Attached files

file filename
EX-31.2 - EXHIBIT 31.2 - Spok Holdings, Incspok-ex312_10292015xq2.htm
EX-31.1 - EXHIBIT 31.1 - Spok Holdings, Incspok-ex311_10292015xq2.htm
EX-32.2 - EXHIBIT 32.2 - Spok Holdings, Incspok-ex322_10292015xq2.htm
EX-32.1 - EXHIBIT 32.1 - Spok Holdings, Incspok-ex321_10292015xq2.htm
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
(Mark One)
x
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended September 30, 2015
 
¨
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from                      to                     
Commission File Number: 001-32358
  
SPŌK HOLDINGS, INC.
(Exact name of registrant as specified in its charter)

DELAWARE
 
16-1694797
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
6850 Versar Center, Suite 420
 
 
Springfield, Virginia
 
22151-4148
(Address of principal executive offices)
 
(Zip Code)
(800) 611-8488
(Registrant’s telephone number, including area code)
N/A
(Former name, former address and former fiscal year if changed since last report)
 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer
¨
Accelerated filer
x
 
 
 
 
Non-accelerated filer
¨  (Do not check if a smaller reporting company)
Smaller reporting company
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x
21,001,425 shares of the registrant’s common stock ($0.0001 par value per share) were outstanding as of October 23, 2015.
 




SPŌK HOLDINGS, INC.
QUARTERLY REPORT ON FORM 10-Q
INDEX
 
 
Page  
PART I.
 
 
Item 1.
 
 
 
Condensed Consolidated Balance Sheets as of September 30, 2015 (Unaudited) and December 31, 2014
 
 
Condensed Consolidated Statements of Income for the Three and Nine Months Ended September 30, 2015 and 2014 (Unaudited)
 
 
Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2015 and 2014 (Unaudited)
 
 
 
Item 2.
 
Item 3.
 
Item 4.
PART II.
 
 
Item 1.
 
Item 1A.
 
Item 2.
Unregistered Sale of Equity Securities and the Use of Proceeds
 
Item 6.
 




PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
SPŌK HOLDINGS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
 
 
September 30, 2015
 
December 31, 2014
 
(In thousands)
 
(Unaudited)
 
 
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
113,383

 
$
107,869

Accounts receivable, net
22,034

 
24,969

Prepaid expenses and other
5,497

 
7,250

Inventory
1,896

 
2,673

Deferred income tax assets, net
1,509

 
2,194

Total current assets
144,319

 
144,955

Property and equipment, net
15,377

 
17,395

Goodwill
133,031

 
133,031

Other intangible assets, net
16,083

 
19,698

Deferred income tax assets, net
15,563

 
21,949

Other assets
1,554

 
862

TOTAL ASSETS
$
325,927

 
$
337,890

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable and accrued liabilities
$
9,340

 
$
11,688

Accrued compensation and benefits
10,785

 
14,041

Deferred revenue
28,177

 
24,034

Total current liabilities
48,302

 
49,763

Deferred revenue
796

 
937

Other long-term liabilities
8,692

 
8,131

TOTAL LIABILITIES
57,790

 
58,831

Commitments and contingencies


 


Stockholders’ equity:
 
 
 
Preferred stock

 

Common stock
2

 
2

Additional paid-in capital
113,313

 
126,678

Retained earnings
154,822

 
152,379

TOTAL STOCKHOLDERS’ EQUITY
268,137

 
279,059

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
$
325,927

 
$
337,890



The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

2



SPŌK HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
 
 
For the Three Months Ended September 30,
 
For the Nine Months Ended September 30,
 
 
2015
 
2014
 
2015
 
2014
 
 
(Unaudited and in thousands except share and per share amounts)
Revenue:
 
 
 
 
 
 
 
 
Wireless revenue
 
$
29,375

 
$
32,855

 
$
90,287

 
$
100,724

Software revenue
 
16,806

 
16,936

 
52,002

 
48,280

Total revenue
 
46,181

 
49,791

 
142,289

 
149,004

Operating expenses:
 
 
 
 
 
 
 
 
Cost of revenue
 
7,871

 
8,000

 
25,816

 
21,985

Service, rental and maintenance
 
11,117

 
10,988

 
33,376

 
34,200

Selling and marketing
 
6,572

 
7,072

 
20,409

 
22,098

General and administrative
 
10,410

 
10,866

 
31,883

 
33,991

Severance and restructuring
 
141

 
545

 
1,645

 
569

Depreciation, amortization and accretion
 
3,413

 
4,247

 
10,608

 
12,628

Total operating expenses
 
39,524

 
41,718

 
123,737

 
125,471

Operating income
 
6,657

 
8,073

 
18,552

 
23,533

Interest income (expense), net
 
1

 
(63
)
 
3

 
(194
)
Other income (expense), net
 
784

 
(2
)
 
1,110

 
(180
)
Income before income tax expense
 
7,442

 
8,008

 
19,665

 
23,159

Income tax expense
 
(3,222
)
 
(3,356
)
 
(8,150
)
 
(9,326
)
Net income
 
$
4,220

 
$
4,652

 
$
11,515

 
$
13,833

Basic net income per common share
 
$
0.20

 
$
0.21

 
$
0.53

 
$
0.64

Diluted net income per common share
 
$
0.20

 
$
0.21

 
$
0.53

 
$
0.63

Basic weighted average common shares outstanding
 
21,301,311

 
21,651,347

 
21,623,612

 
21,643,951

Diluted weighted average common shares outstanding
 
21,352,838

 
22,135,554

 
21,687,526

 
22,089,892

Cash dividends declared per common share
 
$
0.125

 
$
0.125

 
$
0.375

 
$
0.375





The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

3



SPŌK HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 
 
For the Nine Months Ended September 30,
 
 
2015
 
2014
 
 
(Unaudited and
in thousands)
Cash flows from operating activities:
 
 
 
 
Net income
 
$
11,515

 
$
13,833

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
Depreciation, amortization and accretion
 
10,608

 
12,628

Amortization of deferred financing costs
 

 
194

Deferred income tax expense
 
6,989

 
7,726

Amortization of stock based compensation
 
1,497

 
2,816

Provision for doubtful accounts, service credits and other
 
1,040

 
875

Adjustment of non-cash transaction taxes
 
(530
)
 
(259
)
Gain on disposals of property and equipment
 
(794
)
 
(2
)
Changes in assets and liabilities:
 
 
 
 
Accounts receivable
 
1,896

 
(4,615
)
Prepaid expenses and other assets
 
1,878

 
(240
)
Accounts payable, accrued liabilities and accrued compensation and benefits
 
(8,446
)
 
(1,968
)
Deferred revenue and customer deposits
 
4,002

 
1,264

Other long-term liabilities
 
45

 

Net cash provided by operating activities
 
29,700

 
32,252

Cash flows from investing activities:
 
 
 
 
Purchase of property and equipment
 
(4,450
)
 
(6,327
)
Proceeds from disposals of property and equipment
 
807

 
63

Net cash used in investing activities
 
(3,643
)
 
(6,264
)
Cash flows from financing activities:
 
 
 
 
Cash dividends to stockholders
 
(8,739
)
 
(8,123
)
Purchase of common stock
 
(11,804
)
 

Net cash used in financing activities
 
(20,543
)
 
(8,123
)
Net increase in cash and cash equivalents
 
5,514

 
17,865

Cash and cash equivalents, beginning of period
 
107,869

 
89,075

Cash and cash equivalents, end of period
 
$
113,383

 
$
106,940

Supplemental disclosure:
 
 
 
 
Interest paid
 
$
2

 
$
7

Income taxes paid
 
$
1,169

 
$
1,327




The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

4

SPŌK HOLDINGS, INC.
UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS



(1) Business — Spōk Holdings, Inc. and its subsidiaries (collectively, “Spok” or the “Company”) deliver smart, reliable solutions to help protect the health, well-being, and safety of people around the globe. Organizations worldwide rely on Spok for workflow improvement, secure texting, paging services, contact center optimization, and public safety response.  

