Spok Holdings, Inc Q2 2026 Earnings Call

This conference is being recorded. I will now turn the conference over to Al Galgano of Investor Relations. Thank you, Al. You may begin.

Hello everyone, welcome. I am joined today by Vince 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. 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 second 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 second quarter 2026 earnings call. Let me preface my comments by saying how proud I am of our Spok team and that we remain true to our mission. Since the strategic pivot we announced a few years ago, our focus has not changed. That is to increase our software revenue, generate cash, and return capital to our stockholders. In the second quarter, we were able to deliver a nearly 92% sequential increase in software operations bookings, as well as sustained year-over-year levels of wireless average revenue per unit. Additionally, we generated a record level of adjusted EBITDA. 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 return capital to stockholders.

While driving our top line, we also continued to focus on expense management, as adjusted operating expense levels in the second quarter were down nearly 8% from the prior year. Much of that improvement results from the initial impacts of the strategic realignment that we announced in April. Additionally, Spok is implementing AI to drive further operational efficiencies across the organization with a particular focus on accelerating product development timelines, reducing time to market for new Care Connect Suite capabilities, and other internal uses. It is 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 investment in product development, sales and marketing, customer support, and professional services to support the growth of our Spok Care Connect solution offerings.

Through the first half of 2026, Spok invested over $6.7 million in product research and development, a nearly 10% increase from 2025. Investments such as these are critical to creating a best-in-class product platform and to maintaining our solid industry reputation. In addition to the metrics I've outlined for you, there were many other operational accomplishments in the second quarter. We saw a more than 3% year-over-year increase in software revenue, driven by double-digit growth in managed services revenue as well as software license sales. A less than 2% reduction in wireless units in service, an 80 basis point improvement from the prior quarter, and consistent with prior year levels, and record adjusted EBITDA levels that more than covered our dividend and other capital obligations in the second quarter.

Today, we will provide you a sense of how our strategic business plan is progressing. First, I will provide a review of our second quarter sales performance. Second, I'll cover an overview of the asset sale we closed last week and how it supports our capital allocation strategy. Next, Mike Wallace, our COO and CFO, will provide a review of our second quarter financial highlights, including Spok's updated financial expectations for 2026. Finally, I will conclude our prepared remarks with a brief wrap-up before opening the call to your questions. Amidst all the progress in continuing to create the 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.

As we remind listeners each quarter, simply put, we deliver critical information to care teams when and where it matters most to improve patient outcomes as Spok enables smarter, faster communication throughput for our customers. Importantly, we continue to maintain our reputation as a thought leader in healthcare communications as we continue to see customer satisfaction ratings at very high levels. In the second quarter of 2026, we were able to execute 14 six-figure and one seven-figure new customer contracts. We are very pleased with our very strong performance in the second quarter, regaining our momentum. I'd like to highlight a couple of the notable customer agreements from the second quarter, including one of the largest contracts in our company's history, and one with a well-known national health system.

The first agreement is with a customer headquartered in the Midwest that delivers more than 20 million patient encounters annually across more than 2,200 care sites and employs more than 160,000 people, including 45,000 nurses and 25,000 physicians and advanced practice providers across 24 states. The agreement expands the customer's existing software, managed services, and premium maintenance and support contract, extending Spok solutions to 85 additional locations. The customer continues to unify operations with our Spok Care Connect platform using our operator console, alerting, and alarm routing solutions. This means delivering a consistently positive experience across every channel the customer touches: sales, support, services, and finance. A full 360-degree relationship with Spok. Also in the second quarter, a prestigious academic health system and longstanding Spok Smart Suite customer made a significant strategic investment with Spok to modernize their clinical communication platform.

The engagement expands their deployment to include Spok Messenger, Spok Mobile, SMS services, Epic chat integration, email in and out, and the Ascom Gateway. These additions complement their existing Spok Smart Suite solution and Spok GenA pagers, creating a comprehensive platform that delivers critical information to the most appropriate device and modality for every clinical need. The agreement also includes an upgrade and expansion to the customer's test system and redundancy environment, along with our workflow analysis value-added service to design communication strategies tailored to the organization's clinical and operational processes. Together, these Spok solutions help ensure the right information reaches the right caregiver at the right time, reduces communication delays, and ultimately improves caregiver efficiency and patient outcomes. In summary, our team delivered an outstanding second quarter, reflecting focused execution and continued progress against our strategic priorities.

