Spok Holdings (SPOK) This fall 2020 Earnings Name Transcript

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Spok Holdings (NASDAQ:SPOK)
This fall 2020 Earnings Name
Feb 18, 2021, 10:00 a.m. ET

Contents:

  • Ready Remarks
  • Questions and Solutions
  • Name Individuals

Ready Remarks:

Operator

Good morning, girls and gents, and welcome to the Spok 2020 fourth-quarter investor name. At present’s name is being recorded.  On-line in the present day, we have now Vince Kelly, president and chief government officer; Mike Wallace, chief working officer and chief monetary officer.  At the moment, for opening feedback, I would like to show the convention over to Mr. Wallace. Please go forward, sir.

Mike WallaceChief Working Officer and Chief Monetary Officer

Good morning. Thanks for becoming a member of us for our 2020 fourth quarter and full-year investor replace. Earlier than we focus on our working outcomes, I wish to remind everybody that in the present day’s convention name could embrace forward-looking statements which might be topic to dangers and uncertainties referring to Spok’s future monetary and enterprise efficiency. Such statements could embrace estimates of income, bills and revenue, in addition to different predictive statements or plans, that are dependent upon future occasions or situations.

These statements signify the corporate’s estimates solely on the date of this convention name and will not be meant to provide any assurance as to precise future outcomes. Spok’s precise outcomes might differ materially from these anticipated in these forward-looking statements. Though these statements are primarily based upon assumptions that the corporate believes to be cheap, they’re topic to dangers and uncertainties.  Please assessment the danger components part referring to our operations and the enterprise setting by which we compete contained in our 2020 Kind 10-Ok, which we count on to file later in the present day, and associated paperwork filed with the Securities and Change Fee. Please observe that Spok assumes no obligation to replace any forward-looking statements from previous or current filings and convention calls.  With that, I will flip the decision over to Vince.

Vince KellyPresident and Chief Government Officer

Thanks, Mike, and good morning, everybody. Thanks for becoming a member of us on in the present day’s name. Earlier than I get began in the present day, I simply wish to acknowledge that we’re nonetheless within the midst of a worldwide pandemic. Many people have been sick, misplaced family members, have been in any other case adversely impacted by this disaster.

And most of us are nonetheless ready for a vaccine for the world to return to some sense of normalcy. The stress and stress have fallen disproportionately on healthcare clinicians and employees. At Spok, we perceive that and recognize the sacrifices and dedication that caregivers proceed to exhibit within the service of their fellow people. We wish to thank them for what they do each day.  We have been inspired with our efficiency within the fourth quarter of 2020 and imagine that the momentum generated by our crew within the second half of the 12 months positions Spok for sustained enchancment in 2021 as we proceed to market and promote our new cloud-native and built-in communications platform, Spok Go.

Regardless of the numerous challenges that we encountered final 12 months, because of a once-in-a-century international pandemic, our crew was capable of keep on activity and centered breaking a five-year report for promoting new console licenses, serving to our present prospects arrange distant name heart functionality through the preliminary onset of COVID and reserving Spok Go offers within the second half of the 12 months whereas constructing the pipeline into 2021.  However earlier than we get into the small print of the quarter and the total 12 months, I wish to underscore the place we’re strategically with respect to our marketing strategy and outlook. As we enter the brand new 12 months, we imagine we’re poised to positively influence the healthcare panorama via our technique of providing an built-in cloud-native platform for mobility, scientific alerting, workflows and speak to heart options. The Spok Go platform introduced early final 12 months was developed on the muse of a single, best-in-class structure constructed on a cloud-based Software program-as-a-Service or SaaS supply mannequin.  Clearly, we have been challenged with rolling out a brand new platform proper because the pandemic struck. The truth is, the timing of COVID-19 couldn’t have been worse for our plan to introduce a brand new answer.

Nonetheless, we do not imagine that modified the long-term potential for Spok Go. Gross sales and income will ramp up over time because the pandemic recedes and the vaccines are extra broadly distributed. Primarily based on buyer suggestions and our analysis of the aggressive setting, we imagine we’re on monitor for long-term success and worth creation that can reward all our constituents.  The influence of COVID-19 that has had on our prospects has been profound, each by way of the stress that’s placed on the docs, nurses and hospital directors, in addition to the monetary influence that it has had on the healthcare {industry} basically. Already skinny margins at these organizations have been additional challenged by shifting assets to take care of the pandemic, thus altering funding selections.

This clearly impacted not solely our prospects’ potential to buy however their potential to focus to even have a look at demos of a brand new platform that they had by no means seen earlier than. That is clearly a troublesome promoting setting to launch a brand new answer. Once more, we count on that to vary over the course of the brand new 12 months, and the excellent news is elective procedures have been trending again up and have been between 70 to 80% of pre-pandemic ranges at giant hospitals within the fourth quarter. I am notably pleased with our Spok gross sales crew and their potential to adapt and alter below these circumstances.  Once we kicked off 2020, there was a lot pleasure and enthusiasm surrounding the introduction of Spok Go.

