Shawn E. Endsley - Chief Financial Officer
Vincent D. Kelly - Chief Executive Officer, President and Director
Colin M. Balmforth - President of Amcom
USA Mobility (USMO) Q4 2013 Earnings Call March 11, 2014 9:00 AM ET
Good morning, and welcome to the USA Mobility's Fourth Quarter and Year-End 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; MyLe Chang, Controller; and Colin Balmforth, President of the company's Consolidated Operating Company.
And at this time, for opening remarks, I'd like to turn the call over to Mr. Endsley. Please go ahead, sir.
Shawn E. Endsley
Good morning. Thank you for joining us for our fourth quarter and 2013 year-end 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 operations and the business environment in which we compete contained in our 2013 Form 10-K, 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 fourth quarter and 2013 operating results and what we believe was another year of substantial progress for USA Mobility.
The accomplishments during the past year included strong performances for our Wireless and Software operations, continued improvement in Wireless subscriber and revenue trends, expansion of our Software sales in both international and domestic markets and the immigration of our 2 operating subsidiaries and management team. On a consolidated basis, we met or exceeded our internal expectations, as well as our financial guidance for revenue and operating expenses. We made significant strides last year toward our goal of stabilizing our total revenue and transitioning to a growing business and long-term provider of unified communications solutions.
In 2013, our Wireless operations ended the year ahead of key operating goals for total revenue, operating cash flow, average revenue per unit, or ARPU, and operating expenses, while our quarterly and annual rate of subscriber and revenue erosion improved either record or near record levels. In addition, our Software operations posted record-high revenue in bookings for the year, while our backlog at year end once again exceeded $40 million. At the same time, we were able to maintain strong consolidated cash flow margins, reduce expenses, operate profitably and remain debt free while once again returning capital to our stockholders in the form of cash distributions.
Shawn will provide a financial overview in a few minutes, but first I want to review some other key highlights in the fourth quarter and 2013. Number one, strong performances from both Wireless and Software resulted in consolidated revenue of $209.8 million for 2013, a decline of only 4.5% from $219.7 million in 2012.
Number two, subscriber and revenue trends in Wireless continued to improve in 2013 as we again exceeded our plan for gross additions, revenue, expenses, EBITDA, operating cash flow and ARPU. Our annual rate of revenue erosion reached an all-time low of 10.2% in the fourth quarter, while net subscriber churn also remained near record low levels. In addition, our year-over-year rate of Wireless revenue erosion improved to a record low of 11.3% in 2013 from 15.7% in 2012.
We are greatly encouraged by this positive revenue trend, which reflects a level of revenue stability we have not experienced in many years. We were especially pleased to see continuation of these positive trends in our top-performing Healthcare segment, which now exceeds 75% of our direct paging subscriber base. These impressive results were due in part to another excellent performance by our Wireless sales team plus the benefit of selling our Wireless products in conjunction with our Software solutions.
Number three, our Software operations also posted excellent results for 2013, establishing positive momentum going into 2014. Software revenues were up 17.6% from the prior year. Bookings reached a record high of $63.5 million, and we had a strong pipeline and backlog of $40.2 million at December 31. During the year, demand for our Software solutions remained strong as in North America, specifically among hospitals where we sold solutions for call center management, clinical alerting middleware, secured texting, mobile communications and emergency notification.
We also expanded our international sales efforts during 2013, as well as broadened our focus on such market segments as hospitality, education, business and government services. We also experienced significant growth among public safety organizations with a number of military and municipal 911 emergency response centers choosing our Software dispatch solution. In addition, our pipeline of sales prospects increased substantially during the year, and our dedicated sales team generated increasingly wider visibility for our suite of customized software solution.
Number four, we continued to reduce operating expenses in 2013, mostly on the Wireless side, consistent with our long-term plan. Operating expenses, excluding depreciation, amortization, accretion and impairment, declined 2.1% from the prior year to $149.1 million, while expenses for Wireless declined 8.8% in 2012.
