All right, my name's Jessica Tassan. I am the healthcare services analyst at Piper, and I'm so excited to be here with Spok CEO Vincent Kelly. It's so great to see you, Vincent, and thanks for joining us.
Thanks for having us.
So, to kick things off, I think it might be worthwhile to walk through Spok's unique history. As we understand it, the origins of the company date back to the combination of Arch Wireless and Metrocall, creating USA Mobility in the early 2000s. Then in 2011, USA Mobility purchased Amcom Software, bringing together kind of software solutions and messaging with the legacy wireless business. And in 2014, you renamed the business Spok. Vincent, you were CEO of USA Mobility. What was the value proposition of the, the Amcom purchase, and how has the company kind of evolved to date?
Thank you very much for the question. A little bit of background. In 2004, we formed USA Mobility with what was left of the paging industry, you know, the wireless Narrowband PCS industry. And, you know, we were generating a lot of cash. We were returning a lot of capital to shareholders. We had really restructured our business around the healthcare segment. That was the segment that still valued paging because it would work when mobile phones wouldn't work. It had great in-building penetrations, and frankly, the doctors had grown up with pagers, and they were very, you know, friendly toward paging and wanted to keep it, and they still do. But, you know, the company was slowly getting smaller.
We had churn on the units, which we've subsequently ebbed a bit, and we took a look around in late 2010 in terms of what we could do to kind of extend the life of the business and the cash flow stream, and we ran into a company that was called Amcom. It was a software company that had hospital contact center solutions. Basically, they operate the call centers inside most of the major hospitals today. So we bought that company. It was growing, you know, not fast, but it was growing slowly. While paging was coming down, we were off a lot of cash with the paging. We were throwing off cash with Amcom. We ran that for about six years until 2017.
We started going down a slightly different path with a cloud-native communications platform called Spok Go and launched that thing right in the middle of the pandemic. So obviously, didn't have great timing there or great traction, and we spent a lot of money on it and worked hard to make it successful. I still think it was a wonderful solution, but it just wasn't ready for the hospital financial situation. So we shut that down two years ago now and just started throwing off a lot of cash. We're a communications company at our core. We run the hospital communication system as almost like a utility. They look at us as a system of action, where they'll look at like an EHR as a system of record. And so we're very successful with our customers.
We have a blue-chip customer base. We're growing this year. We have big upside on our, our bookings in terms of where we were last year, signing up a lot of multi-year engagements this year, and we're got even more in the pipeline for next year. So we're in a really good place right now, making money, and these hospitals are coming to us, and they're, they're asking us to make some enhancements to our platforms, which we're doing. But why are we spending about $11 million a year on R&D in order to achieve that? And in exchange for that, they're, they're executing these multiyear engagements and extending the, the life of the platform, you know, well out into the future.
So, can you just explain what were the enhancements that you aimed to deliver with Spok Go? And is there a possibility that you kind of revive that solution under a different name, maybe-
Yeah.
In a few years?
Yeah. Yeah. Our contact center solutions today are premise-based primarily, and Spok Go was cloud native, built on the AWS platform, and it was more of a communications type center with dynamic workflows. We also were in the process of bringing out a device that would have competed with the Vocera Badge to go along with our pagers. And so that was kind of a little bit different of a concept, moving more into the clinical side of the business than just the pure communication side. So it had a lot of workflows for critical test results management, et cetera. Some of that stuff is still valid today, and some of it we're building slowly into the new platform, but that was the concept there.
Okay. That makes sense. And then just what are the enhancements that customers are asking you for in 2023 that you're able to execute on with the $11 million of R&D investments?
Well, the first, the first thing that they wanna do is they wanna leverage their existing investments and get more of what they have. So first up on the list is they just want interfaces. So we have a lot of interfaces into the EHRs. We have interfaces into scheduling software. Our, our contact center solution has the database that we call the directory, and that enterprise directory is the source of truth within the hospital. So oftentimes, they use our directory to feed their EHR or feed, you know, one of our competitors, like a mobile product, et cetera. We offer mobile products as well, both paging and an app on a mobile phone. And so they want more integration around that ecosystem, and rely less on other point solutions.
So we're actually displacing other competitors that have point solutions by making these enhancements into our software to give them more integration.