Although the unfold of the virus impeded the quite a few buyer conferences we had arrange at HIMSS to introduce the product, our crew was capable of keep centered, reserving Spok Go offers within the second half of the 12 months and constructing our gross sales funnel and pipeline. That is fairly an accomplishment when you think about our gross sales crew is developing on one 12 months with out with the ability to journey and meet with prospects nose to nose. This notably impacts our new enterprise fashions. Regardless, the momentum we have now constructed provides us confidence wanting ahead, notably with an eventual decision to the worldwide pandemic.

We count on because the 12 months progresses, our new platform enterprise will proceed to select up every quarter, ending the 12 months on a really constructive footing. That being stated, in 2020, our crew set a brand new report for Spok console licenses and likewise helped our prospects reconfigure their name facilities for distant work. Our gross sales crew additionally turned in sturdy ends in authorities gross sales and channel gross sales as effectively.  Over the previous three years in tight cooperation with Amazon, Spok has developed a best-in-class AWS cloud-native structure for the Spok Go platform. The Spok Go platform has been designed expressly for mission-critical utility scalability, efficiency and reliability.  Along with vetting Spok’s structure with Amazon’s high architects, Spok has commissioned unbiased third-party consultants to assessment and examine the Spok Go platform to Silicon Valley finest practices.

Spok invests for the long run. And with the Spok Go platform structure, Spok is effectively positioned for the following decade in offering purpose-built, mission-critical cloud providers for healthcare and public security.  In 2020, we proceed to spend money on Spok Go, which we imagine is important to be finest in school with an industry-leading scientific communication platform. On the software program facet, we proceed to enhance the platform and add performance and workflows, whereas our crew makes substantial progress on constructing the gross sales pipeline and recruiting innovation companions. On the wi-fi facet, the crew continues to exceed expectations with common income per unit, or ARPU, being held from each our software program providing, Spok Cellular with pager and our encrypted pagers.

As you realize, if you happen to can decrease unit churn and preserve ARPU ranges up, it gratefully impacts the recurring wi-fi income stream. Spok cell with pagers, the place we additionally put the pager quantity on our smartphone app, and that gives us with an additional income alternative. Paging continues to be a strategic differentiator for us, and we have now extra plans this 12 months to reinforce that functionality even additional.  For 2021, we’re centered on trying to find new Spok Go enterprise, changing present prospects to Spok Go, providing our scientific diagnostics, plus package deal, to laboratory and radiology markets and pursuing worldwide alternatives in Australia and Canada. We are going to proceed our efforts promoting our contact heart licenses as effectively.

We additionally intend to proceed to capitalize on our distinctive wi-fi and software program leverage in our put in buyer base.  General, the vaccine information has been constructive up to now. If it is right and the overall timing is that we’re all lined by midyear, by the second half of ’21, the results of the pandemic ought to start to subside and profitability for healthcare programs ought to return with maybe even some extra authorities assist for them alongside the best way. This can assist drive Spok gross sales as we proceed to develop and improve our platform.  As I’ve highlighted, we have developed, enhanced and are actively promoting Spok Go, our absolutely built-in cloud-native scientific communications platform. Our plans are strengthened by our trusted accomplice standing.

Spok has over 2,200 hospitals, together with all the perfect hospitals for U.S. Information and World Report’s annual rating. Our new platforms, Spok Go, supplies scalable enterprise answer. The AWS-backed cloud structure removes boundaries and connects your complete care community, clever routing and escalation.

We will ship actionable scientific data to expedite communications, highly effective listing and native on name. This reduces errors and wasted time of 1 supply of fact for all roles, departments and areas and versatile and open structure. We empower hospital employees to make use of the perfect gadgets for his or her roles, together with pagers.  We imagine the market alternative is giant. The suggestions we obtain from prospects and {industry} CIOs, in addition to historic stage of annual gross sales made with our legacy CCS product, serves as the muse for the market alternative we have now at Spok Go.

We have regarded on the market intently, together with our rivals, and imagine, as soon as recovered from the pandemic, it’s going to greater than help our technique primarily based on scale and desires.  Our not too long ago introduced partnership with Mayo Clinic is only one extra knowledge level in help of our plan. Previous to the pandemic, the healthcare market had skilled important change in consolidation. COVID-19 is barely accelerating that. Hospitals now have an amazing quantity of stress on them to scale back sub-standardized distributors, regionalize healthcare supply and become profitable.

We imagine our technique round Spok Go aligns completely with this and with our imaginative and prescient to grow to be the strategic accomplice of selection for enterprise-grade scientific communication and affected person care coordination.  We have been notably happy with the sequential development in our software program income within the fourth quarter and sustained ranges in our software program income backlog, which continues to exceed $50 million. Additionally, the continued yearly enchancment in our wi-fi tendencies, together with discount in paging unit erosion, in addition to continued slowing of wi-fi income declines, contributed to our working efficiency. We imagine these accomplishments are the direct results of the investments we have now made in our gross sales crew and infrastructure, together with our wi-fi infrastructure.  General, we proceed to reinforce our product choices and keep the energy of our steadiness sheet. Our potential to proceed to generate money allowed us to execute in opposition to our capital allocation technique, returning almost $10 million to our stockholders in 2020 within the type of common quarterly dividends whereas rising our money, money equivalents and short-term funding balances.  Mike Wallace will present particulars on our monetary efficiency shortly.

