Q2 2022 Spok Holdings Inc Earnings Call
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, which are contained in our second quarter 2022 Form 10-Q and related documents with the Securities and Exchange Commission.
Please note that spoke assumes no obligation to update any forward looking statements from past or present filings and conference call.
With that I'll turn the call over to Vince.
Thank you and good morning, everyone and thank you for joining US this morning for our second quarter 2022 earnings call.
Today, we will share with you an update on how our strategic business plan is progressing as well as our financial results for the quarter I'll start by reviewing the agenda for today's call.
The order will be as follows.
We will begin by providing an update on our strategic business plan.
Next we will provide an overview of our second quarter and year to date 2022 results as well as our year to date pro forma results.
Then we'll cover our updated guidance for 2022, as well as onetime restructuring costs related to our strategic business shift.
And finally, we'll wrap up and take your questions.
Since the implementation of our strategic business plan five months ago, we've been operating cash flow business model, featuring our wireless service line and our care connect suite software solution offerings.
The goal of returning capital to shareholders.
I'm happy to announce today that our strategic business plan is tracking well ahead of schedule.
The streamlining of management and employee head count that we had previously announced on February 17 is now substantially complete.
Our 60 day warn act notification period ended in mid April . So we had at least two months in the second quarter and our new operating posture.
Our operating expenses and capital expenditures are coming in favorable to our plan and we're confident they will continue to do so in the second half.
We've delivered on our strategic objectives of driving revenue from our two service lines and investing in a targeted and limited manner such that we can return capital to shareholders. We expect to continue to do so.
With a renewed focus on our care connect suite of software solutions, we've been able to increase year to date software bookings by 23% year over year with 32 of these deals worth over six figures each.
Most of this positive variance came in the second quarter as our software sales folks force was focused 100% on our care connect suite solutions with no other distractions.
Additionally, our customers have reacted very positively to our plans for investing in and enhancing our contact center alerting and mobile solutions that they already use no and low.
<unk> welcome this news with open arms, and importantly, with sales orders.
Additionally, our sales representatives have been able to visit many more sites in person this past quarter relative to the last few years and that is having a positive effect in short our focus has resulted in our second quarter software bookings increasing by 51% over the same period a year ago.
And there's plenty more in the pipeline.
While it takes time for these bookings to complete implementation and show up in revenue. We believe this is a good leading indicator for the health of the business.
And as Youll hear the details for Mike and a couple of minutes, our wireless business continues to achieve plan with a record low unit decline.
Plus we've rolled out our new encrypted ARPA numeric pager, we have named the G&A.
Our Gulf payers to rejuvenate interest and reduce resistance to pagers and while we're in the early stages. So far so good we have approximately 2400 units in service and growing.
They're commanding a much higher RPM in the market due to their increased feature set that includes improved screen resolution battery life and multiple other features functions and benefits. Our wireless sales team is excited about this offering and our customers are too weak.
We expect to report further progress on this initiative as the year progresses.
Youll also hear from Mike with respect to our year to date pro forma results, but the high level answer is we would have generated well over $10 million and adjusted EBITDA, which is defined in the earnings release tables. This is our non-GAAP calculation of cash flow generally by the company before net working capital items in the first half of the year.
Assuming we had implemented the plan on January one.
Our expectation reflected in our guidance is to achieve plan. This year and continue making progress on cash flow generation and revenue stabilization into 2023 and beyond this will take time, but we've gotten off to a great start we expect to generate more cash this year than we anticipated when we announced the plan in the first quarter.
And we continue to make progress building, our partnership relationships and opportunities.
Subsequent to the end of the second quarter, we signed a distribution agreement with <unk> technology, a leading value added distributor driving technologies into the Pacific Asia Channel.
In technologies distribution ability to provide pre and post sales support implementation services and a 24 by seven support desk made the company a perfect distribution partner for spoke.
We believe that in technology and its partner network will enhance <unk> ability to provide meaningful outcomes for our clients in the Asia Pacific region.
