Spok Holdings' (SPOK) CEO Vince Kelly on Q4 2017 Results - Earnings Call Transcript

Spok Holdings, Inc. (NASDAQ:SPOK) Q4 2017 Earnings Conference Call March 1, 2018 10:00 AM ET

Executives

Vince Kelly - President and CEO

Mike Wallace - CFO

Hemant Goel - President, Operating Company

Analysts

Operator

Good morning, and welcome to Spok's Fourth Quarter Investor Call. Today's call is being recorded. On line today, we have Vince Kelly, President and Chief Executive Officer; Mike Wallace, Chief Financial Officer; and Hemant Goel, President of Spok's Operating Company.

At this time, for opening comments, I will turn the call over to Mr. Wallace. Please go ahead, sir.

Mike Wallace

Good morning. Thank you for joining us for our fourth quarter and 2017 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 Spok's future financial and business performance. Such statements may include estimates of revenue, expenses and income as well as other predictive statements or plans, which are dependent upon future events or conditions. These statements represent the company's estimates only on the date of this conference call and are not intended to give any assurance as to actual future results. Spok's actual results could differ materially from those anticipated in these forward-looking statements. Although these statements are based on 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 business environment in which we compete contained in our 2016 Form 10-K, which we expect to file later today; and related documents filed with the Securities and Exchange Commission. Please note that Spok assumes no obligation to update any forward-looking statements from past or present filings and conference calls.

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

Vince Kelly

Thank you, Mike, and good morning. We're pleased to speak with you today about our fourth quarter and full year 2017 operating results. We are encouraged by our performance as we met or exceeded the majority of our key operating metrics for both the quarter and the full year.

We achieved these results while both returning capital to our shareholders and continuing to make key strategic investments in our business to enhance and upgrade our operating platforms and sales infrastructure.

Before we get into the details of the quarter, I want to underscore where we are strategically with respect to our business plan and outlook. We're a company with the majority of our revenues still coming from our wireless paging base. While this base has slowed in its year-over-year erosion and outperformed our own forecasts on a regular basis. We still believe that will continue to shrink over time and that we need to invest in the growth potential of our healthcare software initiative. These investments have resulted in diminished margins and margin outlook reflected in our latest guidance.

However, the investments have also resulted in stabilizing our top-line revenue in the last three quarters of 2017 where our software revenue growth exceeded our paging revenue decline. Also as you have seen, our 2018 revenue guidance range is now exactly the same as our 2017 revenue guidance range which will result in the first year of stable top-line revenue since our founding in late 2004.

Since that time we've generated over $983 million in free cash flow. We've returned $468 million to shareholders in the form of dividends and $95 million in the form of share repurchases. Our share repurchases have retired approximately 8.4 million shares and at an average price of just under $11.40 per share. We've paid off all our debt acquired our software business and increased our cash balances. However, it was clear to us that our ability to continue to generate meaningful free cash flow will diminish over time as our paging base eroded with the transition to new smartphone based communications technologies.

We could have gone in one of two directions. Number one, we could have continued to manage the business as a liquidating trust. Number two, we could pivot to a software business with a healthcare focus creating long-term shareholder value. It was my recommendation in the judgment of our Board to do the latter. About two years ago, we doubled down on the strategy as we move forward into 2018 that's the path we continue on. Our focus is to create sound service, industry leading clinical communication and collaboration solutions to our Spok Care Connect platform. We believe that we are starting to see the benefits of the investments that we have made and we believe that the investments will continue to make in our systems and people will position as well for the future. We're not happy with our share price performance for 2017 and the first part of 2018, but we also realize that in order to grow value we need to execute our 2018 business plan, create beautiful software that delights our customers, retain our wireless subscribers and revenue for as long as possible and demonstrate a path to long-term top line growth and profitability. That's our mission. We are on it.

With this as background, yesterday our Board of Directors authorized a repurchase of an additional $10 million of the company's common stock through 2018. This comes on top of the $10 million that we repurchased in 2017 and affirms our commitment to creating stockholder value and returning capital.

Now turning to the fourth quarter of 2017. Again, we were particularly pleased that this quarter represented our third consecutive quarter of total revenue growth. Noteworthy was our performance in the second half of the year as software revenue grew by nearly 17% compared to the first half of 2017and wireless revenue decline slowed to a record low 3.5% over the same period. We believe this provides strong momentum as we enter 2018. Spok posted solid results for our wireless products and services in the fourth quarter and for the full year as well.