However earlier than that, I wish to spotlight just a few key outcomes for the 2020 fourth quarter and full 12 months. First, within the second half of the 12 months, we noticed sequential development for software program income in each the third and fourth quarters as second half software program income grew almost 11% from first half ranges. Moreover, we noticed a greater than 22% enhance in software program bookings within the second half of the 12 months as Spok continues to generate gross sales of each our legacy care join options and our new Spok Go platform.  Yr-over-year efficiency mirrored a slower-than-anticipated wi-fi income attrition fee as annual declines have been down 130 foundation factors from prior-year ranges. Whereas the subscriber and income tendencies proceed to enhance in 2020 as we once more exceeded our expectations for gross additions, internet churn, income and ARPU.

Noteworthy in 2020 was the 104,000 new models that have been added to our subscriber base.  Second was a continued influence from centered expense administration as we proceed to align spending ranges with the demand that we have been seeing within the market. We’ll present extra element in a couple of minutes, however adjusted working bills, regardless of continued funding in our product choices, have been down greater than 6% from prior-year ranges. The truth is, even after including again capitalized software program improvement prices, product analysis and improvement bills in 2020 have been down barely from prior-year ranges.  Because of this, we generated almost $5.7 million of adjusted EBITDA in 2020, in line with 2019 ranges. We have been additionally capable of develop our money, money equivalents and short-term funding balances from the prior-year finish ranges, even after capital expenditures and paying our quarterly dividend.  General, given the challenges posed by the pandemic whereas rolling out a brand new cloud-native platform, we’re happy with our working efficiency within the fourth quarter and the corporate’s substantial progress in 2020.

We met or exceeded our expectations on quite a lot of key working measures, and we achieved these outcomes as we proceed to make key strategic investments in our enterprise.  Along with our monetary efficiency, progress was made in a number of different areas, together with product improvement, gross sales technique and key strategic partnership agreements. In the course of the quarter, we accomplished greater than 24 new six-figure installations of Spok options for our prospects. Of these, 5 have been new emblem offers. Additionally included within the quarter totals have been three new Spok Go offers.  Let me spotlight a few the brand new six determine offers for you.

First was a Spok Go buy by a 3 hospital Massachusetts well being system with greater than 860 beds, 4,800 workers and 1,000 affiliated physicians. This premier Spok buyer has a number of options, together with Spok Good Console, Good Net, Good Speech and Messenger, and has been a Spok accomplice for greater than 20 years. The client has optimized its use of Spok options through the years, together with consolidating their telemetry hub from three disparate areas to at least one. The group had a objective of shifting all safe communications for his or her complete well being system to Spok.

Spok Go will permit them to realize this objective and have all communications systemwide on extra unified platform for all suppliers and employees. Meaning extra effectivity and quicker response to sufferers.  The opposite deal I would like to focus on for you is among the largest and most complete suppliers of health-related providers within the higher Baltimore area. The group has greater than 13,000 workers, 1,800 staffed beds and greater than 2,600 affiliated physicians. They’re a premier Spok buyer with a number of options, together with Spok operator console, software program, enterprise internet listing, on-call scheduling, Spok Cellular, alarm integration and code paging.

They’ve been a Spok software program and wi-fi accomplice for greater than 12 years. Spok options are at the moment current in three of their hospitals via the area and can develop right into a fourth as a part of the This fall improve.  The challenge objective is to consolidate their name facilities to help an enterprisewide name heart and develop on alarms monitoring. By positioning Spok as a real enterprise strategic accomplice that aligns with the group’s infrastructure consolidation, utility standardization and showcasing the flexibility to scale to help the rising hospital community, we have been capable of compete an enterprise improve to Spok Care Join 1.9. These are simply a few the examples of our exercise stage in This fall.  And eventually, we had two massive administration organizational targets this 12 months, they usually’re persevering with into 2021.

The primary was to place a product lead in place to work with our engineering management crew to handle Spok’s portfolio of options via a market-driven strategy, consequently driving worth for purchasers within the firm. This has been completed with the addition in late November of Kristen Lalowski as Spok’s chief product officer. Kristen brings over 20 years of expertise in healthcare and healthcare IT, particularly within the areas of nursing, product administration, advertising, operations, gross sales and shopper providers. She’ll play a key position in executing our long-term technique as we proceed to help hospitals and well being programs with dependable communication options.  The second main objective is ongoing, and that’s to additional enhance our go-to-market technique.

We’re within the midst of a posh pivot from a conventional communications firm, traditionally promoting premise-based level options focusing on communications managers to a scientific communications firm promoting extremely built-in SaaS options focusing on C-suite executives and buying committees with deep scientific experience. We proceed to usher in the scientific expertise vital to achieve success on this transition. We have been shifting in that path, and we’ll proceed to concentrate on it this 12 months with alacrity.  In 2020, Spok continued to construct an industry-leading repute within the market. Here is a short overview of a few of our accomplishments on this space.

First, for the full-year 2020, we accomplished greater than 79 new six-figure offers, primarily within the healthcare and authorities sectors — through the second half of the 12 months, we accomplished 5 new Spok Go offers, and the momentum continues into 2021.  Subsequent, Spok obtained recognition because the No. 1 safe communications platform for hospitals and well being programs by Black Guide Market Analysis for the fourth quarter. Additionally, we proceed to offer options to all the U.S. Information & World Report Finest Grownup and Youngsters’s Hospitals.

