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EX-32.2 - EXHIBIT 32.2 - Spok Holdings, Inca3q1710qex322.htm
EX-32.1 - EXHIBIT 32.1 - Spok Holdings, Inca3q1710qex321.htm
EX-31.2 - EXHIBIT 31.2 - Spok Holdings, Inca3q1710qex312.htm
EX-31.1 - EXHIBIT 31.1 - Spok Holdings, Inca3q1710qex311.htm
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
(Mark One)
x
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended September 30, 2017
 
¨
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)
N/A
(Former name, former address and former fiscal year if changed since last report)
 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth 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
¨
 
 
 
 
 
 
Emerging growth company
¨
 
 
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Securities Act.
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x
19,983,343 shares of the registrant’s common stock ($0.0001 par value per share) were outstanding as of October 20, 2017.
 




SPOK HOLDINGS, INC.
QUARTERLY REPORT ON FORM 10-Q
INDEX
 
 
Page  
PART I.
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
Item 2.
 
Item 3.
 
Item 4.
PART II.
 
 
Item 1.
 
Item 1A.
 
Item 2.
 
Item 6.
 




PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SPOK HOLDINGS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS 
(in thousands)
September 30, 2017
 
December 31, 2016
ASSETS
(Unaudited)
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
110,140

 
$
125,816

Accounts receivable, net
27,057

 
23,666

Prepaid expenses and other
6,637

 
4,384

Inventory
1,906

 
1,996

Total current assets
145,740

 
155,862

Non-current assets:
 
 
 
Property and equipment, net
13,706

 
12,818

Goodwill
133,031

 
133,031

Intangible assets, net
8,542

 
10,803

Deferred income tax assets
71,973

 
73,068

Other non-current assets
2,025

 
2,505

Total non-current assets
229,277

 
232,225

TOTAL ASSETS
$
375,017

 
$
388,087

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
3,023

 
$
1,909

Accrued compensation and benefits
13,577

 
13,268

Accrued dividends payable
365

 
5,140

Accrued taxes
2,668

 
4,132

Deferred revenue
30,159

 
29,145

Other current liabilities
2,185

 
2,733

Total current liabilities
51,977

 
56,327

Non-current liabilities:
 
 
 
Deferred revenue
1,051

 
752

Other non-current liabilities
8,620

 
8,921

Total non-current liabilities
9,671

 
9,673

TOTAL LIABILITIES
61,648

 
66,000

COMMITMENTS AND CONTINGENCIES


 


STOCKHOLDERS' EQUITY:
 
 
 
Preferred stock

 

Common stock
2

 
2

Additional paid-in capital
97,630

 
104,810

Retained earnings
215,737

 
217,275

TOTAL STOCKHOLDERS’ EQUITY
313,369

 
322,087

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
$
375,017

 
$
388,087

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

2



SPOK HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
 
 
For the Three Months Ended September 30,
 
For the Nine Months Ended September 30,
(Unaudited and in thousands except share and per share amounts)
 
2017
 
2016
 
2017
 
2016
Revenue:
 
 
 
 
 
 
 
 
Wireless
 
$
25,110

 
$
27,024

 
$
76,609

 
$
83,055

Software
 
18,526

 
18,331

 
50,796

 
52,322

Total revenue
 
43,636

 
45,355

 
127,405

 
135,377

Operating expenses:
 
 
 
 
 
 
 
 
Cost of revenue
 
7,069

 
7,639

 
21,295

 
23,167

Research and development
 
5,001

 
3,645

 
13,768

 
9,765

Service, rental and maintenance
 
7,875

 
8,253

 
23,885

 
24,745

Selling and marketing
 
5,533

 
5,955

 
16,784

 
18,912

General and administrative
 
12,058

 
10,605

 
35,706

 
31,551

Depreciation, amortization and accretion
 
2,775

 
3,229

 
8,849

 
9,787

Total operating expenses
 
40,311

 
39,326

 
120,287

 
117,927

Operating income
 
3,325

 
6,029

 
7,118

 
17,450

Interest income
 
214

 
67

 
490

 
176

Other income
 
359

 
85

 
415

 
443

Income before income tax expense
 
3,898

 
6,181

 
8,023

 
18,069

Income tax expense
 
(171
)
 
(2,123
)
 
(1,945
)
 
(7,116
)
Net income
 
$
3,727

 
$
4,058

 
$
6,078

 
$
10,953

Basic and diluted net income per common share
 
$
0.19

 
$
0.20

 
$
0.30

 
$
0.53

Basic weighted average common shares outstanding
 
19,977,263

 
20,541,275

 
20,285,240

 
20,604,905

Diluted weighted average common shares outstanding
 
20,008,321

 
20,541,275

 
20,362,774

 
20,604,905

Cash dividends declared per common share
 
$
0.125

 
$
0.125

 
$
0.375

 
$
0.375


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

3



SPOK HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 
 
For the Nine Months Ended September 30,
(Unaudited and in thousands)
 
2017
 
2016
Cash flows provided by operating activities:
 
 
 
 
Net income
 
$
6,078

 
$
10,953

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
Depreciation, amortization and accretion
 
8,849

 
9,787

Deferred income tax expense
 
1,118

 
6,188

Stock based compensation
 
2,815

 
2,067

Provision for doubtful accounts, service credits and other
 
767

 
648

Adjustment of non-cash transaction taxes
 
(754
)
 
(214
)
Changes in assets and liabilities:
 
 
 
 
Accounts receivable
 
(4,156
)
 
(1,389
)
Prepaid expenses, inventory, intangibles and other assets
 
(1,726
)
 
27

Accounts payable, accrued liabilities and other
 
(319
)
 
(1,738
)
Deferred revenue
 
1,313

 
3,109

Net cash provided by operating activities
 
13,985

 
29,438

Cash flows used in investing activities:
 
 
 
 
Purchase of property and equipment, net of proceeds from disposals of property and equipment
 
(7,034
)
 
(4,377
)
Net cash used in investing activities
 
(7,034
)
 
(4,377
)
Cash flows used in financing activities:
 
 
 
 
Cash distributions to stockholders
 
(12,733
)
 
(7,718
)
Purchase of common stock (including commissions), net of proceeds from issuance of common stock
 
(9,894
)
 
(6,214
)
Net cash used in financing activities
 
(22,627
)
 
(13,932
)
Net (decrease) increase in cash and cash equivalents
 
(15,676
)
 
11,129

Cash and cash equivalents, beginning of period
 
125,816

 
111,332

Cash and cash equivalents, end of period
 
$
110,140

 
$
122,461

Supplemental disclosure:
 
 
 
