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Executives

Shawn E. Endsley - Chief Financial Officer

Vincent D. Kelly - Chief Executive Officer, President and Director

USA Mobility (USMO) Q2 2013 Earnings Call August 2, 2013 10:00 AM ET

Operator

Good day, and welcome to USA Mobility's second quarter investor call. Today's call is being recorded. On line today, we have Vince Kelly, President and Chief Executive Officer; Shawn Endsley, Chief Financial Officer; and MyLe Chang, Controller of USA Mobility. Also, from the company's software subsidiary, Amcom Software, we have Colin Balmforth, President; and Lynn Danko, Chief Financial Officer. At this time, for opening comments, I will turn the call over to Mr. Endsley. Please go ahead, sir.

Shawn E. Endsley

Good morning. Thank you for joining us for our second quarter investor update.

Before we discuss our operating results. I want to remind everyone that today's conference call may include forward-looking statements that are subject to risks and uncertainties relating to USA Mobility's future, financial and business performance. Such statements may include estimates of revenue, expenses and income as well as other predictive statements or plans which are dependent upon future events or conditions. These statements represent the company's estimates only on the date of this conference call and are not intended to give any assurance as to actual future results.

USA Mobility's actual results could differ materially from those anticipated in these forward-looking statements. Although these statements are based upon assumptions that the company believes to be reasonable, they are subject to risks and uncertainties. Please review the Risk Factors section relating to our operation and the business environment in which we compete contained in our 2012 Form 10-K, our second quarter Form 10-Q, which we expect to file later today, and related company documents filed with the Securities and Exchange Commission. Please note that USA Mobility assumes no obligation to update any forward-looking statements from past or present filings and conference calls.

With that, I'll turn the call over to Vince.

Vincent D. Kelly

Thanks, Shawn, and good morning. We're pleased to speak with you today regarding our second quarter operating results, and what we believe was another outstanding quarter and first half of the year for both our wireless and software businesses. On the wireless side, we ended the quarter ahead of our key operating goals for total revenue, operating cash flow, average revenue per unit or ARPU, and operating expenses. Our wireless sales force also exceeded the plan for subscribers, including gross additions, and the annual rate of revenue erosion improved to its lowest level in the company's history. In addition, our software business achieved excellent results of increased revenue and bookings, a near record high backlog and a growing pipeline of prospective accounts. At the same time, we were able to maintain strong consolidated cash flow margins, reduced expenses, and once again, returned capital to our stockholders.

Shawn will discuss our financial results in more detail in a few minutes, but first I want to review a few key highlights of the quarter. Number one, subscriber and revenue trends in our wireless business continued to show improvement in the second quarter, with the rates of paging unit and the revenue erosion either at or near historically low levels. The annual rate of subscriber erosion was 8.7%, down from 11% a year earlier, while our annual rate of revenue erosion improved to a record level of 11.7%.

We believe these positive results were due to another strong performance by our wireless sales force and increasing recognition among customers that paging continues to be the most reliable and cost-effective form of wireless communications and our continued investment in our software solutions and service capability. In fact, our top-performing Healthcare segment not only showed continued stability for the quarter but actually posted a net gain in units and service.

Number two, our Software business also posted excellent results in the quarter, as revenue and bookings increased from both the prior year and year-earlier quarter’s while the backlog totaled just under $40 million at June 30. In addition, Amcom's pipeline of sales prospects continue to grow. A credit to the outstanding work of our software sales and marketing team. We also continued to expand the scope of our international sales efforts during the quarter, building our pipeline in such key markets as Canada, the Middle East and the Asia-Pacific region. We also broadened our sales reach within the domestic market segments of healthcare, public safety and government services.

Number three, we continue to reduce consolidated operating expenses, mostly in our wireless operations, consistent with our long-term business plan. The current operating expense for wireless, excluding depreciation and amortization and accretion, declined 10% from the year-earlier quarter. Going forward, we expect operating expenses in our wireless business will continue to decline, offset in part by incremental investment in our software business as we continue to transition to a more software-based business model. We have integrated many overhead functions between our wireless and software segments and will continue to look for synergistic opportunities as we plan for the future. Many of our customers are patrons of both of our operating segments and are increasingly looking to us as a single-source provider of unified communications solutions.

Number four, excellent performances from both our wireless and software businesses allowed us to maintain strong operating margins in the second quarter. Consolidated EBITDA increased to $15.7 million from $15.5 million in the first quarter, and represented a consolidated margin of 30.1% versus 29.3%. Second quarter EBITDA for wireless totaled $13.3 million from a margin of 38% versus 36.9% for the previous quarter.