Subsequent, within the late summer season, Spok earned system and organizational management SOC 2 Sort 2 compliance for Spok Go options, together with Spok paging options.  And eventually, in October, we welcomed greater than 600 attendees to Join 20 Digital, our firm’s annual consumer convention for healthcare professionals. The digital occasion offered healthcare clinicians, IT consultants and C-suite executives an opportunity to be taught from each other about the way forward for care crew communication and share insights about how the COVID-19 pandemic has modified how they use well being IT. We intend to hold this momentum ahead into 2021 to stimulate long-term development.  I will have extra feedback on our 2021 outlook and capital allocation methods in a couple of minutes. However first, Michael Wallace, our chief monetary officer and chief working officer, will assessment the monetary highlights for the quarter.

Mike?

Mike WallaceChief Working Officer and Chief Monetary Officer

Thanks, Vince. Earlier than I assessment our monetary highlights for the fourth quarter and full-year 2020, I might once more encourage you to assessment our 2020 Kind 10-Ok, which we count on to file later in the present day, because it incorporates considerably extra details about our enterprise operations and monetary efficiency than we’ll cowl on this name.  As Vince famous, 2020 was a difficult 12 months for Spok from each a administration and operational perspective as we proceed to really feel the profound influence that the worldwide pandemic has had on our enterprise and our prospects. Nonetheless, we imagine that the working setting continues to strengthen, and we have been usually happy with our total efficiency within the fourth quarter because it clearly demonstrates the continued enchancment from the primary half of final 12 months. As such, we imagine that Spok’s efficiency during the last two quarters of 2020 supplies us with momentum as we head into the brand new 12 months.  Whereas we’re not glad with income ranges final 12 months, important progress is made in assembly our long-term enterprise targets.

Sustained ranges of software program income within the second half of 2020 and continued report low attrition of wi-fi income, mixed with continued concentrate on expense administration, resulted in internet money offered by working actions of $26.2 million. This was partially offset by investing actions of $14.8 million, particularly for capital expenditures and capitalized software program improvement prices through the 12 months.  Spok was capable of obtain this efficiency as we proceed to return money to our shareholders within the type of quarterly dividends of $9.8 million whereas additionally investing in our enterprise for long-term development. Our steadiness sheet stays sturdy with a money, money equivalents and short-term funding steadiness of $78.7 million at December 31, 2020, and we proceed to function as a debt-free firm. We imagine this supplies us a stable monetary platform as Spok is effectively positioned to execute in opposition to our long-term targets in 2021 and past.  Within the curiosity of time in the present day, I cannot assessment our fourth quarter and full-year 2020 revenue assertion on a line-by-line foundation since a lot of that data is contained in our earnings launch tables and SEC filings.

Nonetheless, to the extent you will have particular questions on our quarterly monetary outcomes, I might be to glad handle them through the Q&A portion of this name.  Reasonably, I wish to focus this morning on 4 particular areas. These embrace income, working bills, a short assessment of our steadiness sheet and our monetary steerage for 2021. With respect to income within the fourth quarter of 2020, complete income of $37.5 million was in step with the prior quarter and down from $39.5 million within the fourth quarter of 2019. Full-year 2020 income of $148.2 million was down 7.6% from income of $160.3 million in 2019.

Nonetheless, almost 40% of the year-over-year decline was as a result of anticipated erosion of the wi-fi income portfolio with the steadiness as a result of impacts of the pandemic on our software program enterprise.  software program income. Complete fourth-quarter income of $17.2 million confirmed continued sequential enchancment and was up from income of $16.9 million within the prior quarter and barely decrease than the income of $17.9 million within the fourth quarter of 2019. The lower in software program income for the quarter on a year-over-year foundation was primarily on account of decrease license and related tools income. This was a results of decrease software program operations bookings and the combo of these bookings being extra closely skewed towards skilled providers.

On common, skilled providers are acknowledged over six to 12 months as work is carried out, whereas license bookings are usually acknowledged in the identical interval they’re offered. And tools bookings are acknowledged a number of months thereafter, each upon switch of management to the client.  Relating to skilled providers income, once more virtually solely associated to our legacy merchandise, income was barely down with the fourth quarter of final 12 months however elevated steadily throughout 2020 as our potential to entry our hospital prospects to carry out implementations have been impacted by COVID restrictions and journey prohibitions, primarily within the second and third quarters. Nonetheless, we have now been happy by our crew’s potential to adapt and decide strategies to deploy our options virtually fully on a distant foundation at this level.  And lastly, software program income within the fourth quarter was supported by upkeep income of $9.9 million. This included roughly $250,000 of catch-up income mentioned in final quarter’s earnings name from a authorities renewal that was delayed.

