Good morning, and welcome to Spok's 2020 Investor Call. Today's call is being recorded. Online today, we have Vince Kelly, President and Chief Executive Officer; and Mike Wallace, Chief Operating Officer and Chief Financial Officer. At this time, for opening comments, I will turn the call over to Mr. Wallace. Please go ahead, sir.

Good morning. Thank you for joining us for our second quarter 2020 investor update. Before we discuss our operating results, I want to remind everyone that today's conference call may include forward-looking statements that are subject to risks and uncertainties relating to Spok's future financial and business performance. Such statements may include estimates of revenue, expenses and income and as well as other predictive statements or plans, which are dependent upon future events or conditions. These statements represent the company's estimates only on the date of this conference call and are not intended to give any assurance as to the actual future results. Spok's actual results could differ materially from those anticipated in these forward-looking statements. Although these statements are based upon assumptions that the company believes to be reasonable, they are subject to risks and uncertainties. Please review the risk factors section relating to our operations and the business environment in which we compete contained in our 2019 Form 10-K, our second quarter 2020 Form 10-Q, which we expect to file later today, and related documents filed with the Securities and Exchange Commission. Please note that Spok assumes no obligation to update any forward-looking statements in past or present filings and conference calls. With that, I'll turn the call over to Vince.

Thanks, Mike, and good morning, everyone. I hope all of you, your families and friends are and remain safe during this challenging time in the midst of this pandemic. At Spok, we continue to take this situation very seriously and have developed the protocols and procedures to be able to provide for the safety of our employees and our customers, many of whom are on the frontline, fighting this virus and saving lives. We are forever grateful for their service. With regard to our operations, we're in the throes of [ 100-year ] pandemic that has created a huge negative impact on the finances of our health care customer base. Prior to COVID-19, most hospitals ran on fairly thin margins in the single digits. Most of their profitable business came from ambulatory care and elective procedures. These were more profitable activities that have been significantly curtailed, causing a very challenging financial environment for the health care sector. However, we at Spok, expect this huge segment of our national economy, that at one point was nearly 18% of GDP, to ultimately recover. In the meantime, we will continue running our business profitably, enhancing and selling our wireless and software solutions, including our new platform, Spok Go, while preparing for a future that has a positive outcome as our country eventually gets the virus under control. We believe in our core values of putting the customer first, respecting what they do matters, our commitment to innovation and accountability. Further, we believe in investing in and building for the future, and we think what we've developed with Spok Go will be a game-changer in clinical communications. So while this pandemic has put a damper on our results in the second quarter and will likely represent significant headwinds for the foreseeable future, we believe…

Thanks, Vince. I will provide a more -- more detail on our financial performance in the second quarter, but I would again encourage you to review our second quarter 2020 Form 10-Q, which we expect to file later today as it contains far more information about our business operations and financial performance than we will cover on this call. As Vince noted, in the second quarter and in response to the uncertainties of the COVID-19 pandemic, Spok was successful in taking immediate steps to position our operations into a free cash flow posture through several cost-saving initiatives. Coupled with continued strong wireless revenue trends, we were able to generate net income of $3.8 million or $0.20 per diluted share, a sharp reversal from the $4.5 million loss in the prior quarter and $670,000 loss in the prior year. We were also able to generate $5.2 million of EBITDA or $1.6 million when adjusted for capitalized software development costs, which was up from last year's EBITDA loss of $2 million or a $3.7 million loss when adjusted for capitalized software development costs, and EBITDA of $343,000 in the prior year quarter where we did not have such capitalization. However, as Vince detailed, our operations continued to be significantly impacted by the effects of COVID-19 and the toll that it is taking on the North American health care infrastructure. The most severe impact was to our new software product sales and software bookings totaled $15.4 million. Additionally, the pandemic also negatively impacted our ability to deliver professional services to our hospital customers due to the various access issues caused by COVID-19. Over the next few minutes, I will review key areas which drove our second quarter financial performance. They include: first, a review of certain factors impacting second quarter revenue; second, selected…

Really great job. Thanks, Mike. Okay. Before we open the call up for questions, I'd like to comment briefly on a couple of items. First, I want to update you on our current capital allocation strategy. And then second, I want to review our key goals and business outlook in the balance of the year. With respect to our current capital allocation strategy, our overall goal is to achieve sustainable, profitable business growth while maximizing long-term stockholder value. Toward that end, the allocation of capital can be the primary area of focus. Our multifaceted capital allocation strategy still includes dividends and share repurchases as appropriate as well as key strategic investments that augment our product, development, operating platform, sales and infrastructure. Our strategy also includes the potential for acquisitions that are more strategic in nature and that are accretive to earnings. However, as I've mentioned in prior quarters, our main focus is on the development and enhancement of Spok Go versus acquiring additional functionality right now. We believe the cost of acquisitions and the integration of disparate functionality is much less efficient and ultimately limiting than the internal build approach we are taking at Spok. We're confident in the transition, and believe that financial flexibility over the long term is important to the success of our strategy. That is why we adjusted our cost structure and intend to continue paying our quarterly dividend while investing in our future. Focus -- laser-focused on selling and enhancing the next-generation of our software platform, as I've said, we believe that our cloud-based and fully integrated communications platform will be a game-changer in our chosen markets. We will continue to evaluate our capital allocation strategy and communicate our plans to you each quarter when we report earnings. Finally, with regard to our key goals…

[Operator Instructions] We'll take our first question from [ Brad Gold ] with [ Capital AU Consulting ].