Number five, our strong operating performance in 2013 also resulted in consolidated EBITDA, or earnings before interest, taxes, depreciation, amortization and accretion, of $50.7 million versus $67.3 million in 2012. This represented a consolidated EBITDA margin of 28.9% versus 30.7% a year ago. EBITDA for Wireless in 2013 was $54.7 million and represented EBITDA margin of 36.6%. Consolidated EBITDA was $16 million for the fourth quarter compared to $12.4 million in the year-earlier quarter, while our consolidated EBITDA margin was 29.2% versus 23.9% a year ago.
Number six, we again met our goal of generating sufficient free cash flow in 2013 to return capital to stockholders in the form of cash dividends. During the year, the company paid quarterly cash dividends to stockholders totaling $12.3 million or $0.50 per share. Over the past 9 years, we have now returned a total of $417.6 million to our stockholders in cash dividend.
Also, our Board of Directors recently declared regular quarterly dividend of $0.125 per share, totaling approximately $2.7 million. The dividend is payable on March 28 to stockholders of record on March 18. Additionally, our Board of Directors extended of our stock repurchase program through year-end 2014 and reset the amount available for purchase to $15 million. I'll comment further on our capital allocation strategy in a few minutes.
Overall, we're very pleased with our operating performance and progress in 2013. We met or exceeded virtually all of our key operating goals, generated significant free cash flow, expanded our software services and geographic reach, fully consolidated our 2 operating businesses and returned capital to stockholders. We also moved closer to our goal of transforming USA Mobility into a company with a viable path for long-term growth. We're proud of this record of achievements, and we look forward to continued success in 2014.
I'll comment further on our operating performance and related business activities in a few minutes. But first, Shawn Endsley, our Chief Financial Officer will review financial highlights of the quarter and year. Shawn?
Shawn E. Endsley
Thanks, Vince. Before I review a few key financial highlights for the fourth quarter and 2013, I would encourage you to review our 2013 Form 10-K, which we expect to file later today since it contains significantly more information about our business operations and financial performance than we will be able to cover on this call.
As Vince noted, we were pleased with our operating performance for the fourth quarter and 2013, as well as the substantial progress we made toward meeting our long-term operating goals. Results were consistent with our previously announced financial guidance for 2013 for both our Wireless and Software operations, and we believe we have positioned the company well for another solid year in 2014.
In the interest of time today, I plan to forgo my usual review of the income statement since much of that information is contained in our news release schedule and federal filings. However, to the extent you ask specific questions about our financial results, I would be glad to address them during the Q&A. I want to focus instead this morning on 3 other key financial items that may be of interest. Those items include: number one, the status of our Software revenue remediation work; number two, a review of our deferred tax assets along with other balance sheet items; and number three, our financial guidance for 2014.
As we noted in our earnings release, we successfully remediated the previously identified material weakness in the design of internal control over financial reporting relating to Software revenue recognition. Our remediation process involved staffing, training and process and procedure changes that are detailed in our 2013 Form 10-K. Our remediation efforts have also provided us the ability to reliably estimate the professional service period relating to our Software arrangements. This will enable us to begin recognizing revenues for just Software arrangements ratably over the estimated period of delivery to the customer.
For Software arrangements ordered prior to January 1, 2014, revenue has or will generally be recognized only at project completion. Maintenance revenue will continue to be deferred and recognized over the contract period, which is generally 1 year.
Turning to the balance sheet. The company generated $50.5 million in cash during 2013 from operating activities and ended the year with a cash balance of $89.1 million. We expect to use a portion of that cash in connection with quarterly cash dividends and share repurchases in 2014. I would also note that we have no debt outstanding, and our existing credit facility remains in place, unused and provides us with approximately $40 million in borrowing capacity for potential acquisition or related investment opportunities.
Looking at our deferred tax assets, or DTA. We currently have approximately $148.2 million in DTA before recognition of our valuation allowance. These DTAs allow us to shelter virtually all of our federal taxable income from cash income taxes. We are required to pay a minimal amount in federal alternative minimum tax, which is approximately $0.6 million for 2013.
