10-K 1 spok-12312014x10k.htm 10-K SPOK-12.31.2014-10K
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
 
(Mark One)
x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 2014
or
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from              to             
Commission file number 001-32358
SPŌK HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE
 
16-1694797
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
 
6850 Versar Center, Suite 420
Springfield, Virginia
 
22151-4148
(Address of principal executive offices)
 
(Zip Code)
(800) 611-8488
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Name of each exchange on which registered
Common Stock, par value $0.0001 per share
 
NASDAQ National Market®
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    YES  ¨    NO  x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    YES  ¨    NO  x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    YES  x    NO  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    YES  x    NO  ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  x
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
 
¨
Accelerated filer
 
x
 
 
 
 
Non-accelerated filer
 
¨  (Do not check if a smaller reporting company)
Smaller reporting company
 
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    YES    ¨    NO  x
The aggregate market value of the common stock held by non-affiliates of the registrant was $329,130,140 based on the closing price of $15.40 per share on the NASDAQ National Market® on June 30, 2014.
The number of shares of registrant’s common stock outstanding on February 27, 2015 was 21,966,825.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s Definitive Proxy Statement for the 2015 Annual Meeting of Stockholders of the registrant, which will be filed with the Securities and Exchange Commission pursuant to Regulation 14A no later than April 30, 2015, are incorporated by reference into Part III of this Report.
 




TABLE OF CONTENTS
 
 
 
 
 
 
 
 
Part I
 
 
 
 
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
 
 
 
 
Part II
 
 
 
 
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8
Item 9.
Item 9A.
Item 9B.
 
 
 
 
Part III
 
 
 
 
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
 
 
 
 
Part IV
 
 
 
 
Item 15.
 

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Forward-Looking Statements
This Annual Report on Form 10-K contains forward-looking statements and information relating to Spōk Holdings, Inc. and its subsidiaries (“SPŌK” or the “Company”) (formerly USA Mobility, Inc.) that set forth anticipated results based on management’s current plans, known trends and assumptions. These statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Statements that are predictive in nature, that depend upon or refer to future events or conditions, or that include words such as “anticipate,” “believe,” “estimate,” “expect,” “intend,” “will,” “target,” “forecast” and similar expressions, as they relate to SPŌK are forward-looking statements.
Although these statements are based upon current plans, known trends and assumptions that management considers reasonable, they are subject to certain risks, uncertainties and assumptions, including but not limited to the following:

Our ability to manage wireless subscriber erosion rates
Our ability to manage the software sales cycle
Our ability to manage network rationalization without causing disruption of service to our customers
Our ability to retain key management personnel and to attract and retain talent within the organization
Our ability to manage change related to regulation
The reliability of our networks and servers and our ability to prevent cyber-attacks and other security issues and
disruptions
Our ability to expand into international markets
Those discussed in this Annual Report under Item 1A “Risk Factors.”
Should known or unknown risks or uncertainties materialize, known trends change, or underlying assumptions prove inaccurate, actual results or outcomes may differ materially from past results and those described herein as anticipated, believed, estimated, expected, intended, targeted or forecasted. Investors are cautioned not to place undue reliance on these forward-looking statements.
The Company undertakes no obligation to update forward-looking statements. Investors are advised to consult all further disclosures the Company makes in its subsequent reports on Form 10-Q and Form 8-K that it will file with the Securities and Exchange Commission (“SEC”). Also note that, in the risk factors, the Company provides a cautionary discussion of risks, uncertainties and possibly inaccurate assumptions relevant to its business. These are factors that, individually or in the aggregate, could cause the Company’s actual results to differ materially from past results as well as those results that may be anticipated, believed, estimated, expected, intended, targeted or forecasted. It is not possible to predict or identify all such risk factors. Consequently, investors should not consider the risk factor discussion to be a complete discussion of all of the potential risks or uncertainties that could affect SPŌK’s business, statement of income or financial condition, subsequent to the filing of this Annual Report.




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PART I

The terms "we," "us," "our," "Company" and "SPŌK" refer to Spōk Holdings, Inc. and its direct and indirect wholly owned subsidiaries.

ITEM 1. BUSINESS
General
We are a holding company, which, primarily acting through our indirect wholly-owned subsidiary, Spōk, Inc., is a comprehensive provider of critical communication solutions for enterprises. We are a leader in critical communication for healthcare, government, public safety and other industries. We deliver smart reliable solutions to help protect the health, well-being and safety of people around the global. We are a provider of paging services and selected software solutions in the United States and abroad, generally in Europe, Canada, Australia, Asia and the Middle East. Our product offerings are capable of addressing a customer’s mission critical communications needs.
Our principal office is located at 6850 Versar Center, Suite 420, Springfield, Virginia 22151, and our telephone number is 800-611-8488. We maintain an Internet website at http://www.spok.com. (This website address is for information only and is not intended to be an active link or to incorporate any website information into this 2014 Annual Report on Form 10-K ("2014 Form 10-K").) We make available on our website, free of charge, our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports as soon as reasonably practicable after such reports are electronically filed with, or furnished to, the United States Securities and Exchange Commission (the “SEC”). The public may read and copy any materials we file with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC also maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC at http://www.sec.gov. We also make available on our website, and in print, if any stockholder or other person so requests, our code of business conduct and ethics entitled “Code of Ethics” which is applicable to all employees and directors, our “Corporate Governance Guidelines” and the charters for all committees of our Board of Directors, including Audit, Corporate Governance and Nominating. Any changes to our Code of Ethics or waiver, if any, of our Code of Ethics for executive officers or directors will be posted on that website.
Effective January 1, 2014, the legal entity, Amcom Software, Inc. ("Amcom"), was merged into Spōk, Inc. (formerly USA Mobility Wireless, Inc.), an indirect wholly-owned subsidiary of Spōk Holdings, Inc. Our sole domestic operating subsidiary is now Spōk, Inc. In addition, management was reorganized to consolidate the separate management structures for the wireless and software segments into one integrated management structure. Effective January 1, 2014, the Company is structured as one operating (and reportable) segment, a critical communication business. To allow for the comparability of financial results, certain revenue and operating expenses were reclassified to conform to the current year's presentation of reports within one segment.
On July 8, 2014, the Company changed its name from USA Mobility, Inc. to Spōk Holdings, Inc.
Scope
We are a provider of paging services and selected software solutions in the United States and abroad, generally in Europe, Canada, Australia, Asia and the Middle East. These foreign sales represent less than 4% of consolidated revenue. We offer our services and products primarily to three major market segments: healthcare, government, and large enterprise, but with a greater emphasis on the healthcare market segment. For the year ended December 31, 2014, wireless and software revenue represent approximately 66% and 34%, respectively, of our consolidated revenue.
Industry Overview
We deliver smart, reliable critical communications solutions to help protect the health, well-being and safety of people around the globe. More than 100,000 organizations worldwide rely upon us for workflow improvement, secure texting, paging services, contact center optimization and public safety response.
We develop, sell, and support enterprise-wide systems for healthcare, government, large enterprise and other organizations needing to automate, centralize and standardize mission critical communication solutions. Our solutions can be found in prominent hospitals; large government agencies; leading public safety institutions, colleges and universities; large hotels, resorts and casinos; and well-known manufacturers.
Due to the focused nature of our software solutions there is no single competitor that matches our portfolio of software solutions (see “Competition” below). Our primary market has been the healthcare industry, particularly hospitals. We have identified

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hospitals with 200 or more beds as the primary targets for our software solutions. Within this market we have identified the following dynamics and have focused our software solutions (see “Products” and “Operations” below) to address these dynamics:
a heightened awareness of the ubiquitous, mission critical role of communications in healthcare;
an increased focus within hospitals on quality of care and patient safety initiatives;
a continuing focus within hospitals to reduce labor and administrative costs while increasing productivity; and
a broader proliferation of information technology in healthcare as hospitals strive to apply technology to solve their business problems
Products
Paging Services. We offer subscriptions to one-way or two-way messaging services for a periodic (monthly, quarterly, semi-annual, or annual) service fee. This is generally based upon the type of service provided, the geographic area covered, the number of devices provided to the customer and the period of commitment. A subscriber to one-way messaging services may select coverage on a local, regional or nationwide basis to best meet their messaging needs. Two-way messaging is generally offered on a nationwide basis. In addition, subscribers either lease a messaging device from us for an additional fixed monthly fee or they own a device, having purchased it either from us or from another vendor. We also sell devices to resellers who lease or resell devices to their subscribers and then sell messaging services utilizing our networks. We offer ancillary services, such as voicemail and equipment loss or maintenance protection, which help increase the monthly recurring revenue we receive along with these traditional messaging services.
The demand for one-way and two-way messaging services declined during the years ended December 31, 2014, 2013 and 2012 and we believe demand will continue to decline for the foreseeable future. As demand for one-way and two-way messaging has declined, we have developed or added service offerings in order to increase our revenue potential and mitigate the decline in our wireless operations. We will continue to look for ways to innovate and provide customers the highest value possible.
Software. Dependable critical communications are paramount for individuals in healthcare, public safety and a host of other industries. We offer a number of solutions, providing our customers with the ability to communicate anywhere, anytime across a number of situations. Our solutions are used for contact centers, clinical alerting and notification, mobile communications and messaging and for public safety notifications. The following details our critical communication solutions grouped by our four major product categories:

Contact Center
Spōk® Healthcare Console: Provides operators with the information needed to process calls using their computers, with just a few keystrokes. This solution integrates with the customers’ existing phone systems and is used by the operator group to answer incoming calls to the contact center. Operators can quickly and accurately perform directory searches and code calls, as well as messaging and paging by individual, groups and roles using the Spōk Healthcare Console’s computer telephony integration (CTI) and directory capabilities.

Spōk® Web-Based Directory: Makes employee contact information more accessible and enables staff to send messages quickly right from the directory. Authenticated users can log on anywhere, anytime to perform a variety of important updates to contact information and on-call schedules, search the directory and send important messages.

Spōk® Web-Based On-Call Scheduling: Keeps personnel, calendars and on-call scheduling information updated, even with thousands of staff, using a secure web portal to maintain and allow password-protected access to the latest on-call schedules and personnel information.

Spōk® Speech: Enables the organization to process routine phone requests including transfers, directory assistance, messaging and paging, without live operators and with more ease-of-use than touchtone menus.

Spōk® Call Recording and Quality Management: Records, monitors and scores operators’ conversations to allow for better management of calls, helping improve customer service.


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Eclipse Call Accounting: Provides a wealth of information about every call being made and received. The information can be formatted and used to analyze voice network resources, employee telephone usage and bill-back information.

Clinical Alerting
Spōk® Messenger and Fusion: Provides an intelligent, United States Food and Drug Administration ("FDA") 510(k)-cleared solution that connects virtually all crucial alert systems, including nurse call, fire, security, patient monitoring and building management to mobile staff via their wireless communication devices. This solution provides the ability to reach mobile team members within seconds of an alert, improving the overall work flow, staff productivity, and the comfort and safety of everyone in the facility.

Spōk® e.Notify: Enables organizations to quickly and reliably notify and confirm team member availability during emergency situations without relying on calling trees thereby reducing confusion that may arise in an emergency situation. This solution automatically delivers messages, collects responses, escalates issues to others and logs all activities for reporting and analysis purposes.

Spōk® Critical Test Results Management: Automates and streamlines the process of delivering critical test results to the right clinicians to help ensure patient safety. Closed-loop communications enable lab technicians to spend less time tracking down doctors and more time interpreting tests. This solution can send messages from the laboratory and Radiology departments by means of encrypted smartphone communications, two-way paging, secure email, secure text, images, annotations and voice to a variety of endpoints such as workstations, laptops, tablets, smartphones, pagers and other wireless devices.

Mobile Communications
Spōk Mobile™: Simplifies communications and strengthens care by using smartphones and tablets for secure code alerts, patient updates, lab results, consult requests and much more. Allows users to access the full directory of accurate contact information, to send messages/photos/videos to smartphones and other devices, and to ensure critical communications are logged, all with security, traceability and reliability.

Spōk® Pagers and Transmitters: Provides reliable and cost-effective communications through the right paging system. The solution enables our customers to cut costs, increase messaging speed and provide strong reliability, especially during disaster situations.

Spōk® Device Preference Engine: Facilitates voice conversations among doctors and caregivers based on their busy schedules by enabling users to choose the desired communication method based on the situation, urgency, time and date.

Public Safety
Spōk® PC/PSAP: Speeds emergency dispatch by giving the Public Service Answering Point ("PSAP") call-takers an easy-to-use standards-based, graphical interface that integrates the underlying phone system, mapping systems and other resources for critical information availability. 9-1-1 call-takers are able to instantly involve police, fire, EMT and hazardous material personnel with a single click of the mouse or touch of the screen.

Spōk® Enterprise Alert: Directs emergency personnel to a 9-1-1 caller’s exact location (building, floor, room), helping to ensure speed, accuracy and reliability. The E9-1-1 software provides real time, onsite notification when 9-1-1 is dialed, and works to decrease emergency response time.
Operations
The following details critical elements of our operations that support both our wireless and software revenue.
        


