Spok Holdings, Inc. (NASDAQ:SPOK) Q4 2023 Earnings Call Transcript

Spok Holdings, Inc. (NASDAQ:SPOK) Q4 2023 Earnings Call Transcript February 21, 2024

Spok Holdings, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Greetings. Welcome to Spok Holdings’ Fourth Quarter 2023 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator instructions] Please note, this conference is being recorded. I will now turn the conference over to Al Galgano from Investor Relations. Thank you. You may begin.

Al Galgano: Hello, everyone, and welcome. I am joined today by Vince Kelly, Chief Executive Officer, Michael Wallace, President of Spok, Inc., and Chief Operating Officer, and Calvin Rice, Chief Financial Officer. After a brief presentation by management, we will open up the call to your questions. I want to remind everyone that today’s conference call may include forward-looking statements that are subject to risks and uncertainties relating to Spok’s future financial and business performance. Such statements may include estimates of revenue, expenses and income, as well as other predictive statements or plans, which are dependent upon future events or conditions. These statements represent the company’s estimates only on the date of this conference call and are not intended to give any assurance as to actual future results.

Spok’s actual results could differ materially from those anticipated in these forward-looking statements. Although these statements are based upon assumptions that the company believes to be reasonable, they are subject to risks and uncertainties. Please review the risk factors section relating to our operations and the business environment, which are contained in our 2023 Form 10-K and related documents filed with the Securities and Exchange Commission. Please note that Spok assumes no obligation to update any forward-looking statements from past or present filings and conference calls. With that, I’ll turn the call over to Vince.

Vincent Kelly: Thank you, Al and good afternoon. Thank you for joining us for our fourth quarter 2023 earnings call. Let me preface my comments by saying how proud I am of our Spok team and our ability to generate very impressive performance in 2023, while staying true to our mission. I’m very pleased with the momentum our team has created, and I’m excited by our prospects and outlook. Since the strategic pivot we announced about two years ago, our focus has not changed; that is to grow revenue, generate cash, and return capital to our stockholders. For 2023, it was mission accomplished. We returned $25.6 million of cash to our stockholders while more than covering that total by generating in excess of $30 million of adjusted EBITDA.

We were also successful in our stated goal to grow revenue. I’m proud to report that for the first time in Spok’s history, we were able to grow consolidated total revenue with revenue growth for both wireless and software. We accomplished this by responsibly investing in our business to support growing revenue, while closely managing our operating expenses and capital expenditures. While the dividend level we declared when we announced our pivot in February of 2022 may have initially seemed high, we believe Spok has struck an excellent balance between making the necessary investments to fuel future growth, while continuing to generate cash flow and returning capital to our stockholders. We believe we are on a sustainable path to continue paying our quarterly dividend at these levels for the foreseeable future and are encouraged by our prospects.

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Q&A Session

Today we’ll share with you an update on how our strategic business plan is progressing in support of our goals, as well as our financial results for the quarter and full year. I’ll start by reviewing the agenda for today’s call. The order will be as follows. First, a review of our strategic focus and goals and reporting our progress against those goals. Next, Michael Wallace, our President and COO, will provide a review of our operational performance and review our market opportunity. Then, Calvin Rice, our CFO, will review our fourth quarter and full year 2023 financial highlights in more detail. We will then conclude our prepared remarks with a review of our business outlook and financial guidance for 2024. And finally, we’ll open up the call to your questions.

In 2023, our team achieved numerous operational and financial milestones. Significant accomplishments were made regarding top-line revenue growth, record profitability levels, continued expense management, cash flow generation, progress on our product roadmap and development, augmentation of our sales team, generating six-figure customer contracts and multi-year engagements, GenA pager placements, maintenance contract bookings and retention, increased professional services revenue, coupled with improvements in resource utilization, and enhancing our industry reputation and improving our customer satisfaction scores. Investment in our product and sales team resulted in a historic increase in consolidated total revenues with both a 7% growth in software revenue and a modest growth in wireless revenue.

Overall software revenue growth was driven by growth in each of the four software revenue categories; license, professional services, hardware and maintenance. In 2023, Spok generated over $30 million of software operations bookings. This was a 22% increase from the prior year, but more importantly, a level not seen since 2019 and an annual growth rate not seen in almost a decade. While we were very happy with our bookings level last year and believe that we are certainly trending in the right direction, let me take a moment to provide some perspective on our software operations bookings trajectory. As we have said in the past, software operations bookings tend to be lumpy from quarter to quarter and timing is a major factor. While it’s easier to move sales through the various stages of the pipeline, the ultimate closing of a contract is a bit harder to predict and by a matter of days can impact the quarterly total significantly.

