Q4 2020 Spok Holdings Inc Earnings Call
Good morning, ladies and gentlemen, and welcome to the spoke 2024th quarter Investor call. Today's call is being recorded on line today, we have Vince Kelly, President and Chief Executive Officer, Mike Wallace, Chief operating Officer, and Chief Financial Officer.
At this time for opening comments I'd like to turn the conference over to Mr. Wallace. Please go ahead Sir.
Good morning, Thank you for joining us for our 2024th quarter and full year Investor update.
Before we discuss our operating results I want to remind everyone that todays conference call may include forward looking statements that are subject to risks and uncertainties relating to spokes 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 guidance 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.
<unk> actual results could differ materially from those.
Anticipated in these forward looking statements.
While 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 business environment in which we compete contained in our 2020 form 10-K, which we expect to file later today and related documents filed with the Securities and Exchange Commission. Please.
Please note that spoke 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.
Thanks, Mike and good morning, everyone. Thank you for joining us on today's call.
Before I get started today I just want to acknowledge that we are still in the midst of a global pandemic many of us had been sick.
Lost loved ones or have been otherwise adversely impacted by this crisis and most of US are still waiting for a vaccine for the world to return to some sense of normalcy the pressure on stuffs have fallen disproportionately on health care clinicians and staff.
Spoke we understand that and appreciate the sacrifices and commitment that caregivers continue to exhibit in the service of their fellow humans, we want to thank them for what they do each and every day.
We were encouraged with our performance in the fourth quarter of 2020 and believe that the momentum generated by our team in the second half of the year position spoke for sustained improvement in 2021, as we continue to market and sell our new cloud native and integrated communications platform spoke out.
Despite the many challenges that we encountered last year as the result of a once it is essentially a global pandemic. Our team was able to stay on task and focused breaking a five year record for selling new console licenses.
Our existing customer set up remote call center capability. During the initial onset of Covid and booking spoke go deals in the second half of the year, while building the pipeline into 2021.
But before we get into the details of the quarter on a full year I want to underscore where we are strategically with respect to our business plan and outlook.
As we enter the new year, we believe we are poised to positively impact the health care landscape through our strategy of offering an integrated cloud native platform for mobility clinical alerting workflows and contact Center solutions spoke go platform announced early last year has developed on the foundation.
On the single best in class architecture built on a cloud based software as a service or SaaS delivery model.
Clearly we were challenged with rolling out a new platform right as the pandemic struck in fact, the timing of COVID-19 could not have been worse for our plan to introduce a new solution.
However, we don't believe that change the long term potential per spoke out sales and revenue will ramp up over time as the pandemic recedes and the vaccines are more widely distributed based on customer feedback and our evaluation of the competitive environment. We believe we are on track for long term success and value creation that will reward all I can stick.
Once.
The impact of COVID-19 that has had on our customers has been profound both in terms of the stress that is put on the doctors nurses and hospital administrators as well as the financial impact that has had on the health care industry in general already thin margins. At these organizations were further challenged by shifting resources to deal with the pandemic. Thus.
Altering investment decisions. This clearly impacted not only our customer's ability to purchase but their ability to focus to even look at demos of our new platform. They had never seen before this.
This is clearly a tough selling environment to launch on new solution again, we expect that to change over the course of the new year on the good news is elective procedures have been trending back up we're between 70% to 80% of pre pandemic levels at large hospitals in the fourth quarter.
I'm, particularly proud of our spoke sales team and their ability to adapt and change on under these circumstances when.
When we kicked off 2020, there was much excitement and enthusiasm surrounding the introduction to spoke out.
The spread on the virus impeded the numerous customer meetings, we had set up at HIMSS to introduce the product. Our team was able to stay focused bookings spoke low deals in the second half of the year and building our sales funnel and pipeline. This is quite an accomplishment. When you consider our sales team is coming up on one year without being able to travel and meet with customers face to face.
This particularly impacts on new business hunters.
Regardless the momentum we have built gives us confidence looking forward, particularly with an eventual resolution to the global pandemic, we expect as the year progresses, our new platform business will continue to pick up each quarter ending the year on a very positive footing.
That being said in 2020, our team set a new record per spoke console licenses and also helped our customers reconfigure their call centers from remote work. Our sales team also turned in strong results in government sales and channel sales as well.
Over the past three years and take cooperation with Amazon spoke has developed a best in class AWS cloud Native architecture for the spoke go platform.
<unk> platform has been designed expressly for mission critical applications scalability performance and reliability.