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Sales and Marketing
Marketing. We have a centralized marketing function which is focused on supporting our products and sales efforts by strengthening our corporate brand, generating sales leads, and facilitating the sales process. Our principal marketing programs include:
Content marketing as an underlying foundation of all marketing campaigns or initiatives;
Website development and maintenance, which provides product and company information, as well as thought leadership and engagement;
Participation at trade shows and industry events, such as Healthcare Information and Management Systems Society ("HIMSS"), National Emergency Number Association ("NENA"), and Radiological Society of North America ("RSNA");
Webinars about current industry trends and our solutions;
Social media involvement to provide information regarding upcoming educational events or new product offerings;
Newsletters to provide information about industry trends and our solutions to customers, prospects, and alliances; and
Annual customer conferences that solicit feedback on our solutions and services.
Sales. We have organized our global sales organization into two theaters: the Americas and International. We market and distribute our critical communication solutions through a direct sales force and an indirect sales channel.
Americas. The direct sales force rents or sells products, solutions, messaging services and other services directly to customers ranging from small and medium-sized businesses to companies in the Fortune 1000, healthcare and related businesses, and Federal, state and local government agencies. Though we will continue to market to commercial enterprises, especially healthcare organizations, interested in our communication solutions, we continue to grow our presence in the government sector. We maintain a sales presence in key markets throughout the United States in an effort to gain new customers and to retain and increase sales to existing customers. We also maintain several corporate sales groups, such as our Key Account Management team, focused on retaining and selling additional products and services to our key healthcare accounts as well as a team selling to government and national accounts. The direct sales force targets critical communications leadership such as chief information officers, information technology directors, telecommunications directors and contact center managers. Additionally, for certain of our software solutions, we target clinical leadership including chief medical officers and chief nursing officers. The timing for a direct sale varies by the type of service or solution that is being offered, but a software solution sale may take from 6 to 18 months depending on the type of software solution.
The indirect sales force compliments our direct sales force team. This channel coordinates relationships with alliance partners or third-party service providers that are ultimately responsible for the delivery of our services or solutions to the customer. For paging services, we contract with and invoice an intermediary for airtime services. For our software sales, our relationships with alliance partners assists us in broadening the distribution of our products and further diversifying into markets outside healthcare.
International. The international sales strategy is primarily focused on the healthcare market segment. We believe that the challenges within the healthcare industry are a global phenomenon. Worldwide, hospitals and healthcare practices have a heightened awareness regarding patient safety, clinical workflow issues, privacy, efficiency and better patient outcomes. We continue to pursue an international sales strategy and are expanding distribution of our core products into Latin American and select Asian and Pacific Rim markets. Although we continue to grow our presence internationally, to date our international sales represent less than 4% of our consolidated revenue, but remain a focus for future growth.
Professional Services and Customer Support
Professional Services. We offer implementation services for our products. These implementation services are provided by a dedicated group of professional service employees. For software products, our professional services staff uses a branded, consistent methodology that provides a comprehensive phased work plan for both new software installations and/or upgrades. In support of our implementation methodology, we manage the various aspects of the process through a professional services automation tool. A typical implementation process ranges from 30 to 180 days depending on the type of implementation. We may also use third-party professional services firms to implement our solutions for customers.
Customer Support. To support our products, we have established a dedicated customer support organization. Due to the mission critical nature of our products, we provide 24 hours a day, 7 days a week, 365 days a year customer support that customers can access via telephone, email or the Internet. We also use third-party services to assist in providing customer support.

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Licenses and Messaging Networks
In order to provide our wireless services, we hold licenses to operate on various frequencies in the 150 MHz, 450 MHz and 900 MHz narrowband. We are licensed by the United States Federal Communications Commission (the “FCC”) to operate Commercial Mobile Radio Services (“CMRS”). These licenses are required to provide one-way and two-way messaging services over our networks.
We operate local, regional and nationwide one-way networks, which enable subscribers to receive messages over a desired geographic area. The majority of the messaging traffic that is transmitted on our 150 MHz and 450 MHz frequency bands utilize the Post Office Code Standardization Advisory Group (“POCSAG”) messaging protocol. This technology is an older and less efficient air interface protocol due to slower transmission speeds and minimal error correction. One-way networks operating in 900 MHz frequency bands predominantly utilize the FLEX protocol developed by Motorola Mobility, Inc. (“Motorola”); some legacy POCSAG traffic also is broadcast in the 900 MHz frequency band. The FLEX protocol is a newer technology having the advantages of functioning at higher network speeds (which increases the volume of messages that can be transmitted over the network) and of having more robust error correction (which facilitates message delivery to a device with fewer transmission errors).
Our two-way networks utilize the ReFLEX 25 protocol, also developed by Motorola. ReFLEX 25 promotes spectrum efficiency and high network capacity by dividing coverage areas into zones and sub-zones. Messages are directed to the zone or sub-zone where the subscriber is located, allowing the same frequency to be reused to carry different traffic in other zones or sub-zones. As a result, the ReFLEX 25 protocol allows the two-way network to transmit substantially more messages than a one-way network using either the POCSAG or FLEX protocols. The two-way network also provides for assured message delivery. The network stores messages that could not be delivered to a device that is out of coverage for any reason, and when the unit returns to service, those messages are delivered. The two-way paging network operates under a set of licenses called narrowband Personal Communications Service, which uses 900 MHz frequencies. These licenses require certain minimum five and ten-year build-out commitments established by the FCC, which have been satisfied.
Although the capacities of our networks vary by geographic area, we have a significant amount of excess capacity. We have implemented a plan to manage network capacity and to improve overall network efficiency by consolidating subscribers onto fewer, higher capacity networks with increased transmission speeds. This plan is referred to as network rationalization. Network rationalization will result in fewer networks and therefore fewer transmitter locations, which we believe will result in lower operating expenses due primarily to lower site rent expenses.
Generally, our software solutions do not require licenses or permits from Federal, state and/or local government agencies in order to be sold to customers. However, certain of our software products are subject to regulation by the FDA. (See “Regulation” below).
Customers
Our customers include businesses and employees who need to be accessible to their offices or customers, first responders who need to be accessible in emergencies, and third parties, such as other telecommunication carriers and resellers that pay our Company to use our networks. Customers include businesses, professionals, management personnel, medical personnel, field sales personnel and service forces, members of the construction industry and construction trades, real estate brokers and developers, sales and services organizations, specialty trade organizations, manufacturing organizations and government agencies.
We offer our communication services and products in the United States and abroad primarily to three major market segments: healthcare, government and large enterprise, but with a greater emphasis on the healthcare market segment. For the years ended December 31, 2014, 2013 and 2012, revenues from healthcare customers accounted for approximately 66.0%, 65.8% and 61.1% of our total revenues, respectively. No single customer accounted for more than 5% of our total revenues in 2014, 2013 and 2012.
We pursue close, long-term relationships with our customers because we believe strong customer relationships enable us to retain our current customer base and grow it.
Product Development
We maintain a product development group, which is focused on developing new software products along with ongoing maintenance and enhancement of existing products. Our product development group uses a methodology that balances enhancement requests from a number of sources including customers, the professional services staff, customer support incidents, known defects, market and technology trends, and competitive requirements. These requests are reviewed and prioritized based on criteria that include the potential for increased revenue, customer/employee satisfaction, possible cost savings and development time and expense.

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Sources of Equipment
We do not manufacture the messaging devices our customers need to take advantage of our services or the network equipment we use to provide messaging services. We have relationships with several vendors to purchase new messaging devices. Used messaging devices are available in the secondary market from various sources. We believe existing inventory, returns of devices from customers that cancelled services, and purchases from other available sources of new and reconditioned devices will be sufficient to meet expected messaging device requirements for the foreseeable future. We negotiate contractual terms with our vendors that do not directly relate to the manufacturing of the network equipment or messaging devices. The network equipment and messaging devices are generic on which we may place our logo or label.
Our software products are considered to be “off-the-shelf software” as the software is marketed as a stock item that customers can use with little or no customization. We also sell third party equipment for use with the software. The third party equipment that we sell is generally available and does not require any specialty manufacturing to accommodate our software solutions.
We currently have inventory and network equipment on hand that we believe will be sufficient to meet our wireless and software equipment requirements for the foreseeable future.
Competition
The wireless messaging industry is highly competitive. Companies compete on the basis of price, coverage area, services offered, transmission quality, network reliability, and customer service.
For wireless messaging services, we compete by maintaining competitive pricing for our products and services, by providing broad coverage options through high-quality, reliable messaging networks and by providing quality customer service. Direct competitors for wireless messaging services include American Messaging Service, LLC and a variety of other regional and local providers. We also compete with a broad array of wireless messaging services provided by mobile telephone companies, including AT&T Mobility LLC, Sprint Nextel Corporation, T-Mobile USA, Inc., and Verizon Wireless, Inc. This competition has intensified as prices for the services of mobile telephone companies have declined and as those companies have incorporated messaging capabilities into their mobile phone devices. Many of these companies possess greater financial, technical and other resources than we do.
Most Personal Communications Service and other mobile phone devices currently sold in the United States are capable of sending and receiving one-way and two-way messages. Most subscribers that purchase these services no longer need to subscribe to a separate messaging service. As a result, many one-way and two-way messaging subscribers can readily switch to cellular, Personal Communications Service and other mobile telephone services. The decrease in prices and increase in capacity and functionality for cellular, Personal Communications Service and other mobile telephone services have led many subscribers to select combined voice and messaging services from mobile telephone companies as an alternative to stand-alone messaging services.
Based on industry research, we do have a number of competitors whose software products compete with one or more modules of our unified communications solutions. These competitors are mostly privately held companies and offer a number of call center and middleware products. Currently, there are no competitors that offer a similar comprehensive set of software modules that match our product offerings. Based on the current competitive environment, we do not foresee in the near term any competitor developing a comprehensive set of modular software products that will completely match our current portfolio of software products.
Regulation
Federal Regulation
The FCC issues licenses to use radio frequencies necessary to conduct our business and regulate many aspects of the operations that support our wireless revenue. Licenses granted to us by the FCC have varying terms, generally of up to ten years, at which time the FCC must approve renewal applications. In the past, FCC renewal applications generally have been granted upon showing compliance with FCC regulations and adequate service to the public. Other than those still pending, the FCC has thus far granted each license renewal that we have requested.
The Communications Act of 1934, as amended (the “Communications Act”), requires radio licensees, including us, to obtain prior approval from the FCC for the assignment or transfer of control of any construction permit or station license or authorization of any rights thereunder. The FCC has thus far granted each assignment or transfer request we have made in connection with a change of control.
The Communications Act also places limitations on foreign ownership of CMRS licenses, which constitute the majority of our licenses. These foreign ownership restrictions limit the percentage of stockholders’ equity that may be owned or voted, directly

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or indirectly, by non-United States citizens or their representatives, foreign governments or their representatives, or foreign corporations. Our Amended and Restated Certificate of Incorporation permits the redemption of our equity from stockholders where necessary to ensure compliance with these requirements.
The FCC’s rules and regulations require us to pay a variety of fees that otherwise increase our costs of doing business. For example, the FCC requires licensees, including SPŌK, to pay levies and fees, such as universal service fees, to cover the costs of certain regulatory programs and to promote various other societal goals. These requirements increase the cost of the services provided. By law, we are permitted to bill our customers for these regulatory costs and we typically do so.
Additionally, the Communications Assistance to Law Enforcement Act of 1994, (“CALEA”) and certain rules implementing CALEA require some telecommunication companies, including SPŌK, to design and/or modify their equipment in order to allow law enforcement personnel to “wiretap” or otherwise intercept messages. Other regulatory requirements restrict how we may use customer information and prohibit certain commercial electronic messages, even to our own customers.
In addition, the FCC’s rules require us to pay other carriers for the transport and termination of some telecommunication traffic. As a result of various FCC decisions over the last few years, we no longer pay fees for the termination of traffic originating on the networks of local exchange carriers providing wireline services interconnected with our services. In some instances, we received refunds for prior payments to certain local exchange carriers. We have entered into a number of interconnection agreements with local exchange carriers in order to resolve various issues regarding charges imposed by local exchange carriers for interconnection.
Failure to follow the FCC’s rules and regulations can result in a variety of penalties, ranging from monetary fines to the loss of licenses. Additionally, the FCC has the authority to modify licenses, or impose additional requirements through changes to its rules.
The FDA has determined software systems that connect to medical devices are subject to regulation as medical devices as defined by the Federal Food, Drug and Cosmetic Act (“the FDC Act”). Since our middleware software products connect to medical devices, we are required to comply with the FDC Act’s requirements, including but not limited to: registration and listing, labeling, medical device reporting (reporting of medical device-related adverse events), removal and correction, and good manufacturing practice requirements. We have complied with the regulatory requirements of the FDC Act, and registered and received the necessary clearances for our products. As we modify and/or enhance our software products (including our middleware product), we may be required to request FDA clearance before we are permitted to market these products.
In addition, our software products may handle or have access to personal health information subject in the United States to the Health Insurance Portability and Accountability Act (“HIPAA”), the Health Information Technology for Economic and Clinical Health Act (“HITECH”), and related regulations. These statutes and related regulations impose numerous requirements regarding the use and disclosure of personal health information with which we help our customers comply. Our failure to accurately anticipate or interpret these complex and technical laws could subject us to civil and/or criminal liability. We believe that we are in compliance with these laws and their related regulations.
Although these and other regulatory requirements have not, to date, had a material adverse effect on our operating results, such requirements could have a material impact on our operating results in the future. We monitor discussions at the FCC and FDA on pending changes in regulatory policy or regulations; however, we are unable to predict what changes, if any, may occur in 2015 to regulatory policy or regulations.
State Regulation
As a result of the enactment by the United States Congress of the Omnibus Budget Reconciliation Act of 1993 (“OBRA”) in August 1993, states are now generally preempted from exercising rate or entry regulation over any of our operations. States are not preempted, however, from regulating “other terms and conditions” of our operations, including consumer protection and similar rules of general applicability. Zoning requirements are also generally permissible, however, provisions of the OBRA prohibit local zoning authorities from unreasonably restricting wireless services. States that regulate our services also may require us to obtain prior approval of (1) the acquisition of controlling interests in other paging companies and (2) a change of control.
At this time, we are not aware of any proposed state legislation or regulations that would have a material adverse impact on our business.
Joint Interoperability Test Command Certification
The Joint Interoperability Test Command ("JITC") is a military organization that tests technology for use by the branches of the armed services and the United States federal government. JITC certification is required of all systems with joint interfaces or joint information exchanges with other systems used by these organizations and is done to ensure all systems operate effectively