Okay, that makes sense. So when you refer to just point solutions that you could potentially be displacing, would that be like a hospital on-call scheduling system, or is that a completely different-
There's also, you know, small vendors that offer specific solutions, you know, mobile solutions that aren't part of an integrated package, and so there's a lot of integration that the CIO has to keep up with. We can completely remove that. And there's also non-hospital-focused contact center providers out there that are more generic that we replace because the workflows inside hospitals are so esoteric, and once we get in there, you know, we never come out. We're very sticky, and we've got such a good blue-chip customer base. We've got 1,600 customers in about 2,200 hospitals. We have the majority of the U.S. News & World Report Honor Rolls on both adult and children's hospitals, and the tenure of those customers is over 24 years.
You know, our solutions are very well appreciated and very sticky once we get in there.
Okay. I think that's really helpful. It sounds as if you are a complement, not necessarily a competitor to a solution like a Vocera today. Is that fair? And if so, who are your direct competitors?
Yeah, yeah. Vocera was different than us in that Vocera came at it from the—well, their, their first thing was the badge, and, and, and they were really clinically focused, and they were focused on nurses. And, we were focused on the call center and, and the contact center technology. Vocera doesn't have a, a contact center solution, so very different. We have many customers that have our contact center and Vocera badges, and we, we feed it. So, not exactly the same thing. Now, we do offer in our ecosystem, Spok Mobile, which is, is a mobile product that goes on a, on an iPhone or an Android device. We also have our, our new GenA pager, which is kind of a paperwhite screen here with a super long battery life that's HIPAA compliant, it's encrypted.
We also offer that, but we're device agnostic. We'll interface with anyone's device, and oftentimes these hospitals have embedded investments in their communication solutions that if you can interface with them, it just saves them the headache, you know, and saves them a lot of money.
Okay. That's really helpful. So I want to move into the wireless segment. The enterprise is split, obviously, into two segments, wireless and software. Wireless is over 50% of revenues, but you expect demand for wireless services to kind of decline for the foreseeable future. Can you help us understand this dynamic? Where is the market shifting to, and kind of who benefits as demand for wireless moderates?
Yeah. So wireless is... You know, we've had the wireless business since 2004 when we started the company, and I think, you know, when you model wireless going forward, and you look at kind of an annual churn on that base, maybe between 4%-6%, say 5% is probably a good number, but that's in the unit. So it's slowly dwindling down. From a revenue perspective, this year will be flat to slightly up because we're putting, you know, average revenue per unit back into the business by two ways. One, with the GenA pager that I just showed you. A hospital typically pays about $6.50 a month for a pager. They're paying us almost $10 for this, so it's got a much higher margin.
So as you get these out there in the marketplace, that raises the ARPU back up, and it offsets some of the revenue erosion. We've also done price increases, so we did about a 3% price increase last fall, at the end of the year, and then this year, we got smart, and we did a 6% price increase, and it stuck. We haven't had any churn on that so far, so it's been really good. So I think the wireless business, it's slowly gonna, over the years, erode, but it's gonna be around for a long time. And what we're really focused on is protecting that revenue stream, and so that's why we brought out the new device, that's why we did the price increases, which have been, you know, received with not a lot of pushback.
That's a really good business because it throws off a ton of cash and allows us to invest back into the business on the software side in a responsible manner to continue growing that business, and that business is on a good glide path right now.
Okay, that makes sense. First off, I just want to understand, when you mentioned about 5%, that is on a net basis in device attrition?
Device attrition, yeah.
Is that just kind of older physicians migrating out of the workforce, or what is driving that?
Yeah, it is. That happens over time, and it's been doing that for the last 20 years, you know, since I've been involved with it. There's not, you know, a big mass exodus, but there's slowly, it trips down over time. The new interns come in, they push back a little bit. Although, again, bragging about our new pager, that's getting a little bit more uptick and traction. And look, just a quick advertisement for paging. Just, I'm sure everybody knows this, but a mobile phone has kind of got a one to one relationship with the closest transmitter, and it's broadcasting about 100 W, and it's designed that way on purpose because it's designed to be mobile and move, you know, with traffic as you go through town.
It wasn't designed quite for the way they're using it today, so it broadcasts at a very low rate. If that tower goes down, your phone doesn't work, you know, unless you're on a Wi-Fi in the building, you know, backup signal. Pagers are completely different. They broadcast at 3,500 W effective radiated power. They simulcast with multiple transmitters in a city. We control the transmitters with redundant satellites. It'll burn through concrete and steel. So if you're in emergency services-
Mm-hmm.