The Company continues to enhance the way people communicate in critical situations. Critical communications occur when minutes and seconds matter, and lives are on the line. For example, Spok helps doctors reach other clinicians quickly to treat patients and supports 9-1-1 operators who dispatch assistance for callers in distress. People who improve and save lives rely upon technology to communicate when seconds matter, which is why our customers choose Spok. Our diverse product offerings help them communicate safely, securely, and efficiently when fast response is key, no matter what situations they face.

We work with organizations worldwide in a variety of industries, including healthcare, public safety, government, hospitality, large enterprise, and education. Each month, we deliver millions of messages across a host of devices - from smartphones and pagers, to tablets and Wi-Fi enabled devices - so information is delivered when and where it matters most.

Healthcare organizations represent our largest customer base. Today, these organizations are facing unprecedented challenges. In the U.S., many healthcare organizations are dealing with reduced reimbursements, compliance requirements, and other financial pressures. More than ever, staff cannot waste time looking for information, people, supplies, or open beds. Notifications must go to the right people at the right time. Doctors need a way to find one another for important conversations, and automated information sharing from clinical systems needs to be embraced for efficient care and interaction. Organizations require plans for what tools are supported, how information is encrypted in messages, how to remove sensitive information from lost or stolen smartphones, and the best way to manage access to web directories and on-call schedules.

Technology can effectively enable hospitals to address these challenges. Improved communications through technology can have a domino effect that impacts nearly every area of the hospital, including the financial challenges. Reimbursements are directly tied to patient satisfactions scores, which in turn are affected by improved response to patient requests as well as speedier discharge procedures. Improving communications can have a positive impact on these factors. Spok spans the patient care continuum within the hospital, providing communication solutions for all those who are responsible directly or indirectly for patient care. From clinical alarm/alert management technology to on-call schedules and preferred devices, to mobile devices of all types, to the contact center, Spok technology extends throughout the reach of patient care.

Spok products are also used in the public safety sectors. Our customers seek advanced technology to respond to emergency calls received via mobile devices. Estimates are that as much as 70 percent of 9-1-1 calls are made from cell phones. 9-1-1 callers also want to use text messaging and video when communicating with public safety answering points about emergencies. We have recognized this as the future and our strategic direction. The way public safety organizations handle response is truly changing, and the technology capabilities that can address these changes are known as next-generation 9-1-1 ("NG9-1-1"). Our customers want to be able to track down a 9-1-1 caller’s exact location-even if the caller is unable to speak for any reason-and be able to handle incoming videos at the 9-1-1 call center. We also have to support mobile first responders with smartphone solutions like traceable text messaging and reliable paging even during disasters when cellular service is down. Mobile solutions are critical for continuity of response and protecting safety.

In recent years, smartphones and apps have become an integral part of our daily lives, and Spok customers rely on us for our secure texting app. However, even as usage of smartphones, tablets, and wearable devices grows, it is important to recognize that paging's survivable architecture and cost effectiveness retain clear advantages over cellular service in many instances. Paging has been essential to workflow and emergency response for well over 30 years. And the value of paging remains high today.

If anything, the proliferation of smartphones is making the redundancy of paging even more critical to the medical and public safety sectors. In an emergency, cellular networks can become congested or a local cellular site can be down due to power loss, preventing a message from being received on a timely basis. In fact, emergencies of all sizes and scopes have indicated that no single wireless technology should be relied upon exclusively, and having multiple options is the best way to ensure a message gets through.

When critical communications matter, Spok delivers.
(2) Preparation of Interim Financial Statements — Our condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and the rules and regulations of the United States Securities and Exchange Commission (the “SEC”). Amounts shown on the condensed consolidated statements

5

SPŌK HOLDINGS, INC.
UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


of income within the operating expense categories of cost of revenue; service, rental and maintenance; selling and marketing; and general and administrative are recorded exclusive of severance and restructuring costs, and depreciation, amortization and accretion. These items are shown separately on the condensed consolidated statements of income within operating expenses. Foreign currency translation adjustments were deemed immaterial and consequently, no statements of comprehensive income are presented.
The financial information included herein, other than the condensed consolidated balance sheet as of December 31, 2014, is unaudited. The condensed consolidated balance sheet at December 31, 2014 has been derived from, but does not include all the disclosures contained in the audited consolidated financial statements as of and for the year ended December 31, 2014. In management’s opinion, our unaudited condensed consolidated statements include all adjustments and accruals that are necessary for a fair presentation of the results of all interim periods reported herein and all such adjustments are of a normal, recurring nature.
These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and accompanying notes included in the Company's Annual Report on Form 10-K for the year ended December 31, 2014 (the “2014 Annual Report”). The condensed consolidated statements of income for the interim periods presented are not necessarily indicative of the results that may be expected for a full year.
The accompanying condensed consolidated financial statements include our accounts and the accounts of our wholly owned direct and indirect subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.
The preparation of these condensed consolidated financial statements requires management to make judgments and estimates that affect the amounts reported in our condensed consolidated financial statements and accompanying notes. Actual results may differ from these estimates under different assumptions or conditions.
(3) Risks and Other Important Factors — See “Item 1A. Risk Factors” of Part II of this Quarterly Report on Form 10-Q (“Quarterly Report”) and "Item 1A. Risk Factors" of Part I of the 2014 Annual Report, which describes key risks associated with our operations and industry. 
(4) Recent and New Accounting Pronouncements — In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers. ASU 2014-09 creates a five-step model that requires companies to exercise judgment when considering all relevant facts and circumstances in the determination of when and how revenue is recognized. When ASU 2014-09 was issued, it was effective for annual reporting periods beginning after December 15, 2016, for publicly traded companies and any interim periods that fall within that reporting period. Early application was not permitted. In August 2015, the FASB issued ASU 2015-14, Revenue from Contracts with Customers, which deferred the effective date of ASU 2014-09 for one year. ASU 2014-09 is now effective for annual reporting periods beginning after December 15, 2017, for publicly traded companies and any interim periods that fall within that reporting period. Early adoption of ASU 2014-09 is permitted for annual reporting periods beginning after December 15, 2016, for publicly traded companies and any interim periods that fall within that reporting period. We continue to evaluate the potential impact from this ASU on our consolidated financial statements.
The two permitted transition methods under ASU 2014-09 are the full retrospective method, in which case the standard would be applied to each prior reporting period presented, or the modified retrospective method, in which case the cumulative effect of applying the standard would be recognized at the date of initial application. We have not selected a transition method.


6

SPŌK HOLDINGS, INC.
UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


(5) Prepaid Expenses and Other — Prepaid expenses and other consisted of the following:
 
 
September 30,
2015
 
December 31,
2014
 
 

Other receivables
 
$
1

 
$
751

Tax receivables
 
84

 
155

Deposits
 
869

 
420

Prepaid insurance
 
179

 
517

Prepaid rent
 
131

 
234

Prepaid repairs and maintenance
 
1,157

 
917

Prepaid taxes
 
340

 
279

Prepaid commissions
 
1,900

 
2,935

Prepaid expenses
 
836

 
1,042

Total prepaid expenses and other
 
$
5,497

 
$
7,250

Deposits increased by $0.4 million during the nine months ended September 30, 2015 primarily due to an increase in two vendor deposits. Other receivables decreased by $0.8 million during the nine months ended September 30, 2015, primarily due to the reclassification of a deposit to long-term deposits from other receivables. Prepaid insurance and prepaid rent decreased by $0.3 million and $0.1 million, respectively, as the balances have been recognized as expense over time during the nine months ended September 30, 2015. Prepaid repairs and maintenance increased by $0.2 million for the nine months ended September 30, 2015 due to the renewal of certain contracts that will be recognized over a twelve month period. Prepaid commissions decreased by $1.0 million during the nine months ended September 30, 2015 as the revenue from the associated projects has been recognized. Commission rates on certain products changed in 2015, which in part lead to the reduction in prepaid commissions during the nine months ended September 30, 2015.
(6) Inventory — Inventory of $1.9 million and $2.7 million at September 30, 2015 and December 31, 2014, respectively, consisted of third-party hardware and software held for resale. We value our inventory based on the lower of cost or current market value.
(7) Depreciation, Amortization and Accretion — The total depreciation, amortization and accretion expenses related primarily to property and equipment, amortizable intangible assets, and asset retirement obligations for the three months ended September 30, 2015 and 2014 were $3.4 million and $4.2 million, respectively; and for the nine months ended September 30, 2015 and 2014 were $10.6 million and $12.6 million, respectively. The consolidated expenses consisted of the following for the periods stated:
 