 
Income taxes paid
 
$
2,300

 
$
681


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

4

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


NOTE 1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Spok Holdings, Inc. (NASDAQ: SPOK) ("Spok" or the "Company") through its wholly-owned subsidiary Spok, Inc., is the global leader in healthcare communications. We deliver clinical information to care teams when and where it matters most to improve patient outcomes. Many hospitals rely on the Spok Care Connect platform 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.
We offer a focused suite of unified critical communication solutions that include call center operations, clinical alerting and notifications, one-way and advanced two-way wireless messaging services, mobile communications and public safety solutions.
We provide one-way and advanced two-way wireless messaging services including information services throughout the United States. These services are offered on a local, regional and nationwide basis employing digital networks. One-way messaging consists of numeric and alphanumeric messaging services. Numeric messaging services enable subscribers to receive messages that are composed entirely of numbers, such as a phone number, while alphanumeric messages may include numbers and letters, which enable subscribers to receive text messages. Two-way messaging services enable subscribers to send and receive messages to and from other wireless messaging devices, including pagers, mobile devices and personal computers. We also offer voice mail, personalized greeting, message storage and retrieval, and equipment loss and/or maintenance protection to both one-way and two-way messaging subscribers. These services are commonly referred to as wireless messaging and information services.
We also develop, sell and support enterprise-wide systems for hospitals and other organizations needing to automate, centralize and standardize mission critical communications. These solutions are used for contact centers, clinical alerting and notification, mobile communications and messaging and for public safety notifications. These areas of market focus complement the market focus of our wireless services outlined above. These products and services are commonly referred to as software solutions and services.
Basis of Presentation
The accompanying condensed consolidated financial statements include our accounts and the accounts of our wholly-owned direct and indirect subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. Our condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) and the rules and regulations of the United States Securities and Exchange Commission (the “SEC”). In management's opinion, the unaudited condensed consolidated financial statements include all adjustments and accruals that are necessary for a fair presentation of the results of all interim periods reported herein and all such adjustments are of a normal, recurring nature.
Amounts shown on the condensed consolidated statements of income within the operating expense categories of Cost of Revenue; Research and Development; Service, Rental and Maintenance; Selling and Marketing; and General and Administrative are recorded exclusive of depreciation, amortization and accretion. These items are shown separately on the condensed consolidated statements of income within operating expenses. Foreign currency translation adjustments were immaterial and are not presented separately in our condensed consolidated financial statements and consequently no statements of comprehensive income are presented.
Certain prior period amounts in the condensed consolidated financial statements have been reclassified to conform to the current period's presentation. These reclassifications had no effect on the reported results of operations or the statement of financial position. In the fourth quarter 2016, the Company concluded that it was appropriate to separately state those operating expenses related to research and development. Previously those expenses had been classified under the Service, Rental and Maintenance operating category. Corresponding reclassifications were made to the Condensed Consolidated Statements of Income for the three and nine months ended September 30, 2016. This change in classification has no effect on the previously reported Condensed Consolidated Statements of Income for any period.
The financial information included herein, other than the Condensed Consolidated Balance Sheet as of December 31, 2016, is unaudited. The Condensed Consolidated Balance Sheet at December 31, 2016 has been derived from, but does not include, all the disclosures contained in the audited consolidated financial statements as of and for the year ended December 31, 2016.
These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and accompanying notes included in the Company's Annual Report on Form 10-K for the year ended December 31, 2016 (the “2016 Annual Report”). The Condensed Consolidated Statements of Income for the interim periods presented are not necessarily indicative of the results that may be expected for a full year.

5

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


Use of Estimates
The preparation of these condensed consolidated financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosures. On an on-going basis, we evaluate estimates and assumptions, including, but not limited to, those related to the impairment of long-lived assets; intangible assets subject to amortization and goodwill; accounts receivable allowances; revenue recognition; depreciation expense; asset retirement obligations; severance and income taxes. We base our estimates on historical experience and various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
NOTE 2 - RISKS AND OTHER IMPORTANT FACTORS
See “Item 1A. Risk Factors” of Part II of this Quarterly Report on Form 10-Q (“Quarterly Report”) and "Item 1A. Risk Factors" of Part I of the 2016 Annual Report, which describes key risks associated with our operations and industry. 
NOTE 3 - RECENT AND PENDING ACCOUNTING STANDARDS
Revenue
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers. Since this ASU was issued, the FASB has issued several updates including ASU No. 2015-14 in July 2015 which delayed the effective date, ASU No. 2016-08 in March 2016 which updated guidance related to principal versus agent considerations, ASU No. 2016-10 in April 2016 which updated guidance related to the identification of performance obligations, ASU No. 2016-12 in May 2016 which updated guidance related to scope improvements and practical expedients and ASU No. 2016-20 which provided technical corrections and improvements but did not update guidance issued in prior updates. The effective date is January 1, 2018, and while early adoption to the original effective date of January 1, 2017 is permitted, we have elected not to early adopt.
ASU No. 2014-09 creates a five-step model that requires companies to exercise judgment when considering all relevant facts and circumstances in the determination of when and how revenue is recognized. The two permitted transition methods under the new standard are the full retrospective method, in which case the standard would be applied to each prior reporting period presented, or the modified retrospective method, in which case the cumulative effect of applying the standard would be recognized at the date of initial application. We have completed our review of the acceptable transition methods and have selected the modified retrospective approach. We currently estimate the modified retrospective approach may have a material impact on either deferred revenue or retained earnings in our 2018 consolidated financial statements as the potential impact is dependent upon the mix of products and services for contracts outstanding as of December 31, 2017.
We currently believe the standard will materially impact our revenue recognition on a going-forward basis once adopted. While we continue to assess the potential impacts of this standard, we currently believe that the most significant impact relates to our accounting for software license revenue. We expect software license revenue to generally be recognized when made available rather than over a combined service period or term period. Due to the nuances of certain contracts, the actual revenue recognition treatment required under the standard will be dependent on contract-specific terms and may vary in some instances from recognition at the time that software is made available to the customer.
Leases
In February 2016, the FASB issued ASU No. 2016-02, Leases. The new standard establishes a right of use (“ROU”) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than twelve months. Leases will be classified as either financing or operating with the classification affecting the pattern of expense recognition in the income statement.
ASU No. 2016-02 will be effective for fiscal years beginning on January 1, 2019, including the related interim periods and early adoption of the standard is permitted. A modified retrospective transition approach is required for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. While we are still evaluating the impact of the potential new standard on our consolidated financial statements, we expect that upon adoption we will recognize ROU assets and lease liabilities and that the amounts could be material.

6

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


Goodwill
In January 2017, the FASB issued ASU No. 2017-04, Intangibles - Goodwill and Other: Simplifying the Test for Goodwill Impairment. The new standard simplifies how an entity tests for goodwill by eliminating Step 2 from the goodwill impairment test. Step 2 measured a goodwill impairment loss by comparing the implied fair value of a reporting unit's goodwill with the carrying amount of that goodwill. By eliminating Step 2 an entity must now record an impairment to goodwill based on an analysis of the fair value of a reporting unit as compared to its carrying amount. An impairment charge is recognized for the amount that the carrying value exceeds the reporting unit's fair value.
ASU No. 2017-04 will be effective for fiscal years beginning on January 1, 2020, including interim periods within those fiscal years, and early adoption as of January 1, 2017 is permitted. All changes are to be accounted for on a prospective basis upon adoption. We do not believe adoption of ASU No. 2017-04 will have a material impact on our consolidated financial statements. We have not yet determined whether we will early adopt ASU No. 2017-04.
NOTE 4 - CONSOLIDATED FINANCIAL STATEMENT COMPONENTS
Prepaid Expenses and Other
Prepaid expenses and other consisted of the following as of the date stated:
(Dollars in thousands)
September 30, 2017
 