This is why we believe it is more appropriate to look at bookings on a 12-month basis. A full year basis better normalizes both positive and negative timing anomalies in the normal course of the sales cycle. For example, some of the contracts we anticipated to close in the fourth quarter of 2023 were postponed to the beginning of the year and consequently 2024 has started out extremely strong. In fact, January was a company record and February has been strong as well. So we did not spend a great deal of time analysing the sales performance of an individual month or quarter as opposed to viewing bookings in the broader context of our pipeline execution and anticipated annual results. We expect 2024 operations bookings to grow well above our 2023 levels.

Switching to operating expenses. While driving our top line, we also continued our focus on expense management as operating expense levels for the year were down more than 12% from 2022. As an example, you may remember in September 2023, as part of our continued focus on managing expense levels, we exercised an option for the early termination for the lease on our corporate headquarters in Alexandria, Virginia. The bottom line is that we expect to save approximately $1 million annually beginning after the conclusion of our lease in September of 2024. Our focus on expense management is one of the key drivers to generate increased cash flow does not come at the expense of our product platform, as we continue to make the necessary investments in product development, sales and marketing, customer support, and professional services to support the growth of our Spok Care Connect and wireless solutions.

In 2023, Spok invested more than $10.5 million in product research and development. Investments such as these are critical to creating a best-of-breed product platform and to maintaining our solid industry reputation. In 2023, I believe that two key proof points of our premier market position were evidenced by a couple of results. One, receiving the number one spot for the sixth consecutive year in Black Book Market Research’s review of the healthcare industry, and two, having 20 of the 22 adult hospitals and seven of the 10 children’s hospitals named to the 2023 US News and World Report Best Hospital Honor Roll as customers. Accolades such as these do not come if you don’t have a best-in-class product offering and a solid reputation with your customers.

Spok has an amazing blue chip customer base. Many customers have been with us decades and continue to buy from us. In short, we continue to fire on all cylinders and are confident about the future as we start 2024. Based on our performance in 2023, we’re providing our guidance estimates for revenue and adjusted EBITDA generation in 2024. This guidance reflects the team’s confidence in being able to outpace our 2023 performance. At the midpoint of the guidance range, we believe we’re on track to again grow consolidated revenue in 2024 on a year-over-year basis. We also anticipate that the midpoint of our adjusted EBITDA guidance will be consistent with last year with additional growth potential at the high end of the guidance range. Calvin will go into more detail regarding our expectations later in the call.

Of course, like last year, we will review guidance with you on a quarterly basis and make adjustments as appropriate. Our strategic goal is simple; run the business profitably, generate cash flow, and return that capital to stockholders. Spok has a proud legacy of creating stockholder value through free cash flow generation, and we intend to continue this track record. Since the beginning of our strategic pivot, which started about two years ago, Spok has returned just under $51 million, or about $2.50 per share to our stockholders in the form of our regular quarterly dividend. In fact, since we founded this company in 2004, Spok has returned nearly $675 million to our stockholders even through our regular quarterly dividend, special dividends or share repurchases.

In the fourth quarter of 2023, this history of returning cash to our stockholders continued as we again generated impressive levels of adjusted EBITDA and returned $6.2 million to our stockholders. This represents the 76th consecutive quarterly dividend paid since becoming a public company, and we expect to pay dividends totalling approximately $26.1 million in 2024. Spok remains committed to our dividend policy and returning capital to our stockholders. When you take into consideration our current cash balance, distributions to stockholders, share repurchases, debt repayments and acquisitions, Spok has now generated more than a $1 billion of free cash flow since our 2004 inception. Our focus on maximizing cash over the long term supports the four major tenets of our strategy.

Those are number one, continued investment in our wireless and software solutions. Number two, growing our revenue base. Number three, disciplined expense management. And number four, a stockholder-friendly capital allocation plan. Going forward, we believe our extensive experience operating our established communication solutions and world-class customer base will continue to create significant value for stockholders. Now I’ll turn the call over to our President and Chief Operating Officer, Michael Wallace, who will talk about our operational accomplishments and quantify some of our opportunities. Michael?