Despite these solid results I would caution you, once again, that our ability to sustain margins at current levels will be difficult as our ability to reduce operating expenses in our wireless business becomes increasingly challenging over time, and as we invest in our software growth initiatives.

And, lastly, we again met our goal of generating sufficient free cash flow during the quarter to return capital to stockholders in the form of cash dividends. We paid a regular quarterly dividend of $0.125 per share on June 25. In addition, our Board of Directors declared our next regular quarterly dividend of $0.125 per share to be paid on September 10. Approximately $17 million of the authorized $25 million remains available for stock purchases under our buyback programs as of June 30. The buyback program extends to December 31, 2013. Since the program began in 2008, we have repurchased a total of 6,268,504 shares of our common stock at an average price of $9.53 per share. Including the June 25th dividend, we have now returned a total of $471.9 million in capital to our stockholders over the past 8 years, including $412.1 million in cash dividends and distributions and another $59.8 million share repurchases.

Overall, we were very pleased with our operating performance and programs in the second quarter and first half of 2013. We met or exceeded virtually all of our key operating goals, generated significant free cash flow, reduced expenses, expanded our services and geographic reach, and return capital to stockholders. As a result, we believe we are well positioned to achieve continued success over the balance of this year. I'll comment further on our recent operating performance and related business activities in a few minutes, but first, our Chief Financial Officer, Shawn Endsley will review our second quarter financial results. Shawn?

Shawn E. Endsley

Thanks, Vince. As Vince noted, we are pleased with our second quarter financial results and the continued progress we made toward meeting our long-term operating and strategic goals. Both our wireless and software businesses performed exceptionally well, continuing the positive momentum we experienced over the past few quarters. Further improvement in the rates of subscriber churn and revenue erosion, combined with reduced operating expenses and a stable ARPU, contributed to strong cash flows and continued high margins in our wireless business. In addition, our software business reported increased revenue and bookings from the prior quarter, while the backlog remained near an all-time high.

Looking first at our wireless business, we ended the quarter with 1,445,000 units in service, a net decrease of 35,000 units. This compares to unit declines of 35,000 in the first quarter and 34,000 in the second quarter of 2012. The slight uptick in the second quarter cancellation was due to a single large disconnect of 15,000 units by an indirect customer. These units came off at an ARPU of $2.18, substantially below our total ARPU of $8.22. As a result, our total net churn rate for the quarter was 2.4% compared to 2.3% in the first quarter and 2.1% in the year-earlier quarter. At the same time, however, our direct net churn rate for the quarter improved to 1.3% from 2% a year earlier. Our direct net churn rate is a better indicator of the overall performance in our subscriber base, as direct units and service represent 95.4% of our total subscriber base as of June 30. Despite the uptick in indirect net churn, our annual rate of total net unit erosion improved to 8.7% from 11% a year ago.

Healthcare, once again, was our best performing market segment, accounting for 85% of direct gross placement. As Vince noted, our Healthcare segment also reported a small net unit gain for the quarter which actually was the third time we've seen a slight gain in the healthcare market segment over the past 12 months. We are encouraged by the stability in this part of our business. Healthcare now represents 70.9% of our paging subscriber base and we expect that percentage will continue to increase over time. Total paging ARPU was $8.22 in the second quarter, compared to $8.25 in the first quarter. While ARPU continues to decline slowly, due to a shift in our subscriber base toward larger accounts that benefit from volume pricing. Overall pricing levels in our paging business remain relatively stable.

Revenue from wireless totaled $37.8 million in the second quarter versus $42.8 million a year earlier. Paging revenue, which represents 95% of wireless revenue total $36.1 million for the quarter, a decline of 11.1% from the year-earlier quarter. This represents a continued improvement in the second quarter annual rate of paging revenue erosion, which has fallen from 19.3% in 2010, 13.8% in 2011, and 14.3% in 2012. Healthcare contributed $23.6 million or 68% of direct paging revenue in the second quarter.

Turning to our software business. Revenue for the second quarter totaled $14.5 million compared to $13.2 million in the second quarter of 2012. An increase of 10%. Of the $14.5 million, $6.9 million was maintenance revenue and $7.6 million was operations revenue. Maintenance revenue includes ongoing support of a software application while operations revenue includes software licenses, professional services and equipment sales.

Bookings for the quarter increased 3.6% to $15.6 million from $15.1 million in the year-earlier quarter, as our sales force continue to convert it's a growing pipeline of sales leads into executed contracts. Bookings are all purchase orders received or maintenance renewals during the quarter and represent future revenue.