December 31, 2016
Prepaid repairs and maintenance
$
2,517

 
$
1,561

Prepaid commissions
1,622

 
594

Prepaid taxes
862

 
100

Other prepaid expenses
1,636

 
2,129

Total prepaid expenses and other
$
6,637

 
$
4,384

Depreciation, Amortization and Accretion
Depreciation, amortization and accretion expenses consisted of the following for the periods stated:
 
For the Three Months Ended September 30,
 
For the Nine Months Ended September 30,
(Dollars in thousands)
2017
 
2016
 
2017
 
2016
Depreciation
 
 
 
 
 
 
 
Leasehold improvements
$
50

 
$
47

 
$
175

 
$
145

Asset retirement costs
(97
)
 
(69
)
 
(292
)
 
(209
)
Paging and computer equipment
1,990

 
2,015

 
6,077

 
6,010

Furniture, fixtures and vehicles
66

 
73

 
207

 
221

Total depreciation
2,009

 
2,066

 
6,167

 
6,167

Amortization
625

 
1,007

 
2,261

 
3,153

Accretion
141

 
156

 
421

 
467

Total depreciation, amortization and accretion expense
$
2,775

 
$
3,229

 
$
8,849

 
$
9,787

Accounts Receivable, Net
Accounts receivable was recorded net of an allowance of $1.2 million and $1.1 million at September 30, 2017 and December 31, 2016, respectively.

7

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


Property and Equipment, Net
Property and equipment, net consisted of the following as of the date stated:
(Dollars in thousands)
Useful Life
(In Years)
 
September 30, 2017
 
December 31, 2016
Leasehold improvements
shorter of useful life or lease term
 
$
4,083

 
$
3,843

Asset retirement costs
1-5
 
3,289

 
3,263

Paging and computer equipment
1-5
 
112,827

 
113,175

Furniture, fixtures and vehicles
3-5
 
4,551

 
2,852

Total property and equipment

 
124,750

 
123,133

Accumulated depreciation

 
(111,044
)
 
(110,315
)
Total property and equipment, net

 
$
13,706

 
$
12,818

Other Current Liabilities
Other current liabilities consisted of the following as of the date stated:
(Dollars in thousands)
September 30, 2017
 
December 31, 2016
Accrued outside services
$
999

 
$
975

Accrued network costs
630

 
773

Accrued accounting and legal
277

 
467

Asset retirement obligations
235

 
85

Deferred rent and other
44

 
433

Total other current liabilities
$
2,185

 
$
2,733

Other Non-Current Liabilities
Other non-current liabilities consisted of the following as of the date stated:
(Dollars in thousands)
September 30, 2017
 
December 31, 2016
Asset retirement obligations
$
7,580

 
$
7,472

Deferred rent and other
872

 
942

Dividends payable
168

 
507

Total other non-current liabilities
$
8,620

 
$
8,921

NOTE 5 - INTANGIBLE ASSETS, NET
Intangible Assets
Amortizable intangible assets at September 30, 2017 related primarily to customer relationships that resulted from our acquisition of Amcom Software, Inc. in 2011. Such intangibles are being amortized over a period of ten years.
The net consolidated balance of intangible assets consisted of the following at September 30, 2017:
 
 
 
 
September 30, 2017
(Dollars in thousands)
 
Useful Life
(In Years)
 
Gross Carrying
Amount
 
Accumulated
Amortization
 
Net Balance
Customer relationships
 
10
 
$
25,002

 
$
(16,460
)
 
$
8,542

Total amortizable intangible assets
 
10
 
$
25,002

 
$
(16,460
)
 
$
8,542


8

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


Estimated amortization of intangible assets for future periods was as follows:
 
(Dollars in thousands)
For the remaining three months ending December 31, 2017
$
625

For the year ending December 31:
 
2018
2,500

2019
2,500

2020
2,500

2021
417

Total amortizable intangible assets
$
8,542

NOTE 6 - ASSET RETIREMENT OBLIGATIONS
The components of the changes in the asset retirement obligation liabilities were:
(Dollars in thousands)
 
Short-Term
Portion
 
Long-Term
Portion
 
Total
Balance at January 1, 2017
 
$
85

 
$
7,472

 
$
7,557

Accretion
 
6

 
415

 
421

Amounts paid
 
(189
)
 

 
(189
)
Asset additions recorded, net
 

 
26

 
26

Reclassifications
 
333

 
(333
)
 

Balance at September 30, 2017
 
$
235

 
$
7,580

 
$
7,815

The balances above were included within other current liabilities and other non-current liabilities, respectively, at September 30, 2017.
Increases and reductions other than accretion, reclassification and amounts paid primarily relate to changes in estimate of the underlying liability, specifically as it relates to updates in estimated costs to remove a transmitter and the estimated timing of removal. The cost associated with the estimated removal costs and timing refinements due to ongoing network rationalization activities is expected to accrete to a total liability of $9.0 million. The total estimated liability is based on the transmitter locations remaining after we have consolidated the number of networks we operate and assume the underlying leases continue to be renewed to that future date.
Accretion expense was $0.4 million and $0.5 million for the nine months ended September 30, 2017 and 2016, respectively. Accretion expense related solely to asset retirement obligations and was recorded based on the interest method.
NOTE 7 - STOCKHOLDERS' EQUITY
General
Our authorized capital stock consists of 75 million shares of common stock, par value $0.0001 per share, and 25 million shares of preferred stock, par value $0.0001 per share.
At September 30, 2017 and December 31, 2016, we had no stock options outstanding.
At September 30, 2017 and December 31, 2016, there were 19,977,318 and 20,525,614 shares of common stock outstanding, respectively, and no shares of preferred stock outstanding.

9

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


Changes in Stockholders' Equity
Changes in stockholders’ equity for the nine months ended September 30, 2017 consisted of the following:
 
(Dollars in thousands)
Balance at January 1, 2017
$
322,087

Net income for the nine months ended September 30, 2017
6,078

Cash dividends declared
(7,776
)
Common stock repurchase program
(10,024
)
Amortization of stock based compensation
2,815

Other
189

Balance at September 30, 2017
$
313,369

Dividends
The following table details our cash dividend payments made in 2017. Cash dividends paid as disclosed in the condensed consolidated statements of cash flows for the nine months ended September 30, 2017 and 2016 include previously declared cash dividends on shares of vested restricted common stock ("restricted stock") issued to our non-executive directors and dividends related to vested restricted stock units ("RSUs") issued to eligible employees. Cash dividends on RSUs and restricted stock have been accrued and are paid when the applicable vesting conditions are met. Accrued cash dividends on forfeited restricted stock and RSUs are also forfeited.
Declaration Date
 
Record Date
 
Payment Date
 
Per Share Amount
 
Total Payment(1)
 
 
 
 
 
 
 
 
(Dollars in thousands)
December 20, 2016
 
January 4, 2017
 
January 17, 2017
 
$
0.250

 
$
5,128

March 1, 2017
 
March 17, 2017
 
March 30, 2017
 
0.125

 
2,566

April 26, 2017
 
May 23, 2017
 
June 23, 2017
 
0.125

 
2,545

July 26, 2017
 
August 18, 2017
 
September 8, 2017
 
0.125

 
2,494

 
 
