Press release

Spok Reports 2020 Second Quarter Operating Results; Continued Strong Wireless Trends and Operating Expense Improvements Contribute to Strong Second Quarter Net Income and EBITDA

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Spok Holdings, Inc. (NASDAQ: SPOK), a global leader in healthcare communications, today announced operating results for the second quarter ended June 30, 2020. In addition, the Company’s Board of Directors declared a regular quarterly dividend of $0.125 per share, payable on September 10, 2020, to stockholders of record on August 17, 2020.

Key Second Quarter Operating Highlights:

  • Second quarter software revenue was $14.7 million. Included in second quarter software revenue was $5.2 million of operations revenue and $9.5 million in maintenance revenue, compared to $7.4 million in operations revenue and $10.0 million in maintenance revenue in the second quarter of 2019.
  • Software bookings in the second quarter totaled $15.4 million. Second quarter bookings included $5.8 million of operations bookings and $9.6 million of maintenance renewals. At June 30, 2020 the software revenue backlog totaled $48.4 million, up from the backlog of $39.7 million at June 30, 2019.
  • The quarterly rate of paging unit erosion was 1.2 percent in the second quarter of 2020. This compares to paging unit erosion of 1.3 percent in the prior quarter and 0.5 percent in the year-earlier period. Net paging unit losses were 11,000 in the second quarter of 2020, compared to 12,000 in the prior quarter and 5,000 in the second quarter of 2019. Paging units in service at June 30, 2020, totaled 915,000, compared to 977,000 at June 30, 2019.
  • The rate of wireless revenue erosion was 1.4 percent, down from 2.1 percent erosion in the second quarter of 2019.
  • Total paging ARPU (average revenue per unit) was $7.24 in the second quarter of 2020, compared to $7.31 in the prior quarter and $7.26 in the year-earlier quarter.
  • Operating expenses in the second quarter of 2020 totaled $32.6 million, down from $41.5 million in the prior year quarter. Adjusted operating expenses (excludes depreciation, amortization and accretion and includes capitalized software costs) totaled $34.1 million in the second quarter of 2020, compared to $39.2 million in the prior year quarter. Benefiting operating expenses for the second quarter of 2020, the Company received $0.8 million in CARES Act credits, as well as approximately $2 million in cost savings from the previously discussed employee furloughs.
  • Capital expenses were $846,000 in the second quarter of 2020, compared to $1.5 million in the year-earlier quarter.
  • The number of full-time equivalent employees at June 30, 2020 totaled 610, compared to 600 in the prior year quarter.
  • Capital paid to stockholders in the second quarter of 2020 totaled $2.4 million. This came in the form of the Company’s regular quarterly dividend.
  • The Company’s cash, cash equivalents and short-term investments balance at June 30, 2020, was $70.9 million.

2020 Second Quarter and Year-To-Date Results:

Consolidated revenue for the second quarter of 2020 under Generally Accepted Accounting Principles (“GAAP”) was $35.7 million compared to $39.5 million in the second quarter of 2019. For the first six months of 2020, consolidated revenue totaled $73.0 million, compared to $81.3 million in the first six months of 2019.

 

 

For the three months ended

 

For the six months ended

(Dollars in thousands)

 

June 30, 2020

 

June 30, 2019

 

Change

(%)

 

June 30, 2020

 

June 30, 2019

 

Change

(%)

Wireless revenue

 

 

 

 

 

 

 

 

 

 

 

 

Paging revenue

 

$

19,990

 

$

21,342

 

(6.3

)%

 

$

40,441

 

$

43,029

 

(6.0

)%

Product and other revenue

 

 

1,088

 

 

785

 

38.6

%

 

 

2,024

 

 

1,708

 

18.5

%

Total wireless revenue

 

$

21,078

 

$

22,127

 

(4.7

)%

 

$

42,465

 

$

44,737

 

(5.1

)%

 

 

 

 

 

 

 

 

 

 

 

 

 

Software revenue

 

 

 

 

 

 

 

 

 

 

 

 

Operations revenue

 

$

5,162

 

$

7,353

 

(29.8

)%

 

$

11,390

 

$

16,361

 

(30.4

)%

Maintenance revenue

 

 

9,499

 

 

10,045

 

(5.4

)%

 

 

19,151

 

 

20,190

 

(5.1

)%

Total software revenue

 

 

14,661

 

 

17,398

 

(15.7

)%

 

 

30,541

 

 

36,551

 

(16.4

)%

Total revenue

 

$

35,739

 

$

39,525

 

(9.6

)%

 

$

73,006

 

$

81,288

 

(10.2

)%

GAAP net income for the second quarter of 2020 was $3.8 million, or $0.20 per diluted share, compared to a net loss of $0.7 million, or $0.03 per diluted share, in the second quarter of 2019. GAAP net loss for the first half of 2020 was $0.8 million, or $0.04 per diluted share, compared to net income of $0.1 million, in the first half of 2019.

In the second quarter of 2020, the Company generated $5.2 million of EBITDA (earnings before interest, taxes, depreciation and amortization), compared to EBITDA of $0.3 million in the prior year quarter. In the first half of 2020, the Company generated $3.3 million of EBITDA, compared to EBITDA of $3.8 million in the prior year period.