In addition to vetting spokes architecture with Amazon's top architects spoke is commissioned independent third party experts to review and compare the spoke go platform to Silicon Valley best practices.
Spoke invest for the long term and with the spoke go platform architecture spoke is well positioned for the next decade, and providing purpose built mission critical cloud services for healthcare and public safety.
In 2020, we continued to invest in spoke out which we believe is necessary to be best in class with an industry, leading clinical communication platform on the software side, we continue to improve the platform and add functionality and workflows, while our team make substantial progress on building the sales pipeline and recruiting innovation partners on the <unk>.
Wireless side the team continues to exceed expectations with average revenue per unit or <unk> being help from both our software offering spoke mobile a pager and are encrypted pagers.
Now if you can minimize unit churn and keep RP levels up greatly impacts the recurring wireless revenue stream.
Spoke mobile of Pagers, where we also put the page number on our smartphone app that provides us with an extra revenue opportunity paging continues to be a strategic differentiator for us and we have more plans this year to enhance that capability even further.
For 2021, we're focused on hunting for new spoke go business converting existing customers to spokeo offering our clinical diagnostics plus package to laboratory and radiology markets pursuing international opportunities in Australia, and Canada. We will continue our efforts on their contact center licenses as well we also intend to.
Continue to capitalize on our unique wireless and software leverage and our installed customer base.
Overall, the vaccine news has been positive so far if it's correct in the general timing is that were all covered by mid year, then by the second half of 'twenty. One the effects of the pandemic should begin to subside and profitability for health care systems should return with perhaps even some more government help for them along the way.
This would help drive spoke sales as we continue to develop and enhance our platform.
As we've highlighted we've developed enhanced interactively selling spokeo are fully integrated cloud native critical communications platform. Our plans are strengthened by our trusted partner status spoke as over 2200 hospitals, including all the best hospitals per U S News and World reports annual ranking.
Our new platform and spoke go provides scalable enterprise solution. The AWS back cloud architecture removes barriers and connects the entire care network.
Intelligent routing and escalation, we can deliver actionable clinical information to expedite communications.
Powerful directory and native on call. This reduces errors and wasted time with one source of truth for all roles departments and locations.
Flexible on open architecture, we empower hospital staff to use the best devices for their roles, including pagers.
We believe the market opportunity is large and the feedback we received from customers and industry <unk> as well as historic level of annual sales made with our legacy Ccs product serves as the foundation from the market opportunity. We have spoke go we've looked at the market closely including our competitors and believe once we covered from the pandemic it will more than support.
Our strategy based on scale on needs.
Our recently announced partnership with Mayo Clinic is just one more data point in support of our plan.
Prior to the pandemic the health care market has experienced significant change in consolidation COVID-19 is only accelerating that hospitals now have a tremendous amount of pressure on them to reduce a standardized vendors regionalized health care delivery and make money. We believe our strategy around spoke go aligns perfectly with this.
With our vision to become the strategic partner of choice for Enterprise grade clinical communications and patient care coordination.
We were particularly pleased with the essentials low sequential growth on our software revenue in the fourth quarter and sustained levels on our software revenue backlog, which continues to exceed $50 million on.
Also the continued yearly improvement in wireless trends, including reduction of paging unit erosion as well as continued slowing in the wireless revenue declines contributed to our operating performance. We believe these accomplishments are the direct result of the investments we have made in our sales team and infrastructure, including our wireless infrastructure.
Overall, we continue to enhance our product offerings and maintain the strength of our balance sheet, our ability to continue to generate cash allowed us to execute against our capital allocation strategy, returning nearly $10 million to our stockholders in 2020 in the form of regular quarterly dividends, while growing our cash cash equivalents and.
Short term investment balances.
Wallace will provide details on our financial performance shortly but before that I want to highlight a few key results from the 2024th quarter and full year.
First in.
On the second half of the year, we saw sequential growth for software revenue in both the third and fourth quarters are second half software revenue grew nearly 11% from first half levels. Additionally, we saw more than 22% increase in software bookings in the second half of the year spoke continues to generate sales on both our legacy care collect connect.
<unk> on it.
And you spoke a platform.
Year over year performance reflected a slower than anticipated wireless revenue attrition rate as annual declines were down 130 basis points from prior year levels wireless subscriber and revenue trends continued to improve in 2020, as we again exceeded our expectations for gross additions.
Net churn revenue and <unk> net.
Noteworthy in 2020, when the 104000, new units that were added to our subscriber base.