Total
 
 
 
$
0.625

 
$
12,733

(1) The total payment reflects the cash dividends paid in relation to common stock and vested restricted stock.
On October 25, 2017, our Board of Directors declared a regular quarterly cash dividend of $0.125 per share of common stock with a record date of November 17, 2017, and a payment date of December 8, 2017. This cash dividend of approximately $2.5 million will be paid from available cash on hand.
Common Stock Repurchase Program
On April 26, 2017, the Company's Board of Directors authorized the repurchase of up to $10.0 million of the Company's common stock through 2017 on the open market or in privately negotiated transactions. The Company used the entire $10.0 million of repurchase authority by June 30, 2017. The following table presents information with respect to purchases made by the Company during the nine months ended September 30, 2017:
Period
 
Total Number of Shares Purchased
 
Average Price Paid Per Share
 
Total Number of Shares Purchased as Part of the Publicly Announced Plans or Programs
 
Approximate Dollar Value of Shares That May Yet Be Purchased Under the Publicly Announced Plans or Programs
 
 
 
 
 
 
 
 
(Dollars in thousands)
Beginning Balance
 

 

 

 
$
10,000

Three Months Ended June 30, 2017
 
572,550

 
17.47

 
572,550

 

Total
 
572,550

 
$
17.47

 
572,550

 
 


10

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


Net Income per Common Share
Basic net income per common share is computed on the basis of the weighted average common shares outstanding. Diluted net income per common share is computed on the basis of the weighted average common shares outstanding plus the effect of all potentially dilutive common shares including outstanding restricted stock and RSUs, which are treated as contingently issuable shares, using the “treasury stock” method.
The Company has determined, based on the provisions of the 2015 Long-Term Incentive Plan ("2015 LTIP"), that unvested RSUs do not currently meet, nor have they met since issuance, the criteria to be considered dilutive. Therefore, we have excluded them from the calculation of both diluted net income per common share as well as the diluted weighted average shares of common stock and common stock equivalents for the three and nine months ended September 30, 2017 and removed them from the comparative information for the three and nine months ended September 30, 2016. This correction is immaterial to our financial statements and corresponding disclosures.
Our third quarter 2017 interim Condensed Consolidated Financial Statements reflect this determination within the calculation of basic and diluted weighted average shares outstanding and earnings per share for the three and nine months ended September 30, 2017 and 2016.
We assessed the materiality of these changes on our 2016 financial statements in accordance with SEC Staff Accounting Bulletin ("SAB") No. 99, Materiality, codified in Accounting Standards Codification ("ASC") 250, Presentation of Financial Statements, and concluded that they were not material to any prior annual or interim periods. We have corrected the third quarter 2016 by revising the third quarter 2016 interim condensed consolidated financial statements and other financial information included herein. Future periods will be revised, as applicable.
The components of basic and diluted net income per common share were as follows for the periods stated:
 
For the Three Months Ended September 30,
 
For the Nine Months Ended September 30,
(in thousands, except for share and per share amounts)
2017
 
2016
 
2017
 
2016
Numerator:
 
 
 
 
 
 
 
Net income
$
3,727

 
$
4,058

 
$
6,078

 
$
10,953

 
 
 
 
 
 
 
 
Denominator:
 
 
 
 
 
 
 
Weighted average shares used to compute net income per common share - basic
19,977,263

 
20,541,275

 
20,285,240

 
20,604,905

Weighted average shares used to compute net income per common share - diluted
20,008,321

 
20,541,275

 
20,362,774

 
20,604,905

Basic and diluted net income per common share
$
0.19

 
$
0.20

 
$
0.30

 
$
0.53

Spok Holdings, Inc. Equity Incentive Award Plan
The following table summarizes the activities under the 2012 Equity Incentive Award Plan ("2012 Equity Plan") from January 1, 2017 through September 30, 2017:
 
Activity
Total equity securities available at January 1, 2017
1,246,939

Less: 2015 performance-based LTIP RSUs awarded to eligible employees, net of forfeitures
87,594

Less: Time-based RSUs awarded to eligible employees (including 2017 LTIP), net of forfeitures
122,629

Less: Restricted stock awarded to non-executive members of the Board of Directors
15,271

Total equity securities available at September 30, 2017
1,021,445


11

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


On July 24, 2017 the Company's stockholders approved an amendment to our 2012 Equity Plan to: (i) expand the list of performance criteria that may be used for purposes of granting performance awards under the 2012 Equity Plan, and (ii) limit the annual value awards that may be granted to the Company's non-employee directors to $750,000 per year, subject to limited exceptions as described in the amendment. The approval of the amendment was intended to satisfy the stockholder approval requirements under Section 162(m) of the Internal Revenue Code.
2015 Long Term Incentive Plan. On December 9, 2014, our Board of Directors adopted the 2015 LTIP (which provides for a 36-month vesting period) that included a stock component in the form of RSUs. Under this incentive program, RSUs will be granted to eligible employees annually and each annual grant will generally vest over a three-year service period. Each annual grant includes performance metrics required to be met for vesting purposes, as established by the Board of Directors. Our Board of Directors also approved that future cash dividends related to the RSUs will be set aside and paid in cash to each eligible employee when the RSUs are converted into shares of common stock. RSUs would be converted into shares of common stock on the earlier of a change in control of the Company (as defined in the 2015 LTIP) or on or after the third business day following the day that we file the Annual Report on Form 10-K with the SEC for the grant's final vesting year, but in no event later than December 31 of the year following the vesting date if the pre-established performance conditions are achieved. Any unvested RSUs awarded under the 2015 LTIP and the related cash dividends are forfeited if the participant terminates employment with the Company.
On January 2, 2015, our Board of Directors granted 254,777 RSUs with a grant date fair value of $4.4 million. An additional 6,123 RSUs were granted to eligible employees who were promoted or joined the Company during the twelve months ended December 31, 2015. On January 28, 2016, our Board of Directors issued a second grant of 227,082 RSUs with a grant date fair value of $3.8 million. An additional 7,629 RSUs were granted to eligible employees who were promoted or joined the Company during the twelve months ended December 31, 2016. On January 2, 2017, our Board of Directors issued a third grant of 108,428 RSUs with a grant date fair value of $2.2 million. An additional 10,039 RSUs were issued to eligible employees who were promoted or joined the Company during the nine months ended September 30, 2017. All issuances were made to eligible employees under the 2012 Equity Plan for the 2015 LTIP pursuant to a Restricted Stock Unit Agreement. Eligible employees have the opportunity to earn RSUs based upon continued employment with the Company and the achievement of performance goals established by our Board of Directors for our consolidated revenue and operating cash flows (as defined by the Company) during the period of January 1, 2015 through December 31, 2017 (“the 2015-2017 performance period”) for the 2015 grant, the period of January 1, 2016 through December 31, 2018 ("the 2016-2018 performance period") for the 2016 grant, and January 1, 2017 through December 31, 2019 ("the 2017-2019 performance period") for the 2017 grant, respectively. (For additional details regarding stock compensation refer to Note 9, "Stock Based Compensation".)
The following table details activities with respect to RSUs issued and outstanding under the 2015 LTIP for the nine months ended September 30, 2017:
 
