Spok Holdings, Inc - Quarter Report: 2017 September (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)



x	Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended September 30, 2017



¨	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

SPOK 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)

N/A

(Former name, former address and former fiscal year if changed since last report)

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 whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth 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	¨

		Emerging growth company	¨

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Securities Act.			¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

19,983,343 shares of the registrant’s common stock ($0.0001 par value per share) were outstanding as of October 20, 2017.

SPOK HOLDINGS, INC.

QUARTERLY REPORT ON FORM 10-Q

INDEX



			Page
PART I.	FINANCIAL INFORMATION
	Item 1.	Condensed Consolidated Financial Statements
		Condensed Consolidated Balance Sheets as of September 30, 2017 (Unaudited) and December 31, 2016	2
		Condensed Consolidated Statements of Income for the Three and Nine Months Ended September 30, 2017 and 2016 (Unaudited)	3
		Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2017 and 2016 (Unaudited)	4
		Unaudited Notes to Condensed Consolidated Financial Statements	5
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	15
	Item 3.	Quantitative and Qualitative Disclosures about Market Risk	29
	Item 4.	Controls and Procedures	30
PART II.	OTHER INFORMATION
	Item 1.	Legal Proceedings	31
	Item 1A.	Risk Factors	31
	Item 2.	Unregistered Sales of Equity Securities and the Use of Proceeds	31
	Item 6.	Exhibits	32
Signatures

PART I. FINANCIAL INFORMATION

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SPOK HOLDINGS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS



(in thousands)	September 30, 2017		December 31, 2016
ASSETS	(Unaudited)
Current assets:
Cash and cash equivalents	$	110,140	$	125,816
Accounts receivable, net	27,057		23,666
Prepaid expenses and other	6,637		4,384
Inventory	1,906		1,996
Total current assets	145,740		155,862
Non-current assets:
Property and equipment, net	13,706		12,818
Goodwill	133,031		133,031
Intangible assets, net	8,542		10,803
Deferred income tax assets	71,973		73,068
Other non-current assets	2,025		2,505
Total non-current assets	229,277		232,225
TOTAL ASSETS	$	375,017	$	388,087
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	3,023	$	1,909
Accrued compensation and benefits	13,577		13,268
Accrued dividends payable	365		5,140
Accrued taxes	2,668		4,132
Deferred revenue	30,159		29,145
Other current liabilities	2,185		2,733
Total current liabilities	51,977		56,327
Non-current liabilities:
Deferred revenue	1,051		752
Other non-current liabilities	8,620		8,921
Total non-current liabilities	9,671		9,673
TOTAL LIABILITIES	61,648		66,000
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock	—		—
Common stock	2		2
Additional paid-in capital	97,630		104,810
Retained earnings	215,737		217,275
TOTAL STOCKHOLDERS’ EQUITY	313,369		322,087
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	375,017	$	388,087

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

SPOK HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME



	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
(Unaudited and in thousands except share and per share amounts)	2017			2016			2017			2016
Revenue:
Wireless	$	25,110		$	27,024		$	76,609		$	83,055
Software	18,526			18,331			50,796			52,322
Total revenue	43,636			45,355			127,405			135,377
Operating expenses:
Cost of revenue	7,069			7,639			21,295			23,167
Research and development	5,001			3,645			13,768			9,765
Service, rental and maintenance	7,875			8,253			23,885			24,745
Selling and marketing	5,533			5,955			16,784			18,912
General and administrative	12,058			10,605			35,706			31,551
Depreciation, amortization and accretion	2,775			3,229			8,849			9,787
Total operating expenses	40,311			39,326			120,287			117,927
Operating income	3,325			6,029			7,118			17,450
Interest income	214			67			490			176
Other income	359			85			415			443
Income before income tax expense	3,898			6,181			8,023			18,069
Income tax expense	(171		)	(2,123		)	(1,945		)	(7,116		)
Net income	$	3,727		$	4,058		$	6,078		$	10,953
Basic and diluted net income per common share	$	0.19		$	0.20		$	0.30		$	0.53
Basic weighted average common shares outstanding	19,977,263			20,541,275			20,285,240			20,604,905
Diluted weighted average common shares outstanding	20,008,321			20,541,275			20,362,774			20,604,905
Cash dividends declared per common share	$	0.125		$	0.125		$	0.375		$	0.375

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

SPOK HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS



	For the Nine Months Ended September 30,
(Unaudited and in thousands)	2017			2016
Cash flows provided by operating activities:
Net income	$	6,078		$	10,953
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation, amortization and accretion	8,849			9,787
Deferred income tax expense	1,118			6,188
Stock based compensation	2,815			2,067
Provision for doubtful accounts, service credits and other	767			648
Adjustment of non-cash transaction taxes	(754		)	(214		)
Changes in assets and liabilities:
Accounts receivable	(4,156		)	(1,389		)
Prepaid expenses, inventory, intangibles and other assets	(1,726		)	27
Accounts payable, accrued liabilities and other	(319		)	(1,738		)
Deferred revenue	1,313			3,109
Net cash provided by operating activities	13,985			29,438
Cash flows used in investing activities:
Purchase of property and equipment, net of proceeds from disposals of property and equipment	(7,034		)	(4,377		)
Net cash used in investing activities	(7,034		)	(4,377		)
Cash flows used in financing activities:
Cash distributions to stockholders	(12,733		)	(7,718		)
Purchase of common stock (including commissions), net of proceeds from issuance of common stock	(9,894		)	(6,214		)
Net cash used in financing activities	(22,627		)	(13,932		)
Net (decrease) increase in cash and cash equivalents	(15,676		)	11,129
Cash and cash equivalents, beginning of period	125,816			111,332
Cash and cash equivalents, end of period	$	110,140		$	122,461
Supplemental disclosure:
Income taxes paid	$	2,300		$	681

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

SPOK HOLDINGS, INC.

UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES

Spok Holdings, Inc. (NASDAQ: SPOK) ("Spok" or the "Company") through its wholly-owned subsidiary Spok, Inc., is the global leader in healthcare communications. We deliver clinical information to care teams when and where it matters most to improve patient outcomes. Many hospitals rely on the Spok Care Connect platform to enhance workflows for clinicians, support administrative compliance, and provide a better experience for patients. Our customers send over 100 million messages each month through their Spok solutions.

We offer a focused suite of unified critical communication solutions that include call center operations, clinical alerting and notifications, one-way and advanced two-way wireless messaging services, mobile communications and public safety solutions.

We provide one-way and advanced two-way wireless messaging services including information services throughout the United States. These services are offered on a local, regional and nationwide basis employing digital networks. One-way messaging consists of numeric and alphanumeric messaging services. Numeric messaging services enable subscribers to receive messages that are composed entirely of numbers, such as a phone number, while alphanumeric messages may include numbers and letters, which enable subscribers to receive text messages. Two-way messaging services enable subscribers to send and receive messages to and from other wireless messaging devices, including pagers, mobile devices and personal computers. We also offer voice mail, personalized greeting, message storage and retrieval, and equipment loss and/or maintenance protection to both one-way and two-way messaging subscribers. These services are commonly referred to as wireless messaging and information services.

We also develop, sell and support enterprise-wide systems for hospitals and other organizations needing to automate, centralize and standardize mission critical communications. These solutions are used for contact centers, clinical alerting and notification, mobile communications and messaging and for public safety notifications. These areas of market focus complement the market focus of our wireless services outlined above. These products and services are commonly referred to as software solutions and services.

Basis of Presentation

The accompanying condensed consolidated financial statements include our accounts and the accounts of our wholly-owned direct and indirect subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. Our condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) and the rules and regulations of the United States Securities and Exchange Commission (the “SEC”). In management's opinion, the unaudited condensed consolidated financial statements include all adjustments and accruals that are necessary for a fair presentation of the results of all interim periods reported herein and all such adjustments are of a normal, recurring nature.

Amounts shown on the condensed consolidated statements of income within the operating expense categories of Cost of Revenue; Research and Development; Service, Rental and Maintenance; Selling and Marketing; and General and Administrative are recorded exclusive of depreciation, amortization and accretion. These items are shown separately on the condensed consolidated statements of income within operating expenses. Foreign currency translation adjustments were immaterial and are not presented separately in our condensed consolidated financial statements and consequently no statements of comprehensive income are presented.

Certain prior period amounts in the condensed consolidated financial statements have been reclassified to conform to the current period's presentation. These reclassifications had no effect on the reported results of operations or the statement of financial position. In the fourth quarter 2016, the Company concluded that it was appropriate to separately state those operating expenses related to research and development. Previously those expenses had been classified under the Service, Rental and Maintenance operating category. Corresponding reclassifications were made to the Condensed Consolidated Statements of Income for the three and nine months ended September 30, 2016. This change in classification has no effect on the previously reported Condensed Consolidated Statements of Income for any period.

The financial information included herein, other than the Condensed Consolidated Balance Sheet as of December 31, 2016, is unaudited. The Condensed Consolidated Balance Sheet at December 31, 2016 has been derived from, but does not include, all the disclosures contained in the audited consolidated financial statements as of and for the year ended December 31, 2016.