Second was the continued impact from focused expense management as we continue to align spending levels with the demand that we were seeing in the marketplace, who will provide more detail on a few minutes, but adjusted operating expenses. Despite continued investment in our product offerings were down more than 6% from prior year levels in fact, even after adding back capitalized soft.
Development cost product research and development expenses in 2020 were down slightly from prior year levels. As a result, we generated nearly $5 7 million of adjusted EBITDA in 2020, consistent with 2019 levels we.
We were also able to grow our cash cash equivalents and short term investment balances from the prior year end levels, even after capital expenditures and pay on a quarterly dividend.
Overall.
Given the challenges caused by the pandemic, while rolling out a new cloud native platform. We are pleased with our operating performance in the fourth quarter in the company's substantial progress from 2020, we met or exceeded our expectations on a number of key operating measures and we achieved these results as we continue to make key strategic investments on our business. In addition to our financial.
Performance progress was made in several other areas, including product development sales strategy and key strategic partnership agreements during the quarter, we completed more than 24, new six figure installations on spokes solutions for our customers.
Those five were new logo deals.
Also included in the quarter totals were three new spoke go deals.
Let me highlight a couple of the new six figure deals for you.
First was a spoke go purchase by a three hospital, Massachusetts health system with more than 860 beds 4800 employees and 1000 affiliated physicians. This premier spoke customer has multiple solutions, including spoke smart console smart web smart speech and messenger.
It has been a spoke partner for more than 20 years. The customer has optimized its use of spoke solutions over the years, including consolidating their telemetry hub from three disparate locations to one.
The organization had a goal of moving all secure communications for their entire health system to spoke spoke go will allow them to achieve this goal and have all communications system wide on one unified platform for all providers on staff that means more efficiency and faster response to patients.
The other day I would like to highlight for you is one of the largest and most comprehensive providers of health related services in the greater Baltimore region.
The organization has more than 13000 employees 1800 staff beds and more than 2600 affiliated physicians their premier spoke customer with multiple solutions, including spoke operator console software enterprise web directory on call scheduling spoke mobile alarm integrations and Covid page.
As Dennis spoke software and wireless partner for more than 12 years.
<unk> solutions are currently present in three of their hospitals through the region and we will expand into a fourth as part of the Q4 upgrade the.
The project goal is to consolidate their call centers to support on enterprise wide call center and expand on our loans monitored by.
By positioning spoke as a true enterprise strategic partner that aligns with the organization's infrastructure consolidation application standardization and showcase on the ability to scale to support the growing hospital network, we were able to compete in enterprise upgrade spoke care connect on that night.
These are just a couple of the examples of our activity level in Q4.
Finally, we had two big management organizational goals this year and they're continuing into 2021. The first was to put our product lead in place to work with our engineering leadership team to manage spokes portfolio of solutions through a market driven approach consequently, driving value for customers and the company. This has been accomplished with the addition in late November of Christian allowed.
Ski spokes Chief product Officer Christian brings over 20 years of experience in health care and health care IP, specifically in the areas of nursing.
Management marketing operations sales and client services will play a key role in executing our long term strategy as we continue to support hospitals and health systems with reliable communication solutions.
The second major goal is ongoing and that is to further improve our go to market strategy. We are in the midst of a complex pivot from a traditional communications company historically selling premise based point solutions targeting communications managers to a clinical communications company selling highly integrated SaaS solutions.
Are you being C suite executives and purchasing committees with deep clinical expertise, we continue to bring in the clinical talent necessary to be successful on this transition.
We've been moving in that direction and we'll continue to focus on it this year with alacrity.
In 2020 smoke continued to build an industry leading reputation in the marketplace.
Brief overview of some of our accomplishments in this area.
First for the full year 2020, we completed more than 79, new six figure deals primarily in the healthcare and government sectors. During the second half of the year. We completed five new spoke go deals and the momentum continues into 2021.
Next spoke received recognition as the number one secure communications platform for hospitals and health systems by Black book market research for the fourth quarter.
Also we continue to provide solutions to all of the U S News on will report best adult and children's hospitals.
Next in the late summer spoke earned system and organizational control stock to type two compliance for spoke of solutions along with spoke paging solutions.
And finally in October we welcomed more than 600 attendees to connect 20 virtual our company's annual user conference for health care professionals. The virtual event provided health care clinicians experts on C suite executives a chance to learn from one another about the future of care team communication and share insights about how the COVID-19.
19 pandemic has changed how they use <unk>.
We intend to carry this momentum forward into 2021 to stimulate long term growth.
