Spok Holdings, Inc.

Greetings, and welcome to Spoke Holdings' second quarter 2022 earnings call. At this time, all participants are in a listen-only mode. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Lisa Fortuna. Thank you. You may begin.

Hello, everyone, and welcome to Spoke Holdings' second quarter 2022 earnings call. I am joined by Vince Kelly, President and Chief Executive Officer, as well as Mike Wallace, Chief Financial Officer and Chief Operating Officer. I want to remind everyone that today's conference call may include forward-looking statements that are subject to risks and uncertainties relating to folks' 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 on 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. Folks' 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 this factor section relating to our operations and the business environment, which are contained in our second quarter 2022 form 10Q 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 calls. 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. We'll cover our updated guidance for 2022, as well as one-time 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 a cash flow business model featuring our wireless service line and our CareConnect Suite software solution offerings with 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 headcount that we had previously announced on February 17 is now substantially complete. Our 60-day Warrant Act notification period ended in mid-April, so we had at least two months in the second quarter in 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 our renewed focus on our CareConnect 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 force was focused 100% on our CareConnect 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, know, and love. They've welcomed 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 two 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. And 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 you'll hear the details from Mike in 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 oppo numeric pager we have named the Gen A. Our goal here is to rejuvenate interest and reduce resistance to pagers. And while we're in the early stages, so far, so good. We have approximately 2,400 units in service and growing. They're commanding a much higher RPO 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. We expect to report further progress on this initiative as the year progresses. You'll 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 in adjusted EBITDA, which is defined in the earnings release tables. This is our non-gap calculation of cash flow generated by the company before networking capital items in the first half of the year, assuming we had implemented the plan on January 1st. 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 within technology, a leading value-added IT distributor driving technologies into the Pacific Asia IT channel. InTechnology's distribution ability to provide pre- and post-sale support implementation services in a 24x7 support desk made the company a perfect distribution partner for Spoke. We believe that InTechnology and its partner network will enhance Spoke's 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%. from 12.5 cents per share to 31.25 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 is subject to the Board's discretion and will depend 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 through 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 completed by the end of 2022, with the majority of our rightsizing 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 the market leadership position and hospital call center software solutions in narrowband personal communication wireless services. We have over 2,200 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 in providing world-class healthcare. We value our place in their communications ecosystem. The overwhelming majority, or 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 and enhancing our integrated CareConnect ecosystem in order to continue our longstanding relationships with the nation's leading healthcare 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 10Q, 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 percent from $19.9 million, and software revenue of $15 million, down 5.4% from $15.9 million, largely in line with our expectations. With respect to wireless revenue, second quarter 2022 performance was driven by a continued decline in pager unit churn on a year-over-year basis. In fact, the net pager decline during the trailing 12 months was 3.9%, another record low. And on a sequential basis, units in service declined by only 3,000 units, or 0.4%. As a result, wireless revenue for the second quarter remains solid, declining 5.8% 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 5.2% on a year-over-year basis. The remainder of wireless revenue relates to product sales, primarily through lost pager fees, which are one time 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 where average revenue per unit, or ARPU, was $7.23 for the quarter. versus $7.25 in the year-ago period when adjusted for approximately $0.07 of decline attributable to decreases in Universal Service Fund revenue. These fees are charged to customers based on quarterly rates set by the FCC 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 costs owed to the FCC. Additionally, ARPU 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 Gen A pager will be an important factor in our ability to minimize future unit churn and ARPU degradation. On a year-to-date basis, wireless revenue saw similar dynamics to the second quarter as just discussed, declining 6.1% compared to the prior year and again, in the range of our expectations, with the monthly paging revenue component of wireless declining only 5.3% on a year-over-year basis. Turning to the second quarter software revenue, specifically maintenance revenue, which is the largest component of software revenue, was $9.2 million versus $9.6 million in the same period of the prior year, or 4.2% lower. As we have discussed in previous quarterly calls, and as we continue through this pivot with the focus being brought back to our CareConnect Suite software products, our expectation is for maintenance revenue to be down slightly year over year, given gross churn and uplift levels remain 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 licensed 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 through a planned reduction in personnel to better align with our current backlog and to drive a higher rate of net cash flow in 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 license 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 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 0.9 million, and severance and restructuring costs of 0.5 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 headcount 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, effects of capitalized software development costs, and including capital expenditures is our non-GAAP calculation of cash flow generated by the company before networking capital items. In the second quarter, adjusted EBITDA was a positive $3.7 million compared with a negative $1.5 million in the same quarter of 2021 and reflects the progress made to date with our strategic bids. On a year-to-date basis, our adjusted EBITDA was negative 3.6 million compared to a negative 2 million in 2021. And in a few minutes, I'll walk you through our pro forma year-to-date adjusted EBITDA results, which will exclude the one-time cost related to the strategic pivot. But with our strategic pivot progressing as expected, our adjusted EBITDA that we have 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 for the negative 3.6 million in adjusted EBITDA previously mentioned. Had the strategic changes that we made been in effect as of January 1st, 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-payroll SPOCO costs of approximately $1.3 million, and approximately $1.4 million in other costs. Inclusive of these adjustments, our year-to-date adjusted EBITDA for the six months ended June 30, 2022 would have been $10.8 million. Now turning to our guidance for full fiscal year 2022. As a reminder, the figures I am going to discuss today are included in our guidance table in the earnings release and have 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 60.5 million. 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 2022 guidance serve to significantly narrow the ranges previously provided and largely indicate midpoints consistent with our original guidance. Now turning to our forecast for restructuring costs for 2022. As you can see from the slide, we have further lowered our range for total restructuring costs from $6.2 million to $7.5 million in the first quarter to 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 $5.5 million to $5.8 million, and contractual terminations to be in the range of $0.5 million to $0.7 million. 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 patient care coordination. This commitment has allowed SPOKE to create a significant market position with longstanding relationships with the nation's leading healthcare providers. SPOKE has a best-in-class paging network, currently the largest in the United States, which continues to generate strong results. Additionally, Spoke continues to provide a valuable and critical service to our customers, delivering information to care teams when and where it matters most to improve patient outcomes. As previously discussed, our Spoke CareConnect 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 transition to focus on cash flow generation. As reflected in our guidance, we're continuing to invest more in our legacy products as we progress through our strategic pivot. 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 healthcare 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 or 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 current stock valuation represents an attractive opportunity for share appreciation as well. 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. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Once again, that's star one to ask a question at this time. One moment while we poll for questions.

Operator, I don't see any questions in the queue, so 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 appreciation will be coming. So thanks all. Have a great day, and we look forward to speaking to you again next quarter.

Thank you. This does conclude today's Della Conference. You may disconnect your lines this time, and have a wonderful day.