These deals reinforce our expertise and ongoing commitment to delivering high-value communication solutions that drive meaningful outcomes for our customers. As you may have seen, a little over a month ago, we announced our entry into an agreement to sell certain narrowband spectrum licenses on our two-way paging inventory to Sensus USA. The transaction has been approved by the FCC and closed on July 20th. For those of you who may not be familiar with Sensus USA, they're a brand within the Xylem Inc. family of products and are a designer and manufacturer of metering and automatic meter reading products catering to municipal and industrial markets worldwide. The total purchase price for the acquired licenses is a cash consideration totaling $8 million.

Of that, the majority was paid at closing on July 20th, with a small portion held back and paid on a pro-rata basis only after Spok confirms that each spectrum license sold has been cleared of existing Spok users, as they are being transferred to other frequencies. Spok has 180 days after closing to clear the spectrum. We expect to complete the clearing this quarter. While the purchase price of $8 million is important as it contributes to our cash balances, this transaction is most important because of its strategic value as we continue to find efficiencies within our organization and create opportunities to monetize our highly valuable asset base. This is truly a win-win for all parties involved as we create stockholder value without impacting our two-way subscribers, transferring them to alternative frequencies in our spectrum portfolio.

Because the spectrum being sold has no cost basis on our balance sheet, the entire amount received, less customary transaction costs, will result in a gain. Given our available deferred tax assets, or DTAs, we would expect no federal tax to be due on the gain. After this transaction, our DTA balance is expected to be approximately $30 million. We believe that there may be additional opportunities to create stockholder value through monetizing our asset base. Combined with the benefits of the strategic realignment that we announced back in April, as well as the progress we are making on implementing AI initiatives to create operational efficiencies in our organization, we are confident in our future. Before I turn the call over to Mike to review our 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, and we intend to continue this track record. Our dividend level represents a yield in excess of 10% for our stockholders, and 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 in 2022, Spok has returned approximately $118.7 million, or nearly $5.63 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 $740 million to our stockholders, be it through our regular quarterly dividend, special dividends, or share repurchases.

In the second quarter of 2026, our history of returning cash to our stockholders continued as we returned $6.5 million in dividends. We expect to pay dividends in excess of $27 million in 2026, and we remain committed to our dividend policy in 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 approximately two-thirds 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 product platform. 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 our established communication solutions and world-class customer base will continue to create significant value for stockholders. I will turn the call over to our Chief Operating Officer and Chief Financial Officer, Mike Wallace, who will talk about financial performance and earnings guidance. Mike? Thanks, Vince, and good afternoon.

I'd like to take a few minutes and provide a recap of our second quarter 2026 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 second quarter of 2026, GAAP net income totaled $4.1 million, or $0.20 per diluted share, compared to net income of $4.6 million, or $0.22 per diluted share in the prior year.

Adjusting for one-time impacts in both quarters, which include an extraordinary gain of approximately $700,000 related to the sale of a domain name in the second quarter of 2025, and the $1.5 million of severance and restructuring expense related to the strategic realignment in the second quarter of 2026, then prior year net income would've been $4 million or $0.19 per diluted share, and in the current quarter, net income would've been $5.3 million or $0.25 per diluted share. Overall, an extremely strong quarter from a profitability perspective. With respect to wireless revenue, the year-over-year revenue decline from lower units in service was partially mitigated by previously taking 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 totaled $8.20, was consistent with prior year levels, continues to be our primary tool in partially offsetting revenue decline from unit loss. Sustained ARPU levels have been 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 higher ARPU GenA pagers in use. Turning to software revenue for the quarter, license revenue totaled $3.6 million, compared to $2.4 million in the same period of 2025 as a result of momentum in overall software operations bookings, specifically license bookings, which impact revenue immediately. As we have pointed out in the past, software operations bookings are lumpy in nature and as a result, looking at a particular quarter may not always provide the entire picture. We are encouraged by the momentum we saw in the second quarter.

