon, everyone, and thank you for joining us for our second quarter 2025 earnings call. Once again, 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 double-digit full year software bookings growth relative to 2024. As you know, software sales are always going to be lumpy, but our trajectory over 12 months continues its multiyear trend of up and to the right. As we entered the quarter, we knew the year-over-year comparable was going to be tough as the second quarter of 2024 was a very healthy $8.7 million in software operations bookings. However, the investments that we are making in our technology base as well as our sales and marketing programs are continuing to pay dividends as we significantly exceeded last year's bookings levels for the quarter and year-to-date periods. Our total bookings for the first half of the year were approximately $20 million. We remain confident in our competitive positioning. We believe we have advantages over the competition in our core health care software contact center space. We have long-term and deep relationships with top health care systems in the nation who continue to purchase from us on a regular basis. We offer an integrated platform as opposed to multiple point solutions. We continue to invest in and enhance our platforms, consistent with what our customers are requesting. And we're viewed as an indispensable partner by many of our customers. In other words, they need Spok to efficiently carry out their day-to-day operations. 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 stockholders 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 3 years ago, we believe we are on a sustainable path to doing so. That is our primary focus. Returning capital to stockholders is our legacy, and we feel good about executing a strategy we believe in and that we have had a lot of historical success with. Today, we 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 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 revised financial guidance for 2025. I'll then wrap up the call, and we'll take your questions as time allows. As I said upfront, we're proud of what the Spok team has been able to accomplish in the second quarter, and we're positioned for a strong second half. Second quarter highlights include a more than 34% growth in software operations bookings from the impressive production levels in the prior year quarter; continued strong levels of adjusted EBITDA, which covered our quarterly dividend and capital expenditure requirements; continued sales pipeline growth, providing confidence in our outlook; 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, consistent with past trends; a 10% increase in software revenue that included double-digit growth in license revenue and triple-digit growth in managed services revenue on a year-over-year basis; improved wireless trends as net unit churn dropped by 50 basis points 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 in expense management as we saw less than a 5% increase in overall year-over-year adjusted operating expenses while supporting the significant increase in software sales and making the necessary investments in product research and development to fuel future growth. In short, we are 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 2025. We maintain our optimism for the year and are increasing our guidance estimates for revenue and adjusted EBITDA in 2025. Calvin will review the details of our revised guidance in a few minutes. In the second quarter of 2025, we generated $7.5 million of adjusted EBITDA, which more than covered the $6.5 million we returned to our stockholders in the form of dividend distributions. However, at the same time, we maintained our second quarter research and development investment and believe we are on track to invest approximately $12 million in product research and development expenses 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 continue to create significant value for our stockholders by maximizing revenue and cash flow generation. As we look ahead, we continue to evaluate opportunities to thoughtfully integrate AI into our products and into our operating platform to drive even greater value. 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. More recently, since we announced our strategic pivot back in early '22, Spok has returned $4.38 per share or approximately $91 million to our stockholders. When you take into consideration our current cash balance, distributions to stockholders, share repurchases, debt repayments and acquisitions, since our inception, Spok has generated more than $1 billion of free cash flow. Our focus on maximizing cash over the long term supports the 3 major tenets of our strategy. Those are, number one, continued investment in our wireless and software solutions to grow our revenue base; number two, continued disciplined expense management; and number three, a stockholder- friendly capital allocation plan. Before I turn the call over to Mike, let me take a moment to review Spok's significant positive attributes. Today at Spok, we're a leader in health care communications. We maintain the largest paging network in the United States. We control significant narrowband personal communication services spectrum. We have a blue-chip customer base of more than 2,200 hospitals who continue to purchase from us on a regular basis. We've created a large portfolio of intellectual property via strategic R&D investments. We continue to generate significant cash flow and return it to our investors on a quarterly basis, and we're a pioneer in health care communications with a best-in-class product offering. We've built our industry-leading reputation over the years. Under the Spok banner, we are recognized in Black Book Research's annual customer satisfaction survey for health care secure messaging and clinical communications as the top clinical communications platform in our industry for 8 of the past 10 years. We are honored by the unwavering trust our health care clients have placed in Spok as their go-to partner for critical internal communications. The achievement of securing the top position for 8 consecutive years underscores our commitment to delivering critical communication technology that enhances hospital and health system communication, which ultimately enhances patient care and safety. With that, I'll turn the call over to Mike.