 

 

For the three months ended

 

For the six months ended

(Dollars in thousands)

 

June 30, 2020

 

June 30, 2019

 

June 30, 2020

 

June 30, 2019

Net income (loss)

 

$

3,759

 

$

(670

)

 

$

(780

)

 

$

72

Basic and diluted net income (loss) per share

 

$

0.20

 

$

(0.03

)

 

$

(0.04

)

 

$

EBITDA

 

$

5,231

 

$

343

 

 

$

3,270

 

 

$

3,816

Management Commentary:

“We are in the throes of a 100-year pandemic that has negatively impacted the finances of our healthcare customer base. As such, software product sales were slow in the second quarter, as this was the first full quarter impacted by the pandemic. The majority of our healthcare customer base continued to struggle with the challenges presented by COVID-19,” said Vincent D. Kelly, president and chief executive officer. “However, on a positive note, while hospitals are focusing their efforts on the current crisis, surveys are showing that by the end of the second quarter hospitals were back to more than a third of their pre-COVID-19 elective volumes and by the end of the year hospitals expect to be back to more than three-quarters of those volumes, with full recovery sometime in 2021,” continued Kelly. “While we did not lose a lot of deals, many were pushed back due to the pandemic, including our first significant Spok Go® deal, which was booked in July. The same was true with the installation of our backlog from prior bookings. As hospitals begin to open back up, we expect to see these trends improve. In the meantime, Spok continues to demonstrate a stable revenue base, as nearly 86 percent of our revenues in the second quarter were recurring in nature, coming from either our legacy wireless business or software maintenance contracts. This, combined with disciplined expense control, has allowed us to post profitable results. And, we did this while continue to invest in and develop our cloud native platform, Spok Go. Spok provides a critical function, which we believe will become even more important in this environment. Spok’s clinical communications platform provides hospitals with a system of action, not just of record, delivering reliable communications and clinical information, including clinical test results, to care teams when and where it matters most to improve patient outcomes.”

In the second quarter of 2020, Spok returned $2.4 million in capital to stockholders, in the form of its regular quarterly dividend. “During the quarter, we took immediate steps to position our operations to a positive free cash flow basis through a combination of furlough and other cost savings initiatives. As a result, we were able to generate increased levels of net income and EBITDA. We are focused on running positive EBITDA and Spok remains committed to paying our regular quarterly dividend. We believe we will be able to achieve this while continuing to support our Spok Care Connect® platform and in the near term, investing in the evolution of our cloud-native and integrated communication platform, Spok Go.

Business Outlook:

Michael W. Wallace, chief operating officer and chief financial officer, said: “Expense management and strong financial discipline have always been critical in balancing the short and long-term components of our business and that was especially so in the second quarter, given the impacts of COVID-19. In the second quarter, GAAP operating expenses were down nearly 22% from prior year levels, with improvements in all expense categories driven by furloughs, the CARES Act credits, and including a $3.6 million benefit versus 2019 due to capitalization of software costs required in 2020. Spok’s balance sheet remains strong, with a cash, cash equivalents and short-term investment balance of $70.9 million at June 30, 2020.”

Commenting on the Company’s previously provided financial guidance for 2020, Wallace noted: “Spok has been focused on continuing to understand the impact of the pandemic on our business, particularly given the impact of COVID-19 on the roll-out of our Spok Go software business. Because of the fluid nature of the situation, we, like many of our peer public companies, believe that it is most prudent to continue to suspend our practice of providing annual guidance for revenues and expenses at this time. We look forward to returning to our normal guidance format after the crisis is over.”

2020 Annual Meeting Results:

At its annual meeting of stockholders yesterday, the Company announced that each of the 10 nominees to the company’s board of directors were elected for one-year terms. The board members are:

Royce Yudkoff

 

 

 

Matthew Oristano

N. Blair Butterfield

 

 

 

Todd Stein

Stacia A. Hylton

 

 

 

Dr. Bobbie Byrne

Vincent D. Kelly

 

 

 

Christine M. Cournoyer

Brian O’Reilly

 

 

 

Brett Shockley

Additionally, Spok Holdings, Inc. stockholders voted to approve the following items proposed by the board of directors:

  • The appointment of Grant Thornton LLP as the company’s independent auditor
  • In an advisory vote, the compensation of Spok’s named executive officers, as described in the 2020 proxy statement.
  • The Company’s 2020 Equity Incentive Award Plan.

Additionally, the shareholder proposal regarding Board of Director Independence and Refreshment was defeated.

When final voting results are available, they will be filed with the SEC.

2020 Second-Quarter Call and Replay:

Spok plans to host a conference call for investors to discuss its 2020 second quarter results at 10:00 a.m. ET on Thursday, July 30, 2020. Dial-in numbers for the call are 334-323-0501 or 800-353-6461. The pass code for the call is 4509240. A replay of the call will be available from 1:00 p.m. ET on July 30, 2020 until 1:00 p.m. ET on Thursday, August 13, 2020. To listen to the replay, please register at http://tinyurl.com/Spok2020Q2earningsreplay. Please cut and paste this address into your browser, enter the registration information, and you will be given access to the replay.

About Spok

Spok, Inc., a wholly owned subsidiary of Spok Holdings, Inc. (NASDAQ: SPOK), headquartered in Springfield, Virginia, is proud to be a global leader in healthcare communications. We deliver clinical information to care teams when and where it matters most to improve patient outcomes. Top hospitals rely on the Spok Care Connect® and Spok Go® platforms 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. Spok is making care collaboration easier. For more information, visit spok.com or follow @spoktweets on Twitter.

Spok is a trademark of Spok Holdings, Inc. Spok Care Connect and Spok Go are trademarks of Spok, Inc.

Safe Harbor Statement under the Private Securities Litigation Reform Act: Statements contained herein or in prior press releases which are not historical fact, such as statements regarding Spok’s future operating and financial performance and statements relating to the unsolicited takeover bid from B. Riley Financial, Inc., are forward-looking statements for purposes of the safe harbor provisions under the Private Securities Litigation Reform Act of 1995. These forward-looking statements involve risks and uncertainties that may cause Spok’s actual results to be materially different from the future results expressed or implied by such forward-looking statements. Factors that could cause actual results to differ materially from those expectations include, but are not limited to, declining demand for paging products and services, continued demand for our software products and services, our ability to develop additional software solutions for our customers and manage our development as a global organization, the ability to manage operating expenses, particularly third party consulting services and research and development costs, future capital needs, competitive pricing pressures, competition from traditional paging services, other wireless communications services and other software providers, many of which are substantially larger and have much greater financial and human capital resources, changes in customer purchasing priorities or capital expenditures, government regulation of our products and services and the healthcare and health insurance industries, reliance upon third-party providers for certain equipment and services, unauthorized breaches or failures in cybersecurity measures adopted by us and/or included in our products and services, the effects of changes in accounting policies or practices, adverse economic, political or market conditions in the U.S. and international markets and other factors such as natural disasters, pandemics and outbreaks of contagious diseases and other adverse public health developments, such as coronavirus disease 2019 (COVID-19), as well as other risks described from time to time in our periodic reports and other filings with the Securities and Exchange Commission. Although Spok believes the expectations reflected in the forward-looking statements are based on reasonable assumptions, it can give no assurance that its expectations will be attained. Spok disclaims any intent or obligation to update any forward-looking statements.

