Q2 2021 Spok Holdings Inc Earnings Call
Good morning, and welcome to Spokes 2021 second quarter Investor call. Today's call is being recorded on line today, we have Vince Kelly, President and Chief Executive Officer, and Mike Wallace, Chief Operating Officer, and Chief Financial Officer. At this time for opening comments I will turn the call over to Mr. Wallace.
Please go ahead Sir.
The 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 spoke of future financial and business performance.
All of this.
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 Companys estimates only on the date of this conference call and are not intended to give any assurance as to actual future results.
Spokes of actual.
Else could differ materially from those anticipated and these forward looking statements. Although these statements are based upon assumptions of the company believes to be reasonable and 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 on our 2020 form 10-K.
The second quarter 2021 form 10-Q, which we expect to file later today and related documents filed with the Securities and Exchange Commission.
Please note that's focused and has no obligation to update any forward looking statements for the past or present filings and conference calls.
And with that I'll turn the call over to Vince Thanks, Mike and good morning.
And hope all of you your families and friends are and remain safe. During these unprecedented times, especially because we continue to navigate the challenges presented by COVID-19, and the Delta variant.
The spoke and continue to take the situation very seriously and are ensuring that our employee.
Every 1 of the getting vaccinated to secure a safe work environment.
And as always we want to thank our customers many of whom for on the frontline fighting this virus and saving lives and we're forever grateful for their sacrifice.
We are entering the second half of the year with an improved outlook on important progress.
And over the second quarter and several key performance areas overall.
Overall, we saw software revenue increased from prior year levels continued improvement and wireless retention trends.
Particularly the significant increase and a year over year paid for placements and continued expense management that resulted in sequential decline.
Smith and many expense categories.
However, our second quarter results also demonstrate the continuation of the very challenging selling environment, we're operating and as a result of the COVID-19 pandemic and the related impact on our customers' budgets and ability to focus on new projects.
While we are certainly not satisfied with the level of software revenue bookings and the second quarter, we believe that the pandemic and its after effects of hospital financial health and resources had a large impact on our second quarter performance. We remain encouraged by the size and quality of our pipeline and software deals for the second half of 'twenty 'twenty.
The client and believe that we will see improvement and this area over the course of the remaining 2 quarters.
And we've developed the company with the strong operational foundation built on 3 pillars for our.
First is our best in class Paging network the largest in the United States. The continues to generate strong results.
The next is I spoke care connect suite of products with a valuable maintenance revenue stream contributes just under $10 million per quarter.
Last is our new subscription based cloud native platform spoke up.
Spoke continues to demonstrate a stable revenue base with over 82% second.
Quarter 2021 revenues recurring in nature coming from either of our legacy wireless business, our software maintenance contracts.
Spoke provides a valuable and critical service to our customers deliver on clinical information to care teams and when and where it matters most to improve patient outcomes, we remain committed.
Committed to our mission to create beautiful software that the livestock customers with a vision to be and the strategic partner of choice Enterprise grade clinical communications and patient care coordination.
Our core values include putting the customer first.
Respecting what they do.
And of continuous commitment to innovation.
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So while the pandemic continues to create a challenging environment. We are encouraged by the long term trends and health care and the need for of sophisticated system of action represented by spoke of.
Turning to our second quarter results first wireless subscriber and.
And the units were up sharply from the prior quarter as a result, net pager losses declined to approximately 5000 units and record low of 6%.
We were pleased to see the continuation of these more stable trends.
Especially on the top performing healthcare segment, which comprises nearly 85% of.
And the subscriber base.
Next on the GAAP basis software revenue of $15.9 million was up more than 8% from the prior year quarter.
The increase and year over year performance resulted primarily from of nearly 28% increase and second quarter professional services revenue as hospitals are still.
Starting to allow more people on site and our integration teams for completing many of the postponed projects from prior quarters.
However, our related software revenue backlog of June 30th was $45.6 million down $3.2 million from the prior quarter.
The sequential decline and our software revenue backlog.
It was driven primarily off the level of our second quarter operations software bookings.
