SPOK

Greetings, and welcome to the Spok Holdings First Quarter 2026 Earnings Results Call. At this time, all participants are in a listen-only mode. A Question and Answer session will follow the formal presentation. As anyone should require of our assistance, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce Al Galgano, investor relations. Please go ahead.

Hello, everyone, and welcome. Today, I am joined by Vincent Kelly, Chief Executive Officer, and Michael Wallace, Chief Operating Officer and Chief Financial Officer. After a brief presentation by management, we will open up the call to your questions. But before we begin, 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 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 first quarter 2026 Form 10-Q and related documents, which will be 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 afternoon. Thank you for joining us for Our First Quarter 2026 Earnings call. Let me preface my comments by saying that Spok remains true to our mission, and I believe with the actions taken a couple of weeks ago, we have positioned Spok for even greater success in the future. Since our strategic pivot we announced about four years ago now, our focus has not changed. That is to increase our software revenue, generate cash, and return capital to our stockholders. In the first quarter, we were able to deliver a nearly 57% year-over-year increase in Software Managed Services revenue, as well as a continued increase in our wireless average revenue per unit. Additionally, we generated nearly $2 million of net income and $5.3 million of Adjusted EBITDA.

Our ability to generate net income in various economic environments results from the financial platform our team has created. With over 80% of our revenues generated from recurring revenue streams, including software maintenance and subscription contracts, Managed Services, and wireless pager revenue, and a debt-free balance sheet, we can provide a consistent and predictable revenue stream. We believe that Spok has struck an excellent balance between making the necessary investments to fuel future growth while continuing to generate cash flow and returning capital to our stockholders. While driving our top line, we also continue to focus on expense management as operating expense levels in the first quarter were essentially flat to the prior year. Additionally, a couple weeks ago, we announced a strategic realignment to create even more efficiency and take advantage of artificial intelligence technologies to drive increased profitability and cash flow.

However, it's important to note that our focus on expense management as one of the key drivers to generate increased cash flow does not come at the expense of our product platform as we continue to make the necessary investments in product development, sales and marketing, customer support, and Professional Services to support the growth of our Spok Care Connect solution offerings. In the first quarter of 2026, Spok invested almost $3.5 million in product research and development, a nearly 12% increase from 2025. Investments such as these are critical to creating a best-in-class product platform and to maintaining our solid industry reputation. While software sales are always going to be lumpy quarter to quarter, our investments are already paying dividends.

The Software Operations bookings for the second quarter are off to an excellent start and have already exceeded the levels we saw in the entirety of the first quarter. I look forward to sharing those results with you when we report our second quarter performance in July. Today, we'll share with you an update on how our strategic business plan is progressing in support of our goals, as well as our financial results for the quarter and the full year. I'll start by reviewing the agenda for today's call. The order will be as follows. First, I'll provide an overview of our strategic realignment announcement and capital allocation strategy. Next, Mike Wallace, our COO and CFO, will provide a review of our first quarter sales performance and review our financial highlights, including Spok's financial expectations for 2026.

Finally, I'll conclude our prepared remarks with a brief wrap-up before opening the call to your questions. As you may have seen, a couple weeks ago, we announced a strategic realignment designed to reduce costs and sharpen operational focus across our go-to market functions. These actions will enable us to allocate resources toward continued investment in our Care Connect suite and artificial intelligence initiatives while sustaining our commitment to returning cash to stockholders. After extensive analysis by our management team and advisors, and with the support of our board, we are confident that this strategic shift will create significant value for stockholders while continuing our quarterly dividend, which currently represents a yield in excess of 10%. As part of the plan to realign and streamline Spok's leadership structure, we're reducing our workforce by approximately 10%.

As a result, this will reduce headcount related expenses, excluding stock-based compensation and other operating expenses by over $6 million on an annualized basis. Related to this reduction in force, we estimate that we will incur restructuring charges, excluding stock-based compensation, of approximately $1.6 million-$2 million. These charges will primarily be taken in the second and third quarters of 2026. We expect that the restructuring charges will be substantially completed by the third quarter. While any reduction of our leadership team and employee base is a difficult decision, we believe these reductions will help us continue to drive productivity and efficiency, maintain profitability, and streamline our organizational structure. This includes implementing artificial intelligence technologies to further optimize our processes and workflows both internally and externally. As part of this realignment, we are consolidating our executive team for efficiency.

Michael Wallace, our Chief Operating Officer, will take on the additional role of Chief Financial Officer. As you know, Mike has been with Spok since 2017 and has served as the company's Chief Financial Officer from 2017 to 2022, so we're able to maintain continuity in our management structure. We believe that the announced strategic realignment was the right thing to do in order to sustain our mission. We are firmly committed to maintaining profitability levels while returning value to our stockholders. Before I turn the call over to Mike to review our sales and financial performance, let me briefly summarize the goals that support our critical and important mission. Our strategic goal is simple: run the business for profitable growth, generate cash flow, and return that capital to stockholders.

