Q1 2021 Spok Holdings Inc Earnings Call

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Ladies and gentlemen, good morning, and welcome to Spokes 2021 first quarter Investor call. Today's call is being recorded on line today, we have Mr. Vince Kelly, President and Chief Executive Officer, and Mr. Mike Wallace, Chief operating Officer, and Chief Financial Officer. At this time for opening comments I will turn the call over to Mr. Wallace.

Go ahead Sir.

Good morning, Thank you for joining us for our 2021 first quarter 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 <unk> 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 day to this conference call and on <unk>.

Non intended to give any assurance as to actual future results.

Spokes 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 in which we compete contained in our 2021 form 10-Q, which we expect to file later today and related documents filed with the Securities and Exchange Commission.

Please note that spoke assumes no obligation to update any forward looking statements past or present filings and conference calls.

With that I'll turn the call over to Vince Thanks, Mike and good morning. Thank you everyone for joining us on our first quarter 2021 update call as always I hope all of you your friends and families.

Are and remain safe.

Fortunately, we've had recently loss on employee and we're down on them.

We have another employee down hard right now with COVID-19 long for staff, we're praying for their speedy and full recovery.

In the first quarter, we saw positive indicators that our customers are recovering operationally financially from a very challenging year.

2020, most of our customers were essentially shut down for meat business more on a.

<unk> to work with us to install existing backlog as a result from the pandemic primary spending focus when the patient monitoring respiratory and vital signs equipment and medication administration and lab equipment, including PPE.

Health care I T and enterprise software products like ours understandably moved down on the priority list that is starting to change.

Like many companies last years, albeit by health care professionals, essentially shut down our offices and stopped all business travel made it very difficult for our sales teams to prospect for new business, while working from home.

Our customers want able to focus on new projects, we mcmanus access to their for Sony to install existing projects.

The reality is it was a new product like spoke go you just can't sell effectively over soon.

Early last year, we knew this pandemic would impact our results and we took steps to preserve cash continue investing in product and R&D keep the team together by implementing across the board furloughs versus select risk.

Heard significant feedback from our employee base thanking us for our approach emphasizing our decisions. We are pleased to announce we are canceling those furloughs.

Half of this year as the economy reopens for travel and slowly returns to an office environment, albeit in a hybrid manner.

We have successfully preserved our team and they are ready to hit the field and force.

Despite the challenges from the pandemic this quarter, we made significant progress continue our transition from a traditional communications company to an integrated clinical software business, we have achieved or exceeded the majority of our targets in the first quarter, including both wireless and software revenue is lost cash flow starting the.

Year on ahead of plan.

We've continued to evangelize, Inc, selling signing partners domestically and internationally spoke go our cloud native clinical communication solution.

Now signed up seven spoke how customers in three clinical innovation partners through the first quarter. This includes customers in the United States, Australia, and Canada, we've continued to revise and refine our product roadmap and made significant progress delivering functionality.

We've expanded our pipeline of spoke go targets, we're focused on increasing on momentum here as our customers open back up.

As our customer base heals operationally and financially we're building a referenced simple spoke go a countless that creates for the momentum we need some big deals to come in and we're on the hunt.

Big deals require big conversations big proposals, we've been focused on this and continue to make progress we have multiple large deals in front of the customers. We expect to see success here as the year progresses, and as we continue to enhance and refine our go to market strategy.

Our wireless sales team has continued to exceed plan on gross additions lowering cancellations and outperforming the competition.

We have linked our wireless offerings to our software solutions with over 25% of our customers sharing both service lines.

In fact, our wireless sales team is preserved revenue from over 80000, paging unit cancellations by placing subscribers paint or numbers on our spoke mobile smartphone app, thus preserving approximately six point for millions in annual recurring revenue.

Additionally, we placed approximately 78000 HIPAA compliant encrypted pagers into customers' hands preserving those accounts and generating another seven 8 billion in annual revenue.

We have a good sized backlog to install even more and the great thing about these two offerings as they are Raleigh.

We continue to innovate and are currently exploring more creative ways to combine our wireless networks unique capabilities for our software solutions. Thus differentiating spoke further from the competition.

One of our newest directors, Brad Shockley is helping us in this regard and we appreciate his contributions his background and technical expertise for adding significant value.