These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and accompanying notes included in the Company's Annual Report on Form 10-K for the year ended December 31, 2016 (the “2016 Annual Report”). The Condensed Consolidated Statements of Income for the interim periods presented are not necessarily indicative of the results that may be expected for a full year.

SPOK HOLDINGS, INC.

UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Use of Estimates

The preparation of these condensed consolidated financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosures. On an on-going basis, we evaluate estimates and assumptions, including, but not limited to, those related to the impairment of long-lived assets; intangible assets subject to amortization and goodwill; accounts receivable allowances; revenue recognition; depreciation expense; asset retirement obligations; severance and income taxes. We base our estimates on historical experience and various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

NOTE 2 - RISKS AND OTHER IMPORTANT FACTORS

See “Item 1A. Risk Factors” of Part II of this Quarterly Report on Form 10-Q (“Quarterly Report”) and "Item 1A. Risk Factors" of Part I of the 2016 Annual Report, which describes key risks associated with our operations and industry.

NOTE 3 - RECENT AND PENDING ACCOUNTING STANDARDS

Revenue

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers. Since this ASU was issued, the FASB has issued several updates including ASU No. 2015-14 in July 2015 which delayed the effective date, ASU No. 2016-08 in March 2016 which updated guidance related to principal versus agent considerations, ASU No. 2016-10 in April 2016 which updated guidance related to the identification of performance obligations, ASU No. 2016-12 in May 2016 which updated guidance related to scope improvements and practical expedients and ASU No. 2016-20 which provided technical corrections and improvements but did not update guidance issued in prior updates. The effective date is January 1, 2018, and while early adoption to the original effective date of January 1, 2017 is permitted, we have elected not to early adopt.

ASU No. 2014-09 creates a five-step model that requires companies to exercise judgment when considering all relevant facts and circumstances in the determination of when and how revenue is recognized. The two permitted transition methods under the new standard are the full retrospective method, in which case the standard would be applied to each prior reporting period presented, or the modified retrospective method, in which case the cumulative effect of applying the standard would be recognized at the date of initial application. We have completed our review of the acceptable transition methods and have selected the modified retrospective approach. We currently estimate the modified retrospective approach may have a material impact on either deferred revenue or retained earnings in our 2018 consolidated financial statements as the potential impact is dependent upon the mix of products and services for contracts outstanding as of December 31, 2017.

We currently believe the standard will materially impact our revenue recognition on a going-forward basis once adopted. While we continue to assess the potential impacts of this standard, we currently believe that the most significant impact relates to our accounting for software license revenue. We expect software license revenue to generally be recognized when made available rather than over a combined service period or term period. Due to the nuances of certain contracts, the actual revenue recognition treatment required under the standard will be dependent on contract-specific terms and may vary in some instances from recognition at the time that software is made available to the customer.

Leases

In February 2016, the FASB issued ASU No. 2016-02, Leases. The new standard establishes a right of use (“ROU”) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than twelve months. Leases will be classified as either financing or operating with the classification affecting the pattern of expense recognition in the income statement.

ASU No. 2016-02 will be effective for fiscal years beginning on January 1, 2019, including the related interim periods and early adoption of the standard is permitted. A modified retrospective transition approach is required for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. While we are still evaluating the impact of the potential new standard on our consolidated financial statements, we expect that upon adoption we will recognize ROU assets and lease liabilities and that the amounts could be material.

SPOK HOLDINGS, INC.

UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Goodwill

In January 2017, the FASB issued ASU No. 2017-04, Intangibles - Goodwill and Other: Simplifying the Test for Goodwill Impairment. The new standard simplifies how an entity tests for goodwill by eliminating Step 2 from the goodwill impairment test. Step 2 measured a goodwill impairment loss by comparing the implied fair value of a reporting unit's goodwill with the carrying amount of that goodwill. By eliminating Step 2 an entity must now record an impairment to goodwill based on an analysis of the fair value of a reporting unit as compared to its carrying amount. An impairment charge is recognized for the amount that the carrying value exceeds the reporting unit's fair value.

ASU No. 2017-04 will be effective for fiscal years beginning on January 1, 2020, including interim periods within those fiscal years, and early adoption as of January 1, 2017 is permitted. All changes are to be accounted for on a prospective basis upon adoption. We do not believe adoption of ASU No. 2017-04 will have a material impact on our consolidated financial statements. We have not yet determined whether we will early adopt ASU No. 2017-04.

NOTE 4 - CONSOLIDATED FINANCIAL STATEMENT COMPONENTS

Prepaid Expenses and Other

Prepaid expenses and other consisted of the following as of the date stated:



(Dollars in thousands)	September 30, 2017		December 31, 2016
Prepaid repairs and maintenance	$	2,517	$	1,561
Prepaid commissions	1,622		594
Prepaid taxes	862		100
Other prepaid expenses	1,636		2,129
Total prepaid expenses and other	$	6,637	$	4,384

Depreciation, Amortization and Accretion

Depreciation, amortization and accretion expenses consisted of the following for the periods stated:



	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
(Dollars in thousands)	2017			2016			2017			2016
Depreciation
Leasehold improvements	$	50		$	47		$	175		$	145
Asset retirement costs	(97		)	(69		)	(292		)	(209		)
Paging and computer equipment	1,990			2,015			6,077			6,010
Furniture, fixtures and vehicles	66			73			207			221
Total depreciation	2,009			2,066			6,167			6,167
Amortization	625			1,007			2,261			3,153
Accretion	141			156			421			467
Total depreciation, amortization and accretion expense	$	2,775		$	3,229		$	8,849		$	9,787

Accounts Receivable, Net

Accounts receivable was recorded net of an allowance of $1.2 million and $1.1 million at September 30, 2017 and December 31, 2016, respectively.

SPOK HOLDINGS, INC.

UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Property and Equipment, Net

Property and equipment, net consisted of the following as of the date stated:



(Dollars in thousands)	Useful Life (In Years)	September 30, 2017			December 31, 2016
Leasehold improvements	shorter of useful life or lease term	$	4,083		$	3,843
Asset retirement costs	1-5	3,289			3,263
Paging and computer equipment	1-5	112,827			113,175
Furniture, fixtures and vehicles	3-5	4,551			2,852
Total property and equipment		124,750			123,133
Accumulated depreciation		(111,044		)	(110,315		)
Total property and equipment, net		$	13,706		$	12,818

Other Current Liabilities

Other current liabilities consisted of the following as of the date stated:



(Dollars in thousands)	September 30, 2017		December 31, 2016
Accrued outside services	$	999	$	975
Accrued network costs	630		773
Accrued accounting and legal	277		467
Asset retirement obligations	235		85
Deferred rent and other	44		433
Total other current liabilities	$	2,185	$	2,733

Other Non-Current Liabilities

Other non-current liabilities consisted of the following as of the date stated:



(Dollars in thousands)	September 30, 2017		December 31, 2016
Asset retirement obligations	$	7,580	$	7,472
Deferred rent and other	872		942
Dividends payable	168		507
Total other non-current liabilities	$	8,620	$	8,921

NOTE 5 - INTANGIBLE ASSETS, NET

Intangible Assets

Amortizable intangible assets at September 30, 2017 related primarily to customer relationships that resulted from our acquisition of Amcom Software, Inc. in 2011. Such intangibles are being amortized over a period of ten years.

The net consolidated balance of intangible assets consisted of the following at September 30, 2017:



		September 30, 2017
(Dollars in thousands)	Useful Life (In Years)	Gross Carrying Amount		Accumulated Amortization			Net Balance
Customer relationships	10	$	25,002	$	(16,460	)	$	8,542
Total amortizable intangible assets	10	$	25,002	$	(16,460	)	$	8,542

SPOK HOLDINGS, INC.

UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Estimated amortization of intangible assets for future periods was as follows:



	(Dollars in thousands)
For the remaining three months ending December 31, 2017	$	625
For the year ending December 31:
2018	2,500
2019	2,500
2020	2,500
2021	417
Total amortizable intangible assets	$	8,542

NOTE 6 - ASSET RETIREMENT OBLIGATIONS

The components of the changes in the asset retirement obligation liabilities were:



(Dollars in thousands)	Short-Term Portion			Long-Term Portion			Total
Balance at January 1, 2017	$	85		$	7,472		$	7,557
Accretion	6			415			421
Amounts paid	(189		)	—			(189		)
Asset additions recorded, net	—			26			26
Reclassifications	333			(333		)	—
Balance at September 30, 2017	$	235		$	7,580		$	7,815

The balances above were included within other current liabilities and other non-current liabilities, respectively, at September 30, 2017.

Increases and reductions other than accretion, reclassification and amounts paid primarily relate to changes in estimate of the underlying liability, specifically as it relates to updates in estimated costs to remove a transmitter and the estimated timing of removal. The cost associated with the estimated removal costs and timing refinements due to ongoing network rationalization activities is expected to accrete to a total liability of $9.0 million. The total estimated liability is based on the transmitter locations remaining after we have consolidated the number of networks we operate and assume the underlying leases continue to be renewed to that future date.

Accretion expense was $0.4 million and $0.5 million for the nine months ended September 30, 2017 and 2016, respectively. Accretion expense related solely to asset retirement obligations and was recorded based on the interest method.