I guess I have 2 questions, if that's legal here. They're usually not that many. I guess my first question has to do with the visibility of your software business. As I understand from your verbiage and your earnings as well as what you said today, you seem to be blaming most of your poor performance on the pandemic. But if you look at Vocera, they had a great quarter with the pandemic. And if I go back to your previous earnings reports in the third quarter of last year, you said you were going to give us guidance in February when we released earnings. We expect not only revenue growth but pretty significant operations booking growth as well both from legacy solutions and new Care Connect. And then in the fourth quarter, you told us that, "Thank you for your support and patience." This is in response to a shareholder's question. "I get your frustration. We're behind in delivering the platform. We didn't deliver when we thought we would," on and on and on. So I guess my question is, it seems as though the problem was pre-pandemic, and why should shareholders feel any confidence in you being able to perform moving forward?

Okay, great. Thank you for both of your questions. I also look up to our -- look forward to our follow-up call that we have. I think it's on Monday that you scheduled with us. But let me [ dive into the problem ]...

Before you answer, that was my first question, because I have a question on valuation.

Let me answer this question and then you can ask that question, how's that?

Perfect.

Okay. First of all, with respect to Vocera's performance in the second quarter, I'm happy for Vocera and I'm happy for their shareholders. I'm glad that they had a good quarter. One of the things that's happening as a result of this pandemic has been a huge impact. Hospitals have had to, on a very quick basis and on a short-term basis, change their priorities. And one of the things that's top of list for their priorities right now is PPE, personal protective equipment. And Vocera's badge, as you know, is a hands-free device. You don't have to touch the badge. And so they've had some great results in the first half of this year with respect to selling those badges. I mean, those -- I look at those badges like I look at our pagers, they're great. They're certainly not the future of technology in terms of driving long-term value. They're certainly in the middle of a pandemic when they can be treated as PPE. That's fantastic. You notice our paging was now getting better, not growing like Vocera's devices are growing, but it's great. But we also noticed in the second quarter, Vocera software revenue way down, down like 20.6% from the second quarter a year ago. And that's no different really than what we're seeing. We're seeing our software revenue down as well as a result of the pandemic. We had a number of very large deals ready to roll, ready to book, push on us. So we have a lot of customers come to us, they give us various reasons, but they all point back to the pandemic. So if you don't think the pandemic is real and you don't think it's impacting an industry that was up to 18% of our GDP but largely operated…

And that's a perfect segue to valuation. I guess, last quarter, you wrote that the company was worth $10, exclusive of software. Basically, the stock is trading now at $9.60. And according to my numbers -- your numbers, you've spent $218 million on the software business. I would say it's closer to $300 million. Anyway, between $11 and $15 a share and we're getting no value. So I guess my 2 questions are, can you explain why we get no value for the greatest thing that's coming? And number two, if you had to grade yourself since the purchase of Amcom, how would you grade yourself on the effectiveness of what you've done there?

Well first of all, I don't agree with the numbers you threw out there, so I'll have to see if you could send me backup or something because both of us are sitting here shaking our heads, saying we never -- don't agree with that.

Well of course you [indiscernible] share.

Hey, Brad, we're not going to get credit for Spok Go until shareholders can see a lot of sales of Spok Go. And when they start seeing a lot of sales of Spok Go, I believe the stock is going to go up. And I believe it's going to be a great long-term solution for our customers, a great long-term solution for our employees. And it's going to improve clinical communications and the quality of life of these caregivers. And that's what we're working for. We want to make you guys money, but we also have a passion about what we do and we're going to be successful doing it. You don't have to believe that, but obviously, you have vision because you've held on to your stock, so you probably feel it's coming. Otherwise, you would sell, right? So thank you for that support and thank you for that endorsement.

Well Vince, actually, what I think is that a number of your shareholders over the last 6 months, B. Riley, Palogic, [indiscernible] who's an activist who joined your Board, another investor forced a new Board member on. I think people are getting a little impatient because it's been 5 years. So I think that you've been running this company for 15 or 16 years, it's time for some change. And I think a lot of people are investing because they think in different hands, this asset would perform better. So I appreciate you taking my questions, but I think that, that is an attitude that a lot of people share and it's one that you should think about. So thank you for taking the questions.