We've continued our board refreshment process under the leadership of our chair of wish Young Cock the chair of our nominating governance Committee Christine Cournoyer Kristine as yourself one of our newest directors and she has been leading our efforts to enhance and disclose more of our ESG framework as well.

We expect to report more progress on both these funds from the coming months I very much appreciate their efforts on our behalf as well as the support on the rest of our board as we create a bright future for our shareholders customers and employees.

Turning back to spoke go we've continued to make significant progress in enhancing the product, particularly with respect to integration with our three contact center solutions, where spoke enjoys the largest market share in the industry in terms of large hospitals for 600 plus beds as we deploy this integration. This will open the universe spoke of.

Target customers significantly.

We've also made significant progress as it relates to spoke a roadmap planning and execution. We have for major market releases planned for this year. We delivered the first one on the January and the second one was released yesterday.

We released three is scheduled for July.

And released for an October time to be highlighted at our annual user conference connect.

'twenty alone our engineering team delivered over 140 spoke go capabilities and 430 features to an already robust and broad platform.

Spoke go platform continues to exceed platform availability and reliability goals for our customers.

Based on our product strategy teams research, we focused our efforts on continued integration.

Console solutions, we can sell on to our customer base with an integrated solution without expecting them to replace what is currently working well for them.

Also focused our teams on work necessary to support large complex clients as well as laboratory radiology markets.

As part of our efforts to support innovation planning. We're also purchasing a software solution that will allow us to conduct our own market research that will be used by our product team to ensure that we understand market needs and to help us make data driven decisions. We believe that this investment in time and money pay significant dividends and focusing on.

On it and engineering resources on the right things.

This platform will also be used by marketing customer service teams to help them with continuous improvement as well.

We've recently received the results from an independent third Party brand Health survey, we commissioned hospitals.

Hospitals, Cio's and C. M. iOS were contacted about their awareness consideration and impressions spoke the results are very encouraging in spite of Twenty-twenty COVID-19 impacts our vantage continued to show strong growth and spoke now has our highest overall brand perception among our key.

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That makes me very optimistic for future sales and marketing campaigns throughout the first quarter took on marketing to a new level with many press releases key events, social media flips to drive traffic to our website.

And new advertising in the Canadian and APAC markets, and we've seen high quality earned media and a variety of publications, including the New York Times Health care. It today Health leaders Hospital management.

This year, we're opening our connect user conference the week of October 11th in Dallas to shareholders for an Investor day, we will communicate the details on agenda later.

Rodley, our plan will be to kick off the show with both investors and customers present for the keynote and opening sessions.

Then we will host a breakout where management will dedicate time to investors going over our strategy and plans and answering questions.

This would take place over three days this would allow us to spend time with both investors and importantly, with customers and prospects.

Investors will be invited to join us for the first day and we would host our customers for an event that evening and give them our full focus on day, two and three.

In terms of our company on many of US have already been vaccinated and as we shared with you some of US will be returning to the offices on a hybrid manner over the next several months, Mike and I have already done so ourselves along with other managers and employees.

Outside our sales organization. Some will continue to work from home. So we've learned to do this effectively now have the tools to manage and monitor productivity.

Currently studying the need to maintain physical offices in several locations and expect to make decisions on those in the coming months and quarters. The world has changed and we will change with it.

We anticipate our customers will be returning to normalcy at about the same rate of spoke the impact on their finances and budget cycles are still on now and it may depend on some more government health and the willingness of customers to start returning for needed procedures and treatments that were put on hold over the last year.

We remain a debt free company with considerable cash resources due to the disciplined manner in which we've operated over the years outstanding returning significant capital to our shareholders.

To put it in context for you we spent approximately $85 million developing spoke go over the last five years.

Net investment represents approximately $4 50 per share.

Over that same timeframe, we've distributed approximately $95 million for $5 per share to our shareholders in the form of dividends and share repurchases.

During the quarter, we further executed against our capital allocation strategy by continuing to make key strategic investments on our business, while continuing to return cash to our shareholders during the quarter in the form of a regular quarterly dividend.

Before I turn the call over to Mike to provide additional details on our financial performance.

To briefly review some key results for the quarter.

First software revenue of $15 9 million included continued high levels of maintenance revenue it looks consist.

Consistent with prior year levels, we were particularly pleased with this milestone. This comparison was against the last quarter, we had that had not been materially impacted by COVID-19.

Second wireless subscriber and revenue trends continue to improve and remains strong.