The continued solid performance of professional services revenue, albeit slightly lower than last year due to the timing of some higher dollar value projects, was a key driver in second quarter software revenue levels. Specifically, managed professional services revenue of $2.3 million in the second quarter was up 53% 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. As discussed previously, 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 from a continuing increase in our managed services mix, which traditionally has a higher margin profile.

Second quarter adjusted operating expenses, which excludes depreciation, amortization, and accretion, and severance and restructuring costs, totaled $27.1 million, down from $29.4 million in the prior year, or nearly 8%. Drilling down into the specifics, cost of revenue was down from the prior year, primarily due to the accelerated operations bookings level we saw in the second quarter of 2025. Increases in research and development reflect our continued investment in our products 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 10% from the prior year, consistent with what we saw in the first quarter, reflecting lower commissions and lower trade show and event expenses. Year-over-year general and administrative costs also declined by nearly 14% as a result of the strategic realignment we announced in April.

Finally, I'd like to address our cash balances, which were $16.6 million at the end of the second quarter. Consistent with prior years, our cash balances declined in the first half of the year as a result of typical working capital needs that include items such as the payment of our short-term incentive plans and prepaid annual renewals of technology contracts. Additionally, first-half cash flow financing activities are typically higher than in the second half of the year, reflecting payments on the company's long-term incentive plans. We anticipate cash balances will grow in the second half of the year, given that those working capital needs are behind us, coupled with our continued expectation of driving significant free cash flow.

Additionally, we are encouraged by the cash contribution of over $7 million after related transaction expenses and associated income taxes in the third quarter from the spectrum license sale that Vince outlined earlier. Given that contribution and the anticipated reduction in working capital needs throughout the remainder of the year, we anticipate that we will exit 2026 with $26 million-$29 million in cash and cash equivalents. Moving on to financial guidance for 2026. Based on the anticipated full-year financial impact of the strategic realignment, first half software operations bookings levels, and our visibility into our product sales pipeline, we are adjusting our full-year 2026 financial guidance estimates. In general, we believe that bookings levels we saw in the first quarter and the lumpiness of software sales that we have experienced over the past year, it is prudent to build in a more cautious approach to our guidance.

Given the pace of technological change, and against the backdrop of consistently tight hospital budgets, we are seeing two effects show up in the pipeline. First, deals are taking longer to close as customers do more evaluation upfront before committing. Second, even when they do sign, they are increasingly favoring shorter terms over multi-year agreements. Budget pressure makes them reluctant to lock in long term, and technology uncertainty makes them want to wait for more clarity. Together, these dynamics are compressing near-term revenue. With these factors in mind, we are slightly lowering the midpoint of the revenue guidance range, while the high end of that range is consistent with prior year revenue totals. Additionally, given the benefits we are seeing from the strategic realignment we announced in April, we believe those benefits will offset any revenue reduction.

Importantly, we are not changing the midpoint of our adjusted EBITDA guidance for 2026. We now expect the midpoint for total revenue to be $136 million, while the midpoint for adjusted EBITDA remains at $30 million. In 2026, we expect total revenue to range from $132.5 million-$139.5 million. We expect wireless revenue to now range from $67 million-$70 million, and software revenue to range from $65.5 million-$69.5 million in 2026. Lastly, our adjusted EBITDA guidance for 2026 is expected to range from $28 million-$32 million. The midpoint reflects improvement over 2025, while the high end represents over 10% growth from 2025, largely expected to be driven by a greater mix of higher margin software license bookings and the aforementioned benefits related to the strategic realignment cost reductions. I will 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 are strongly positioned to grow our franchise value 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 that has been integrated with our software operations. 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 would 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 are committed to our current dividend policy and capital allocation policy. That concludes our prepared remarks. At this point, I will ask the operator to open the call up for your questions. We would ask you to limit your initial questions to one and a follow-up, and after that, we will take additional questions as time allows. Operator? Thank you. We will now be conducting a question and answer session.