SPOK HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (a)

(Unaudited and in thousands except share, per share amounts and ARPU)

 

 

 

 

 

 

 

 

 

 

 

For the three months ended

 

For the six months ended

 

 

6/30/2020

 

6/30/2019

 

6/30/2020

 

6/30/2019

Revenue:

 

 

 

 

 

 

 

 

Wireless

 

$

21,078

 

 

$

22,127

 

 

$

42,465

 

 

$

44,737

 

Software

 

 

14,661

 

 

 

17,398

 

 

 

30,541

 

 

 

36,551

 

Total revenue

 

 

35,739

 

 

 

39,525

 

 

 

73,006

 

 

 

81,288

 

Operating expenses:

 

 

 

 

 

 

 

 

Cost of revenue

 

 

5,901

 

 

 

7,239

 

 

 

14,165

 

 

 

14,831

 

Research and development

 

 

2,754

 

 

 

6,807

 

 

 

8,203

 

 

 

12,974

 

Technology operations

 

 

7,212

 

 

 

7,866

 

 

 

15,115

 

 

 

15,540

 

Selling and marketing

 

 

3,831

 

 

 

5,574

 

 

 

10,192

 

 

 

11,684

 

General and administrative

 

 

10,810

 

 

 

11,696

 

 

 

22,061

 

 

 

22,443

 

Depreciation, amortization and accretion

 

 

2,072

 

 

 

2,335

 

 

 

4,218

 

 

 

4,694

 

Total operating expenses

 

 

32,580

 

 

 

41,517

 

 

 

73,954

 

 

 

82,166

 

% of total revenue

 

 

91.2

%

 

 

105.0

%

 

 

101.3

%

 

 

101.1

%

Operating income (loss)

 

 

3,159

 

 

 

(1,992

)

 

 

(948

)

 

 

(878

)

% of total revenue

 

 

8.8

%

 

 

(5.0

)%

 

 

(1.3

)%

 

 

(1.1

)%

Interest income

 

 

146

 

 

 

452

 

 

 

509

 

 

 

901

 

Other income (expense)

 

 

101

 

 

 

602

 

 

 

(37

)

 

 

367

 

Income (loss) before income taxes

 

 

3,406

 

 

 

(938

)

 

 

(476

)

 

 

390

 

Benefit from (provision for) income taxes

 

 

353

 

 

 

268

 

 

 

(304

)

 

 

(318

)

Net income (loss)

 

$

3,759

 

 

$

(670

)

 

$

(780

)

 

$

72

 

Basic and diluted net (loss) income per common share

 

$

0.20

 

 

$

(0.03

)

 

$

(0.04

)

 

$

 

Basic weighted average common shares outstanding

 

 

19,016,853

 

 

 

19,217,866

 

 

 

18,987,469

 

 

 

19,207,476

 

Diluted weighted average common shares outstanding

 

 

19,115,148

 

 

 

19,217,866

 

 

 

18,987,469

 

 

 

19,375,599

 

Cash dividends declared per common share

 

 

0.125

 

 

 

0.125

 

 

 

0.25

 

 

 

0.25

 

Key statistics:

 

 

 

 

 

 

 

 

Units in service

 

 

915

 

 

 

977

 

 

 

915

 

 

 

977

 

Average revenue per unit (ARPU)

 

$

7.24

 

 

$

7.26

 

 

$

7.27

 

 

$

7.28

 

Bookings

 

$

15,411

 

 

$

21,334

 

 

$

31,050

 

 

$

35,989

 

Backlog

 

$

48,441

 

 

$

39,718

 

 

$

48,441

 

 

$

39,718

 

 

 

 

 

 

 

 

 

 

(a) Slight variations in totals are due to rounding.

SPOK HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (a)

(Unaudited and in thousands except share, per share amounts and ARPU)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the three months ended

 

 

6/30/2020

 

3/31/2020

 

12/31/2019

 

9/30/2019

 

6/30/2019

 

3/31/2019

 

12/31/2018

 

9/30/2018

Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Wireless

 

$

21,078

 

 

$

21,386

 

 

$

21,615

 

 

$

21,814

 

 

$

22,127

 

 

$

22,610

 

 

$

23,091

 

 

$

23,259

 

Software

 

 

14,661

 

 

 

15,881

 

 

 

17,933

 

 

 

17,639

 

 

 

17,398

 

 

 

19,154

 

 

 

20,165

 

 

 

19,217

 

Total revenue

 

 

35,739

 

 

 

37,267

 

 

 

39,548

 

 

 

39,453

 

 

 

39,525

 

 

 

41,764

 

 

 

43,256

 

 

 

42,476

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of revenue (b)

 

 

5,901

 

 

 

8,264

 

 

 

8,051

 

 

 

7,190

 

 

 

7,239

 

 

 

7,592

 

 

 

8,772

 

 

 

8,141

 

Research and development

 

 

2,754

 

 

 

5,449

 

 

 

7,132

 

 

 

7,437

 

 

 

6,807

 

 

 

6,167

 

 

 

6,618

 

 

 

5,934

 

Technology operations

 

 

7,212

 

 

 

7,904

 

 

 

8,083

 

 

 

7,805

 

 

 

7,866

 

 

 

7,674

 

 

 

8,120

 

 

 

7,787

 

Selling and marketing

 

 

3,831

 

 

 

6,361

 

 

 

5,891

 

 

 

5,595

 

 

 

5,574

 

 

 