Now as you know, we announced our strategic business plan in February we increased our quarterly dividend payment by 150.
Percent from $12 five per share to <unk> 31 in the quarter cents per share. We are returning $1 25 per share this year in dividends to our shareholders and we're already halfway there since the implementation of the plan in February $12 7 million in cumulative capital has now been returned to spoke shareholders.
This return of capital includes distributing our annual cash flow, which will continue to fund the majority of our dividend distribution going forward supplemented by cash on our balance sheet.
As always the declaration and payment of future dividends are subject to the board's discretion.
<unk> on financial and legal requirements and other considerations.
At this time the company has not repurchased any shares using the board authorized share repurchase program of up to $10 million of the company's common stock along with our advisors. We will continue to evaluate our capital allocation strategy as spoke continues its transition to our strategic pivot this year and beyond.
Fiscal year 2022 continues to remain a transition year for spoke given the implementation time required to execute and operationalize our strategic shift to a cash flow focused model again. The good news is we've gotten off to a great start as we've previously mentioned we continue to anticipate that this transition will be.
<unk> by the end of 2022 with the majority of our right sizing already behind us.
We expect the company to be adjusted EBITDA positive going forward and will cover a significant portion of the third and fourth quarter dividends through cash flow.
We will reach our full cash flow run rate by the end of 2022 as we head into 2023.
As we move through this transition we will continue to update shareholders on our progress.
Spoke has an excellent track record of driving revenue from our business lines and enjoys D market leadership position and hospital call Center software solutions and narrow band personal communication wireless services, we have over 2200 healthcare organizations as customers, representing the who's who of hospitals in the United States.
We've built our solutions over many years and have longstanding valuable customer relationships, we honor and respect our customer service and providing world class health care.
The value of our place in their communications ecosystem.
The overwhelming majority are over 80% of our revenue is recurring in nature. We are a company with no debt, which provides us significant flexibility. We continue to remain focused on investing in enhancing our integrated care connect ecosystem in order to continue our long standing relationships with the nation's leading health care providers.
We believe these attributes combined with our dedicated and committed employee base are what allows us to generate significant cash flow into the future and return capital to our shareholders.
And with that I'll now turn the call over to Mike Wallace, Our Chief Financial Officer, and Chief Operating Officer, who will review, our second quarter financial results Mike.
Thanks, Vince and good morning, everyone I would now like to take a few minutes and provide a recap of our second quarter and year to date 2022 financial performance, which we reported yesterday.
I encourage you to review our 10-Q when filed as it includes significantly more information about our business operations and financial performance than we will cover on this call.
For the second quarter of 2022 total GAAP revenue was 33 7 million compared to revenue of $35 7 million in 2021.
Revenue for the quarter consisted of wireless revenue of $18 7 million, which was down $5 8 million five 8% from $19 $9 million and software revenue of $15 million down five 4% from $15 9 million largely in line with our expectations.
With respect to wireless revenue second quarter 2022 performance was driven by continued a continued decline in pager unit churn on a year over year basis. In fact, the net pager declined during the <unk>. The trailing 12 months was three 9% another record low.
On a sequential basis units in service declined by only 3000 units.
4%.
As a result wireless revenue for the second quarter remained solid declining five 8% compared to the prior year and in the range of our expectations.
With the monthly paging revenue component of wireless, which represents 97% of overall wireless revenue declining by only five 2% on a year over year basis.
The remainder of wireless revenue relates to product sales, primarily through lost pager fees, which are onetime in nature and are far less impactful to the ongoing value of this business.
These continued strong trends in our wireless business are being driven by the combination of solid gross additions from our sales organization.
Continued minimization of churn with existing customers as well as stable unit pricing or average revenue per unit or <unk>.
<unk> was $7 23 for the quarter versus $7 25 in the year ago period, when adjusted for approximately <unk> <unk>.
Of decline attributable to decreases in Universal Service Fund revenue.
These fees are charged to customers based on quarterly rates set by the SEC and can fluctuate from one quarter to the next.