Michael Wallace: Thanks, Vince, and good afternoon. Thank you all for joining us for what we believe is another solid quarter and full year of results from Spok. We are pleased to report that we have continued to execute on our business plan, and in 2023 we generated GAAP net income of $15.7 million, or $0.77 per diluted share, which represents a sharp increase from breakeven adjusted GAAP net income in the prior year period. As you may remember, 2022 GAAP net income included a non-recurring and non-cash benefit of $21.9 million related to the release of previously established tax valuation allowance in alignment with our projections of future taxable income prior to the announced pivot and shutting down of development and deployment of the Spok Go product.

Including that benefit, 2022 GAAP net income totalled $21.9 million, or $1.9 per diluted share. Importantly, we accomplished this bottom line performance while continuing to generate software operations bookings growth, which drove revenue in 2023, as well as significantly building our professional services and maintenance backlog levels to over $56 million, which will drive revenue in future periods. On a full year basis, software operations bookings totalled more than $30 million, up 22% from prior year levels. Also, total 2023 software bookings reached levels not seen for the past four years, and continue on a trajectory of growth following our pivot almost two years ago. Amidst all the progress in creating a solid financial platform and stockholder-friendly capital allocation strategy, we remain true to our mission of being a global leader in healthcare communications.

We deliver clinical information to care teams when and where it matters most to improve patient outcomes as Spok enables smarter, faster clinical communications for our customers. And importantly, we continue to maintain our reputation as a thought leader in the healthcare communications space as we continue to see customer satisfaction ratings increase. Spok has over 2,200 healthcare facilities as customers, representing the who’s who of hospitals in the United States. We have built our solutions over many years and have longstanding valuable customer relationships. This is an amazing and valuable asset for Spok, and these hospitals buy from us regularly and renew maintenance at a high level. In a couple of minutes, I will outline an exciting opportunity for Spok that we believe widens our addressable market and will provide a future growth catalyst for our products.

Before I switch gears, let me take the opportunity to drill down into our software operations bookings this quarter. 2023 was certainly a year of milestones with regard to our software operations bookings. In addition to the solid year-over-year growth and total bookings of 22%, we were able to execute 67 six-figure customer contracts, an all-time high for Spok, and included the largest single customer contract ever recorded for the company. Additionally, in 2023, we executed 30 multi-year engagements with customers, an approximately 60% increase from the prior year. Hopefully, this performance gives you a good indication of the momentum that our sales team is generating in the marketplace and the confidence we have as we work our way through 2024 with a solid sales pipeline, both in terms of size and quality.

Supporting our achievements in the fourth quarter of 2023 were four multi-year engagement contracts that we were able to close and I’d like to discuss. The first was with one of the mid-Atlantic region’s largest tertiary care facilities, another with one of the top academic medical centers in the U.S., and a recognized leader in quality patient care and research, one with a private not-for-profit healthcare organization in the southeast, and the final with a leading academic health enterprise in the Midwest. The first health system is a long-standing Spok customer and one of our longest Spok Smart Suite users. This healthcare provider boasts more than 400 inpatient beds and over 2,500 attending physicians and nurses. This three-year multi-year engagement was for a platform upgrade across their facilities on Spok Smart Suite, Spok e.Notify, Spok Voice Connect, Spok Mobile, and Spok Messenger solutions, as well as our solution assessment and data integrity value-added services.

These additional consulting services expand and enhance the value that our customers gain from fully utilizing our solutions. Another of our standout contracts last quarter was with a hospital that is among the 20 largest and best equipped in the nation, with over 1,200 beds. This multi-year engagement with Spok included an upgrade to Spok Smart Suite, a new test system, new CTI architecture, the addition of Spok Voice Connect, as well as two Spok value-added services, solution assessment and data integrity. The third multi-year engagement I’d like to highlight was with a health system that has three acute care hospitals and a physical rehabilitation hospital for a total of 970 beds with 12,000 employees and providers. Spok executed a three-year engagement for upgrades to Spok Smart Suite, Spok eNotify, and Spok Messenger.

We also added a test environment for all solutions and included a solution assessment value-added service for further optimization. And finally, we executed a multi-year engagement with a customer who has been with us for over a decade. This health system has over 440 inpatient beds and provides comprehensive care, education and research to the areas it serves. Their Spok Smart Suite platform serves several critical needs throughout the hospital, including contact center operations, system-wide paging and messaging, web directories, code and emergency procedures. This new agreement creates a path for them to upgrade their system for deeper integration and enhanced functionality. Spok consistently delivers effective communication solutions to hospitals and health care systems.