Thanks, Brad. I appreciate it. I do think about it. I do value your feedback. You and a very small minority of our shareholders are welcome to voice your concerns and voice your opinions all you want. You guys did yesterday or you guys did Tuesday at the shareholder meeting. But you're a very small percentage, and all our shareholders, the overwhelming super majority of our shareholders supported the Board and supported our strategy going forward. And again, my goal is for them to be successful and my goal is for you to be successful. I have run this company for a very long time, as you point out. I have generated almost $1 billion of free cash flow and given the majority of that back to our shareholders. When we were developing Spok, we ran into a flat period in terms of our software sales and cash flow, and that caused our stock to be flat for a very long time. I get that. But before we bought Amcom, our stock was dropping precipitously because we had no future. Now we have a future. Now we have a platform. Now we're generating money, we're operating profitably, returning capital to shareholders, and we have a future platform that we believe is much better and far more superior than what our competitors have, and we think that's going to yield very positive results. Thank you.

[Operator Instructions] We'll take our next question from Ryan Vardeman with Palogic.

Congrats on the Spok Go win. Can you give us a little bit more color as it relates to the profile of that customer, kind of the scale and scope of that engagement and how you're pricing it, which might then give us a little bit more visibility on to kind of the opportunity that's there other customers?

No. We're going to do that, like I said, in my opening comments, Ryan, when we report third quarter results in late October.

Okay. Do you have any more color that you'd like to or could provide as it relates to the total opportunity set for the company in general or how you're intending to price Spok Go more generally and more broadly?

Yes. We have a pipeline that we review on a regular basis and it continues to grow. I'm not going to give the specifics of that pipeline in terms of how many deals, what the average deal size or what the total is, but it has grown considerably in this quarter. And we expect that'll continue to grow and that we'll continue to book sales out of that pipeline. Also, I think the potential that we have to sell Spok Go is only going to increase as a result of this pandemic, number one, because hospitals are going to realize how important timely clinical communication is. One of the things that our platform does, and it does it very, very well, is it delivers critical test results when and where it matters most. And as you can imagine, with COVID-19 and with all the delays in people getting results, the quicker you can get information into the hands of people, the more effective you can be fighting as pandemic. So we think sales is only going to increase. That functionality that we've built into the platform will be a big selling point. And then we think when we deliver [ R3 ] at the end of the year, by the end of the year, that pipeline opportunity will expand yet again because that's the release where we actually have then the full functionality with respect to our own contact center integration. And so we'll have a lot more customers in our existing customer base that we can go to. We have 2,200 customers at our hospitals right now, and that's a huge opportunity set for us to go back to. The other nice thing about Spok Go in terms of future opportunity, Ryan, as you know, most of our customers,…

Yes. I think kind of cutting the opportunity in giving us scale and scope at some point as well as kind of how you're planning on billing folks at some point, kind of just providing a business model, if you will, I think, could be very instructive in helping educate us as it relates to the opportunity. Anyway, thank you for taking the question and thank you for the cost controls.

Appreciate it, Ryan. And I will just say this about what you were just saying a second ago. We intend, over time, to have more disclosure around our SaaS solutions. As of June 30, we didn't have Spok Go booked and generating revenue. That happened -- the large one happened actually in July. As we go forward, we'll start talking about it. We're generally looking at these bookings with a total contract value over a 3-year period. It's a SaaS-based model, so it's 36 months. You can figure out how then the revenue would flow in and then that layers and we build it over time. But we are talking -- Mike and his team have worked with Parthenon to look at how you the SaaS business transformation or what metrics and KPIs, et cetera, are appropriate for it. We've talked to a couple of our shareholders who have given us resources for it, and our accounting and finance team have taken that. We've done a lot of research on it, and we're working with our auditors on that right now. And we are talking to -- Mike's got another CFO in the industry that's working on something very, very similar to what we're going through, talking to them about it. Because not only is it a new metric for us in terms of how we report and how we'll give guidance, but we have to -- it's very easy when we go sell a new customer and how to look at it. But when we go to an existing customer and we start selling Spok Go to them and they're also paying us maintenance and doing upgrades, there's a whole another level of sophistication you have to go through there and how you go through that transition. We're in the throes of that right now. And today, as I sit here on the 30th of July, it would not be appropriate for us to provide a lot of detail around that. But I get the fact that you want it, and Mike and his team, trust me, are all over it. Mike's been through this before. He knows what he's doing and we'll get there. Thank you. Okay. I don't see any other questions in the queue. I appreciate the 2 callers that did ask questions. I really want to thank you all for joining us this morning and those who joined us earlier this week. And we look forward to speaking with you again when we release our third quarter results in October. Look, everyone, have a great day. Stay safe and stay healthy. Thank you.

Thank you. Ladies and gentlemen, this concludes today's teleconference. You may now disconnect.