Good morning, and welcome to Spok Holdings Third Quarter 2023 Earnings Call. [Operator Instructions]. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Al Galgano. You may begin.

Hello, everyone, and welcome to Spok Holdings Third Quarter 2023 Earnings Call. I am joined by Vince Kelly, Chief Executive Officer; Mike Wallace, President of Spok Inc. and Chief Operating Officer; and Calvin Rice, Chief Financial Officer. After a brief presentation by management, we will open up the call to your questions. 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 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, which are contained in our third quarter 2023 Form 10-Q and related documents filed with the Securities and Exchange Commission. Please note that Spok assumes no obligation to update any forward-looking statements from past or present filings and conference calls. With that, I'll turn the call over to Vince.

Good morning. Thank you for joining us for our third quarter 2023 earnings call. I'm very pleased with how our team performed in the third quarter. We are excited by the growth we are generating in terms of revenue, profitability and cash flow. And we are excited by our prospects and our outlook. Our strategic focus remains the same, that is to generate cash and return capital to our stockholders over the long term. We're accomplishing this by responsibly investing in our business to support growing revenue while closely managing our operating expenses and capital expenditures. While the dividend level we declared when we announced our pivot in 2022 may have initially seemed high, we believe Spok has struck an excellent balance between making the necessary investments to fuel future growth while continuing to demonstrate our prowess in generating cash flow and then returning capital to our stockholders. We believe we are on a sustainable path to continue paying our quarterly dividend at these levels for the foreseeable future. Further, we believe our cash flow is on a path to grow into our current dividend level. And based on our updated and increased guidance for the full year of 2023, we expect to cover at least 95% of our $1.25 annual dividend this year based on the midpoint of our adjusted EBITDA guidance less capital expenditures. Today, we'll share with you an update on how our strategic business plan is progressing in support of this goal as well as our financial results for the quarter. I'll start by reviewing the agenda for today's call. The order will be as follows. We'll begin by reviewing our strategic focus and goals and looking at our progress against those goals. Next, I'll turn the call over to Michael Wallace, our President and COO,…

Thanks, Vince, and good morning, and thank you all for joining us for another solid quarter of results from Spok. We are happy to report that we have continued to execute on our business plan and in the third quarter of 2023 we generated GAAP net income of $4.5 million or $0.22 per diluted share, which represents a 52% increase from net income of $2.9 million or $0.15 per diluted share in the prior year period. We accomplished this while continuing to generate year-over-year third quarter software operations bookings growth. Again, on a year-to-date basis, software operations bookings have totaled $26 million, up more than 38% from the prior year levels and have already surpassed our full year total for 2022. Also, total 2023 software bookings are on track to reach levels not seen since 2019. Amidst all the progress in creating a solid financial platform and stockholder-friendly capital allocation strategy, we remain true to our mission of being a global leader in health care communications. We deliver clinical information to care teams when and where it matters most to improve patient outcomes as Spok enables smarter, faster clinical communications for our customers. And importantly, we continue to maintain our reputation as a thought leader in the health care communication space. Now let me take a couple of minutes to tell you about 2 recent events that underscore our industry-leading reputation. First, earlier this month, we released the results of Spok's 13th annual survey on communications and health care. This year, more than 150 executives, physicians, nurses, IT personnel and contact center representatives responded with input about the state of communication at their respective organizations. The survey results unveiled 3 major takeaways. First, unified communication across the organization is essential for modern health care. Health care leaders won a unified…