We ask that you please limit yourself to one question and one follow-up. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we pull for questions. Our first question is from Joseph France at Nichefield Hills. Please proceed with your question.

Great. Thank you very much. Just a couple of questions. What drove the 92% sequential jump in bookings? Apologize for my laryngitis. In terms of number of deals and deal size, and how much, if any, of that was pull forward from 3Q?

Well, I think we've said in the past on these calls, bookings is always going to be lumpy. We happen to pull in a couple of really big whales in the second quarter. We don't always get deals that size in terms of the absolute value of dollars on each of those deals every quarter. You'll see them if you look in our past on a quarterly basis. You'll see a few quarters in the past where it's just way out of line with the other quarters in the year because we pulled in a big deal. We're always elephant hunting. Something that we incent our sales force to do, and we pulled off two very nice ones in the second quarter that we talked about in our earlier comments.

Another question I had was, Mike did in the comments on the quarter, that people are looking for shorter terms and it's taking longer to close. Your cancelable backlog also increased in the quarter versus last year. Is this sort of the same part of the negotiation that's going on because of all the uncertainty in the marketplace?

Yeah. That's fortuitous that you said that because those are lined up. My comments regarding why we took revenue down a little bit, especially on the software side, actually dovetails exactly with what you're seeing from the standpoint of more customers where we have signed deals where they have a termination for convenience, essentially. Grossed up for those amounts, our backlog stayed pretty much flat year-over-year. Clearly there is a trend towards customers wanting more flexibility, although we're not overly concerned about that. Once our products get into customers, they tend to remain pretty sticky at the end of the day. Once we're deep into a project, it's very difficult for a customer to unwind what they've done. Clearly that is something that is happening throughout the industry.

I think it goes to just uncertainty that some of our hospital customers have with the One Big Beautiful Bill Act and what some of the Medicare and Medicaid reimbursements are going to be as we move through the balance of 2026 and into 2027. As you probably know, in the healthcare sector, at the end of the day, these hospitals always have very tight budgets. I think all of those things are kind of moving in tandem.

If I could squeeze in one more.

You actually highlighted a very large account in the Midwest. I'm not sure I know which one that is for sure, but congratulations. When you win these 6 and 7-digit contracts, and this was a really nice one, what are the top two or three reasons they choose you over their alternatives? Some of those companies are pretty big. I'm just curious. Yeah. It's the sheer breadth and depth of our enterprise offering.

All the different things we do, from the contact center to our alerting project, which is Spok Messenger, to our mobile product, which is Spok Mobile, to our many integrations, our Epic integration, our integration with their PBXs through our CTI expertise. We really fit within the healthcare ecosystem very closely with how they function and how they do business. Many of these large customers that we've had, the average tenure of our enormous customers is over 20 years. We get in their hospitals, we get ingrained into their workflows, and we're hard to rip out. We can do a lot of things that other companies can't do that would like to come into the space just because of the years and years of legacy expertise that we have in our solutions.

That bodes well for us, and that's why we tend to, when it comes to the very large IDNs, we tend to win those businesses. We know the best practices with how they need to do their critical communications. We know which solutions they use. It's no secret we focus around their EHR of choice. Our top 2 PBXs that we interface are the top 2 PBXs that are used in the healthcare industry. With the alerting and with the mobile product, we can kind of tie it all together so the right person gets the right message on the right device at the right time. We can pull in the on-call schedule. We really empower the code calls. We really empower a lot of workflows that the big institutions need to function. That's why we get those.

Thank you very much for your time.

Once again, if you would like to ask a question, please press star one on your telephone keypad. We have reached the end of the question and answer session. I would like to turn the floor back over to Vince Kelly for closing comments.

Thank you, operator. Ladies and gentlemen, thank you for your participation and your support. This does conclude today's teleconference. You may disconnect your lines and have a wonderful evening. Bye. This concludes today's teleconference.

You may disconnect your lines at this time. Thank you for your participation.