NOTE 7 - STOCKHOLDERS' EQUITY

General

Our authorized capital stock consists of 75 million shares of common stock, par value $0.0001 per share, and 25 million shares of preferred stock, par value $0.0001 per share.

At September 30, 2017 and December 31, 2016, we had no stock options outstanding.

At September 30, 2017 and December 31, 2016, there were 19,977,318 and 20,525,614 shares of common stock outstanding, respectively, and no shares of preferred stock outstanding.

SPOK HOLDINGS, INC.

UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Changes in Stockholders' Equity

Changes in stockholders’ equity for the nine months ended September 30, 2017 consisted of the following:



	(Dollars in thousands)
Balance at January 1, 2017	$	322,087
Net income for the nine months ended September 30, 2017	6,078
Cash dividends declared	(7,776		)
Common stock repurchase program	(10,024		)
Amortization of stock based compensation	2,815
Other	189
Balance at September 30, 2017	$	313,369

Dividends

The following table details our cash dividend payments made in 2017. Cash dividends paid as disclosed in the condensed consolidated statements of cash flows for the nine months ended September 30, 2017 and 2016 include previously declared cash dividends on shares of vested restricted common stock ("restricted stock") issued to our non-executive directors and dividends related to vested restricted stock units ("RSUs") issued to eligible employees. Cash dividends on RSUs and restricted stock have been accrued and are paid when the applicable vesting conditions are met. Accrued cash dividends on forfeited restricted stock and RSUs are also forfeited.



Declaration Date	Record Date	Payment Date	Per Share Amount		Total Payment⁽¹⁾
					(Dollars in thousands)
December 20, 2016	January 4, 2017	January 17, 2017	$	0.250	$	5,128
March 1, 2017	March 17, 2017	March 30, 2017	0.125		2,566
April 26, 2017	May 23, 2017	June 23, 2017	0.125		2,545
July 26, 2017	August 18, 2017	September 8, 2017	0.125		2,494
	Total		$	0.625	$	12,733

(1) The total payment reflects the cash dividends paid in relation to common stock and vested restricted stock.

On October 25, 2017, our Board of Directors declared a regular quarterly cash dividend of $0.125 per share of common stock with a record date of November 17, 2017, and a payment date of December 8, 2017. This cash dividend of approximately $2.5 million will be paid from available cash on hand.

Common Stock Repurchase Program

On April 26, 2017, the Company's Board of Directors authorized the repurchase of up to $10.0 million of the Company's common stock through 2017 on the open market or in privately negotiated transactions. The Company used the entire $10.0 million of repurchase authority by June 30, 2017. The following table presents information with respect to purchases made by the Company during the nine months ended September 30, 2017:



Period	Total Number of Shares Purchased	Average Price Paid Per Share		Total Number of Shares Purchased as Part of the 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					$	10,000
Three Months Ended June 30, 2017	572,550	17.47		572,550	—
Total	572,550	$	17.47	572,550

SPOK HOLDINGS, INC.

UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Net Income per Common Share

Basic net income per common share is computed on the basis of the weighted average common shares outstanding. Diluted net income per common share is computed on the basis of the weighted average common shares outstanding plus the effect of all potentially dilutive common shares including outstanding restricted stock and RSUs, which are treated as contingently issuable shares, using the “treasury stock” method.

The Company has determined, based on the provisions of the 2015 Long-Term Incentive Plan ("2015 LTIP"), that unvested RSUs do not currently meet, nor have they met since issuance, the criteria to be considered dilutive. Therefore, we have excluded them from the calculation of both diluted net income per common share as well as the diluted weighted average shares of common stock and common stock equivalents for the three and nine months ended September 30, 2017 and removed them from the comparative information for the three and nine months ended September 30, 2016. This correction is immaterial to our financial statements and corresponding disclosures.

Our third quarter 2017 interim Condensed Consolidated Financial Statements reflect this determination within the calculation of basic and diluted weighted average shares outstanding and earnings per share for the three and nine months ended September 30, 2017 and 2016.

We assessed the materiality of these changes on our 2016 financial statements in accordance with SEC Staff Accounting Bulletin ("SAB") No. 99, Materiality, codified in Accounting Standards Codification ("ASC") 250, Presentation of Financial Statements, and concluded that they were not material to any prior annual or interim periods. We have corrected the third quarter 2016 by revising the third quarter 2016 interim condensed consolidated financial statements and other financial information included herein. Future periods will be revised, as applicable.

The components of basic and diluted net income per common share were as follows for the periods stated:



	For the Three Months Ended September 30,				For the Nine Months Ended September 30,
(in thousands, except for share and per share amounts)	2017		2016		2017		2016
Numerator:
Net income	$	3,727	$	4,058	$	6,078	$	10,953

Denominator:
Weighted average shares used to compute net income per common share - basic	19,977,263		20,541,275		20,285,240		20,604,905
Weighted average shares used to compute net income per common share - diluted	20,008,321		20,541,275		20,362,774		20,604,905
Basic and diluted net income per common share	$	0.19	$	0.20	$	0.30	$	0.53

Spok Holdings, Inc. Equity Incentive Award Plan

The following table summarizes the activities under the 2012 Equity Incentive Award Plan ("2012 Equity Plan") from January 1, 2017 through September 30, 2017:



	Activity
Total equity securities available at January 1, 2017	1,246,939
Less: 2015 performance-based LTIP RSUs awarded to eligible employees, net of forfeitures	87,594
Less: Time-based RSUs awarded to eligible employees (including 2017 LTIP), net of forfeitures	122,629
Less: Restricted stock awarded to non-executive members of the Board of Directors	15,271
Total equity securities available at September 30, 2017	1,021,445

SPOK HOLDINGS, INC.

UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

On July 24, 2017 the Company's stockholders approved an amendment to our 2012 Equity Plan to: (i) expand the list of performance criteria that may be used for purposes of granting performance awards under the 2012 Equity Plan, and (ii) limit the annual value awards that may be granted to the Company's non-employee directors to $750,000 per year, subject to limited exceptions as described in the amendment. The approval of the amendment was intended to satisfy the stockholder approval requirements under Section 162(m) of the Internal Revenue Code.

2015 Long Term Incentive Plan. On December 9, 2014, our Board of Directors adopted the 2015 LTIP (which provides for a 36-month vesting period) that included a stock component in the form of RSUs. Under this incentive program, RSUs will be granted to eligible employees annually and each annual grant will generally vest over a three-year service period. Each annual grant includes performance metrics required to be met for vesting purposes, as established by the Board of Directors. Our Board of Directors also approved that future cash dividends related to the RSUs will be set aside and paid in cash to each eligible employee when the RSUs are converted into shares of common stock. RSUs would be converted into shares of common stock on the earlier of a change in control of the Company (as defined in the 2015 LTIP) or on or after the third business day following the day that we file the Annual Report on Form 10-K with the SEC for the grant's final vesting year, but in no event later than December 31 of the year following the vesting date if the pre-established performance conditions are achieved. Any unvested RSUs awarded under the 2015 LTIP and the related cash dividends are forfeited if the participant terminates employment with the Company.

On January 2, 2015, our Board of Directors granted 254,777 RSUs with a grant date fair value of $4.4 million. An additional 6,123 RSUs were granted to eligible employees who were promoted or joined the Company during the twelve months ended December 31, 2015. On January 28, 2016, our Board of Directors issued a second grant of 227,082 RSUs with a grant date fair value of $3.8 million. An additional 7,629 RSUs were granted to eligible employees who were promoted or joined the Company during the twelve months ended December 31, 2016. On January 2, 2017, our Board of Directors issued a third grant of 108,428 RSUs with a grant date fair value of $2.2 million. An additional 10,039 RSUs were issued to eligible employees who were promoted or joined the Company during the nine months ended September 30, 2017. All issuances were made to eligible employees under the 2012 Equity Plan for the 2015 LTIP pursuant to a Restricted Stock Unit Agreement. Eligible employees have the opportunity to earn RSUs based upon continued employment with the Company and the achievement of performance goals established by our Board of Directors for our consolidated revenue and operating cash flows (as defined by the Company) during the period of January 1, 2015 through December 31, 2017 (“the 2015-2017 performance period”) for the 2015 grant, the period of January 1, 2016 through December 31, 2018 ("the 2016-2018 performance period") for the 2016 grant, and January 1, 2017 through December 31, 2019 ("the 2017-2019 performance period") for the 2017 grant, respectively. (For additional details regarding stock compensation refer to Note 9, "Stock Based Compensation".)