Gross disconnects improved on a sequential year-over-year and annual basis. As a result, annual paging losses remained at near historical lows for both the quarter and the full year. While our paging units in wireless revenue continued to decline as expected, we are very pleased by a much slower than anticipated rate of quarterly and year-over-year reduction.

Our performance in the fourth quarter was consistent with our expectations and the trends we typically experienced during the year. We were particularly pleased to see fourth quarter software bookings improved sequentially and annual software bookings increased more than 5% from prior year levels.

Our 2017 backlog levels remain strong and we're up more than 10% from the prior year. We believe these results are due to the investments we have made in our sales team and infrastructure. Overall, we continue to operate profitably enhance our product offerings and maintain the strength of our balance sheet. Our ability to continue to generate healthy cash flow allowed us to execute against our capital allocation strategy returning more than $25 million to our stockholders in 2017 in the form of dividends and share repurchases.

Mike and Hemant will provide details on our financial performance and operating activities shortly. But before that, I want to highlight a few key results for 2017 for the fourth quarter and for the full year.

First, continued demand for our software solutions and wireless services resulted in consolidated revenue of $171.2 million for 2017 down 4.7% from the prior year, but a slower decline than the 5% reduction we saw in 2016. Year-over-year performance was driven in large part by consistent annual levels of software revenue as we continue to invest on our industry leading clinical communication and collaboration platform, Spok Care Connect and slower than anticipated attrition of wireless revenue.

Sustained annual levels of software revenue were due in large part to a continuing trend of very strong renewal rates on software maintenance contracts. Our pipeline of marketing qualified sales leads also remains strong. Demand for our solutions remain strong in North American markets specifically among hospitals and other healthcare organizations where we sell solutions for smartphone communications, call center management, secure texting, clinical learning and emergency notifications to both new and existing customers.

Although we are greatly encouraged by the revenue momentum we saw in 2017 and the sequential growth we saw for the past three quarters, we expect it will take more time for the company to grow meaningfully on an annual basis.

Next, wireless subscriber and revenue trends continue to improve in 2017 as we again exceeded our expectations for gross additions, net unit churn, revenue and ARPU. Our year-over-year rate of paging unit erosion was consistent with 2016 levels as a net number of units lost during the year was unchanged from the prior period.

Our year-over-year rate of wireless revenue erosion was 7.7% for 2017, a 20 basis point improvement from the prior year and a sharp reduction from the 10.1%, we had in 2015. We were especially pleased to see these positive trends continue when our top performing healthcare segment, our best performing market segment in the fourth quarter with the highest rate of gross placements and the lowest rate of the disconnects.

Before I move on, for those of you that are newer to our story, let me say that we're benefiting from a slower than anticipated rate of wireless paging unit and revenue erosion. While many physicians want smart devices and secure messaging is a natural fit for them. They also want to keep pagers because they have long trusted them or want to separate their personal smartphone communications from their work communications arriving on a pager.

Also on a true emergency situations such a severe weather like what we saw from the recent devastating hurricanes in Texas, Florida and Puerto Rico or an event involving rapid deployment of first responders such as the Las Vegas shootings, cellular networks tend to get overloaded and message delivery can fail or be interrupted. If an organization utilizes only smartphones communications can be at risk. Pager still work in the scenarios because we use a separate high powered simulcast network and multiple satellite control of our transmitters for redundancy. As a result of these dynamics we believe that migration from wireless pagers will continue to occur at a slower pace than in the past.

Third, consolidated operating expenses which exclude depreciation, amortization accretion and impairment were up only 3% from 2016 and we were below the low end of the guidance that we have provided at the beginning of the year. Noteworthy was that our team was able to achieve this performance as we saw nearly 40% increase in product research and development expenses over the same period in order to support our investment in the Spok Care Connect platform. Mike will reveal details in a few minutes but essentially the lower year-over-year operating expenses reflected a cost structure that is fully aligned with the demand levels we saw during the year.

We continue to manage operating expenses closely and the efficiencies we have been able to implement across our cost structure provide a solid financial platform as we continue to make investments in areas that support our strategy for long-term growth.

