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EX-32.2 - EXHIBIT 32.2 - Spok Holdings, Inccfosoxcertification-ex322.htm
EX-32.1 - EXHIBIT 32.1 - Spok Holdings, Incceosoxcertification-ex321.htm
EX-31.2 - EXHIBIT 31.2 - Spok Holdings, Inccfocertification-ex312.htm
EX-31.1 - EXHIBIT 31.1 - Spok Holdings, Incceocertification-ex311.htm
EX-23 - EXHIBIT 23 - Spok Holdings, Incauditorconsent-ex23.htm
EX-21 - EXHIBIT 21 - Spok Holdings, Incsubsidiarieschart-ex21.htm
EX-10.18 - EXHIBIT 10.18 - Spok Holdings, Incamendedseveranceplanandsum.htm
EX-10.17 - EXHIBIT 10.17 - Spok Holdings, Incrsunotice2015ltipex1017.htm
EX-10.16 - EXHIBIT 10.16 - Spok Holdings, Incrsunoticetimebasedltipex10.htm
EX-10.15 - EXHIBIT 10.15 - Spok Holdings, Incltip2017redacted-ex1015.htm
EX-10.14 - EXHIBIT 10.14 - Spok Holdings, Incstip2017redacted-ex1014.htm
EX-10.11 - EXHIBIT 10.11 - Spok Holdings, Incstip2016unredacted-ex1011.htm

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
 
(Mark One)
x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 2016
or
¨
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
SPOK 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)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Name of each exchange on which registered
Common Stock, par value $0.0001 per share
 
NASDAQ National Market®
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    YES  ¨    NO  x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    YES  ¨    NO  x
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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  x
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 Act).    YES    ¨    NO  x
The aggregate market value of the common stock held by non-affiliates of the registrant was $393.8 million based on the closing price of $19.17 per share on the NASDAQ National Market® on June 30, 2016.
The number of shares of registrant’s common stock outstanding on February 24, 2017 was 20,530,795.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s Definitive Proxy Statement for the 2017 Annual Meeting of Stockholders of the registrant, which will be filed with the Securities and Exchange Commission pursuant to Regulation 14A no later than May 1, 2017, are incorporated by reference into Part III of this Report.
 




TABLE OF CONTENTS
 
 
 
 
 
 
 
 
Part I
 
 
 
 
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
 
 
 
 
Part II
 
 
 
 
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8
Item 9.
Item 9A.
Item 9B.
 
 
 
 
Part III
 
 
 
 
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
 
 
 
 
Part IV
 
 
 
 
Item 15.
 

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Forward-Looking Statements
This Annual Report on Form 10-K contains forward-looking statements and information relating to Spok Holdings, Inc. and its subsidiaries (“Spok” or the “Company”) 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 the following:
Continuing decline in the number of paging units we have in service with customers, commensurate with a continuing decline in our wireless revenue
The sales cycle of our software solutions and services can run from six to eighteen months, making it difficult to plan for and meet our sales objectives and bookings on a steady basis quarter-to-quarter and year-to-year
Our ability to manage network rationalization to lower our costs without causing disruption of service to our customers
Our ability to design and develop an integrated critical communications platform to address mobile communications, clinical alerting, nursing and workflow functions at state of the art hospitals that gains market acceptance and wide-spread use by customers
Our ability to address changing market conditions with new or revised software solutions
Our ability to retain key management personnel and to attract and retain talent within the organization
Our ability to manage change related to regulation, including laws and regulations affecting hospitals and the healthcare industry generally
Competition for our services and products from new technologies or those offered and/or developed from firms that are substantially larger and have much greater financial and human capital resources
The reliability of our networks and servers and our ability to prevent cyber-attacks and other security issues and disruptions
Those matters discussed in this Annual Report under Item 1A “Risk Factors.”
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 United States Securities and Exchange Commission (“SEC”). Also note that, in the risk factors section, 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 Annual Report.




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PART I

The terms "we," "us," "our," "Company" and "Spok" refer to Spok Holdings, Inc. and its direct and indirect wholly-owned subsidiaries.
ITEM 1. BUSINESS
Overview
Spok, Inc., a wholly owned subsidiary of Spok Holdings, Inc. (NASDAQ: SPOK), is proud to be the global leader in healthcare communications. We deliver clinical information to care teams when and where it matters most to improve patient outcomes. Top hospitals rely on the Spok Care Connect suite to enhance workflows for clinicians, support administrative compliance, and provide a better experience for patients. Our customers send over 100 million messages each month through their Spok solutions.
Our headquarters is located at 6850 Versar Center, Suite 420, Springfield, Virginia 22151, and our telephone number is 800-611-8488. We maintain an Internet website at http://www.spok.com. (This website address is for information only and is not intended to be an active link or to incorporate any website information into this 2016 Annual Report on Form 10-K ("2016 Form 10-K").)
We are a provider of paging services and selected software solutions in the United States and abroad, on a limited basis, in Europe, Canada, Australia, Asia and the Middle East. We offer our services and products to three major market segments: healthcare, government, and large enterprise, with a greater emphasis on the healthcare market segment.
Industry Overview
We deliver smart, reliable critical communication solutions to help protect the health, well-being, and safety of people around the globe, primarily in the United States. Our customers rely on Spok for workflow improvement, secure texting, paging services, contact center optimization, and public safety response.
We develop, sell, and support enterprise-wide systems primarily for healthcare and other organizations needing to automate, centralize, and standardize their approach to critical communications. Our solutions can be found in prominent hospitals; large government agencies; leading public safety institutions, colleges and universities; large hotels, resorts and casinos; and well-known manufacturers.
Due to the focused nature of our software solutions there is no single competitor that matches our portfolio (additional details can be found under “Competition”). Our primary market is healthcare providers, particularly hospitals. We have identified hospitals with 200 or more beds as the primary targets for our software solutions as well as our paging services. Within this market we have identified the following dynamics and have focused our efforts to address these dynamics:
a heightened awareness of the ubiquitous, critical role of communications in healthcare;
an increased focus within hospitals on quality of care and patient safety initiatives;
the importance of confidentiality when sharing information;
increased regulations that may result in process changes, increased documentation and reporting and increased costs;
a continuing focus within hospitals to reduce labor and administrative costs while increasing productivity; and
a broader proliferation of information technology in healthcare as hospitals strive to apply technology to solve their business problems.
Sales and Marketing
Sales. We market and distribute our critical communication solutions through a direct sales force and an indirect sales channel.
The direct sales force contracts 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 primarily to commercial enterprises, with a focus on healthcare organizations, interested in our communication solutions. We maintain a sales presence in key markets throughout the United States in an effort to gain new customers and to retain and increase sales to existing customers. We also maintain several corporate sales 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 primarily to national accounts. The direct sales force targets leadership responsible for the procurement of critical communications solutions such as chief information officers, chief technology officers, chief medical officers, chief nursing officers, information technology directors, telecommunications directors, and contact center managers. The timing for a direct sale varies, but may take from six to 18 months depending on the type of software solution.
The indirect sales force complements our direct sales force. Through relationships with alliance partners we are able to sell our solutions to a wider customer base. For paging services that we do not provide directly, we contract with and invoice an intermediary for airtime

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services. For our software sales, our relationships with alliance partners assist us in broadening the distribution of our products and further diversifying into markets outside healthcare.
Marketing. We have a centralized marketing function, which is focused on supporting our solutions and sales efforts by strengthening our corporate brand, generating sales leads, and facilitating the sales process. Our principal marketing programs include:
Content marketing (eBriefs, case studies, brochures, videos, infographics, and more) as an underlying foundation of all marketing campaigns or initiatives;
Website development and maintenance, which provides product and Company information, customer support options, paging capabilities, as well as thought leadership and engagement;
Participation at trade shows and industry events, such as Healthcare Information and Management Systems Society, College of Healthcare Information Management Executives and Radiological Society of North America;
Webinars about current industry trends and our solutions;
Social media involvement to provide information regarding upcoming educational events or new product offerings;
Industry analyst relationships;
Newsletters and blog posts to provide information about industry trends and our solutions to customers, prospects, and alliances; and
Annual customer conferences that solicit feedback on our solutions and services.
Licenses and Messaging Networks
In order to provide our wireless services, we hold licenses to operate on various frequencies in the 900 MHz narrowband. We are licensed by the United States Federal Communications Commission (the “FCC”) to operate Commercial Mobile Radio Services (“CMRS”). These licenses are required to provide one-way and two-way messaging services over our networks.
We operate local, regional and nationwide one-way networks, which enable subscribers to receive messages over a desired geographic area. One-way networks operating in 900 MHz frequency bands utilize the FLEX™ protocol developed by Motorola Mobility, Inc. (“Motorola”). The FLEX™ protocol has advantages of functioning at higher network speeds (which increases the volume of messages that can be transmitted over the network) and of having more robust error correction (which facilitates message delivery to a device with fewer transmission errors).
Our two-way networks utilize the ReFLEX 25™ protocol, also developed by Motorola. ReFLEX 25™ promotes spectrum efficiency and high network capacity by dividing coverage areas into zones and sub-zones. Messages are directed to the zone or sub-zone where the subscriber is located, allowing the same frequency to be reused to carry different traffic in other zones or sub-zones. As a result, the ReFLEX 25™ protocol allows the two-way network to transmit substantially more messages than a one-way network using the FLEX™ protocols. The two-way network also provides for assured message delivery. The network stores, for a limited amount of time, messages that could not be delivered to a device that is out of coverage for any reason, and when the unit returns to service, those messages are delivered. The two-way paging network operates under a set of licenses called narrowband Personal Communications Service, which uses 900 MHz frequencies. These licenses require certain minimum five and ten-year build-out commitments established by the FCC, which have been satisfied.
Although the capacities of our networks vary by geographic area, we have a significant amount of excess capacity. We have implemented a plan to manage network capacity and to improve overall network efficiency by consolidating subscribers onto fewer, higher capacity networks with increased transmission speeds. This plan is referred to as network rationalization. Network rationalization will result in fewer networks and therefore fewer transmitter locations, which we believe will result in lower operating expenses due primarily to lower site rent expenses. As we continue to implement our network rationalization plan, we expect to have fewer transmitters that can be removed efficiently from our networks and still maintain the level of service required for our customers, and thus the benefits of network rationalization will decline.
Generally, our software solutions do not require licenses or permits from Federal, state and/or local government agencies in order to be sold to customers. However, certain of our software products are subject to regulation by the United States Food and Drug Administration ("FDA") and are subject to certification by the Joint Interoperability Test Command to be sold to the branches of the armed services of the Unite States and the United States government. (See “Regulation” below).
Our messaging networks and related infrastructure are located exclusively in the United States.