Thanks, Mike, and good morning, everyone. I would now like to take a few minutes and provide a recap of our third quarter 2023 financial performance, which we reported yesterday. I encourage you to review our 10-Q when filed as it includes significantly more information about our business operations and financial performance than we will cover on this call. Turning to our income statement. In the third quarter of 2023, GAAP net income totaled $4.5 million or $0.22 per diluted share compared to net income of $2.9 million or $0.15 per diluted share in the same 2022 period and in line with our record second quarter performance. For the third quarter of 2023, total GAAP revenue was $35.4 million compared to revenue of $33.7 million in the third quarter 2022. Revenue for the quarter consisted of wireless revenue of $19 million, which was essentially flat to revenue of $19.1 million in the prior year period and software revenue of $16.5 million, up 12% from last year, reflecting the significant year-over-year increase in professional services revenue driven by the significant increase in bookings and related backlog of professional service projects. With respect to wireless revenue, third quarter performance continues to be primarily driven by improvement in average revenue per unit, or ARPU, which saw growth of $0.19 on a quarterly basis year-over-year. This improvement is largely the result of additional pricing actions taken in September of 2023. These pricing actions will be fully reflected in our fourth quarter results, and we anticipate a corresponding increase of $0.15 to $0.19 in ARPU in relation to the $7.59 realized in the third quarter, all things being equal. Net unit churn continues to remain at historically low levels as net units in service declined by roughly 4.7% from the prior year period. While we…

Thank you, Calvin. Before we open up the call to your questions, let me just reiterate how proud I am of the entire Spok team and their ability to maintain the momentum and generate further growth despite coming off a record second quarter that shattered all performance metrics. It is their efforts which gave us the confidence to increase guidance yet again, and we believe will provide the springboard to take us into an even stronger 2024. I'd also like to thank our stockholders for their continued support and want to assure you that our primary focus remains on generating cash and increasing stockholder value. We're committed to our current dividend and capital allocation policy. On a final note, I'd like to tell everybody about Spok's presentation at the upcoming Piper Sandler Healthcare Conference in New York. Look for a press release soon with the dates and timing of our presentation. We hope to see many of you there, and we'll continue to look for opportunities to tell our story to the investment community and focus on investor marketing activities that we know the ultimate attraction will come as a result of our consistent and successful business execution. That concludes our prepared remarks. At this point, I'll ask the operator to open the call up for your questions. We'd ask you to limit your initial questions to one and a follow-up. And then after that, we'll take additional questions as time allows. Operator?

[Operator Instructions]. Our first question comes from Eric Martinuzzi with Lake Street.

Congrats on the revenue and profitability as well as the second quarter in a row now of year-on-year growth. I had a question regarding the price increase that you rolled in, in September. What -- how much was the price increase? And what percentage of the installed base is impacting?

Good. Eric, this is Calvin. Yes, so we rolled out a 6% price increase in September to the customer base that impacted probably somewhere between 65% and 70% of that customer base, and we expect that to be fully reflected in the fourth quarter here.

Okay. And then I did see an uptick in churn in the third quarter. You guys have been, I think Q2 was 3.5%. Q1 was 3.2% and then we saw an uptick of 4.7% in Q3. What are you expecting for churn kind of a range that investors can look to?

Yes. So we've been very fortunate for probably the last 9 months preceding the third quarter in terms of the lowest churn rates on record probably over the last decade or so, and it's been a consistent decline. I would say that uptick in third quarter is isolated, we don't believe it's part of any new trend. Those will be variable from one quarter to the next. We'd expect to see churn anywhere in the range of probably 3.5% to 5%, give or take.

Okay. And then I noticed a disconnect between your adjusted EBITDA and the cash from ops. The adjusted EBITDA coming in at $8.4 million and yet your cash balance declined sequentially and the cash from ops was $3.2 million. So just walk me through the delta between the adjusted EBITDA and the cash from op.

Yes, Eric, we had a couple of onetime things in the third quarter that affected working capital. One of the things we did is we paid out our PTO and went to a different policy, that's going to save us about $0.5 million a year going forward, but we had to spend about $3 million to do that. And then the other thing was the early termination on the lease, we spent about, what, Calvin, $750,000 buying that out. That's going to save us about $1 million a year going forward. All this stuff is focused on getting to free cash flow. Those are working capital items that were both in the third quarter that won't be obviously in the fourth quarter or the first quarter or ever again.

Okay. And then lastly, just stepping back, you're tracking to year-on-year growth here in 2023. I've got you up about 2% on the year. Obviously, that's roughly flat on the wireless and up about 5% on the software side of the house. You did comment in your prepared remarks about anticipating growth in 2024 for those of us modeling out. Can you give us kind of a range? Or is it too soon to talk about potential growth rates next year?