Third we continue to demonstrate disciplined expense management I'm pleased to report that in the first quarter adjusted operating expenses continued to decline from prior levels. Prior.

Prior year levels with improvement in most expense categories.

Spite the challenges of the current strong environment, we believe the combination spoke strong team.

Solid financial base, and broad depth of our products and services positions us to capture opportunity in the health care sector and stimulate sustainable growth.

Marriage by our performance in the first quarter and believe that it provides a solid foundation to exit the year on a very firm footing.

I'll make some additional comments on a few minutes first Mike Wallace, our Chief operating Officer, and Chief Financial Officer will review the financial highlights for the quarter.

Sure.

Thank you Vince before I review, our financial highlights for the first quarter of 2021 I would again encourage you to review our 2021 form 10-Q, 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 conference call.

As Vince noted we were encouraged by our performance in the first quarter and believe that it provides a foundation for continued momentum for the balance of 2021.

The momentum that we saw over the last two quarters of 2020 has carried into 2021 and we were pleased to see several operating metrics returned to levels consistent with those pre pandemic.

Coupled with the stable trends in our reoccurring revenue streams of wireless and software maintenance and the traction we are beginning to see from the spoke on platform.

We believe we are well positioned for the balance of the year.

While overall, we were encouraged by our first quarter performance. We are not satisfied with revenue levels continue to work towards sustained levels of software revenue growth offsetting the planned attrition and the wireless portfolio.

We made progress on a return to pre pandemic operating levels in the first quarter and saw growth in year over year license revenue.

Continued low attrition of wireless revenue.

<unk> focus on expense management, resulting in net cash provided by operating activities of <unk> 7 million, while continuing our investment in the Spokeo platform.

This was partially offset by investing activities of $3 6 million for capital expenditures and capitalized software development costs during the period.

We were able to achieve this performance as we continued to return cash to our shareholders for the form of quarterly dividends of $12.05 per share from $2 7 million on.

Also investing in our business for the long term our.

Our balance sheet remains strong with cash cash equivalents and short term investments balance of $71 6 million at March 31, 2021, and we continue to operate as a debt free company.

As noted previously we believe this provides us with a solid financial plan for and positions us to execute against our long term goals in 2021 and beyond.

In the interest of time today I will not review our first quarter 2021 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 this morning, I want to focus on the specific areas of revenue on.

Operating and capital expenses, and our updated financial guidance for 2021.

With respect to revenue in the first quarter of 2021 total revenue of $36 million was down from $37 3 million in the first quarter of 2020.

However, all of the year over year decline was due to the expected erosion of the wireless revenue portfolio, albeit at historically historically low levels.

Looking at software revenue total first quarter revenue of $15 9 million was consistent with revenue the first quarter of 2020.

While we were encouraged to see an increase in our legacy license revenues maintenance continues to provide the foundation for our legacy software business and it's critical to maintain as we ultimately transition existing customers from our legacy products to spoke go over the next several years.

Regarding professional services revenue again, almost exclusively related to our legacy products for.

First quarter 2021 revenue of $4 4 million was slightly lower than revenue of $4 5 million in the first quarter of last year.

However, when adjusted for the impact of travel revenue, which was negligent for the quarter and a reduction of billable hours as a result of reduced work schedules. During the first quarter of 2021 professional service revenue was higher in the current quarter.

With that said reduced access to hospital customers to perform onsite implementations continues to present challenges.

Over the past 12 months. These challenges however has been significantly reduced by our ability to perform these implementations remotely.

Also included in software revenue in the first quarter, albeit small was $45000 in subscription revenue from our spoke go platform with bookings in the quarter of $7 million in total contract value for T. C. D with annual recurring revenue or <unk> 1 million and an average contract life of three three years.

And in aggregate since inception of our first spokeo deals for the third quarter of 2020, PCB is $1 7 million and <unk> 4 million.

In conjunction with our Spokeo transactions. The company provides minor implementation and consulting services by our professional services group services group, especially when compared to our legacy on premise business model and that is included in the respective T. C V. These.

These implementation revenues are included in the services line of our detailed revenue tables.

Wireless revenue trends in the first quarter remained solid declining by only <unk>, 9% as compared to one 1% from the first quarter of 2020.

Partially offsetting the planned attrition and the number of units in service was an increase in our average revenue per unit or <unk>.

For $7 30 for the.

The increase in <unk> was attributable to an increase in government fees, which is generally a pass through items.