As I mentioned before the current health care crisis is also a financial crisis for many of our customers. Many deals got put on hold and pushed out. However, we are optimistic that many of these will revert back and the second half of the year provided the backdrop does.
Worsened due to the Delta Varian.
Our sales team will continue to be laser focused on generating activity throughout the remainder of the year and booking additional sales and spoke of platform.
Moving to the $3.1 million and spoke of the deals we've already posted.
Finally, the spa.
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And does not make disciplined expense management.
Mike will review the specifics for the quarter in minutes.
Let me point out that we continue to make the necessary investments and our product development and sales and marketing infrastructure to support the evolution of our new platform.
That being said second quarter operating expenses were down sequentially.
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Part of what our team has been able to accomplish in this area and such a short time in order to align our expense base of market demand.
However, we did a lot more than just manage cost and the second quarter I am excited to share some of our new business generated and the quarter. The added 6 new customers for the spud.
Both family, including 3 wireless and 3 software like the highlight of couple of the 6 figure second quarter deals for you.
Our software bookings included 2 spokeo deals from existing customers transitioning to our new spoke of platform with an aggregate contract value of amount of approximately $1.3 million.
In addition, yet.
And other 6 figure deals and the second quarter, including 1 with and academic Medical Center that operates the oldest medical school and the south.
As an existing customer this hospital of extended its the console licenses to an enterprise wide agreement, including services and maintenance the sales contributed to the strong sales we have seen.
And from a console solutions.
These are just a couple of examples of the activity level that gives us confidence as we move into the second half of the year I'm proud of what our sales team has been able to accomplish against very strong headwinds this year.
On a final note and early June we announced the release of spokes first environmental.
Yet a bushel and governance or ESG report, which provides an overview of the company's policies and commitments since the company's inception in 2000 and for spoke has been committed to sustainability and being a responsible corporate citizen.
We are proud to the published our inaugural ESG report and look forward to worst and hard.
And the initiatives we identified we believe we have a meaningful impact and the communities that we serve and where we live and work and we take our commitment very seriously as.
And as we all continue to cope with ongoing impact from COVID-19, there's lots of ongoing social unrest and the U S spoke recognizes and embraces our role as the company.
So I can help shape, the culture, social attitudes and societal outcomes spoke of will strive to be an example of social responsibility for all of our constituencies and we look forward to providing future updates and our journey.
And I'll make some additional comments on our business outlook, shortly but first Mike Wallace, our chief operating officer and.
<unk> Financial Officer will review the financial highlights for the quarter strength.
Thanks, Vince I'll provide a of certain details of our financial performance and the second quarter, but I would again encourage you to review our second quarter 2021 form 10-Q, which we expect to file later today as it contains far more.
Information about our business operations and financial performance and we will cover on this call.
As Vince noted progress was made and several key performance areas of software revenue up more than 8% for prior year levels, albeit as compared to the lower level revenue the lower revenue levels and 2020 due to the pandemic.
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The improvement in wireless trends and continued expense management.
However, our second quarter results demonstrate the continuation of challenging selling environment. We're operating in as the COVID-19 pandemic continues to impact our customers and their budgets.
While not satisfied with the level of software bookings and the second quarter.
And we remain encouraged by the size and quality of the pipeline of software deals for the second half of 2021 and believe that activity will accelerate and the second half.
As a result, we are confident in reiterating the financial guidance that we provided last quarter.
And the balance of my comments I will review key areas.
Which drove our second quarter financial performance.
They include first a review of certain factors impacting second quarter revenue second selected items, which influenced second quarter expenses and lastly, a brief review of the balance sheet.
As usual if you have specific questions about these items or any of our quarterly financial results I'll.
To address them during the Q&A portion of this morning's call.
With respect of revenue for the second quarter of 2021 total GAAP revenue was $35.7 million unchanged from total revenue and the second quarter of 2020.
Through the first 6 months of 2020, GAAP revenue totaled $71.8 million compared to revenue.
The new of $73 million and the first half of 2020.
With respect of wireless revenue first half performance was driven by a lower level of pager unit churn on a year over year basis. In fact, the net pager decline and the second quarter average, 6% another record low.