Look, I mean this is obviously the first time, Eric, that we're going to grow the company in the company's history from a top line perspective. And right now, everything is going right. We're hitting on all cylinders. When we look at our plan, we beat on total revenue. We beat on adjusted EBITDA. We're beating our guidance. We're beating your model. When we break our service lines out and look at software and wireless, we're doing the same across the board. Bookings is a huge plus for us, up 38% compared to the same 9-month period last year. The gross additions on our wireless plan are beating, Gena sales are beating our plan, professional services, their hours, their rate, all that's beating, maintenance is beating plan. We're managing our operating expense, managing our CapEx. Our R&D team has made great progress. We're going to have some great things to reveal next year on the software side. Employee in turnover is about as low as we've ever had in the company and morale is really high. So we're going to grow in 2024. We'll put guidance out probably before the end of the year. We haven't decided on exactly when, but we've been talking about that internally. A lot of good things going on. I mean our sales results are significantly ahead of our internal plan and where they were at this time last year. Our team already this year sold 26 multiyear engagements that had a total booking value of about $15 million. We've got 4 of those reps over $2.5 million in sales alone this year. And last year, we had none. And our average deal size this year has doubled over 2022. It's tripled over 2021, and we've sold over 15,000 Gene pages this year, and our target this year is 20,000, and we're going to do even more next year. So we're on a growth posture right now, but it's going to be disciplined from the standpoint that we still focus on free cash flow and returning capital to shareholders. That's still our #1 goal. We expect that the industry is still going to be somewhat challenged in terms of health care and spending in their internal resources. What we do for our customers is almost like a utility. We're making, I think, responsible improvements to that with our investment back into our platform. I think we got a really good business model here right now, might not grow like a rocket like some people do. But you know what, you're getting paid along the way. And so we'll grow next year. We'll get some guidance out to you guys as soon as we can. We let the dust settle and do some more modeling. And hopefully, we'll have some news for you before the end of the year on what we expect for next year. But the answer is it's going to grow.

Good luck in Q4.

[Operator Instructions]. Our next question comes from Christopher Irons.

Fantastic quarter. Thank you very much for everything. I just wanted to touch on a couple of things that you said last quarter. And Steve, if you can update last quarter, you had talked about receiving interest outside interest in the company, kind of unsolicited interest. Wondering if there's anything new in that. In that regard, you had also talked about potentially raising the dividend at some point. I know I don't want to get ahead of anything and certainly don't want to line it because it was a great quarter, but I just wanted to see if you can offer an update on those 2 things.

Yes. Let me take the second one first. The first goal was to grow into the existing dividend. At the beginning of the year, we were talking about covering 80% of our dividend with free cash -- with our adjusted EBITDA less CapEx. And so we're obviously beating that significantly. I think we'll cover about what is 95%, Calvin this year of adjusted EBITDA less CapEx. So we're not going to be burning through a lot of cash obviously in 2024. So we're getting very, very close to that. We want to get above 100% before we determine what we want to do with that. And frankly, I think we have time to make that decision. So I would say for 2024, $1.25 is probably what you should bank on. And I would say for 2025, if we were going to make a change, that's where we would be looking. So that's that. Look, your first question, we're a public company, we're for sale in the market every day. where interest rates have gone and what's been kind of going on out there in the sponsor community, it's tough sledding for those guys right now. It doesn't mean we haven't got calls. We've gotten a couple of calls. We're not running a process right now. We're not for sale right now. Is there an interest in the company? I can tell you, absolutely, there's interest in the company. A company like us that has the kind of customer base we have has the kind of sales results we have and this off at time of cash is a very rare bird in the market right now. And -- not many of these sponsors have an asset like this. So if they want us, come on and get us boys, but you're going to have to pay up, okay? Because we've got good things going on here at Spok. We had a great team. Morale is really high, and we're all about executing and we're going to execute. So if you want someone that can execute in your portfolio, maybe unlike some of the other investments, come take a look at us. But in the meantime, we're going to do what we do, and we're doing it well right now, and we're very pleased with our results, and we're very pleased with our outlook.

Our next question comes from George Melas with MKH Management.