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Our Strategy
Our goal is to continue to execute on our vision of becoming a leading provider of integrated communications and collaboration enterprise solutions. In doing so, we will strengthen our core product offerings and offer new solutions as we continue to focus on serving the mission critical needs of our customers, while operating an efficient and profitable business strategy.
Critical aspects of our strategy include:
Growth of our software revenue and bookings — We expect to substantially increase our investment in sales and marketing, product implementation, product development and customer support to drive software, services and maintenance bookings and revenue growth. We will continue to focus our sales and marketing efforts in the healthcare market in order to identify opportunities for sales and close those opportunities in the form of purchase orders or bookings. We have established software operations bookings as a key performance objective for our consolidated operations in 2017.
We have an ongoing initiative to further penetrate the hospital segment in the United States and while we believe there is a significant opportunity to sell critical communication solutions to hospitals located outside the United States our focus is on the domestic market. We intend to leverage the strength of our market presence and the breadth of our product offerings to further expand our customer base in healthcare.
Retention of our wireless subscribers and revenue stream — Wireless subscribers and the resulting revenue represented about 61%, 63% and 66% of our total consolidated revenue for each of the years ended December 31, 2016, 2015 and 2014, respectively. We will continue to focus on reducing the rate of subscriber disconnects and minimize the rate of wireless revenue erosion. We continue to have a valuable wireless presence in the healthcare market, particularly in larger hospitals. We offer a comprehensive suite of wireless messaging products and services focused on healthcare and “campus” type environments and critical mission notification. We will continue to focus on network reliability and customer service to help minimize the rate of subscriber disconnects. Retention of our wireless revenue has been included as a key performance objective for our consolidated operations in 2017.
We recognize that the number of our wireless subscribers, our units in service and the related revenue will continue to decline. We intend to continue reducing our underlying cost structure impacting this wireless revenue stream. We will reduce payroll and related expenses as well as network related expenses as necessary in light of the declining wireless revenue. We will integrate and consolidate operations as necessary to ensure the lowest cost operational platform for our consolidated business. We have established management of our operating and capital expenses as a key performance objective for our consolidated operations in 2017.
Invest in our future solutions — The market for communication and collaboration solutions is expected to grow as healthcare continues to change. Trends including the establishment of accountable care organizations, reimbursement changes and emphasis on quality improvement and care coordination are all driving an evolution in communication and collaboration between previously disparate departments and systems within and outside hospitals. Becoming the leader in healthcare communication and collaboration requires us to continue development of our integrated platform and invest in the key areas of customer need including: 1) mobility, 2) integrated platform, 3) nursing solutions and 4) alerting. We will increase our spending on product development and strategy in 2017 and beyond to develop these solutions and compete in the changing marketplace. This is a key performance objective for our consolidated operations in 2017. Investment in our future solutions is discussed in further detail under "Research and Development".
Return capital to our stockholders — The development of our integrated critical communications solutions is a key performance objective for our consolidated operations in 2017. We understand that our primary objective is to create long-term stockholder value. Executing our 2017 objectives is important, and we will continue to evaluate how best to deploy our capital resources to support sustainable business growth and maximize stockholder value. We expect to continue to pay a quarterly dividend of $0.125 per share of common stock or $0.50 annually in 2017. We will continue to evaluate both market and Company factors to determine whether a common stock repurchase program is an appropriate method to return capital to our stockholders.
Long-term revenue growth through business diversification — We believe that add-on acquisitions of companies or technologies could be an important part of our future growth. We believe add-on acquisitions of complementary companies or technologies in the healthcare market could enhance our position with current customers and expand our overall addressable markets. Rapidly and successfully integrating strategic acquisitions and improving operational efficiencies would be a focus of our management team. Given the nature of our solutions, new technologies can be integrated to accelerate cross-selling opportunities. We evaluate these potential businesses or technologies to determine if they can be acquired at a reasonable valuation and will be profitably accretive and accelerate our revenue goals.
To ensure focus on our business strategy we establish specific performance objectives and develop short-term and long-term incentive plans (“STIP” and "LTIP," respectively) for our management that include a combination of these operating objectives and priorities.

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Our Products and Services
Wireless Products and Services. We offer subscriptions to one-way or two-way messaging services for a periodic (monthly, quarterly, semi-annual, or annual) service fee. The level of service fees 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 contract for 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 them 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. In 2015 and 2016 we launched new and exclusive one-way (T5) and two-way (T52) alphanumeric pagers, respectively. Both pagers are configurable to support un-encrypted or encrypted operation. When configured for encryption, they utilize AES-128 bit encryption, screen locking and remote wipe capabilities. With encryption enabled these new secure paging devices enhance our service offerings to the healthcare community by adding Health Insurance Portability and Accountability Act ("HIPAA") security capabilities to the low cost, highly reliable and availability benefits of paging.
The demand for one-way and two-way messaging services declined during the years ended December 31, 2016, 2015 and 2014 and we believe demand will continue to decline for the foreseeable future. Wireless products and services revenue represented 61%, 63% and 66% of total consolidated revenue for the years ended December 31, 2016, 2015 and 2014, respectively. As demand for one-way and two-way messaging has declined, we have developed or added service offerings in order to increase our revenue potential and mitigate the decline in our wireless revenues. We will continue to evaluate opportunities to provide customers the highest value possible.
Software. Dependable critical communications are paramount for individuals in healthcare and a host of other industries. We offer a number of solutions, providing our customers with the ability to communicate anywhere, anytime across a number of situations. Our solutions are used for contact centers, clinical alerting and notification, mobile communications and messaging, and for public safety notifications. We offer critical communication solutions in four major product categories:
Contact Center
Spok® Healthcare Console: Provides operators with the information needed to process calls using their computers, with just a few keystrokes. This solution integrates with the customers’ existing phone systems and is used by the operator group to answer incoming calls to the contact center. Operators can quickly and accurately perform directory searches and code calls, as well as messaging and paging by individual, groups, and roles using the Spok Healthcare Console’s computer telephony integration ("CTI") and directory capabilities.
Spok® Web-Based Directory: Makes employee contact information more accessible and enables staff to send messages quickly right from the directory. Authenticated users can log on anywhere, anytime to perform a variety of important updates to contact information and on-call schedules, search the directory, and send important messages.
Spok® Web-Based On-Call Scheduling: Keeps personnel, calendars and on-call scheduling information updated, even with thousands of staff, using a secure web portal to maintain and allow password-protected access to the latest on-call schedules and personnel information.
Spok® Speech: Enables the organization to process routine phone requests, including transfers, directory assistance, messaging and paging without live operators and with more ease-of-use than touchtone menus.
HigherGround® Call Recording and Quality Management: Records, monitors, and scores operators’ conversations to allow for better management of calls, helping improve customer service.
Spok® Eclipse Call Accounting: Provides a wealth of information about every call being made and received. The information can be formatted and used to analyze voice network resources, employee telephone usage and bill-back information.

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Clinical Alerting
Spok® Messenger: Provides an intelligent, FDA, 510(k)-cleared solution that connects virtually all crucial alert systems, including nurse call, fire, security, patient monitoring, and building management to mobile staff via their wireless communication devices. This solution provides the ability to reach mobile team members within seconds of an alert, improving overall workflow, staff productivity, and the comfort and safety of everyone in the facility.
Spok® e.Notify: Enables organizations to quickly and reliably notify and confirm team member availability during emergency situations without relying on calling trees, thereby reducing confusion that may arise in an emergency situation. This solution automatically delivers messages, collects responses, escalates issues to others, and logs all activities for reporting and analysis purposes.
Spok® Critical Test Results Management: Automates and streamlines the process of delivering critical test results to the right clinicians to help ensure patient safety. This solution can send messages from the cardiology, laboratory and radiology departments by means of encrypted smartphone communications, two-way paging, secure email, secure text, images, annotations, and voice to a variety of endpoints such as workstations, laptops, tablets, smartphones, pagers, and other wireless devices.
Mobile Communications
Spok Mobile®: Simplifies communications and strengthens care by using smartphones and tablets for secure code alerts, patient updates, results, consult requests, and much more. Allows users to access the full directory of accurate contact information to send messages/photos/videos to smartphones and other devices, and to ensure critical communications are logged, all with security, traceability, and reliability.
Spok® Device Preference Engine: Facilitates voice conversations among doctors and caregivers by enabling users to choose the desired communication method based on factors such as message priority.
Public Safety
Spok® pc/psap: Speeds emergency dispatch by giving Public Safety Answering Point ("PSAP") call-takers an easy-to-use, standards-based, graphical interface that integrates the underlying phone system, mapping systems, and other resources for critical information availability. 9-1-1 call-takers are able to instantly involve police, fire, EMT, and hazardous material personnel with a single click of the mouse or touch of the screen.
Spok® Enterprise Alert: Directs emergency personnel to a 9-1-1 caller’s exact location (building, floor, room), helping to ensure speed, accuracy, and reliability of response. The E9-1-1 software provides real-time, onsite notification when 9-1-1 is dialed, and works to decrease emergency response time.
Services. We offer a variety of professional services to assist our customers in the successful implementation of, and to maximize the benefits obtained from the use of, our software solutions. We also offer support services to enhance and refine the customers experience throughout their relationship with Spok.
Professional Services: We offer a full suite of professional services which are provided by a dedicated group of professional service employees. Our professional services include consultation, implementation and training services. For software solution implementations, our professional services staff uses a branded, consistent methodology that provides a comprehensive phased work plan for both new software installations and/or upgrades. In support of our implementation methodology, we manage the various aspects of the process through a professional services automation tool. A typical implementation process ranges from 30 to 180 days depending on the type of implementation. We may also use third-party professional services firms to implement our solutions for customers depending on the circumstances. Professional services revenue represented 10%, 10% and 9% of total consolidated revenue for the years ended December 31, 2016, 2015 and 2014 respectively.
Software License Updates and Product Support (Maintenance): Software license updates and product support, which is generally referred to as maintenance when sold to customers, is an important offering to customers who utilize our software solutions. In order to support our products that provide mission critical solutions to our customer’s organizations, we have a dedicated customer support organization.  The customer support organization provides support 24 hours a day, 7 days a week, 365 days a year and the service can be accessed via telephone, email or the Internet via the Spok webpage.  The Spok support service is augmented by third party services where needed. Software license updates and product support are generally priced together as a percentage of the software licenses for which these services will be provided. Largely all of our customers purchase maintenance when they purchase new software licenses after which renewals generally occur on an annual basis and are paid in advance. Software license updates provide customers with rights to unspecified product upgrades as well as maintenance and patch releases that are released during the term of the support period. Software license updates and product support revenue (i.e. maintenance revenue) represented 21%, 18% and 15% of total consolidated revenue for the years ended December 31, 2016, 2015 and 2014 respectively.

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Sources of Equipment
We do not manufacture the messaging devices our customers need to take advantage of our services or the network equipment we use to provide messaging services. We have relationships with several vendors to purchase new messaging devices. Used messaging devices are available in the secondary market from various sources. We believe existing inventory, returns of devices from customers that canceled services, and purchases from other available sources of new and reconditioned devices will be sufficient to meet expected messaging device requirements for the foreseeable future. We negotiate contractual terms with our vendors that do not directly relate to the manufacturing of the network equipment or messaging devices. The network equipment and messaging devices are generic on which we may place our logo or label.
We sell third party equipment for use with our software solutions. The third party equipment that we sell is generally available and does not require any specialty manufacturing to accommodate our software solutions.
We currently have inventory and network equipment on hand that we believe will be sufficient to meet our wireless and software equipment requirements for the foreseeable future.
Intellectual Property
As of December 31, 2016 we held 64 trademarks and 19 patents which we believe are important to protect our intellectual property. We believe our intellectual property distinguishes our business from our competition and are integral to our continued success in the area of critical communication solutions. The expiration dates of these trademarks range from 2017 to 2032 and can be extended for 10 year periods upon renewals.
Customers
Our customers include businesses and employees who need to be accessible to their offices or customers, first responders who need to be accessible in emergencies, and third parties, such as other telecommunication carriers and resellers that pay our Company to use our networks. Customers include businesses, professionals, management personnel, medical personnel, field sales personnel and service forces, members of the construction industry and construction trades, real estate brokers and developers, sales and services organizations, specialty trade organizations, manufacturing organizations and government agencies.
We offer our communication services and products primarily in the United States and to three major market segments: healthcare, government and large enterprise, but with a greater emphasis on the healthcare market segment. For the years ended December 31, 2016, 2015 and 2014, revenues from healthcare customers accounted for approximately 70.3%, 68.2% and 66.0% of our total revenues, respectively. We expect the trend of an increasing percentage of our total revenue to come from the health care segment, even as our total revenue declines due to our subscriber erosion from our wireless services. No single customer accounted for more than 10% of our total revenues in 2016, 2015 and 2014. For the years ended December 31, 2016, 2015 and 2014, foreign sales represented approximately 3.2%, 2.0% and 2.7% of our consolidated revenue, respectively.
We pursue close, long-term relationships with our customers because we believe strong customer relationships enable us to retain our current customer base and expand our services and revenue to that customer base.
Backlog
Our backlog of undelivered or in-progress orders was $38.3 million and $38.7 million at December 31, 2016 and 2015, respectively. Of the current backlog we expect to deliver and complete all but $5.8 million in 2017.
Competition
The competitors and degree of competition vary among our various product categories. Competition is particularly strong for our wireless messaging services. Within the wireless industry, companies compete on the basis of price, coverage area, services offered, transmission quality, network reliability, and customer service. We compete by maintaining competitive pricing for our products and services, by providing broad coverage options through high-quality, reliable messaging networks and by providing quality customer service. Direct competitors for wireless messaging services include American Messaging Service, LLC and a variety of other regional and local providers. We also compete with a broad array of wireless messaging services provided by mobile telephone companies, including AT&T Mobility LLC, Sprint Nextel Corporation, T-Mobile USA, Inc., and Verizon Wireless, Inc. This competition has intensified as prices for the services of mobile telephone companies have declined and as those companies have incorporated messaging capabilities into their mobile phone devices. Many of these companies possess far greater financial, technical and other resources than we do.