This drove an roughly 4% enhance in income in comparison with the quarterly common within the first three quarters of 2020. Upkeep continues to offer a basis below our legacy software program enterprise and is important to keep up as we in the end transition present prospects of our legacy merchandise to Spok Go over the following a number of years.  For the full-year 2020, we noticed the identical dynamics simply talked about play out with respect to software program income. We noticed important enhancements in all classes of software program income through the second half of 2020 as in comparison with the primary half and the onset of the pandemic. Nonetheless, we weren’t absolutely working at pre-pandemic ranges through the fourth quarter of 2020 and absolutely count on to see some stage of continued influence from the pandemic as we enter 2021.  Additionally included in software program income within the fourth quarter, albeit small, was $41,000 in subscription income from our cloud-native Spok Go platform with bookings of $255,000 in complete contract worth, or TCV, with annual recurring income, or ARR, of $55,000 and common contract life of two.3 years.

In mixture, Spok Go bookings for 2020 have been $1.1 million in TCV with ARR of almost $300,000 and a median contract life of roughly 2.7 years.  At the side of our Spok Go transactions, the corporate supplies minor implementation providers by our skilled providers group, particularly when in comparison with our legacy on-premise enterprise mannequin, and that’s included within the respective complete contract worth. These implementation revenues are included within the providers line of our detailed income tables.  Wi-fi income for the fourth quarter remained sturdy, declining by solely 2.5% from the prior quarter. And for the total 12 months, wi-fi income was down a report low 5.2% from 2019. These outcomes replicate one other spectacular efficiency by our gross sales crew to once more generate wi-fi gross additions whereas minimizing churn and sustaining secure unit pricing.

Our wi-fi enterprise, together with the upkeep part of our legacy software program enterprise, proceed to offer a cornerstone as they represented, in mixture, greater than 82% of complete income in 2020 and permit for the continued improvement efforts of the Spok Go platform.  Turning to working bills. For the full-year 2020, adjusted working bills, which exclude depreciation, amortization, accretion, goodwill impairment and contains capitalized software program improvement prices, totaled $148 million, down greater than 6% from $158 million within the prior 12 months. This efficiency primarily displays elevated efficiencies and expense reductions basically and administrative prices, in addition to the influence of worker furloughs.  Yr-over-year reductions in all expense classes was vital in our potential to drive constructive free money movement in a rare 12 months by all measures whereas persevering with our Spok Go improvement spend at ranges anticipated previous to the pandemic.  Much like earlier years, through the fourth quarter of 2020, we carried out our annual evaluation of goodwill as of October 31. Primarily based on that evaluation, utilizing a short-term shifting common of our inventory worth and given the decline out there worth of Spok’s widespread inventory that resulted in a 52-week low in mid-October, it was decided that the carrying worth of the enterprise exceeded the estimated honest worth of the corporate, leading to an impairment.

Nonetheless, this impairment under no circumstances displays administration’s confidence and the long run worth of the enterprise. This evaluation relies on the corporate’s market worth as of a selected time limit. Now, sadly, that time was in October. And as beforehand talked about, the value of Spok’s widespread shares hit a 52-week low.  With the latest enhance in Spok’s market worth over the previous a number of months, had the evaluation been carried out utilizing our inventory costs throughout 2021, it’s probably that no impairment would have been vital.  Moreover, within the fourth quarter, we accomplished our annual evaluation of the recoverability of our deferred revenue tax property which signify the tax advantages of future tax deductions.

This evaluation is required to find out whether or not it’s “extra probably than not,” however all or some portion of the deferred revenue tax property can be realized in future durations. Primarily based on the cumulative pre-tax guide revenue loss incurred by the corporate over the three-year interval ended December 31, 2020, albeit fairly small, and the uncertainty created by COVID-19, our potential to contemplate our projections for future profitability and development have been considerably restricted. Thus, we have been required to report a valuation allowance to scale back internet deferred revenue taxes as the conclusion didn’t meet the extra probably than not standards below the accounting steerage of ASC 740. We didn’t report a valuation allowance throughout 2019.  Nonetheless, given the traction we’re starting to see from gross sales of the Spok Go platform, our outlook continues to stay sturdy.

We imagine Spok Go is about to satisfy a big want within the healthcare market and can create important worth for shareholders within the coming years.  For a extra detailed clarification of how the estimated honest market worth of the corporate is derived to figuring out the goodwill impairment cost and the standards for creating the valuation allowance for the recoverability of the deferred tax property, please see observe six and 9 in our 2020 10-Ok, which, once more, we count on to file later in the present day.  Nonetheless, the evaluation of goodwill resulted in a $25 million noncash impairment cost within the fourth quarter, and the valuation allowance for the deferred tax asset diminished earnings by a further $22.1 million. Excluding the influence of those expenses, which we imagine is a extra applicable technique to view our outcomes since these are noncash expenses that didn’t end result from operations, adjusted earnings per diluted share have been $0.02 and $0.15 for the fourth quarter and full-year 2020, respectively.  Subsequent, our capital expenditures for the fourth quarter of 2020 have been roughly $0.6 million and have been incurred primarily for the acquisition of pagers and infrastructure to help our wi-fi prospects. For the total 12 months, capital bills totaled $3.5 million, down from $4.8 million in 2019, reflecting the decreased capital must help the Spok Go platform improvement. We imagine that we’re previous the foremost portion of our capex necessities to help our technique and that ranges ought to usually stay flat over time.  And lastly, to our monetary steerage for 2021.