The DTA is primarily consist of net operating losses that will expire in the years 2021 through 2029. Based on the availability of these DTAs, we do not expect to pay a significant amount in federal income taxes for the foreseeable future. The DTA valuation allowance adjusts the total balance of the DTAs to the amount that we expect to use in the future based on our forecast of taxable income. We will adjust the level of the valuation allowance, either up or down, as our expectations of taxable income change.
Finally, with respect to our financial guidance for 2014, we currently expect consolidated total revenue to range from $183 million to $201 million, with Wireless revenue between $125 million and $135 million and Software revenue between $58 million and $66 million; consolidated operating expenses, excluding depreciation, amortization, accretion, of $147 million to $156 million; and capital expenses to range from $7 million to $9 million.
Finally, I would remind you once again 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 briefly on several other items that may be of interest: first, the recent integration of our operating subsidiaries and management reorganization; second, our current capital allocation strategy; and third, our business outlook and key initiatives for 2014.
With respect to consolidation of our Wireless and Software operations, on January 1, we established our company as a unified communications business founded on one integrated sales force selling Software and Wireless solutions, one set of overhead, one custom messaging experience, one platform for future growth and acquisitions. We took the initial steps to integrate our 2 businesses early last year, including consolidation of our finance, human resources, legal and IT departments. As a result, our final integration of sales, marketing and operations has gone very smoothly and without any disruptions to customer service.
Today, as one unified company, we've not only gained operating efficiencies, but we are much better positioned to serve our customers, many of whom have increasingly asked us to be a single source provider for their unified communications needs.
As mentioned in our press release, Colin Balmforth, former President of Amcom Software, was named President of our combined operating company, while Jim Boso, former President of our Wireless subsidiary, is now consultant and will focus on operational sales and related corporate development activities. Both Colin and Jim are exceptionally capable and experienced business executives, and we are confident they will be successful in their new assignments.
Other management changes at the operating company include Kate Bolseth as Chief Operating Officer; and Gary Ash as Global Executive Vice President of Sales.
While we now function as a single company, there are other steps that we might take to more effectively and efficiently market our company and services to customers on a global scale. Towards that end, we are currently exploring several avenues to better communicate our corporate mission, as well as generate greater exposure for our products and services. We'll keep you posted on this initiative as updates occur.
At this point, I'll ask Colin Balmforth, President of our Consolidated Operating Company, to comment briefly on our fourth quarter sales and marketing activities. In addition, Colin will share some insights on what we see as our principal growth drivers going forward. Colin?
Colin M. Balmforth
Thank you, Vince. Good morning. With respect to sales and marketing activities, both our Wireless and Software sales teams performed very well during the quarter. On the Wireless side, the end of 2013 marked 5 years of achieving gross additions targets on a quarterly basis. This phenomenal track record of success is a testament to the hard work by many teams in the company and reinforces the message that paging continues to be highly relevant and maintains an important place in critical mobile communications.
The Wireless sales team continued the momentum from the previous quarter by bringing in 4 new hospital accounts. These were notable not only because these organizations selected our services to displace competitive systems but also because these wins underscore the ongoing trust and reliability of paging for critical communications. In addition to these new customer wins, 2 existing hospital customers significantly increased the number of paging units used in their facilities.
Regarding our efforts in cross-selling and collaboration between our Wireless and Software sales teams, there were 14 transactions booked during the fourth quarter, up from 6 in the third quarter. We are pleased to achieve expectations in this area and anticipate further progress as we integrate our sales teams in 2014.
On the Software side of the business, the Amcom sales and marketing team ended the year with record bookings, and the team recorded a record revenue performance, up from $51.3 million in 2012 to $60.3 million in 2013.
Healthcare continued to be the primary vertical market for North American accounts won, with public safety and government sales growing steadily. We are pleased to note that both tenured and U.S. sales reps performed very well and closed deals in the fourth quarter, a great sign that we're accelerating the productivity of our newly hired sales staff. And we continue to see good inroads in our international markets including Europe, the Middle East and Africa, as well as in Asia Pacific.