These results reflect another solid performance by our sales team to again generate significant wireless gross additions, while minimizing churn and maintaining stable unit price.

Our wireless business, along with the maintenance component of our legacy software business continued to provide a cornerstone as they represented in aggregate approximately 82% of total revenue in the first quarter and allow for the ongoing development efforts on the spoke on platform.

Turning to operating expenses in the first quarter of 2021, adjusted operating expenses, which exclude depreciation amortization and accretion and includes capitalized software development costs totaled $38 million down.

Down more than 7% from $40 9 million in the prior year period.

This performance primarily reflects the continued impact on employee furloughs alongside small reductions in many expense categories.

Year over year reductions in operating expenses continues to be acreage on a critical component of our ability to drive positive operating cash flow, while continuing our spokeo development spend.

This is down from $1 1 million in the first quarter of 2020, reflecting in part the decreased capital needs to support the spoke of platform development as well as timing between quarters.

We believe that we are past the major portion of our capex requirements to support our strategy and that level should remain generally flat over time.

And lastly, with respect to our financial guidance for 2021.

While there remains some uncertainty and challenges with respect to the markets and customers that we serve due to the pandemic. We believe we have an increasing visibility into our operating performance through the end of the year.

Based on the encouraging results for the first quarter and the overall improving trends we have seen during the last three quarters, we are adjusting our guidance for 2021.

Including in our revised guidance, our spokes expectations for software and wireless revenue generation in 2021.

We expect total revenue to range from $138 million to $151 million up from the previous guidance of $132 2 million to $147 2 million.

Included in that total we expect software revenue to now comprise 61 million to $70 million up from the previous guidance of $58 2 million to 67 point to that.

Please keep in mind as discussed previously and approximately 95% 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 up through 2021.

At these early stages of Spokeo not only the level of bookings, but also the timing of such bookings impacts revenue to be recognized during 2021.

As our legacy on premise bookings are replaced by spoke of bookings in the coming years. Our revenue recognition will also transition for more immediate recognition characteristics to ratable recognition over time associated with the subscription revenue model.

Finally based on the recent improvements in the operating environment successes, we are seeing with the distribution of vaccines.

And offices opening back up we will be ending the furlough program, we initiated at the onset of the pandemic at the end of the second quarter of 2021, which will increase expenses approximately $2 5 million.

Additionally, we plan to accelerate approximately 1 million two 2 million in additional research and development spend which is meant to mitigate development efforts with tempered during the pandemic as a result of furloughs.

As a result, we now expect adjusted operating expenses to range from $151 million to 157 million. This is up from the previous guidance range of $142 7 million to $150 7 million.

Finally, we have tightened the guidance range for capital expenditures from $3 5 billion to $5 five line.

I would remind you once again on our projections are based on current trends net.

Those trends are always subject to change.

With that I will turn the call over to Vincent will make some closing comments before opening up the calls to your questions. That's ex.

Mike before we open the call to your questions I'd like to update you on our business outlook from our strategic direction.

Before I do I'd like to briefly discuss the recent change that was made the spokes board of directors.

Earlier this month and supported the board refreshment process, Brian O'reilly a member of the board of directors.

On the company that he will not stand for reelection to the board at the company's 2021 annual meeting of stockholders.

Let me be clear that Brian's decision was not the result of any disagreement with the company on any matter relating to operations policies or practices. He will remain a director and maintain this committee memberships through the 2020 one annual meeting.

I wanted to take this opportunity to thank Brian for his leadership on the board and the contributions he has made to the company.

Now with respect to key goals and business outlook, Let me take a few moments to outline our outlook and strategy for 2021.

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 signals, 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 clinical communication and collaboration platform.

Okay.

In many respects this past year was the most challenging for spoke on our history for both the management and operational perspective.

Despite the soft people our mission and vision remain unchanged simply put our mission is to create beautiful software that delights our customers. Our vision is to be the strategic partner of choice enterprise grade clinical communications and patient care coordination.

Our strategy to support that mission and vision is three fault. It includes first.

Minimize the planned customer attrition in our wireless product line by offering a comprehensive suite of standard the art wireless products and services integrated with our software offerings.

Second support our spoke care connect on premise communication suite that was driven by the 2011 acquisition of AMCOL software.

And third develop new applications and capabilities as we did in early 2020 with the introduction on the cloud native subscription based spoke out integrated communications platform.