Whereas there stays important uncertainty and challenges with respect to the markets and prospects we serve as a result of pandemic, we have now seen rising visibility over the second half of 2020 and due to this fact offering steerage as is typical with our fourth-quarter earnings launch with the objective of offering buyers with our views on 2021. We now have included a further schedule, detailing the elements of our annual steerage for this 12 months. Included in that steerage are Spok’s expectations for software program and wi-fi income era in 2021.  We count on complete income to vary from 132.2 to $147.2 million. Included in that complete, we count on software program income to comprise 58.2 to $67.2 million, which is in line with 2020 ranges on the midpoint of the steerage vary.

Greater than 90% of this software program income steerage is anticipated to be pushed by our legacy software program options as bookings of Spok Go and the associated subscription income proceed to ramp via 2021. As our legacy on-premise bookings are changed by Spok Go bookings within the coming years, our income recognition may even transition from extra rapid recognition traits via ratable recognition over time related to the subscription income mannequin.  Lastly, Spok expects adjusted working bills, which exclude depreciation, amortization and accretion and the addition of capitalized software program improvement price, to vary from 142.7 to $150.7 million as in comparison with adjusted bills of $148 million in 2020. Lastly, we count on capital bills to vary from 2.7 to $6.7 million. I might remind you as soon as once more that our projections are primarily based on present tendencies and that these tendencies are at all times topic to vary, particularly as we proceed to achieve additional perception into the potential easing from the impacts of COVID-19.  With that, I’ll flip the decision again over to Vince, who will make some closing feedback earlier than opening the decision as much as your questions.

Vince?

Vince KellyPresident and Chief Government Officer

Thanks, Mike. With respect to our key targets and enterprise outlook, let me take just a few moments to stipulate our outlook and technique for 2021. As we have talked about previously, about 5 years in the past, we launched into a change that was a tidal shift in our strategic path for healthcare, our largest buyer section.  This technique pivot signaled a really intentional transfer from providing our prospects level options or single-product options for name heart software program, alarm administration and safe messaging to providing them a cloud-based, single, built-in communications and collaboration platform known as Spok Go. Our determination to make this shift and concentrate on the Spok Go platform resulted from many causes, together with buyer wants, as our healthcare prospects have been telling us they wanted a extra unified strategy to communications throughout their enterprise; the big potential market alternative as we additional penetrate the multibillion-dollar well being IT communications market, enterprise simplification as we have been providing our prospects many various merchandise and a number of variations on a number of completely different platforms, and aggressive positioning as we concluded that nobody else provided a single, built-in, cloud-native platform for healthcare communications.  In lots of respects, 2020 was probably the most difficult 12 months for Spok in our historical past from each a administration and operational perspective.

The influence that this unprecedented pandemic has had on our prospects has been profound, each by way of the stress that’s placed on the docs, nurses and hospital directors, in addition to the monetary influence that it has had on the healthcare {industry} basically. Already skinny margins at these organizations have been additional challenged by shifting assets to take care of COVID-19, thus altering funding selections.  This has clearly impacted our buyer spending priorities and skill to concentrate on a brand new platform answer over the brief time period. Nonetheless, we count on that to vary over the course of the brand new 12 months. I am notably pleased with our Spok crew and their potential to adapt and alter below these circumstances.

Our core basis of scientific communications is powerful. We’re pleased with the work our workers have carried out in help of this mission. We now have completed a lot collectively since we turned Spok. We’re laser-focused on making Spok Go the main scientific communication and collaboration platform within the healthcare {industry}.  So with that as a background and with respect to our 2021 steerage, this 12 months, we proceed our dedication in investing to handle near-term alternatives and to realize long-term natural development.

We imagine these investments are vital in supporting our technique to reinforce our industry-leading scientific communication and collaboration platform and drive long-term stockholder worth.  Included in complete working bills, we imagine that R&D bills, excluding the influence of capitalized software program improvement, will proceed to flatten in 2021 and strategy a extra steady-state stage. For 2021, we count on a comparatively small portion of our R&D spend to be for legacy options and the bulk to be on our new Spok Go platform, reflecting our continued funding sooner or later.  With respect to our capital allocation technique, our total objective has been to realize sustainable enterprise development whereas maximizing long-term stockholder worth via our multifaceted capital allocation methods, which has included each dividends and share repurchases, in addition to key strategic investments to enhance our working platform and infrastructure with a purpose to drive long-term natural development. We’re additionally open-minded to potential acquisitions and partnerships that might present extra income streams.  For 2021, we’re dedicated to proceed paying our $0.125 per share quarterly dividend whereas maintaining a tally of profitability. We are going to proceed to judge our capital allocation technique on a quarterly foundation and talk our plans to you with respect to dividends, share repurchases and different makes use of of capital every quarter once we report earnings.  We’re centered on the massive alternative in entrance of us in scientific communications.

From a enterprise configuration and technique perspective, we imagine we’re strongly positioned in the meanwhile. We now have created a long-term natural development engine, Spok Go. We keep a supply of sturdy recurring income in our paid and repair line. We run the most important paging providing on the earth and have built-in its operations deeply with our software program operations whereas persevering with to reinforce our paging platform and consumer gadgets.

We imagine with these two property going for us, our greatest monetary outcomes are forward of us and Spok’s future is vivid.  At this level, I will ask the operator to open the decision in your questions. [Operator instructions] Operator?