Additional comments on our 2021 outlook and capital allocation strategies in a few minutes, but first Michael Wallace, our Chief Financial Officer, and Chief Operating Officer will review the financial highlights for the quarter.
Mike.
Yeah.
Thanks Vince.
Four I review, our financial highlights for the fourth quarter and full year 2020, I would again encourage you to review our 2020 form 10-K, which we expect to file later today since it contains significantly more information about our business operations and financial performance than we will cover on this call.
As Vince noted 2020 was a challenging year for spoke from both a management and operational perspective, as we continue to feel the profound impact that the global pandemic has had on our business and our customers.
However, we believe that the operating environment continues to strengthen and.
And we were generally pleased with our overall performance in the fourth quarter as it clearly demonstrates the continued improvement from the first half of last year.
Such we believe that spokes performance over the last two quarters of 2020 provides us with momentum as we head into the new year.
While we are not satisfied with revenue levels last year significant progress was made in meeting our long term business goals.
Sustained levels of software revenue on the second half of 2020 and continued record low attrition of wireless revenue.
With continued focus on expense management.
And net net cash provided by operating activities of $26 to $26 2 million. This was partially offset by investing activities of $14 8 million, specifically for capital expenditures and capitalized software development costs during the year.
Spoke was able to achieve this performance as we continue to return cash to our shareholders in the form of quarterly dividends of $9 8 million, while also investing in our business for long term growth.
Our balance sheet remains strong with cash cash equivalents and short term investment balance of $78 7 million at December 31, 2020, and we continue to operate as a debt free company.
We believe this provides us a solid financial platform and spoke is well positioned to execute against our long term goals in 2021 and beyond.
In the interest of time today, I will not review, our fourth quarter and full year 2020 income statement on a line by line basis since much of that information is contained in our earnings release tables and SEC filings.
However to the extent you have specific questions about our quarterly financial results I would be glad to address them during the Q&A portion of this call.
Rather I want to focus this morning on four specific areas.
These include revenue operating expenses, a brief review of our balance sheet and our financial guidance for 2021.
With respect to revenue on the fourth quarter of 2020 total revenue of $37 5 million was in line with the prior quarter and down from $79 5 million in the fourth quarter of 2019.
Full year 2020 revenue on $148 2 million was down seven 6% from revenue of $163 million in 2019.
However, nearly 40% of the year over year decline was due to the expected erosion of the wireless revenue portfolio.
Loans due to the impacts of the pandemic on our software business.
Looking at software revenue total fourth quarter revenue of $17 2 million showed continued sequential improvement and was up from revenue of $16 9 million in the prior quarter and slightly lower than the revenue of $17 9 million in the fourth quarter of 2019.
The decrease in software revenue for the quarter on a year over year basis was primarily due to lower license and associated equipment revenue.
This was a result of lower software operations bookings and the mix of those bookings being more heavily skewed towards professional services on.
On average professional services are recognized over six to 12 months as work is performed.
Whereas license bookings are generally recognized in the same period, they're sold and equipment bookings are recognized several months thereafter, both upon transfer of control to the customer.
Regarding professional services revenue again, almost exclusively related to our legacy products.
Revenue was slightly down with the fourth quarter of last year, but increased steadily during 2020 as our ability to access our hospital customers to perform implementations were impacted by Covid restrictions and travel prohibitions, primarily in the second and third quarters.
However, we have been pleased by our team's ability to adapt and determined methods to deploy our solutions almost entirely on a remote basis at this point.
And lastly software revenue in the fourth quarter was supported by maintenance revenue of $9 9 million.
This included approximately $250000 of catch up revenue discussed on last quarter's earnings call from a government renewal that was delayed.
This drove an approximately 4% increase in revenue compared to the quarterly average in the first three quarters of 2020.
Maintenance continues to provide a foundation under our legacy software business. It is significant to maintain to be ultimately transition existing customers on legacy products to spoke go over the next several years.
Okay.
For the full year 2020, we saw the same dynamics just mentioned play out with respect to software revenue.
We saw significant improvements in all categories of software revenue during the second half of 2020 as compared to the first half and the onset of the pandemic. However.
However, we were not fully operating at pre pandemic levels during the fourth quarter of 2020 and fully expect to see some level of continued impact from the pandemic as we enter 2021.
Also included in software revenue on the fourth quarter, albeit small was 41000 in subscription revenue from our cloud Native spoke go platform with bookings of 255000 in total contract value or <unk>.