The following table details activities with respect to RSUs issued and outstanding under the 2015 LTIP for the nine months ended September 30, 2017:



	Shares		Weighted- Average Grant Date Fair Value		Total Unrecognized Compensation Cost (Dollars in thousands)		Weighted-Average Period Over Which Cost is Expected to be Recognized (In months)
Non-vested RSUs at January 1, 2017	451,493		$	17.10
Granted	118,467		20.52
Vested	—		—
Forfeited	(30,873	)	18.02
Non-vested RSUs at September 30, 2017	539,087		$	17.80	$	2,576	15

2017 Time Based Long Term Incentive Plan. On January 2, 2017, our Board of Directors granted 108,394 RSUs with a grant date fair value of $2.2 million. An additional 10,039 shares were issued to eligible employees who were promoted or joined the Company during the nine months ended September 30, 2017. Our Board of Directors also approved that future cash dividends related to the RSUs will be set aside and paid in cash to each eligible employee when the RSUs are converted into shares of common stock. These RSUs vest one third on December 31, 2017, December 31, 2018 and December 31, 2019. RSUs would be converted into shares of common stock on the earlier of a change in control of the Company (as defined in the 2012 Equity Plan) or on or after the first business day following the vesting date but in no event later than 60 days following the vesting date. Any unvested RSUs awarded under the 2017 time based grant and the related cash dividends are forfeited if the participant terminates employment with the Company. (For additional details regarding stock compensation refer to Note 9, "Stock Based Compensation".)

SPOK HOLDINGS, INC.

UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The following table details activities with respect to RSUs issued and outstanding under the 2017 time based LTIP grant for the nine months ended September 30, 2017:



	Shares		Weighted- Average Grant Date Fair Value		Total Unrecognized Compensation Cost (Dollars in thousands)		Weighted-Average Period Over Which Cost is Expected to be Recognized (In months)
Non-vested RSUs at January 1, 2017	—		$	—
Granted	118,433		20.52
Vested	—		—
Forfeited	(8,339	)	20.75
Non-vested RSUs at September 30, 2017	110,094		$	20.50	$	1,234	15

Employee Stock Purchase Plan. On July 25, 2016, our stockholders approved the registration with the SEC of 250,000 shares of common stock, to be issued from time to time in connection with purchases under the Spok Holdings, Inc. 2016 Employee Stock Purchase Plan ("ESPP"). Shares were first offered for purchase under the ESPP during the third quarter of 2016. Under the ESPP, eligible participants can voluntarily elect to have contributions withheld from their pay for the duration of an offering period, subject to the ESPP limits. At the end of an offering period, contributions will be used to purchase the Company's common stock at a discount to the market price based on the first or last day of the offering period, whichever is lower. Participants are required to hold common stock for a minimum period of two years from the grant date. Participants will begin earning dividends on shares after the purchase date. Each offering period will generally last for no longer than six months. Once an offering period begins, participants cannot adjust their withholding amount. If a participant chooses to withdraw, any previously withheld funds will be returned to the participant, with no stock purchased, and that participant will be eligible to participate in the ESPP at the next offering period. If the participant terminates employment with the Company during the offering period, all contributions will be returned to the employee and no stock will be purchased at a discounted rate.

No shares were purchased for the three months ended September 30, 2017 or during the corresponding period in 2016. For the nine months ended September 30, 2017, 8,983 shares of common stock were purchased for a total cost of $0.1 million. No shares were purchased during the corresponding time periods in 2016.

The following table summarizes the activities under the ESPP from January 1, 2017 through September 30, 2017:



	Activity
Total ESPP equity securities available at January 1, 2017	246,039
Less: ESPP common stock purchased by eligible employees	8,983
Total ESPP securities available at September 30, 2017	237,056

Amounts withheld from participants will be classified as a liability on the balance sheet until funds are used to purchase shares. This liability amount is immaterial to the overall financial statements. (For additional details regarding stock compensation refer to Note 9, "Stock Based Compensation".)

NOTE 8 - INCOME TAXES

Spok files a consolidated U.S. Federal income tax return and income tax returns in various state, local and foreign jurisdictions as required.

At September 30, 2017, we had total deferred income tax assets ("DTAs") of $72.0 million and no valuation allowance. This reflects a change from the December 31, 2016 balance of DTAs of $73.1 million and no valuation allowance. The change from December 31, 2016 to September 30, 2017 reflects the expected usage of the DTAs to offset expected 2017 taxable income and changes in tax rates.

We consider both positive and negative evidence when evaluating the recoverability of our DTAs. The assessment is required to determine whether based on all available evidence, it is more likely than not (i.e., greater than a 50% probability) whether all or some portion of the DTAs will be realized in the future. During the fourth quarter of each year, we update our multi-year forecast of taxable income for our operations which assists in analyzing the recoverability of our DTAs.

SPOK HOLDINGS, INC.

UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The anticipated effective income tax rate is expected to continue to differ from the Federal statutory rate of 35% primarily due to the effect of state income taxes, research and development credits, permanent differences between book and taxable income and certain discrete items.

Our investment in research and development qualifies for the research and development income tax credit under Section 41 of the Internal Revenue code. Unused research and development tax credits have a 20-year carryover and will provide future tax benefits once Spok’s net operating losses are fully utilized. Of the total $1.3 million credit, $0.1 million relates to 2015, $0.3 million relates to 2016, and the remaining amount relates to 2017.

As of January 1, 2017, we had approximately $126 million of Federal Net Operating Losses ("NOLs") available to offset future taxable income.

NOTE 9 - STOCK BASED COMPENSATION

We record all stock-based awards, which consist of RSUs, restricted stock and the option to purchase common stock under the ESPP, at fair value as of the grant date. Stock based compensation expense is recognized based on a straight-line amortization basis over the respective service period. Forfeitures and withdrawals are accounted for on an as incurred basis.

The following table reflects the items for stock based compensation expense on the condensed consolidated statements of income for the periods stated:



	For the Three Months Ended September 30,				For the Nine Months Ended September 30,
(Dollars in thousands)	2017		2016		2017		2016
2015 LTIP (performance-based)	$	388	$	584	$	1,385	$	1,737
Time-based awards (including 2017 LTIP)	358		—		1,073		—
ESPP	16		9		46		9
Board of Directors restricted stock	100		107		311		321
Total stock based compensation expense	$	862	$	700	$	2,815	$	2,067

In the fourth quarter of 2016 we determined that only 50% of the 2015 and 2016 grants made under the 2015 LTIP are expected to vest based on the related performance criteria and our assessment of the anticipated future performance applied to the performance criteria. As such, expenses listed in the table above reflect only the portion of grants and related expense that we anticipate will vest for those awards.

NOTE 10 - COMMITMENTS AND CONTINGENCIES

There have been no material changes during the nine months ended September 30, 2017 to the commitments and contingencies previously reported in the 2016 Annual Report.

NOTE 11 - RELATED PARTIES

A member of our Board of Directors also serves as a director for an entity that leases transmission tower sites to the Company. For the three months ended September 30, 2017 and 2016, we incurred site rent expenses of $0.9 million and $1.0 million, respectively, and for the nine months ended September 30, 2017 and 2016, we incurred site rent expenses of $2.9 million from the entity on which the individual serves as a director. Site rent expenses are included in service, rental and maintenance expenses.

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward-Looking Statements

This Quarterly Report contains forward-looking statements and information relating to Spok Holdings, Inc. and its subsidiaries (collectively, “we,” “Spok,” or the “Company”) 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 Spok 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 those discussed below and under the captions “Business,” “Management’s Discussion and Analysis of Financial Condition and Statements of Income (“MD&A”),” and “Risk Factors” in our 2016 Annual Report. 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 SEC. Also note that, in the risk factors disclosed in the Company’s 2016 Annual Report, 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 Spok's business, statement of income or financial condition, subsequent to the filing of this Quarterly Report.

Overview

The following MD&A is intended to help the reader understand the statements of income and financial position of Spok. This MD&A is provided as a supplement to, and should be read in conjunction with, our 2016 Annual Report and our unaudited condensed consolidated financial statements and accompanying notes. A reference to a “Note” in this section refers to the accompanying Unaudited Notes to Condensed Consolidated Financial Statements.

Spok, acting through its indirect wholly-owned operating subsidiary, Spok, Inc., delivers smart, reliable solutions to help protect the health, well-being and safety of people primarily in the United States. Organizations rely on Spok for workflow improvement, secure texting, paging services, contact center optimization and public safety response.

Business

See Note 1 to our Unaudited Notes to Condensed Consolidated Financial Statements of Part I of this Quarterly Report on Form 10-Q ("Quarterly Report") and "Item 1. Business" of Part I of the 2016 Annual Report, which describes our business in further detail.

Revenue

We offer a suite of unified critical communication solutions that include call center operations, clinical alerting and notifications, one-way and advanced two-way wireless messaging services, mobile communications 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 their approach to critical communications. 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. Our primary market has been the healthcare industry, particularly hospitals. We have identified hospitals with 200 or more beds as the primary targets for our software and wireless solutions.

Revenue generated by wireless messaging services (including voice mail, personalized greeting, message storage and retrieval) and equipment loss and/or maintenance protection for both one-way and two-way messaging subscribers is presented as wireless revenue in our statements of income. Revenue generated by the sale of our software solutions, which includes software subscription, software license, professional services (installation, consulting and training), equipment (to be used in conjunction with the software) and post-contract support (on-going maintenance), is presented as software revenue in our statements of income. Our software is licensed to end users under an industry standard software license agreement. For the nine months ended September 30, 2017 and 2016, wireless revenue represented approximately 60% and software revenue represented approximately 40% of our consolidated revenue.