As a result of wireless revenue for the.
And be happy half of 2021 remained solid and declining only 5.9% from the prior year.
And a stable unit pricing.
First of our software revenue total second quarter performance of $15.9 million reflected of more than 8% increase from the second quarter of 2020 with year to date software revenue of $31.8 million up more than 4% from prior year levels.
Both of the quarterly and year to date improvements were driven primarily by of 27, 6%.
The increase and year over year second quarter professional services revenue, which is almost exclusively related to our legacy products as our teams have continued to increase utilization from an all time low and the second quarter of 2020 as the result of the significant locked out efforts across the country.
Customers have also continued to reengage.
Reengage on implementation projects at a greater pace with each passing quarter.
And while we were pleased with the recovery from the all time lows and professional services rubber revenue on site access to our hospital customers continues to remain below historical levels.
With that said access continues to improve and we are hopeful it will normally.
Normalized to pre pandemic levels during the second half of 2021.
Regarding software maintenance revenue, which is of critical source of our reoccurring revenue stream second quarter and year to date 2021 revenue was $9.6 million and $19 million, respectively versus $9.5 million and $19.
And the corresponding year ago periods.
As we continue to focus the majority of our development efforts on spoke go we anticipate a purposeful continued decline and our ability to sell new licenses for the care connect suite of products. Our intent is to offset customer churn over time with the sale of spoke go.
And these dynamics, we would expect relatively flat slightly down annual maintenance revenue as we move forward and especially as we transition existing customers to a subscription model over time.
Also included and software revenue and the second quarter, albeit small was $90000 and subscription revenue from our spoke.
Low platform.
Things and the quarter of $1.3 million and total contract value or <unk> with annual recurring revenue or our <unk> or <unk> of <unk> 2 million and an average contract life of approximately 5 years.
These bookings originated from an existing customer transitioning to the new platform and.
In aggregate since.
Consumption of ours first spokeo deals and the third quarter of 2020, we have had bookings of $3.1 million and <unk> with IRR of $6 million.
Turning to operating expenses expense management continues to be a key focus as we continuously ally and expense levels market demand for our products.
Since the second quarter, both operating expenses and adjusted operating expenses were up from the prior year levels as the year over year comparison as Jason is disjointed, given the timing of furloughs and cares Act reimbursement.
And the second quarter, we continued to me and our focus on creating efficiencies and our expense base and benefiting from the cost reduction initiatives.
And the second and implemented to offset the impacts from the pandemic on our revenue streams.
For the second quarter of 2021, we reported adjusted operating expenses, which excludes depreciation and amortization and accretion and includes capitalized software development cost of $37.6 million up from $34.1 million and the same period.
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Adjusted operating expenses are higher largely as a result of the following 2 items.
We incurred approximately $1.7 million of greater payroll and related costs and the second quarter of 2021 as compared to the same period, a year ago as employees incurred 1 week of furlough as opposed to higher health.
Health care cost as many individuals delayed wellness visits and medical procedures with Lockdowns in place during 2020 and higher average employee costs as the health care technology market continues to see low unemployment as well as tougher competition for retention and.
Partly attributable to the market's adoption of the remote working environment, which.
Good year on the reach of many companies.
And to the second quarter of 2020 included approximately $8 million of 1 time savings related to refundable tax credits for employee retention take employee retention taken under the cares Act.
And lastly regarding operating expenses as we discussed last quarter.
As Brian of discontinued the furloughs as of the third quarter of 2021. This is reflected on our current financial guidance.
Our capital expenses and the second quarter were approximately $1.5 million with the first 6 months of 2021 capital expenses totaled $2.2 million and was up slightly from the first half of 2020.
Capital expenses are incurred primarily for the purchase of the pagers network infrastructure to support our wireless customers as well as the necessary infrastructure to support the software business.
Not expect any significant changes to the level of our capital expense requirements and plan to be and the range of our guidance.
Finally, turning to the balance.
And other financial items, we ended the quarter with about a cash balance of $68.1 million down approximately $10.6 million from December 31.2020.