6,110

 

 

 

6,275

 

 

 

5,716

 

General and administrative

 

 

10,810

 

 

 

11,251

 

 

 

11,531

 

 

 

11,813

 

 

 

11,696

 

 

 

10,747

 

 

 

10,721

 

 

 

13,673

 

Depreciation, amortization and accretion

 

 

2,072

 

 

 

2,146

 

 

 

2,250

 

 

 

2,305

 

 

 

2,335

 

 

 

2,359

 

 

 

2,601

 

 

 

2,785

 

Goodwill impairment

 

 

 

 

 

 

8,849

 

 

 

 

 

 

 

 

 

 

 

Total operating expenses

 

 

32,580

 

 

 

41,375

 

 

 

51,787

 

 

 

42,145

 

 

 

41,517

 

 

 

40,649

 

 

 

43,107

 

 

 

44,036

 

% of total revenue

 

 

91.2

%

 

 

111.0

%

 

 

130.9

%

 

 

106.8

%

 

 

105.0

%

 

 

97.3

%

 

 

99.7

%

 

 

103.7

%

Operating (loss) income

 

 

3,159

 

 

 

(4,108

)

 

 

(12,239

)

 

 

(2,692

)

 

 

(1,992

)

 

 

1,115

 

 

 

149

 

 

 

(1,560

)

% of total revenue

 

 

8.8

%

 

 

(11.0

)%

 

 

(30.9

)%

 

 

(6.8

)%

 

 

(5.0

)%

 

 

2.7

%

 

 

0.3

%

 

 

(3.7

)%

Interest income

 

 

146

 

 

 

363

 

 

 

350

 

 

 

399

 

 

 

452

 

 

 

449

 

 

 

628

 

 

 

384

 

Other income (expense)

 

 

101

 

 

 

(137

)

 

 

206

 

 

 

163

 

 

 

602

 

 

 

(236

)

 

 

(593

)

 

 

(110

)

(Loss) income before income taxes

 

 

3,406

 

 

 

(3,882

)

 

 

(11,683

)

 

 

(2,130

)

 

 

(938

)

 

 

1,328

 

 

 

184

 

 

 

(1,286

)

Benefit from (provision for) income taxes

 

 

353

 

 

 

(657

)

 

 

2,172

 

 

 

804

 

 

 

268

 

 

 

(586

)

 

 

5

 

 

 

446

 

Net income (loss)

 

$

3,759

 

 

$

(4,539

)

 

$

(9,511

)

 

$

(1,326

)

 

$

(670

)

 

$

742

 

 

$

189

 

 

$

(840

)

Basic and diluted net (loss) income per common share

 

$

0.20

 

 

$

(0.24

)

 

$

(0.50

)

 

$

(0.07

)

 

$

(0.03

)

 

$

0.04

 

 

$

0.01

 

 

$

(0.04

)

Basic weighted average common shares outstanding

 

 

19,016,853

 

 

 

18,958,716

 

 

 

18,860,020

 

 

 

19,086,811

 

 

 

19,217,866

 

 

 

19,196,970

 

 

 

19,445,401

 

 

 

19,456,149

 

Diluted weighted average common shares outstanding

 

 

19,115,148

 

 

 

18,958,716

 

 

 

18,860,020

 

 

 

19,086,811

 

 

 

19,217,866

 

 

 

19,356,712

 

 

 

19,445,401

 

 

 

19,456,149

 

Key statistics:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Units in service

 

 

915

 

 

 

926

 

 

 

938

 

 

 

955

 

 

 

977

 

 

 

982

 

 

 

992

 

 

 

999

 

Average revenue per unit (ARPU)

 

$

7.24

 

 

$

7.31

 

 

$

7.33

 

 

$

7.32

 

 

$

7.26

 

 

$

7.32

 

 

$

7.36

 

 

$

7.40

 

Bookings

 

$

15,411

 

 

$

15,639

 

 

$

21,932

 

 

$

20,421

 

 

$

21,334

 

 

$

14,654

 

 

$

23,076

 

 

$

21,580

 

Backlog

 

$

48,441

 

 

$

49,052

 

 

$

50,553

 

 

$

42,604

 

 

$

39,718

 

 

$

37,392

 

 

$

40,422

 

 

$

36,366

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(a) Slight variations in totals are due to rounding.

(b) An adjustment of $771 to cost of revenue, identified in the fourth quarter of 2018, has been reflected in this table as an increase to cost of revenue of $166, $196 and $359 in the first, second and third quarters of 2018, respectively. Total operating expenses, operating income (loss), income (loss) before income taxes, Net (loss) income and net (loss) income per share have been adjusted accordingly to reflect these changes.

SPOK HOLDINGS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS (a)

(In thousands)

 

 

 

 

 

 

 

6/30/2020

 

12/31/2019

 

 

Unaudited

 

 

Assets

 

 

 

 

Current assets:

 

 

 

 

Cash and cash equivalents

 

$

40,886

 

 

$

47,361

 

Short term investments

 

 

29,974

 

 

 

29,899

 

Accounts receivable, net

 

 

29,595

 

 

 

30,174

 

Prepaid expenses

 

 

7,921

 

 

 

7,517

 

Other current assets

 

 

2,997

 

 

 

2,714

 

Total current assets

 

 

111,373

 

 

 

117,665

 

Non-current assets:

 

 

 

 

Property and equipment, net

 

 

7,169

 

 

 

8,000

 

Operating lease right-of-use assets

 

 

14,795

 

 

 

16,317

 

Capitalized software development

 

 

5,300

 

 

 

Goodwill

 

 

124,182

 

 

 

124,182

 

Intangible assets, net

 

 

1,667

 

 

 

2,917

 

Deferred income tax assets, net

 

 

48,022

 

 

 

48,983

 

Other non-current assets

 

 

1,187

 

 

 

1,808

 

Total non-current assets

 

 

202,322

 

 

 

202,207

 

Total assets

 

$

313,695

 

 

$

319,872

 

Liabilities and stockholders’ equity

 