Shares
 
Weighted-
Average Grant
Date Fair Value
 
Total Unrecognized Compensation Cost
(Dollars in thousands)
 
Weighted-Average
Period Over Which
Cost is Expected to
be Recognized
(In months)
Non-vested RSUs at January 1, 2017
451,493

 
$
17.10

 
 
 
 
Granted
118,467

 
20.52

 
 
 
 
Vested

 

 
 
 
 
Forfeited
(30,873
)
 
18.02

 
 
 
 
Non-vested RSUs at September 30, 2017
539,087

 
$
17.80

 
$
2,576

 
15

2017 Time Based Long Term Incentive Plan. On January 2, 2017, our Board of Directors granted 108,394 RSUs with a grant date fair value of $2.2 million. An additional 10,039 shares were issued to eligible employees who were promoted or joined the Company during the nine months ended September 30, 2017. Our Board of Directors also approved that future cash dividends related to the RSUs will be set aside and paid in cash to each eligible employee when the RSUs are converted into shares of common stock. These RSUs vest one third on December 31, 2017, December 31, 2018 and December 31, 2019. RSUs would be converted into shares of common stock on the earlier of a change in control of the Company (as defined in the 2012 Equity Plan) or on or after the first business day following the vesting date but in no event later than 60 days following the vesting date. Any unvested RSUs awarded under the 2017 time based grant and the related cash dividends are forfeited if the participant terminates employment with the Company. (For additional details regarding stock compensation refer to Note 9, "Stock Based Compensation".)

12

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


The following table details activities with respect to RSUs issued and outstanding under the 2017 time based LTIP grant for the nine months ended September 30, 2017:
 
Shares
 
Weighted- Average Grant Date Fair Value
 
Total Unrecognized Compensation Cost
(Dollars in thousands)
 
Weighted-Average Period Over Which Cost is Expected to be Recognized (In months)
Non-vested RSUs at January 1, 2017

 
$

 
 
 
 
Granted
118,433

 
20.52

 
 
 
 
Vested

 

 
 
 
 
Forfeited
(8,339
)
 
20.75

 
 
 
 
Non-vested RSUs at September 30, 2017
110,094

 
$
20.50

 
$
1,234

 
15
Employee Stock Purchase Plan. On July 25, 2016, our stockholders approved the registration with the SEC of 250,000 shares of common stock, to be issued from time to time in connection with purchases under the Spok Holdings, Inc. 2016 Employee Stock Purchase Plan ("ESPP"). Shares were first offered for purchase under the ESPP during the third quarter of 2016. Under the ESPP, eligible participants can voluntarily elect to have contributions withheld from their pay for the duration of an offering period, subject to the ESPP limits. At the end of an offering period, contributions will be used to purchase the Company's common stock at a discount to the market price based on the first or last day of the offering period, whichever is lower. Participants are required to hold common stock for a minimum period of two years from the grant date. Participants will begin earning dividends on shares after the purchase date. Each offering period will generally last for no longer than six months. Once an offering period begins, participants cannot adjust their withholding amount. If a participant chooses to withdraw, any previously withheld funds will be returned to the participant, with no stock purchased, and that participant will be eligible to participate in the ESPP at the next offering period. If the participant terminates employment with the Company during the offering period, all contributions will be returned to the employee and no stock will be purchased at a discounted rate.
No shares were purchased for the three months ended September 30, 2017 or during the corresponding period in 2016. For the nine months ended September 30, 2017, 8,983 shares of common stock were purchased for a total cost of $0.1 million. No shares were purchased during the corresponding time periods in 2016.
The following table summarizes the activities under the ESPP from January 1, 2017 through September 30, 2017:
 
Activity
Total ESPP equity securities available at January 1, 2017
246,039

Less: ESPP common stock purchased by eligible employees
8,983

Total ESPP securities available at September 30, 2017
237,056

Amounts withheld from participants will be classified as a liability on the balance sheet until funds are used to purchase shares. This liability amount is immaterial to the overall financial statements. (For additional details regarding stock compensation refer to Note 9, "Stock Based Compensation".)
NOTE 8 - INCOME TAXES
Spok files a consolidated U.S. Federal income tax return and income tax returns in various state, local and foreign jurisdictions as required.
At September 30, 2017, we had total deferred income tax assets ("DTAs") of $72.0 million and no valuation allowance. This reflects a change from the December 31, 2016 balance of DTAs of $73.1 million and no valuation allowance. The change from December 31, 2016 to September 30, 2017 reflects the expected usage of the DTAs to offset expected 2017 taxable income and changes in tax rates.
We consider both positive and negative evidence when evaluating the recoverability of our DTAs. The assessment is required to determine whether based on all available evidence, it is more likely than not (i.e., greater than a 50% probability) whether all or some portion of the DTAs will be realized in the future. During the fourth quarter of each year, we update our multi-year forecast of taxable income for our operations which assists in analyzing the recoverability of our DTAs.

13

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


The anticipated effective income tax rate is expected to continue to differ from the Federal statutory rate of 35% primarily due to the effect of state income taxes, research and development credits, permanent differences between book and taxable income and certain discrete items.
Our investment in research and development qualifies for the research and development income tax credit under Section 41 of the Internal Revenue code. Unused research and development tax credits have a 20-year carryover and will provide future tax benefits once Spok’s net operating losses are fully utilized. Of the total $1.3 million credit, $0.1 million relates to 2015, $0.3 million relates to 2016, and the remaining amount relates to 2017.
As of January 1, 2017, we had approximately $126 million of Federal Net Operating Losses ("NOLs") available to offset future taxable income.
NOTE 9 - STOCK BASED COMPENSATION
We record all stock-based awards, which consist of RSUs, restricted stock and the option to purchase common stock under the ESPP, at fair value as of the grant date. Stock based compensation expense is recognized based on a straight-line amortization basis over the respective service period. Forfeitures and withdrawals are accounted for on an as incurred basis.
The following table reflects the items for stock based compensation expense on the condensed consolidated statements of income for the periods stated:
 
For the Three Months Ended September 30,
 
For the Nine Months Ended September 30,
(Dollars in thousands)
2017
 
2016
 
2017
 
2016
2015 LTIP (performance-based)
$
388

 
$
584

 
$
1,385

 
$
1,737

Time-based awards (including 2017 LTIP)
358

 

 
1,073

 

ESPP
16

 
9

 
46

 
9

Board of Directors restricted stock
100

 
107

 
311

 
321

Total stock based compensation expense
$
862

 
$
700

 
$
2,815

 
$
2,067

In the fourth quarter of 2016 we determined that only 50% of the 2015 and 2016 grants made under the 2015 LTIP are expected to vest based on the related performance criteria and our assessment of the anticipated future performance applied to the performance criteria. As such, expenses listed in the table above reflect only the portion of grants and related expense that we anticipate will vest for those awards.
NOTE 10 - COMMITMENTS AND CONTINGENCIES
There have been no material changes during the nine months ended September 30, 2017 to the commitments and contingencies previously reported in the 2016 Annual Report.
NOTE 11 - RELATED PARTIES
A member of our Board of Directors also serves as a director for an entity that leases transmission tower sites to the Company. For the three months ended September 30, 2017 and 2016, we incurred site rent expenses of $0.9 million and $1.0 million, respectively, and for the nine months ended September 30, 2017 and 2016, we incurred site rent expenses of $2.9 million from the entity on which the individual serves as a director. Site rent expenses are included in service, rental and maintenance expenses.