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Most Personal Communications Service and other mobile phone devices currently sold in the United States are capable of sending and receiving one-way and two-way messages. Most subscribers that purchase these services no longer need to subscribe to a separate messaging service. As a result, many one-way and two-way messaging subscribers can readily switch to cellular, Personal Communications Service and other mobile telephone services. The decrease in prices and increase in capacity and functionality for cellular, Personal Communications Service, WiFi, and other mobile telephone services have led many subscribers to select combined voice and messaging services from mobile telephone companies as an alternative to our stand-alone messaging services.
We also have a number of competitors whose software products compete with one or more modules of our critical communications solutions. These competitors are a mix of privately held and public companies that offer a number of call center, alerting and mobile communication products. Our primary competitive advantages include having:
An integrated product suite;
A communication-driven workflow;
Certifications, such as those through the Joint Interoperability Test Command (See "Joint Interoperability Test Command" below) and the FDA; and
A complete directory of contacts throughout the customer enterprise.
Although there are no competitors that offer a similar comprehensive set of software modules that match our product offerings, there are several competitors who offer software similar to many of our solutions. Selected competitors for portions of our product portfolio include:
Amtel Communications, Inc. (AMTELCO) - Contact center solutions;
Nuance Communications, Inc. - Clinical alerting solutions;
peerVue, Inc. - Clinical alerting solutions;
TigerText, Inc. - Mobile communication solutions;
Vocera Communications, Inc. (including Extension Healthcare)- Mobile communications solutions;
Imprivata, Inc. - Mobile communications solutions;
Voalte, Inc. - Mobile communications solutions;
Ascom Holding AG - Mobile Communications solutions;
Emergin, a Phillips Healthcare company - Alerting and notification;
DBA HipLink Software, Inc. - Mobile communications solutions; and
Veriphy Ltd - Critical test results management.

In addition, substantially larger companies in the electronic medical records ("EMR") space such as Epic Systems Corporation, Cerner Corporation, Athenahealth, Inc. and Allscripts Healthcare, LLC may choose to offer software related solutions similar to our critical communications and work flow solutions, or may acquire one of our competitors.
Research and Development ("R&D")
We maintain a product development group, a substantial portion of which is focused on developing new software products , especially with respect to developing an integrated platform for communications solutions. Within our Research and Development group is a separate task force focused on ongoing maintenance and enhancement of existing point-solution products. Our product development group uses a methodology that balances enhancement requests from a number of sources including customers, regulatory requirements, the professional services staff, customer support incidents, known defects, market and technology trends, and competitive requirements. These requests are reviewed and prioritized based on criteria that include the potential for increased revenue, customer/employee satisfaction, possible cost savings and development time and expense.
We have increasingly focused our product development activities on developing our unified communications solution, Spok Care Connect®. This unified communication solution focuses on four key areas of customer need: mobility offerings, an integrated platform, alerting and nursing solutions. The development of Spok Care Connect requires a multi-year effort by a dedicated product development staff and will be deployed in multiple phases which include planned development and enhancements. We believe that development of the Spok Care Connect platform will drive long-term stockholder value and play an important role in determining the future success of our strategy.
Our expenses for research and development for the years ended December 31, 2016, 2015 and 2014 were $13.5 million, $10.3 million, and $9.5 million, respectively, and we expect our research and development expenses to grow substantially over the next two to three years. We plan to invest significantly in our research and development efforts to build a fully integrated communications and workflow platform for hospitals focused on mobility, critical alerting, and nursing care with full enterprise accessibility.

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Employees
At December 31, 2016 and 2015 we had 587 and 600 full time equivalent (“FTE”) employees, respectively. We recently announced plans to hire up to 60 new employees focused on our research and development efforts for our Spok Care Connect platform. Our employees are not represented by labor unions or covered by a collective bargaining agreement. We believe that our employee relations are good.
Regulation
Federal Regulation
The FCC issues licenses to use radio frequencies necessary to conduct our business and regulate many aspects of the operations that support our wireless revenue. Licenses granted to us by the FCC have varying terms, generally of up to ten years, at which time the FCC must approve renewal applications. In the past, FCC renewal applications generally have been granted upon showing compliance with FCC regulations and adequate service to the public. Other than those still pending, the FCC has thus far granted each license renewal that we have requested.
The Communications Act of 1934, as amended (the “Communications Act”), requires radio licensees, including us, to obtain prior approval from the FCC for the assignment or transfer of control of any construction permit or station license or authorization of any rights thereunder. The FCC has thus far granted each assignment or transfer request we have made in connection with a change of control.
The Communications Act also places limitations on foreign ownership of CMRS licenses, which constitute the majority of our licenses. These foreign ownership restrictions limit the percentage of stockholders’ equity that may be owned or voted, directly or indirectly, by non-United States citizens or their representatives, foreign governments or their representatives, or foreign corporations. Our Amended and Restated Certificate of Incorporation permits the redemption of our equity from stockholders where necessary to ensure compliance with these requirements.
The FCC’s rules and regulations require us to pay a variety of fees that otherwise increase our costs of doing business. For example, the FCC requires licensees, including Spok, to pay levies and fees, such as universal service fees, to cover the costs of certain regulatory programs and to promote various other societal goals. These requirements increase the cost of the services provided. By law, we are permitted to bill our customers for these regulatory costs and we typically do so.
Additionally, the Communications Assistance to Law Enforcement Act of 1994, (“CALEA”) and certain rules implementing CALEA require some telecommunication companies, including Spok, to design and/or modify their equipment in order to allow law enforcement personnel to “wiretap” or otherwise intercept messages. Other regulatory requirements restrict how we may use customer information and prohibit certain commercial electronic messages, even to our own customers.
In addition, the FCC’s rules require us to pay other carriers for the transport and termination of some telecommunication traffic. As a result of various FCC decisions over the last few years, we no longer pay fees for the termination of traffic originating on the networks of local exchange carriers providing wireline services interconnected with our services. In some instances, we received refunds for prior payments to certain local exchange carriers. We have entered into a number of interconnection agreements with local exchange carriers in order to resolve various issues regarding charges imposed by local exchange carriers for interconnection.
Failure to follow the FCC’s rules and regulations can result in a variety of penalties, ranging from monetary fines to the loss of licenses. Additionally, the FCC has the authority to modify licenses, or impose additional requirements through changes to its rules.
The FDA has determined software systems that connect to medical devices are subject to regulation as medical devices as defined by the federal Food, Drug and Cosmetic Act (“the FDC Act”). Since our middleware software products connect to medical devices, we are required to comply with the FDC Act’s requirements, including but not limited to: registration and listing, labeling, medical device reporting (reporting of medical device-related adverse events), removal and correction, and good manufacturing practice requirements. We have complied with the regulatory requirements of the FDC Act, and registered and received the necessary clearances for our products. As we modify and/or enhance our software products (including our middleware product), we may be required to request FDA clearance before we are permitted to market these products.
In addition, our software solutions may handle or have access to personal health information subject in the United States to the HIPAA, the Health Information Technology for Economic and Clinical Health Act (“HITECH”), and related regulations. These statutes and related regulations impose numerous requirements regarding the use and disclosure of personal health information with which we help our customers comply. Our failure to accurately anticipate or interpret these complex and technical laws could subject us to civil and/or criminal liability. We believe that we are in compliance with these laws and their related regulations.

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Although these and other regulatory requirements have not, to date, had a material adverse effect on our operating results, such requirements could have a material impact on our operating results in the future. We monitor discussions at the FCC and FDA on pending changes in regulatory policy or regulations; however, we are unable to predict what changes, if any, may occur in 2017 to regulatory policy or regulations.
State Regulation
As a result of the enactment by the United States Congress of the Omnibus Budget Reconciliation Act of 1993 (“OBRA”) in August 1993, states are now generally preempted from exercising rate or entry regulation over any of our operations. States are not preempted, however, from regulating “other terms and conditions” of our operations, including consumer protection and similar rules of general applicability. Zoning requirements are also generally permissible, however, provisions of the OBRA prohibit local zoning authorities from unreasonably restricting wireless services. States that regulate our services also may require us to obtain prior approval of (1) the acquisition of controlling interests in other paging companies and (2) a change of control.
At this time, we are not aware of any proposed state legislation or regulations that would have a material adverse impact on our business.
Joint Interoperability Test Command ("JITC") Certification
JITC is a military organization that tests technology for use by the branches of the armed services of the United States and the United States federal government. JITC certification is required of all systems with joint interfaces or joint information exchanges with other systems used by these organizations and is done to ensure all systems operate effectively together. All information technology and national security systems that exchange and use information to enable units or forces to operate effectively in joint, combined, coalition and interagency operations and simulations must be certified. Once a system has been certified under this program, the certification must be renewed every four years or after any changes that may affect interoperability. The interoperability certification process consists of four basic steps, which are:
Identify (interoperability) requirements;
Develop certification approach (planning);
Perform interoperability test and evaluation; and
Report certifications and statuses.
We submit and receive JITC certification for certain of our products through the Defense Information Systems Agency ("DISC"), which allows us to sell and implement our solutions at Federal government agencies.  We currently certify a console, web, speech, mass notification, public safety answering point, call recording and campus 911 product with JITC.  We have a roadmap to renew the existing certifications with new releases of existing products and to bring additional products to JITC to increase the products that can be sold into Federal agencies. 
Information about Segment and Geographic Revenue
Information regarding segment and geographic revenue can be found in Note 13, "Segments and Geographic Information". No country other than the United States accounted for more than 10% of our total revenue, and we intend to focus our marketing and sales efforts on customers in the United States due to lower margins on sales abroad and low volume relative to the cost of maintaining an international sales team. Financial information regarding revenues from external customers and measure of profit and/or loss for the years ended December 31, 2016, 2015 and 2014, and our total assets as of December 31, 2016 and 2015, is included in our Consolidated Financial Statements.
Available Information
We make available on our website at http://www.spok.com, free of charge, our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports as soon as reasonably practicable after such reports are electronically filed with, or furnished to, the United States Securities and Exchange Commission ("SEC"). The public may read and copy any materials we file with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC also maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC at http://www.sec.gov. We also make available on our website, and in print, if any stockholder or other person so requests, our code of business conduct and ethics entitled “Code of Ethics” which is applicable to all employees and directors, our “Corporate Governance Guidelines” and the charters for all committees of our Board of Directors, including Audit, Compensation and Corporate Governance and Nominating. Any changes to our Code of Ethics or waiver, if any, of our Code of Ethics for executive officers or directors will be posted on that website.