These fees do not materially impact the bottom line as they are collected from customers to offset cost owed to the SEC.
Additionally, <unk> was favorably impacted by our previously announced Gen. A pager, which is now in the early stages of being sold to customers.
We expect that the G&A Pedro will be an important factor in our ability to minimize future unit churn and <unk> degradation.
On a year to date basis wireless revenue saw similar dynamics to the second quarter as just discussed.
Declining six 1% compared to the prior year and again in the range of our expectations.
The monthly paging revenue component of wireless declining only five 3% on a year over year basis.
Turning to the second quarter software revenue, specifically maintenance revenue, which is the largest component of the software revenue was $9 2 million versus $9 6 million in the same period of the prior year or four 2% lower.
As we have discussed in previous quarterly calls and as we continue through this pivot with the focus being brought back to our care connect suite software products. Our expectation is for maintenance revenue to be down slightly year over year.
Given gross churn and uplift levels remained consistent with prior quarters.
However, with higher expected license bookings as we move through this pivot licensing will serve to drive inflows to maintenance revenue as license bookings provide the basis for new maintenance.
Professional services revenue was $3 3 million versus $4 9 million in the second quarter of 2021.
As we stated in our earnings call in February related to our 2022 financial guidance, we assumed an intentional reduction in services revenue the way planned reduction in personnel to better align with our current backlog and to drive a higher rate of net cash flow and alignment with the strategic shift in our business plan.
And again, it's important to remember that services has not historically driven meaningful cash flow on a standalone basis, but has been viewed as an opportunity to expand our licensed footprint through customer engagement as well as to fulfill upgrade obligations under our maintenance contracts, which is critical in maintaining our existing customers.
Lastly license and hardware revenue was $2 5 million compared with $1 4 million in the same period of the prior year or <unk>, 79% higher.
As we saw higher bookings in the second quarter, and a solid mix of license and hardware in those bookings.
On a year to date basis total GAAP revenue was $67 5 million compared to revenue of $71 8 million in 2021.
Wireless revenue was $37 5 million compared to $40 million, reflecting net paging revenue churn in line with the trends seen in the second quarter.
And year to date software revenue of $30 million compared to $31 8 million in the prior period.
This was driven by maintenance revenue being down 3% on a year over year basis professional services down 27, 7% due to the intentional reduction in professional services resources to better align with backlog.
And which was offset by higher license revenue of 53, 3% driven by the strong bookings during the first half of the year.
Second quarter, adjusted operating expenses, which excludes depreciation amortization and accretion of $1 9 million.
Severance and restructuring costs of <unk> 5 million totaled $30 million in the second quarter compared to $37 4 million in 2021.
And on a year to date basis, adjusted operating expenses were $67 million compared to $75 4 million.
As Vince mentioned earlier, the streamlining of employee and management head Count reduction is now substantially complete and we are now in the final stages of paying the severance costs associated with our strategic business plan.
Adjusted EBITDA, which is defined in our earnings release tables and represents EBITDA before stock based compensation expense impairment of intangible assets.
<unk> of capitalized software development costs, and including capital expenditures.
Our non-GAAP calculation of cash flow generated by the company before net working capital items.
In the second quarter adjusted EBITDA was a positive $3 7 million.
Paired with a negative $1 5 million in the same quarter of 2021 and reflects the progress made to date with our strategic pivot.
On a year to date basis.
Our adjusted EBITDA was negative $3 6 million compared to a negative $2 million in 2021.
And then in a few minutes I'll walk you through our pro forma year to date, adjusted EBITDA results, which will exclude the onetime costs related to the strategic pivot.
But with our strategic pivot progressing as expected our adjusted EBITDA that we had seen over the past several quarters has begun to reverse and improve we expect this more normalized trend to continue going forward.
Next I would like to discuss our year to date pro forma impact to the negative $3 6 million in adjusted EBITDA previously mentioned.
Had the strategic changes that we made and in effect as of January one 2022, our adjusted EBITDA would have been $14 $4 million higher for the first six months of 2022.