Our fourth quarter success underscores our steadfast dedication to offering unparalleled communication solutions to our clients. We are confident that our software solutions will continue bringing positive change to the health care institutions nationwide. Before I hand the call off to our Chief Financial Officer, Calvin Rice, to review our financial performance in more detail, let me take a few minutes to outline what we believe is an important set of facts for our shareholders and the investing community at large to understand about Spok and how it is situated in the U.S. healthcare marketplace. Of the approximately 7,100 hospitals and healthcare facilities in the U.S. market, Spok currently works with about 26% of those locations as either software-only customers, wireless-only customers, or both.

While this market penetration is impressive relative to our peers, we believe that we have developed a solution that will expand our footprint and widen our addressable market. Based on learnings from our development of the Spok Go subscription product, we are excited to announce the full rollout of the Spok Care Connect hosted solution. Hosted in Spok’s data center in Plano, Texas, our hosted solution provides hospitals and healthcare systems with remote access to Spok Care Connect solutions. Currently, that product set includes Spok Health Care Console, Spok Web-based Directory, Spok Web-based On-Call Scheduling, and Spok Mobile. We believe that the hosted solution creates an environment where mid-size and small hospitals can efficiently take advantage of the resources that are mostly being used by the large hospitals who have the capital and human resources to use our premise-based software solutions.

As you can see from the chart on the right side of the slide, small and mid-size hospitals comprise the vast majority, or just under 95%, of the total U.S. health care marketplace when looking solely at hospital facilities. While Spok enjoys a 50% market share among the large hospitals, that is, hospitals with more than 600 patient beds and that drive the largest share of revenue, we are not as well penetrated into the less than 600 bed markets. In fact, within the mid-size tier, or 200 beds to 599 beds, we have an approximately 30% market share and within the small hospital tier, or less than 200 bed facilities, we have only an approximately 5% market share. As I said, we believe that the capital and human resource flexibility that this hosted solution provides to mid-size and smaller hospitals, coupled with the minimal initial capital outlay, tremendously expands our addressable market and opens up future growth channels for Spok.

We rolled this product out at the beginning of this year, and while it will take time to ramp the solution, we already have our first customer being hosted from our data center. We look forward to updating you on our progress in future quarters. With that said, I’d like to turn the call over to our Chief Financial Officer, Calvin Rice. Calvin?

Calvin Rice: Thanks, Mike, and good afternoon, everyone. I would now like to take a few minutes and provide a recap of our fourth quarter and full year 2023 financial performance, which we reported earlier today. As always, I encourage you to review our 10-K when filed, as it includes significantly more information about our business operations and financial performance that we will cover on this call. Turning to our income statement, in 2023, GAAP net income totalled $15.7 million, or $0.77 per diluted share, compared to net income of $21.9 million, or $1.09 per diluted share in 2022. As previously pointed out, 2022 net income included a non-cash benefit of $21.9 million for the release of a previously established valuation allowance for our projections of future taxable income at that time.

Adjusted for this non-cash benefit, 2022 net income would have been roughly breakeven. In 2023, total GAAP revenue was $139 million, up from revenue of $134.5 million in 2022, for the first time in our company’s history. Revenue for the year consisted of wireless revenue of $76 million, up slightly from revenue of $75.6 million in the prior year, and software revenue of $63.1 million, up 7% from the prior year, reflecting the significant increase in software operations bookings, as well as higher professional services revenue, driven primarily by improvements in resource utilization. With respect to wireless revenue, 2023 performance continues to be primarily driven by improvement in average revenue per unit, or ARPU, which saw growth of $0.37 on a year-over-year basis.

Approximately 20% of this increase was driven by incremental pass-through taxes and fees, with the majority of growth stemming from additional pricing actions taken in September. While we did see an increase in unit churn during the second half, relative to what we’ve experienced over the previous 18 months, net unit churn continues to remain at historically low levels, as net units and service declined by roughly 6.5% from the prior year period. The uptick in churn relative to recent trends was driven by several large cancellations, which reflects disproportionately in our rate of churn. When we look at the broader base of customers outside of those larger cancellations, we actually saw improvement in churn rates from the first half into the second half of 2023.