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ITEM 1A. RISK FACTORS
The following important factors, among others, could cause our actual operating results to differ materially from those indicated or suggested by forward-looking statements made in this 2016 Form 10-K or presented elsewhere by management from time to time.
The rate of wireless subscriber and revenue erosion could exceed our ability to reduce operating expenses in order to maintain overall positive operating cash flow.
Our wireless revenue is dependent on the number of subscribers that use our paging devices. There is intense competition for these subscribers from other paging service providers and alternate wireless communications providers such as mobile phone and mobile data service providers. In addition to competition, our customer base may be impacted by the introduction of new technologies. As mobile communications technology evolves, competitors that provide wireless broadband data services may lower their prices to customers that approach, meet or undercut our prices for paging services. We are unable to predict how customer perceptions of the value of our wireless services will be impacted by the development of new wireless technologies.
We expect our subscriber numbers, units in service and revenue will continue to decline into the foreseeable future. As this revenue erosion continues, maintaining positive cash flow is dependent on substantial and timely reductions in selected operating expenses. Reductions in operating expenses require both the reduction of internal costs and negotiation of lower costs from outside vendors. As we require fewer services and products from our vendors, our negotiating leverage to lower our costs is diminished. There can be no assurance that we will be able to reduce our operating expenses commensurate with the level of revenue erosion. The inability to reduce operating expenses would have a material adverse impact on our business, financial condition and statement of income including our continued ability to remain profitable, produce positive operating cash flow, continue our research and development investment in our Spok Care Connect platform, pay cash dividends to stockholders, and repurchase shares of our common stock.
We may be unable to effectively develop, introduce and deploy our integrated communications platform, Spok Care Connect, which is the basis for our future growth.
Our future revenue growth depends on our ability to develop, introduce and effectively deploy our integrated communications suite. This multi-year effort will require the coordination of multiple development teams dedicated to this task. Simultaneously with this new development effort, we must continue to improve and support our existing suite of products to transition to the integrated critical communications suite. We foresee the following risks inherent in our research and product development efforts:
Requirements Definition - Our plans for an integrated communications suite may not meet the market's needs or customer expectations and could result in low market demand and/or acceptance.
Product Scope and Schedule - We may fail to manage the scope of our software development activities effectively, resulting in delays to meet key milestones, achieve network solutions on a fully integrated basis, or solve coding problems in a timely and efficient manner. In addition, the continuing software development efforts on our existing products could distract management time and focus on developing our integrated communications platform.
Staffing and Organization - The development of the integrated communications suite requires the hiring of new staff. We may be unable to attract, in a timely manner, the qualified staff to meet our requirements. The organizational changes and new hires necessary to address our development requirements could create attrition risk for our current staff.
Operational Readiness - While the development of the integrated communications suite could occur as we have planned, we may not be prepared or ready to sell, deliver and support the new platform technology.
Technical problems and higher costs may affect our product development initiatives.
Our future software revenue growth depends on our ability to develop, introduce and effectively deploy new solutions and features to our existing software solutions. These new features and functionalities are designed to address both existing and new customer requirements. We may experience technical problems and additional costs as these new features are tested and deployed. Failure to effectively develop new or improved software solutions could adversely impact software revenue growth and could have a material adverse effect on our operations, financial condition and statement of income including our continued ability to remain profitable, produce positive operating cash flow, pay cash dividends to stockholders, and repurchase shares of our common stock.

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If we are unable to retain key management personnel, we might not be able to find suitable replacements in a timely basis, or at all, and our business could be disrupted.
Our success is largely dependent upon the continued service of key personnel, including our Chief Executive Officer, senior management team and other highly skilled personnel, particularly in product development, product strategy and sales. We believe that there is, and will continue to be, intense competition for qualified personnel in the telecommunication and software industries, and there is no assurance that we will be able to attract and retain the personnel necessary for the management and development of our business. Turnover, particularly among senior management, can also create distractions as we search for replacement personnel, which could result in significant recruiting, relocation, training and other costs, and can cause operational inefficiencies as replacement personnel become familiar with our business and operations. In addition, manpower in certain areas may be constrained, which could lead to disruptions over time. The elimination or reconfiguration of employee responsibilities could impact retention decisions by key executives and personnel.
In order to grow our software revenue and bookings and maintain our wireless revenue and subscribers we are dependent on our ability to effectively manage our employee base in sales and marketing to achieve our sales productivity goals.
Growth in our software revenue and bookings and maintenance of our wireless revenue and subscriber base is dependent on the productivity of our sales organization. From time to time it may be necessary to reorient our sales representatives to focus on specific market segments, product lines or new software solutions or to remove underperforming individuals which may require additional resources to maintain productivity. The impact of these changes could adversely impact our ability to achieve our sales productivity goals. We have also identified the following risks that could impact our sales productivity:
Customer Dissatisfaction and Spok's Reputation - We may experience customer dissatisfaction with our solutions that could result in lost opportunities for sales. Potential low ratings of our solutions may negatively impact our perception by future prospects. In addition, fewer references for our solutions could impact our ability to prospect new sales.
Training - Training of our marketing and sales personnel as to the clinical requirements of our healthcare customers and the complexity of our service offerings, takes time and requires a substantial, continuing investment in new hires as well as long term employees.
Competitive Speed - Sales productivity can be impacted by the capabilities of our competitors. There is a risk that competitors can innovate or partner faster than we do to deliver a unified communications platform.
Employee Retention - The impact of the elements noted above can challenge the ability of employees to make sales. This is tough on morale and can affect employee retention.
We may experience a long sales cycle for our software products.
Our software revenue growth results from a long sales cycle that from initial contact to final sales order may take six to 18 months depending on the type of software solution. Our software sales and marketing efforts involve educating our customers on the technical capabilities of our software solutions and the potential benefits from the deployment of our software, as well as educating ourselves as to the clinical needs of our customers. The inherent unpredictability of decision making resulting from customer budget constraints, multiple approvals and administrative issues may result in fluctuating bookings and revenue from month to month, quarter to quarter and year to year. Our bookings and corresponding revenue are dependent on actions that have occurred in the past. Each month we need to spend substantial time, effort, and expense on our marketing and sales efforts that may not result in future revenue.
Service to our customers could be adversely impacted by network rationalization.
We have an active program to consolidate the number of networks and related transmitter locations, which is referred to as network rationalization. Network rationalization is necessary to match our technical infrastructure to our smaller subscriber base and to reduce both site rent and telecommunication costs. The implementation of the network rationalization program could adversely impact service to our existing subscribers despite our efforts to minimize the impact on subscribers. This adverse impact could increase the rate of gross subscriber cancellations and/or the level of wireless revenue erosion. Adverse changes in gross subscriber cancellations and/or revenue erosion could have a material adverse effect on our business, financial condition and results of operations.
We may be unable to find vendors able to supply us with paging equipment based on future demands.
We purchase paging equipment from third party vendors. This equipment is sold or leased to customers in order to provide wireless messaging services. The reduction in industry demand for paging equipment has caused various suppliers to cease manufacturing this equipment. There can be no assurance that we can continue to find vendors to supply paging equipment, or that the vendors will supply equipment at costs that allow us to remain a competitive alternative in the wireless messaging industry. A lack of paging equipment could impact our ability to provide certain wireless messaging services and could have a material adverse effect on our business, leading to further wireless revenue erosion.

14


We may be unable to maintain successful relationship with our channel partners.
We use channel partners such as resellers, consulting firms, original equipment manufacturers, and technology partners to license and support our products. Contract defaults by any of these channel partners or the loss of our relationships with them may materially adversely affect our ability to develop, market, sell, or support our communication solution offerings.
We may be unable to realize the benefits associated with our deferred income tax assets.
We have significant deferred income tax assets that are available to offset future taxable income and increase cash flows from operations. The use of these deferred income tax assets is dependent on the availability of taxable income in future periods. The availability of future taxable income is dependent on our ability to profitably manage our operations to support a growing base of software revenue offset by declining wireless subscribers and revenue. To the extent that anticipated reductions in operating expenses do not occur or sufficient revenue is not generated, we may not achieve sufficient taxable income to allow for use of our deferred income tax assets. The accounting for deferred income tax assets is based upon an estimate of future results, and the valuation allowance may be increased or decreased as conditions change or if we are unable to implement certain tax planning strategies. If we are unable to use these deferred income tax assets, our financial condition and statement of income may be materially affected. In addition, a significant portion of our deferred income tax assets relate to net operating losses. If our ability to utilize these losses is limited, due to Internal Revenue Code (“IRC”) Section 382, our financial condition and statement of income may be materially affected.
Our wireless products are regulated by the FCC and, to a lesser extent, state and local regulatory authorities. Changes in regulation could result in increased costs to us and our customers.
We are subject to regulation by the FCC and, to a lesser extent, by state and local authorities. Changes in regulatory policy could increase the fees we must pay to the government or to third parties, and could subject us to more stringent requirements that could cause us to incur additional capital and/or operating costs. To the extent additional regulatory costs are passed along to customers, those increased costs could adversely impact subscriber cancellations.
For example, the FCC issued an order in October 2007 that mandated paging carriers (including the Company) along with all other CMRS providers serving a defined minimum number of subscribers to maintain an emergency back-up power supply at all cell sites to enable operation for a minimum of eight hours in the event of a loss of commercial power (the “Back-up Power Order”). Ultimately, after a hearing by the DC Circuit Court and disapproval by the Office of Management and Budget (the “OMB”) of the information collection requirements of the Back-Up Power Order, the FCC indicated that it would not seek to override the OMB’s disapproval. Rather the FCC indicated that it would issue a Notice of Proposed Rulemaking with the goal of adopting revised back-up power rules. To date, there has been no Notice of Proposed Rulemaking by the FCC and we are unable to predict what impact, if any, a revised back-up power rule could have on our operations, cash flows, ability to continue payment of cash dividends to stockholders, and ability to repurchase shares of our common stock.
As a further example, the FCC continues to consider changes to the rules governing the collection of universal service fees. The FCC is evaluating a flat monthly charge per assigned telephone number as opposed to assessing universal service contributions based on telecommunication carriers’ interstate revenue. There is no timetable for any rulemaking to implement this numbers-based methodology. If the FCC adopts a numbers-based methodology, our attempt to recover the increased contribution costs from our customers could significantly diminish demand for our services, and our failure to recover such increased contribution costs could have a material adverse impact on our business, financial condition and results of operations.
Certain of our software products are regulated by the FDA. The application of or changes in regulations could impact our ability to market new or revised software products to our customers.
Certain of our software products are regulated by the FDA as medical devices. The classification of our software products as medical devices means that we are required to comply with certain registration and listing, labeling, medical device reporting, removal and correction, and good manufacturing practice requirements. Updates to these products or the development of new products could require us to seek clearance from the FDA before we are permitted to market or sell these software products. In addition, changes to FDA regulations could impact existing software products or updates to existing products. The impact of delays in FDA clearance or changes to FDA regulations could impact our ability to market or sell our software products and could have a material adverse effect on our software sales, financial condition and results of operations, including our continued ability to remain profitable, produce positive operating cash flow, pay cash dividends to stockholders and repurchase shares of our common stock.

15


We have investigated potential acquisitions and may not be able to identify an opportunity at favorable terms or have the ability to close on financing necessary to consummate the transaction.
We cannot provide any assurances that we will be successful in finding such acquisitions or consummating future acquisitions on favorable terms. We anticipate that our acquisitions will be financed through a combination of methods, including but not limited to the use of available cash on hand, and, if necessary, borrowings from third party financial institutions. Disruptions in credit markets and an unwillingness to lend may limit our ability to finance acquisitions.
We have investigated potential acquisitions and may be unable to successfully integrate such acquisitions into our business and may not achieve all or any of the operating synergies or anticipated benefits of those acquisitions.
We continue to evaluate acquisitions of other businesses where we believe such acquisitions will yield increased cash flows, improved market penetration and/or identified operating efficiencies and synergies. We may face various challenges with our integration efforts, including the combination and simplification of product and service offerings, sales and marketing approaches and establishment of combined operations. Although acquired businesses may have significant operating histories, we may have limited or no history of owning and operating these businesses. If we were to acquire these businesses, there can be no assurance that:
such businesses will perform as expected;
such businesses will not incur unforeseen obligations or liabilities;
such businesses will generate sufficient cash flow to support the indebtedness, if incurred, to acquire them or the expenditures needed to develop them; and/or
the rate of return from such businesses will justify the decision to invest the capital to acquire them.
We may experience litigation claiming intellectual property infringement by us, and we may not be able to protect our rights in intellectual property that we own and develop.
Intellectual property infringement litigation has become commonplace, particularly in the wireless and software industries in which we operate. This litigation can be protracted, expensive, and time consuming. There is no assurance that we will remain immune to this type of predatory litigation. Any such claims, whether meritorious or not, could be time consuming and costly in terms of both resources and management time.
Third parties may claim we infringe their intellectual property rights. We may receive claims that we have infringed the intellectual property rights of others, including claims regarding patents, copyrights, and trademarks. The number of these claims may grow as a result of constant technological change in the segments in which our software products compete, the extensive patent coverage of existing technologies, and the rapid rate of issuance of new patents.
Our patents, trademarks, copyrights and trade secrets relating to our wireless services and networks, and our software solutions, are important assets. The efforts we undertake to protect our proprietary rights may not be sufficient or effective. Any significant impairment to our intellectual property rights could harm our business and our ability to compete effectively. Protecting our intellectual property rights can be costly and time consuming.
We seek to maintain certain of our intellectual property rights as trade secrets, including the source code for many of our software solutions and innovations. Our source code and system architecture may be reverse engineered by our competitors, or the secrecy of our solutions and designs could be compromised through a security breach or otherwise, or by our employees or former employees, intentionally or accidentally. Any compromise of our trade secrets could cause us to lose any competitive advantage our software solutions have and the investment we have made in developing our products and services.
Our portfolio of issued patents and copyrights may be insufficient to defend ourselves against intellectual property infringement claims, and the validity and scope of our patents could be challenged by third parties were we to seek to enforce them.