You're a doctor, you're gonna get that message no matter what. And we integrate that with our software, so if you're getting some kind of clinical alert, somebody's pulse oximeter has gone below some critical value, they'll get that message on their pager when maybe they wouldn't on their phone. And we do. We send the message to both as a backup, as redundancy. So paging, it's gonna be around for a long time. It is slowly augering down, and we're doing everything we can to slow that rate of erosion. And we're growing our software business while we're slowing that rate of erosion.
Yeah, I think that makes sense, and also just the elimination of noise. It feels like a more conducive channel for the purpose indicated. I was sort of impressed with the price that you were able to take with this next generation of the device. Can you just... What are the features that allowed you to take that level of price, or is it just, at this point, market share and kind of-
Well, I think the biggest killer feature is that it's totally encrypted, right? So it's, you know, from a HIPAA standpoint, you don't have to worry about, you know, not being secure. The other thing that happened is when we engineered this device, we've got it super long battery life. With the way this paperwhite screen came out, it doesn't burn a lot of juice to show what's on there, so it lasts a really long time. It's just a double A battery. You can pop it out, throw it away, get a new one, put it in there, and it works great. So that's been a big selling point.
With the cost of things today, when you go to a hospital, and you say: "Well, you're gonna pay $10 a month for this," compared to what you're paying for anything else, and, you know, a cup of coffee, you know, the coffee shop. It's not particularly expensive, and we're not getting a lot of pushback on it-
It's durable.
with the new price. And it's very durable. Yeah, you'll feel it, how light it is.
Yeah.
It's not real heavy, and it's. Yeah, it works great. I have it set on silent, so it doesn't go beep, beep, beep. You can have all kinds of different settings to alert you, and when you talk about people's lives, it's nice to know you've got another form of communication that might work when something else doesn't.
Yeah, that makes sense. Okay, so just final question on the wireless part of the business. How long is the average contract, and are all contracts kind of a function of ARPU times number of units in service, or are there any that have kind of fixed rates?
About two-thirds of our customer base is on a month-to-month rate. And so that gives us the opportunity to go do the price increase we just did. We just did the 6% price increase on that portion of the customer base that's on a month-to-month rate. And that really is just an ARPU times how many units that customer has in services, equals the revenue that they got to pay us each month. Then, about the other third of our customer base is on, you know, a couple year contracts, so we don't get the opportunity to go back to them and raise price until that contract comes up for renewal. And so that's always kind of churning through. Last year it was the same equation. We raised the...
The 3% increase went on 2/3 of our customer base, and this year, the 6% increase went on the next 2/3 of our customer base.
Okay, that makes sense. Then just during kind of renewal events, do you tend to have to concede price or, you know, with these new features, do you expect to be able to sustain the same price?
Our ARPU has been going up-
Okay
Over the last couple of years. It's... Yeah, we're not conceding price at all.
Okay. That is good to hear. On the software segment, so the enterprises is, again, split into two segments. Software, software is further divided across operations revenue and maintenance revs. So, on the software operations side of the business, from 2019 to 2021, your investor day deck attributes kind of the decline in software operations bookings to the company's efforts to market Spok Go. You know, kind of why did that platform struggle? And I guess, what did you learn from that event, if anything? You know, I know you attributed it to COVID, but any kind of general learnings-
Yeah
to take away from that?
Yeah, so a couple of things. We have about 30 salespeople. Eight of them are for wireless, so all the rest are for software. And when we rolled out Spok Go, we basically gave them all a quota for selling Spok Go, and frankly, they were struggling with it. The hospitals, their budgets were locked down. We couldn't even get face-to-face meetings. You couldn't. You could. The only meetings you could get were virtual meetings, and no one was asking for more money. And even today, I don't have a lot of hospital CIOs calling me saying, "Hey, Vince, I got a ton of extra cash I want to spend. Help me spend it." It's kind of just the opposite.
So what we learned is it's a very difficult environment in a pandemic, but even outside of a pandemic, it's a very different, difficult environment financially with the hospitals to sell them new stuff and, and new ideas when their budgets are so tight. What they want is they want what they have to work better, and they want... You know, they'll hire us. We're having great success this year with value-added services, where they hire us to come in and do a, essentially a consultancy engagement. We look at all the solutions they bought from us. We look at how they're using them. We compare them to best practices from our, from our other customers. We've got this deep blue-chip customer base. We say: Here, you could use this better.