With annual recurring revenue or IRR on 55000, and average contract life of two three years.
In aggregate Spokeo bookings for 2020 were $1 1 million in PCB with <unk> on nearly 300000, and an average contract life of approximately $2 seven years.
In conjunction with our spoke go transactions. The company provides minor implementation services by our professional services group, especially.
When compared to our legacy on premise business model and that is included in that respect the total contract value.
Implementation revenues are included in our services line of our detailed revenue tables.
Wireless revenue for the fourth quarter remained strong.
Declining by only two 5% from the prior quarter and for the full year wireless revenue was down a record low of five 2% from 2019.
These results reflect another impressive performance by our sales team to again generate wireless gross additions, while minimizing churn and maintaining stable unit pricing.
Wireless business, along with the maintenance component of our legacy software business continue to provide a cornerstone as they represented in aggregate more than 82% of total revenue in 2020 and allow for the ongoing development efforts on the spoke go platform.
Turning to operating expenses for the full year 2020, adjusted operating expenses, which exclude depreciation amortization accretion goodwill impairment and includes capitalized software development cost totaled $148 million down more than 6% from $158 million in the prior.
A year.
This performance, primarily reflects increased efficiencies and expense reductions and general administrative costs.
Well as the impact of an employee furloughs.
Year over year reductions in all expense categories was critical in our ability to drive positive free cash flow and an extraordinary year by all measures while continuing our spoke go development spend at levels expected prior to the pandemic.
Similar to previous years during the fourth quarter of 2020, we performed our annual assessment of goodwill as of October 31st.
Based on that assessment using a short term moving average of our stock price and given the decline in the market value of spokes common stock that resulted in a 52 week low in mid October.
It was determined that the carrying value of the business exceeded the estimated fair value on the company, resulting in an impairment.
However, this is this impairment in no way reflects management's confidence in the future value of the business.
This assessment is based on the company's market value as of a particular point in time.
And Unfortunately that point was on October one as previously mentioned the price and spokes common shares net of 52 week low.
The recent increase in spokes market value over the past several months had the assess assessment then performed using our stock prices. During 2021. It is likely that no impairment would have been necessary.
Additionally, in the fourth quarter, we completed our annual assessment on the Recoverability of our deferred income tax assets, which represent the tax benefits of future tax deductions.
This assessment is required to determine whether it is more likely than not and quote that all or some portion of the deferred income tax assets will be realized in future periods.
Just on the cumulative pre book pre tax book income loss incurred by the company over the three year period ended December 31, 2020, albeit quite small and the uncertainty created by COVID-19, our ability to consider our projections for future profitability and growth.
<unk> limited.
Thus, we were required to record a valuation allowance to reduce net deferred income taxes as the realisation did not meet the more likely than not criteria under the accounting guidance of ASC 740 <unk>.
Did not record a valuation allowance during 2019.
However, given the traction we are beginning to see from sales of the spoke go platform. Our outlook continues to remain strong.
Believe spokeo are set to meet a significant need in the health care marketplace and will create significant value for shareholders in the coming years.
So on a more detailed explanation of how the estimated fair market value of the company is derived in determining the goodwill impairment charge and the criteria for creating the valuation allowance for the recoverability of deferred tax assets.
Please see note six and nine in our 2020 10-K, which again, we expect to file later today.
Nonetheless, the assessment of goodwill resulted in a $25 million noncash impairment charge in the fourth quarter and the valuation allowance from the deferred tax asset reduced earnings by an additional 22.1 day.
Excluding the impact of these charges, which we believe is a more appropriate way to view our results. Since these are non cash charges that did not result from operations adjusted earnings per diluted share with <unk> and <unk> 15 for the fourth quarter and full year 2020, respectively.
Next our capital expenses for the fourth quarter of 2020 were approximately <unk> 6 million.
Were incurred primarily for the purchase of pagers and infrastructure to support our wireless customers.
For the full year capital expenses totaled $3 5 million down from $4 8 million in 2019.
Electing the decreased capital needs to support and spoke go platform development.
We believe that we are past the major portion of our capex requirements to support our strategy and that level should generally have remained flat over time.
Lastly to our financial guidance for 2021.
There remains significant uncertainty and challenges with respect to the mark to the markets and customers we serve due to the pandemic.
We have we have seen increasing visibility over the second half of 2020, and therefore, providing guidance as is typical with our fourth quarter earnings release with the goal of providing investors with our views on 2021.
We have included an additional schedule detailing the components of our annual guidance for this year.
Included in that guidance are spokes expectations for software and wireless revenue generation in 2021.