Questions & Solutions:

Operator

[Operator instructions] We’ll take our first query from Ryan Vardeman with Palogic. Please go forward. 

Ryan VardemanPalogic Worth Administration LP — Analyst

Hey, guys. Thanks for taking the query. So did I hear proper that 90% of the income projected in 2021 goes to be from the legacy answer? So with the 58.2 to 67.2 million in steerage, can I assume that 10% of that can be from Spok Go?

Mike WallaceChief Working Officer and Chief Monetary Officer

Yeah. Ryan, it is Mike. You are right. I imply it is most likely somewhat bit greater than 90%.

However till the Spok Go bookings proceed to ramp, after which as you are conscious, with a subscription mannequin, it’s going to clearly take time for that income to make its approach via the P&L. For almost all of 2021, the overwhelming quantity of income on the software program facet goes to proceed to return from our legacy merchandise. So I might say that it is about 90 to 95% would come from our legacy merchandise.

Ryan VardemanPalogic Worth Administration LP — Analyst

OK. So type of on the low finish then, if you happen to’re utilizing 5%, perhaps slightly below 3 million perhaps of Spok Go income. So I imply I am nonetheless making an attempt to know what the chance is that you simply guys see. You say the outlook stays sturdy.

What are you type of forecasting the annual recurring income to be from Spok Go by the tip of the 12 months? And the way massive is the chance over time?

Mike WallaceChief Working Officer and Chief Monetary Officer

Yeah. I imply, so far as ARR is worried, sure, we’re not going to publish that at this level. I imply we’re nonetheless on the very early days because it pertains to Spok Go. As we proceed to report every quarter and get extra visibility into that, we will definitely share that with buyers.

Vince, do you wish to take the general alternative query?

Vince KellyPresident and Chief Government Officer

We have checked out lots of knowledge, lots of statistics by way of the scale and the dimensions of the potential market. It is large. We’re not — it is within the billions. We’re not the one one going after it.

Sure, there’s different rivals going after it, however there’s a lot available for all of us. We expect nobody has the kind of answer that we have now by way of what we have created will Spok Go, and there is going to be a long-term winner.  Our luck most likely couldn’t have been worse to be rolling this factor out proper because the pandemics struck as a result of it is onerous to get of us’ consideration. We have taken a glance with quite a lot of {industry} consultants, and we have checked out lots of knowledge by way of what hospitals and healthcare programs have centered on in 2020, although in dependency of this pandemic by way of spending, they usually centered on issues like anesthesia and respiratory tools, affected person monitoring and very important indicators tools, remedy administration, lab tools. The place we’re, healthcare, IT and enterprise software program is type of fifth on the record.

And of that, if you happen to have a look at the quantity of establishments which have delayed capital budgets are unsure proper now, that is about 47%. So virtually half of the potential market is off the sphere by way of rolling out a brand new cloud-based platform in 2020.  Nonetheless, the conversations that we have had with CIOs, the conversations that we have had with innovation companions just like the Mayo Clinic accomplice we simply introduced, point out that there’s a massive want for what we’re doing. Our board member, Dr. Bobbie Byrne, who’s at Advocate Aurora, signifies there is a massive want for what we’re doing and what we have created.  So our objective is to proceed to speculate on this platform, proceed to handle the enterprise effectively, proceed to pay the dividend after which as we come out of this pandemic develop the Spok Go gross sales.

And while you develop these bookings, usually, you are taking a look at a three-year TCV. So you are going to be primarily amortizing that reserving into income ratably over a 36-month interval. So it will have much less influence on income within the brief time period than the reserving will. However over time, that can construct a really good recurring income layer.

Subsequent query please. 

Operator

[Operator instructions] We’ll take our subsequent query from Richard Dearnley with Longport Companions. Please go forward. 

Richard DearnleyLongport Companions — Analyst

Good morning. I bought distracted while you have been speaking about R&D, the 40-ish % of gross sales R&D going ahead, now that Go is a go product. May you simply discuss the place your R&D goes now? And how much spending ranges are you fascinated about for ’21 after which the long run, please?

Vince KellyPresident and Chief Government Officer

Mike, do you wish to take that or would you like me to? I am completely satisfied to.

Mike WallaceChief Working Officer and Chief Monetary Officer

Sure, sure. I will go forward and begin off. Proper now, from an R&D perspective, as we have now been socializing within the final couple of years, we count on it to stage off at type of present ranges, which, in the present day, is, name it, about 27 to $28 million on a gross foundation. So not together with the capitalization of software program improvement.  So the money spending on R&D is about 27 to twenty-eight million.

And as Vince talked about, the vast majority of that, name it, 75 to 80% in the present day is being spent on Spok Go together with the steadiness being spent on our legacy merchandise to maintain them within the market till we’re capable of absolutely make the transition to Spok Go.  With that stated, our expectation is over the following a number of years, and we do not like to provide steerage after this upcoming 12 months, however we really feel fairly comfy that issues will — from an R&D perspective, we’ll be pretty flat with the degrees that you simply’re seeing in the present day.  Vince, I do not know if you wish to add anything.