By the way, why don't you sign up, you know, a multi-year engagement with us, and we'll tell you exactly what your upgrade's gonna cost. You get an extra upgrade during that three-year contract period. Here's what you're gonna pay in maintenance each three-year with any escalator that we negotiate in there with them. And they have predictability in what their spend's gonna be. They look at us like we're a utility. It works for them. It works for us. And, you know, last year we signed 17 of those. We're at 30 this year. We got over 100 of those big engagements in the pipeline right now, so 2024 is gonna be an even better year for us. So it... Yeah, we learned it's a tough environment in healthcare to sell a brand-new idea and a brand-new concept.
I think Spok Go had a lot of good things going for it, and I think some of the ideas that we used in Spok Go and developing it, we're gonna be able to, over time, incorporate into our existing platforms. It was tough sledding to get that out the door, and we were spending a lot of money on it. These software engineers cost a small fortune. We were spending $20 million a year on it, and we shut it down.
Okay. That makes sense. So, are these kind of consulting arrangements part of what is driving, you know, this massive acceleration in year-to-date software operations bookings? Year-to-date, you reported 38% year-over-year growth in software operations bookings. This is 2x the 17% growth in software operations bookings that you saw in 2022. So just, you know, what has changed year-over-year? Is it your go-to-market strategy, the kind of health of your end market, or some combination of the two?
Yeah, I think in the first quarter of 2022, when we kind of went through this pivot and stood down on Spok Go and really refocused on the core business, on both wireless and software, I think a couple things happened. One, you know, morale inside the company got much higher because we started winning, and the salespeople are in a really good place right now. Our salespeople have a long tenure. They're all hitting records. We have six of them right now, over $2 million, four of them over $2.5 million, and I think the two that aren't over $2.5 million are probably gonna hit it by the end of the year. So they're making money. They're doing record-sized deals. The average size of our deal has gone way up.
It's just a much better environment, and the customers have been much more receptive to the concept of: "I already have the solution from you, Spok. What, you know, what are you gonna do to enhance it?" "Here's our roadmap, here's what we're gonna do to enhance it." "Oh, I like that. I'll sign up. I want more." It works, and now it's gonna work even better. You know, everything. I was explaining this the other day, like, this year, everything that could have gone right has gone right, and it's, and I see that continuing. So it's, it's been one of those years. We went through some tough times with what we tried to do with Spok Go, and I still believe we, we were doing something good there, but, it just wasn't ready. The market wasn't ready for it.
Well, that's good to hear, and congratulations.
Yep, thank you.
I think it's deserving of that. So what is the seasonality of your annual bookings, and kind of how much of the annual bookings hit in the fourth quarter or even, you know, the last month of the year?
Yeah, you know, it depends. Every year is a little bit different. It just depends on how the pipeline is. We have a pipeline now that's approaching $90 million. We've got 100 of these multiyear engagements in that pipeline. You know, our salespeople are gonna be pushing to get as much as they can in by the end of the year just because the way the accelerators work on their commissions, once they hit certain levels, they make a little bit more. It just depends on the receptivity of the customers. You know, we are more than comfortable with the guidance that we have out there for this year. I know we don't have a lot of time, but you know, in terms of the end of the year, but yeah, we're gonna do good.
We had an enormous second quarter you saw in bookings. I think the first half of next year is gonna be really big, you know, just based on what I'm looking at for the pipeline. So, yeah, a good place. Next year is gonna be better than this year. I can't always tell you what quarter each, you know, deal's gonna—which one's gonna be the lumpy quarter, which one's not, but in the aggregate, the year's gonna be better in 2024 than it was in 2023, and 2023 beat the heck out of 2022, so all good.
Okay, that's helpful. So can you help us understand the bookings mix kind of among, existing clients versus net new clients, and what is the timeline of conversion from bookings to backlog to revenue?
So kind of two questions there. One, with most of our bookings right now are to existing customers renewing their deals. And then on these multiyear engagements, as we build those layers, you know, when they're coming off the third year, we'll re-sign them for another three year. But most of them. We're probably getting four to five new logo deals a quarter right now, and that's probably an average of about, you know, $150,000 a deal. Those aren't particularly huge deals, but that'll come over time. We focused our business long term on large customers, so look at that as hospitals with 600 or more beds, and that's where we really have kind of the dominant market share in the contact center solution, and we sell our ancillary services off that.
I'd say in the 200-599, we've got maybe about a third of that market. We don't have a huge market share there. And then in the one to 199, we don't have many at all. We're starting to host our solution out of our data center in Plano, Texas. We've already got one customer that's up there running. We've got three in the pipeline right now. I think one or two of those on that hosted platform will close by the end of this year. We're gonna do a lot more next year.