 

 

 

Current liabilities:

 

 

 

 

Accounts payable

 

$

5,717

 

 

$

3,615

 

Accrued compensation and benefits

 

 

10,576

 

 

 

11,680

 

Accrued taxes

 

 

1,487

 

 

 

1,529

 

Deferred revenue

 

 

24,688

 

 

 

25,944

 

Operating lease liabilities

 

 

5,267

 

 

 

5,437

 

Other current liabilities

 

 

3,165

 

 

 

2,978

 

Total current liabilities

 

 

50,900

 

 

 

51,183

 

Non-current liabilities:

 

 

 

 

Asset retirement obligations

 

 

6,146

 

 

 

6,061

 

Operating lease liabilities

 

 

10,162

 

 

 

11,575

 

Other non-current liabilities

 

 

806

 

 

 

959

 

Total non-current liabilities

 

 

17,114

 

 

 

18,595

 

Total liabilities

 

 

68,014

 

 

 

69,778

 

Commitments and contingencies

 

 

 

 

Stockholders’ equity:

 

 

 

 

Preferred stock

 

$

 

 

$

 

Common stock

 

 

2

 

 

 

2

 

Additional paid-in capital

 

 

88,681

 

 

 

86,874

 

Accumulated other comprehensive loss

 

 

(1,718

)

 

 

(1,601

)

Retained earnings

 

 

158,716

 

 

 

164,819

 

Total stockholders’ equity

 

 

245,681

 

 

 

250,094

 

Total liabilities and stockholders’ equity

 

$

313,695

 

 

$

319,872

 

 

 

 

 

 

(a) Slight variations in totals are due to rounding.

SPOK HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (a)

(Unaudited and in thousands)

 

 

 

 

 

 

 

For the six months ended

 

 

6/30/2020

 

6/30/2019

Operating activities:

 

 

 

 

Net (loss) income

 

$

(780

)

 

$

72

 

Adjustments to reconcile net loss to net cash provided by operating activities:

 

 

 

 

Depreciation, amortization and accretion

 

 

4,218

 

 

 

4,694

 

Deferred income tax expense

 

 

290

 

 

 

208

 

Stock based compensation

 

 

2,544

 

 

 

1,557

 

Provisions for doubtful accounts, service credits, and other

 

 

673

 

 

 

272

 

Changes in assets and liabilities:

 

 

 

 

Accounts receivable

 

 

(670

)

 

 

(6,682

)

Prepaid expenses, inventory and other assets

 

 

1,997

 

 

 

2,075

 

Accounts payable, accrued liabilities and other

 

 

(440

)

 

 

(3,161

)

Deferred revenue

 

 

(1,373

)

 

 

1,734

 

Net cash provided by operating activities

 

 

6,459

 

 

 

769

 

Investing activities:

 

 

 

 

Purchases of property and equipment

 

 

(1,895

)

 

 

(2,783

)

Capitalized software development

 

 

(5,300

)

 

 

Purchase of short-term investments

 

 

(29,877

)

 

 

(29,650

)

Maturity of short-term investments

 

 

30,000

 

 

 

4,000

 

Net cash used in investing activities

 

 

(7,072

)

 

 

(28,433

)

Financing activities:

 

 

 

 

Cash distributions to stockholders

 

 

(5,008

)

 

 

(5,049

)

Purchase of common stock (including commissions)

 

 

 

 

(1,810

)

Proceeds from issuance of common stock under the Employee Stock Purchase Plan

 

 

166

 

 

 

119

 

Purchase of common stock for tax withholding on vested equity awards

 

 

(903

)

 

 

(1,017

)

Net cash used in financing activities

 

 

(5,745

)

 

 

(7,757

)

Effect of exchange rate on cash

 

 

(117

)

 

 

(93

)

Net decrease in cash and cash equivalents

 

 

(6,475

)

 

 

(35,514

)

Cash and cash equivalents, beginning of period

 

 

47,361

 

 

 

83,343

 

Cash and cash equivalents, end of period

 

$

40,886

 

 

$

47,829

 

Supplemental disclosure:

 

 

 

 

Income taxes paid

 

$

148

 

 

$

683

 

 

 

 

 

 

(a) Slight variations in totals are due to rounding.

SPOK HOLDINGS, INC.

CONSOLIDATED REVENUE

SUPPLEMENTAL INFORMATION (a)

(Unaudited and in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the three months ended

 

 

6/30/2020

 

3/31/2020

 

12/31/2019

 

9/30/2019

 

6/30/2019

 

3/31/2019

 

12/31/2018

 

9/30/2018

Revenue

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Paging

 

$

19,990

 

$

20,451

 

$

20,826

 

$

21,212

 

$

21,342

 

$

21,687

 

$

21,997

 

$

22,442

Non-paging

 

 

1,088

 

 

935

 

 

789

 

 

602

 

 

785

 

 

923

 

 

1,094

 

 

817

Total wireless revenue

 

$

21,078

 

$

21,386

 

$

21,615

 

$

21,814

 

$

22,127

 

$

22,610

 

$

23,091

 

$

23,259

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

License

 

 

749

 

 

955

 

 

1,711

 

 

2,723

 

 

1,676

 

 

2,840

 

 

3,496

 

 

3,175

Services

 

 

3,812

 

 

4,549

 

 

4,947

 

 

4,202

 

 

4,835

 

 

5,206

 

 

5,103

 

 

4,555

Equipment

 

 

601

 

 

725

 

 

1,125

 

 

689

 

 

842

 

 

963

 

 

1,568

 

 

1,296

Operations revenue

 

$

5,162

 

$

6,229

 

$

7,783

 

$

7,614

 

$

7,353

 

$

9,009

 

$

10,167

 

$

9,026

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Maintenance revenue

 

$

9,499

 

$

9,652

 

$

10,150

 

$

10,025

 

$

10,045

 

$

10,145

 

$

9,998

 

$

10,191

Total software revenue

 

$

14,661

 

$

15,881

 

$

17,933

 

$

17,639

 

$

17,398

 

$

19,154

 

$

20,165

 

$

19,217

 

                               

Total revenue

 

$

35,739

 

$

37,267

 

$

39,548

 

$

39,453

 

$

39,525

 

$

41,764

 

$

43,256

 

$

42,476

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(a) Slight variations in totals are due to rounding.