Wireless Revenue

Our core offering includes subscriptions to one-way or two-way messaging services for a periodic (monthly, quarterly, semiannual, 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 contract for 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. In 2015 and 2016 we launched new and exclusive one-way (model number T5) and two-way (model number T52) alphanumeric pagers, respectively. Both pagers are configurable to support un-encrypted or encrypted operation. When configured for encryption, they utilize AES-128 bit encryption, screen locking and remote wipe capabilities. With encryption enabled these new secure paging devices enhance our service offerings to the healthcare community by adding Health Insurance Portability and Accountability Act ("HIPAA") security capabilities to the low cost, highly reliable and availability benefits of paging. (See Item 1. “Business” in the 2016 Annual Report for more details.)

Software Revenue

Software revenue consists of two primary components: operations revenue and maintenance revenue. Operations revenue consists of license revenue, professional services revenue, and equipment revenue. 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 the delivery method of Free on Board ("FOB") shipping or FOB destination, respectively. 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 the maintenance revenue will be recognized ratably over the remaining contractual term of the agreement.

The following tables present the wireless and software revenue by key market segments for the periods stated and illustrate the relative significance of these market segments to our operations.



Market Segment	For the Three Months Ended September 30, 2017								For the Three Months Ended September 30, 2016
(Dollars in thousands)	Wireless		Software		Total		% of Total		Wireless		Software		Total		% of Total
Healthcare	$	19,516	$	14,532	$	34,048	78.0	%	$	20,247	$	11,094	$	31,341	69.1	%
Government	1,461		1,601		3,062		7.0	%	1,658		1,964		3,622		8.0	%
Large Enterprise	1,913		405		2,318		5.3	%	2,303		726		3,029		6.7	%
Other⁽¹⁾	2,220		1,988		4,208		9.7	%	2,816		4,547		7,363		16.2	%
Total	$	25,110	$	18,526	$	43,636	100.0	%	$	27,024	$	18,331	$	45,355	100.0	%

⁽¹⁾Other includes hospitality, resort, indirect and billable travel revenue.



Market Segment	For the Nine Months Ended September 30, 2017								For the Nine Months Ended September 30, 2016
(Dollars in thousands)	Wireless		Software		Total		% of Total		Wireless		Software		Total		% of Total
Healthcare	$	59,004	$	36,561	$	95,565	75.0	%	$	61,788	$	32,550	$	94,338	69.7	%
Government	4,541		4,455		8,996		7.1	%	5,245		5,837		11,082		8.2	%
Large Enterprise	6,057		1,778		7,835		6.1	%	7,272		2,468		9,740		7.2	%
Other⁽¹⁾	7,007		8,002		15,009		11.8	%	8,750		11,467		20,217		14.9	%
Total	$	76,609	$	50,796	$	127,405	100.0	%	$	83,055	$	52,322	$	135,377	100.0	%

⁽¹⁾Other includes hospitality, resort, indirect and billable travel revenue.

Operating Expenses

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 associated with the delivery of our revenue, which consist primarily of hardware, third-party software, outside service expenses and payroll and related expenses for our professional services, logistics, customer support and maintenance staff.


•	Research and Development. These expenses relate primarily to the development of new software products and the ongoing maintenance and enhancement of existing products. This classification consists primarily of employee payroll and related expenses, outside services related to the design, development, testing and enhancement of our solutions and to a lesser extent hardware equipment.


•	Service, rental and maintenance. These are expenses associated with the operation of our paging networks. 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 and pager repair functions.

•

Selling and marketing. The sales and marketing staff are involved in selling our communication solutions primarily in the United States. 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. Expenses consist largely of payroll and related expenses, commissions and other costs such as travel and advertising costs.


•	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 operating expenses to revenue on a regular basis. Even though the operating expenses are classified as previously described, expense control and management are also performed by expense category. Approximately 65% of the operating expenses referred to above were incurred in payroll and related expenses, site and facility rent expenses and telecommunication expenses for both the three and nine months ended September 30, 2017 and 2016.

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 had 599 full-time equivalent employees (“FTEs”) at September 30, 2017, an increase of 0.2% from 598 FTEs at September 30, 2016 and an increase of 2.0% from 587 FTEs at December 31, 2016.

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 wireless 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 2.9% to 4,042 active transmitters at September 30, 2017 from 4,164 active transmitters at September 30, 2016 and by 2.8% from 4,159 active transmitters at December 31, 2016.

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. 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.

Stock based compensation includes expenses related to our Long Term Incentive Plan ("LTIP"), Employee Stock Purchase Plan ("ESPP") and restricted stock issued to the Board of Directors. In 2017, the Company determined for competitive and employee retention reasons the 2017 LTIP grant would consist of a performance based component and a time-based component (For additional details refer to Note 7, "Stockholders' Equity" and Note 9, "Stock Based Compensation".)

Statements of Income

Comparison of the Statements of Income Elements for the Three and Nine Months Ended September 30, 2017 and 2016



	For the Three Months Ended September 30,				Change					For the Nine Months Ended September 30,				Change
(Dollars in thousands)	2017		2016		Total			%		2017		2016		Total			%
Revenue:
Wireless	$	25,110	$	27,024	$	(1,914	)	(7.1	)%	$	76,609	$	83,055	$	(6,446	)	(7.8	)%
Software	18,526		18,331		195			1.1	%	50,796		52,322		(1,526		)	(2.9	)%
Total	$	43,636	$	45,355	$	(1,719	)	(3.8	)%	$	127,405	$	135,377	$	(7,972	)	(5.9	)%
Selected operating expenses:
Cost of revenue	$	7,069	$	7,639	$	(570	)	(7.5	)%	$	21,295	$	23,167	$	(1,872	)	(8.1	)%
Research and development	5,001		3,645		1,356			37.2	%	13,768		9,765		4,003			41.0	%
Service, rental and maintenance	7,875		8,253		(378		)	(4.6	)%	23,885		24,745		(860		)	(3.5	)%
Selling and marketing	5,533		5,955		(422		)	(7.1	)%	16,784		18,912		(2,128		)	(11.3	)%
General and administrative	12,058		10,605		1,453			13.7	%	35,706		31,551		4,155			13.2	%
Total	$	37,536	$	36,097	$	1,439		4.0	%	$	111,438	$	108,140	$	3,298		3.0	%
FTEs	599		598		1			0.2	%	599		598		1			0.2	%
Active transmitters	4,042		4,164		(122		)	(2.9	)%	4,042		4,164		(122		)	(2.9	)%

Revenue — Wireless

The table below details total wireless revenue for the periods stated:



	For the Three Months Ended September 30,				Change					For the Nine Months Ended September 30,				Change
(Dollars in thousands)	2017		2016		Total			%		2017		2016		Total			%
Wireless revenue:
Paging revenue	$	24,128	$	25,944	$	(1,816	)	(7.0	)%	$	73,672	$	79,609	$	(5,937	)	(7.5	)%
Product and other revenue	982		1,080		(98		)	(9.1	)%	2,937		3,446		(509		)	(14.8	)%
Total wireless revenue	$	25,110	$	27,024	$	(1,914	)	(7.1	)%	$	76,609	$	83,055	$	(6,446	)	(7.8	)%

The decrease in wireless revenue for the three and nine months ended September 30, 2017 compared to the same periods in 2016 reflects the decrease in demand for our wireless services. Paging revenue consists primarily of recurring fees associated with the provision of messaging services and fees for paging devices and is net of a provision for service credits. Product and other revenue reflects system sales, the sale of devices and charges for paging devices that are not returned and are net of anticipated credits.

The demand for one-way and two-way messaging declined at each specified date and we believe demand will continue to decline for the foreseeable future. Demand for our services has also been impacted by the shift from narrow band wireless service offerings to broad band technology services by our competition.

As demand for one-way and two-way messaging has declined, we have developed or added service offerings such as Spok Mobile with a pager number in order to increase our revenue potential and mitigate the decline in our wireless revenue. We will continue to explore ways to innovate and provide customers the highest value possible. 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.

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 the 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 information on our units in service by account size at specified dates:



Account Size	As of September 30, 2017			As of June 30, 2017			As of September 30, 2016
(Units in thousands)	Units	% of Total		Units	% of Total		Units	% of Total
1 to 100 Units⁽¹⁾	95	8.9	%	98	9.0	%	110	9.8	%
101 to 1000 Units⁽¹⁾	201	18.9	%	204	18.8	%	222	19.8	%
> 1000 Units⁽¹⁾	767	72.2	%	784	72.2	%	792	70.4	%
Total units in service⁽¹⁾	1,063	100.0	%	1,086	100.0	%	1,124	100.0	%


⁽¹⁾	All figures presented include both direct and indirect units in service

The following table sets forth information on the net disconnect rate by account size for our customers for the periods stated:



	For the Three Months Ended
Account Size	September 30, 2017		June 30, 2017		September 30, 2016
1 to 100 Units⁽¹⁾	(2.8	)%	(3.7	)%	(3.5	)%
101 to 1000 Units⁽¹⁾	(1.8	)%	(4.5	)%	(2.6	)%
> 1000 Units⁽¹⁾	(2.2	)%	1.1	%	(1.2	)%
Total net unit loss %⁽¹⁾	(2.2	)%	(0.4	)%	(1.7	)%


⁽¹⁾	All figures presented include both direct and indirect units in service

The following table sets forth information on Average Revenue Per Unit ("ARPU") by account size for the periods stated:



	For the Three Months Ended
Account Size	September 30, 2017		June 30, 2017		September 30, 2016
1 to 100 Units⁽¹⁾	$	12.23	$	12.16	$	12.34
101 to 1000 Units⁽¹⁾	8.62		8.61		8.64
> 1000 Units⁽¹⁾	6.59		6.64		6.68
Total ARPU⁽¹⁾	$	7.48	$	7.52	$	7.63


⁽¹⁾	All figures presented include both direct and indirect units in service

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 annual revenue to decline in line with recent trends. The decrease in consolidated ARPU for the three months ended September 30, 2017 from the same period in 2016 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 will trend lower for the remainder of 2017. Price increases could mitigate, but not completely offset, the expected declines in both ARPU and revenue.