Spok has a proud legacy of creating stockholder value and returning capital through free cash flow generation. We intend to continue this track record. Our dividend level represents a significant yield for our stockholders. We are proud of our legacy there and our ability and commitment to continue funding it. Since the beginning of our strategic pivot, which started four years ago, Spok has returned approximately $112.3 million, or more than $5.38 per share to our stockholders in the form of our regular quarterly dividend. In fact, since we created this company in 2004, Spok has returned more than $735 million to our stockholders, either through our regular quarterly dividends, special dividends, or share repurchases.

In the first quarter of 2026, our history of returning cash to our stockholders continued as we returned $8 million in dividends. Our dividend level in the first quarter is typically a little higher than the out quarters of the year due to vesting of our incentive plan grants. Dividend levels in the following three quarters will total approximately $6.5 million per quarter. We expect to pay dividends in excess of $27 million in 2026. Spok remains committed to our dividend policy and returning capital to our stockholders. When you take into consideration our current cash balance, distribution to stockholders, share repurchases, debt repayments, and acquisitions, Spok has now generated nearly $1.1 billion of free cash flow since our creation in 2004, and returned the majority of it to our shareholders.

Our focus on maximizing cash over the long term supports the four major tenets of our strategy. Those are, number one, continued investment in our wireless and software solutions. Number two, growing our revenue base. Number three, disciplined expense management. Number four, a stockholder-friendly capital allocation plan. Going forward, we believe our extensive experience operating an established communication solution and world-class customer base will continue to create significant value for our stockholders. Now I'll turn the call over to our Chief Operating Officer and Chief Financial Officer, Mike Wallace, who will talk about our operational accomplishments and financial performance. Mike?

Thanks, Vince, and good afternoon. First, I want to thank you and our board of directors for trusting me with the additional responsibilities of Chief Financial Officer. Having been a part of the Spok team for the past nine years, including serving as the company's Chief Financial Officer for the first five years of my tenure, I understand the tremendous potential of Spok's best-in-class product platform. In assuming the Chief Financial Officer's responsibilities, I will continue to remain laser-focused on creating additional efficiencies within our operating platform. Next, I'd like to thank you all for joining us for our first quarter conference call. Amidst all the progress in continuing to create this solid financial platform and stockholder-friendly capital allocation strategy, I want to reiterate that we remain true to our mission of being a global leader in healthcare communications.

Simply put, 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. Importantly, we continue to maintain our reputation as a thought leader in the healthcare communication space as we continue to see customer satisfaction ratings at very high levels. In the first quarter of 2026, we were able to execute 17 six-figure customer contracts up from the prior quarter, with one of those customer contracts being a new logo agreement. As Vince mentioned, we are pleased with our very strong start to the second quarter and regaining the momentum we saw at the end of last year. As I typically do, I'd like to highlight a few of the customer agreements from the first quarter.

One with a well-known regional community-based health system in the Mid-Atlantic, one with a world-renowned leader in patient care also located in the Mid-Atlantic, and a third with a healthcare organization in the Pacific Northwest. We are excited to continue our partnership with a health system that has been a Spok customer for more than 20 years. They are an approximately 600-bed health system managing high patient volumes annually, including nearly 100,000 emergency department visits and tens of thousands of admissions and emergency responses. This customer uses the Spok Care Connect platform to initiate nearly 100,000 codes annually and provide highly specialized physician answering services as part of their overall patient care endeavors. For this engagement, they will be adding additional licenses for business continuity and Spok Care Connect reporting and dashboards for comprehensive data reporting and analytics.

Spok also secured another multi-year commitment from a public academic health center comprising a system of hospitals and clinics serving patients across a broad multi-state region that serves more than 300,000 unique patients annually. They use the Spok Care Connect platform to manage nearly 800,000 operator calls annually, dispatching over 6 million messages or pages per year, and oversee nearly 600 on-call groups. This multi-year engagement includes upgrade services, maintenance, and support of their Spok Smart Suite solutions that include Smart Console, Smart Web, eNotify, and Spok Mobile usage for the organization's 4,000+ licenses. The third customer agreement is with a prestigious health system that provides care and life-saving services to more than 430,000 ED and inpatients annually. This organization manages over 2 million operator calls utilizing Spok Console from a centralized hybrid call center.

This three-year Managed Services commitment extends our existing partnership, expanding their Spok Console platform to include integrated Epic messaging, Spok Care Connect reporting and dashboards, and three additional years of support, coupled with our value-added services, including data integrity. These first quarter contracts underscore our momentum and continued commitment to delivering high-value communication solutions that drive meaningful outcomes for our customers. I would now like to take a few minutes and provide a recap of our first quarter 2026 financial performance, which we reported earlier today. As always, 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 first quarter of 2026, GAAP net income totaled $2 million or $0.09 per diluted share, down from net income of $5.2 million or $0.25 per diluted share in 2025, driven primarily by the timing of Software Operations bookings and related license revenue, as Vince mentioned earlier. With respect to wireless revenue, the year-over-year revenue decline from lower units in service was partially offset by previously taken pricing actions over the course of the last couple of years. Product sales also continue to augment any losses related to units in service. Average revenue per unit, or ARPU, which saw growth of $0.05 on a year-over-year basis, continues to be our primary tool in partially offsetting revenue decline from unit loss.