Vince KellyPresident and Chief Government Officer

You bought it spot-on. I used to be going to say 80 to 75% of what we’re spending in the present day of that 27 million numbers on Spok Go, and the 20 to 25% is on our legacy options. And that can keep about there for 2021. That may change over time going ahead.

Clearly, extra can be spent on Spok Go sooner or later and fewer on the legacy options as we make the transition.

Richard DearnleyLongport Companions — Analyst

Proper. OK. And is the goodwill write-off strictly a matter of the inventory worth?

Mike WallaceChief Working Officer and Chief Monetary Officer

Yeah. So yeah. I imply the driving think about that evaluation is the inventory worth. And as I acknowledged in my ready feedback, we try this evaluation every year on the finish of October.

That is our cadence, and that occurred to be once we are at a 52-week low. Clearly, we have been shut, anyhow. However as I stated, if we regarded on the share worth within the first six weeks of this 12 months, there probably would have been no impairment.  So I hate to be on these calls and blame something on accounting, and so forth., however that is type of one of many vagaries of accounting. It doesn’t influence our view in any approach, form or type on the outlook for the enterprise and our projections, so.

Richard DearnleyLongport Companions — Analyst

OK. I had thought that the goodwill was the outlook for — I imply, the impairment was associated to the outlook for income and — as contemplated income and earnings from the asset, not the inventory worth.

Mike WallaceChief Working Officer and Chief Monetary Officer

Yeah. No. I imply, you — there’s quite a lot of methods you may have a look at goodwill impairment. That’s one part of it.

However the largest piece, the most important driving issue of that evaluation is the share worth to drive the market worth as being, if you’ll, in a public firm probably the most available determinant of worth on a given date. So whereas your projections are a part of it, they carry far much less weight than the precise share worth.

Richard DearnleyLongport Companions — Analyst

OK. Thanks. 

Mike WallaceChief Working Officer and Chief Monetary Officer

You wager. 

Operator

And girls and gents, we’ll take our subsequent query from George Melas with MKH Administration. Please go forward. 

George MelasMKH Administration — Analyst

Thanks. Good morning, gents. I am pretty new to the story, so I would prefer to ask you a reasonably kind of broad query, which is concerning the legacy options or quite a lot of level options. Spok Go is primarily kind of a communication platform that may unify quite a lot of its options on high of that.

Are you able to discuss concerning the transition from one to the opposite? How are your prospects, notably the purchasers which might be present legacy prospects, how do they implement the communication platform after which principally use it for the assorted performance of the purpose options that they have already got?

Vince KellyPresident and Chief Government Officer

Certain. Let me take that. Yeah. I believe I perceive your query.

So look we have offered 5 within the second half of 2025, 5 Spok Go options. Two of them have been model new. In order that’s clearly a a lot simpler sale. Three of them have been to legacy prospects that had present software program.  And what it’s important to do in actually each circumstances is it is a communications platform that may do lots of issues.

You’ll be able to add workflows on it. It retains on-call scheduling. You are able to do vital check outcomes administration. There’s different workflows and repair traces you may layer on to it.

However it’s important to combine with the platforms which might be on the market proper now.  Our legacy options are primarily in three classes. The primary class can be contact heart options, so we run the hospital name facilities. The second class, our messenger answer is type of an alerting — scientific alerting answer. And the third class is simply type of cell basically.

Encompassing in all that can also be our on-call schedule providing.  So you may go to an present buyer. We will promote the Spok Go platform. We combine that platform to a gateway with their contact heart options. The platform replaces the vital alerting half.

It replaces the on-call scheduling half. It replaces the cell half, and we construct on that into the long run whereas integrating with their contact heart answer.  If they seem to be a new buyer they usually’re not an present buyer, then we disintegrate with what they’ve, whether or not it is their EHR, what different programs they wish to combine with, to do their scientific communications.  The largest benefit of Spok Go is that we preserve the listing, which is type of the hospital hub, if you’ll, the supply of fact by way of the place all people is. So if you wish to know anyone’s in campus, west campus, flooring six, ward A, who’s on-call, we preserve all that knowledge. How do they wish to be reached? Do they wish to be reached by a cell phone app? Do they wish to be reached on a pager, and so forth., so we preserve all that knowledge.

And so, that is actually what the platform does, and it does that very elegantly, and it does that with the flexibility to scale with AWS is our accomplice on that. And that is completely different as a result of it is cloud than the prevailing options that we offered through the years, that are legacy primarily based, that are on-file servers which might be put in in prospects’ knowledge facilities. I hope that helps present some readability.

George MelasMKH Administration — Analyst

Very good. Thanks. Respect it.

Vince KellyPresident and Chief Government Officer

Yep. Completely.

Operator

Women and gents, there is not any additional questions within the queue. I would like to show the decision — go forward.

Vince KellyPresident and Chief Government Officer

Yeah. Thanks, everybody, for becoming a member of us this morning. We look ahead to talking with you once more after we launch our first-quarter ends in April. So everybody, have an important day, and keep secure.

Operator

[Operator signoff]

Length: 54 minutes

Name members:

Mike WallaceChief Working Officer and Chief Monetary Officer

Vince KellyPresident and Chief Government Officer

Ryan VardemanPalogic Worth Administration LP — Analyst

Richard DearnleyLongport Companions — Analyst

George MelasMKH Administration — Analyst

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