14



ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-Looking Statements
This Quarterly Report contains forward-looking statements and information relating to Spok Holdings, Inc. and its subsidiaries (collectively, “we,” “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 those discussed below and under the captions “Business,” “Management’s Discussion and Analysis of Financial Condition and Statements of Income (“MD&A”),” and “Risk Factors” in our 2016 Annual Report. Should known or unknown risks or uncertainties materialize, known trends change, or underlying assumptions prove inaccurate, actual results or outcomes may differ materially from past results and those described herein as anticipated, believed, estimated, expected, intended, targeted or forecasted. Investors are cautioned not to place undue reliance on these forward-looking statements.
The Company undertakes no obligation to update forward-looking statements. Investors are advised to consult all further disclosures the Company makes in its subsequent reports on Form 10-Q and Form 8-K that it will file with the SEC. Also note that, in the risk factors disclosed in the Company’s 2016 Annual Report, the Company provides a cautionary discussion of risks, uncertainties and possibly inaccurate assumptions relevant to its business. These are factors that, individually or in the aggregate, could cause the Company’s actual results to differ materially from past results as well as those results that may be anticipated, believed, estimated, expected, intended, targeted or forecasted. It is not possible to predict or identify all such risk factors. Consequently, investors should not consider the risk factor discussion to be a complete discussion of all of the potential risks or uncertainties that could affect Spok's business, statement of income or financial condition, subsequent to the filing of this Quarterly Report.
Overview
The following MD&A is intended to help the reader understand the statements of income and financial position of Spok. This MD&A is provided as a supplement to, and should be read in conjunction with, our 2016 Annual Report and our unaudited condensed consolidated financial statements and accompanying notes. A reference to a “Note” in this section refers to the accompanying Unaudited Notes to Condensed Consolidated Financial Statements.
Spok, acting through its indirect wholly-owned operating subsidiary, Spok, Inc., delivers smart, reliable solutions to help protect the health, well-being and safety of people primarily in the United States. Organizations rely on Spok for workflow improvement, secure texting, paging services, contact center optimization and public safety response.
Business
See Note 1 to our Unaudited Notes to Condensed Consolidated Financial Statements of Part I of this Quarterly Report on Form 10-Q ("Quarterly Report") and "Item 1. Business" of Part I of the 2016 Annual Report, which describes our business in further detail.
Revenue
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.
We develop, sell and support enterprise-wide systems for healthcare, government, large enterprise 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.

15



Revenue generated by wireless messaging services (including voice mail, personalized greeting, message storage and retrieval) and equipment loss and/or maintenance protection for 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 subscription, software license, professional services (installation, consulting and training), equipment (to be used in conjunction with the software) and post-contract support (on-going maintenance), is presented as software revenue in our statements of income. Our software is licensed to end users under an industry standard software license agreement. For the nine months ended September 30, 2017 and 2016, wireless revenue represented approximately 60% and software revenue represented approximately 40% of our consolidated revenue.
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 (model number T5) and two-way (model number 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” in the 2016 Annual Report for more details.)
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.
The following tables present the wireless and software revenue by key market segments for the periods stated and illustrate the relative significance of these market segments to our operations.
Market Segment
For the Three Months Ended September 30, 2017
 
For the Three Months Ended September 30, 2016
(Dollars in thousands)
Wireless
 
Software
 
Total
 
% of Total
 
Wireless
 
Software
 
Total
 
% of Total
Healthcare
$
19,516

 
$
14,532

 
$
34,048

 
78.0
%
 
$
20,247

 
$
11,094

 
$
31,341

 
69.1
%
Government
1,461

 
1,601

 
3,062

 
7.0
%
 
1,658

 
1,964

 
3,622

 
8.0
%
Large Enterprise
1,913

 
405

 
2,318

 
5.3
%
 
2,303

 
726

 
3,029

 
6.7
%
Other(1)
2,220

 
1,988

 
4,208

 
9.7
%
 
2,816

 
4,547

 
7,363

 
16.2
%
Total
$
25,110

 
$
18,526

 
$
43,636

 
100.0
%
 
$
27,024

 
$
18,331

 
$
45,355

 
100.0
%
(1) Other includes hospitality, resort, indirect and billable travel revenue.
Market Segment
For the Nine Months Ended September 30, 2017
 
For the Nine Months Ended September 30, 2016
(Dollars in thousands)
Wireless
 
Software
 
Total
 
% of Total
 
Wireless
 
Software
 
Total
 
% of Total
Healthcare
$
59,004

 
$
36,561

 
$
95,565

 
75.0
%
 
$
61,788

 
$
32,550

 
$
94,338

 
69.7
%
Government
4,541

 
4,455

 
8,996

 
7.1
%
 
5,245

 
5,837

 
11,082

 
8.2
%
Large Enterprise
6,057

 
1,778

 
7,835

 
6.1
%
 
7,272

 
2,468

 
9,740

 
7.2
%
Other(1)
7,007

 
8,002

 
15,009

 
11.8
%
 
8,750

 
11,467

 
20,217

 
14.9
%
Total
$
76,609

 
$
50,796

 
$
127,405

 
100.0
%
 
$
83,055

 
$
52,322

 
$
135,377

 
100.0
%
(1) Other includes hospitality, resort, indirect and billable travel revenue.

16



Operating Expenses
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 associated with the delivery of our revenue, which consist primarily of 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 operating expenses to revenue on a regular basis. Even though the operating expenses are classified as previously described, expense control and management are also performed by expense category. Approximately 65% of the operating expenses referred to above were incurred in payroll and related expenses, site and facility rent expenses and telecommunication expenses for both the three and nine months ended September 30, 2017 and 2016.
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 599 full-time equivalent employees (“FTEs”) at September 30, 2017, an increase of 0.2% from 598 FTEs at September 30, 2016 and an increase of 2.0% from 587 FTEs at December 31, 2016.
We operate local, regional, and nationwide one-way and two-way paging networks. These networks each require locations on which to place transmitters, receivers, and antennae. Site rent expenses for transmitter locations are highly dependent on the number of transmitters, which in turn is dependent on the number of networks. In addition, these expenses generally do not vary directly with the number of subscribers or units in service, which is detrimental to our operating margins as wireless revenue declines. In order to reduce these expenses, we have an active program to consolidate the number of paging networks, and thus transmitter locations, which we refer to as network rationalization. We have reduced the number of active transmitters by 2.9% to 4,042 active transmitters at September 30, 2017 from 4,164 active transmitters at September 30, 2016 and by 2.8% from 4,159 active transmitters at December 31, 2016.
Telecommunication expenses are incurred to interconnect our paging networks and to provide telephone numbers for customer use, points of contact for customer service, and connectivity among our offices. These expenses are dependent on the number of units in service, the number of customers we support and the number of office and network locations that we maintain. The number or duration of telephone calls to call centers may vary from period to period based on factors other than the number of units in service or customers, which could cause telecommunication expenses to vary.
Stock based compensation includes expenses related to our Long Term Incentive Plan ("LTIP"), Employee Stock Purchase Plan ("ESPP") and restricted stock issued to the Board of Directors. In 2017, the Company determined for competitive and employee retention reasons the 2017 LTIP grant would consist of a performance based component and a time-based component (For additional details refer to Note 7, "Stockholders' Equity" and Note 9, "Stock Based Compensation".)