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together. All information technology and national security systems  that exchange and use information to enable units or forces to operate effectively in joint, combined, coalition and interagency operations and simulations must be certified. Once a system has been certified under this program, the certification must be renewed every four years or after any changes that may affect interoperability. The interoperability certification process consists of four basic steps, which are:

Identify (interoperability) requirements
Develop certification approach (planning)
Perform interoperability test and evaluation
Report certifications and statuses

SPŌK submits and receives JITC certification for some of its products through the Defense Information Systems Agency ("DISC"), which allows us to sell and implement our solutions at Federal government agencies.  SPŌK currently certifies a console, web, speech, mass notification, public safety answering point, call recording and campus 911 product with JITC.  SPŌK has a roadmap to renew the existing certifications with new releases of existing products and to bring additional products to JITC to increase the products that can be sold into Federal agencies. 
Trademarks
We have owned the service marks “SPŌK” since July 8, 2014, “USA Mobility” since November 16, 2004, “Arch” since December 17, 2002 and “Metrocall” since September 4, 1979, and hold Federal registrations for the service marks “Metrocall” and “Arch Wireless”. We have owned the trademarks, “Spok” and “Spōk Holdings, Inc.” since September 25, 2013. We have also owned the trademark “Amcom” in the United States since April 9, 2002 and in Australia since August 28, 2009 and the trademark “Amcom Software, Inc.” in the United States since April 8, 2009 and in Australia since August 28, 2009. We also own various other trademarks, such as “911 Solutions” since July 21, 1998, “Intellidesk” in the United States since August 1, 1995 and “Intellispeech” in the United States since July 22, 2003. We believe our trademarks distinguish our business from our smaller and diverse competitors.
Employees
At December 31, 2014 and February 27, 2015 we had 587 and 598 full time equivalent (“FTE”) employees, respectively. Our employees are not represented by labor unions. We believe that our employee relations are good.
2015 Business Strategy
During 2015, we will continue to focus on serving the mission critical needs of our customers with a variety of wireless and software communication solutions and new product offerings while operating an efficient and profitable business strategy. In 2013 we recognized that maintaining two distinct businesses - wireless and software - could distract from our long range goal of creating stockholder value based on the ultimate growth potential of our technology solutions and operations. On January 1, 2014 we consolidated our wireless and software operations into one company to operate as a critical communications business with (1) an integrated sales force selling software and wireless solutions, (2) one set of operating overhead, (3) a single customer message and experience and (4) a consolidated operation for future growth and acquisitions. On July 8, 2014, we changed our name from USA Mobility, Inc. to Spōk Holdings, Inc. The new brand reflected our global, innovative identity. As an innovative, global critical communication provider, we deliver smart, reliable solutions to help protect the health, well-being, and safety of people around the globe.
In furtherance of this consolidation and re-branding, we have established the following operating objectives and priorities for 2015:
Grow our software revenue and bookings;
Retain our wireless subscribers and revenue stream;
Return capital to our stockholders; and
Seek long-term revenue growth through business diversification.

Grow our software revenue and bookings — Throughout 2015 we expect to continue our investments in sales and marketing, product implementation, product development and customer support that drive software, services and maintenance bookings and revenue growth. Healthcare customers represent our most stable and loyal customers and represented approximately 66% of our revenue base in 2014. We will continue to focus our sales and marketing efforts in the healthcare market in order to identify opportunities for sales and close those opportunities in the form of purchase orders or bookings.


11


We have an ongoing initiative to further penetrate the hospital segment in the United States and believe there is a significant opportunity to sell critical communication solutions to hospitals located outside the United States. We intend to leverage the strength of our market presence and the breadth of our product offerings to further expand our customer base in healthcare, but also in the government and large enterprise segments both in the United States and overseas.
We plan to continue to innovate and invest in product development in order to enhance existing software solutions and bring new offerings to market. In particular we have focused on the increased potential in the mobile communications marketplace and our ability to make sure the right person gets the right message on the right device at the right time.
We must address the challenge of effectively managing our operating expenses to support our revenue and bookings growth without allowing costs to erode our profitability objectives. We have established operating cash flow, a non-GAAP financial measure, as a key performance objective for our consolidated operations that focuses management on achieving operating efficiencies. We define operating cash flow as operating income plus depreciation, amortization, accretion and impairment expenses (also known as “EBITDA”) less capital expenditures. (See Item 7. Non-GAAP Financial Measures.)
Retain our wireless subscribers and revenue stream — Wireless subscribers and the resulting revenue represented about 66%, 71% and 77% of our total consolidated revenue for each of the three years ended December 31, 2014, 2013 and 2012, respectively. We will continue to focus on reducing the rate of subscriber disconnects and minimize the rate of wireless revenue erosion. We continue to have a valuable wireless presence in the healthcare market, particularly in larger hospitals. We offer a comprehensive suite of wireless messaging products and services focused on healthcare and “campus” type environments and critical mission notification. We will also focus on network reliability and customer service to help minimize the rate of subscriber disconnects.
We recognize that our wireless subscribers and revenue will continue to decline. We will also continue to reduce the underlying cost structure directly supporting this wireless revenue stream. These cost reductions will come from all impacted areas. We will reduce payroll and related expenses as well as network related expenses as necessary in light of the declining wireless revenue. We will integrate and consolidate operations as necessary to ensure the lowest cost operational platform for our consolidated business. We have established a total consolidated revenue objective for our operations that will focus management on both our software and wireless revenue targets.
Return capital to our stockholders — We understand that our primary objective is to create long-term stockholder value. Executing our 2015 objectives is important, but we continue to evaluate how best to deploy our capital resources to support sustainable business growth and maximize stockholder value. We expect to continue to pay a quarterly dividend of $0.125 per share of common stock or $0.50 annually. Also, we may repurchase more shares of our common stock from time to time under our existing stock repurchase program that expires on December 31, 2015. The repurchase authority under this program was reset to $15.0 million as of January 1, 2015. In total, we have committed to return approximately $26.0 million to our shareholders in a combination of dividends and stock repurchases in 2015. (See Item 5. Common Stock Repurchase program).
Seek long-term revenue growth through business diversification — We believe that add-on acquisitions of companies or technologies are an important part of our future growth. We believe add-on acquisitions of complementary companies or technologies in the healthcare market will further enhance our position with current customers and expand our overall addressable markets. Rapidly and successfully integrating strategic acquisitions and improving operational efficiencies is a focus of our management team. Given the nature of our solutions, new technologies can be integrated to accelerate cross-selling opportunities. Our goal is to evaluate other businesses that are profitably accretive and can accelerate our revenue goals.
To ensure focus on our 2015 business strategy we have established specific performance objectives in our short-term incentive plan (“STIP”) for our management that include these operating objectives and priorities. In addition, our long-term incentive plan (“LTIP”) includes specific performance objectives for these priorities.

ITEM 1A. RISK FACTORS
The following important factors, among others, could cause our actual operating results to differ materially from those indicated or suggested by forward-looking statements made in this 2014 Form 10-K or presented elsewhere by management from time to time.
The rate of subscriber and revenue erosion could exceed our ability to reduce operating expenses in order to maintain overall positive operating cash flow.
Our wireless revenue is dependent on the number of subscribers that use our paging devices. There is intense competition for these subscribers from other paging service providers and alternate wireless communications providers such as mobile phone

12


and mobile data service providers. We expect our subscriber numbers and revenue to continue to decline into the foreseeable future. As this revenue erosion continues, maintaining positive cash flow is dependent on substantial and timely reductions in selected operating expenses. Reductions in operating expenses require both the reduction of internal costs and negotiation of lower costs from outside vendors. There can be no assurance that we will be able to reduce our operating expenses commensurate with the level of revenue erosion. The inability to reduce operating expenses would have a material adverse impact on our business, financial condition and statement of income including our continued ability to remain profitable, produce positive operating cash flow, pay cash dividends to stockholders, and repurchase shares of our common stock.
We may experience a long sales cycle for our software products.
Our software revenue growth results from a long sales cycle that from initial contact to final sales order may take 6 to 18 months depending on the type of software solution. Our software sales and marketing efforts involve educating our customers on the technical capabilities of our software solutions and the potential benefits from the deployment of our software. The inherent unpredictability of decision making resulting from budget constraints, multiple approvals and administrative issues may result in fluctuating bookings and revenue from month to month and quarter to quarter. While we attempt to manage this unpredictability through a robust marketing effort to identify sales opportunities, our bookings and corresponding revenue are dependent on actions that have occurred in the past. In every month we need to spend substantial time, effort, and expense on our marketing and sales efforts that may not result in future revenue.
The impact of this sales cycle could adversely impact our operating cash flow and margins and could have a material adverse effect on our business, financial condition and statement of income, including our continued ability to remain profitable, produce positive operating cash flow, pay cash dividends to stockholders, and repurchase shares of our common stock.
Service to our customers could be adversely impacted by network rationalization.
We have an active program to consolidate our number of networks and related transmitter locations, which is referred to as network rationalization. Network rationalization is necessary to match our technical infrastructure to our smaller subscriber base and to reduce both site rent and telecommunication costs. The implementation of the network rationalization program could adversely impact service to our existing subscribers despite our efforts to minimize the impact on subscribers. This adverse impact could increase the rate of gross subscriber cancellations and/or the level of wireless revenue erosion. Adverse changes in gross subscriber cancellations and/or revenue erosion could have a material adverse effect on our business, financial condition and statement of income, including our continued ability to remain profitable, produce positive operating cash flow, pay cash dividends to stockholders, and repurchase shares of our common stock.
If we are unable to retain key management personnel, we might not be able to find suitable replacements in a timely basis, or at all, and our business could be disrupted.
Our success is largely dependent upon the continued service of a relatively small group of experienced and knowledgeable executive and management personnel. We believe that there is, and will continue to be, intense competition for qualified personnel in the telecommunication and software industry, and there is no assurance that we will be able to attract and retain the personnel necessary for the management and development of our business. Turnover, particularly among senior management, can also create distractions as we search for replacement personnel, which could result in significant recruiting, relocation, training and other costs, and can cause operational inefficiencies as replacement personnel become familiar with our business and operations. In addition, manpower in certain areas may be constrained, which could lead to disruptions over time. The consolidation of our wireless and software operations may mitigate this risk, although the elimination or reconfiguration of employee responsibilities could impact retention decisions by key executives and management personnel. The loss or unavailability of one or more of our executive officers or the inability to attract or retain key employees in the future could have a material adverse effect on our business, financial condition and statement of income, including our continued ability to remain profitable, produce positive operating cash flow, pay cash dividends to stockholders, and repurchase shares of our common stock.