Thanks, Vince, and thank you, everyone, for joining us this afternoon. As Vince pointed out, it was a very strong quarter, and we made tremendous progress in a number of key areas. And amidst all the progress in continuing to build a solid financial platform and stockholder-friendly capital allocation strategy, we remain true to our mission of being a global leader in health care communications. It's 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 previously noted, we have over 2,200 health care facilities as customers, representing the who's who of hospitals in the United States. We have built our solutions over many years and have long-standing valuable customer relationships. This is coupled with the financial strength that 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 second quarter, our $11.7 million of software operations bookings included 23 6-figure customer contracts and 1 7-figure customer contract, sustaining the momentum that we have seen for the past 3 years. Most impressively, second quarter software operations bookings included 12 multiyear engagements and those 6- and 7-figure contracts had an average contract size that was up substantially from the prior quarter and year. We are extremely pleased with our sales performance in the first 6 months of 2025. And as Vince noted, we fully expect software operations bookings to continue its double-digit annual growth. Now let me take a few minutes to highlight 3 of the customer engagements that we signed in the second quarter. The first is with a nonprofit 14-hospital academic medical system, with facilities serving multiple states across the Mid-Atlantic and West Belt regions. With over 2,500 beds and 22,000 employees, this health system has over 120,000 annual inpatient discharges and 340,000 ED visits. This deal evolved from an upgrade-only opportunity into a 5-year multiyear engagement, establishing a unified critical communication strategy and platform. We anticipate that this contract will expand to include 7 additional sites. In addition to an extensive SmartSuite upgrade, this health system adds Spok e.Notify, Spok Messenger, physician answering service and several value- added services. Building on that success, we secured another major agreement with a Spok customer of over 40 years. This Mid-Atlantic-based health care provider with an international footprint employs over 100,000 people, including more than 5,000 physicians, and delivers care across more than 40 academic community and specialty hospitals. The organization's main requirement was sending messages to Epic and Mobile Heartbeat, resulting in a 5-year multiyear agreement upgrade. The agreement includes 6 instances of our latest Spok Messenger middleware release, handling 11 facilities and several value-added services. In the future, they are looking to consolidate at other facilities and look to partner with Spok to provide an enterprise-wide Spok messenger solution. Our third spotlighted agreement was with a leading integrated academic health system in the Midwest. This organization cares for more than 830,000 patients annually and employs more than 25,000 people across 7 hospitals, including 1,800 physicians, and has partnered with Spok for over a decade. They had a 2-year multiyear agreement renewal due at the end of the quarter, and Spok was able to not only offer an individual renewal, but also added additional software licensing. The new licenses included unlimited upgrades for the MediCall Console and Web, Spok SmartSuite and Web and both Spok Messenger and Spok Mobile platforms, and we also added Spok's new value-added services along with our console reporting software. So as you can see, our sales performance for the second quarter and the first half of the year continues to show strong progress from the ongoing investments we are making in our software business. I will now turn the call over to Calvin Rice, our Chief Financial Officer, to briefly review our second quarter financial performance. Calvin?