This reduction was primarily used to fund first half of quarterly dividends of $5.2 million and capital expenses of $2.2 million.
With that I'll turn the.
Sheet and go over to Vince for some closing comments before we open the call up.
Thanks, Mike before we open the call up for questions I'd like to comment briefly on a couple of items first I want to update you on our current capital allocation strategy and SEC.
I want to review, our key goals and business outlook for the balance.
Balance of the year.
With respect of our current capital allocation strategy, our overall goal to achieve sustainable profitable business growth, while maximizing long term shareholder value.
Towards that and the allocation of capital remains the primary area of focus and our board is constantly reviewing.
Our multifaceted.
And the capital allocation strategy currently includes dividends as well as key strategic investments that augment our product development operating platform and infrastructure.
Strategy also includes the potential for acquisitions that are both strategic and nature and that are accretive to earnings however, as we've mentioned.
Mentioned in prior quarters for the main focus is on the development and enhancement of our software solutions versus acquiring additional functionality of the present time.
We believe the cost of acquisitions and the integration of Dispirit architectures and functionality is much less efficient and ultimately limiting and the internal build approach we're taking.
Finally, with regard to our key goals and business outlook, we believe our efforts and the first half of the year have positioned us to see improvement as the health care industry eventually fully recovers on this pandemic.
However, we will closely monitor market conditions. This year in terms of of our progress on selling spoke go and other software.
We will remain nimble and being able to react to changing market conditions and being able to quickly align our operations with the demand levels that we're seeing.
I'd like to thank our shareholders for their patience and support for them.
The also thanks for them for their participation and our annual meeting last week.
As we.
We reported each of the 10 nominees to the company's board of directors were elected to 1 year terms spoke does not have of classified board and our directors stand for reelection and every year.
And for a full review of the final voting results. Please see our disclosures and our report on form 10-K filed with the Securities and Exchange Commission.
So at this.
<unk> the operator to open the call for your questions, we'd like to ask you to limit your initial questions to 1 of the follow up and after that we'll take additional questions as time allows operator.
Thank you if you would like to ask a question. Please signal by pressing star 1 on your telephone keypad, if you're using a speaker phone. Please make sure your mute function of.
Point off to allow your signal to reach our equipment.
And again press Star 1 to ask your question and we'll pause for just a moment to allow everyone an opportunity to signal.
Yes.
And our first question comes from Ryan Vardeman with Pelagics. Please go ahead.
Hey, guys.
As you start selling the existing customers.
Transition.
Transitioning from the legacy platform to spoke go what are the selling efforts look like and what sort of.
Maintenance revenue to spoke go subscription revenue per year does that typically look like.
So the selling efforts I'll pick that 1 and then Mike can take the latter of the selling efforts consists really of 2.
2 pieces Ryan we number 1 we have of new business group.
Group that we've put together and we've gone out and recruited people with deep clinical backgrounds in terms of sales capability and they have of quota that's 70.
Percent spoke go and about 25% of our legacy software and then we also have 3 operating regions and there.
Those regions, essentially international and east and West.
And people that are <unk> that of enterprise sales directors that are used to selling our existing software.
And their quotas are about 75% of our legacy software and 25% focus so that's the current.
Structure in terms of how we go to market with that particular team. We've also recently conducted a study of pricing study with an outside third party consultants in terms of what.
The 5 or so you've seen the pricing and where we need to be price and of our solution on a per user per month basis that has been completed we are and the process of rolling that out and we will start seeing the benefits of that here and the second half of this year. So those of our primary areas and in terms of how we're going to market.
We're also using.
Using from our existing innovation partners and we're talking about Mayo clinic here and we're talking about title health et cetera.
Feedback from them in terms of our development and then.
The case of the ladder specific case studies and use cases.
Particularly around the emergency departments to help use.
And as a reference of all account referenced simple studies in terms of how you can improve your communications with our new platform. So that's the primary area there and Mike you want to take the second half Yeah Ryan.
Good question on the the spoke go to existing customers regarding maintenance.
And this case as it relates to the deals.
And that we announced.