16


We may encounter issues with privacy and security of personal information.
A substantial portion of our revenue comes from healthcare customers. Our software solutions may handle or have access to personal health information subject in the United States to HIPAA, HITECH and related regulations as well as legislation and regulations in foreign countries. These statutes and related regulations impose numerous requirements regarding the use and disclosure of personal health information with which we and our software solutions must comply. Our failure to accurately anticipate or interpret these complex and technical laws and regulations could subject us to civil and/or criminal liability. Such failure could adversely impact our ability to market and sell our software solutions to healthcare customers, and have a material adverse impact on our software sales.
In addition, customers may use our wireless services to transmit patient health information subject to HIPAA and other regulatory requirements. While we offer encrypted pagers to our customers, many customers use pager devices provided by us that do not encrypt text messages. While we disclaim liability for customer non-compliance with HIPAA and other privacy requirements, there remains some risk we could be held responsible for privacy violations by our customers.
System disruptions and security threats to our computer networks, satellite control or telecommunications systems could have a material adverse effect on our business.
The performance and reliability of our computer network and telecommunications systems infrastructure is critical to our operations. Any computer system or satellite network error or failure, regardless of cause, could result in a substantial outage that materially disrupts our operations. In addition, we face the threat to our computer systems of unauthorized access, computer hackers, computer viruses, malicious code, organized cyber-attacks and other security problems and system disruptions.
Our satellite network connections for our wireless services depend upon VSAT terminals, many of which are based on decades-old technology or equipment that could fail resulting in a loss of service to our customers. With respect to our Enterprise Reporting and Management systems and data storage we rely on third party data centers and services with whom we are dependent for maintaining accessibility, reliability and uninterrupted connectivity.
Our computer systems may be vulnerable to these threats. A user who circumvents security measures could misappropriate proprietary information or cause interruptions or malfunctions in our operations. We utilize a costly, multilayered security framework including detailed security policies and procedures, security appliances and software, third party vulnerability testing and detailed Business Continuity Plans that could be disrupted at any time.
However, we may be required to expend significant resources to protect against the threat of these system disruptions and security breaches or to alleviate problems caused by these disruptions and breaches.
General economic conditions that are largely out of our control may adversely affect our financial condition and statement of income.
Our business is sensitive to changes in general economic conditions, both in the United States and foreign markets. Recessionary economic cycles, higher interest rates, inflation, higher levels of unemployment, higher tax rates and other changes in tax laws, or other economic factors that may affect business spending or buying habits could adversely affect the demand for our services. This adverse impact could increase the rate of gross subscriber cancellations and/or the level of revenue erosion.
A significant portion of our revenue is derived from healthcare customers and we are impacted by changes in the healthcare economic environment. The healthcare industry is highly regulated and is subject to changing political, legislative, regulatory, and other economic developments. These developments can have a dramatic effect on the decision-making and the spending by our customers for information technology and software. This economic uncertainty can add to the unpredictability of decision-making and lengthen our sales cycle.
Further, the consequences of the implementation of changes to healthcare reform legislation continue to impact both the economy in general and the healthcare market in particular. The uncertainty created by possibility of changes to the legislation is impacting customer decision making and information technology plans in our key healthcare market. We are unable to predict the full consequences of this uncertainty on our operations. Adverse changes in the economic environment could adversely impact our ability to market and sell our wireless and software solutions to healthcare customers.
 
ITEM 1B. UNRESOLVED STAFF COMMENTS
We had no unresolved SEC staff comments as of March 2, 2017.

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ITEM 2. PROPERTIES
Our corporate headquarters is located in Springfield, Virginia, and consists of approximately 18,000 square feet of space under a lease that expires on March 31, 2018. At December 31, 2016, we leased facility space, including our executive headquarters, sales offices, technical facilities, warehouse and storage facilities in 72 locations in 30 states in the United States, one facility in Australia and one facility in the Middle East. The total leased space is approximately 160,000 square feet. At December 31, 2016, we owned three small parcels of land in three states in the United States.
At December 31, 2016, we leased transmitter sites on commercial broadcast towers, buildings and other fixed structures in approximately 3,380 locations throughout the United States. These leases are for our active transmitters and are for various terms and provide for periodic lease payments at various rates.
At December 31, 2016, we had 4,159 active transmitters on leased sites which provide service to our customers (of which 2,234 are located at customer sites).
ITEM 3. LEGAL PROCEEDINGS
We are involved, from time to time, in lawsuits arising in the normal course of business. We believe these pending lawsuits will not have a material adverse impact on our financial condition or statement of income.
On January 23, 2017, 911 Notify, Inc. filed a lawsuit against us in the United States District Court for the Eastern District of Texas alleging infringement of U.S. Patent Nos. 6,151,385; 6,775,356; and 8,965,447 pertaining to our software solution for notification of 911 emergency calls. We have settled this lawsuit for an immaterial amount.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable. 

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PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information
Our sole class of common equity is our $0.0001 par value common stock, which is listed on the NASDAQ National Market® and is traded under the symbol “SPOK.”
The following table sets forth the high and low sales prices per share of our common stock, based on the last daily sale, for the periods indicated, which correspond to our quarterly fiscal periods for financial reporting purposes. Prices for our common stock are as reported on the NASDAQ National Market® from January 1, 2015 through December 31, 2016. 
 
2016
 
2015
For the Three Months Ended
High
 
Low
 
High
 
Low
March 31,
$
18.01

 
$
15.85

 
$
20.20

 
$
16.85

June 30,
19.29

 
16.17

 
21.04

 
16.18

September 30,
20.56

 
16.34

 
17.63

 
15.46

December 31,
21.30

 
16.40

 
18.95

 
15.92

Holders of Common Stock
As of February 24, 2017, there were 3,314 holders of record of our common stock.
Dividends
The Company declared dividends totaling $15.8 million and $13.5 million during 2016 and 2015, respectively, and expects to pay dividends of $0.125 per common share each quarter, subject to declaration by the Board of Directors, in 2017. Cash dividends declared for the years ended December 31, 2016 and 2015, respectively, include dividends related to unvested restricted stock units (“RSUs”) and shares of unvested restricted common stock (“restricted stock”) granted under the Spok Holdings, Inc. Equity Incentive Plan (“Equity Plan”) to executives and non-executive members of our Board of Directors. Cash distributions on RSUs and restricted stock are accrued and paid when the applicable vesting conditions are met. Accrued cash distributions on forfeited RSUs and restricted stock are also forfeited.

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The following table details information on our dividends declared and cash distributions since the formation of the Company through the year ended December 31, 2016:
Year
Dividends Declared Per Share
Amount

Total
Payment
(1)
 
 

(Dollars in
thousands)
2005
$
1.500

 
$
40,691

2006(2)
3.650

 
98,904

2007(3)
3.600

 
98,250

2008(4)
1.400

 
39,061

2009(3)
2.000

 
45,502

2010(3)
2.000

 
44,234

2011
1.000

 
22,121

2012(5)
0.750

 
16,512

2013
0.500

 
12,312

2014
0.500

 
10,826

2015(6)
0.625

 
13,333

2016(7)
0.750

 
10,287

Total
$
18.275

 
$
452,033

(1) 
The total payment reflects the cash distributions paid in relation to common stock, vested RSUs and vested shares of restricted stock.
(2) 
On August 8, 2006, we announced the adoption of a regular quarterly cash distribution of $0.65 per share of common stock.
(3) 
The cash distribution includes an additional special one-time cash distribution to stockholders of $1.00 per share of common stock.
(4) 
On May 2, 2008, our Board of Directors reset the quarterly cash distribution rate to $0.25 per share of common stock from $0.65 per share of common stock.
(5) 
On July 30, 2012, our Board of Directors reset the quarterly cash distribution rate to $0.125 per share of common stock from $0.25 per share of common stock.
(6) 
The cash distribution includes an additional special one-time cash distribution to stockholders of $0.125 per share of common stock.
(7) 
The per share amount includes a special one-time dividend of $0.25 per share of common stock declared in 2016 but payable to stockholders in 2017.
On March 1, 2017, our Board of Directors declared a regular quarterly cash dividend of $0.125 per share of common stock, with a record date of March 17, 2017, and a payment date of March 30, 2017. This cash dividend of approximately $2.6 million is expected to be paid from available cash on hand.


20


Performance Graph
We began trading on the NASDAQ National Market® on November 17, 2004. The chart below compares the relative changes in the cumulative total return of our common stock for the period December 31, 2011 to December 31, 2016, against the cumulative total return of the NASDAQ Composite Index®, the NASDAQ Telecommunications Index® and the S&P Health Care Technology Index for the same period.
The chart below assumes that on December 31, 2011, $100 was invested in our common stock and in each of the indices. The comparisons assume that all cash distributions were reinvested. The chart indicates the dollar value of each hypothetical $100 investment based on the closing price as of the last trading day of each fiscal year from December 31, 2011 to December 31, 2016.

chart.jpg
 
December 31,
 
2011

 
2012

 
2013

 
2014

 
2015

 
2016

Spok Holdings, Inc.
$
100.00

 
$
89.46

 
$
113.44

 
$
142.50

 
$
155.87

 
$
184.09

NASDAQ Composite Index
100.00

 
116.41

 
165.47

 
188.69

 
200.32

 
216.54

NASDAQ Telecommunications Index
100.00

 
102.78

 
143.40

 
149.42

 
144.02

 
153.88

S&P Health Care Technology Index
100.00

 
126.76

 
182.01

 
211.13

 
196.47

 
154.68


21


Purchases of Equity Securities by the Issuer and Affiliated Purchasers
The following table presents information with respect to common stock repurchased by us during the year ended December 31, 2016.
Period
Total Number of Shares Purchased
 
Average Price Paid Per Share(1)
 
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs
 
Approximate Dollar Value of Shares That May Yet Be Purchased Under the Publicly Announced Plans or Programs
 
 
 
 
 
 
 
(Dollars in thousands)
Beginning Balance as of January 1, 2016
 
 
 
 
 
 
$
10,000

January 1 through January 31, 2016
152,198

 
$
16.53

 
152,198

 
7,484

February 1 through February 29, 2016
101,736

 
$
17.24

 
101,736

 
5,730

March 1 through March 31, 2016
37,927

 
$
16.44

 
37,927

 
5,106

April 1 through April 30, 2016
31,468

 
$
16.40

 
31,468

 
4,590

May 1 through May 30, 2016
34,323

 
$
16.37

 
34,323

 
4,028

June 1, through June 30, 2016

 
$

 

 
4,028

July 1, through July 31, 2016

 
$

 

 
4,028

August 1, through August 31, 2016
3,800

 
$
16.44

 
3,800

 
3,966

September 1, through September 30, 2016
10,084

 
$
16.46

 
10,084

 
3,800

October 1 through October 31, 2016

 
$

 

 
3,800

November 1 through November 30, 2016
16,719

 
$
16.43

 
16,719

 
3,525

December 1 through December 31, 2016

 
$

 

 
3,525

Total
388,255

 
$
16.67

 
388,255

 
 
(1) Average price paid per share excludes commissions of approximately $15,410.
Repurchased shares of our common stock were accounted for as a reduction to common stock and additional paid-in-capital in the period in which the repurchase occurred. From the inception of the share repurchase program in August 2008 through December 31, 2016, we have repurchased a total of 7,817,708 shares of our common stock for approximately $85.5 million (excluding commissions). The Company's Board of Directors did not reset the repurchase authority under the share repurchase program for 2017 and the previous authority expired on December 31, 2016.
Transfer Restrictions on Common Stock
In order to reduce the possibility that certain changes in ownership could impose limitations on the use of our deferred income tax assets, our Amended and Restated Certificate of Incorporation contains provisions that generally restrict transfers by or to any 5% stockholder of our common stock or any transfer that would cause a person or group of persons to become a 5% stockholder of our common stock. After a cumulative indirect shift in ownership of more than 45% since our emergence from bankruptcy proceedings in May 2002 through a transfer of our common stock, any transfer of our common stock by or to a 5% stockholder of our common stock or any transfer that would cause a person or group of persons to become a 5% stockholder of such common stock, will be prohibited unless the transferee or transferor provides notice of the transfer to us and our Board of Directors determines in good faith that the transfer would not result in a cumulative indirect shift in ownership of more than 47%.
Prior to a cumulative indirect ownership change of more than 45%, transfers of our common stock will not be prohibited, except to the extent that they result in a cumulative indirect shift in ownership of more than 47%, but any transfer by or to a 5% stockholder of our common stock or any transfer that would cause a person or group of persons to become a 5% stockholder of our common stock requires notice to us. Similar restrictions apply to the issuance or transfer of an option to purchase our common stock, if the exercise of the option would result in a transfer that would be prohibited pursuant to the restrictions described above. These restrictions will remain in effect until the earliest of (1) the repeal of IRC Section 382 (or any comparable successor provision) and (2) the date on which the limitation amount imposed by IRC Section 382 in the event of an ownership change would not be less than the tax attributes subject to these limitations. Transfers by or to us and any transfer pursuant to a merger approved by our Board of Directors or any tender offer to acquire all of our outstanding stock where a majority of the shares have been tendered will be exempt from these restrictions.
Based on publicly available information and after considering any direct knowledge we may have, our combined cumulative change in ownership was an insignificant amount as of December 31, 2016 and 2015.