Finally, in 2017, we return more than 25 million to our stockholders consistent with 2016 levels. In 2018, we continue to be remain focused on returning value to shareholders through our capital allocation strategy which I'll talk about in a few minutes. Overall, we're pleased with our operating performance in the fourth quarter and the company's substantial progress in 2017. We met or exceeded our expectations on a number of key operating measures. We achieved these results as we continued to make key strategic investments into our business.

However, we had many other accomplishments in addition to our financial performance. Let me outline a few of those for you.

In 2017, we continue to take steps to further strengthen our leadership team. Early in the year, we announced the appointment of Mike Wallace, our Chief Financial Officer who brought with him a proven ability to manage the finance function in a rapidly growing and changing environment as well as implementing strategies for improving revenue and profitability.

Later in the year, we announced the addition of our Senior Vice President of Professional Services, Mark Costanza whose mission is to accelerate the conversion of our strong backlog into our revenue stream as we continue to take advantage of large market opportunity in the healthcare IT market. And our focus on creating a best in class leadership team continues in 2018.

Earlier this year, we were happy to further upgrade our management talent by appointing a new Chief Technology Officer, John LaLonde. John is an industry veteran who brings a strong passion for innovation along with his extensive clinical and technical expertise in bioelectronics, cloud-based digital health, remote patient monitoring and mobile applications. With a background in physics and biomedical engineering and over 30-plus years of leadership experience in healthcare companies such as Medtronic, Boston Scientific and G.E. Healthcare. John will lead his team to focus on scaling and driving innovation around performance, clinical communications solutions, patient care workflow and creative new features supporting Spok's existing and new business models.

And while we've enhanced our human resources, we've also invested in technology to support our operations and the development of our solutions. We've also invested in our sales support and back office operations. Our goals have been to increase not only our effectiveness but our efficiency. Our marketing team has been busy too. During the year we attended numerous trade shows and conferences where we generated tremendous attention in high approval ratings and that momentum carries into 2018. Next week we will present the latest evolution of our suite of integrated healthcare communication and collaboration solutions at the 2018 HIMSS Annual Conference and Exhibition.

In 2017, these trade shows and conferences were a major source of customer leads and helped us generate more than 100 new customer relationships during the year. We intend to carry that momentum throughout 2018 to stimulate sustainable long-term growth for our stockholders.

And last, we demonstrated meaningful thought leadership and solidified our reputation in this industry. We completed our seventh annual survey on mobility and healthcare conducted numerous webinars and clinical communications from our Chief Medical Officer, Dr. Andrew Mellin and our Chief Nursing Officer Dr. Nat'e Guyton and continue to build our reputation with healthcare suite executives by participating in multiple industry events.

During the year, there were many other examples of leadership position we took. These range from our work helping the Federal Communications Commission identify a robocall scammer, the Spok's role in supporting healthcare institutions in the regions affected by the recent hurricanes to handling communication volume spikes and the aftermath of the Las Vegas shootings. I'm proud of our team and their efforts in 2017 and I look forward to their achievements in 2018.

I make additional comments on our 2018 outlook and strategies in a few minutes, but first Mike Wallace, our Chief Financial Officer will review financial highlights for the quarter. Then Hemant Goel, President of our operating company will also comment on our fourth quarter operational activities. Mike?

Mike Wallace

Thanks Vince.

Before I review our financial highlights for the fourth quarter and full year of 2017. I would again encourage you to review our 2017 Form 10-K, which we expect to file later today since it contains far more information about our business operations and financial performance than we will cover on this conference call.

As Vince noted, we were pleased with our overall operating performance for the fourth quarter and the full year of 2017 along with the progress we made before meeting our long-term business goals.

Revenue contribution from both software and wireless combined with continuously focused expense management helped to maintain solid operating cash flow, EBITDA and operating margins for the quarter and full year 2017 as we continue to invest in our business for long-term growth. Our balance sheet remains strong with a cash balance of $107.2 million at December 31, 2017 and we continue to operate as a debt free company.

As a result of this performance, we believe we have a solid financial platform and are well positioned to execute against our long-term goals during 2018 and beyond. In the interest of time today, I will not review our fourth quarter and full year 2017 income statement on a line by line basis. Since much of that information is contained in our news release schedules and Federal filings. However, to the extent you have specific questions about our quarterly financial results, I would be glad to address them during the Q&A portion of this call.