With respect to our capital allocation strategy. Our overall goal has been to achieve sustainable business growth, while maximizing long term shareholder value through our multifaceted capital allocation program, which has included over $500 million in dividends and over $150 million.

<unk> million dollars on share repurchases as well as key strategic investments to improve our operating platform and infrastructure in order to drive long term organic growth for 2021, we're committed to continue paying 12 on a half cent per share quarterly on our dividend, while keeping an eye on profitability, we'll continue to evaluate our capital al.

<unk> strategy on a quarterly basis communicate our plans with you prospect of 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 clinical communications from a business configuration on strategy perspective, we believe we are strongly positioned.

We've created long term organic growth engine and spoke out maintain a source of strong recurring revenue on our patient service line, we run the largest paging offering in the world have integrated this operations deeply with our software operations, while continuing to enhance our paging platform and user devices and there'll be more news to come on this I'm coming from.

Orders, we believe with these two assets going for US our best financial results are ahead of us and spokes future is bright.

We're committed to delivering long term shareholder value, while staying true to our core values, putting the customer first provider.

Providing solutions that matter innovation and accountability I'd like to briefly comment on that last one that is so often overlooked in the world greatly impacts our daily lives.

Mike you I've been shocked at the news lately too often includes the multiple hate crimes against black indigenous and people of color and Asian American and Pacific Islander communities. We're all saddened by the avoidable, killing last spring of Georgia, Florida, Most recently aplenty right.

We all want to use these experiences to find a better way to treat each other and Gil fairly and equitably with everyone regardless of the color of their skin.

I believe there are a lot of good people in this world and it's their ideas and their social mores that should prevail I want to remind everyone that spoke strives to be a safe place to work for people of all backgrounds, we condemn racism and xenophobia in all forms and we are United and working toward a more inclusive future for all of our team members and cash.

Alex This is why we formed the diversity and inclusion council last year and Moreover, this is an organizational focus area. We will continue to develop prioritize going forwards.

Our adult spoke and I believe this is the culture, we've created on <unk>.

All of our employees to feel safe and welcome one.

All of our employees to feel valued empowered April expressed our diverse opinions and ideas and to recognize that their contributions make a difference.

Thank you operator, you can now open the call for questions.

Thank you ladies and gentlemen at this time the floor is open for your questions. If you'd like to ask a question you may do so by pressing star one now if you're on a speaker phone. Please make sure that your mute function is disabled to allow for your signal to reach our equipment again, if you'd like to ask a question. Please press star one now.

Yeah.

And on your first question comes from Ryan Vardeman with pelagic.

Hey, guys. Thanks for taking the question I'm sure. The color that you guys gave as it relates to the.

Progress.

It sounds like Youre still expecting somewhere around 3 million Bucks of revenue coming from spoke go this year.

Kind of put you close to $10 million, maybe eight or 9 million bucks of exiting the year on a run rate basis is that kind of the right way to be thinking about how you guys are thinking about pipeline and pipeline conversion.

Hey, Ryan it's Mike.

It's the right way to think about it as I said in my comments the <unk>.

The litmus test here is going to be obviously, the level of bookings and the timing of those bookings.

Throughout the year that will drive the SaaS revenue.

Probably what I'm most focused on given.

Given the size and timing of those bookings.

Once we have a full year of 2021 Israeli to see what the exit rate is.

From an IRR perspective, as we as we exit 2021, but theoretically yes, you are thinking about it the right way.

Okay, that'd be quite <unk>.

Would be quite a nice growth trajectory for the next two or three quarters. If you are anywhere close to that so.

And integrated E E.

Brought up in your prepared remarks that you've spent around $85 million of investing in the spoke go project do you think that you have built a business that will give you a.

Worth more than what we spent so far and will give us a good rate of return kind of.

From 2015 and beyond.

We absolutely do right. There's no question about it that's why I've been a buyer of spoke stock for last three quarters absolutely.

Great. Thank you.

Thank you again, if you'd like to ask a question you may do so by pressing star one now.

Yes.

Speakers at this time, we have no one else on the question in queue.

Okay, well look everyone. Thank you for joining us this morning, much appreciated and we look forward to speaking with you again after we release our second quarter earnings in late July everyone stay safe out there and have a great day. Thank you.

Yeah.

Ladies and gentlemen that concludes this morning's presentation. Thank you for your participation you may now disconnect.

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