<unk> total revenue to range from $132 2 million to $147 2 million.
And that total we expect software revenue to comprise $58 2 million to $67 2 million, which is consistent with 2020 levels at the midpoint of our guidance range.
More than 90% of the software revenue guidance is expected to be driven by our legacy software solutions as bookings of Spokeo and the related subscription revenue continue to ramp through 2021.
As our legacy on premise bookings are replaced by spoke go bookings in the coming years. Our revenue recognition will also transition from more immediate recognition characteristics to ratable recognition overtime associated with the subscription revenue model.
Finally spoke expects adjusted operating expenses, which exclude depreciation amortization and accretion and the addition of capitalized software development costs.
To range from $142 7 million to $150 7 million as compared to adjusted expenses of $148 million in 2020.
Finally, we expect capital expenses to range from $2 7 million to $6 seven day.
I would remind you once again that our projections are based on current trends and that those trends are always subject to subject.
Subject to change, especially as we continue to gain further insight into the potential easing from the impacts of COVID-19.
With that I will turn the call back over to Vince who will make some closing comments before opening the call up to your questions.
<unk>.
Thank you, Mike with respect to our key goals and business outlook, Let me take a few moments to outline our outlook on strategy for 2021.
As we've talked about in the past about five years ago, we embarked on a transformation that was a title shift in our strategic direction for healthcare our largest customer segment.
The strategy pivot signal, a very intentional move from offering our customers point solutions or single product solutions for call Center software alarm management and secure messaging to offering them a cloud based single integrated communications and collaboration platform called spoke out our decision to make this shift in focus.
On the spoke to a platform rig.
<unk> for many reasons, including customer needs as our health care customers were telling us they needed a more unified approach to communications across their enterprise.
The large potential market opportunity as we further penetrate the multibillion dollar health communications market.
Business simplification as we've been offering our customers many different products and multiple versions on several different platforms.
And competitive positioning as we concluded that no one else offered a single integrated cloud native platform for healthcare communications.
In many respects 2020 was the most challenging year for spoke on our history from both the management and operational perspective.
The impact that this unprecedented pandemic has had on our customers has been profound both in terms of the stress that is put on the doctors nurses and hospital administrators as well as the financial impact. It has had on the health care industry in general.
Already thin margins at these organizations were further challenged by shifting resources to deal with COVID-19, that's altering investment decisions.
This has clearly impacted our customer spending priorities and the ability to focus on a new platform solution over the short term.
However, we expect that to change over the course of the new year, I'm, particularly proud of our spoke team and their ability to adapt and change under these circumstances, our core foundation of clinical communications are strong.
Proud of the work on our employees have done in support of this mission. We have accomplished so much together since we became spoke we are laser focused on making spoke go the leading clinical communication and collaboration platform and the health care industry, So with that as a background and with respect to our 2021 guidance. This year, we continue our commitment and investment.
<unk> to address near term opportunities and to achieve long term organic growth. We believe these investments are critical in supporting our strategy to enhance our industry, leading clinical communication and collaboration platform and drive long term stockholder value.
Included in total operating expenses, we believe that R&D expenses, excluding the impact of capitalized software development will continue to flatten in 2021 and approach a more steady state level.
For 2021, we expect a relatively small portion of our R&D spend to be for legacy solutions and the majority to be on a new spoke go platform, reflecting our continued investment in the future.
With respect to our capital allocation strategy. Our overall goal has been to achieve sustainable business growth, while maximizing long term stockholder value from our multifaceted capital allocation strategy, which has included both dividends and share repurchases as well as key strategic investments to improve our operating platform and infrastructure and all.
To drive long term organic growth. We're also open minded to potential acquisitions and partnerships that could provide additional revenue streams.
For 2021, we're committed to continue paying our 12 on a half cent per share quarterly dividend, while keeping an eye on profitability. We will continue to evaluate our capital allocation strategy on a quarterly basis and communicate our plans with you with respect to dividends share repurchases and other uses of capital each quarter when we reported earnings.
We are focused on the huge opportunity in front of us and clinical communications from our business configuration and strategy perspective, we believe we're strongly positioned at the moment, we've created long term organic growth engine and spoke go low.
Maintain a source of strong recurring revenue on a page on service line. We went on the largest paging offering in the world and have the integrated if operations deeply with our software operations, while continuing to enhance our paging platform and user devices. We believe with these two assets going for US our best financial results are ahead of us and spokes.
Future is bright.