Rather I want to focus instead this morning on four specific areas. These include one, a review of certain factors impacting fourth quarter revenue; two, a review of selected items which impacted fourth quarter expenses; three, a brief review of deferred tax assets and the impact of the enacted Tax Cuts and Jobs Act in December 2017 along with other balance sheet items; and four, our financial guidance for 2013.

With respect to revenue for the fourth quarter of 2017 total revenue was $43.8 million compared to $44.2 million in the fourth quarter of 2016 and up from $43.6 million in the third quarter of 2017. We were particularly pleased with our ability to grow further revenue for the third quarter in a row and a continued strong year-over-year and sequential increases in software revenue as well as slower erosion in our wireless business.

Total fourth quarter software revenue reflecting increases from the prior quarter and the fourth quarter of 2016 by 4% and 9% respectively, as we have grown both software operations revenue as well as maintenance revenue. Software operations revenue has continued to increase each quarter during 2017. From a low in the first quarter of 2017 of $6 million to $9.4 million in the fourth quarter. Additionally, maintenance revenue continues to increase reflecting our maintenance revenue renewal rates in excess of 99% from our installed software solution base and providing a reliable and reoccurring revenue and cash flow stream.

Wireless revenue for the fourth quarter remains solid declining only 2.1% from the previous quarter. Noteworthy in the second half of 2017, wireless revenue erosion slowed to a historical low of 3.5%. This was driven by solid retention reflecting another impressive performance by our sales team to again generate significant wireless gross additions, while minimizing churn and maintaining stable [indiscernible].

Turning to operating expenses, we reported consolidated operating expenses which excludes depreciation, amortization and accretion of $37.4 million for the fourth quarter, up slightly from the $36.3 million in the fourth quarter of 2016.

For the full year 2017, operating expenses totaled $148.8 million versus $144.4 million in the prior year reflecting the increased level of investment in our Spok Care Connect platform. Yet we're well below the low-end of our guidance range of $153 million to $159 million that we had established at the beginning of 2017.

Our operating expenses in the fourth quarter of 2017 increased approximately $1.1 or 3% from the fourth quarter of 2016 driven primarily by $1.2 million increase in research and development expenses over the same period.

For the full year of 2017, operating expenses increased approximately $4.4 million from prior year levels. Again, driven by a planned increase in the annual R&D expenses of $5.2 million on a year-over-year basis. In a few minutes Vince will outline our expectations for R&D expenses in 2018 and while we expect these expenses to continue to increase in the near term to support our investment strategy, we believe the rate of growth will diminish over time.

Offsetting the increase in R&D expense, while declines in other expense categories reflecting efficiencies implemented over the course of 2017 and the year-over-year anticipated decline in total revenue. Specifically reductions in cost of revenue which include lower hardware costs coupled with internal and external implementation services as we become more efficient in delivering our software solutions a more focused in lean sales and marketing organization and continued reductions in service rental and maintenance expenses as we continue to rationalize the erosion of our wireless business.

Additionally, we continue to adjust our employee levels to meet the changing requirements of our business including investments in our product and development staff. Our full time equivalent employees or FTEs were 596 at December 31, 2017 versus 587 FTEs at year end 2016.

Depreciation, amortization and accretion decreased in the fourth quarter and full year of 2017 compared to the same levels in 2016 primarily due to lower amortization expense associated with our intangible assets. As you may remember due to our rebranding in 2014, we have revised the amortization period for the intangible assets associated with the Amcom acquisition which resulted in increased amortization expense in that year.

Our capital expenses in the fourth quarter of 2017 were $2.2 million and were incurred primarily for the purchase of pagers and infrastructure to support our wireless customers. For the full year, capital expenses totaled $9.2 million up from $6.3 million in 2016 reflecting the increased level of investment to support this Spok Care Connect platform development. However, 2017 capital expenses were at the low-end of the guidance range of $8 million to $12 million that we had provided at the beginning of 2018.

We believe we have past the major portion of our CapEx requirements to support our strategy and that levels should generally remain flat over time.

Looking at our deferred tax assets or DTAs, we had approximately $47.7 million in DTAs at year end. The sharp decline from third quarter levels results from our revaluation of our DTA is under the Tax Cuts and Jobs Act which was passed in December and was primarily driven by the rate reduction from 35% to 21%. We no longer have a valuation allowance as we fully expect to realize the benefits associated with our DTAs. The DTAs primarily consist of net operating losses which 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 as these DTAs allow us to shelter virtually all of our regular Federal taxable income.