 
For the Three Months Ended September 30,
 
For the Nine Months Ended September 30,
 
 
2015
 
2014
 
2015
 
2014
 
 

Depreciation Expense
 
$
2,127

 
$
2,555

 
$
6,496

 
$
7,846

Amortization Expense
 
1,120

 
1,503

 
3,615

 
4,218

Accretion Expense
 
166

 
189

 
497

 
564

Total
 
$
3,413

 
$
4,247

 
$
10,608

 
$
12,628


(8) Goodwill and Amortizable Intangible Assets — Goodwill at September 30, 2015 and December 31, 2014 was $133.0 million. Goodwill is evaluated in the fourth quarter of each year and when events or circumstances suggest a potential impairment has occurred. There were no indicators of impairment as of September 30, 2015.
Amortizable intangible assets at September 30, 2015 primarily include customer related intangibles, technology based intangibles, contract based intangibles and marketing intangibles that resulted from our acquisition of Amcom Software, Inc. in 2011 and IMCO Technologies Corporation in 2012. Such intangibles are being amortized over periods ranging from two to ten years.

7

SPŌK HOLDINGS, INC.
UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


The gross carrying amount of amortizable intangible assets was $41.6 million at September 30, 2015 and the accumulated amortization was $25.5 million. The net consolidated balance of amortizable intangible assets consisted of the following:
 
 
 
 
September 30, 2015
 
 
Useful Life
(In Years)
 
Gross Carrying
Amount
 
Accumulated
Amortization
 
Net Balance
 
 
 
 
(Dollars in thousands)
Customer relationships
 
10
 
$
25,002

 
$
(11,459
)
 
$
13,543

Acquired technology and product license
 
2 - 4
 
8,453

 
(8,253
)
 
200

Non-compete agreements
 
3
 
2,370

 
(2,324
)
 
46

Trademarks
 
3
 
5,754

 
(3,460
)
 
2,294

Total amortizable intangible assets
 

 
$
41,579

 
$
(25,496
)
 
$
16,083

Estimated amortization of intangible assets for future periods was as follows:
 
(Dollars  in thousands)
For the remaining three months ending December 31, 2015
$
1,120

For the year ending December 31:

2016
4,160

2017
2,886

2018
2,500

2019
2,500

Thereafter
2,917

Total amortizable intangible assets
$
16,083

(9) Other Assets — Other assets were as follows:

 
September 30,
2015
 
December 31,
2014

 

Deposits
 
$
935

 
$
189

Prepaid royalty
 
234

 
242

Other assets
 
385

 
431

Total other assets
 
$
1,554

 
$
862

Deposits increased $0.7 million during the nine months ended September 30, 2015 primarily due to a reclassification of long-term deposits from other receivables.


8

SPŌK HOLDINGS, INC.
UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


(10) Accounts Payable and Accrued Liabilities — Accounts payable and accrued liabilities were as follows:

 
September 30,
2015
 
December 31,
2014

 

Accounts payable
 
$
1,578

 
$
2,784

Accrued network costs
 
1,021

 
1,072

Accrued taxes
 
4,225

 
4,195

Asset retirement obligations
 
327

 
342

Accrued outside services
 
959

 
1,101

Accrued accounting and legal
 
322

 
275

Accrued recognition awards
 
340

 
345

Accrued other
 
430

 
696

Deferred rent
 
76

 
77

Escheat liability
 
12

 

Lease incentive
 
40

 
147

Dividends payable - 2011 LTIP
 

 
637

Capital lease payable
 
10

 
17

Total accounts payable and accrued liabilities
 
$
9,340

 
$
11,688

Accrued taxes are based on our estimate of outstanding state and local taxes. This balance may be adjusted in the future as we settle with various taxing jurisdictions. The issuance of our common stock associated with the vesting of restricted stock units (“RSUs”) awarded under the 2011 Long-Term Incentive Plan ("LTIP") were made during the first quarter of 2015 (the line item Dividends payable - 2011 LTIP). The issuance of our common stock associated with the vesting of RSUs awarded under the 2015 LTIP is expected to be made during the first quarter of 2018. Therefore, the related dividends payable (the line item Dividends payable - 2015 LTIP) is classified as a long-term liability. Accounts payable decreased $1.2 million during the nine months ended September 30, 2015 due to the timing related to the payment of invoices.
(11) Asset Retirement Obligations — We recognize liabilities and corresponding assets for future obligations associated with the retirement of assets. We have paging equipment assets, principally transmitters, which are located on leased locations. The underlying leases generally require the removal of equipment at the end of the lease term; therefore, a future obligation exists.
At January 1, 2015, we had recognized cumulative asset retirement costs of $2.8 million. During 2015, we have recorded nominal charges and as a result, the total cumulative asset retirement cost remains $2.8 million at September 30, 2015. The asset retirement cost additions during the nine months ended September 30, 2015 increased paging equipment assets and are being depreciated over the related estimated lives of 51 to 57 months. The asset retirement costs and the corresponding liabilities that have been recorded to date generally relate to either current plans to consolidate networks or to the removal of assets at an estimated future terminal date.
The components of the changes in the asset retirement obligation liabilities were:
 
 
Short-Term
Portion
 
Long-Term
Portion
 
Total
 
 
(Dollars in thousands)
Balance at January 1, 2015
 
$
342

 
$
6,805

 
$
7,147

Accretion
 
93

 
404

 
497

Additions
 

 
45

 
45

Reclassifications
 
20

 
(20
)
 

Amounts paid
 
(128
)
 

 
(128
)
Balance at September 30, 2015
 
$
327

 
$
7,234

 
$
7,561

The balances above were included with accounts payable and accrued liabilities and other long-term liabilities, respectively, at September 30, 2015.
(12) Deferred Revenue — Deferred revenue at September 30, 2015 was $28.2 million for the current portion and $0.8 million for the non-current portion. Deferred revenue at December 31, 2014 was $24.0 million for the current portion and $0.9 million for the non-current portion. Deferred revenue primarily consists of unearned maintenance, software license and professional services revenue. Unearned maintenance revenue represents a contractual liability to provide maintenance support over a defined

9

SPŌK HOLDINGS, INC.
UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


period of time for which payment has generally been received. Unearned software license and professional services revenue represents a contractual liability to provide professional services more substantive than post contract support for which not all payments have been received. We will recognize revenue when the service or software is provided or the delivery otherwise meets our revenue recognition criteria.
(13) Accrued Compensation and Benefits — Accrued compensation and benefits was $10.8 million at September 30, 2015 and $14.0 million at December 31, 2014. The decrease of $3.2 million reflects a nine month accrual for the Short-Term Incentive Plan ("STIP") at September 30, 2015 versus a twelve month accrual at December 31, 2014. and the timing of payroll payments.
(14) Other Long-Term Liabilities — Other long-term liabilities consisted of the following:
 
 
September 30, 2015
 
December 31, 2014
 
 

Asset retirement obligations
 
$
7,234

 
$
6,805

Dividends payable - 2015 LTIP
 
96

 

Escheat liability
 
209

 
220

Capital lease payable
 
1

 
6

Lease incentive
 
538

 
426

Deferred rent
 
352

 
404

Royalty payable
 
262

 
270

Total other long-term liabilities
 
$
8,692

 
$
8,131

The issuance of our common stock associated with the vesting of RSUs awarded under the 2015 LTIP is expected to be made during the first quarter of 2018 should the pre-established performance criteria be achieved. Therefore, the related dividends payable (the line item Dividends payable - 2015 LTIP) is classified as a long-term liability.
(15) Stockholders’ Equity — Our authorized capital stock consists of 75 million shares of common stock, par value $0.0001 per share, and 25 million shares of preferred stock, par value $0.0001 per share.
Changes in Stockholders’ Equity. Changes in stockholders’ equity for the nine months ended September 30, 2015 consisted of:
 
(Dollars in thousands)
Balance at January 1, 2015
$
279,059

Net income for the nine months ended September 30, 2015
11,515

Cash dividends declared
(8,197
)
Amortization of stock based compensation
1,497

Stock repurchase - 2011 LTIP
(3,825
)
Stock repurchase - other
(11,804
)
Other
(108
)
Balance at September 30, 2015
$
268,137

General. At September 30, 2015 and December 31, 2014, there were 21,069,454 and 21,978,762 shares of common stock outstanding, respectively, and no shares of preferred stock outstanding.