The following reflects the impact of subscribers and ARPU on the change in wireless revenue:



	Units in Service as of September 30,				Revenue for the Three Months Ended September 30,							Change Due To:
(in thousands)	2017	2016	Change		2017		2016		Change			ARPU		Units
Total	1,063	1,124	(61	)	$	24,128	$	25,944	$	(1,816	)	$	435	$	1,381



	Units in Service as of September 30,				Revenue for the Nine Months Ended September 30,						Change Due To:
(in thousands)	2017	2016	Change		2017		2016	Change			ARPU		Units
Total	1,063	1,124	(61	)	$	73,672	79,609	$	(5,937	)	$	1,533	$	4,404

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 decreased number of subscribers and related units in service.

Revenue — Software

The table below details the components of software revenue for the periods stated:



	For the Three Months Ended September 30,				Change					For the Nine Months Ended September 30,				Change
(Dollars in thousands)	2017		2016		Total			%		2017		2016		Total			%
Subscription	$	577	$	560	$	17		3.0	%	$	1,744	$	1,561	$	183		11.7	%
License	1,995		1,842		153			8.3	%	4,807		5,126		(319		)	(6.2	)%
Services	5,189		5,578		(389		)	(7.0	)%	12,192		14,095		(1,903		)	(13.5	)%
Equipment	1,102		1,091		11			1.0	%	3,202		4,070		(868		)	(21.3	)%
Operations revenue	8,863		9,071		(208		)	(2.3	)%	21,945		24,852		(2,907		)	(11.7	)%
Maintenance revenue	9,663		9,260		403			4.4	%	28,851		27,470		1,381			5.0	%
Total software revenue	$	18,526	$	18,331	$	195		1.1	%	$	50,796	$	52,322	$	(1,526	)	(2.9	)%

The decrease in operations revenue primarily reflects a decrease in the number of projects completed during the three and nine months ended September 30, 2017 as compared to the same periods in 2016. The increase in maintenance revenue reflects our continuing success in renewals of our maintenance support for existing software solutions and in maintenance support for sales of new solutions. The maintenance revenue renewal rates for the three and nine months ended September 30, 2017 and 2016 were in excess of 99%.

Our software revenue is dependent on the conversion of our software bookings into revenues. 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 of existing solutions. These contractual arrangements are reported as bookings and represent future revenue. Total bookings decreased by 1.8% for the three months ended September 30, 2017 as compared to the same period in 2016 and increased by 8.7% for the nine months ended September 30, 2017 as compared to the same period in 2016. Operations and new maintenance orders bookings increased by 6.3% and 16.9% for the three and nine months ended September 30, 2017 compared to the same periods in 2016. The increase in bookings for the nine months ended September 30, 2017 as compared to the same period in 2016 was primarily due to a strong first quarter in which average deal sizes were larger in 2017 as compared to 2016. The maintenance bookings continue to reflect a strong revenue renewal rate in excess of 99%. Maintenance and subscription renewals bookings decreased by 8.5% and increased by 2.0% for the three and nine months ended September 30, 2017, respectively, as compared to the same periods in 2016. The decrease in maintenance and subscription renewals bookings for the three months ended September 30, 2017 as compared to the same period in 2016 was primarily due to the timing of renewals.

The following table summarizes total bookings for the periods stated:



Bookings	For the Three Months Ended September 30,				For the Nine Months Ended September 30,
(Dollars in thousands)	2017		2016		2017		2016
Operations and new maintenance orders	$	8,999	$	8,469	$	28,379	$	24,274
Maintenance and subscription renewals	9,328		10,190		30,140		29,555
Total bookings	$	18,327	$	18,659	$	58,519	$	53,829

We reported a software backlog of $46.9 million at September 30, 2017, which represented all orders received from customers not yet recognized as revenue. We continually review our backlog and adjust the balance to reflect expected amount and timing of customer implementations.



Backlog	(Dollars in thousands)
Beginning balance at July 1, 2017	$	43,455
Operations bookings	8,999
Maintenance and subscription renewals	9,328
Available backlog	$	61,782
Operations revenue	(8,863		)
Maintenance revenue	(9,663		)
Other⁽¹⁾	3,644
Total backlog at September 30, 2017	$	46,900


⁽¹⁾	Other reflects cancellations and other adjustments to backlog.

Operating Expenses

Certain immaterial prior period amounts, within individual operating expense categories, have been reclassified to conform to the current period's presentation. These reclassifications had no effect on the reported results of operations nor did they have any effect on the total operating expense amounts they are a part of.

The following is a review of our operating expense categories for the three and nine months ended September 30, 2017 and 2016.



Operating expenses	For the Three Months Ended September 30,				Change					For the Nine Months Ended September 30,				Change
(Dollars in thousands)	2017		2016		Total			%		2017		2016		Total			%
Cost of revenue	$	7,069	$	7,639	$	(570	)	(7.5	)%	$	21,295	$	23,167	$	(1,872	)	(8.1	)%
Research and development	5,001		3,645		1,356			37.2	%	13,768		9,765		4,003			41.0	%
Service, rental and maintenance	7,875		8,253		(378		)	(4.6	)%	23,885		24,745		(860		)	(3.5	)%
Selling and marketing	5,533		5,955		(422		)	(7.1	)%	16,784		18,912		(2,128		)	(11.3	)%
General and administrative	12,058		10,605		1,453			13.7	%	35,706		31,551		4,155			13.2	%
Total	$	37,536	$	36,097	$	1,439		4.0	%	$	111,438	$	108,140	$	3,298		3.0	%
FTEs	599		598		1			0.2	%	599		598		1			0.2	%

Cost of revenue. Cost of revenue consisted primarily of the following items:



	For the Three Months Ended September 30,				Change					For the Nine Months Ended September 30,				Change
(Dollars in thousands)	2017		2016		Total			%		2017		2016		Total			%
Payroll and related	$	4,330	$	4,469	$	(139	)	(3.1	)%	$	13,432	$	13,505	$	(73	)	(0.5	)%
Cost of sales	2,228		2,587		(359		)	(13.9	)%	6,128		7,695		(1,567		)	(20.4	)%
Stock based compensation	4		57		(53		)	(93.0	)%	121		164		(43		)	(26.2	)%
Other	507		526		(19		)	(3.6	)%	1,614		1,803		(189		)	(10.5	)%
Total cost of revenue	$	7,069	$	7,639	$	(570	)	(7.5	)%	$	21,295	$	23,167	$	(1,872	)	(8.1	)%
FTEs	185		185		—			—	%	185		185		—			—	%

As illustrated in the table above, total cost of revenue decreased $0.6 million for the three months ended September 30, 2017 compared to the same period in 2016 and decreased $1.9 million for the nine months ended September 30, 2017 compared to the same period in 2016 primarily due to the following significant components and variances:


•	Payroll and related — Payroll and related expenses were incurred largely for maintenance, support and service personnel and reflects the increase in staffing.

•

Cost of sales — Cost of sales consisted primarily of third party software, use of third party resources for software implementation related work, inventory and maintenance of third party products. The decrease of $0.4 million and $1.6 million for the three and nine months ended September 30, 2017 compared to the same period in 2016, respectively, was primarily attributable to the decrease in hardware revenue and lower usage of third party resources for professional services.


•	Stock based compensation — The decrease of $0.1 million for the three and nine months ended September 30, 2017 compared to the same period in 2016, respectively, was primarily attributable to forfeitures incurred during the three months ended September 30, 2017.