In order to grow our software revenue and bookings and maintain our wireless revenue and subscribers we are dependent on our ability to effectively manage our employee base in areas such as sales, marketing, product development and implementation.
Growth in our software revenue and bookings and maintenance of our wireless revenue and subscriber base is dependent on the sales productivity of our sales organization. We anticipate that we will continue to improve our sales productivity. A number of mitigating factors could adversely impact our productivity assumptions. Those factors include competitive forces, employee turnover, product innovation and overall market conditions. Our software revenue and bookings growth is also dependent on our ability to attract, integrate and retain employees in our operations. To protect our employee base from competition for talent, we initiated a compensation study and developed a market-competitive compensation and rewards strategy. We believe that we have implemented appropriate compensation and incentive programs for our employees, but future costs of these programs is dependent

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on market conditions that are subject to change. Adverse changes in our sales productivity or ability to attract, integrate and retain employees could have a material adverse effect on our business, financial condition and statement of income including our continued ability to remain profitable, produce positive operating cash flow, pay dividends to stockholders and repurchase shares of our common stock.
We may be unable to find vendors able to supply us with paging equipment based on future demands.
We purchase paging equipment from third party vendors. This equipment is sold or leased to customers in order to provide wireless messaging services. The reduction in industry demand for paging equipment has caused various suppliers to cease manufacturing this equipment. There can be no assurance that we can continue to find vendors to supply paging equipment, or that the vendors will supply equipment at costs that allow us to remain a competitive alternative in the wireless messaging industry. A lack of paging equipment could impact our ability to provide certain wireless messaging services and could have a material adverse effect on our business, financial condition and statement of income, including our continued ability to remain profitable, produce positive operating cash flow, pay cash dividends to stockholders, and repurchase shares of our common stock.
We may be unable to maintain successful relationship with our channel partners.
We use channel partners such as resellers, consulting firms, original equipment manufacturers, and technology partners to license and support our products. Contract defaults by any of these channel partners may materially adversely affect our ability to develop, market, sell, or support our communication solution offerings. If we are unable to maintain our relationships with these channel partners, and our channel partners fail to comply with their contractual obligations to us, this could have a material adverse effect on our business, financial condition and statement of income, including our continued ability to remain profitable, produce positive operating cash flow, pay cash dividends to stockholders, and repurchase shares of our common stock.
We may be unable to realize the benefits associated with our deferred income tax assets.
We have significant deferred income tax assets that are available to offset future taxable income and increase cash flows from operations. The use of these deferred income tax assets is dependent on the availability of taxable income in future periods. The availability of future taxable income is dependent on our ability to profitably manage our operations to support a growing base of software revenue offset by declining wireless subscribers and revenue. To the extent that anticipated reductions in operating expenses do not occur or sufficient revenue is not generated, we may not achieve sufficient taxable income to allow for use of our deferred income tax assets. The accounting for deferred income tax assets is based upon an estimate of future results, and the valuation allowance may be increased or decreased as conditions change or if we are unable to implement certain tax planning strategies. If we are unable to use these deferred income tax assets, our financial condition and statement of income may be materially affected. In addition, a significant portion of our deferred income tax assets relate to net operating losses. If our ability to utilize these losses is limited, due to Internal Revenue Code (“IRC”) Section 382, our financial condition and statement of income may be materially affected.
Our wireless products are regulated by the FCC and, to a lesser extent, state and local regulatory authorities. Changes in regulation could result in increased costs to us and our customers.
We are subject to regulation by the FCC and, to a lesser extent, by state and local authorities. Changes in regulatory policy could increase the fees we must pay to the government or to third parties, and could subject us to more stringent requirements that could cause us to incur additional capital and/or operating costs. To the extent additional regulatory costs are passed along to customers, those increased costs could adversely impact subscriber cancellations.
For example, the FCC issued an order in October 2007 that mandated paging carriers (including the Company) along with all other CMRS providers serving a defined minimum number of subscribers to maintain an emergency back-up power supply at all cell sites to enable operation for a minimum of eight hours in the event of a loss of commercial power (the “Back-up Power Order”). Ultimately, after a hearing by the DC Circuit Court and disapproval by the Office of Management and Budget (the “OMB”) of the information collection requirements of the Back-Up Power Order, the FCC indicated that it would not seek to override the OMB’s disapproval. Rather the FCC indicated that it would issue a Notice of Proposed Rulemaking with the goal of adopting revised back-up power rules. To date, there has been no Notice of Proposed Rulemaking by the FCC and we are unable to predict what impact, if any, a revised back-up power rule could have on our operations, cash flows, ability to continue payment of cash dividends to stockholders, and ability to repurchase shares of our common stock.
The FCC continues to consider changes to the rules governing the collection of universal service fees. The FCC is evaluating a flat monthly charge per assigned telephone number as opposed to assessing universal service contributions based on telecommunication carriers’ interstate revenue. There is no timetable for any rulemaking to implement this numbers-based methodology. If the FCC adopts a numbers-based methodology, our attempt to recover the increased contribution costs from our customers could significantly diminish demand for our services, and our failure to recover such increased contribution costs could

14


have a material adverse impact on our business, financial condition and statement of income, including our continued ability to remain profitable, produce positive operating cash flow, pay cash dividends to stockholders and repurchase shares of our common stock.
Certain of our software products are regulated by the FDA. The application of or changes in regulations could impact our ability to market new or revised software products to our customers.
Certain of our software products are regulated by the FDA as medical devices. The classification of our software products as medical devices means that we are required to comply with certain registration and listing, labeling, medical device reporting, removal and correction, and good manufacturing practice requirements. Updates to these products or the development of new products could require us to seek clearance from the FDA before we are permitted to market or sell these software products. In addition, changes to FDA regulations could impact existing software products or updates to existing products. The impact of delays in FDA clearance or changes to FDA regulations could impact our ability to market or sell our software products and could have a material adverse effect on our software operations, financial condition and statement of income, including our continued ability to remain profitable, produce positive operating cash flow, pay cash dividends to stockholders and repurchase shares of our common stock.

We have have investigated potential acquisitions and may not be able to identify an opportunity at favorable terms or have the ability to close on financing necessary to consummate the transaction
We cannot provide any assurances that we will be successful in finding such acquisitions or consummating future acquisitions on favorable terms. We anticipate that our acquisitions will be financed through a combination of methods, including but not limited to the use of available cash on hand, and, if necessary, borrowings from third party financial institutions. Disruptions in credit markets and an unwillingness to lend may limit our ability to finance acquisitions.
We have investigated potential acquisitions and may be unable to successfully integrate such acquisitions into our business and may not achieve all or any of the operating synergies or anticipated benefits of those acquisitions.
We continue to evaluate acquisitions of other businesses where we believe such acquisitions will yield increased cash flows, improved market penetration and/or identified operating efficiencies and synergies. We may face various challenges with our integration efforts, including the combination and simplification of product and service offerings, sales and marketing approaches and establishment of combined operations. Although acquired businesses may have significant operating histories, we may have limited or no history of owning and operating these businesses. If we were to acquire these businesses, there can be no assurance that:
such businesses will perform as expected;
such businesses will not incur unforeseen obligations or liabilities;
such businesses will generate sufficient cash flow to support the indebtedness, if incurred, to acquire them or the expenditures needed to develop them; and/or
the rate of return from such businesses will justify the decision to invest the capital to acquire them.
If we do not realize all or any of the anticipated benefits of an acquisition, it could have a material adverse effect on our business, financial condition and statement of income, including our continued ability to remain profitable, produce positive operating cash flow, pay cash dividends to stockholders, and repurchase shares of our common stock.
Technical problems and higher costs may affect our product development initiatives.
Our future software revenue growth depends on our ability to develop, introduce and effectively deploy new solutions and features to our existing software solutions. These new features and functionalities are designed to address both existing and new customer requirements. While we have a disciplined approach to product development, we may experience technical problems and additional costs as these new features are tested and deployed. Failure to effectively develop new or improved software solutions could adversely impact software revenue growth and could have a material adverse effect on our operations, financial condition and statement of income including our continued ability to remain profitable, produce positive operating cash flow, pay cash dividends to stockholders, and repurchase shares of our common stock.
We may experience litigation on intellectual property infringement.
Intellectual property infringement litigation has become commonplace. This litigation can be protracted, expensive, and time consuming. Although we have not experienced any litigation of this type in the past, there is no assurance that we will remain immune to this type of predatory litigation. Any such claims, whether meritorious or not, could be time consuming and costly in terms of both resources and management time.

15


Third parties may claim we infringe their intellectual property rights. We may receive claims that we have infringed the intellectual property rights of others, including claims regarding patents, copyrights, and trademarks. The number of these claims may grow as a result of constant technological change in the segments in which our software products compete, the extensive patent coverage of existing technologies, and the rapid rate of issuance of new patents.
Our portfolio of issued patents and copyrights may be insufficient to defend ourselves against intellectual property infringement claims. We understand these risks and will take reasonable and appropriate action to protect ourselves as we develop and deploy additional software solutions. Should we experience litigation on intellectual property infringement, such litigation could have a material adverse impact on our ability to sell our software solutions and on our financial condition and statement of income including our continued ability to remain profitable, produce positive operating cash flow, pay cash dividends to stockholders, and repurchase shares of our common stock.
We may encounter issues with privacy and security of personal information.
A substantial portion of our revenue comes from healthcare customers. Our software solutions may handle or have access to personal health information subject in the United States to HIPPA, HITECH and related regulations as well as legislation and regulations in foreign countries. These statutes and related regulations impose numerous requirements regarding the use and disclosure of personal health information with which we must comply. Our failure to accurately anticipate or interpret these complex and technical laws and regulations could subject us to civil and/or criminal liability. We make every effort to comply with these and all relevant statutes and regulations. Such failure could adversely impact our ability to market and sell our software solutions to healthcare customers, and have a material adverse impact on our software operations, financial condition and statement of income including our continued ability to remain profitable, produce positive operating cash flow, pay cash dividends to stockholders and repurchase shares of our common stock.
System disruptions and security threats to our computer networks, satellite control or telecommunications systems could have a material adverse effect on our business.
The performance and reliability of our computer network and telecommunications systems infrastructure is critical to our operations. Any computer system or satellite network error or failure, regardless of cause, could result in a substantial outage that materially disrupts our operations. In addition, we face the threat to our computer systems of unauthorized access, computer hackers, computer viruses, malicious code, organized cyber-attacks and other security problems and system disruptions. We devote significant resources to the security of our computer systems, but our computer systems may still be vulnerable to these threats. A user who circumvents security measures could misappropriate proprietary information or cause interruptions or malfunctions in our operations. We utilize a multilayered security framework to mitigate the potential impact of any such threats including detailed security policies and procedures, security appliances and software, third party vulnerability testing and detailed Business Continuity Plans. However, we may be required to expend significant resources to protect against the threat of these system disruptions and security breaches or to alleviate problems caused by these disruptions and breaches. Any of these events could have a material adverse effect on our business, financial condition, statement of income and cash flows.
We may encounter issues with international sales and expansion.
A portion of our revenue comes from international sales. We plan to further expand our international presence. We may not be successful in our efforts to expand into these international markets. Our international sales and operations are subject to a number of risks, including:
compliance with foreign and United States laws and regulations including the U.S. Foreign Corrupt Practices Act and the United Kingdom Bribery Act 2010;
volatility in international political and economic environments;
imposition of taxes, export controls, tariffs, embargoes and other trade barriers;
changes in regulatory requirements;
lack of strong intellectual property protection;
difficulty in staffing, developing and managing foreign operations;
limitations on the repatriation and investment of funds;
fluctuations in foreign currency exchange rates; and
geopolitical developments, including war and terrorism.
In addition, uncertain economic conditions in Australia, Asia and Pacific Rim and Europe, the implementation of stringent financial austerity measures by many national governments, and the continuing risk of conflict and political instability in the Middle East could lead to delays or cancellations of our sales orders and impact our ability to timely execute our sales strategy and generate bookings and software revenue.

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We are unable to predict the impact of these factors. Any one or more of these factors could adversely affect our business, financial condition and statement of income including our continued ability to remain profitable, produce positive operating cash flow, pay cash dividends to stockholders, and repurchase shares of our common stock.
General economic conditions that are largely out of our control may adversely affect our financial condition and statement of income.
Our business is sensitive to changes in general economic conditions, both in the United States and foreign markets. Recessionary economic cycles, higher interest rates, inflation, higher levels of unemployment, higher tax rates and other changes in tax laws, or other economic factors that may affect business spending or buying habits could adversely affect the demand for our services. This adverse impact could increase the rate of gross subscriber cancellations and/or the level of revenue erosion. Adverse changes in gross subscriber cancellations and/or revenue erosion could have a material adverse effect on our business, financial condition and statement of income, including our continued ability to remain profitable, produce positive operating cash flow, pay cash dividends to stockholders, and repurchase shares of our common stock.
A significant portion of our revenue is derived from healthcare customers and we are impacted by changes in the healthcare economic environment. The healthcare industry is highly regulated and is subject to changing political, legislative, regulatory, and other economic developments. These developments can have a dramatic effect on the decision-making and the spending for information technology and software. This economic uncertainty can add to the unpredictability of decision-making and lengthen our sales cycle. We plan to respond to these conditions by maintaining our marketing focus and continuing our diversification into other market segments including government and large enterprise.
Further, the consequences of the implementation of healthcare reform legislation continue to impact both the economy in general and the healthcare market in particular. The uncertainty created by the legislation is impacting customer decision making and information technology plans in our key healthcare market. We are unable to predict the full consequences of this uncertainty on our operations. Adverse changes in the economic environment could adversely impact our ability to market and sell our wireless and software solutions to healthcare customers and have a material adverse impact on our financial condition and statement of income including our continued ability to remain profitable, produce positive operating cash flow, pay cash dividends to stockholders, and repurchase shares of our common stock.
 
ITEM 1B. UNRESOLVED STAFF COMMENTS
We had no unresolved SEC staff comments as of March 5, 2015.
 
ITEM 2. PROPERTIES
Our corporate headquarters is located in Springfield, Virginia, and consists of approximately 17,556 square feet of space under a lease that expires on March 31, 2018. At December 31, 2014, we leased facility space, including our executive headquarters, sales offices, technical facilities, warehouse and storage facilities in 78 locations in 32 states in the United States, one facility in Canada, one facility in Australia, one facility in the United Kingdom and one facility in the Middle East. The total leased space is approximately 177,000 square feet. At December 31, 2014, we owned six pieces of land in six states in the United States.
At December 31, 2014, we leased transmitter sites on commercial broadcast towers, buildings and other fixed structures in approximately 3,520 locations throughout the United States. These leases are for our active transmitters and are for various terms and provide for periodic lease payments at various rates.
At December 31, 2014, we had 4,339 active transmitters on leased sites which provide service to our customers (of which 2,248 are customer provided sites with no associated site rent expenses).
 
ITEM 3. LEGAL PROCEEDINGS
We are involved, from time to time, in lawsuits arising in the normal course of business. We believe these pending lawsuits will not have a material adverse impact on our financial condition or statement of income.
 