10

SPŌK HOLDINGS, INC.
UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


The following table summarizes the activities under the 2012 Equity Incentive Award Plan (the "2012 Equity Plan") from inception through September 30, 2015:
 
Activity
Total equity securities available at May 16, 2012
2,194,986

Add: 2011 LTIP RSUs forfeited by eligible employees
209,382

Add: 2015 LTIP RSUs forfeited by eligible employees
9,792

Add: Restricted shares of common stock ("restricted stock") forfeited by non-executive member of the Board of Directors
3,189

Less: 2011 LTIP RSUs awarded to eligible employees
(557,484
)
Less: Common stock awarded to eligible employees
(5,820
)
Less: Restricted stock awarded to non-executive members of the Board of Directors
(70,607
)
Less: STIP
(41,702
)
Less: 2015 LTIP RSUs awarded to eligible employees
(260,899
)
Total equity securities available at September 30, 2015
1,480,837

2015 LTIP. On December 9, 2014, our Board of Directors adopted a long-term incentive program (over a 36 month vesting period) that included a stock component in the form of RSUs. The 2015 LTIP provides eligible employees the opportunity to earn RSUs based upon the achievement of performance goals established by our Board of Directors for our consolidated revenue and operating cash flows (as defined by the Company) during the period of January 1, 2015 through December 31, 2017 (“the performance period”), and continued employment with the Company. Our Board of Directors also approved that future cash dividends related to the RSUs will be set aside and paid in cash to each eligible employee when the RSUs are converted into shares of common stock. Existing RSUs would be converted into shares of common stock on the earlier of a change in control of the Company (as defined in the 2012 Equity Plan) or on or after the third business day following the day that we file our 2017 Annual Report on Form 10-K ("2017 Annual Report”) with the SEC but in no event later than December 31, 2018. Any unvested RSUs awarded under the 2015 LTIP and the related cash dividends are forfeited if the participant terminates employment with the Company.
On January 2, 2015, our Board of Directors granted 254,777 RSUs to eligible employees under the 2012 Equity Plan for the 2015 LTIP pursuant to a Restricted Stock Unit Agreement with a grant date fair value of $4.4 million (net of estimated forfeitures). During the third quarter of 2015, 4,974 RSUs were issued with a grant date fair value of $0.1 million to individuals who became eligible to participate in the plan. For the nine months ended September 30, 2015, 6,122 RSUs with a grant date fair value of $0.2 million were issued to individuals who became eligible to participate in the plan. Additionally, 9,792 RSUs were forfeited by eligible employees who left the company during the period. As of September 30, 2015 there were 251,107 RSUs outstanding relating to the 2015 LTIP. A total of $0.4 million was included in stock based compensation expense for the three months ended September 30, 2015 relating to the 2015 LTIP.
The following table details activities with respect to RSUs issued and outstanding under the 2015 LTIP for the three months ended September 30, 2015:
 
 
Shares
 
Weighted-
Average Grant
Date Fair Value
 
Total Unrecognized Compensation Cost (net of estimated forfeitures)
(In thousands)
 
Weighted-Average
Period Over Which
Cost is  Expected to
be Recognized
(In months)
Non-vested RSUs at July 1, 2015
 
255,925

 
$
17.36

 
 
 
 
Granted
 
4,974

 
16.72

 
 
 
 
Vested
 

 

 
 
 
 
Forfeited
 
(9,792
)
 
17.36

 
 
 
 
Non-vested RSUs at September 30, 2015
 
251,107

 
$
17.35

 
$
2,860

 
27


11

SPŌK HOLDINGS, INC.
UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


The following table reflects the stock based compensation expense for the awards under the 2015 LTIP and predecessor 2011 LTIP:
 
 
For the Three Months Ended September 30,
 
For the Nine Months Ended September 30,
Equity Awards
 
2015
 
2014
 
2015
 
2014
 
 
 (Dollars in thousands)
Common stock
 
$

 
$
85

 
$

 
$
85

2011 LTIP
 

 
930

 

 
2,486

2015 LTIP
 
301

 

 
1,220

 

Board of Directors Compensation
 
93

 
91

 
277

 
245

Total stock based compensation
 
$
394

 
$
1,106

 
$
1,497

 
$
2,816

The $0.4 million in stock based compensation expense for the 2015 LTIP for the three months ended September 30, 2015 relates to the 251,107 RSUs granted through September 30, 2015 to eligible employees. The 2011 LTIP vested on December 31, 2014 and was subsequently paid to eligible employees and therefore, we did not incur any additional expense in 2015 related to the 2011 LTIP. The increase in the Board of Directors compensation reflects the quarterly issuance of restricted stock to each director as part of their annual compensation for service on the Board of Directors.
Cash Dividends to Stockholders. The following table details our cash dividend payments made in 2015. Cash dividends paid as disclosed in the statements of cash flows for the nine months ended September 30, 2015 and 2014 included previously declared cash dividends on shares of vested restricted stock issued to our non-executive directors. Cash dividends on RSUs and restricted stock have been accrued and are paid when the applicable vesting conditions are met. Accrued cash dividends on forfeited restricted stock and RSUs are also forfeited.

Declaration Date
 
Record Date
 
Payment Date
 
Per Share Amount
 
Total  Payment(1)
 
 
 
 
 
 
 
 
(Dollars in thousands)
March 4
 
March 18
 
March 30
 
$
0.125

 
$
2,715

April 30
 
May 22
 
June 25
 
0.125

 
2,713

July 28
 
August 19
 
September 10
 
0.125

 
2,666


 
Total
 
 
 
$
0.375

 
$
8,094


(1) 
The total payment reflects the cash dividends paid in relation to common stock and vested restricted stock.
Future Cash Dividends to Stockholders. On October 28, 2015, our Board of Directors declared a regular quarterly cash dividend of $0.125 per share of common stock and a special dividend of $0.125 per share of common stock, both with a record date of November 18, 2015, and a payment date of December 10, 2015. These cash dividends of approximately $5.2 million will be paid from available cash on hand.
Common Stock Repurchase Program. On October 29, 2014, the Board of Directors extended the common stock repurchase program through December 31, 2015. In extending the common stock repurchase plan, the Board of Directors also maintained the repurchase authority of $15.0 million as of January 1, 2015. During the three months ended September 30, 2015, we purchased 502,942 shares of common stock for $8.3 million. For the nine months ended September 30, 2015, we purchased 707,739 shares of common stock for $11.8 million. At our current rate of stock repurchases, we expect to fully exhaust the funds in the existing common stock repurchase program in the fourth quarter of 2015.
On October 28, 2015, the Board of Directors extended the common stock repurchase program through December 31, 2016. In extending the common stock repurchase plan the Board of Directors reset the purchase authority of $10.0 million with the repurchase authority to begin the earlier of January 4, 2016 or the completion of the existing common stock repurchase program.