Vince, Mike and Calvin. Good job on the quarter again. The question is for Mike. Mike you outlined those 3 very sizable deals that you closed in the quarter. I was not sure whether those were new customers. And on the new customer side, who are you replacing? Are you replacing internal systems? Or are you replacing other third-party software providers.

Yes. George, good to talk to you. Yes, the 3 deals that I talked about were all existing customers in this quarter. So none of those were new logo. Yes, to answer your question more broadly, when we do displace somebody, a lot of times, it is internal systems that they use internally. There are some competitors out there that we typically displace. I obviously won't mention names. But look, the reality is we're in a position where the majority of our bookings are still to our installed base. We do have about probably 10% or 15% of our businesse's new logo, as I've said in previous calls, the expectation is over the next several years as we continue to execute on the plan that we've talked about from an R&D perspective and are focused again on our on-premise solution as opposed to Spok as you know, being a shareholder for quite a while. And putting new things out in the market that will allow us to get more new logo business than we've experienced over the past several years. So that's really the plan, if you will, if you look out over the next kind of 2 to 3 years.

And George, just to add on to what Mike said, we had our Board meeting yesterday, and we had some of our top sales managers in to talk to our Board. A couple of the very large deals that we got in both our Eastern Division and Western division this year were takeaways from competitors. And when we look at our pipeline, a couple of the large deals that we have from each division in the pipeline right now were specific takeaways from competitors. And I'm not going to name the competitors, but I will tell you the common characteristic of these takeaways is that these competitors are offering more what you and I would refer to as point solutions. And Spok offers the enterprise suite. So we do a lot of things. We don't have to do a specific point solution as well as a competitor to win. It's kind of the same tactic, frankly, that Epic took years ago to consolidate the EHR space or that Microsoft took with the whole office suite that they have. If you can offer an integrated suite, you're going to save that CIO a lot of headache in the long term, and then they'll sign a multiyear engagement with you and you're off to the races. So our R&D budget and our focus is all about building on that strength and making that suite more powerful and more flexible and more extensible going forward. And so I think you'll see, as we make progress on the road map in '24 and '25 a lot more potential in terms of new logo coming into the business right now. I think our best years '24 is going to be a huge transition for us in terms of our platform. I think our best years are going to be '24 and '25. I think we got a lot of good things in front of us. I hope that helps.

Definitely. That's really interesting. And then maybe a quick question maybe for Calvin. You've had amazing software bookings this year, especially in the second quarter, but also in the third. How does that flow in through the P&L? I mean, is it just like -- I mean, I see that the maintenance revenue increased nicely. So I think that's an incredible indication of success. But how does it flow.

Yes. So the direct correlation isn't going to exist between bookings and the P&L, generally speaking. There's a significant breakout in terms of the booking mix that's within that number between license, services, maintenance and equipment. And so when we make a sale, that's going to go into our backlog. So bookings and backlog are really relevant. And you've seen that similar growth in the backlog, which ultimately represents future revenue yet to be recognized. So that's a critical element. License and equipment are generally relatively book in turn. So those are going to be the 2 components that generally, when sold are going to flow through either immediately or within the next several months from a revenue standpoint. And then the maintenance, that's going to get recognized over the contract period, which can be anywhere from 1 to typically 3 years. And then on the services front, that's generally going to be recognized as the projects are completed themselves. And those projects, typically 5 to 7 months in completion time, but it can take a couple of months to get up and running, depending on resource allocation at the customer sites. And so generally speaking, we kind of look to about 12 months for those projects to flow through as well.

Okay. Great. Great. Can you remind me software 101. I appreciate that, thanks a lot.

You're welcome.

There are no further questions at this time. I would now like to turn the floor back over to Vince Kelly for closing comments.

Look, thanks, everyone, for your participation today. We're proud of what this company is accomplishing, and we're very excited about the future. Like I said, we're going to consider when we want to put our '24 guidance out, and we'll get back to the market then. And we'll also be at the Piper conference in New York next month. So look forward to seeing some of you there. And we'll report our fourth quarter year-end results in late February and talk to you there as well. And everyone, have a great day, and thanks for being a supporter of Spok.

Ladies and gentlemen, thank you for your participation. This does conclude today's teleconference. You may disconnect your lines, and have a wonderful day.