As a result of the solid bookings performance, the backlog totaled $39.6 million as of June 30, up from $34 million a year earlier. An increase of 15.1%. The total backlog at June 30 included $28.4 million in operations and maintenance new orders, and $14.8 million in future maintenance and other recurring revenue. Backlog decreased by $0.6 million from the first quarter, due primarily to adjustments related to aged orders that are not likely to be completed. The current backlog consists of all purchase orders received from customers not yet recognized as revenue. We expect to convert this backlog into revenue in future quarters.

On a consolidated basis, total revenue for the second quarter was $52.3 million versus $53.1 million in the first quarter. Total revenue declined 6.6% from $56 million in the year-earlier quarter.

Second quarter operating expenses, excluding depreciation, amortization and accretion, decreased to $36.5 million from $37.5 million a year ago. Of the total, wireless expenses declined to $23.4 million from $26 million a year earlier, while software expenses increased to $13.1 million from $11.5 million in the year-earlier quarter. Operating expenses for wireless decreased 10% from the year-earlier quarter, and once again, reflected continued expense management in our wireless business. The increase in software operating expenses primarily reflects investment for growth in that business.

Company-wide headcount at June 30 was 659 full-time equivalent employees, including 361 for wireless and 294 software. Compared to a headcount of 686 the year earlier, with 411 from wireless and 275 software. Going forward, we will continue to adjust staffing levels, as necessary, to meet our long-term business goals, continuing our efforts to eliminate overhead redundancies and extract cost efficiencies.

Consolidated EBITDA for the second quarter was $15.7 million or 30.1% of revenue. Compared to $18.4 million or 32.9% of revenue in the year-earlier quarter. Second quarter EBITDA included $14.3 million from wireless or a margin of 38% and $1.4 million from software or a margin of 9.5%. A schedule reconciling operating income to EBITDA has been included in our earnings release.

Net income for the second quarter was $6.8 million or $0.31 per fully diluted share compared to $8.4 million or $0.37 per fully diluted share in the second quarter of 2012.

Turning to the balance sheet. The company ended the quarter with a cash balance of $72 million. We expect to use a portion of that cash in connection with quarterly cash dividends and share repurchases in 2013. I would also note that our existing credit facility remains in place and provides us with approximately $40 million in borrowing capacity for potential acquisition or related investment opportunities.

Finally, with respect to our financial expectations, we are maintaining our previously announced guidance for full-year 2013. To reiterate that guidance, we currently expect consolidated total revenue to range from $195 million to $213 million. Consolidated operating expenses, excluding depreciation, amortization and accretion, to range from $150 million to $152 million and capital expenses to range from $8.1 million to $9.7 million. There are no changes to the breakout between the wireless and the software businesses that were previously provided. I would also remind you that our projections are based on current trends and that those trends are always subject to change.

With that, I'll turn it back over to Vince.

Vincent D. Kelly

Thanks, Shawn. Before we take your questions I want to comment on our second quarter sales and marketing activities, as well as briefly update you on our current capital allocation strategy.

With respect to sales and marketing activities, both our wireless and software sales teams turned in excellent quarters. On the wireless side, our sales team surpassed expectations for subscribers, as we recorded 55,000 gross pager placements compared to 43,000 in the prior quarter, once again demonstrated an ability to consistently achieve a meaningful level of gross pager placement despite a still challenging business environment. Of note, the wireless team landed 5 large hospital sales during the quarter. They also recorded a significant number of unit placements to support the incoming class of medical students to our numerous existing hospital accounts. And, as previously noted, they are even able to achieve a net unit gain in our healthcare segment for the quarter. In addition, our wireless sales team played a key role in minimizing the rate of direct unit churns for the quarter which improved to 1.3% from 2% in the second quarter of 2012. Our wireless sales team also deserves a tremendous amount of credit for reducing the quarterly rate of revenue erosion to a 2-year low of 2.6% for the second quarter, as well as reducing annual rate of revenue erosion to an all-time low of 11.7%.

As we look at long-term trends in our top wireless accounts, especially healthcare accounts, these accounts have been, and continue to be, very stable, notwithstanding the huge rise in alternative technologies such as smartphones, tablets and Wi-Fi. We attribute this primarily to 2 factors: Number one, the cost and reliability advantages of paging; and number two, our continued investment into our unified communications platform at Amcom, which differentiates us from our competitors. While some of our competitors compete on price alone, at the expense of maintaining their networks and servicing their customers, we have chosen to compete on service, investment and our vision for the future. We believe this vision on investment and software solutions and our service capabilities are recognized and appreciated by our existing customers and the new customers we add each quarter.