12

SPŌK HOLDINGS, INC.
UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


The following table presents information with respect to purchases made by the Company during the nine months ended September 30, 2015:
Period
 
Total Number of Shares Purchased
 
Average Price Paid Per Share
 
Total Number of Shares Purchased as Part of the Publicly Announced Plans or Programs(1)
 
Approximate Dollar Value of Shares That May Yet Be Purchased Under the Publicly Announced Plans or Programs(1)(2)
 
 
 
 
 
 
 
 
(Dollars in thousands)
Beginning Balance
 
 
 
 
 
 
 
$
15,000

January 1 through January 31, 2015
 
16,031

 
16.92

 
16,031

 
14,729

February 1 through February 28, 2015
 
1,234

 
16.98

 
1,234

 
14,708

March 1 through March 31, 2015
 
230,532

 
17.34

 
10,202

 
14,536

April 1 through April 30, 2015
 

 

 

 
14,536

May 1 through May 30, 2015
 
38,898

 
16.94

 
38,898

 
13,876

June 1, through June 30, 2015
 
138,432

 
16.98

 
138,432

 
11,531

July 1, through July 31, 2015
 
182,826

 
16.38

 
182,826

 
8,545

August 1, through August 31, 2015
 
156,408

 
16.63

 
156,408

 
5,950

September 1, through September 30, 2015
 
163,708

 
16.69

 
163,708

 
3,224

Total
 
928,069

 
$
16.84

 
707,739

 
 

Other. For 2015, the Board of Directors intends to return a minimum of $26.0 million to stockholders in a combination of dividends, common stock repurchases and/or special dividends.
Additional Paid-in Capital. For the nine months ended September 30, 2015, additional paid-in capital decreased by $13.4 million to $113.3 million at September 30, 2015 from $126.7 million at December 31, 2014. The decrease in the nine months ended September 30, 2015 was due primarily to the repurchase of shares of common stock through the stock repurchase program and the repurchase of shares of common stock for income tax withholding resulting from the issuance of common stock under the 2011 LTIP.
Net Income per Common Share. Basic net income per common share is computed on the basis of the weighted average common shares outstanding. Diluted net income per common share is computed on the basis of the weighted average common shares outstanding plus the effect of all potentially dilutive common shares including outstanding restricted stock and RSUs, which are treated as contingently issuable shares, using the “treasury stock” method. The components of basic and diluted net income per common share were as follows for the periods stated:
 
 
For the Three Months Ended September 30,
 
For the Nine Months Ended September 30,
 
 
2015
 
2014
 
2015
 
2014
 
 
(Dollars in thousands, except share and per share amounts)
Net income
 
$
4,220

 
$
4,652

 
$
11,515

 
$
13,833

Weighted average shares of common stock outstanding
 
21,301,311

 
21,651,347

 
21,623,612

 
21,643,951

Dilutive effect of restricted stock and RSUs
 
51,527

 
484,207

 
63,914

 
445,941

Weighted average shares of common stock and common stock equivalents
 
21,352,838

 
22,135,554

 
21,687,526

 
22,089,892

Net income per common share
 
 
 
 
 
 
 
 
Basic
 
$
0.20

 
$
0.21

 
$
0.53

 
$
0.64

Diluted
 
$
0.20

 
$
0.21

 
$
0.53

 
$
0.63



13

SPŌK HOLDINGS, INC.
UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


(16) Stock Based Compensation — Compensation expense associated with RSUs and restricted stock was recognized based on the fair value of the instruments, over the instruments’ vesting period. The following table reflects the statements of income line items for stock based compensation expense for the periods stated:
 
 
For the Three Months Ended September 30,
 
For the Nine Months Ended September 30,
Operating Expense Category
 
2015
 
2014
 
2015
 
2014
 
 
(Dollars in thousands)
Cost of revenue
 
$
33

 
$
108

 
$
101

 
$
270

Service, rental and maintenance
 
29

 
56

 
86

 
78

Selling and marketing
 
16

 
151

 
118

 
413

General and administrative
 
316

 
791

 
1,192

 
2,055

Total stock based compensation
 
$
394

 
$
1,106

 
$
1,497

 
$
2,816


The decrease in stock based compensation expense during the nine months ended September 30, 2015, compared to the same period in 2015, was due to the use of the 2015 LTIP as compared to the 2011 LTIP, which fully vested on December 31, 2014. Fewer RSUs were granted under the 2015 LTIP resulting in lower stock based compensation expense in 2015.
(17) Income Taxes — We file a consolidated U.S. Federal income tax return and income tax returns in state, local and foreign jurisdictions as required.
At September 30, 2015, we had total deferred income tax assets of $131.2 million and a valuation allowance of $114.1 million resulting in an estimated recoverable amount of deferred income tax assets of $17.1 million. This reflects a change from the December 31, 2014 balance of deferred income tax assets of $138.3 million and a valuation allowance of $114.2 million resulting in an estimated recoverable amount of $24.1 million. The change reflects the expected usage of the deferred income tax assets based on estimated 2015 taxable income and an adjustment of our deferred income tax rate.
We consider both positive and negative evidence when evaluating the recoverability of our deferred income tax assets. The assessment is required to determine whether based on all available evidence, it is more likely than not (i.e., greater than a 50% probability) whether all or some portion of the deferred income tax assets will be realized in the future. During the fourth quarter of each year, we prepare a multi-year forecast of taxable income for our operations that is used in evaluating the recoverability of our deferred tax assets. During the fourth quarter of 2015, after we complete the multi-year forecast, we will evaluate the recoverability of our deferred tax assets.
The anticipated effective income tax rate is expected to continue to differ from the Federal statutory rate of 35% primarily due to the effect of state income taxes, the effect of changes to the deferred income tax asset valuation allowance, permanent differences between book and taxable income and certain discrete items.
As of September 30, 2015, we had approximately $308.1 million of Federal net operating losses (“NOLs”) available to offset future taxable income. Section 382 of the Internal Revenue Code limits the utilization of approximately $119.6 million of these NOLs to $6.1 million per year.
(18) Related Party Transactions — A member of our Board of Directors also serves as a director for an entity that leases transmission tower sites to the Company. For the three months ended September 30, 2015 and 2014, we incurred site rent expenses of $1.0 million and $1.0 million, respectively, and for the nine months ended September 30, 2015 and 2014, we incurred site rent expenses of $3.1 million and $3.2 million respectively, from the entity on which the individual serves as a director. Site rent expenses are included in service, rental and maintenance expenses.
(19) Commitments and Contingencies — There have been no material changes during the three months or nine months ended September 30, 2015 to the commitments and contingencies previously reported in the 2014 Annual Report except as noted below.
In February 2015, we amended an existing agreement with a vendor for network services over a forty-seven month contract term. Spok has a remaining purchase commitment of $1.7 million as of September 30, 2015 with an expiration date of January 2019.


14



Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Statements
This Quarterly Report contains forward-looking statements and information relating to Spōk Holdings, Inc. and its subsidiaries (“Spok” or the “Company”) (formerly USA Mobility, Inc.) that set forth anticipated results based on management’s current plans, known trends and assumptions. These statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Statements that are predictive in nature, that depend upon or refer to future events or conditions, or that include words such as “anticipate,” “believe,” “estimate,” “expect,” “intend,” “will,” “target,” “forecast” and similar expressions, as they relate to Spok are forward-looking statements.
Although these statements are based upon current plans, known trends and assumptions that management considers reasonable, they are subject to certain risks, uncertainties and assumptions, including but not limited to those discussed below and under the captions “Business,” “Management’s Discussion and Analysis of Financial Condition and Statements of Income (“MD&A”),” and “Part I – Item 1A – Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2014, filed with the United States Securities and Exchange Commission (the “SEC”) on March 5, 2015 (the “2014 Annual Report”). Should known or unknown risks or uncertainties materialize, known trends change, or underlying assumptions prove inaccurate, actual results or outcomes may differ materially from past results and those described herein as anticipated, believed, estimated, expected, intended, targeted or forecasted. Investors are cautioned not to place undue reliance on these forward-looking statements.
The Company undertakes no obligation to update forward-looking statements. Investors are advised to consult all further disclosures the Company makes in its subsequent reports on Form 10-Q and Form 8-K that it will file with the SEC. Also note that, in the risk factors disclosed in the Company’s 2014 Annual Report, the Company provides a cautionary discussion of risks, uncertainties and possibly inaccurate assumptions relevant to its business. These are factors that, individually or in the aggregate, could cause the Company’s actual results to differ materially from past results as well as those results that may be anticipated, believed, estimated, expected, intended, targeted or forecasted. It is not possible to predict or identify all such risk factors. Consequently, investors should not consider the risk factor discussion to be a complete discussion of all of the potential risks or uncertainties that could affect Spok's business, statement of income or financial condition, subsequent to the filing of this Quarterly Report.
Overview
The following MD&A is intended to help the reader understand the statements of income and financial position of Spok. The MD&A is provided as a supplement to, and should be read in conjunction with, our 2014 Annual Report and our unaudited condensed consolidated financial statements and accompanying notes. A reference to a “Note” in this section refers to the accompanying Unaudited Notes to the Condensed Consolidated Financial Statements.
Spok, acting through its indirect wholly-owned operating subsidiary, Spōk, Inc., delivers smart, reliable solutions to help protect the health, well-being and safety of people around the globe. Organizations worldwide rely on Spok for workflow improvement, secure texting, paging services, contact center optimization and public safety response. When critical communications matter, Spok delivers. For the three and nine months ended September 30, 2015, wireless revenue represented approximately 64% and 63% and software revenue represented approximately 36% and 37%, respectively of our consolidated revenue. For the three and nine months ended September 30, 2014, wireless revenue represented approximately 66% and 68% and software revenue represented approximately 34% and 32%, respectively of our consolidated revenue.
The following tables indicate the wireless and software revenue by key market segments for the periods stated and illustrate the relative significance of these market segments to our operations.
 