SPOK HOLDINGS, INC.

CONSOLIDATED OPERATING EXPENSES

SUPPLEMENTAL INFORMATION (a)

(Unaudited and in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the three months ended

 

 

6/30/2020

 

3/31/2020

 

12/31/2019

 

9/30/2019

 

6/30/2019

 

3/31/2019

 

12/31/2018

 

9/30/2018

Cost of revenue

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Payroll and related

 

$

4,350

 

 

$

5,785

 

 

$

5,222

 

$

5,099

 

$

4,749

 

 

$

4,931

 

$

4,868

 

$

4,923

Cost of sales

 

 

1,098

 

 

 

1,940

 

 

 

2,278

 

 

1,567

 

 

1,900

 

 

 

2,080

 

 

3,349

 

 

2,623

Stock-based compensation

 

 

134

 

 

 

119

 

 

 

42

 

 

21

 

 

97

 

 

 

107

 

 

44

 

 

75

Other

 

 

319

 

 

 

420

 

 

 

509

 

 

503

 

 

493

 

 

 

474

 

 

511

 

 

520

Total cost of revenue (b)

 

 

5,901

 

 

 

8,264

 

 

 

8,051

 

 

7,190

 

 

7,239

 

 

 

7,592

 

 

8,772

 

 

8,141

Research and development

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Payroll and related

 

 

4,115

 

 

 

4,761

 

 

 

5,056

 

 

5,083

 

 

4,639

 

 

 

4,263

 

 

4,350

 

 

4,709

Outside services

 

 

1,803

 

 

 

1,584

 

 

 

1,742

 

 

2,027

 

 

1,912

 

 

 

1,745

 

 

2,115

 

 

1,040

Capitalized software development

 

 

(3,596

)

 

 

(1,705

)

 

 

 

 

 

 

 

Stock-based compensation

 

 

243

 

 

 

236

 

 

 

113

 

 

102

 

 

84

 

 

 

11

 

 

5

 

 

71

Other

 

 

189

 

 

 

573

 

 

 

221

 

 

225

 

 

172

 

 

 

148

 

 

148

 

 

114

Total research and development

 

 

2,754

 

 

 

5,449

 

 

 

7,132

 

 

7,437

 

 

6,807

 

 

 

6,167

 

 

6,618

 

 

5,934

Technology operations

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Payroll and related

 

 

2,213

 

 

 

2,712

 

 

 

2,656

 

 

2,823

 

 

2,662

 

 

 

2,647

 

 

2,616

 

 

2,866

Site rent

 

 

3,399

 

 

 

3,398

 

 

 

3,669

 

 

3,269

 

 

3,480

 

 

 

3,296

 

 

3,432

 

 

3,482

Telecommunications

 

 

961

 

 

 

1,001

 

 

 

1,026

 

 

1,016

 

 

1,019

 

 

 

996

 

 

1,021

 

 

950

Stock-based compensation

 

 

47

 

 

 

43

 

 

 

32

 

 

30

 

 

30

 

 

 

30

 

 

24

 

 

24

Other

 

 

592

 

 

 

750

 

 

 

700

 

 

667

 

 

675

 

 

 

705

 

 

1,027

 

 

465

Total technology operations

 

 

7,212

 

 

 

7,904

 

 

 

8,083

 

 

7,805

 

 

7,866

 

 

 

7,674

 

 

8,120

 

 

7,787

Selling and marketing

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Payroll and related

 

 

2,538

 

 

 

3,583

 

 

 

3,382

 

 

3,524

 

 

3,329

 

 

 

3,273

 

 

3,047

 

 

3,401

Commissions

 

 

852

 

 

 

1,212

 

 

 

1,158

 

 

1,114

 

 

1,298

 

 

 

1,424

 

 

1,759

 

 

1,225

Stock-based compensation

 

 

194

 

 

 

172

 

 

 

164

 

 

137

 

 

128

 

 

 

161

 

 

99

 

 

135

Advertising and events

 

 

160

 

 

 

784

 

 

 

1,034

 

 

703

 

 

656

 

 

 

933

 

 

1,236

 

 

857

Other

 

 

87

 

 

 

610

 

 

 

153

 

 

117

 

 

163

 

 

 

319

 

 

134

 

 

98

Total selling and marketing

 

 

3,831

 

 

 

6,361

 

 

 

5,891

 

 

5,595

 

 

5,574

 

 

 

6,110

 

 

6,275

 

 

5,716

General and administrative

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Payroll and related

 

 

3,355

 

 

 

4,134

 

 

 

3,974

 

 

4,220

 

 

4,136

 

 

 

4,041

 

 

4,087

 

 

4,834

Stock-based compensation

 

 

744

 

 

 

612

 

 

 

770

 

 

674

 

 

690

 

 

 

219

 

 

860

 

 

1,118

Bad debt

 

 

628

 

 

 

43

 

 

 

56

 

 

402

 

 

(96

)

 

 

308

 

 

303

 

 

513

Facility rent, office, and technology costs

 

 

2,276

 

 

 

2,068

 

 

 

1,952

 

 

2,369

 

 

2,485

 

 

 

2,294

 

 

2,072

 

 

2,925

Outside services

 

 

2,043

 

 

 

2,036

 

 

 

2,350

 

 

2,004

 

 

2,306

 

 

 

1,776

 

 

2,062

 

 

1,864

Taxes, licenses and permits

 

 

804

 

 

 

859

 

 

 

1,000

 

 

888

 

 

863

 

 

 

921

 

 

111

 

 

1,081

Other

 

 

960

 

 

 

1,499

 

 

 

1,429

 

 

1,256

 

 

1,312

 

 

 

1,188

 

 

1,226

 

 

1,338

Total general and administrative

 