Those are—they're gonna be smaller deals 'cause they're in the cloud, and they're targeting smaller customers, but we have to go after that segment differently than the traditional customers that we've gone to that are very large 'cause they don't—it doesn't intimidate them to put a system in and buy a lot of hardware and professional services. Where little guys, it does. In terms of the pipeline and the way the revenue gets recognized, you know, we'll probably—at the end of the year, we'll probably be sitting somewhere between $55 million and $60 million in backlog, and part of that's maintenance, and a lot of that's professional services. When you sell, you know, one of our software solutions, the license component of that sale goes into revenue almost immediately.
The service and the equipment can be pretty quick going into revenue as well. The services component of that goes up in the backlog, sits on the shelf until you coordinate with that customer and do the actual install of the solution, the way the revenue recognition rules work. And then the maintenance, obviously, is kind of ratable over time. Most of those maintenance contracts are one year auto renew contracts, and then we build escalators into them. And so it's a little layered in terms of how it comes in, but I'd say license and equipment comes in almost immediately from bookings, and then services and maintenance comes in over time. I'd say eight to 10 months is a good average for when services is gonna get recognized.
And then again, maintenance is just gonna be ratable over that 12-month period.
Should we think about kind of, right, the return to software operations, revenue growth, maintenance revenue should kind of lag that growth at an eight to 10 months or hit at an eight to 10-month lag on the software op?
Yeah, yeah, it's gonna lag.
Okay.
I mean, we're gonna have a really good answer for maintenance revenue this year, but it'll be even better next year.
Okay, great. So, in our last few minutes, just wanna hit on kind of capital allocation and balance sheet priorities. In February 2022, you guys obviously executed a strategic business plan. Part of that included discontinuing Spok Go, focusing efforts on Spok Care Connect, and you executed a reduction in force. Kind of why or how is your 7% annual dividend yield sustainable over the long term, and what are your near-term capital allocation priorities apart from that?
Well, of all the things that I could lose sleep over, that's the least. So look, you know, the midpoint of our guidance would suggest our revenue is about $138 million this year, and our adjusted EBITDA is gonna be about $28 million. If you look at the midpoint of that revenue guidance, wouldn't be surprised if we end up doing better than that. But just using that number and back out about $3.5 million for CapEx, you know, what I used to call free cash flow, they don't let me use that term anymore, it'd be about $25 million. That's about equal to the dividend that we're paying right now. We're paying $1.25 a share on 20 million shares. And that number is gonna grow next year.
So for our ability to pay the dividend, I mean, yields are obviously gonna be a function of the stock price, but in terms of our the absolute value of the dividend, I'm very comfortable with that. As a matter of fact, we're about to pay our next dividend on December eighth here, coming up in a couple of days. And yeah, so that, that'll grow. We don't have any debt, so there's no interest payments going out. We have wonderful deferred tax assets, so not a lot of money going out for that. And we've got a pretty decent cash balance right now. I think we're sitting on $30+ million of cash today, so. And that's growing 'cause, you know, we're growing the business.
So I would imagine at some point in the future, we'll be more than covering that dividend, and so then we'll have to decide what do we wanna do with that excess cash. And I think some of it could be used to actually increase the dividend. I mean, there's nothing wrong with that, and I think some of that could be used to, you know, fund a little bit more into R&D. Not go crazy, you know, not go do another Spok Go thing.
Okay.
But, you know, give that team a few more million bucks a year to do a few more things with the roadmap. I think, you know, our next two years are gonna be really good in terms of returning capital to shareholders and just results on the business. You know, we're still a small company. We got to think longer term, you know, what's the industry do? Does it consolidate? How, if so, do we participate in that, and how? You know, I think those are kind of some of the strategic things we're thinking through with the board and with our advisors. But I think from the standpoint of that dividend, yeah, that's gonna be money in the bank.
So, is it fair to say just kind of next two years is execution with your existing product portfolio, and then from there, you'd consider, you know, organic, organic efforts to develop or expand the-
Yeah, I think that's fair. I mean, it could always change. Yeah, I'm one person on a board of directors, and it could always change. But we're all very aligned right now in terms of the strategy that we're executing, and you know, the shareholders have been rewarded well for this strategy, and I think they'll continue to be rewarded well. I think we're gonna keep executing.
Awesome. Well, thank you very much, Vince, for joining us. It was a pleasure to have you, and I think we will wrap up on that note.
Thank you so much, Jessica.
Thank you.
Appreciate it. Okay. Take care.