For the Three Months Ended 
 September 30, 2015

For the Three Months Ended 
 September 30, 2014
Market Segment

Wireless

Software

Total

% of Total

Wireless

Software

Total

% of Total
 

 

 

 

(Dollars in thousands)

 

 

 
Healthcare

$
21,143


$
11,340


$
32,483


70.3
%

$
22,130


$
10,871


$
33,001


66.4
%
Government

1,986


2,418


4,404


9.5
%

2,298


2,609


4,907


9.9
%
Large Enterprise

2,808


778


3,586


7.8
%

3,314


533


3,847


7.7
%
Other (1)

2,607


800


3,407


7.4
%

4,060


1,026


5,086


10.2
%
Total Direct

28,544


15,336


43,880


95.0
%

31,802


15,039


46,841


94.1
%
Total Indirect

831


1,470


2,301


5.0
%

1,053


1,897


2,950


5.9
%
Total

$
29,375


$
16,806


$
46,181


100.0
%

$
32,855


$
16,936


$
49,791


100.0
%

(1) Other includes hospitality, resort and billable travel revenue.

15



 
 
For the Nine Months Ended 
 September 30, 2015
 
For the Nine Months Ended 
 September 30, 2014
Market Segment
 
Wireless
 
Software
 
Total
 
% of Total
 
Wireless
 
Software
 
Total
 
% of Total
 
 
 
 
 
 
 
 
(Dollars in thousands)
 
 
 
 
 
 
Healthcare
 
$
64,259

 
$
34,320

 
$
98,579

 
69.3
%
 
$
68,152

 
$
31,427

 
$
99,579

 
66.8
%
Government
 
6,087

 
8,764

 
14,851

 
10.4
%
 
7,248

 
6,087

 
13,335

 
8.9
%
Large Enterprise
 
8,873

 
1,927

 
10,800

 
7.6
%
 
10,649

 
1,550

 
12,199

 
8.2
%
Other (1)
 
8,412

 
2,928

 
11,340

 
8.0
%
 
11,380

 
2,191

 
13,571

 
9.1
%
Total Direct
 
87,631

 
47,939

 
135,570

 
95.3
%
 
97,429

 
41,255

 
138,684

 
93.1
%
Total Indirect
 
2,656

 
4,063

 
6,719

 
4.7
%
 
3,295

 
7,025

 
10,320

 
6.9
%
Total
 
$
90,287

 
$
52,002

 
$
142,289

 
100.0
%
 
$
100,724

 
$
48,280

 
$
149,004

 
100.0
%

The following table indicates the percentage of our paging units in service by key market segments as of the dates stated and illustrates the relative significance of these market segments to our wireless revenue:
Market Segment
 
As of September 30, 2015
 
As of June 30, 2015
 
As of September 30, 2014
Healthcare
 
76.3
%
 
75.9
%
 
73.6
%
Government
 
7.2
%
 
7.4
%
 
7.9
%
Large Enterprise
 
7.2
%
 
7.2
%
 
7.8
%
Other
 
5.6
%
 
5.7
%
 
6.4
%
Total Direct
 
96.3
%
 
96.2
%
 
95.7
%
Total Indirect
 
3.7
%
 
3.8
%
 
4.3
%
Total
 
100.0
%
 
100.0
%
 
100.0
%
Revenue
We offer a focused suite of unified critical communication solutions that include call center operations, clinical alerting and notifications, one-way and advanced two-way wireless messaging services, mobile communications and public safety solutions.
We develop, sell, and support enterprise-wide systems for hospitals and other organizations needing to automate, centralize, and standardize mission critical communication solutions. Given the focused nature of our software products, our primary market has been the healthcare industry, particularly hospitals. We have identified hospitals with 200 or more beds as the primary targets for our software solutions.
We have established solutions for:
Hospital Call Centers - These solutions encompass operator and answering services along with call recording, scheduling and selective additional support modules.
Clinical Workflow Communication - These solutions address hospital code processing as well as physician support tools.
Communication Applications - These solutions support hospital notification and appointment support.
Communications Infrastructure - These solutions support the wireless messaging infrastructure and offer a software product that can link disparate communications software (“middleware”).
Public Safety - These solutions implement and support emergency communication systems.
Revenue generated by wireless messaging services (including voice mail, personalized greeting, message storage and retrieval) and equipment loss and/or maintenance protection to both one-way and two-way messaging subscribers is presented as wireless revenue in our statements of income. Revenue generated by the sale of our software solutions, which includes software license, professional services (installation and training), equipment (to be used in conjunction with the software) and post-contract support (on-going maintenance), is presented as software revenue in our statements of income. Our software is licensed to end users under an industry standard software license agreement.
We market and distribute our communication services and solutions through a direct sales force and an indirect sales channel.
Direct. The direct sales force rents or sells products, solutions, messaging services and other services directly to customers ranging from small and medium-sized businesses to companies in the Fortune 1000, healthcare and related businesses, and Federal, state and local government agencies. We will continue to market to commercial enterprises, especially healthcare organizations, that are interested in our communication solutions. We maintain a sales presence in key markets throughout the United States in

16



an effort to gain new customers and to retain and increase sales to existing customers. We also maintain several corporate groups, such as our Key Account Management team, focused on retaining and selling additional products and services to our key healthcare accounts as well as a team selling to government and national accounts. The direct sales force targets unified communications leadership such as chief information officers, information technology directors, telecommunications directors and contact center managers. Additionally, for certain of our software solutions, we target clinical leadership including chief medical officers and chief nursing officers. The timing for a direct sale varies by the type of service or solution that is being offered, but a software solution sale may take from 6 to 18 months to close depending on the type of software solution.
Indirect. The direct sales force is complimented by an indirect sales channel. This channel coordinates relationships with alliance partners or third-party service providers that are ultimately responsible for the delivery of our services or solutions to the customer.
Wireless Revenue
Our core offering includes subscriptions to one-way or two-way messaging services for a periodic (monthly, quarterly, semi-annual, or annual) service fee. This is generally based upon the type of service provided, the geographic area covered, the number of devices provided to the customer and the period of commitment. A subscriber to one-way messaging services may select coverage on a local, regional or nationwide basis to best meet their messaging needs. Two-way messaging is generally offered on a nationwide basis. In addition, subscribers either lease a messaging device from us for an additional fixed monthly fee or they own a device, having purchased it either from us or from another vendor. We also sell devices to resellers who lease or resell devices to their subscribers and then sell messaging services utilizing our networks. We offer ancillary services, such as voicemail and equipment loss or maintenance protection, which help increase the monthly recurring revenue we receive along with these traditional messaging services.
Wireless revenue consists of two primary components: paging revenue and product and other revenue. The breakout of wireless revenue by component was as follows for the periods stated:
 