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
 




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PART II


ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES

Our sole class of common equity is our $0.0001 par value common stock, which is listed on the NASDAQ National Market® and is traded under the symbol “SPOK.”
The following table sets forth the high and low intraday sales prices per share of our common stock for the periods indicated, which correspond to our quarterly fiscal periods for financial reporting purposes. Prices for our common stock are as reported on the NASDAQ National Market® from January 1, 2013 through December 31, 2014.
 
 
2014
 
2013
For the Three Months Ended
High
 
Low
 
High
 
Low
March 31,
$
18.32

 
$
13.48

 
$
13.30

 
$
11.10

June 30,
19.50

 
13.89

 
14.19

 
12.19

September 30,
18.30

 
13.00

 
15.79

 
13.30

December 31,
17.95

 
12.93

 
15.55

 
12.58

We sold no unregistered securities during the years ended December 31, 2014, 2013 and 2012. As of February 27, 2015, there were 4,218 holders of record of our common stock.
Cash Distributions/Dividends to Stockholders
The following table details information on our cash distributions since the formation of the Company through the year ended December 31, 2014. Cash distributions paid as disclosed in the statements of cash flows for the years ended December 31, 2008 through December 31, 2014, include previously declared cash distributions on restricted stock units (“RSUs”) and shares of vested restricted common stock (“restricted stock”) granted under the Spōk Holdings, Inc. Equity Incentive Plan (“Equity Plan”) to executives and non-executive members of our Board of Directors. Cash distributions on RSUs and restricted stock have been accrued and are paid when the applicable vesting conditions are met. Accrued cash distributions on forfeited RSUs and restricted stock are also forfeited.
Year
Per Share
Amount

Total
Payment(1)
 
 

(Dollars in
thousands)
2005
$
1.50

 
$
40,691

2006(2)
3.65

 
98,904

2007(3)
3.60

 
98,250

2008(4)
1.40

 
39,061

2009(3)
2.00

 
45,502

2010(3)
2.00

 
44,234

2011
1.00

 
22,121

2012(5)
0.75

 
16,512

2013
0.50

 
12,312

2014
0.50

 
10,826

Total
$
16.90

 
$
428,413

 
(1) 
The total payment reflects the cash distributions paid in relation to common stock, vested RSUs and vested shares of restricted stock.
(2) 
On August 8, 2006, we announced the adoption of a regular quarterly cash distribution of $0.65 per share of common stock.
(3) 
The cash distribution includes an additional special one-time cash distribution to stockholders of $1.00 per share of common stock.
(4) 
On May 2, 2008, our Board of Directors reset the quarterly cash distribution rate to $0.25 per share of common stock from $0.65 per share of common stock.

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(5) 
On July 30, 2012, our Board of Directors reset the quarterly cash distribution rate to $0.125 per share of common stock from $0.25 per share of common stock.
On March 4, 2015, our Board of Directors declared a regular quarterly cash dividend of $0.125 per share of common stock, with a record date of March 18, 2015, and a payment date of March 30, 2015. This cash dividend of approximately $2.7 million is expected to be paid from available cash on hand.
Common Stock Repurchase Program
On July 31, 2008, our Board of Directors approved a program to repurchase up to $50.0 million of our common stock in the open market during the twelve-month period commencing on or about August 5, 2008. This program has been extended at various times, most recently through December 31, 2015.
Credit Suisse Securities (USA) LLC administers such purchases. We use available cash on hand and net cash provided by operating activities to fund the common stock repurchase program. This repurchase authority allows us, at management’s discretion, to selectively repurchase shares of our common stock from time to time in the open market depending upon market price and other factors. 
The following table presents information with respect to stock repurchased by us during the three months ended December 31, 2014. There were no common stock repurchases during the nine months ended September 30, 2014.
Period
Total Number of Shares Purchased(1)
 
Average Price Paid Per Share(2)
 
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs
 
Approximate Dollar Value of Shares That May Yet Be Purchased Under the Publicly Announced Plans or Programs
 
 
 
 
 
 
 
(Dollars in thousands)
Beginning Balance as of September 30, 2014
 
 
 
 
 
 
$
15,000

October 1 through October 31, 2014

 
$

 

 
15,000

November 1 through November 30, 2014
153,406

 
16.31

 
153,406

 
12,497

December 1 through December 31, 2014
110,366

 
16.42

 
110,366

 
10,685

Total
263,772

 
$
16.36

 
263,772

 
 
 
 
 
 
 
 
 
 
(1) The total number of shares purchased includes shares purchased pursuant to the common stock repurchase program.
(2) Average price paid per share excludes commissions of approximately $10,000.

The repurchase authority was reset to $15.0 million as of January 1, 2014. For the year ended December 31, 2014, we purchased 263,772 shares of our common stock under the repurchase program for approximately $4.3 million (excluding commissions). From the inception of the program in August 2008 through December 31, 2014, we have repurchased a total of 6,532,276 shares of our common stock for approximately $64.1 million (excluding commissions). There was approximately $10.7 million of common stock repurchase authority remaining under the program as of December 31, 2014. The repurchase authority was reset to $15.0 million as of January 1, 2015 and ends on December 31, 2015. All repurchased shares of common stock were returned to the status of authorized but unissued shares of the Company. Repurchased shares of our common stock were accounted for as a reduction to common stock and additional paid-in-capital in the period in which the repurchase occurred. We have committed to return approximately $26.0 million to our shareholders in a combination of dividends and stock repurchases in 2015.
Securities Authorized for Issuance Under Equity Compensation Plan
The following table sets forth, as of December 31, 2014, the number of securities outstanding under our currently authorized Equity Plan, the weighted-average exercise price of such securities and the number of securities available for grant under this plan:
 

19


Plan Category
Number of securities to be issued upon exercise of outstanding options, warrants and rights
[a]

Weighted-average exercise price of outstanding options, warrants and rights
[b]

Number of securities remaining available for future issuance under equity compensation plans (excluding securities
reflected in column[a])[c]
Equity compensation plan approved by security holders:(1)





2012 Spōk Holdings, Inc. Equity Incentive Plan




1,747,586

Equity compensation plan not approved by security holders:
 
 
 
 
 
None

 

 

Total

 

 
1,747,586

 
(1) 
The Equity Plan provides that common stock authorized for issuance under the plan may be granted in the form of common stock, stock options, restricted stock and RSUs. As of December 31, 2014, 24,684 shares of restricted stock were granted to the non-executive members of the Board of Directors, 5,820 shares of common stock were granted, 57,338 RSUs were forfeited and 559,689 RSUs were vested to eligible employees under the Equity Plan.
Performance Graph
We began trading on the NASDAQ National Market® on November 17, 2004. The chart below compares the relative changes in the cumulative total return of our common stock for the period December 31, 2009 to December 31, 2014, against the cumulative total return of the NASDAQ Composite Index® and the NASDAQ Telecommunications Index® for the same period.
The chart below assumes that on December 31, 2009, $100 was invested in our common stock and in each of the indices. The comparisons assume that all cash distributions were reinvested. The chart indicates the dollar value of each hypothetical $100 investment based on the closing price as of the last trading day of each fiscal year from December 31, 2009 to December 31, 2014.

20


 
 
12/09

12/10

12/11

12/12

12/13

12/14

Spōk Holdings, Inc.
 
$
100.00

$
183.79

$
153.62

$
137.44

$
174.27

$
218.91

NASDAQ Composite
 
100.00

117.61

118.70

139.00

196.83

223.74

NASDAQ Telecommunications
 
100.00

107.95

96.16

100.40

139.11

148.69


Transfer Restrictions on Common Stock
In order to reduce the possibility that certain changes in ownership could impose limitations on the use of our deferred income tax assets, our Amended and Restated Certificate of Incorporation contains provisions that generally restrict transfers by or to any 5% stockholder of our common stock or any transfer that would cause a person or group of persons to become a 5% stockholder of our common stock. After a cumulative indirect shift in ownership of more than 45% since our emergence from bankruptcy proceedings in May 2002 through a transfer of our common stock, any transfer of our common stock by or to a 5% stockholder of our common stock or any transfer that would cause a person or group of persons to become a 5% stockholder of such common stock, will be prohibited unless the transferee or transferor provides notice of the transfer to us and our Board of Directors determines in good faith that the transfer would not result in a cumulative indirect shift in ownership of more than 47%.
Prior to a cumulative indirect ownership change of more than 45%, transfers of our common stock will not be prohibited, except to the extent that they result in a cumulative indirect shift in ownership of more than 47%, but any transfer by or to a 5% stockholder of our common stock or any transfer that would cause a person or group of persons to become a 5% stockholder of our common stock requires notice to us. Similar restrictions apply to the issuance or transfer of an option to purchase our common stock, if the exercise of the option would result in a transfer that would be prohibited pursuant to the restrictions described above. These restrictions will remain in effect until the earliest of (1) the repeal of IRC Section 382 (or any comparable successor provision) and (2) the date on which the limitation amount imposed by IRC Section 382 in the event of an ownership change would not be less than the tax attributes subject to these limitations. Transfers by or to us and any transfer pursuant to a merger approved by our Board of Directors or any tender offer to acquire all of our outstanding stock where a majority of the shares have been tendered will be exempt from these restrictions.
Based on publicly available information and after considering any direct knowledge we may have, our combined cumulative change in ownership was 3.24% as of December 31, 2014 and 2013.

ITEM 6. SELECTED FINANCIAL DATA
The following selected consolidated financial data should be read in conjunction with “Item 7. Management’s Discussion and Analysis of Financial Condition and Statement of Income” (“MD&A”), the consolidated financial statements and notes thereto, and other financial information appearing elsewhere in this 2014 Form 10-K. (Amcom operations have been reflected in the consolidated financial data from March 3, 2011, the acquisition date.)

21


 
For the Year Ended December 31,
 
2014
 
2013
 
2012
 
2011
 
2010
 
(Dollars in thousands except per share amounts)
Statements of Income Data:
 
 
 
 
 
 
 
 
 
Revenues
$
200,273

 
$
209,752

 
$
219,696

 
$
233,693

 
$
233,254

Operating expenses
172,122

 
164,258

 
173,968

 
181,864

 
176,075

Operating income
28,151

 
45,494

 
45,728

 
51,829

 
57,179

Net income
20,745

 
27,530

 
26,984

 
83,786

 
77,898

Basic net income per common share
0.96

 
1.27

 
1.23

 
3.79

 
3.50

Diluted net income per common share
0.94

 
1.25

 
1.20

 
3.72

 
3.45

Cash distributions declared per common share
0.50

 
0.50

 
0.75

 
1.00

 
2.00

 
 
 
 
 
 
 
 
 
 
 
December 31,
 
2014
 
2013
 
2012
 
2011
 
2010
 
(Dollars in thousands)
Balance Sheets Data:
 
 
 
 
 
 
 
 
 
Current assets
$
144,955

 
$
120,168

 
$
95,909

 
$
105,492

 
$
154,356

Total assets
337,890

 
326,898

 
322,627

 
354,421

 
230,658

Long-term debt

 

 

 
28,250

 

Long-term liabilities, excluding deferred revenue
8,131

 
9,259

 
9,789

 
12,223

 
11,787

Stockholders’ equity
279,059

 
269,950

 
251,419

 
247,587

 
184,390



ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND STATEMENT OF
INCOME
The following discussion and analysis should be read in conjunction with our consolidated financial statements and related notes and the discussion under “Application of Critical Accounting Policies” (also under Item 7), which describes key estimates and assumptions we make in the preparation of our consolidated financial statements; “Item 1. Business,” which describes our operations; and “Item 1A. Risk Factors,” which describes key risks associated with our operations and markets in which we operate. A reference to a “Note” in this section refers to the accompanying Notes to Consolidated Financial Statements.
Overview
We offer our communication services and products in the United States and abroad primarily to three major market segments: healthcare, government and large enterprise, but with a greater emphasis on the healthcare market segment. For wireless revenue, the government business has been trending downward over the last several years as state and local governments have been struggling with budget constraints. At the same time, our wireless services tend to be a reliable and low cost communication alternative when budgets are constrained and therefore paging services can be positioned well against other communication tools. Large enterprise customers have been trending away from paging to cellular/smart phones for a number of years and we expect that trend to continue in future years. Our software services leverage these trends with more advanced critical messaging offerings such as our Spōk Mobile offering for smart phones, which enables caregivers and physicians to communicate more effectively. The trend toward more advanced/smart communications devices has been ongoing in large enterprise and is emerging in healthcare and government sectors.
The following tables present wireless and software revenue by key market segments for the periods stated and illustrate the relative significance of these market segments to our operations.

22


 
For the Year Ended December 31, 2014
 
For the Year Ended December 31, 2013
Market Segment
Wireless
 
Software
 
Total
 
% of Total
 
Wireless
 
Software
 
Total
 
% of Total
 
 
 
 
 
 
 
(Dollars in thousands)
 
 
 
 
 
 
Healthcare
$
90,092

 
$
42,117

 
$
132,209

 
66.0
%
 
$
97,458

 
$
40,501

 
$
137,959

 
65.8
%
Government
9,426

 
11,217

 
20,643

 
10.3
%
 
11,894

 
6,751

 
18,645

 
8.9
%
Large enterprise
13,867

 
2,257

 
16,124

 
8.1
%
 
17,056

 
2,658

 
19,714

 
9.4
%
Other(1)
14,734

 
3,072

 
17,806

 
8.9
%
 
17,559

 
3,276

 
20,835

 
9.9
%
Total Direct
128,119

 
58,663

 
186,782

 
93.3
%
 
143,967

 
53,186

 
197,153

 
94.0
%
Total Indirect
4,283

 
9,208

 
13,491

 
6.7
%
 
5,481

 
7,118

 
12,599

 
6.0
%
Total
$
132,402

 
$
67,871

 
$
200,273

 
100.0
%
 
$
149,448

 
$
60,304

 
$
209,752

 
100.0
%
 
(1) Other includes hospitality, resort and billable travel revenue.
 