17



Statements of Income
Comparison of the Statements of Income Elements for the Three and Nine Months Ended September 30, 2017 and 2016
 
For the Three Months Ended September 30,
 
Change
 
For the Nine Months Ended September 30,
 
Change
(Dollars in thousands)
2017
 
2016
 
Total
 
%
 
2017
 
2016
 
Total
 
%
Revenue:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Wireless
$
25,110

 
$
27,024

 
$
(1,914
)
 
(7.1
)%
 
$
76,609

 
$
83,055

 
$
(6,446
)
 
(7.8
)%
Software
18,526

 
18,331

 
195

 
1.1
 %
 
50,796

 
52,322

 
(1,526
)
 
(2.9
)%
Total
$
43,636

 
$
45,355

 
$
(1,719
)
 
(3.8
)%
 
$
127,405

 
$
135,377

 
$
(7,972
)
 
(5.9
)%
Selected operating expenses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cost of revenue
$
7,069

 
$
7,639

 
$
(570
)
 
(7.5
)%
 
$
21,295

 
$
23,167

 
$
(1,872
)
 
(8.1
)%
Research and development
5,001

 
3,645

 
1,356

 
37.2
 %
 
13,768

 
9,765

 
4,003

 
41.0
 %
Service, rental and maintenance
7,875

 
8,253

 
(378
)
 
(4.6
)%
 
23,885

 
24,745

 
(860
)
 
(3.5
)%
Selling and marketing
5,533

 
5,955

 
(422
)
 
(7.1
)%
 
16,784

 
18,912

 
(2,128
)
 
(11.3
)%
General and administrative
12,058

 
10,605

 
1,453

 
13.7
 %
 
35,706

 
31,551

 
4,155

 
13.2
 %
Total
$
37,536

 
$
36,097

 
$
1,439

 
4.0
 %
 
$
111,438

 
$
108,140

 
$
3,298

 
3.0
 %
FTEs
599

 
598

 
1

 
0.2
 %
 
599

 
598

 
1

 
0.2
 %
Active transmitters
4,042

 
4,164

 
(122
)
 
(2.9
)%
 
4,042

 
4,164

 
(122
)
 
(2.9
)%
Revenue — Wireless
The table below details total wireless revenue for the periods stated:
 
For the Three Months Ended September 30,
 
Change
 
For the Nine Months Ended September 30,
 
Change
(Dollars in thousands)
2017
 
2016
 
Total
 
%
 
2017
 
2016
 
Total
 
%
Wireless revenue:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Paging revenue
$
24,128

 
$
25,944

 
$
(1,816
)
 
(7.0
)%
 
$
73,672

 
$
79,609

 
$
(5,937
)
 
(7.5
)%
Product and other revenue
982

 
1,080

 
(98
)
 
(9.1
)%
 
2,937

 
3,446

 
(509
)
 
(14.8
)%
Total wireless revenue
$
25,110

 
$
27,024

 
$
(1,914
)
 
(7.1
)%
 
$
76,609

 
$
83,055

 
$
(6,446
)
 
(7.8
)%
The decrease in wireless revenue for the three and nine months ended September 30, 2017 compared to the same periods in 2016 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 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.

18



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 September 30, 2017
 
As of June 30, 2017
 
As of September 30, 2016
(Units in thousands)
Units
 
% of Total
 
Units
 
% of Total
 
Units
 
% of Total
1 to 100 Units(1)
95

 
8.9
%
 
98

 
9.0
%
 
110

 
9.8
%
101 to 1000 Units(1)
201

 
18.9
%
 
204

 
18.8
%
 
222

 
19.8
%
> 1000 Units(1)
767

 
72.2
%
 
784

 
72.2
%
 
792

 
70.4
%
Total units in service(1)
1,063

 
100.0
%
 
1,086

 
100.0
%
 
1,124

 
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 Three Months Ended
Account Size
September 30, 2017
 
June 30, 2017
 
September 30, 2016
1 to 100 Units(1)
(2.8
)%
 
(3.7
)%
 
(3.5
)%
101 to 1000 Units(1)
(1.8
)%
 
(4.5
)%
 
(2.6
)%
> 1000 Units(1)
(2.2
)%
 
1.1
 %
 
(1.2
)%
Total net unit loss %(1)
(2.2
)%
 
(0.4
)%
 
(1.7
)%
(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 Three Months Ended
Account Size
September 30, 2017
 
June 30, 2017
 
September 30, 2016
1 to 100 Units(1)
$
12.23

 
$
12.16

 
$
12.34

101 to 1000 Units(1)
8.62

 
8.61

 
8.64

> 1000 Units(1)
6.59

 
6.64

 
6.68

Total ARPU(1)
$
7.48

 
$
7.52

 
$
7.63

(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 three months ended September 30, 2017 from the same period in 2016 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 for the remainder of 2017. Price increases could mitigate, but not completely offset, the expected declines in both ARPU and revenue.

19



The following reflects the impact of subscribers and ARPU on the change in wireless revenue:
 
 
Units in Service as of September 30,
 
Revenue for the Three Months Ended September 30,
 
Change Due To:
(in thousands)
 
2017
 
2016
 
Change
 
2017
 
2016
 
Change
 
ARPU
 
Units
Total
 
1,063

 
1,124

 
(61
)
 
$
24,128

 
$
25,944

 
$
(1,816
)
 
$
435

 
$
1,381

 
 
Units in Service as of September 30,
 
Revenue for the Nine Months Ended September 30,
 
Change Due To:
(in thousands)
 
2017
 
2016
 
Change
 
2017
 
2016
 
Change
 
ARPU
 
Units
Total
 
1,063

 
1,124

 
(61
)
 
$
73,672

 
79,609

 
$
(5,937
)
 
$
1,533

 
$
4,404

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 the components of software revenue for the periods stated:
 
For the Three Months Ended September 30,
 
Change
 
For the Nine Months Ended September 30,
 
Change
(Dollars in thousands)
2017
 
2016
 
Total
 
%
 
2017
 
2016
 
Total
 
%
Subscription
$
577

 
$
560

 
$
17

 
3.0
 %
 
$
1,744

 
$
1,561

 
$
183

 
11.7
 %
License
1,995

 
1,842

 
153

 
8.3
 %
 
4,807

 
5,126

 
(319
)
 
(6.2
)%
Services
5,189

 
5,578

 
(389
)
 
(7.0
)%
 
12,192

 
14,095

 
(1,903
)
 