New Software accounts and market trends from the fourth quarter included, number one, an Oregon hospital selected us as their partner for secure texting and start communications in addition to call center applications. What's notable about this deal is that we displaced a competitive system in the contact center. This is a positive trend our sales team has seen over the course of 2013 and reinforcement that offering a full integrated suite has great value in the market.
Number two, longtime call center solution customers are also broadening their relationships with us by adding our clinical communications solutions to their trusted applications. As evidence of this, a children's hospital in the Southeast added clinical alerting to its call center solutions for console, emergency notification, [indiscernible].
Number three, we continue to see a favorable trend with customers, increasing the number of users for our mobility solution Mobile Connect. We are seeing an expansion of initial license investment size and the incremental license additions to our installed base of customers.
Number four, we are also seeing medium-sized hospitals in the 200-bed range start with our initial call center project and then integrate additional solutions over time. This was the case with a Massachusetts-based health care system, which in the fourth quarter added contact center recording and quality management to an existing contact center solution.
The marketing team has been busy generating a record number of qualified leads via e-marketing, the website, webinars and trade shows. In November, we exhibited at RSNA, the Radiological Society of North America, and had high-quality discussions with attendees regarding our Critical Test Results Management Solution. We also attended a successful regional show for public safety.
In November, the team held the Connect 13 customer user conference in San Diego, which was a great success featuring in-depth trend on product sessions, one-on-one meetings between product experts and customers and several sessions of the Amcom Directions customer user group.
Finally, in December, we met with our Physician Advisory Board, which helped us gain further perspective on how physicians communicate every day and where their challenges lie.
In addition to our results, we would like to provide you some color on our growth drivers. As part of our long-range plan, we have developed a strategy incorporating 5 pillars for growth. These pillars are mid-market health care, international, vertical markets, innovation and mergers and acquisitions. Starting with our first pillar of growth, mid-market health care, it's worth noting that approximately 80% of our Software business comes from the health care industry today. We're also pleased and honored to note that USA Mobility and Amcom Software can count all 18 hospitals on the U.S. News Best Hospitals Honor Roll as our customers.
In terms of market share, Amcom Software is used in a quorum of those large health care organizations with 600 or more beds. However, for the mid-market, defined as 200 to 600 beds, and the smaller market defined as less than 200 beds, we have lower market share and a greater opportunity. In these markets, the buying criteria are often driven by total cost of ownership. Our strategy is to bring solutions to market with a true multi-tenant Software-as-a-Service, SaaS, based capabilities that can leverage operating expense budgets and reduce the information technology spend traditionally associated with on-premise capital investments.
Moving on to the second pillar of growth, international. We've traditionally sold our core products to the U.S. market. And as you've heard, this has provided us an enviable portfolio of domestic references. In the same vein as leveraging our position towards the small or medium-sized business market, we plan to follow a similar strategy for our international business. We assess 3 things when we enter new markets: one, the addressable markets; two, the competitive landscape; and three, our solution fit, which includes not just our products but also our ability to sell, service and support our solutions at the level we set -- we and our customers would expect. We are excited by this market potential and plan for double-digit growth over the course of our long-range plan.
Our third growth pillar looks at vertical markets. Critical communications and alerting are used in many different industries beyond health care. We have customers using our products in public safety, hospitality, education, mining, corporate campus and military applications, among others. Our intention is to broaden our base in additional vertical markets using the same criteria described earlier. We had great success in 2013 selling to these markets and expect to expand our efforts going forward.
The fourth pillar covers innovation. There are a number of facets in this area. First, we have a very long loyal customer base. Our maintenance renewal rate of approximately 99% testifies to that loyalty. We expect to develop innovative products our customers can take advantage of, especially in the areas of mobility and call center solutions. The launch of 2 initiatives, Amcom Directions, our global user group, and our Physician Advisory Board, has given us more insight into these requirements going forward.