At this point I'll ask the operator to open the call for your questions, we'd actually limit your initial questions to one on a follow up and then after that we'll take additional questions as time allows operator.
Thank you, ladies and gentlemen, if you'd like to ask a question. Please signal by pressing star one on your telephone keypad, if you're using a speaker phone. Please make sure. They meet function is off just turned off to allow your signal to reach our equipment.
I wanted to ask a question, we'll pause a moment to give everyone an opportunity to signal for questions.
We will take our first question from Ryan Vardeman with Pathologic. Please go ahead.
Hey, guys. Thanks for taking the question. So did I hear right that 90 per cent of the revenue projected in 2021 is going to be from the legacy solution. So I went to 58, 2% to $67 2 million in guidance can I assume that 10% of that will be from spokeo.
Right.
Yeah, Ryan its Mike Youre correct.
It's probably a little bit more than 90%, but.
Until the Spokeo bookings continue to ramp and then as you're aware.
With a subscription model that will obviously take time for that revenue to make its way through the P&L. So the majority of 2021 on the overwhelming amount of of revenue on the software side is going to continue to come from a line.
Some products so on.
I would say that it's about 90 day, 95% would come from our legacy products.
Okay. So kind of on the low end, then if you're using 5% maybe just.
Just under $3 million, maybe you've spoke go revenue. So I mean, I'm still trying to understand what the opportunity is that you guys see or would you say your outlook remains strong on what do you kind of forecasting the annual recurring revenue to be from spoke go by the end of the year and how big is the opportunity over time.
Yeah.
Yeah, I mean as far as <unk> is concerned yes, we're not going to.
Publish that at this point I mean, we're still at the very early days on as it relates to spoke all as we continue to report each quarter and get more visibility into that we will certainly share that with investors.
Vince you want to take the overall.
We believe the low question.
We've looked at a lot of data allowed us statistics in terms of the size and the scale of the potential market is huge.
It's in the billions, we're not the only one going after it yes. There is other competitors going out there, but there is plenty to be had for all of US. We think no. One has the type of solution that we have in terms of what we've created with spoke go and then it's going to be a long term winner. Our luck probably could not have been worse to be rolling This thing out right as the pandemic struck.
Because it's hard to get folks attention, we've taken a look with a number of industry consultants and we've looked at a lot of data in terms of what hospitals and health care systems have focused on in 2020 during the pendency of this pandemic in terms of spending and they focused on things like anesthesia and respiratory equipment patient monitoring and vital.
Signs equipment medication administration lab equipment, where we are healthcare and enterprise software is kind of fifth on the list and of that if you look at the amount of institutions that are delayed capital budgets are uncertain right now that's about 47% so almost half of the potential market is off the field.
In terms of rolling out a new.
Cloud based platform in 2020, however, the cash.
Conversations that we've had with Cio's the conversations that we've had with innovation partners like the Mayo clinic partner, we just enough indicate that there is a big need for what we're doing our board member Dr. Bobbie Byrne Who's at advocate Aurora indicates is a big need for what we're doing on what we've created.
Our goal is to continue.
Continue to invest in this platform continue to manage the business well continue to pay the dividend and then as we come out on this pandemic grow the spoke go sales and when you grow those bookings generally youre looking at a three year T. C V. So youre going to be essentially amortizing that booking into revenue right.
Ably over a 36 month period, so it's going to have less impact on revenue in the short term than the booking well, but over time that'll build on a very nice recurring revenue layer.
Next question please.
As a reminder, star one for questions. We will take our next question from Richard.
Stanley with line card partners. Please go ahead.
Good good morning.
I got distracted when you were talking about R&D.
The.
The 40 ish per cent of sales R&D going forward now that go as a go product.
Could you just talk.
Talk about.
You know, where your R&D is going now and and and and what kind of spending levels are you thinking about for 'twenty, one and then the future. Please.
Mike do you want to take that or you want me to I'm happy to.
Yeah, I'll go ahead and start off.
Right now from an R&D perspective, as we have a.
Then socializing the last couple of years, we expect it to.
To level off at current levels, which today is call.
Call it about 27% to $28 million on a gross basis so on.
Not including the capitalization of software development.
So the cash spending on R&D is about 27 or $28 million.
And as Vince mentioned on the majority of that.
Call It <unk>.
75% to 80 per cent today is being spent on spokeo with the balance.
Being spent on our legacy products too.
To keep them in the marketplace until we're able to fully make the transition to just spoke of but that said our expectation is.