Thanks, Mike, and good afternoon, everyone. I would now like to take a few minutes and provide a recap of our second quarter 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 operations and financial performance than we will cover on this call. Turning to our income statement. In the second quarter of 2025, GAAP net income totaled $4.6 million or $0.22 per diluted share, up from net income of $3.4 million or $0.17 per diluted share in 2024. In the second quarter of 2025, total GAAP revenue was $35.7 million, up from total revenue of $34 million in the prior year. Revenue in the current year quarter consisted of wireless revenue of $18.4 million and software revenue of $17.2 million compared to $18.3 million and $15.7 million in the prior year, respectively. With respect to wireless revenue, we saw a 50 basis point sequential improvement in quarterly net unit churn in the second quarter at 1.6%, down from 2.1% in the prior quarter. ARPU increased $0.36 or nearly 5% from the prior year, primarily driven by the continued impact from the previously taken 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. Also, we closely manage the expense base for the wireless infrastructure to limit the impact of revenue loss. Turning to second quarter software revenue. License and hardware revenue totaled $2.8 million in the second quarter of 2025 compared to $2 million in the same period of 2024, consistent with the strong level of software operation bookings we continue to see. Total professional services revenue was a healthy $5.4 million versus $4.3 million in the second quarter of 2024, up nearly 25% from the prior year period and over 34% for the first half of 2025. Our outperformance in professional services has been primarily driven by the triple-digit year-over-year growth of our managed services. However, we also continue to see sustained improvement in resource utilization, and we continue to drive growth through the addition of resources in alignment with our backlog growth. You may recall from my past commentary that managed services is an offering within our broader umbrella of professional services that is typically bundled with maintenance and sold like a renewal or subscription. This service offering provides customers with all necessary implementation and upgrade services for any Spok software products they own over their multiyear term, which is typically 3 years. While managed services are likely to be cost prohibitive to our smaller customers, we continue to see great traction with enterprise-focused customers. Adjusted operating expenses, which excludes depreciation, accretion and severance and restructuring costs, totaled $29.4 million for the second quarter compared to $28.1 million in the prior year period. Included within the second quarter adjusted operating expense total were a year-over-year increase in the cost of revenue, primarily due to the 10% increase in software revenue discussed earlier; an increase in selling and marketing expense compared to the second quarter of 2024. The second quarter of 2024 reflected a onetime benefit of approximately $0.9 million from the deferral of certain commissions, excluding this benefit in 2024, our sales and marketing expenses were largely in line with the prior year quarter; and an increase in general and administrative expense related to higher IT costs as well as the timing of bad debt and payroll and related expenses, which we believe will largely even out over the full year. These increases were partially offset by lower costs in technology operations as we continue to manage costs in relation to our declining wireless unit totals. On a final note regarding adjusted operating expenses, while product research and development expenses were consistent with prior year levels on both a quarterly and year-to-date basis, we expect that level of spending to accelerate in the second half of the year. We believe that it is prudent to take some of the upside that we have seen in adjusted EBITDA levels and reinvest that capital and improvements to our product platform as well as the AI initiatives that Vince mentioned earlier. As a result, we expect R&D expense levels will exceed prior year levels by approximately 5% to 7% and continue to modestly increase into 2026 by an additional 6% to 8%. Adjusted EBITDA in the second quarter totaled $7.5 million as compared to $7 million in the prior year period. This reflects the highly successful software operations bookings levels that we have seen through the first 6 months of the year, which include higher- margin license revenue. We believe our robust pipeline has us positioned for a strong second half. More on financial guidance in a minute. Of additional note in the second quarter was a onetime benefit for the sale of a legacy domain name. The sale netted us a gain of approximately $0.7 million and is reflected in other income. We ended the second quarter with $20.2 million in cash and cash equivalents, which grew from the first quarter as anticipated. As you may remember, first quarter cash balances were impacted by increased seasonal working capital needs. With those needs behind us, all else remaining equal, we believe that cash balances should continue to grow in the second half of 2025. Based on our current outlook, we anticipate annual free cash flow in the range of $25 million to $29 million and expect to exit 2025 with cash balances between $24 million and $28 million. Moving on to guidance for 2025. Based on our performance in the first half of 2025, we are increasing our financial outlook for the year 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. For the year, we expect total revenue to range from $138 million to $143.5 million, with the midpoint representing a nearly $3 million increase or 2% from the previously guided midpoint of $138 million. Included in this financial guidance is wireless revenue ranging between $71.5 million and $73.5 million and software revenue ranging between $66.5 million and $70 million, representing a more than 9% growth at the high end of that software range. Lastly, adjusted EBITDA is now expected to range from $28.5 million to $32.5 million, with the midpoint representing a 5% increase from 2024 levels. With that said, I will now turn the call back over to Vince.

Thank you, Mike and Calvin. On a final note, 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 believe these results bode well for the remainder of the year. We believe we are solidly 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. We maintain a source of strong recurring revenue in our wireless service line, which remains relevant and important to health care customers and supports critical communications even during network events when cell phones and other technology fail. We run the largest paging offering in the world, integrated with our software operations, and we have enhanced our paging platform and user devices to serve our core health care customer base. We believe with these 2 assets going for us, our best financial results are ahead of us and Spok's future is bright. Before I open the call up to your questions, I'd like to thank our stockholders for their continued support. I'd also like to thank them for their participation in our annual meeting. As we reported, the items of business were: number one, the election of 6 nominees to our Board of Directors; number two, the appointment of Grant Thornton LLP as our independent registered public accounting firm for the year ending December 31, 2025; and number three, an advisory vote to approve 2024 named executive officer compensation, or say- on-pay. All passed with an overwhelming majority. For a full review of the final voting results, please see our disclosures in our Form 8-K filed with the SEC. We appreciate your interest in Spok, and we look forward to updating everyone again when we report third quarter results in late October. Thank you for joining us today. Operator, you may now open the call to questions.

[Operator Instructions] The first question comes from Anderson Schock with B. Riley Securities.