They did not have a great deal of maintenance. So it was a product that we had sold them from our legacy that went end of life that we were able to transition them to spoke go.
As of the perfect scenario really but over time as we as we transition the entire.
And that's <unk>.
As we make that that progress.
I'll actually report out on existing.
And customers and the amount of maintenance that would in theory be going away by the replacement of Spokeo, but and this 1 case.
It was very little.
Okay, so going forward the.
Maintenance to spoke go revenue kind of expectation and we have 40 million of maintenance today. If we were to convert all of our customers to spoke go.
And what might we think about and so far of subscription revenue is concerned there and then I've got a follow up question.
Yes, I mean, that's a that's the big question to answer.
Obviously, we have and expectation.
Spectation over time that the.
The subscription revenue from spoke go will significantly exceed what we're getting and maintenance today.
But again I think given where we're at today.
And we don't have that many of the existing customers that have switched.
We're going to need to let that play out.
Year ago, you guys provided a framework by which to think about the sum of the parts.
And cash plus wireless business.
Where stock is currently trading.
Meaningfully below kind of the cashless wireless business and at what point do you think operational results will give the.
And about the confidence that you say you have the.
We have not span of decade, developing the software business and $270 million.
Thanks, Brian look nobody is more frustrated with the stock price than I am and we look at this business and we'll share our wireless business.
Exceeding every expectation that we have internally month after month quarter after quarter of doing fantastic and pick it has a very solid value.
And we think of it has a great future and in fact, we were talking with the hospital CIO yesterday he said.
There is a chance paging might make a comeback because of all the things that are going on and cyber secure.
Public days and we have as you know encrypted pagers and the last for more news on some more products around the paging business.
And the second half of this year, then we have our legacy software, but as you probably saw the press release. This morning, you know U.
U S News and World report put out a ton of roles of the top adult hospitals and the nation the top children.
And as hospitals and the nation. All 30 of them are spoke customers. I mean, we have a franchise of there that is incredibly valuable and now we've rolled out a new platform, we launched it and the middle of the pandemic.
Is the worst selling environment I've seen for new projects and my career, we have.
No problem going to existing customers selling add on business to the things. They already have the trying to get a consensus internally right now to take on new projects and the sales cycles, often and ball more than 1 decision maker frankly has just been very very difficult. The pipeline has continued to grow.
We think theres, great value and that we're not excited about what's going on with the Delta variant right now that's the third piece of our business that we think has a good future, but look we're not on the Crusade here, we're going to look at this thing very closely as the year goes forward into next year and we'll make the best business decisions. We can about what we're going to do and the future.
I think where the stock is trading right. Now this company is worth a lot more and where it's trading right now we have a situation at the end of June where we came out of Im sure Youre aware, we came out of the Russell and disease.
They raised on market cap of all of the stacks that have gone out there we were underneath that bar and with the huge institutional ownership we have.
There was a.
<unk> of trading huge spike and our volume and and we traded down on that as we traded out of a lot of those funds. The same thing happen. This week and S&P index, It's unfortunate and there was no news from the company and and then all of a sudden huge training and and a reduction I think I personally think we're worth more than where we're trading.
Right now I think we've built a great platform I think we have great customers that platform, we've planted our flag and Australia with planning and and Canada, Obviously, we plan and it here and the United States, We've got real customers using it and implementing it.
We are frustrated with the progress there, we need and see an improvement and the environment, we need to see the hospitals opening.
Opening back up not shutting back down to get real traction there, but we're not quitters, we have not given up but we're also not going to be.
Like I said.
And Crusade on it and we're watching this very very closely and we will try and make the best business decisions. We can so you are a shareholder here 1 of our bigger shareholders I apologize to you where we are.
It's my responsibility I'm kind of do absolutely the best I, possibly can and as long as I'm here running this company to improve that situation line and I can tell you nobody here is satisfied with where we are.
Okay, Yeah, and again I've been asking for the last couple of years about quantifiable metrics by which we could.
Judge the company on a go forward basis, and we still don't have any sort of framework as it relates to what kind of.
What we've been investing and et cetera. So that's that continues to be a source of frustration.