For the Year Ended December 31, 2012
Market Segment
Wireless
 
Software
 
Total
 
% of Total
 
 
 
(Dollars in thousands)
 
 
Healthcare
$
102,036

 
$
32,237

 
$
134,273

 
61.1
%
Government
15,228

 
5,064

 
20,292

 
9.2
%
Large enterprise
20,846

 
2,767

 
23,613

 
10.7
%
Other(1)
22,717

 
2,939

 
25,656

 
11.7
%
Total Direct
160,827

 
43,007

 
203,834

 
92.8
%
Total Indirect
7,578

 
8,284

 
15,862

 
7.2
%
Total
$
168,405

 
$
51,291

 
$
219,696

 
100.0
%
 
(1) Other includes hospitality, resort and billable travel revenue.
We generate revenue by providing wireless (paging) services, as well as developing, licensing, and supporting a wide range of software products and services. Our most significant expenses are related to compensating employees, cost of sales, site rents, telecommunications and transactional taxes.
Wireless Revenue
We provide one-way and advanced two-way wireless messaging services including information services throughout the United States. We provide wireless messaging services to subscribers for a periodic fee. In addition, subscribers either lease a messaging device from us for an additional fixed monthly fee or they own a device, having purchased it either from us or from another vendor. We also sell devices to resellers who lease or resell devices to their subscribers and then sell messaging services utilizing our networks. We also offer ancillary services, such as voice mail and equipment loss and/or maintenance protection to both one-way and two-way messaging subscribers. We market and distribute these wireless messaging and information services through a direct sales force and a small indirect sales channel. (See Item 1. “Business” for more details.)
Wireless revenue consists of two primary components: paging revenue and product and other revenue. The breakout of
wireless revenue by component was as follows for the periods stated:
 
For the Year Ended December 31,
Revenue
2014
 
2013
 
2012
 
(Dollars in thousands)
Paging revenue
$
125,201

 
$
142,271

 
$
159,739

Product and other revenue
7,201

 
7,177

 
8,666

Total wireless revenue
$
132,402

 
$
149,448

 
$
168,405

The following table summarizes the breakdown of our direct and indirect units in service (that underlies our paging revenue)at specified dates:

23


 
As of December 31,
 
2014
 
2013
 
2012
Distribution Channel
Units
 
% of Total
 
Units
 
% of Total
 
Units
 
% of Total
 
(Units in thousands)
Direct
1,204

 
95.8
%
 
1,315

 
95.6
%
 
1,421

 
93.8
%
Indirect
52

 
4.2
%
 
61

 
4.4
%
 
94

 
6.2
%
Total
1,256

 
100.0
%
 
1,376

 
100.0
%
 
1,515

 
100.0
%
As noted above in “Overview,” our key market segments are healthcare, government and large enterprise, but with a greater emphasis on the healthcare market segment. The following table indicates the percentage of our units in service by key market segments for the periods stated and illustrates the relative significance of these market segments to our business.
 
As of December 31,
Market Segment
2014
 
2013
 
2012
Healthcare
74.1
%
 
71.9
%
 
67.1
%
Government
7.8
%
 
8.6
%
 
10.3
%
Large enterprise
7.7
%
 
8.1
%
 
8.5
%
Other
6.2
%
 
7.0
%
 
7.9
%
Total Direct
95.8
%
 
95.6
%
 
93.8
%
Total Indirect
4.2
%
 
4.4
%
 
6.2
%
Total
100.0
%
 
100.0
%
 
100.0
%
We derive the majority of our revenue from fixed monthly or other periodic fees, charged to subscribers for wireless messaging services. Such fees are not generally dependent on usage. As long as a subscriber maintains service, operating results benefit from recurring payment of these fees.
Wireless revenue is generally based upon the number of units in service and the monthly charge per unit. The number of units in service changes based on subscribers added, referred to as gross placements, less subscriber cancellations, or disconnects. The net of gross placements and disconnects is commonly referred to as net gains or losses of units in service or net disconnect rate. The absolute number of gross placements as well as the number of gross placements relative to average units in service in a period, referred to as the gross placement rate, is monitored on a monthly basis. Disconnects are also monitored on a monthly basis. The ratio of units disconnected in a period to average units in service for the same period, called the disconnect rate, is an indicator of our success at retaining subscribers, which is important in order to maintain recurring revenue and to control operating expenses.
The following table sets forth our gross placements and disconnects for the periods stated:
 
For the Year Ended December 31,
 
2014
 
2013
 
2012
Distribution Channel
Gross
Placements
 
Disconnects
 
Gross
Placements
 
Disconnects
 
Gross
Placements
 
Disconnects
 
(Units in thousands)
Direct
166

 
277

 
174

 
280

 
193

 
327

Indirect
4

 
13

 
4

 
37

 
6

 
25

Total
170

 
290

 
178

 
317

 
199

 
352

The following table sets forth information on our direct units in service by account size for the periods stated: 

24


 
As of December 31,
Account Size
2014
 
% of Total
 
2013
 
% of Total
 
2012
 
% of Total
 
(Units in thousands)
1 to 3 units
35

 
2.9
%
 
43

 
3.2
%
 
52

 
3.6
%
4 to 10 units
21

 
1.7
%
 
25

 
1.9
%
 
31

 
2.2
%
11 to 50 units
51

 
4.2
%
 
61

 
4.6
%
 
75

 
5.3
%
51 to 100 units
34

 
2.8
%
 
42

 
3.2
%
 
49

 
3.5
%
101 to 1000 units
262

 
21.8
%
 
287

 
21.9
%
 
334

 
23.5
%
> 1000 units
801

 
66.6
%
 
857

 
65.2
%
 
880

 
61.9
%
Total direct units in service
1,204

 
100.0
%
 
1,315

 
100.0
%
 
1,421

 
100.0
%
The following table sets forth information on the direct net disconnect rate by account size for our direct customers for the periods stated:
 
For the Year Ended December 31,
Account Size
2014
 
2013
 
2012
1 to 3 units
(16.9
)%
 
(17.6
)%
 
(20.9
)%
4 to 10 units
(17.7
)%
 
(18.8
)%
 
(20.9
)%
11 to 50 units
(16.4
)%
 
(18.2
)%
 
(19.1
)%
51 to 100 units
(19.1
)%
 
(14.8
)%
 
(12.2
)%
101 to 1000 units
(8.9
)%
 
(13.9
)%
 
(12.1
)%
> 1000 units
(6.6
)%
 
(2.6
)%
 
(4.5
)%
Total direct net unit loss %
(8.5
)%
 
(7.4
)%
 
(8.6
)%
The other factor that contributes to revenue, in addition to the number of units in service, is the monthly charge per unit. As previously discussed, the monthly charge per unit is dependent on the subscriber’s service, extent of geographic coverage, whether the subscriber leases or owns the messaging device, and the number of units the customer has in the account. The ratio of revenue for a period to the average units in service, for the same period, commonly referred to as average revenue per unit ("ARPU"), is a key revenue measurement as it indicates whether charges for similar services and distribution channels are increasing or decreasing. ARPU by distribution channel and messaging service are monitored regularly.
The following table sets forth ARPU by distribution channel for the periods stated:
 
ARPU For the Year Ended December 31,
Distribution Channel
2014
 
2013
 
2012
Direct
$
8.00

 
$
8.34

 
$
8.53

Indirect
6.26

 
5.87

 
6.00

Consolidated
7.93

 
8.20

 
8.37

While ARPU for similar services and distribution channels is indicative of changes in monthly charges and the revenue rate applicable to new subscribers, this measurement on a consolidated basis is affected by several factors, including the mix of units in service and the pricing of the various components of our services. We expect future sequential annual revenues to decline in line with recent trends. The change in ARPU in the direct distribution channel is the most significant indicator of rate-related changes in our revenue. The decrease in consolidated ARPU during the years 2012 through 2014 was due to the change in composition of our customer base as the percentage of units in service attributable to larger customers continues to increase. These larger customers benefit from lower pricing associated with their larger number of units-in-service. We believe that without further price adjustments, ARPU would trend lower for both the direct and indirect distribution channels in 2015. Price increases could mitigate, but not completely offset, the expected declines in both ARPU and revenue.
The following table sets forth information on direct ARPU by account size for the periods stated:

25


 
For the Year Ended December 31,
Account Size
2014
 
2013
 
2012
1 to 3 units
$
14.71

 
$
15.04

 
$
15.31

4 to 10 units
14.13

 
14.15

 
14.28

11 to 50 units
11.94

 
11.92

 
11.99

51 to 100 units
10.28

 
10.40

 
10.41

101 to 1000 units
8.71

 
8.75

 
9.00

> 1000 units
6.91

 
7.25

 
7.25

Total direct ARPU
$
8.00

 
$
8.34

 
$
8.53

Software Revenue
We enter into agreements whereby our customers purchase products and services including software, professional services (primarily installation and training), equipment (to be used in conjunction with the software), and maintenance support (post-contract support). The software is licensed to end-users under an industry standard software license agreement.
Software revenue consists of two primary components: operations revenue and maintenance revenue.
Operations revenue consists of subscription services revenue, software license revenue, professional services revenue, and equipment sales. Maintenance revenue is for ongoing support of a software application or equipment (typically for one year). We recognize equipment revenue when it is shipped or delivered to the customer depending on delivery method of Free on Board ("FOB") shipping or FOB destination, respectively. As of January 1, 2014, license, professional services and maintenance revenue is recognized ratably over the longer of the period of professional services delivery to the customer or the contractual term of the maintenance agreement. If the period of delivery to the customer is not known, license and professional services revenue will be recognized when software and professional services are fully delivered to the customer and maintenance revenue will be recognized ratably over the remaining contractual term of the maintenance agreement. Prior to January 1, 2014, license and professional services revenue was recognized when the services were fully delivered to the customer and maintenance revenue was recognized ratably over the term of the maintenance agreement. After the initial maintenance term, customers typically renew their maintenance support. The maintenance renewal rates for the years ended December 31, 2014, 2013 and 2012 were 99.5%, 99.1% and 99.0%, respectively.
The breakout of revenue by component was as follows for the periods stated:
  
For the Year Ended December 31,
Revenue
2014
 
2013
 
2012
 
(Dollars in thousands)
Subscription
$
1,483

 
$
821

 
$
445

License
11,274

 
11,236

 
9,010

Services
17,372

 
13,680

 
9,669

Equipment
6,939

 
6,709

 
6,236

Operations revenue
$
37,068

 
$
32,446

 
$
25,360

Maintenance revenue
30,803

 
27,858

 
25,931

Total revenue
$
67,871

 
$
60,304

 
$
51,291

 On a regular basis, we enter into contractual arrangements with our customers to provide software licenses, professional services, and equipment sales. In addition, we enter into contractual arrangements for maintenance with our customers on new solutions or renewals on existing solutions. These contractual arrangements are reported as bookings and represent future revenue. Bookings increased by 23.7% for the year ended December 31, 2014 compared to the same period in 2013. The increase reflects the continuing success of our sales force in closing business and expanding market penetration with new customers, as well as selling additional solutions to our installed base.
The following table summarizes total bookings for the periods stated:

26


  
For the Year Ended December 31,
Bookings
2014
 
2013
 
2012
 
(Dollars in thousands)
Operations and new maintenance orders
$
45,125

 
$
35,130

 
$
33,191

Maintenance and subscription renewals
33,389

 
28,322

 
28,110

Total bookings
$
78,514

 
$
63,452

 
$
61,301

We reported a software backlog of $42.4 million for the year ended December 31, 2014, which represented all purchase orders received from customers not yet recognized as revenue.
Backlog
December 31, 2014
 
(Dollars in thousands)
Beginning balance at January 1, 2014
$
40,211

Operations bookings for the year
45,125

Maintenance renewals for the year
33,389

Available backlog
$
118,725

Operations revenue for the year
(37,068
)
Maintenance revenue for the year
(30,803
)
Other(1) 
(8,463
)
Total backlog at December 31, 2014
$
42,391

Increase in backlog from January 1, 2014
5.4
%
 
 
 
(1) 
Other reflects cancellations and adjustments to backlog.
The breakout of backlog by source was as follows for the year ended December 31, 2014:
 