Also our balance sheet remains strong, with the cash balance of $107.2 million at December 31, 2017. During the year, Spok generated more than $16 million of net cash which partially offset cash return to shareholders and capital expenditures. Vince will comment further on our capital allocation strategy shortly.

With respect to our financial guidance for 2018, as is typical with our fourth quarter earnings release we have included an additional schedule detailing the components of our annual guidance for this year. Included in that guidance are Spok's expectations for software and wireless revenue generation in 2018.

We again expect total revenue to range from $161 million to $177 million. Included in that total we anticipate software revenue to comprise $74.5 million to $82.5 million, 6.4% to 17.9% increase from 2017 levels. Also we expect operating expenses excluding depreciation, amortization and accretion to range from $158 million to $165 million and capital expenses to range from $4 million to $8 million.

I would remind you once again that our projections are based on current trends and that those trends are always subject to change.

Before I turn the call over to Hemant, I'd like to briefly comment on a recent accounting pronouncement that you are probably aware of and will be implemented with our first quarter 2018 results. ASC 606 provides accounting guidance related to revenue recognition from contracts with customers. The main purpose of the new standard is to provide a cohesive set of disclosure requirements such that companies better match the revenue recognition with the satisfaction of the defined performance obligation for the customer.

After considering all relevant facts and circumstances and the determination of when and how revenue is recognized and reviewing the two permitted transition methods under the new standard, we have selected the modified retrospective approach. Under the modified retrospective approach, we will have an impact on deferred revenue, prepaid assets and retained earnings in our 2018 consolidated financial statements. While we continue to finalize our adjustment to beginning balances as of January 1, 2018. We currently estimate the impact to increase retained earnings will be between $4 million and $7 million. This adjustment is primarily a result of the acceleration of license revenue for which we previously recognized over the combined service period as well as certain commission expenses which are expected to be recognized over a longer amortization period than before. While we continue to assess and finalize the impact of this standard which we anticipate disclosing beginning with our first quarter 2018 filing. We believe that the most significant impact relates to our accounting for software license revenue.

We expect software license revenue to be recognized when made available to the customer rather than over a combined service period or subscription period thereby accelerating revenue when compared to the existing revenue recognition standard. However, because there is no historical basis for ASC 606 or comparable prior periods when utilizing the modified retrospective approach. In 2018, our earnings releases will include a reconciliation of the new pronouncement to the ASC 605 treatment, we are currently using so as to level the playing field for you and to provide comparable results under the current ASC 605 standard.

With that, I will turn the call over to Hemant Goel, who will update you on fourth quarter sales and marketing activities. Hemant?

Hemant Goel

Thank you, Mike and good morning.

As you've heard, our sales and maintenance teams delivered software bookings in the fourth quarter of 2017 totaling more than $19 million. This performance was up from last quarter and indicates an increase in total annual bookings of 5.2% over last year. Maintenance revenue renewal rates remain strong at more than 99% for the quarter.

More than 100 new healthcare organizations selected Spok Care Connect in 2017 including 21 during the fourth quarter. That means that more than 1900 hospitals now use Spok solutions including all 30 adults and children's health organizations and the current Best Hospitals Honor Roll by U.S. News and World Report.

Healthcare remains a key part of our growth and primary focus making up 91% of overall bookings in the U.S. for fourth quarter nearly a third of that business came from hospitals that have never worked with us before. It's important to note that the size of these new deals increased 77% over the same quarter last year another indication of the market acceptance of the breadth of our solutions and its confidence in our clinical communication and collaboration platform.

I'd like to share two examples of these types of seven and six figure deals. Among our new customers this quarter is 394 bed not for profit teaching facility in the Washington D.C. area. This customer has chosen Spok to replace one of our competitors call center products which the hospital feels is outdated and siloed. The hospital not only choose Spok to replace that contact center, but it's adding a fully unified platform with the Spok Care Connect solution. They will take full advantage of our directory for enterprise on call scheduling, secure messaging and clinical alerting. Another new customer this quarter is a multi-hospital regional health system in southern Canada. This customer has choose Spok Care Connect to enable collaboration between staff, physicians and the contact center across all their hospitals with a centralized directory, on call scheduling and messaging preferences. The collaboration will improve customer satisfaction and code response times provide secure and encrypted mobile communications and automate notification and escalation based on critical events.