 
For the Three Months Ended September 30,
 
For the Nine Months Ended September 30,
Revenue
 
2015
 
2014
 
2015
 
2014
 
 
(Dollars in thousands)
Paging revenue
 
$
28,196

 
$
30,776

 
$
86,469

 
$
95,130

Product and other revenue
 
1,179

 
2,079

 
3,818

 
5,594

Total wireless revenue
 
$
29,375

 
$
32,855

 
$
90,287

 
$
100,724


The following table summarizes the breakdown of our direct and indirect units in service at specified dates:
 
 
As of September 30, 2015
 
As of June 30, 2015
 
As of September 30, 2014
Distribution Channel
 
Units
 
% of Total
 
Units
 
% of Total
 
Units
 
% of Total
 
 
 
 
 
 
(Units in thousands)
 
 
 
 
Direct
 
1,149

 
96.4
%
 
1,167

 
96.4
%
 
1,220

 
95.8
%
Indirect
 
43

 
3.6
%
 
44

 
3.6
%
 
54

 
4.2
%
Total
 
1,192

 
100.0
%
 
1,211

 
100.0
%
 
1,274

 
100.0
%
The following table summarizes the breakdown of our one-way and two-way units in service at specified dates:
 
 
As of September 30, 2015
 
As of June 30, 2015
 
As of September 30, 2014
Service Type
 
Units    
 
% of Total    
 
Units    
 
% of Total    
 
Units    
 
% of Total    
 
 
(Units in thousands)
One-way messaging
 
1,111

 
93.2
%
 
1,127

 
93.1
%
 
1,185

 
93.0
%
Two-way messaging
 
81

 
6.8
%
 
84

 
6.9
%
 
89

 
7.0
%
Total
 
1,192

 
100.0
%
 
1,211

 
100.0
%
 
1,274

 
100.0
%
The demand for one-way and two-way messaging declined at each specified date and we believe demand will continue to decline for the foreseeable future. Demand for our services has also been impacted by the shift from narrow band wireless service offerings to broad band technology services.

17



As demand for one-way and two-way messaging has declined, we have developed or added service offerings such as Spok Mobile with a pager number in order to increase our revenue potential and mitigate the decline in our wireless revenue. We will continue to explore ways to innovate and provide customers the highest value possible.
Wireless revenue is generally based upon the number of units in service and the monthly charge per unit. The number of units in service changes based on subscribers added, referred to as gross placements, less subscriber cancellations, or disconnects. The net of gross placements and disconnects is commonly referred to as net gains or losses of units in service or net disconnect rate. The absolute number of gross placements as well as the number of gross placements relative to average units in service in a period, referred to as the gross placement rate, is monitored on a monthly basis. Disconnects are also monitored on a monthly basis. The ratio of units disconnected in a period to average units in service for the same period, called the disconnect rate, is an indicator of our success at retaining subscribers, which is important in order to maintain recurring revenue and to control operating expenses.
The following table sets forth our gross placements and disconnects for the periods stated:
 
 
For the Three Months Ended
 
 
September 30, 2015
 
June 30, 2015
 
September 30, 2014
Distribution Channel
 
Gross
Placements
 
Disconnects
 
Gross
Placements
 
Disconnects
 
Gross
Placements
 
Disconnects
 
 
 
 
 
 
(Units in thousands)
 
 
 
 
Direct
 
35

 
53

 
40

 
53

 
44

 
67

Indirect
 
1

 
2

 

 
6

 
1

 
3

Total
 
36

 
55

 
40

 
59

 
45

 
70

The following table sets forth information on our direct units in service by account size at specified dates:
 
 
As of September 30, 2015
 
As of June 30, 2015
 
As of September 30, 2014
Account Size
 
Units
 
% of Total
 
Units
 
% of Total
 
Units
 
% of Total
 
 
(Units in thousands)
1 to 3 Units
 
31

 
2.7
%
 
32

 
2.8
%
 
37

 
3.0
%
4 to 10 Units
 
18

 
1.5
%
 
19

 
1.6
%
 
22

 
1.8
%
11 to 50 Units
 
44

 
3.9
%
 
47

 
4.0
%
 
53

 
4.3
%
51 to 100 Units
 
31

 
2.7
%
 
33

 
2.8
%
 
36

 
3.0
%
101 to 1000 Units
 
238

 
20.7
%
 
244

 
20.9
%
 
267

 
21.9
%
> 1000 Units
 
787

 
68.5
%
 
792

 
67.9
%
 
805

 
66.0
%
Total direct units in service
 
1,149

 
100.0
%
 
1,167

 
100.0
%
 
1,220

 
100.0
%
The following table sets forth information on the direct net disconnect rate by account size for our direct customers for the periods stated:
 
 
For the Three Months Ended
Account Size
 
September 30, 2015
 
June 30, 2015
 
September 30, 2014
1 to 3 Units
 
(4.1
)%
 
(2.9
)%
 
(4.8
)%
4 to 10 Units
 
(5.3
)%
 
(5.0
)%
 
(4.0
)%
11 to 50 Units
 
(4.8
)%
 
(4.1
)%
 
(5.2
)%
51 to 100 Units
 
(5.4
)%
 
0.2
 %
 
(5.2
)%
101 to 1000 Units
 
(2.5
)%
 
(3.0
)%
 
(2.9
)%
> 1000 Units
 
(0.6
)%
 
(0.2
)%
 
(1.0
)%
Total direct net unit loss %
 
(1.5
)%
 
(1.1
)%
 
(1.9
)%
The other factor that contributes to revenue, in addition to the number of units in service, is the monthly charge per unit. As previously discussed, the monthly charge per unit is dependent on the subscriber’s service, extent of geographic coverage, whether the subscriber leases or owns the messaging device, and the number of units the customer has in the account. The ratio of revenue for a period to the average units in service, for the same period, commonly referred to as average revenue per unit or ARPU, is a key revenue measurement as it indicates whether charges for similar services and distribution channels are increasing or decreasing. ARPU by distribution channel and messaging service are monitored regularly.

18



The following table sets forth ARPU by distribution channel for the periods stated:
 
 
ARPU For the Three Months Ended
Distribution Channel
 
September 30, 2015
 
June 30, 2015
 
September 30, 2014
Direct
 
$
7.88

 
$
7.93

 
$
8.05

Indirect
 
6.21

 
6.19

 
6.32

Total
 
7.82

 
7.86

 
7.97

While ARPU for similar services and distribution channels is indicative of changes in monthly charges and the revenue rate applicable to new subscribers, this measurement on a consolidated basis is affected by several factors, including the mix of units in service and the pricing of the various components of our services. We expect future sequential annual revenue to decline in line with recent trends. The change in ARPU in the direct distribution channel is the most significant indicator of rate related changes in our revenue. The decrease in consolidated ARPU for the quarter ended September 30, 2015 from the quarter ended September 30, 2014 was due to the change in composition of our customer base as the percentage of units in service attributable to larger customers continues to increase. These larger customers benefit from lower pricing associated with their larger number of units-in-service. We believe that without further price adjustments, ARPU would trend lower for both the direct and indirect distribution channels for the remainder of 2015. Price increases could mitigate, but not completely offset, the expected declines in both ARPU and revenue.
The following table sets forth information on direct ARPU by account size for the periods stated:
 