Much of this increase was driven by previously discussed pricing actions and, to a lesser extent, incremental pass-through taxes and fees, as well as an increased mix of our GenA pagers in use. Turning to software revenue for the quarter, license and hardware revenue totaled $1.5 million compared to $3 million in the same period of 2025 as a result of lower overall Software Operations bookings, specifically license bookings, which impact revenue immediately. As noted previously in our comments, we have seen a very strong start to our second quarter Software Operations bookings that already exceed the entirety of our performance in the first quarter.

Additionally, the continued solid performance of Professional Services revenue, albeit slightly lower than last year due to the timing of some higher dollar value projects worked and a one-time benefit we saw in the first quarter of last year, was a key driver in the first quarter software revenue levels. Specifically, managed Professional Services revenue of $2.1 million in the first quarter was up nearly 57% from revenue in the prior year. We continue to see solid performance in resource utilization, delivering on our internal initiatives to better align total resources with our backlog and drive a higher rate of margin and net cash flow. At present, we believe we have greatly achieved our optimal operating efficiency in Professional Services relative to our current product state. We will continue to align total resources with our backlog, and we should continue to see benefit for Managed Services.

First quarter adjusted operating expenses, which excludes depreciation, amortization, and accretion and severance and restructuring costs, totaled $29.5 million, up slightly from $29.4 million in the prior year. Cost of revenue increased primarily due to the related hiring to support the services revenue I noted previously, partially offset by lower equipment and software costs as a result of lower operations bookings. Increases in research and development reflected our continued investment in our product and services platform, with reductions in technology operations driven by our normal practice of cost reduction in relationship to declining wireless revenues. Selling and marketing costs decreased nearly 9% from the prior year, reflecting lower commissions and lower trade show and event expenses. Year-over-year general and administrative costs also declined by 2%.

Finally, I'd like to address our cash balances, which were $17.1 million at the end of the first quarter. Consistent with prior years, our cash balances declined in the first quarter as a result of typical working capital needs that occur in the first quarter each year, including items such as the payment of our short-term incentive plans and prepaid annual renewals of technology contracts. Additionally, first quarter cash flow financing activities are typically higher than in the three remaining quarters of the year, reflecting payments on the company's long-term incentive plans. However, we anticipate cash balances will generally grow throughout the remainder of the year, given those needs are behind us with our expectation of driving significant free cash flow, given our Adjusted EBITDA guidance for the year. Moving on to guidance for 2026.

We believe that at this point in the year, it is more prudent to reiterate our guidance estimates for revenue and Adjusted EBITDA. We believe that future guidance estimates could be buoyed by rebounding bookings levels and cost-cutting initiatives, both previously discussed. But we need to get more visibility before we commit to any of those impacts. In 2026, we expect total revenue to range from $136 million-$143 million. The midpoint of our guidance reflects consolidated revenue generally in line with 2025 results, but with a higher mix of software revenue. While the high end of our guidance reflects a nearly 2.3% annual growth rate. We expect wireless revenue to range from $68 million-$71 million and software revenue to range from $68 million-$72 million in 2026.

The midpoint of software revenue guidance implying growth of more than 4% and more than 7% at the high end of the guidance range. Lastly, our Adjusted EBITDA guidance for 2026 is $27.5 million-$32.5 million. The midpoint reflects improvement over 2025, while the high end represents over 12% growth, largely expected to be driven by a greater mix of higher margin software license bookings and benefits related to the strategic realignment cost reductions announced a couple of weeks ago. With that said, I'll now turn the call back over to Vince.

Thanks, Mike. Before we open the call up to your questions, let me reiterate our focus on the opportunity in front of us in critical communications. From a business configuration and strategy perspective, we believe we're strongly positioned to grow our franchise while returning capital to our shareholders. We have a long-term organic growth engine in Spok Care Connect. We maintain a source of strong recurring revenue in our wireless service line. We run the largest paging offering in the world integrated with our software operations, and we have enhanced our paging platform and user devices to serve our core healthcare customer base. We believe with these two assets going for us, our best financial results are ahead of us and Spok's future is bright.

I'd like to take this opportunity 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. We started the year off strong, we very much look forward to speaking with you again when we report our Q2 results in late July. That concludes our prepared remarks. At this point, I'll ask the operator to open the call for your questions. We'd ask you to limit your initial questions to one and a follow-up, after that, we'll take additional questions as time allows. Operator?

Thank you. While we're conducting a Question and Answer session, if you would like to ask your question, please press star one on your telephone keypad. A confirmation tone [inaudible] behind [inaudible] question kit you may press start two to remove your question from the queue. For participants using speaker equipment, maybe necessary to pick up a handset or pressing the star keys. One moment please while we pull your question.

Thank you. The are no question at this time. I would like to hand the floor back over to management for any closing remarks.

Okay, everyone. Thanks for very much for joining us on our conference call today. We really look forward to speaking with you in late July when we report our second quarter earnings. Everyone, have a great evening.

Thank you. This does conclude today's conference. You may disconnect your lines at this time. We thank you again for your participation.