 

10,810

 

 

 

11,251

 

 

 

11,531

 

 

11,813

 

 

11,696

 

 

 

10,747

 

 

10,721

 

 

13,673

Depreciation, amortization and accretion

 

 

2,072

 

 

 

2,146

 

 

 

2,250

 

 

2,305

 

 

2,335

 

 

 

2,359

 

 

2,601

 

 

2,785

Goodwill impairment

 

 

 

 

 

 

8,849

 

 

 

 

 

 

Operating expenses

 

$

32,580

 

 

$

41,375

 

 

$

51,787

 

$

42,145

 

$

41,517

 

 

$

40,649

 

$

43,107

 

$

44,036

Capital expenditures

 

$

846

 

 

$

1,063

 

 

$

679

 

$

1,378

 

$

1,495

 

 

$

1,287

 

$

830

 

$

1,630

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(a) Slight variations in totals are due to rounding.

(b) An adjustment of $771 to cost of sales, identified in the fourth quarter of 2018, has been reflected in this table as an increase to cost of sales of $166, $196 and $359 in the first, second and third quarters of 2018, respectively. Total cost of revenue and operating expenses have been adjusted accordingly to reflect these changes. 

SPOK HOLDINGS, INC.

UNITS IN SERVICE ACTIVITY, MARKET SEGMENT, CHURN

AND AVERAGE REVENUE PER UNIT (ARPU) (a)

(Unaudited and in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the three months ended

 

 

6/30/2020

 

3/31/2020

 

12/31/2019

 

9/30/2019

 

6/30/2019

 

3/31/2019

 

12/31/2018

 

9/30/2018

Paging units in service

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning units in service (000’s)

 

 

926

 

 

 

938

 

 

 

955

 

 

 

977

 

 

 

982

 

 

 

992

 

 

 

999

 

 

 

1,024

 

Gross placements

 

 

35

 

 

 

24

 

 

 

22

 

 

 

28

 

 

 

35

 

 

 

27

 

 

 

30

 

 

 

31

 

Gross disconnects

 

 

(46

)

 

 

(36

)

 

 

(39

)

 

 

(50

)

 

 

(40

)

 

 

(37

)

 

 

(37

)

 

 

(56

)

Net change

 

 

(11

)

 

 

(12

)

 

 

(17

)

 

 

(22

)

 

 

(5

)

 

 

(10

)

 

 

(7

)

 

 

(25

)

Ending units in service

 

 

915

 

 

 

926

 

 

 

938

 

 

 

955

 

 

 

977

 

 

 

982

 

 

 

992

 

 

 

999

 

End of period units in service % of total (b)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Healthcare

 

 

83.6

%

 

 

82.6

%

 

 

82.4

%

 

 

81.7

%

 

 

81.7

%

 

 

81.6

%

 

 

81.4

%

 

 

81.7

%

Government

 

 

5.5

%

 

 

5.4

%

 

 

5.4

%

 

 

5.5

%

 

 

5.6

%

 

 

5.8

%

 

 

5.8

%

 

 

5.8

%

Large enterprise

 

 

4.4

%

 

 

5.5

%

 

 

5.5

%

 

 

6.1

%

 

 

5.9

%

 

 

5.9

%

 

 

5.9

%

 

 

6.0

%

Other(b)

 

 

6.6

%

 

 

6.5

%

 

 

6.6

%

 

 

6.7

%

 

 

6.8

%

 

 

6.7

%

 

 

6.9

%

 

 

6.5

%

Total

 

 

100.0

%

 

 

100.0

%

 

 

100.0

%

 

 

100.0

%

 

 

100.0

%

 

 

100.0

%

 

 

100.0

%

 

 

100.0

%

Account size ending units in service (000’s)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1 to 100 units

 

 

65

 

 

 

67

 

 

 

69

 

 

 

72

 

 

 

74

 

 

 

77

 

 

 

78

 

 

 

81

 

101 to 1,000 units

 

 

165

 

 

 

171

 

 

 

173

 

 

 

175

 

 

 

179

 

 

 

186

 

 

 

190

 

 

 

192

 

>1,000 units

 

 

685

 

 

 

688

 

 

 

696

 

 

 

708

 

 

 

724

 

 

 

719

 

 

 

724

 

 

 

726

 

Total

 

 

915

 

 

 

926

 

 

 

938

 

 

 

955

 

 

 

977

 

 

 

982

 

 

 

992

 

 

 

999

 

Account size net loss rate(c)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1 to 100 units

 

 

(3.1

)%

 

 

(3.0

)%

 

 

(3.8

)%

 

 

(2.1

)%

 

 

(3.2

)%

 

 

(2.3

)%

 

 

(1.7

)%

 

 

(4.3

)%

101 to 1,000 units

 

 

(4.2

)%

 

 

(1.0

)%

 

 

(1.0

)%

 

 

(2.4

)%

 

 

(3.9

)%

 

 

(2.3

)%

 

%

 

 

(2.7

)%

>1,000 units

 

 

(0.4

)%

 

 

(1.2

)%

 

 

(1.8

)%

 

 

(2.2

)%

 

 

0.7

%

 

 

(1.1

)%

 

 

(0.1

)%

 

 

(2.2

)%

Total

 

 

(1.3

)%

 

 

(1.3

)%

 

 

(1.8

)%

 

 

(2.2

)%

 

 

(0.5

)%

 

 

(1.1

)%

 

 

(0.2

)%

 

 

(2.5

)%

Account size ARPU

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1 to 100 units

 

$

11.65

 

 

$

12.01

 

 

$

11.99

 

 

$

11.84

 

 

$

12.00

 

 

$

11.90

 

 

$

11.61

 

 

$

11.33

 

101 to 1,000 units

 

 

8.24

 

 

 

8.34

 

 

 

8.31

 

 

 

8.41

 

 

 

8.47

 

 

 

8.35

 

 

 

8.28

 

 

 

8.19

 

>1,000 units

 

 

6.57

 

 

 

6.59

 

 

 

6.62

 

 

 

6.59

 

 

 

6.47

 

 

 

6.57

 

 

 

6.69

 

 

 

6.74

 

Total

 

$

7.24

 

 

$

7.31

 

 

$

7.33

 

 

$

7.32

 

 

$

7.26

 

 

$

7.32

 

 

$

7.36

 

 

$

7.40

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(a) Slight variations in totals are due to rounding.