(13.5
)%
Equipment
1,102

 
1,091

 
11

 
1.0
 %
 
3,202

 
4,070

 
(868
)
 
(21.3
)%
Operations revenue
8,863

 
9,071

 
(208
)
 
(2.3
)%
 
21,945

 
24,852

 
(2,907
)
 
(11.7
)%
Maintenance revenue
9,663

 
9,260

 
403

 
4.4
 %
 
28,851

 
27,470

 
1,381

 
5.0
 %
Total software revenue
$
18,526

 
$
18,331

 
$
195

 
1.1
 %
 
$
50,796

 
$
52,322

 
$
(1,526
)
 
(2.9
)%
The decrease in operations revenue primarily reflects a decrease in the number of projects completed during the three and nine months ended September 30, 2017 as compared to the same periods in 2016. The increase in maintenance revenue 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 revenue renewal rates for the three and nine months ended September 30, 2017 and 2016 were in excess of 99%.
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. Total bookings decreased by 1.8% for the three months ended September 30, 2017 as compared to the same period in 2016 and increased by 8.7% for the nine months ended September 30, 2017 as compared to the same period in 2016. Operations and new maintenance orders bookings increased by 6.3% and 16.9% for the three and nine months ended September 30, 2017 compared to the same periods in 2016. The increase in bookings for the nine months ended September 30, 2017 as compared to the same period in 2016 was primarily due to a strong first quarter in which average deal sizes were larger in 2017 as compared to 2016. The maintenance bookings continue to reflect a strong revenue renewal rate in excess of 99%. Maintenance and subscription renewals bookings decreased by 8.5% and increased by 2.0% for the three and nine months ended September 30, 2017, respectively, as compared to the same periods in 2016. The decrease in maintenance and subscription renewals bookings for the three months ended September 30, 2017 as compared to the same period in 2016 was primarily due to the timing of renewals.

20



The following table summarizes total bookings for the periods stated:
Bookings
 
For the Three Months Ended September 30,
 
For the Nine Months Ended September 30,
(Dollars in thousands)
 
2017
 
2016
 
2017
 
2016
Operations and new maintenance orders
 
$
8,999

 
$
8,469

 
$
28,379

 
$
24,274

Maintenance and subscription renewals
 
9,328

 
10,190

 
30,140

 
29,555

Total bookings
 
$
18,327

 
$
18,659

 
$
58,519

 
$
53,829

We reported a software backlog of $46.9 million at September 30, 2017, which represented all orders received from customers not yet recognized as revenue. We continually review our backlog and adjust the balance to reflect expected amount and timing of customer implementations.
Backlog
 
(Dollars in thousands)
Beginning balance at July 1, 2017
 
$
43,455

Operations bookings
 
8,999

Maintenance and subscription renewals
 
9,328

Available backlog
 
$
61,782

Operations revenue
 
(8,863
)
Maintenance revenue
 
(9,663
)
Other(1) 
 
3,644

Total backlog at September 30, 2017
 
$
46,900

(1) 
Other reflects cancellations and other adjustments to backlog.
Operating Expenses
Certain immaterial prior period amounts, within individual operating expense categories, have been reclassified to conform to the current period's presentation. These reclassifications had no effect on the reported results of operations nor did they have any effect on the total operating expense amounts they are a part of.
The following is a review of our operating expense categories for the three and nine months ended September 30, 2017 and 2016.
Operating expenses
For the Three Months Ended September 30,
 
Change
 
For the Nine Months Ended September 30,
 
Change
(Dollars in thousands)
2017
 
2016
 
Total
 
%
 
2017
 
2016
 
Total
 
%
Cost of revenue
$
7,069

 
$
7,639

 
$
(570
)
 
(7.5
)%
 
$
21,295

 
$
23,167

 
$
(1,872
)
 
(8.1
)%
Research and development
5,001

 
3,645

 
1,356

 
37.2
 %
 
13,768

 
9,765

 
4,003

 
41.0
 %
Service, rental and maintenance
7,875

 
8,253

 
(378
)
 
(4.6
)%
 
23,885

 
24,745

 
(860
)
 
(3.5
)%
Selling and marketing
5,533

 
5,955

 
(422
)
 
(7.1
)%
 
16,784

 
18,912

 
(2,128
)
 
(11.3
)%
General and administrative
12,058

 
10,605

 
1,453

 
13.7
 %
 
35,706

 
31,551

 
4,155

 
13.2
 %
Total
$
37,536

 
$
36,097

 
$
1,439

 
4.0
 %
 
$
111,438

 
$
108,140

 
$
3,298

 
3.0
 %
FTEs
599

 
598

 
1

 
0.2
 %
 
599

 
598

 
1

 
0.2
 %

21



Cost of revenue. Cost of revenue consisted primarily of the following items:
 
For the Three Months Ended September 30,
 
Change
 
For the Nine Months Ended September 30,
 
Change
(Dollars in thousands)
2017
 
2016
 
Total
 
%
 
2017
 
2016
 
Total
 
%
Payroll and related
$
4,330

 
$
4,469

 
$
(139
)
 
(3.1
)%
 
$
13,432

 
$
13,505

 
$
(73
)
 
(0.5
)%
Cost of sales
2,228

 
2,587

 
(359
)
 
(13.9
)%
 
6,128

 
7,695

 
(1,567
)
 
(20.4
)%
Stock based compensation
4

 
57

 
(53
)
 
(93.0
)%
 
121

 
164

 
(43
)
 
(26.2
)%
Other
507

 
526

 
(19
)
 
(3.6
)%
 
1,614

 
1,803

 
(189
)
 
(10.5
)%
Total cost of revenue
$
7,069

 
$
7,639

 
$
(570
)
 
(7.5
)%
 
$
21,295

 
$
23,167

 
$
(1,872
)
 
(8.1
)%
FTEs
185

 
185

 

 
 %
 
185

 
185

 

 
 %
As illustrated in the table above, total cost of revenue decreased $0.6 million for the three months ended September 30, 2017 compared to the same period in 2016 and decreased $1.9 million for the nine months ended September 30, 2017 compared to the same period in 2016 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 and reflects the increase in staffing.
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. The decrease of $0.4 million and $1.6 million for the three and nine months ended September 30, 2017 compared to the same period in 2016, respectively, was primarily attributable to the decrease in hardware revenue and lower usage of third party resources for professional services.
Stock based compensation — The decrease of $0.1 million for the three and nine months ended September 30, 2017 compared to the same period in 2016, respectively, was primarily attributable to forfeitures incurred during the three months ended September 30, 2017.

Research and Development. Research and development expenses consisted of the following items:
 
For the Three Months Ended September 30,
 
Change
 
For the Nine Months Ended September 30,
 
Change
(Dollars in thousands)
2017
 
2016
 
Total
 
%
 
2017
 
2016
 
Total
 
%
Payroll and related
$
4,005

 
$
2,939

 
$
1,066

 
36.3
 %
 
$
11,216

 
$
7,781

 
$
3,435

 
44.1
%
Outside services
849

 
569

 
280

 
49.2
 %
 
2,025

 
1,577

 
448

 
28.4
%
Stock based compensation
43

 
46

 
(3
)
 
(6.5
)%
 
163