Second, our innovation is focused on next-generation architectures for future customer needs. We are making a significant investment in transforming our platform to support SaaS and advanced workflow capabilities. This in turn will support our growth in international markets and new vertical markets.
They will also enable us to leverage a scalable architecture for future plug-and-play capabilities, which leads me to the fifth pillar for growth, mergers and acquisitions. We have moved to an active acquisition mode and most recently have conducted due diligence on a number of companies in adjacent markets. While we cannot discuss specifics, our M&A team is evaluating everything from technology buys to larger segment roll-ups. So far, none of these candidates meet all of our acquisition criteria. We are taking due care with our evaluation process and anticipate moving forward with the next phase of our M&A strategy sometime in the 2014 timeframe.
With that, I will turn it back to Vince prior to taking your questions. Vince?
Vincent D. Kelly
Thank you, Colin. Turning to our capital allocation strategy, we continue to evaluate how best to deploy our capital resources to support sustainable business growth and maximize stockholder value. This is particularly true as we pursue our stated business strategy to evolve from a standalone paging carrier to a provider of unified communications solutions.
As I stated previously, our board and management has spent considerable time over the past few years evaluating various acquisition opportunities to expand the depth and breadth of our Software applications, service capabilities and market penetration. Today, as Colin noted, we haven't identified a candidate that we believe meets all of our stated criteria. Still, we remain optimistic yet disciplined and continue to look at potential acquisitions with the hope of identifying a good fit.
With regard to other uses of capital, we expect to continue paying our quarterly dividend of $0.125 per share, or $0.50 annually, for the foreseeable future. We believe the current dividend rate provides an appropriate yield on our common stock. Plus this allows us to retain strategic capital as we weigh various other capital needs going forward. Also, we may repurchase more shares of our stock from time to time under our stock buyback program.
With regard to capital allocation decisions over the longer term, the board and management will continue to assess all options. Of course, we will keep you updated with any change in direction or strategy here. As we move closer to a business model that can sustain long-term revenue growth, we expect capital allocation will shift more toward opportunities for long-term capital appreciation and total return. At the same time, we will continue to manage our balance sheet prudently by maintaining ample liquidity to support our working capital needs.
Finally, with respect to our business outlook and key initiatives for 2014, we are optimistic about another strong year. In the coming months, we expect to make additional progress toward our performance goals. While the overall demand for paging will continue to decline, the value of paging for critical messaging remains strong and should allow us to generate solid cash flow for some time to come.
We also expect to add to the significant progress and momentum we achieved over the past year. This includes continued expansion of our integrated sales reach both within and beyond existing market segments, as well as the extension of our sales to the new geographic markets worldwide. In addition, we will continue to explore acquisition opportunities in the unified communications space that are accretive to our business and accelerate our revenue growth and help utilize our valuable tax assets, all of which will enhance long-term stockholder value.
As for key initiatives, we continue to look for ways to upgrade and improve both our Software and Wireless products and service offerings. We will keep you posted on our progress on all of these projects, but as Colin mentioned, these initiatives are just current examples of how we believe product innovation will be a critical factor in our long-term growth.
In summary, 2013 was another year of outstanding progress for USA Mobility. Our Wireless and Software operations worked together exceptionally well, enhanced each other's sales potential and established a solid platform for a successful future as a fully integrated business unit. At the same time, we again operated the company profitably, met or exceeded our primary performance goals, reduced operating cost, increased organizational efficiencies and expanded our sales capabilities in many key target markets. With successful execution of our long-term business strategy and the hard work of our dedicated workforce, we expect to make even further progress in the years ahead.
At this point, I'll ask the operator to open the line up for your questions. [Operator Instructions] Operator?
Vincent D. Kelly
Operator, it doesn't look like there's any questions. So I just want to thank everyone for joining us this morning. We look very much forward to speaking with you after we release our first quarter results. And thanks again, everybody. Have a great day.
And thank you. That does conclude today's presentation. Thank you for your participation.
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