22


ITEM 6. SELECTED FINANCIAL DATA
The following selected consolidated financial data should be read in conjunction with “Item 7. Management’s Discussion and Analysis of Financial Condition and Statement of Income” (“MD&A”), the consolidated financial statements and notes thereto, and other financial information appearing elsewhere in this 2016 Form 10-K. The amounts below related to basic and diluted net income per common share have been revised for all periods presented. Additionally, data presented for the year ended December 31, 2015 reflects an increase of $4.0 million to income tax expense and a corresponding adjustment to net income as well as a $4.0 million reduction to deferred income tax assets and a corresponding adjustment to retained earnings related to the correction of an immaterial misstatement. For more information on these changes, refer to Note 1 "Organization and Significant Accounting Policies" of the Consolidated Financial Statements for additional information.
 
For the Year Ended December 31,
 
2016
 
2015
 
2014
 
2013
 
2012
 
(Dollars in thousands except per share amounts)
Statements of Income Data:
 
 
 
 
 
 
 
 
 
Revenues
$
179,561

 
$
189,628

 
$
200,273

 
$
209,752

 
$
219,696

Operating expenses
157,408

 
164,528

 
172,122

 
164,258

 
173,968

Operating income
22,153

 
25,100

 
28,151

 
45,494

 
45,728

Net income
13,979

 
80,246

 
20,745

 
27,530

 
26,984

Basic and diluted net income per common share
0.68

 
3.74

 
0.96

 
1.27

 
1.23

Cash dividends declared per common share
0.75

 
0.625

 
0.50

 
0.50

 
0.75

 
 
 
 
 
 
 
 
 
 
 
December 31,
 
2016
 
2015
 
2014
 
2013
 
2012
 
(Dollars in thousands)
Balance Sheets Data:
 
 
 
 
 
 
 
 
 
Current assets
$
155,862

 
$
141,613

 
$
142,761

 
$
116,779

 
$
95,909

Total assets
388,087

 
386,433

 
337,890

 
326,898

 
322,627

Long-term debt

 

 

 

 

Long-term liabilities, excluding deferred revenue
8,921

 
8,972

 
8,131

 
9,259

 
9,789

Stockholders’ equity
322,087

 
329,564

 
279,059

 
269,950

 
251,419


ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND STATEMENT OF INCOME
The following discussion and analysis should be read in conjunction with our consolidated financial statements and related notes and the discussion under “Application of Critical Accounting Policies” (also under Item 7), which describes key estimates and assumptions we make in the preparation of our consolidated financial statements; the cautionary language that appears under the title "Forward Looking Statements" immediately following the Table of Contents;“Item 1. Business,” which describes our operations; and “Item 1A. Risk Factors,” which describes key risks associated with our operations and markets in which we operate. A reference to a “Note” in this section refers to the accompanying Notes to Consolidated Financial Statements.
Overview and Highlights
We are a comprehensive provider of critical communication solutions for enterprises. We offer a 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 response. Our customers rely on Spok for workflow improvement, secure texting, paging services, contact center optimization and public safety response. Our product offerings are capable of addressing a customer’s mission critical communications needs. We develop, sell and support enterprise-wide systems for healthcare and other organizations needing to automate, centralize and standardize their approach to critical communications. Our solutions can be found in prominent hospitals; large government agencies; leading public safety institutions, colleges and universities; large hotels, resorts and casinos; and well-known manufacturers. 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 and wireless solutions.

23


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, consulting and training), equipment procured by us from third parties (to be used in conjunction with our 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.
The following tables present 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 Year Ended December 31, 2016
 
For the Year Ended December 31, 2015
 
For the Year Ended December 31, 2014
Market Segment
 
Wireless
 
Software
 
Total
 
% of 
Total
 
Wireless
 
Software
 
Total
 
% of 
Total
 
Wireless
 
Software
 
Total
 
% of 
Total
 
 
(Dollars in thousands)
Healthcare
 
$
81,788

 
$
44,406

 
$
126,194

 
70.3
%
 
$
85,148

 
$
44,113

 
$
129,261

 
68.2
%
 
$
90,092

 
$
42,117

 
$
132,209

 
66.0
%
Government
 
6,867

 
7,286

 
14,153

 
7.9
%
 
7,993

 
9,348

 
17,341

 
9.1
%
 
9,426

 
11,217

 
20,643

 
10.3
%
Large Enterprise
 
9,532

 
3,563

 
13,095

 
7.3
%
 
11,539

 
3,009

 
14,548

 
7.7
%
 
13,867

 
2,257

 
16,124

 
8.1
%
Other(1)
 
11,403

 
14,716

 
26,119

 
14.5
%
 
14,334

 
14,144

 
28,478

 
15.0
%
 
19,017

 
12,280

 
31,297

 
15.6
%
Total
 
$
109,590

 
$
69,971

 
$
179,561

 
100.0
%
 
$
119,014

 
$
70,614

 
$
189,628

 
100.0
%
 
$
132,402

 
$
67,871

 
$
200,273

 
100.0
%
(1) 
Other includes hospitality, resort, indirect and billable travel revenue.
2016 Highlights
Net sales declined by 5.3% or $10.1 million during 2016 compared to 2015, driven primarily by a continued and expected decline in wireless revenue while software revenue decreased slightly for the same period. Our operating expenses declined by 4.3% or $7.1 million during 2016 compared to 2015, driven primarily by reduction in all functional categories partially offset by an increase in research and development expenses attributable to our continued investment in the development of Spok Care Connect. We are committed to increasing our research and development spend throughout 2017 as we look to continue developing new products and services as well as enhancements for our current suite of solutions. We returned approximately $22.0 million of capital to our stockholders in the form of cash dividends and share repurchases which includes the special dividend declared in December 2016 but was paid in January 2017.
2015 Highlights
Net sales declined by 5.3% or $10.6 million during 2015 compared to 2014, driven primarily by a continued and expected decline in wireless revenue partially offset by solid growth in software maintenance revenue. Year-over-year paging unit erosion improved to a low of 6.6% during 2015 which was a decrease of 2.1% compared to 2014. Operating expenses declined by 4.4% or $7.6 million during 2015 compared to 2014, driven primarily by a reduction in general and administrative as well as lower depreciation, amortization and accretion costs. We reduced our deferred income tax asset valuation allowance by $64.2 million based on our analysis and expectation that these assets would now be realized in the future prior to expiration. We returned approximately $29.0 million of capital to our stockholders in the form of cash dividends and share repurchases.
Wireless Revenue
Our core offering includes subscriptions to one-way or two-way messaging services for a periodic (monthly, quarterly, semiannual, 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 contract for 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. In 2015 and 2016 we launched new and exclusive one-way (T5) and two-way (T52) alphanumeric pagers, respectively. Both pagers are configurable to support un-encrypted or encrypted operation. When configured for encryption, they utilize AES-128 bit encryption, screen locking and remote wipe capabilities. With encryption enabled these new secure paging devices enhance our service offerings to the healthcare community by adding Health Insurance Portability and Accountability Act ("HIPAA") security capabilities to the low cost, highly reliable and availability benefits of paging. (See Item 1. “Business” for more details.)

24


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 revenue. 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 the 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 delivery 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.
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.
Research and Development. These expenses relate primarily to the development of new software products and the ongoing maintenance and enhancement of existing products. This classification consists primarily of employee payroll and related expenses, outside services related to the design, development, testing and enhancement of our solutions and to a lesser extent hardware equipment.
Service, rental and maintenance. These are expenses associated with the operation of our paging networks. 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 and pager repair functions.
Selling and marketing. The sales and marketing staff are involved in selling our communication solutions primarily in the United States. These expenses support our efforts to maintain gross placements of units in service, which mitigated the impact of disconnects on our wireless revenue base, and to identify business opportunities for additional or future software sales. We have a centralized marketing function, which is focused on supporting our products and vertical sales efforts by strengthening our brand, generating sales leads and facilitating the sales process. These marketing functions are accomplished through targeted email campaigns, webinars, regional and national user conferences, monthly newsletters and participation at industry trade shows. Expenses consist largely of payroll and related expenses, commissions and other costs such as travel and advertising costs.
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 65.6%, 62.5% and 60.6% of the operating expenses referred to above were incurred in payroll and related expenses, site and facility rent expenses and telecommunication expenses for each the years ended December 31, 2016, 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 physical locations for the Company. We had 587 full-time equivalent employees (“FTEs”) at December 31, 2016, a decrease of 2.2% from 600 FTEs at December 31, 2015. We very recently announced plans to hire up to 60 new employees over the next 18 to 24 months, with the majority of new hires to occur during 2017. Nearly all of the new hires will be working in software development and supporting areas for our planned integrated communications platform, Spok Care Connect.
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 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 2.0% to 4,159 active transmitters at December 31, 2016 from 4,243 active transmitters at December 31, 2015.

25


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. However, 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 Statement of Income Elements for the Years Ended December 31, 2016, 2015 and 2014
(Dollars in thousands)
2016
 
Change
 
2015
 
Change
 
2014
Revenues:
 
 
 
 
 
 
 
 
 
 
 
 
 
Wireless
$
109,590

 
(9,424
)
 
(7.9
)%
 
$
119,014

 
$
(13,388
)
 
(10.1
)%
 
$
132,402

Software
69,971

 
(643
)
 
(0.9
)%
 
70,614

 
2,743

 
4.0
 %
 
67,871

Total
$
179,561

 
$
(10,067
)
 
(5.3
)%
 
$
189,628

 
$
(10,645
)
 
(5.3
)%
 
$
200,273

Selected operating expenses:
 
 
 
 
 
 
 
 
 
 
 
 
 
Cost of revenue
$
30,649

 
$
(3,202
)
 
(9.5
)%
 
$
33,851

 
$
1,295

 
4.0
 %
 
$
32,556

Research and development
13,467

 
3,187

 
31.0
 %
 
10,280

 
779

 
8.2
 %
 
9,501

Service, rental and maintenance
32,734

 
(1,387
)
 
(4.1
)%
 
34,121

 
(1,863
)
 
(5.2
)%
 
35,984

Selling and marketing
24,768

 
(2,678
)
 
(9.8
)%
 
27,446

 
(2,567
)
 
(8.6
)%
 
30,013

General and administrative
41,381

 
(778
)
 
(1.8
)%
 
42,159

 
(3,737
)
 
(8.1
)%
 
45,896

Severance
1,446

 
(1,255
)
 
(46.5
)%
 
2,701

 
1,206

 
80.7
 %
 
1,495

Total
$
144,445

 
$
(6,113
)
 
(4.1
)%
 
$
150,558

 
$
(4,887
)
 
(3.1
)%
 
$
155,445

FTEs
587

 
(13
)
 
(2.2
)%
 
600

 
13

 
2.2
 %
 
587

Active transmitters
4,159

 
(84
)
 
(2.0
)%
 
4,243

 
(96
)
 
(2.2
)%
 
4,339

Revenue — Wireless
The table below details total wireless revenue for the periods stated:
Revenue - wireless
2016
 
Change
 
2015
 
Change
 
2014
(Dollars in thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
Paging revenue
$
105,048

 
$
(9,059
)
 
(7.9
)%
 
$
114,107

 
$
(11,094
)
 
(8.9
)%
 
$
125,201

Product and other revenue
4,542

 
(365
)
 
(7.4
)%
 
4,907

 
(2,294
)
 
(31.9
)%
 
7,201

Total wireless revenue
$
109,590

 
$
(9,424
)
 
(7.9
)%
 
$
119,014

 
$
(13,388
)
 
(10.1
)%
 
$
132,402

The decrease in wireless revenue during 2016 compared to both 2015 and 2014, respectively, reflects the decrease in demand for our wireless services. Paging revenue consists primarily of recurring fees associated with the provision of messaging services and fees for paging devices and is net of a provision for service credits. Product and other revenue reflects system sales, the sale of devices and charges for paging devices that are not returned and are net of anticipated credits.
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 by our competition.
As demand for one-way and two-way messaging has declined, we have developed or added service offerings such as encrypted paging and 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. 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.