Research and Development. Research and development expenses consisted of the following items:



	For the Three Months Ended September 30,				Change					For the Nine Months Ended September 30,				Change
(Dollars in thousands)	2017		2016		Total			%		2017		2016		Total		%
Payroll and related	$	4,005	$	2,939	$	1,066		36.3	%	$	11,216	$	7,781	$	3,435	44.1	%
Outside services	849		569		280			49.2	%	2,025		1,577		448		28.4	%
Stock based compensation	43		46		(3		)	(6.5	)%	163		134		29		21.6	%
Other	104		91		13			14.3	%	364		273		91		33.3	%
Total research and development	$	5,001	$	3,645	$	1,356		37.2	%	$	13,768	$	9,765	$	4,003	41.0	%
FTEs	113		85		28			32.9	%	113		85		28		32.9	%

As illustrated in the table above, research and development expenses increased $1.4 million for the three months ended September 30, 2017 compared to the same period in 2016 and increased $4.0 million for the nine months ended September 30, 2017 compared to the same period in 2016 primarily due to the following significant components and variances:

•

Payroll and related — Payroll and related expenses were incurred largely for product development personnel. The increase of $1.1 million and $3.4 million for the three and nine months ended September 30, 2017 compared to the same period in 2016, respectively, in payroll and related was due primarily to an increase of 28 FTEs compared to the same period in the prior year reflecting our continued efforts to increase research and development associated with our software solutions. We intend to continue to substantially increase our research and development efforts as we continue to invest in our next generation software solutions. The Company is investing in the development of products in the areas of: 1) mobility, 2) a unified software platform, 3) nursing solutions, and 4) alerting. The Company plans to continue to increase its staffing to develop its integrated communications solution portfolio. This increase in staffing will substantially impact margins and our cash flow from operations as the benefits from this development effort will not immediately be realized for at least several years. Based on this emphasis we expect the number of FTEs to increase in this area, substantially impacting future payroll and related expenses.


•	Outside services — The increase in outside services expense consisted primarily of third party developers working on our unified communications solutions for the three and nine months ended September 30, 2017.

Service, Rental and Maintenance. Service, rental and maintenance expenses consisted primarily of the following items:



	For the Three Months Ended September 30,				Change					For the Nine Months Ended September 30,				Change
(Dollars in thousands)	2017		2016		Total			%		2017		2016		Total			%
Payroll and related	$	2,582	$	2,638	$	(56	)	(2.1	)%	$	7,854	$	8,026	$	(172	)	(2.1	)%
Site rent	3,534		3,626		(92		)	(2.5	)%	10,758		10,954		(196		)	(1.8	)%
Telecommunications	1,060		1,162		(102		)	(8.8	)%	3,142		3,511		(369		)	(10.5	)%
Stock based compensation	20		15		5			33.3	%	59		43		16			37.2	%
Other	679		812		(133		)	(16.4	)%	2,072		2,211		(139		)	(6.3	)%
Total service, rental and maintenance	$	7,875	$	8,253	$	(378	)	(4.6	)%	$	23,885	$	24,745	$	(860	)	(3.5	)%
FTEs	92		97		(5		)	(5.2	)%	92		97		(5		)	(5.2	)%

As illustrated in the table above, service, rental and maintenance expenses decreased $0.4 million for the three months ended September 30, 2017 compared to the same period in 2016 and decreased $0.9 million for the nine months ended September 30, 2017 compared to the same period in 2016 primarily due to the following significant components and variances:


•	Payroll and related — Payroll and related expenses were incurred largely for field technicians, their managers, in-house repair personnel and quality assurance personnel. The change in FTEs reflects our continued management of headcount to match the changes in our wireless revenue.

•

Site rent — Site rent expenses consisted primarily of rent for transmitter locations used in our paging network. We anticipate continued rationalization of our networks, which will continue to decrease the number of transmitters required to provide service to our customers. The reduction in transmitters has reduced the number of lease locations. The number of active transmitters declined 2.9% from September 30, 2016 to September 30, 2017. As a result of rationalization of our networks we expect to continue to see a decline in site rent expenses over time.

•

Telecommunications — Telecommunications expenses consisted primarily of expenses 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. We believe continued reductions in these expenses will occur as our networks continue to be consolidated as anticipated, through the remainder of 2017, and as we reduce telephone circuit inventory.


•	Other — Other expenses consisted primarily of repairs and maintenance and outside services and includes management of these expenses to reflect the continued transition to support the growth in software revenue.

Selling and Marketing. Selling and marketing expenses consisted of the following items:



	For the Three Months Ended September 30,				Change					For the Nine Months Ended September 30,				Change
(Dollars in thousands)	2017		2016		Total			%		2017		2016		Total			%
Payroll and related	$	3,113	$	3,467	$	(354	)	(10.2	)%	$	9,223	$	10,609	$	(1,386	)	(13.1	)%
Commissions	1,234		1,317		(83		)	(6.3	)%	3,557		4,401		(844		)	(19.2	)%
Stock based compensation	84		75		9			12.0	%	284		198		86			43.4	%
Other	1,102		1,096		6			0.5	%	3,720		3,704		16			0.4	%
Total selling and marketing	$	5,533	$	5,955	$	(422	)	(7.1	)%	$	16,784	$	18,912	$	(2,128	)	(11.3	)%
FTEs	96		120		(24		)	(20.0	)%	96		120		(24		)	(20.0	)%

As illustrated in the table above, selling and marketing expenses decreased $0.4 million for the three months ended September 30, 2017 compared to the same period in 2016 and decreased $2.1 million for the nine months ended September 30, 2017 compared to the same period in 2016 primarily due to the following significant components and variances:


•	Payroll and related — Payroll and related expenses were incurred largely for sales and marketing personnel. The decrease in FTEs and related expense primarily reflects changes in our sales force as we manage the number of sales staff based on our expectations for the size of each addressable market.

•

Commissions — Commissions expense relates to the payments made to the sales representatives responsible for executing contracts. Commissions are expensed as projects are implemented and are impacted by the level of software operations revenue. The decrease of $0.1 million and $0.8 million for the three and nine months ended September 30, 2017 compared to the same period in 2016, respectively, in commissions is due primarily to lower software operations revenue compared to the same period in the prior year and to a lesser extent due to the continued impact from the change in the commission plan incentives made in 2015.


•	Other — Other expenses consisted primarily of advertising, trade show, convention and related travel expenses and reflect our focus on identifying sales opportunities.

The sales and marketing staff are all involved in selling our communication solutions domestically and internationally. These expenses support our efforts to maintain gross placements of units in service, which mitigate 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, website development, social media, webinars, regional and national user conferences, monthly newsletters and participation at industry trade shows.

General and Administrative. General and administrative expenses consisted of the following items:



	For the Three Months Ended September 30,				Change					For the Nine Months Ended September 30,				Change
(Dollars in thousands)	2017		2016		Total			%		2017		2016		Total			%
Payroll and related	$	4,569	$	4,076	$	493		12.1	%	$	13,428	$	12,724	$	704		5.5	%
Stock based compensation	711		507		204			40.2	%	2,188		1,529		659			43.1	%
Facility rent	913		848		65			7.7	%	2,601		2,497		104			4.2	%
Outside services	2,267		2,082		185			8.9	%	6,778		5,781		997			17.2	%
Taxes, licenses and permits	1,077		1,164		(87		)	(7.5	)%	3,101		3,279		(178		)	(5.4	)%
Other	2,521		1,928		593			30.8	%	7,610		5,741		1,869			32.6	%
Total general and administrative	$	12,058	$	10,605	$	1,453		13.7	%	$	35,706	$	31,551	$	4,155		13.2	%
FTEs	113		111		2			1.8	%	113		111		2			1.8	%

As illustrated in the table above, general and administrative expenses increased $1.5 million for the three months ended September 30, 2017 compared to the same period in 2016 and increased $4.2 million for the nine months ended September 30, 2017 compared to the same period in 2016 primarily due to the following significant components and variances:


•	Payroll and related — Payroll and related expenses were incurred for employees in information technology, administrative operations, finance, human resources and executive management.


•	Outside services — Outside service expenses consisted primarily of costs associated with professional services related to financial reporting, taxes and internal control compliance.


•	Other — Other expenses consisted primarily of bad debt, insurance, shipping costs, financial services, office rent and utilities. The increase in other expenses was primarily due to an increase in computer replacements, maintenance contracts, financial services costs, travel and entertainment and recruiting expenses.

Severance. We incurred an immaterial amount of severance expense for the three and nine months ended September 30, 2017 and 2016. Severance expense is included in General and Administrative - Other expenses.

Depreciation, Amortization and Accretion. Depreciation, amortization and accretion expenses were $2.8 million for the three months ended September 30, 2017 compared to $3.2 million for the same period in 2016 and $8.8 million for the nine months ended September 30, 2017 compared to $9.8 million for the same period in 2016. (For additional details regarding depreciation, amortization and accretion expenses refer to Note 4, "Consolidated Financial Statement Components".) The decrease of $0.4 million in depreciation, amortization and accretion expenses for the three months ended September 30, 2017 compared to the same period in 2016 is primarily due to a $0.4 million decrease in amortization of intangible assets. The decrease of $1.0 million in depreciation, amortization and accretion expenses for the nine months ended September 30, 2017 compared to the same period in 2016 is primarily due to a $0.9 million decrease in amortization of intangible assets an $0.1 million decrease in other depreciation expenses.

Income Tax Expense

Income Tax Expense. Income tax expense decreased $2.0 million for the three months ended September 30, 2017 compared to the same period in 2016 and decreased $5.2 million for the nine months ended September 30, 2017 compared to the same period in 2016. The change in the income tax expense for the three and nine months ended September 30, 2017 primarily relates to the decline in taxable income and a $1.3 million tax credit related to our research and development efforts.