(b) Other includes hospitality, resort and indirect units

(c) Net loss rate is net current period placements and disconnected units in service divided by prior period ending units in service.

SPOK HOLDINGS, INC.

RECONCILIATION FROM NET (LOSS) INCOME TO EBITDA (a)

(Unaudited and in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the three months ended

 

 

6/30/2020

 

3/31/2020

 

12/31/2019

 

9/30/2019

 

6/30/2019

 

3/31/2019

 

12/31/2018

 

9/30/2018

Reconciliation of net (loss) income to EBITDA (b):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) (c)

 

$

3,759

 

 

$

(4,539

)

 

$

(9,511

)

 

$

(1,326

)

 

$

(670

)

 

$

742

 

 

$

189

 

 

$

(840

)

Plus (less): benefit from (provision for) income taxes

 

 

(353

)

 

 

657

 

 

 

(2,172

)

 

 

(804

)

 

 

(268

)

 

 

586

 

 

 

(5

)

 

 

(446

)

Plus (less): Other expense (income)

 

 

(101

)

 

 

137

 

 

 

(206

)

 

 

(163

)

 

 

(602

)

 

 

236

 

 

 

593

 

 

 

110

 

Less: Interest income

 

 

(146

)

 

 

(363

)

 

 

(350

)

 

 

(399

)

 

 

(452

)

 

 

(449

)

 

 

(628

)

 

 

(384

)

Operating income (loss)

 

 

3,159

 

 

 

(4,108

)

 

 

(12,239

)

 

 

(2,692

)

 

 

(1,992

)

 

 

1,115

 

 

 

149

 

 

 

(1,560

)

Plus: depreciation, amortization and accretion

 

 

2,072

 

 

 

2,146

 

 

 

2,250

 

 

 

2,305

 

 

 

2,335

 

 

 

2,359

 

 

 

2,601

 

 

 

2,785

 

EBITDA (as defined by the Company)

 

$

5,231

 

 

$

(1,962

)

 

$

(9,989

)

 

$

(387

)

 

$

343

 

 

$

3,474

 

 

$

2,750

 

 

$

1,225

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the six months ended

 

 

 

 

 

 

 

 

 

 

 

 

 

 

6/30/2020

 

6/30/2019

 

 

 

 

 

 

 

 

 

 

 

 

Reconciliation of net income (loss) to EBITDA (b):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net (loss) income

 

$

(780

)

 

$

72

 

 

 

 

 

 

 

 

 

 

 

 

 

(Less) plus: Benefit from (provision for) income taxes

 

 

304

 

 

 

318

 

 

 

 

 

 

 

 

 

 

 

 

 

Plus (less): Other (expense) income

 

 

37

 

 

 

(367

)

 

 

 

 

 

 

 

 

 

 

 

 

Less: Interest income

 

 

(509

)

 

 

(901

)

 

 

 

 

 

 

 

 

 

 

 

 

Operating loss

 

 

(948

)

 

 

(878

)

 

 

 

 

 

 

 

 

 

 

 

 

Plus: depreciation, amortization and accretion

 

 

4,218

 

 

 

4,694

 

 

 

 

 

 

 

 

 

 

 

 

 

EBITDA (as defined by the Company)

 

$

3,270

 

 

$

3,816

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

RECONCILIATION FROM OPERATING EXPENSES TO ADJUSTED OPERATING EXPENSES (a)(d)

 

 

 

 

 

For the three months ended

 

 

6/30/2020

 

3/31/2020

 

12/31/2019

 

9/30/2019

 

6/30/2019

 

3/31/2019

 

12/31/2018

 

9/30/2018

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses

 

$

32,580

 

 

$

41,375

 

 

$

51,787

 

 

$

42,145

 

 

$

41,517

 

 

$

40,649

 

 

$

43,107

 

 

$

44,036

 

Less: depreciation, amortization and accretion

 

 

2,072

 

 

 

2,146

 

 

 

2,250

 

 

 

2,305

 

 

 

2,335

 

 

 

2,359

 

 

 

2,601

 

 

 

2,785

 

Less: goodwill impairment

 

$

 

 

$

 

 

$

8,849

 

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

Add: capitalized software costs

 

$

3,596

 

 

$

1,705

 

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

Adjusted operating expenses

 

$

34,104

 

 

$

40,934

 

 

$

40,688

 

 

$

39,840

 

 

$

39,182

 

 

$

38,290

 

 

$

40,506

 

 

$

41,251

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(a) Slight variations in totals are due to rounding.

(b) EBITDA or earnings before interest, taxes, depreciation, amortization and accretion is a non-GAAP measure and is presented for analytical purposes only. Management and the Board of Directors rely on EBITDA for purposes of determining the Company’s capital allocation policies. EBITDA is also the starting point for the calculation of operating cash flow for purposes of determining whether management has achieved certain performance objectives in the Company’s short-term and long-term incentive plans.

(c) An adjustment to cost of revenue identified in the fourth quarter of 2018 of $771 has been reflected in this table as a reduction of Net (loss) income of $166, $196, $359, and $771 in the first, second, third, and fourth quarters respectively.

(d) Adjusted operating expenses is a non-GAAP measure and is presented for analytical purposes only. Management and the Board of Directors rely on adjusted operating expenses for purposes of assessing our core operating results based on expenses incurred within a period that directly drive operating income in that period. Management adjusts for certain items because we do not regard these costs as reflective of normal costs related to the ongoing operation of the business in the ordinary course. In general, these items possess one or more of the following characteristics; non-cash expenses, factors outside of our control, items that are non-operational in nature, and unusual items not expected to occur in the normal course of business.