Going forward, we think we can offer the best of both worlds to help our customers solve their communication challenges. While we can now provide highly effective software solutions through our mobile connect secure smartphone communications platform, we can also continue to service these new accounts with our traditional paging products. Both of these options present a good solution depending on the customer's needs. In fact, we believe the best system utilize both pagers and smartphone solutions. Our mission is to help our customers navigate these options in the most cost-effective manner. To underscore this point, I would note that all 18 hospitals listed on the recently released best hospital honor roll, by U.S. News & World Report magazine, are either customers of USA Mobility Wireless or Amcom Software. In other words, we have them all. 17 of the member use our software and 16 of them use our paging services, meaning most are joint customers and look to us a single source of unified communications.

Looking at our software business. Our Amcom sales and marketing team also made significant progress during the quarter, with a record second quarter bookings and lead generation targets in key national and international markets. North American sales continued to come primarily from healthcare, as well as from public safety and government agencies. Top-selling solutions in Amcom's core North American healthcare segment included critical smartphone communications, clinical alerting and call center optimization.

I want to mention, briefly, 2 of our recent software wins. The first one is a comprehensive healthcare system in Oklahoma who selected us for a full suite of services to meet all their critical communications needs. The customer is looking for a total solution that encompasses everything from secure clinical messages on smartphones to better contact center operations and web-based on-call schedules. With these services, the hospital will now be able to significantly improve the way its doctors and nurses coordinate care throughout the day, as well as better support communications flow in both clinical settings and its call center.

The second one is a large and growing hospital in Michigan which selected Amcom to upgrade its call center software. In addition, it wanted to add secure smartphone texting as well as middleware to send alerts from nurse call systems to wireless phones. All 3 solutions will help give caregivers better communication with each other by using the right device at the right time and thus enable better patient care.

In terms of our goal to expand business around the globe, we continue to make inroads in several countries, most recently in the Asia-Pacific region. Sales and marketing efforts included seminars in Australia, on key healthcare topics, plus a series of webinars targeting potential customers in other countries that highlight Amcom's product benefits and customer successes.

Indeed, our international sales accomplishments have not gone unnoticed unknown. In May, Amcom was among the companies awarded the President's "E" Award for exports. The highest recognition a company can receive the contributing to U.S. exports. Presented by the United States Department of Commerce, we were selected because of our entry into new geographic and vertical markets, as well as putting heightened marketing focus on international business.

Other successful marketing initiatives included the launch of a new website to showcase the scope of our product capabilities and a new e-marketing campaign. In addition, our marketing group also produced 2 new customer videos: One for a hospital system in Canada that explains our secure smartphone texting; and second with our partner, SaferMD, that describes the benefits of our critical test results management solution.

With respect to our capital allocation strategy, we remain committed to our long stated goal of creating stockholder value. As such, we continue to evaluate how to best deploy capital resources to support sustainable business growth and to maximize stockholder value. As I've noted previously, we continue to explore acquisition opportunities and expect to allocate additional resources, at some point, to expand the depth and breadth of our software applications, service capabilities and market penetration as our business transition continues to evolve. While I can't predict exactly when we might identify the right acquisition candidate and finalize such a transaction, I can say we are actively pursuing viable options and believe external growth is a critical part of our long-term business plan.

As for other uses of capital, we expect to maintain our annual dividend of $0.50 per share for the foreseeable future, based on our current cash flow projections. We believe the current dividend rate provides an appropriate yield on our common stock, plus it allows us to retain strategic capital as we reposition the company for the future.

Finally, despite the absence of recent purchases, we believe continuation of our stock repurchase plan, through the end of this year, creates another opportunity for us to return capital to stockholders in the short term, as we continue to transition to a sustainable business model for long-term growth. The board will review and consider further extensions of the buyback plan later this year.

In summary, we again made significant progress in the second quarter. Our wireless and software businesses continue to meet their individual performance goals, work hand and hand to enhance sales opportunities for each other, and at the same time, fully supported our strategy to reposition the company for long-term growth. In addition, we continue to operate profitably, reduce operating cost, increase organizational efficiencies and aggressively pursue selling efforts on all key target markets. As a result, we believe we remain on track to complete, over time, our strategic goal of transitioning from a standalone paging company to a fully integrated, growing, unified communications business, and we expect to make further progress towards that goal in the months and quarters ahead.

At this point, I'll ask the operator to open up the line to your questions. [Operator Instructions] Operator?

Question-and-Answer Session

Operator

[Operator Instructions] And at this time, we have no questions in the queue.

Vincent D. Kelly

Okay. Well, look, thanks for joining us for today. We look forward to speaking with you after we release our third quarter results, and everyone have a great day.

Operator

Ladies and gentlemen, this does conclude today's teleconference. We thank you for your participation.

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