For the three months ended

December 31, 2014

September 30, 2014

June 30, 2014

March 31, 2014

(Dollars in thousands)
Operations revenue
$
23,971

 
$
24,745

 
$
22,964

 
$
23,736

Deferred maintenance revenue
11,497

 
12,195

 
12,479

 
13,802

Maintenance pre-billed
6,923

 
5,177

 
4,739

 
3,858

Total Backlog
42,391

 
42,117

 
40,182

 
41,396

Operations - Consolidated
Our operating expenses are presented in functional categories. Certain of our functional categories are especially important to overall expense control and management; these operating expenses are categorized as follows:
Cost of revenue. These are expenses primarily for hardware, third-party software, outside service expenses and payroll and related expenses for our professional services, logistics, customer support and maintenance staff.
Service, rental and maintenance. These are expenses associated with the operation of our paging networks and development of our software. Expenses consist largely of site rent expenses for transmitter locations, telecommunication expenses to deliver messages over our paging networks, and payroll and related expenses for our engineering, pager repair functions and development and maintenance of our software products.
Selling and marketing. These are expenses associated with our direct sales force and indirect sales channel and marketing expenses in support of those sales groups. This classification consists primarily of payroll and related expenses and commission expenses.
General and administrative. These are expenses associated with information technology and administrative functions. This classification consists primarily of payroll and related expenses, outside service expenses, taxes, licenses and permit expenses, and facility rent expenses.
We review the percentages of these operating expenses to revenue on a regular basis. Even though the operating expenses are classified as described above, expense control and management are also performed by expense category. Approximately 75%

27


of the operating expenses referred to above were incurred in payroll and related expenses, cost of sales, site and facility rent expenses and telecommunication expenses for each of the years ended December 31, 2014, 2013 and 2012. Payroll and related expenses for the year ended December 31, 2012 included a benefit of $0.3 million for forfeitures under the 2012 STIP associated with the departure of two former executives.
Our largest expense, payroll and related expenses, includes wages, commissions, incentives, employee benefits and related
taxes. On a monthly basis, we review the number of employees in major functional categories and the design and physical locations of functional groups to continuously improve efficiency, to simplify organizational structures, and to minimize the number of physical locations for the Company. We have 587 full-time equivalent employees (“FTEs”) at December 31, 2014, a decrease of 7.0% from 631 FTEs at December 31, 2013. The change in the number of FTEs reflects adjustments to our workforce resulting from the changing nature of our revenues. Software revenue is anticipated to increase, while the wireless revenue is expected to continue to decrease reflecting the changing technology expectations of our customer base.
Cost of sales includes distribution costs for equipment and products sold and/or licensed, operating costs (excluding payroll and related expenses) related to product implementation, training, and product support services, and costs associated with the delivery of third party implementation services and third party license, and/or maintenance support.
Site rent expenses for transmitter locations are largely dependent on our paging networks. We operate local, regional, and nationwide one-way and two-way paging networks. These networks each require locations on which to place transmitters, receivers, and antennae. Site rent expenses for transmitter locations are highly dependent on the number of transmitters, which in turn is dependent on the number of networks. In addition, these expenses generally do not vary directly with the number of subscribers or units in service, which is detrimental to our operating margins as revenue declines. In order to reduce these expenses, we have an active program to consolidate the number of paging networks, and thus transmitter locations, which we refer to as network rationalization. We have reduced the number of active transmitters by 4.4% to 4,339 active transmitters at December 31, 2014 from 4,538 active transmitters at December 31, 2013.
Telecommunication expenses are incurred to interconnect our paging networks and to provide telephone numbers for customer use, points of contact for customer service, and connectivity among our offices. These expenses are dependent on the number of units in service, the number of customers we support and the number of office and network locations that we maintain. However, the number or duration of telephone calls to call centers may vary from period to period based on factors other than the number of units in service or customers, which could cause telecommunication expenses to vary.
Due to the integration of the management structure and consolidation of our organization effective January 1, 2014, certain prior years' interim revenue and operating expenses were reclassified to conform to the current year's presentation. In 2014, we reported wireless and software revenue, and had reclassified the revenue previously reported in the Annual Report on Form 10-K for 2013 (the "2013 Form 10-K") and Annual Report on Form 10-K for 2012 (the "2012 Form 10-K") to conform with the current year's presentation. In 2013 and 2012, wireless revenue of $149.45 million and $168.41 million, respectively, was reported as $143.63 million and $161.89 million, respectively, in service, rental and maintenance, net of service credits, and $5.82 million and $6.52 million, respectively, in software revenue and other, net. Also in 2013 and 2012, software revenue of $60.30 million and $51.29 million, respectively, was reported in software revenue and other, net. We reclassified payroll and related expenses among functional departments and eliminated general and administrative overhead expenses previously allocated to cost of revenue, service, rental and maintenance and selling and marketing. The reclassifications resulted in the following increases and (decreases) to the 2013 Form 10-K and 2012 Form 10-K reported operating expenses: Cost of revenue of $5.79 million and $6.08 million, respectively; service, rental and maintenance of ($3.17) million and ($2.65) million, respectively; selling and marketing of $0.53 million and ($0.54) million, respectively, and general and administrative of ($3.15) million and ($2.89) million, respectively. The changes had no impact to previously reported total operating expenses and operating income.







28


Statements of Income
Comparison of the Statements of Income for the Years Ended December 31, 2014 and 2013
 
For the Year Ended December 31,
 
Change Between 2014 and 2013
 
2014
 
2013
 
Total
 
%
 
(Dollars in thousands)
Revenues:
 
 
 
 
 
 
 
Wireless
$
132,402

 
$
149,448

 
$
(17,046
)
 
(11.4
)%
Software
67,871

 
60,304

 
7,567

 
12.5
 %
Total
$
200,273

 
$
209,752

 
$
(9,479
)
 
(4.5
)%
Selected operating expenses:
 
 
 
 
 
 
 
Cost of revenue
$
32,556

 
$
27,915

 
$
4,641

 
16.6
 %
Service, rental and maintenance
45,485

 
47,471

 
(1,986
)
 
(4.2
)%
Selling and marketing
30,013

 
26,617

 
3,396

 
12.8
 %
General and administrative
45,896

 
46,105

 
(209
)
 
(0.5
)%
Severance and restructuring
1,495

 
983

 
512

 
52.1
 %
Total
$
155,445

 
$
149,091

 
$
6,354

 
4.3
 %
FTEs
587

 
631

 
(44
)
 
(7.0
)%
Active transmitters
4,339

 
4,538

 
(199
)
 
(4.4
)%
 

Revenue — Wireless
Our wireless revenue was $132.4 million and $149.4 million for the years ended December 31, 2014 and 2013, respectively. The decrease in wireless revenue reflected the decrease in demand for our wireless services. Wireless revenue includes paging revenue, product revenue and other revenue. Paging revenue consists primarily of recurring fees associated with the provision of messaging services and rental of leased units and is net of a provision for service credits. Product and other revenue reflects system sales, the sale of devices and charges for leased devices that are not returned and are net of anticipated credits. The table below details total wireless revenue for the periods stated:
 
 
For the Year Ended December 31,
 
2014
 
2013
 
(Dollars in thousands)
Paging revenue:
 
 
 
One-way messaging
$
109,240

 
$
123,214

Two-way messaging
15,961

 
19,057

Total paging revenue
125,201

 
142,271

Non-paging revenue
7,201

 
7,177

Total wireless revenue
$
132,402

 
$
149,448

The table below sets forth units in service and paging revenue, the changes in each between 2014 and 2013 and the changes in revenue associated with differences in ARPU and the number of units in service:
 
Units in Service
 
Revenues
 
 
 
As of December 31,
 
For the Year Ended December 31,
 
Change Due To:
 
2014
 
2013
 
Change
 
2014(1)
 
2013(1)
 
Change
 
ARPU
 
Units
 
(Units in thousands)
 
(Dollars in thousands)
One-way messaging
1,168

 
1,280

 
(112
)
 
$
109,240

 
$
123,214

 
$
(13,974
)
 
$
(3,548
)
 
$
(10,426
)
Two-way messaging
88

 
96

 
(8
)
 
15,961

 
19,057

 
(3,096
)
 
(276
)
 
(2,820
)
Total
1,256

 
1,376

 
(120
)
 
$
125,201

 
$
142,271

 
$
(17,070
)
 
$
(3,824
)
 
$
(13,246
)
 
(1) 
Amounts shown exclude non-paging revenue.

29


As previously discussed, demand for messaging services has declined over the past several years and we anticipate that it will continue to decline for the foreseeable future, which would result in reductions in wireless revenue due to the lower number of subscribers and related units in service. In addition, ARPU continues to decline as more customers move to fixed rate plans and new subscribers receive lower monthly rates. Price increases could mitigate, but not completely offset, the declines in ARPU and revenue.
Revenue — Software
Our software revenue was $67.9 million and $60.3 million for the years ended December 31, 2014 and 2013, respectively, which consisted of operations revenue (from licenses, subscriptions, professional services and equipment sales) and maintenance revenue. The table below details total revenue for software operations for the periods stated:
 
For the Year Ended December 31,

2014
 
2013
 
(Dollars in thousands)
Subscription
$
1,483

 
$
821

License
11,274

 
11,236

Services
17,372

 
13,680

Equipment
6,939

 
6,709

Operations revenue
37,068

 
32,446

Maintenance revenue
30,803

 
27,858

Total revenue
$
67,871

 
$
60,304

The increase in operations revenue primarily reflects an increase in the average revenue per project compared to the same
period in 2013 reflecting increased professional services for implementations. The increase in maintenance revenue reflects our continuing success in renewals of our maintenance support for existing software solutions, and the impact of price increases at renewal and in maintenance support for sales of new solutions. The maintenance renewal rates for the year ended December 31, 2014 and 2013 were 99.5% and 99.1%, respectively.
 
Operating Expenses
Cost of revenue. Cost of revenue consisted primarily of the following items:
 
For the Year Ended December 31,
 
Change Between 2014 and 2013
 
2014
 
2013
 
Total
 
%
 
(Dollars in thousands)
Payroll and related
$
15,751

 
$
14,805

 
$
946

 
6.4
 %
Cost of sales
12,472

 
8,741

 
3,731

 
42.7
 %
Stock based compensation
351

 
236

 
115

 
48.7
 %
Other
3,982

 
4,133

 
(151
)
 
(3.7
)%
Total cost of revenue
$
32,556

 
$
27,915

 
$
4,641

 
16.6
 %
FTEs
179

 
179

 

 
 %
As illustrated in the table above, cost of revenue for the year ended December 31, 2014 increased $4.6 million or 16.6% from the same period in 2013 due to the following variances:
Payroll and related — The increase of $0.9 million in payroll and related expenses was due primarily to higher average payroll and related expenses for professional services and maintenance support personnel.
Cost of sales — The increase of $3.7 million in cost of sales was primarily due to higher third-party professional services expenses and third-party software and equipment costs associated with the increase in implementation of software sales orders.
Stock based compensation — Stock based compensation expenses consisted primarily of amortization of compensation expense associated with restricted stock units (“RSUs”) or common stock granted to certain eligible employees. Stock based compensation expenses increased by $0.1 million due primarily to higher amortization of compensation expense for awards under the 2011 Long-Term Incentive Plan ("LTIP"). (See Note 5).

30


Service, rental and maintenance. Service, rental and maintenance expenses consisted primarily of the following items:
 
For the Year Ended December 31,
 
Change Between 2014 and 2013
 
2014
 
2013
 
Total
 
%
 
(Dollars in thousands)
Site rent
$
15,744

 
$
16,586

 
$
(842
)
 
(5.1
)%
Telecommunications
6,440

 
7,357

 
(917
)
 
(12.5
)%
Payroll and related
17,667

 
18,160

 
(493
)
 
(2.7
)%
Stock based compensation
108

 
131

 
(23
)
 
(17.6
)%
Repairs and maintenance
1,900

 
2,021

 
(121
)
 
(6.0
)%
Other
3,626

 
3,216

 
410

 
12.7
 %
Total service, rental and maintenance
$
45,485

 
$
47,471

 
$
(1,986
)
 
(4.2
)%
FTEs
152

 
159

 
(7
)
 
(4.4
)%
As illustrated in the table above, service, rental and maintenance expenses for the year ended December 31, 2014 decreased $2.0 million or 4.2% from the same period in 2013 due to the following significant variances:
Site rent — The decrease of $0.8 million in site rent expenses was primarily due to the rationalization of our networks, which has decreased the number of transmitters required to provide service to our customers. The reduction in transmitters has, in turn, reduced the number of lease locations. The number of active transmitters declined 4.4% from 2013 to 2014.
Telecommunications — The decrease of $0.9 million in telecommunication expenses was due to the consolidation of our networks. We believe continued reductions in these expenses will occur as our networks continue to be consolidated as anticipated, throughout 2015, and as we reduce our telephone circuit inventory.
Payroll and related — Payroll and related expenses were incurred largely for field technicians, their managers, and in-house repair personnel and product development, product strategy and quality assurance personnel. The decrease in payroll and related expenses of $0.5 million was due to a reduction of 7 FTEs as compared to the comparable period.
Other — The increase of $0.4 million in other expenses was due primarily to higher outside services expense associated with temporary help.
Selling and marketing. Selling and marketing expenses consisted of the following items:
 
For the Year Ended December 31,

Change Between 2014 and 2013
 
2014

2013

Total

%
 
(Dollars in thousands)
Payroll and related
$
16,001


$
15,393


$
608


3.9
 %
Commissions
8,469


6,378


2,091


32.8
 %
Stock based compensation
544


336


208


61.9
 %
Other
4,999


4,510


489


10.8
 %
Total selling and marketing
$
30,013


$
26,617


$
3,396


12.8
 %
FTEs
124


150


(26
)

(17.3
)%
As indicated in the table above, selling and marketing expenses for the year ended December 31, 2014 increased by $3.4 million, or 12.8%, from the same period in 2013. Selling and marketing expenses consisted primarily of payroll and related expenses, which increased $0.6 million due to higher average payroll and related expenses for sales staff selling software solutions.
The sales and marketing staff are involved in selling our communication solutions domestically and internationally. These
expenses support our efforts to maintain gross placements of units in service, which mitigated the impact of disconnects on our wireless revenue base, and to identify business opportunities for additional or future software sales. We have a centralized marketing function, which is focused on supporting our products and vertical sales efforts by strengthening our brand, generating sales leads and facilitating the sales process. These marketing functions are accomplished through targeted email campaigns, webinars, regional and national user conferences, monthly newsletters and participation at industry trade shows.
Commission expenses increased by $2.1 million due primarily to an increase in software sales and the impact of commission plan incentives for increased sales. Commission expense is recognized as the revenue from the underlying sales order is recognized.