26


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 the 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 information on our units in service by account size at specified dates:
 Account Size
As of December 31,
(Units in thousands)
2016
 
% of Total
 
2015
 
% of Total
 
2014
 
% of Total
1 to 100 Units(1)
105

 
9.5
%
 
123

 
10.5
%
 
145

 
11.5
%
101 to 1000 Units(1)
217

 
19.5
%
 
243

 
20.7
%
 
277

 
22.1
%
> 1000 Units(1)
789

 
71.0
%
 
807

 
68.8
%
 
834

 
66.4
%
Total units in service(1)
1,111

 
100.0
%
 
1,173

 
100.0
%
 
1,256

 
100.0
%
(1) 
All figures presented include both direct and indirect units in service.
The following table sets forth information on the net disconnect rate by account size for our customers for the periods stated:
 
For the Year Ended
Account Size
2016
 
2015
 
2014
1 to 100 Units
(14.7
)%
 
(15.0
)%
 
(17.7
)%
101 to 1000 Units
(10.5
)%
 
(12.4
)%
 
(8.2
)%
> 1000 Units
(2.3
)%
 
(3.3
)%
 
(7.1
)%
Total net unit loss %
(5.3
)%
 
(6.6
)%
 
(8.7
)%
(1) 
All figures presented include both direct and indirect units in service.
The following table sets forth information on Average Revenue Per Unit ("ARPU") by account size for the periods stated:
 
For the Year Ended
Account Size
2016
 
2015
 
2014
1 to 100 Units
$
12.36

 
$
12.51

 
$
12.57

101 to 1000 Units
8.64

 
8.65

 
8.79

> 1000 Units
6.71

 
6.81

 
6.78

Total ARPU
$
7.67

 
$
7.83

 
$
7.93

(1) 
All figures presented include both direct and indirect units in service.
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 annual revenue to decline in line with recent trends. The decrease in consolidated ARPU for the year ended December 31, 2016 compared to the year ended December 31, 2015 and for the year ended December 31, 2015 compared to the year ended December 31, 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 will trend lower in 2017. ARPU may further be affected by lower prices for broad band wireless services offered by our competitors. Any price increases could mitigate, but not completely offset, the expected declines in both ARPU and revenue.

27


The following reflects the impact of subscribers and ARPU on the change in wireless revenue:
 
Units in Service As of December 31,
 
Revenue For the Year Ended December 31,
 
Change Due To:
 
2016
 
2015
 
Change
 
2016
 
2015
 
Change
 
ARPU
 
Units
 
(Units in thousands)
 
(Dollars in thousands)
Total
1,111

 
1,173

 
(62
)
 
$
105,048

 
$
114,107

 
$
(9,059
)
 
$
(1,886
)
 
$
(7,173
)
 
Units in Service as of December 31,
 
Revenue For the Year Ended December 31,
 
Change Due To:
 
2015
 
2014
 
Change
 
2015
 
2014
 
Change
 
ARPU
 
Units
 
(Units in thousands)
 
(Dollars in thousands)
Total
1,173

 
1,256

 
(83
)
 
$
114,107

 
$
125,201

 
$
(11,094
)
 
$
(1,236
)
 
$
(9,858
)
As previously discussed, demand for messaging services has declined over the past several years and we anticipate that it will continue to decline for the foreseeable future, which would result in reductions in wireless revenue due to the decreased number of subscribers and related units in service.
Revenue — Software
The table below details total revenue for software operations for the periods stated:
Revenue - software
2016
 
Change
 
2015
 
Change
 
2014
(Dollars in thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
Subscription
$
2,112

 
$
431

 
25.6
 %
 
$
1,681

 
$
198

 
13.4
 %
 
$
1,483

License
6,720

 
(3,076
)
 
(31.4
)%
 
9,796

 
(1,478
)
 
(13.1
)%
 
11,274

Services
18,594

 
(243
)
 
(1.3
)%
 
18,837

 
1,465

 
8.4
 %
 
17,372

Equipment
5,472

 
(401
)
 
(6.8
)%
 
5,873

 
(1,066
)
 
(15.4
)%
 
6,939

Operations revenue
32,898

 
(3,289
)
 
(9.1
)%
 
36,187

 
(881
)
 
(2.4
)%
 
37,068

Maintenance revenue
37,073

 
2,646

 
7.7
 %
 
34,427

 
3,624

 
11.8
 %
 
30,803

Total revenue
$
69,971

 
$
(643
)
 
(0.9
)%
 
$
70,614

 
$
2,743

 
4.0
 %
 
$
67,871

The decrease in software operations revenue during 2016 when compared to 2015 primarily reflects a decrease in the number and size of projects completed during 2016 as compared to the same period in 2015. Starting in late 2015, we began a reorganization of the sales staff and related sales territories, which realigned territories and replaced lower performing sales employees with new staff. The decrease in operational bookings during 2015 and 2016 also factored into the decrease in operational revenue for the same period. The decrease in operations revenue during 2015 when compared to 2014 primarily reflects lower sales of software to new customers which was reflected in the decrease in license revenue.
The continued increase in maintenance revenue for each of the periods stated reflects our continuing success in renewals of our maintenance support for existing software solutions and in maintenance support for sales of new solutions. The maintenance renewal rates for the year ended December 31, 2016, 2015 and 2014 were in excess of 99%. We achieve very high maintenance renewal rates compared to many companies that have software offerings, and we may experience a downward trend in maintenance renewal as communications technology and services continue to advance, and customers have more choices and opportunities to shift to newer solutions for their communication and work flow needs.
Our software revenue is dependent on the conversion of our software bookings into revenues. 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 of existing solutions. These contractual arrangements are reported as bookings and represent future revenue.

28


The following table summarizes total bookings for the periods stated:
Bookings
2016
 
Change
 
2015
 
Change
 
2014
(Dollars in thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
Operations and new maintenance orders
$
33,598

 
$
(4,979
)
 
(12.9
)%
 
$
38,577

 
$
(6,548
)
 
(14.5
)%
 
$
45,125

Maintenance and subscription renewals
40,256

 
4,810

 
13.6
 %
 
35,446

 
2,057

 
6.2
 %
 
33,389

Total bookings
$
73,854

 
$
(169
)
 
(0.2
)%
 
$
74,023

 
$
(4,491
)
 
(5.7
)%
 
$
78,514

The decrease in bookings during 2016 when compared to 2015 primarily reflects a decrease in the number of new operations orders and new maintenance orders from fewer new installations, partially offset by the continued success of maintenance and subscription renewals. Starting in late 2015, the Company undertook a reorganization of the sales staff and related sales territories. As part of that reorganization, the Company has replaced lower performing sales employees with new staff. The Company is unable to predict the impact of this reorganization on the level and timing of future software operations bookings. The Company is also migrating its sales focus from individual software solutions to its integrated solution portfolio. The change in sales focus has impacted bookings as the focus on the integrated solution portfolio requires a longer sales cycle to achieve completion. The maintenance bookings continue to reflect a strong renewal rate in excess of 99%.
Operations and new orders in 2014 reflect $6.7 million of one-time bookings for a U.S. government entity which is the primary reason for the decrease in bookings during 2015 when compared to 2014. Excluding the one-time booking, operations and new maintenance orders remained relatively flat while maintenance and subscription renewals continued to reflect a strong renewal rate in excess of 99%.
The following table summarizes backlog for the periods stated:
 
For the Year Ended December 31,
Backlog
2016
 
2015
 
2014
 
(Dollars in thousands)
Beginning balance
$
38,650

 
$
42,391

 
$
40,211

Operations bookings
33,598

 
38,577

 
45,125

Maintenance and subscription renewals
40,256

 
35,446

 
33,389

Available backlog
$
112,504

 
$
116,414

 
$
118,725

Operations revenue
(32,898
)
 
(36,187
)
 
(37,068
)
Maintenance revenue
(37,073
)
 
(34,427
)
 
(30,803
)
Other(1) 
(4,238
)
 
(7,150
)
 
(8,463
)
Ending balance
$
38,295

 
$
38,650

 
$
42,391

Change in backlog
(0.9
)%
 
(8.8
)%
 
5.4
%
(1) 
Other reflects cancellations and adjustments to backlog.

We reported a software backlog of $38.3 million at December 31, 2016 which represented all orders received from customers not yet recognized as revenue. We continually review our backlog and adjust the balance to reflect the expected amount and timing of customer implementations. Refer to the discussion on revenue and bookings for explanations of the changes in backlog for the periods ending December 31, 2016, 2015 and 2014.

29


Operating Expenses
Operating expenses
2016
 
Change
 
2015
 
Change
 
2014
(Dollars in thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
Cost of revenue
$
30,649

 
$
(3,202
)
 
(9.5
)%
 
$
33,851

 
$
1,295

 
4.0
 %
 
$
32,556

Research and development
13,467

 
3,187

 
31.0
 %
 
10,280

 
779

 
8.2
 %
 
9,501

Service, rental and maintenance
32,734

 
(1,387
)
 
(4.1
)%
 
34,121

 
(1,863
)
 
(5.2
)%
 
35,984

Selling and marketing
24,768

 
(2,678
)
 
(9.8
)%
 
27,446

 
(2,567
)
 
(8.6
)%
 
30,013

General and administrative
41,381

 
(778
)
 
(1.8
)%
 
42,159

 
(3,737
)
 
(8.1
)%
 
45,896

Severance
1,446

 
(1,255
)
 
(46.5
)%
 
2,701

 
1,206

 
80.7
 %
 
1,495

Total
$
144,445

 
$
(6,113
)
 
(4.1
)%
 
$
150,558

 
$
(4,887
)
 
(3.1
)%
 
$
155,445

FTEs
587

 
(13
)
 
(2.2
)%
 
600

 
13

 
2.2
 %
 
587

Cost of revenue. Cost of revenue consisted primarily of the following items:
Cost of revenue
2016
 
Change
 
2015
 
Change
 
2014
(Dollars in thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
Payroll and related
$
18,119

 
$
998

 
5.8
 %
 
$
17,121

 
$
1,370

 
8.7
 %
 
$
15,751

Cost of sales
9,689

 
(3,184
)
 
(24.7
)%
 
12,873

 
401

 
3.2
 %
 
12,472

Stock based compensation
56

 
(78
)
 
(58.2
)%
 
134

 
(217
)
 
(61.8
)%
 
351

Other
2,785

 
(938
)
 
(25.2
)%
 
3,723

 
(259
)
 
(6.5
)%
 
3,982

Total cost of revenue
$
30,649

 
$
(3,202
)
 
(9.5
)%
 
$
33,851

 
$
1,295

 
4.0
 %
 
$
32,556

FTEs
181

 
(10
)
 