Best of luck. Thank you.
Thanks, Brian.
Our next question comes from George Melas with MGH management. Please go ahead Sir.
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Thank you.
Good morning, gentlemen.
And the last call you talked about the integration of spud to Spud go with your contact Center solutions can you update us on the.
And.
And maybe give us the broadest sense from a functional.
And the integration point of view, what would stimulate the adoption of spoke go and also.
And also what would remove the barriers to adoption.
Thank you.
Yep, great absolutely, yes, well 2 things really if you have to look at our customer base of the existing customers that are using.
For them using our existing contact center solutions of which we have 3.
We have 1 we developed internally historically of 2 that we acquired over the years we.
We have made a ton of progress integrating the contact centers some of them have been in place because of their premise based server based and house solutions. Some of US had been in place.
And over 20 years and they've been highly customized so when you talk about contact center integration. It's the degree of integration that's important because these workflows and these hospitals are built around those contact centers and the directory and so we have delivered contact center integration.
And we have a target list that as a subset of our total customer base right now, where it's green light to our salespeople to go to those specific customers pitch them on the platform and go ahead and book sales. There is another subset, where we have to deliver enhanced functionality and we're looking at this on our roadmap and on a priority.
And any and you can imagine we're constantly trying to prioritize because we don't want to spend a lot of development dollars for just 1 customer we gotta do R.
Our efforts, where we think we're going to get the biggest bang for Buck. So I'd say in terms of console integration, where we want to be ultimately, we're probably still for.
For 5 months away from from the endgame there.
There.
By the end of this year I think we'll be where we want to be ultimately there might be a few tweaks on console integration on <unk>.
Next year, there's a couple of other integrations that we that asked to do that are not our software and other things like some scheduling software et cetera that is in progress and that is going well I think as those integrations.
And complete.
We will have a lot better success and in terms of some of our marketing and selling results.
And there's some other areas.
The cost of functionality and the hospitals need and clinical care and communications things like patient outreach and and other things that we don't have on the platform yet the kind.
And of a little bit of of different creature than exactly what we've done historically and we're looking to partner with some companies with respect of that and those conversations have been ongoing and and.
Well down the road with them and we'll continue that so that's basically the main.
Things that we have to do on our roadmap with respect of console integrate.
Mike is there anything you want to add on that no I think that's for okay.
Yeah.
Okay great.
So of the ask the follow up on that so you have 3 kind of unfolds consoles.
<unk> is 1 of the and what's sort of the the share of both of the consoles within your customer.
The ratio of based.
And Greg Yeah.
And China understand is the integration more complex with what I'm, just trying to get some granularity about because that can be on <unk>.
For the for the adoption of your classic.
Yes.
Great question.
Customers to challenge our customer base of split about a third of third a third between our medical console.
Old and calm console and counsel that we call Smart suite.
Now the console that we call Smart suite is more feature rich its a lot more complicated.
Okay, and the Beast and the other 2 so the other 2 actually a little bit easier to do integration with but we're putting a lot more effort and to doing the integration of was smart suite, which is about a third of our customers of course, and a lot of and as customers who use months, we'd have on the beazer of larger.
The health care organizations, because they wanted that that added functionality. So.
So we are having to do all 3 and as you can imagine with the development team, it's not like Hey go integrate with a console. It's integrate with 3 consoles that are based on the spirit architectures and that's why it's been taking us a little bit longer and I haven't said that we got our hands around it it's in process.
And as I said, I think as we and this year will be and really good shape.
Hope that's helpful. Mike did you want and I think he explained the perfect great. Thank you Greg.
Thank you very much appreciate it.
Youre very welcome.
Thank you and once again, if you'd like to ask a question. Please press star 1.
Yes.
Yeah.
And we have no additional questions at this time I'll turn the call back over to Mr. Kelly for any closing remarks.
Thanks, a lot for joining us. This morning, we look forward to speaking with you again after we release, our third quarter results and our.
October and everyone have a great day, and please stay safe and healthy.
And this concludes today's call. Thank you all for your participation you may now disconnect.
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And.
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