Integration with other hospital systems most notably Electronic Health Records or EHRs is vital to our healthcare customers. We recently established a multiyear partnership with a large medical center in Minnesota to develop integrations with and leverage workflows that originate in the EHR. Our development teams were onsite with this customer to deeply understand their problems and develop new solutions.

As Vince mentioned, Mark Costanza joined Spok as Senior Vice President of Professional Services. He's already delivering on his mission to accelerate the conversion of our backlog into our revenue stream. Under Mark's guidance, we saw strong operations revenue in fourth quarter of $9.4 million, a 5.7% improvement quarter-over-quarter and up 16.5% year-over-year.

Mark has fine tuned our business processes in this area to provide more accurate forecasting and improve our product delivery. He's scaling our professional services group in ways we haven't in the past while maintaining high levels of customer satisfaction and product quality.

We also updated our sales team adding several enterprise sales reps who have experience in selling enterprise solutions in healthcare. Many of our competitors talk about having enterprise solutions but no one offers the breadth of a clinical communication and collaboration platform that Spok delivers with Care Connect. Most of the companies in this market offer a variety of single point solutions and can only claim to deliver a connected communication platform by partnering with others.

Our Spok Care Connect platform is comprehensive and goes far beyond what others are offering.

In 2017, Spok delivered several releases for our contact center, alerting, secure messaging and public safety products. We implemented each release with partner customers before launching more broadly. Working closely with our customers, we are strengthening interoperability and reinforcing security with robust EHR integrations, advanced enterprise directory, real-time location system integrations and security enhancement.

We also formed a Physician Advisory Council and a Nurse Advisory Council. These leaders from top rated hospitals and health systems across the country provide us with relevant feedback, advice and recommendations. Through these close relationships, we know our solutions make a difference in improving patient care delivery nationwide.

In healthcare return on investment is often measured by patient outcomes. Many of our customers have shared how they measure the ROI of Spok solutions and we have posted these results on our Web site. One notable example is of a hospital that reduced mortality rates from sepsis by 20% using workflows that rely on Spok solutions.

Now I want to mention an example of the contribution Spok made during disaster situations in the fourth quarter. Shortly after our third quarter call, Hurricane Maria ravaged Puerto Rico. As we did after Hurricanes Harvey and Irma, Spok was there for customers and the community at large. In Puerto Rico, we supported the greater needs of the island specifically those caused by significant damage to the island's connectivity infrastructure.

Working with the Federal government and local authorities, we lent wireless spectrum in support of Project Loon developed by X formerly Google X which brought balloon powered Internet to the island.

Before turning things back to Vince, I want to provide a brief update on our ongoing marketing activities designed to help us establish our brand, [bright leads] [ph] and fill the sales pipeline. We continue to build on our industry reputation and top leadership. Our paid healthcare advertising programs once again delivered strong results. In the fourth quarter, our marketing partnership with Becker's Hospital review generating more than 900 leads a record for organization and publication.

We participated in four healthcare C-suite events during the quarter building on our marketing strategy to establish relationships with healthcare leaders. In addition to generating leads and adding to our sales pipeline, over the past 18 months, our investment in these types of activities has helped to increase our brand awareness amongst C-suites about 57%.

By every measure, our customers and potential customers believe in our strategy to deliver an enterprise healthcare communication platform. Our brand is gaining traction in the marketplace and our bookings continue to grow.

Looking forward we expect continued market demand for our clinical communication and collaboration platform in healthcare.

With that, I will pass it over to Vince.

Vince Kelly

Thank you, Hemant.

With respect to our key goals and business outlook, let me take a few minutes to outline our strategy.

As I mentioned in my opening comments, about two years ago, we embarked on a transformation that was a title shift in our strategic direction for healthcare our largest customer segments. This strategy pivot is a five-year plan that signaled a very intentional move from offering our customers point solutions for single product solutions for call center software, alarm management and secured messaging to offering them a single integrated clinical communication and collaboration platform call Spok Care Connect.

As we've previously outlined, our decision to make the shift and focus on the Spok Care Connect platform resulted for many reasons including customer needs since our healthcare customers were telling us they needed a more unified approach to communications across our enterprise. The large potential market opportunity as we expand our offering with more than 1900 hospitals we currently serve and introduce our solutions to two thirds of the North American healthcare market, we are currently not working with, business simplification as we've been offering our customers too many different products and multiple versions on several different platforms and competitive positioning. As we concluded that no one else offers a single integrated platform as comprehensive as ours for healthcare communications.