Congrats on the really impressive quarter here. First, I guess, so how has your increased fee for unreturned pagers impacted net unit churn? And should we expect this to drive a reduction through the remainder of the year? And I guess, what are the other ways you're working on reducing unit churn?

Anderson, it's Calvin. From the price increase related to the unreturned equipment, that's really going to have no impact from a unit churn perspective. When we look at our broader price increases on the wireless services that we typically do in the back half of the year, that's something that we take a look at from an impact perspective. But the unreturned equipment component effectively is playing through after someone's already disconnected those units and disconnected their service, right? So effectively, a customer disconnects units and they don't return them within the allotted contract time and they're required to pay effectively a lump sum for that pager. And so that's what those fees represent.

Anderson, the other part of your question with respect to our focus on the wireless service line, we're really trying to mitigate the impact of churn, of unit churn, on our revenue. And we're doing that several ways. Obviously, we've done past pricing actions, and that helps a lot. We saw the actual churn go down a little bit this quarter relative to the first quarter, the unit churn, but it was still within normal ranges. We also sell our new GenA pager. We get a significantly higher average revenue per unit on those GenA pagers because they're alphanumeric, encrypted, HIPAA-compliant 2-way messaging devices. We also sell Spok Mobile with pagers. So it's a software application that works on your smartphone, whether it's iOS or Android, and we charge for that, so you can get messages to your pager, but also get them to your phone. And if all of a sudden, the phone is not working because there's a network outage or whatever, you're still getting the message on your pager. And we sell Spok Mobile, that app, to these paging customers who have actually left us, so we can capture some of that revenue and retain that revenue. I don't have the exact split here right now, but it's still a significant number. It's over $9 million worth of revenue just between those 2. So we're doing everything in our power. We've changed our incentive compensation for our wireless sales reps to be revenue focused. So they're out there. They're actually signing up. When they renew accounts, they're signing multiyear agreements. So a customer will stay on for -- the average is 3 years. So we know we lock that revenue stream up for 3 years. We've got a lot of effort there on that side of the business because, as you know, it's the gift that keeps on giving. And these pager numbers that these doctors have had, they've had them for years. And those pager numbers are our numbers. I mean we own those numbers, and there's great value there. So we can, over time, add more functionality through technology that's attached to that number. And it's a good asset, it's maybe not -- you don't see it on the books, but it's a good asset for the company and for the future. So very focused on the revenue on the wireless service line and mitigating the impact of pager churn on that revenue.

Okay. Got it. That's very helpful. And then on the last earnings call, you mentioned creating a business development team focused on new logos. Can you talk about their progress and pipeline development in the second quarter?

Yes. We've got about 7 business development reps working on new logos, and they're having great success. They're reaching out to a lot of customers. They've added some smaller accounts, not like the huge enterprise accounts that you see us add in the past. But it's coming along. We're not breaking that out separately yet, but it's coming along, and we're very happy with our progress there.

Okay. And then looking at the $11.7 million in software bookings, could you provide some more color on how much of this was new customer acquisitions versus expansions within existing accounts?

Yes, I'll take that one, Vince. Anderson, it's Mike. Yes, as it has been the past several quarters, it was about 15% of our bookings were related to new logos. So to your previous question, we're spending a lot of time internally to build that sort of hunting ground for reps in order to drive more new logos. So still about in the same range. But as Vince said, we're building that group, building the pipeline, et cetera. So in future quarters, we have an expectation that it's not going to be rapid, but we'll have steady growth as it relates to new logo versus current installed base.

Yes. And I think there's a nuance there, Anderson, that we need to appreciate in that like. For instance, the largest deal that we did in the second quarter that Mike talked about just a couple of minutes ago, that's a 5-year deal with a customer that had been a customer of ours for a long time. It's an enormous deal. But since we're selling an enterprise suite that does a lot of different things, we actually replaced 2 competitors' point solutions that were in that account. So even though the account in and of itself wasn't a new logo, we knocked out 2 other competitors. They're not public companies, they're private. But if you're in this space, if I said their names, you'd recognize who the heck they were right away. And the customer likes that because it's kind of like buying an enterprise package where everything integrates, everything is together, it's all bundled. And so there's expansion within existing accounts, even though it's not new logo, if that makes sense.

Ladies and gentlemen, as there are no further questions, I would now like to hand the conference over to Vincent Kelly for the closing comments.

Well, thanks, everybody, for participating. We knew we were going up against stiff competition with Microsoft and Meta and the Fed today. But a good quarter, and we're very excited to report again at the end of the third quarter. And everyone, have a great day. Thanks for joining us.