(5.2
)%
 
191

 
12

 
6.7
 %
 
179

As illustrated in the table above, cost of revenue expense decreased $3.2 million for the year ended December 31, 2016 compared to the year ended December 31, 2015 and increased $1.3 million for the year ended December 31, 2015 compared to the year ended December 31, 2014 primarily due to the following significant components and variances:
Payroll and related — Payroll and related expenses were incurred largely for maintenance, support and service personnel. While there was a decrease of 10 FTEs for the year ended December 31, 2016 compared to the same period in 2015, payroll and related expenses increased by $1.0 million due primarily to the timing of hiring and departures and an increase in the average cost per employee. The increase of $1.4 million in payroll and related expenses for the year ended December 31, 2015 compare to the same period in 2014 was due primarily to an increase of 12 FTEs and by an increase in the average cost per employee.
Cost of sales — Cost of sales consisted primarily of third party software, use of third party resources for software implementation related work, inventory and maintenance of third party products. For the year ended December 31, 2016 compared to the same period in 2015 cost of sales decreased by $3.2 million due primarily to a decrease in the sale of third party software, less use of third party resources for software implementation related work, a reduction in billable travel costs and a one-time charge of $0.8 million related to adjustments made to our inventory balances in 2015. The increase of $0.4 million in cost of sales for the year ended December 31, 2015 compared to the same period in 2014 was due primarily to charges related to missing or obsolete inventory in the second quarter of 2015, which was partially off-set by lower third-party professional services related to the implementation of software sales orders.
Stock based compensation — Stock based compensation expenses consisted primarily of amortization of compensation expense associated with restricted stock units (“RSUs”) granted to certain eligible employees. For the year ended December 31, 2016 compared to the same period in 2015 stock based compensation expense decreased by $0.1 million due primarily to the reversal of stock compensation expense partially offset by the issuance and amortization of the 2016 grants under the 2015 LTIP. The decrease of $0.2 million in stock based compensation expense for the year ended December 31, 2015 compare to the same period in 2014 was due primarily to lower amortization of compensation expense for awards under the 2015 Long-Term Incentive Plan ("LTIP"). (See Note 7, "Stockholders' Equity").
Other — Other expenses consisted primarily of repairs and maintenance, shipping, outside services and travel costs. For the year ended December 31, 2016 compared to the same period in 2015 other expenses decreased by $0.9 million due primarily to a reduction in outside services, shipping expenses, repairs and maintenance and travel costs. The decrease of $0.3 million in other expenses for the year ended December 31, 2015 compared to the same period in 2014 was due primarily to a decrease in outside services, repairs and maintenance and travel costs.

30


Research and development. We intend to substantially increase our research and development efforts associated with our software solutions due to its importance to our continued success. The Company is investing in the development of products in the areas of: 1) mobility, 2) a unified software platform, 3) nursing solutions, and 4) alerting. The Company plans to continue to increase its staffing to develop its integrated communications solution portfolio. This increase in staffing will substantially impact margins and our cash flow from operations as the benefits from this development effort will not immediately be realized for at least three years. Based on this emphasis we expect the number of FTEs to increase in this area, substantially impacting future payroll and related expenses. Research and development consisted primarily of the following items:
Research and development
2016
 
Change
 
2015
 
Change
 
2014
(Dollars in thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
Payroll and related
$
10,941

 
$
3,195

 
41.2
 %
 
$
7,746

 
$
718

 
10.2
 %
 
$
7,028

Outside services
2,088

 
55

 
2.7
 %
 
2,033

 
17

 
0.8
 %
 
2,016

Stock based compensation
52

 
(34
)
 
(39.5
)%
 
86

 
(4
)
 
(4.4
)%
 
90

Other
386

 
(29
)
 
(7.0
)%
 
415

 
48

 
13.1
 %
 
367

Total research and development
$
13,467

 
$
3,187

 
31.0
 %
 
$
10,280

 
$
779

 
8.2
 %
 
$
9,501

FTEs
88

 
28

 
46.7
 %
 
60

 
7

 
13.2
 %
 
53

As illustrated in the table above, research and development expense increased $3.2 million for the year ended December 31, 2016 compared to the year ended December 31, 2015 and increased $0.8 million for the year ended December 31, 2015 compared to the year ended December 31, 2014 primarily due to the following significant components and variances:
Payroll and related — Payroll and related expenses were incurred largely for product development personnel. For the year ended December 31, 2016 compared to the same period in 2015 payroll and related expenses increased by $3.2 million due primarily to an increase of 28 FTEs and an increase in the average cost per employee. The increase of $0.7 million in payroll and related expenses for the year ended December 31, 2015 compare to the same period in 2014 was due primarily to an increase of 7 FTEs and an increase in the average cost per employee.
Outside services — Outside services consisted primarily of third party developers. For the years ended December 31, 2016 and 2015 compared to the same period in 2015 and 2014 outside services remained relatively flat.
Stock based compensation — Stock based compensation expenses consisted primarily of amortization of compensation expense associated with RSUs granted to certain eligible employees. For the years ended December 31, 2016 and 2015 compared to the same period in 2015 and 2014 stock based compensation expense remained relatively flat. (See Note 7, "Stockholders' Equity").
Other — Other expenses consisted primarily of travel and office expenses. For the years ended December 31, 2016 and 2015 compared to the same period in 2015 and 2014 other expenses remained relatively flat.

31


Service, rental and maintenance. Service, rental and maintenance consisted primarily of the following items:
Service, rental and maintenance
2016
 
Change
 
2015
 
Change
 
2014
(Dollars in thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
Payroll and related
$
10,724

 
$
(164
)
 
(1.5
)%
 
$
10,888

 
$
249

 
2.3
 %
 
$
10,639

Site rent
14,572

 
(404
)
 
(2.7
)%
 
14,976

 
(769
)
 
(4.9
)%
 
15,745

Telecommunications
4,569

 
(674
)
 
(12.9
)%
 
5,243

 
(1,120
)
 
(17.6
)%
 
6,363

Stock based compensation
13

 
(16
)
 
(55.2
)%
 
29

 
11

 
61.1
 %
 
18

Other
2,856

 
(129
)
 
(4.3
)%
 
2,985

 
(234
)
 
(7.3
)%
 
3,219

Total service, rental and maintenance
$
32,734

 
$
(1,387
)
 
(4.1
)%
 
$
34,121

 
$
(1,863
)
 
(5.2
)%
 
$
35,984

FTEs
97

 
(1
)
 
(1.0
)%
 
98

 
(1
)
 
(1.0
)%
 
99

As illustrated in the table above, service, rental and maintenance expense decreased $1.4 million for the year ended December 31, 2016 compared to the year ended December 31, 2015 and decreased $1.9 million for the year ended December 31, 2015 compared to the year ended December 31, 2014 primarily due to the following significant components and variances:
Payroll and related — Payroll and related expenses were incurred largely for field technicians, their managers, in-house repair personnel and quality assurance personnel. For the year ended December 31, 2016 compared to the same period in 2015 payroll and related expenses decreased by $0.2 million due primarily to a decrease of 1 FTE partially offset by an increase in the average cost per employee. The increase of $0.2 million in payroll and related expenses for the year ended December 31, 2015 compared to the same period in 2014 was due primarily to a decrease of 1 FTE offset by an increase in the average cost per employee.
Site rent — Site rent expenses consisted primarily of rent for transmitter locations used in our paging network. For the year ended December 31, 2016 compared to the same period in 2015 and for the year ended December 31, 2015 compared to the same period in 2014, site rent expenses decreased by $0.4 million and $0.8 million, respectively, due primarily to the rationalization of our networks, which has decreased the number of transmitters required to provide service to our customers. The reduction in transmitters has, in turn, reduced the number of lease locations. The number of active transmitters declined 2.0% from December 31, 2015 to December 31, 2016 and 2.2% from December 31, 2014 to December 31, 2015.
Telecommunications — Telecommunications expenses consisted primarily of expenses 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. For the year ended December 31, 2016 compared to the same period in 2015 and for the year ended December 31, 2015 compared to the same period in 2014, telecommunications expenses decreased by $0.7 million and $1.1 million, respectively, due to the consolidation of our networks. We believe continued reductions in these expenses will occur as our networks continue to be consolidated for the foreseeable future.
Stock based compensation — Stock based compensation expenses consisted primarily of amortization of compensation expense associated with RSUs granted to certain eligible employees. For the year ended December 31, 2016 and 2015 compared to the same period in 2015 and 2014 stock based compensation expense remained relatively flat. (See Note 7, "Stockholders' Equity").
Other — Other expenses consisted primarily of repairs and maintenance and outside services and includes management of these expenses to reflect the continued transition to support the growth in software revenue. For the year ended December 31, 2016 compared to the same period in 2015 other expenses decreased by $0.1 million due primarily to repairs and maintenance. The decrease of $0.2 million in other expenses for the year ended December 31, 2015 compared to the same period in 2014 was due primarily to a reclassification of expenses to other functional categories.

32


Selling and marketing. Selling and marketing consisted primarily of the following items:
Selling and marketing
2016
 
Change
 
2015
 
Change
 
2014
(Dollars in thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
Payroll and related
$
14,252

 
$
(841
)
 
(5.6
)%
 
$
15,093

 
$
(908
)
 
(5.7
)%
 
$
16,001

Commissions
5,649

 
(1,590
)
 
(22.0
)%
 
7,239

 
(1,230
)
 
(14.5
)%
 
8,469

Stock based compensation
67

 
(44
)
 
(39.6
)%
 
111

 
(433
)
 
(79.6
)%
 
544

Other
4,800

 
(203
)
 
(4.1
)%
 
5,003

 
4

 
0.1
 %
 
4,999

Total selling and marketing
$
24,768

 
$
(2,678
)
 
(9.8
)%
 
$
27,446

 
$
(2,567
)
 
(8.6
)%
 
$
30,013

FTEs
107

 
(23
)
 
(17.7
)%
 
130

 
6

 
4.8
 %
 
124

As illustrated in the table above, selling and marketing expense decreased $2.7 million for the year ended December 31, 2016 compared to the year ended December 31, 2015 and decreased $2.6 million for the year ended December 31, 2015 compared to the year ended December 31, 2014 primarily due to the following significant components and variances:
Payroll and related — Payroll and related expenses were incurred largely for sales and marketing personnel. For the year ended December 31, 2016 compared to the same period in 2015 payroll and related expenses decreased by $0.8 million due primarily to a decrease of 23 FTEs, predominately related to the reorganization of our sales staff and related sales territories, partially offset by an increase in the average cost per employee. This decrease in FTEs reflects the reorganization of the sales staff, which includes the replacement of underperforming sales employees. While there was an increase of 6 FTEs for the year ended December 31, 2015 compared to the same period in 2014, the average headcount outstanding for 2015 was lower by approximately 16 FTEs compared to the same period in 2014. The decrease of $0.9 million in payroll and related expenses in 2015 was due primarily to the lower average headcount, partially offset by an increase in the average cost per employee.
Commissions — Commissions expense relates to the payments made to the sales representatives responsible for executing contracts. Commissions are expensed as projects are implemented and are impacted by the level of software operations revenue. For the year ended December 31, 2016 compared to the same period in 2015 commissions expense decreased by $1.6 million due primarily to lower software operations revenue compared to the same period in the prior year and to a lesser extent due to the continued impact from the change in the commission plan incentives made in 2015. The decrease of $1.2 million in commissions expense for the year ended December 31, 2015 compared to the same period in 2014 was due primarily to the impact of a change in the commission plan incentives, which lowered the commission paid on the sale of certain products and to a lesser extent on lower software operations revenue in 2015.
Stock based compensation — Stock based compensation expenses consisted primarily of amortization of compensation expense associated with RSUs granted to certain eligible employees. For the year ended December 31, 2016 compared to the same period in 2015 stock based compensation expense remained relatively flat due primarily to the reversal of stock compensation expense partially offset by the issuance and amortization of the 2016 grants under the 2015 LTIP. The decrease of $0.4 million in stock based compensation expense for the year ended December 31, 2015 compare to the same period in 2014 was due primarily to lower amortization of compensation expense for awards under the 2015 LTIP. (See Note 7, "Stockholders' Equity").
Other — Other expenses consisted primarily of advertising, trade show, convention and related travel expenses and reflect our focus on identifying sales opportunities. For the year ended December 31, 2016 compared to the same period in 2015 other expenses decreased by $0.2 million due primarily to customer referral fees and an aggregate of smaller insignificant costs partially offset by higher advertising expenses in 2015. Other expenses remained relatively consistent for the year ended December 31, 2015 compared to the same period in 2014.

33


General and administrative. General and administrative consisted primarily of the following items:
General and administrative
2016
 
Change
 
2015
 
Change
 
2014
(Dollars in thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
Pa