For the past two years, we've invested in the additional talent resources and tools to implement our strategic vision. We recruited experts for product strategy and development, created additional work teams, devised a plan to map our existing products to the newly envisioned platform.

We recruited people with the experience in enterprise healthcare sales, while providing training and certification for existing teams to increase their focus on the new approach. We've added clinical expertise to build on our communications legacy.

With the help of our loyal customers, we've made excellent progress. Our core foundation of clinical communication is strong and we are proud of the work our employees have done in support of this mission. We have accomplished so much together since we became Spok. We are laser focused on making Spok Care Connect, the leading clinical communication collaboration platform for the healthcare industry.

We also took our Spok Care Connect message to the market. Our strategy of offering a single platform, single database, single technology that creates an enterprise solution for our healthcare customers has now been validated and endorsed by both customers and industry analysts. We're confident we are in the right path for our future.

So with that as background and with respect to our 2018 guidance, this year we continue our commitment in investing to address near-term opportunities and to achieve long-term organic growth. We believe these investments are critical in supporting our strategy to deliver industry leading clinical communication and collaboration platform named Spok Care Connect and drive long-term stockholder value.

As a backdrop, in 2016 R&D expenses totaled about $13.5 million an increase of nearly one-third from the prior year levels. And in 2017, R&D expenses totaled $18.7 million, an increase of nearly 40% from 2016. We've continued to increase the level of investment in our planning as reflected in our expense and capital expenditure guidance ranges supporting our strategic plan including the expense guidance range that Mike outlined a few minutes ago.

In 2018, we anticipate that R&D expenses can increase 30% to 40% from 2017 level in order to support the full year impact of the hires we made last year and as we add the necessary human resources this year to execute our strategy.

We also plan to continue our efforts in marketing and support to increase our efficiency effectiveness and sales opportunities. This is not a short-term plan. We do not undertake this commitment lightly and there is risk. However, we believe the market is there and that we are starting to see the benefits, opportunities, sales growth and other business efficiencies as we enhance our platform and bring it fully to market.

Finally, with respect to our capital allocation strategy, our overall goal has been to achieve sustainable business growth, while maximizing long-term stockholder value through a multifaceted capital allocation strategy that has included dividends and share repurchases, key strategic investments to improve our operating platform and infrastructure and drive long-term revenue growth and potential acquisitions that could provide additional revenue streams, solution functionality and are accretive to long-term earnings.

We believe the potential in healthcare clinical communication collaboration market is large and that our best path to creating long-term stockholder value is to succeed in enhancing and accelerating our Spok Care Connect platform. We have not closed our mind to acquisitions and will continue to evaluate opportunities, but given the continued high premium expectations relative to integration risks. Now, we believe the best use of our capital and management, focus is to invest more aggressively in our own product research and development resources in order to accelerate our progress toward creating an industry leading healthcare focused clinical communication and collaboration platform and capability that capitalizes on our current solutions portfolio and large customer base.

For 2018, we are committed to continue paying our $0.125 per share quarterly dividend and repurchasing up to $10 million of our company stock while we aggressively increase our investments in research and development to benefit the future and create long-term stockholder value.

We will continue to evaluate our capital allocation strategy on a quarterly basis with our Board of Directors and our advisors and communicate our plans to you with respect to dividends, share repurchases and other uses of capital each quarter when we report earnings.

Wrapping up, we remain committed to our core values of putting the customer first, providing solutions that matter, innovation and accountability. We believe our past results and future plans reflect those values and beliefs and are consistent with the delivery of long-term stockholder value.

At this point, I'll ask the operator to open the call for your questions. We would ask you limit your initial questions to one and a follow up. And then after that we will take additional questions as time allows. Operator?

Question-and-Answer Session

Operator

Thank you. [Operator Instructions]

Unidentified Analyst

Unidentified Company Representative

Vince Kelly

Operator, I'm not seeing anyone in the queue right now. So unless if someone pop in there soon. I think we're probably going to wrap up. So look everyone thank you for joining us this morning. We look forward to speaking with you again after we release our first quarter results in April. Everyone have a great day.

Operator

This concludes today's call. Thank you for your participation. You may now disconnect.