 
For the Three Months Ended
Account Size
 
September 30, 2015
 
June 30, 2015
 
September 30, 2014
1 to 3 Units
 
$
14.34

 
$
14.52

 
$
14.65

4 to 10 Units
 
14.11

 
14.11

 
14.04

11 to 50 Units
 
12.03

 
12.13

 
11.95

51 to 100 Units
 
10.48

 
10.42

 
10.16

101 to 1000 Units
 
8.79

 
8.78

 
8.69

> 1000 Units
 
6.87

 
6.90

 
6.99

Total direct ARPU
 
$
7.88

 
$
7.93

 
$
8.05

Software Revenue
Software revenue consists of two primary components: operations revenue and maintenance revenue.
Operations revenue consists of license revenue, professional services revenue, and equipment sales. Maintenance revenue is for ongoing support of a software application or equipment (typically for one year). We recognize equipment revenue when it is shipped or delivered to the customer depending on delivery method of Free on Board ("FOB") shipping or FOB destination, respectively. License, professional services and maintenance revenue is recognized ratably over the longer of the period of professional services delivered to the customer or the contractual term of the maintenance agreement. If the period of delivery to the customer is not known, license and professional services revenue will be recognized when software and professional services are fully delivered to the customer and the maintenance revenue will be recognized ratably over the remaining contractual term of the agreement.
The breakout of software revenue by component was as follows for the periods stated:
 
 
For the Three Months Ended September 30,
 
For the Nine Months Ended September 30,
 
 
2015
 
2014
 
2015
 
2014
 
 
(Dollars in thousands)
Subscription
 
$
392

 
$
458

 
$
1,209

 
$
1,118

License
 
1,456

 
2,374

 
7,063

 
7,800

Services
 
4,600

 
4,305

 
14,227

 
11,793

Equipment
 
1,434

 
1,930

 
4,110

 
4,794

Operations revenue
 
7,883

 
9,067

 
26,609

 
25,505

Maintenance revenue
 
8,923

 
7,869

 
25,393

 
22,775

Total software revenue
 
$
16,806

 
$
16,936

 
$
52,002

 
$
48,280


19



On a regular basis, we enter into contractual arrangements with our customers to provide software licenses, professional services, and equipment sales. In addition, we enter into contractual arrangements for maintenance with our customers on new solutions or renewals on existing solutions. These contractual arrangements are reported as bookings and represent future revenue. Bookings decreased by 17.8% and 1.3% for the three and nine months ended September 30, 2015, respectively, compared to the same periods in 2014. The decrease in bookings is due to lower than expected bookings in the Asia-Pacific region, which has been experiencing weaker economic conditions.
The following table summarizes total bookings for the periods stated:
 
 
For the Three Months Ended September 30,
 
For the Nine Months Ended September 30,
Bookings
 
2015
 
2014
 
2015
 
2014
 
 
(Dollars in thousands)
Operations and new maintenance orders
 
$
9,271

 
$
12,474

 
$
28,621

 
$
32,180

Maintenance and subscription renewals
 
7,475

 
7,888

 
26,893

 
24,062

Total bookings
 
$
16,746

 
$
20,362

 
$
55,514

 
$
56,242

We reported a software backlog of $41.6 million at September 30, 2015, which represented all purchase orders received from customers not yet recognized as revenue.
Backlog
(Dollars in thousands)
 
 
Beginning balance at July 1, 2015
$
43,524

Operations bookings
9,271

Maintenance and subscription renewals
7,475

Available backlog
$
60,270

Operations revenue
(7,883
)
Maintenance revenue
(8,923
)
Other(1) 
(1,825
)
Total backlog at September 30, 2015
$
41,639

(1) 
Other reflects cancellations and other adjustments to backlog.
Operations — Consolidated
Our operating expenses are presented in functional categories. Certain of our functional categories are especially important to overall expense control and management; these operating expenses are categorized as follows:
Cost of revenue. These are expenses primarily for hardware, third-party software, outside service expenses and payroll and related expenses for our professional services, logistics, customer support and maintenance staff.
Service, rental, and maintenance. These are expenses associated with the operation of our paging networks and development of our software. Expenses consist largely of site rent expenses for transmitter locations, telecommunication expenses to deliver messages over our paging networks, and payroll and related expenses for our engineering, pager repair functions and development and maintenance of our software products.
Selling and marketing. These are expenses associated with our direct sales force and indirect sales channel and marketing expenses in support of those sales groups. This classification consists primarily of payroll and related expenses and commission expenses.
General and administrative. These are expenses associated with information technology and administrative functions. This classification consists primarily of payroll and related expenses, outside service expenses, taxes, licenses and permit expenses, and facility rent expenses.
We review the percentages of these operating expenses to revenue on a regular basis. Even though the operating expenses are classified as described above, expense control and management are also performed by expense category. Approximately 70% of the operating expenses referred to above were incurred in payroll and related expenses, site and facility rent expenses and telecommunication expenses for both the three and nine months ended September 30, 2015 and 2014.
Our largest expense, payroll and related expenses, includes wages, commissions, incentives, employee benefits and related taxes. On a monthly basis, we review the number of employees in major functional categories and the design and physical locations of functional groups to continuously improve efficiency, to simplify organizational structures, and to minimize the number of

20



physical locations for the Company. We have 605 full-time equivalent employees (“FTEs”) at September 30, 2015, a decrease of 0.2% from 606 FTEs at September 30, 2014. Software revenue is anticipated to increase, while the wireless revenue is expected to continue to decrease reflecting the changing technology expectations of our customer base.
Site rent expenses for transmitter locations are largely dependent on our paging networks. We operate local, regional, and nationwide one-way and two-way paging networks. These networks each require locations on which to place transmitters, receivers, and antennae. Site rent expenses for transmitter locations are highly dependent on the number of transmitters, which in turn is dependent on the number of networks. In addition, these expenses generally do not vary directly with the number of subscribers or units in service, which is detrimental to our operating margins as wireless revenue declines. In order to reduce these expenses, we have an active program to consolidate the number of paging networks, and thus transmitter locations, which we refer to as network rationalization. We have reduced the number of active transmitters by 1.8% to 4,277 active transmitters at September 30, 2015 from 4,355 active transmitters at September 30, 2014.
Telecommunication expenses are incurred to interconnect our paging networks and to provide telephone numbers for customer use, points of contact for customer service, and connectivity among our offices. These expenses are dependent on the number of units in service, the number of customers we support and the number of office and network locations that we maintain. The number or duration of telephone calls to call centers may vary from period to period based on factors other than the number of units in service or customers, which could cause telecommunication expenses to vary.
Statements of Income
Comparison of the Statements of Income for the Three Months Ended September 30, 2015 and 2014
 
 
For the Three Months Ended September 30,
 
Change Between 2015 and 2014
 
 
2015
 
2014
 
Total
 
%
 
 
(Dollars in thousands)
Revenue:
 
 
 
 
 
 
 
 
Wireless revenue
 
$
29,375

 
$
32,855

 
$
(3,480
)
 
(10.6
)%
Software revenue
 
16,806

 
16,936

 
(130
)
 
(0.8
)%
Total
 
$
46,181

 
$
49,791

 
$
(3,610
)
 
(7.3
)%
Selected operating expenses:
 
 
 
 
 
 
 
 
Cost of revenue
 
$
7,871

 
$
8,000

 
$
(129
)
 
(1.6
)%
Service, rental and maintenance
 
11,117

 
10,988

 
129

 
1.2
 %
Selling and marketing
 
6,572

 
7,072

 
(500
)
 
(7.1
)%
General and administrative
 
10,410

 
10,866

 
(456
)
 
(4.2
)%
Severance and restructuring
 
141

 
545

 
(404
)
 
(74.1
)%
Total
 
$
36,111

 
$
37,471

 
$
(1,360
)
 
(3.6
)%
FTEs
 
605

 
606

 
(1
)
 
(0.2
)%
Active transmitters
 
4,277

 
4,355

 
(78
)
 
(1.8
)%

21



Revenue — Wireless
Our wireless revenue was $29.4 million and $32.9 million for the three months ended September 30, 2015 and 2014, respectively. The decrease in wireless revenue reflects the decrease in demand for our wireless services. Paging revenue consists primarily of recurring fees associated with the provision of messaging services and rental of leased units and is net of a provision for service credits. Product and other revenue reflects system sales, the sale of devices and charges for leased devices that are not returned and are net of anticipated credits. The table below details total wireless revenue for the periods stated:
 
 
For the Three Months Ended September 30,
 
 
2015
 
2014
 
 
(Dollars in thousands)
Paging revenue:
 
 
 
 
One-way messaging
 
$
24,798

 
$
26,897