31


Stock based compensation expenses increased by $0.2 million due primarily to higher amortization of compensation expense for grants under the 2011 LTIP.
Other expenses increased by $0.5 million due primarily to one-time advertising and related expenses of $0.7 million associated with the company re-branding to the name SPŌK in 2014, partially offset by reductions in various other expenses, net of $0.2 million.
General and administrative. General and administrative expenses consisted of the following items:
 
For the Year Ended December 31,
 
Change Between 2014 and 2013
 
2014
 
2013
 
Total
 
%
 
(Dollars in thousands)
Payroll and related
$
18,190

 
$
19,986

 
$
(1,796
)
 
(9.0
)%
Stock based compensation
2,835

 
2,342

 
493

 
21.1
 %
Bad debt
483

 
1,076

 
(593
)
 
(55.1
)%
Facility rent
3,514

 
3,285

 
229

 
7.0
 %
Telecommunications
1,602

 
1,526

 
76

 
5.0
 %
Outside services
6,965

 
7,904

 
(939
)
 
(11.9
)%
Taxes, licenses and permits
4,955

 
4,863

 
92

 
1.9
 %
Repairs and maintenance
1,811

 
1,186

 
625

 
52.7
 %
Financial services
1,424

 
1,369

 
55

 
4.0
 %
Other
4,117

 
2,568

 
1,549

 
60.3
 %
Total general and administrative
$
45,896

 
$
46,105

 
$
(209
)
 
(0.5
)%
FTEs
132

 
143

 
(11
)
 
(7.7
)%
As illustrated in the table above, general and administrative expenses for the year ended December 31, 2014 decreased $0.2 million, or 0.5%, from the same period in 2013 due to the following significant variances:
Payroll and related — Payroll and related expenses were incurred for employees in information technology, administrative operations, finance, human resources and executive management. Payroll and related expenses decreased by $1.8 million reflecting headcount reductions of 11 FTEs to 132 FTEs at December 31, 2014 from 143 FTEs at December 31, 2013.
Stock based compensation — Stock based compensation expenses consisted primarily of amortization of compensation expense associated with RSUs and common stock awarded to certain eligible employees and amortization of compensation expense for restricted stock awarded to non-executive members of our Board of Directors under the 2012 Equity Incentive Award Plan ("Equity Plan"). Stock based compensation expenses increased by $0.5 million due primarily to higher amortization of compensation expense for grants under 2011 LTIP.
Bad debt — The decrease of $0.6 million in bad debt expenses reflects the decrease of our wireless revenue and the improvement in collection efforts associated with our software revenue.
Outside services — Outside service expenses consisted primarily of professional services fees associated with compliance activities for annual reporting, taxes and the Sarbanes–Oxley Act of 2002 ("SOX") and the printing and mailing of invoices. The $0.9 million decrease in outside service expenses was primarily due to lower professional services fees for external accounting and tax support services.
Repairs and maintenance — The increase of $0.6 million in repairs and maintenance expenses reflects the increase of our efforts associated with supporting our sales and customer services.
Other — The increase of $1.5 million in other expenses was due primarily to a non-recurring charge of $0.8 million related to future billing credits, higher recruiting and relocation expenses of $0.5 million and various other expenses net of $0.2 million.
Severance and restructuring. Severance and restructuring expenses increased to $1.5 million for the year ended December 31, 2014 compared to $1.0 million for the same period in 2013 due primarily to higher severance charges recorded during the year ended December 31, 2014 for post-employment benefits resulting from planned staffing reductions. We accrued post-employment benefits if certain specified criteria are met. Post-employment benefits include salary continuation, severance benefits and continuation of health insurance benefits. (See Note 1 for further discussion on our severance and restructuring policies.)
Depreciation, amortization and accretion. Depreciation, amortization and accretion expenses were $16.7 million for the year ended December 31, 2014 compared to $15.2 million for the same period in 2013. The increase was primarily due to $0.9

32


million in higher depreciation expense for the period for non-paging device assets and $0.8 million in higher amortization expense for intangible assets associated with the change in the useful life of Amcom related intangibles due to our rebranding, net of $0.2 million in other changes. (See Note 1 for further discussion on our depreciation expense policies.)
Interest expense, net, Other income, net and Income tax expense
Interest expense, net. Net interest expense increased to $0.5 million for the year ended December 31, 2014 from $0.3 million for the same period in 2013. This increase was primarily due to recognition of remaining deferred financing costs associated with the revolving credit facility, which was terminated on December 15, 2014. (See Note 4).
Other expense, net. Net other expense increased to $0.4 million for the year ended December 31, 2014 from net other income of $0.1 million for the same period in 2013. The increase in net other expense in 2014 was primarily due to a settlement for the closure of a facility of $0.3 million, an incentive plan buyout of $0.1 million and higher financial services fees of $0.1 million in 2014.
Income tax expense. Income tax expense for the year ended December 31, 2014 was $6.6 million, a decrease of $11.2 million from the prior year’s income tax expense of $17.8 million. The decrease in income tax expense and the effective tax rate was largely due to a reduction of income before tax of $18.0 million and a release of the deferred tax assets ("DTA") Valuation Allowance of $5.1 million. The effective tax rate for the year ended December 31, 2014 was 24.1%, which was a decrease of 15.2% from the December 31, 2013 effective tax rate of 39.3%.
The following is the effective tax rate reconciliation for the years ended December 31, 2014 and 2013, respectively. (See Note 6 for further discussion on our income taxes.)
 
For the Year Ended December 31,
 
2014
 
2013
 
(Dollars in thousands)
Income before income tax expense
$
27,327

 
 
 
$
45,339

 
 
Federal income tax expense at the statutory rate
$
9,564

 
35.0
 %
 
$
15,869

 
35.0
 %
State income taxes, net of Federal benefit
1,188

 
4.4
 %
 
1,709

 
3.8
 %
Nondeductible compensation expense

 
 %
 
841

 
1.8
 %
Change in deferred income tax rates
255

 
0.9
 %
 
(1,194
)
 
(2.6
)%
Change in valuation allowance
(5,087
)
 
(18.6
)%
 
554

 
1.2
 %
Other
662

 
2.4
 %
 
30

 
0.1
 %
Income tax expense
$
6,582

 
24.1
 %
 
$
17,809

 
39.3
 %
The adjusted effective tax rate excludes the effects of the change in the valuation allowance and the change in the deferred income tax rate. The increase from 2013 primarily reflects changes in state and local income tax rates applicable to our operations.
 
For the Year Ended December 31,
 
2014
 
2013
Effective tax rate
24.1
%
 
39.3
%
Change in valuation allowance
18.6
%
 
(1.2
%)
Change in deferred income tax rate
(0.9
%)
 
2.6
%
Adjusted effective tax rate
41.8
%
 
40.7
%








33


Statements of Income
Comparison of the Statements of Income for the Years Ended December 31, 2013 and 2012
 
For the Year Ended December 31,
 
Change Between 2013 and 2012
 
2013
 
2012
 
Total
 
%
 
(Dollars in thousands)
Revenues:
 
 
 
 
 
 
 
Wireless
$
149,448

 
$
168,405

 
$
(18,957
)
 
(11.3
)%
Software
60,304

 
51,291

 
9,013

 
17.6
 %
Total
$
209,752

 
$
219,696

 
$
(9,944
)
 
(4.5
)%
Selected operating expenses:
 
 
 
 
 
 
 
Cost of revenue
$
27,915

 
$
26,923

 
$
992

 
3.7
 %
Service, rental and maintenance
47,471

 
52,776

 
(5,305
)
 
(10.1
)%
Selling and marketing
26,617

 
23,109

 
3,508

 
15.2
 %
General and administrative
46,105

 
47,788

 
(1,683
)
 
(3.5
)%
Severance and restructuring
983

 
1,758

 
(775
)
 
(44.1
)%
Total
$
149,091

 
$
152,354

 
$
(3,263
)
 
(2.1
)%
FTEs
631

 
665

 
(34
)
 
(5.1
)%
Active transmitters
4,538

 
4,749

 
(211
)
 
(4.4
)%
Revenue — Wireless
Our wireless revenue was $149.4 million and $168.4 million for the years ended December 31, 2013 and 2012, respectively. The decrease in wireless revenue reflected the decrease in demand for our wireless services. Paging revenue consists primarily of recurring fees associated with the provision of messaging services and rental of leased units and is net of a provision for service credits. Product and other revenue reflects system sales, the sale of devices and charges for leased devices that are not returned and are net of anticipated credits. The table below details total wireless revenue for the periods stated:
 
For the Year Ended December 31,
 
2013
 
2012
 
(Dollars in thousands)
Paging revenue:
 
 
 
One-way messaging
$
123,214

 
$
136,771

Two-way messaging
19,057

 
22,968

Total paging revenue
142,271

 
159,739

Non-paging revenue
7,177

 
8,666

Total wireless revenue
$
149,448

 
$
168,405

The table below sets forth units in service and service revenue, the changes in each between 2013 and 2012 and the changes in revenue associated with differences in ARPU and the number of units in service.
 
Units in Service
 
Revenues
 
 
 
 
 
As of December 31,
 
For the Year Ended December 31,
 
Change Due To:

2013
 
2012
 
Change
 
2013(1)
 
2012(1)
 
Change
 
ARPU
 
Units
 
(Units in thousands)
 
(Dollars in thousands)
One-way messaging
1,280

 
1,394

 
(114
)
 
$
123,214

 
$
136,771

 
$
(13,557
)
 
$
(1,875
)
 
$
(11,682
)
Two-way messaging
96

 
121

 
(25
)
 
19,057

 
22,968

 
(3,911
)
 
(170
)
 
(3,741
)
Total
1,376

 
1,515

 
(139
)
 
$
142,271

 
$
159,739

 
$
(17,468
)
 
$
(2,045
)
 
$
(15,423
)
 
(1) 
Amounts shown exclude non-paging and product and related sales.
As previously discussed, demand for messaging services has declined over the past several years and we anticipate that it will continue to decline for the foreseeable future, which would result in reductions in wireless revenue due to the lower number of subscribers and related units in service.

34


Revenue — Software
Our software operations was $60.3 million and $51.3 million for the years ended December 31, 2013 and 2012, respectively, which consisted of operations revenue (from licenses, professional services and equipment sales), and maintenance revenue. The table below details total software revenue for the periods stated:
 
For the Year Ended December 31,

2013
 
2012
 
(Dollars in thousands)
Subscription
$
821

 
$
445

License
11,236

 
9,010

Services
13,680

 
9,669

Equipment
6,709

 
6,236

Operations revenue
32,446

 
25,360

Maintenance revenue
27,858

 
25,931

Total revenue
$
60,304

 
$
51,291

 The increase in operations revenue of 27.9% over 2012 is a result of the additional investment in the sales team. We recorded record bookings in 2013 which resulted in higher revenue for the year. Maintenance revenue increased 7.4% over 2012, which reflects the increase in new maintenance orders and price increases to the existing customer base.
Operating Expenses
Cost of revenue. Cost of revenue consisted primarily of the following items:
 
For the Year Ended December 31,
 
Change Between 2013 and 2012
 
2013
 
2012
 
Total
 
%
 
(Dollars in thousands)
Payroll and related
$
14,805

 
$
13,162

 
$
1,643

 
12.5
 %
Cost of sales
8,741

 
9,165

 
(424
)
 
(4.6
)%
Stock based compensation
236

 
91

 
145

 
159.3
 %
Other
4,133

 
4,505

 
(372
)
 
(8.3
)%
Total cost of revenue
$
27,915

 
$
26,923

 
$
992

 
3.7
 %
FTEs
179

 
188

 
(9
)
 
(4.8
)%
As illustrated in the table above, cost of revenue for the year ended December 31, 2013 increased $1.0 million or 3.7% from the same period in 2012 due to the following variances:
Payroll and related — The increase of $1.6 million in payroll and related expenses was due primarily to higher average payroll and related expenses for professional services and maintenance support personnel.
Cost of sales — The decrease of $0.4 million in cost of sales was primarily due to a cost reduction of $0.2 million related to a credit issued for a previously reported cost of a systems sale and a cost reduction of $0.2 million resulting from the lower cost of third party products.
Stock based compensation — Stock based compensation expenses increased by $0.1 million due primarily to higher amortization of compensation expense for awards under the 2011 LTIP
Other — The decrease of $0.4 million in other expenses was primarily due primarily to lower outside services expenses and office expenses.






35


Service, rental and maintenance. Service, rental and maintenance expenses consisted primarily of the following items:
 
For the Year Ended December 31,
 
Change Between 2013 and 2012