Over the next several years and we don't like to give guidance. After this upcoming year, but we feel pretty comfortable that things will from an R&D perspective will be fairly flat with the levels that youre seeing today.
Since I don't know if you want a habit of going on right.
You got it spot on I was going to say $80 75 per cent of what we're spending today on that $27 million numbers on spoke go in the 20 to 25 per cent is on our legacy solutions and that'll that'll stay about there for 2021 that'll change over time going forward. Obviously more will be spent on spoke go out in the future and left on the legacy solutions.
We make the transition.
Right Okay.
Is the the.
Good goodwill write off.
Strictly a matter of of the stock price.
Yeah, so yeah.
Yeah.
The driving factor in that analysis is the stock price.
And as I stated in my prepared comments.
<unk>.
We do that analysis each year at the end of October that's our cadence and that happened to be when we were at a 52 week low obviously, we were close anyways, but as I said, if we if we looked at the share price.
In the first six weeks of this year, they're likely would have been no impairment so on.
I hate to be on these calls on blame anything on accounting et cetera, but this is kind of one of the vagaries of accounts, but does not impact our view.
Any way shape or form on the the outlook for the business and.
And our projection so.
Yeah.
Okay.
I had thought that Oh.
The goodwill was the outlook for the impairment was related to the the outlook for revenue and.
As is contemplated.
Our revenue and earnings from the asset.
Not the stock price.
Yeah, No I mean, you Theres a number of ways. You can you can look at goodwill impairment that is one component of it but the.
The largest piece the largest driving factor of that analysis is the share price.
To drive the market value as being.
If you will.
On a public company.
The most readily available determinant of value on a given date so.
While your projections on a component of it.
They carry far less weight on the actual share price.
Okay. Thank you.
You bet.
And ladies and gentlemen.
We'll take our next question from George Melas with <unk> management. Please go ahead.
Thank you.
Good morning, gentlemen, I'm fairly new to this story is right next to ask you a fairly.
So broad question, which is about that.
Legacy solutions are a number of point solutions.
So go is primarily sort of a communication platform that can unify a number of.
With solutions on top of that can you talk about the transition from one to the other how are your customers.
Particularly the customers that are existing.
Legacy customers, how do they inc.
From that communication platform.
And then basically use.
You don't use it for the day various functionality of the point solutions that they already have.
Yeah.
Sure Let me, let me take on that.
I think I understand your question. So look we've sold five.
In the second half of 2025 spoke gross solutions are two of them were brand new so that's obviously a much easier share.
All three of them were to legacy customers that had existing software.
And what you'd have to do in it really both cases is it's a communications platform that can do a lot of things you can add workflows on it keeps on call scheduling. He can do critical test results management Theres other workflows and service lines you can layer onto it.
But you have to integrate with with the platforms that are out there right now our legacy solutions are primarily in three categories. The first category would be contact center solution. So we run a hospital call centers. The second category on our messenger solution is and kind of on alerting clinical alerting solution and the third category is.
Just kind of mobile in general it encompassing in in all of that is also on an on call schedule offering. So you can go to an existing customer we can sell those spokeo platform, we integrate that platform through a gateway with their contact center solutions. The platform replaces the critical alerting part it replaces the on cost.
Part of it replaces the mobile part and we build on that into the future while integrating with their contact center solution, if they're a new customer and they're not on existing customer then we just integrate with what they have whether it's their EHR what other systems, they would like to integrate with to do their clinical communications the bar.
Biggest advantage spoke out is that we keep the directory, which is kind of the hospital hub. If you will the source of truth in terms of where everybody is so if you Wanna know somebody's in.
Campus West campus.
Floor six Florida a.
You know who is on call.
Keep all that data how does how do they want to be reached.
We wanted to be reached by a mobile phone after they wanna be reached on a pay per et cetera. So we keep all that data and so that's really what the platform does and it does that very elegantly and it does that with the ability to scale with.
With AWS is our partner on that and that's a little different because its cloud than the existing solutions that we've sold over the years, which are legacy base, which are on file servers that are installed in the customer's data center. So I hope that helps provide some clarity.
Sure that's very much appreciated.
I appreciate it.
Yes, absolutely.
Ladies and gentlemen, there's no further questions in the queue.
Okay.
Go ahead, yeah. Thanks, everyone for joining us. This morning, we look forward to speaking with you again after we release our first quarter results in April so everyone.
Have a great day and stay safe.
Ladies and gentlemen. This concludes today's conference. We appreciate your participation you may now disconnect.
Okay.
Okay.
Okay.
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