This $14 4 million includes severance and restructuring costs of approximately $4 9 million.
Costs related to personnel reductions of $6 8 million non.
Non payroll spokeo costs of approximately $1 3 million.
And approximately $1 4 million and other costs.
<unk> about these adjustments our year to date adjusted EBITDA for the six months ended June 32022 would have been $10 8 million.
Now turning to our guidance for full year full fiscal year 2022.
As a reminder, the figures I'm going to discuss today are included in our guidance table in the earnings release and has been updated from the previously provided 2022 financial guidance in our February and April earnings calls.
We now expect total revenue to be in the range of $130 million to $136 million of which we expect wireless revenue to range between $73 5 million to $75 5 million.
Software revenue is expected to range from $56 5 million.
To $65 million we.
We expect adjusted operating expenses for the full year of 2022 to be in the range of $123 3 million to $126 1 million.
And Capex will be in the range of $3 2 million to $3 9 million with the majority of Capex related to our wireless business.
These changes to our 2020 guidance serve to significantly narrow the range as previously provided enlarged and largely indicate mid points consistent with our original guidance.
Now turning to our forecast for restructuring costs for 2022 as you can see from this slide.
We have further lowered our range for total restructuring costs from $6 2 million to $7 5 million in the first quarter two our updated range of 6 million to $6 5 million.
Breaking this down we now expect severance and restructuring costs to be in the range of five five to $5 8 million.
And contractual terminations to be in the range of <unk> 5 million to <unk> 7 million. This.
This narrowing of the range reflects our comfort that these costs are largely behind us at this point.
With that I'll turn the call back over to Vince before Q&A, Vince Thanks, Mike I'd like to end by reminding everyone that we continue to remain committed to our mission of being a strategic partner of choice for enterprise grade clinical communications and patients in care coordination. This commitment has allowed spoke to create a significant.
<unk> market position with long standing relationships with the nation's leading health care providers spoke as a best in class Paging network currently the largest in the United States, which continues to generate strong results.
Additionally book continues to provide a valuable and critical service to our customers delivering information to care teams, when and where it matters most.
Proved patient outcomes.
As previously discussed our spoke care connect solutions provide a suite of products with potential for new license sales and a valuable maintenance stream maintenance continues to provide a foundation under our legacy software business and it's important to maintain as we quickly transitioned to focus on cash flow generation.
As reflected in our guidance, we're continuing to invest more in our legacy products as we progressed through our strategic fit we believe this will drive future sales and upgrade opportunities and improve our results going forward in this important business line, while generating cash flow on a go forward basis, we have a world class customer base and a large market share in health care.
Contact Center solutions, and we believe this represents significant opportunity for the future.
Spoke continues to demonstrate a very predictable revenue base with over 80% of our revenue being recurring in nature coming from either our legacy wireless offerings, our software maintenance contracts.
This gives us confidence that we are not only on the right path forward for executing our strategic pivot, but also to maximize value for all shareholders. We believe that going forward, we will return significant cash flow to our shareholders and that our stern.
Current stock valuation represents an attractive opportunity for share appreciation as well now.
Now with that I'll turn the call over to the operator for Q&A operator.
Thank you we will now conduct a question and answer session.
I'd like to ask a question. Please press star one on your telephone keypad.
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You May press star two if you'd like to remove your question from the queue.
For participants using speaker equipment, it may be necessary to pick up your handset.
Keith.
Once again Thats star one to ask a question at this time.
One moment, while we poll for questions.
Operator.
Yes, I don't see any questions in the queue. So I just I want to wrap up by just thanking everybody for joining US today. We appreciate your support and your interest in spoke as you can see by our results for the second quarter, we've gotten off to a fantastic start we're bullish on the second half of the year, we think our stock represents a compelling value and you're going to get paid a very.
Nice yield while you wait for appreciation and we think depreciation will be coming so thanks off have a great day, and we look forward to speaking to you again next quarter.
Thank you. This does concludes today's teleconference. You may disconnect. Your lines at this time and have a wonderful day.