The following is the effective tax rate reconciliation for the three and nine months ended September 30, 2017 and 2016, respectively:



	For the Three Months Ended September 30,										For the Nine Months Ended September 30,
(Dollars in thousands)	2017					2016					2017					2016
Income before income tax expense	$	3,898				$	6,181				$	8,023				$	18,069
Income tax expense at the Federal statutory rate	$	1,364		35.0	%	$	2,163		35.0	%	$	2,808		35.0	%	$	6,324	35.0	%
State income taxes, net of Federal benefit	110			2.8	%	229			3.7	%	324			4.0	%	700		3.9	%
Research and development tax credit	(1,264		)	(32.4	)%	—			—	%	(1,264		)	(15.8	)%	—		—	%
Other, including permanent differences	(39		)	(1.0	)%	(269		)	(4.4	)%	77			1.0	%	92		0.5	%
Income tax expense	$	171		4.4	%	$	2,123		34.3	%	$	1,945		24.2	%	$	7,116	39.4	%

Liquidity and Capital Resources

Cash and Cash Equivalents

At September 30, 2017, we had cash and cash equivalents of $110.1 million. The available cash and cash equivalents are held in accounts managed by third-party financial institutions and consist of invested cash and cash in our operating accounts. The invested cash is invested in interest bearing funds managed by third-party financial institutions. These funds invest in direct obligations of the government of the United States. To date, we have experienced no loss or lack of access to our invested cash or cash equivalents; however, we can provide no assurance that access to our invested cash and cash equivalents will not be impacted by adverse market conditions.

At any point in time, we have approximately $7.0 to $12.0 million in our operating accounts that are with third-party financial institutions. While we monitor daily the cash balances in our operating accounts and adjust the cash balances as appropriate, these cash balances could be impacted if the underlying financial institutions fail or are subject to other adverse conditions in the financial markets. To date, we have experienced no loss or lack of access to cash in our operating accounts.

We intend to use our cash on hand to provide working capital, to support operations to invest in our business, and to return value to stockholders through cash dividends and possible repurchases of our common stock. We may also consider using cash to fund or complete opportunistic investments and acquisitions that we believe will provide a measure of growth or revenue stability while supporting our existing operations. Because we intend to increase substantially our investment in developing our integrated communications platform over the next two or three years commensurate with declining revenues from our wireless business, we anticipate that our cash on hand will decrease significantly during that period and possibly longer until revenues from our Spok Care Connect platform begin to be realized.

Overview

In the event that net cash provided by operating activities and cash on hand are not sufficient to meet future cash requirements, we may be required to reduce planned capital expenses, reduce or eliminate our cash dividends to stockholders, not resume our common stock repurchase program, and/or sell assets or seek outside financing. We can provide no assurance that reductions in planned capital expenses or proceeds from asset sales would be sufficient to cover shortfalls in available cash or that outside financing would be available on acceptable terms.

Based on current and anticipated levels of operations, we anticipate net cash provided by operating activities, together with the available cash on hand at September 30, 2017, should be adequate to meet our anticipated cash requirements for the foreseeable future.

The following table sets forth information on our net cash flows from operating, investing, and financing activities for the periods stated:



	Nine Months Ended September 30,						Change Between 2017 and 2016
(Dollars in thousands)	2017			2016			Change Between 2017 and 2016
Net cash provided by operating activities	$	13,985		$	29,438		$	(15,453	)
Net cash used in investing activities	(7,034		)	(4,377		)	(2,657		)
Net cash used in financing activities	(22,627		)	(13,932		)	(8,695		)

Net Cash Provided by Operating Activities. As discussed above, we are dependent on cash flows provided by operating activities to meet our cash requirements. Cash provided by operating activities varies depending on changes in various working capital items including deferred revenue, accounts payable, accounts receivable, prepaid expenses and various accrued expenses. Net cash provided by operating activities decreased by $15.5 million for the nine months ended September 30, 2017 compared to the same period in 2016. The decrease of $15.5 million is primarily related to a decrease in net income of $4.9 million (decrease in cash flow), a decrease in deferred income tax expense of $5.1 million (decrease in cash flow) and a net decrease in non-cash items, including depreciation, amortization and accretion and stock based compensation, of $0.6 million (decrease in cash flow). With respect to changes in assets and liabilities the net cash provided by operating activities reflects a $1.4 million lower decrease in accounts payable, accrued liabilities and other (increase in cash flow), $1.8 million smaller increase in deferred revenue (decrease in cash flow) and a net $4.5 million greater increase to assets (decrease in cash flow).

Net Cash Used in Investing Activities. Net cash used in investing activities increased by $2.7 million for the nine months ended September 30, 2017 compared to the same period in 2016 due primarily to an increase in purchases of property and equipment associated with the Company's business expansion related to research and development.

Net Cash Used in Financing Activities. Net cash used in financing activities increased by $8.7 million for the nine months ended September 30, 2017 compared to the same period in 2016 due to a $5.0 million increase in dividends paid and a $3.7 million increase in common stock repurchases.

Future Cash Dividends to Stockholders. On October 25, 2017, our Board of Directors declared a regular quarterly cash dividend of $0.125 per share of common stock with a record date of November 17, 2017, and a payment date of December 8, 2017. This cash dividend of approximately $2.5 million will be paid from available cash on hand.

Common Stock Repurchase Program. On April 26, 2017, the Company's Board of Directors authorized the repurchase of up to $10.0 million of the Company's common stock through 2017 on the open market or in privately negotiated transactions. This repurchase authority was fully used in the three months ended June 30, 2017. For additional details regarding the common stock repurchase program refer to Note 7, "Stockholders' Equity".

Other. For 2017, the Board of Directors currently expects to pay dividends of $0.125 per common share each quarter, subject to declaration by the Board of Directors.

Commitments and Contingencies

Operating Leases. We have operating leases for office and transmitter locations. Substantially all of these leases have lease terms ranging from one month to five years. We continue to review our office and transmitter locations, and intend to replace, reduce or consolidate leases, where possible. Total rent expense under operating leases was $4.4 million and $4.5 million for the three months ended September 30, 2017 and 2016, respectively, and $13.4 million and $13.5 million for the nine months ended September 30, 2017 and 2016, respectively.

Off-Balance Sheet Arrangements. We do not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. As such, we are not exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in such relationships.

Commitments and Contingencies. See Note 10 to our Unaudited Notes to Condensed Consolidated Financial Statements in Part I of this Quarterly Report for further discussion on our commitments and contingencies.

Related Party Transactions

See Note 11 to our Unaudited Notes to Condensed Consolidated Financial Statements in Part I of this Quarterly Report for a discussion regarding our related party transactions.

Critical Accounting Policies and Estimates

The preceding discussion and analysis of financial condition and statement of income is based on our condensed consolidated financial statements, which have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”). The preparation of these condensed consolidated financial statements requires management to make estimates, judgments and assumptions that affect the reported amounts of assets, liabilities, revenue, expenses, and related disclosures. On an on-going basis, we evaluate estimates and assumptions, including but not limited to those related to the impairment of long-lived assets and intangible assets subject to amortization and goodwill, accounts receivable, revenue recognition, asset retirement obligations, and income taxes. We base our estimates on historical experience and various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

There have been no changes to the critical accounting policies reported in the 2016 Annual Report that affect our significant judgments and estimates used in the preparation of our condensed consolidated financial statements.

Non-GAAP Financial Measures

We use non-GAAP financial measures as key elements in determining performance for purposes of incentive compensation for our annual 2017 Short-Term Incentive Plan ("STIP") and the performance periods for our LTIPs. The non-GAAP financial measures include; (1) adjusted operating cash flow (“OCF”), defined as EBITDA less purchases of property and equipment plus severance (the Company defines EBITDA as operating income plus depreciation, amortization and accretion, each determined in accordance with GAAP; purchases of property and equipment and severance are also determined in accordance with GAAP); and (2) the total of adjusted operating expenses and capital expenses. Adjusted operating expenses are defined as operating expenses less depreciation, amortization and accretion less severance less stock based compensation. Capital expenses are defined as the purchase of property and equipment.

For purposes of the LTIP performance periods for 2015-2017 and for 2016-2018, adjusted OCF was as follows for the periods stated:



	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
(Dollars in thousands)	2017			2016			2017			2016
Net income	$	3,727		$	4,058		$	6,078		$	10,953
Plus: Income tax expense	171			2,123			1,945			7,116
Less: Other income	(359		)	(85		)	(415		)	(443		)
Less: Interest income	(214		)	(67		)	(490		)	(176		)
Operating income	3,325			6,029			7,118			17,450
Plus: Depreciation, amortization and accretion	2,775			3,229			8,849			9,787
EBITDA (as defined by the Company)	6,100			9,258			15,967			27,237
Less: Purchases of property and equipment	(1,816		)	(1,396		)	(7,020		)	(4,378		)
Plus: Severance	51			12			51			9
Adjusted OCF (as defined by the Company)	$	4,335		$	7,874		$	8,998		$	22,868

For purposes of the 2017 STIP and the LTIP performance period for 2017-2019, adjusted operating expenses and capital expenses were as follows for the periods stated:



	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
(Dollars in thousands)	2017			2016			2017			2016
Operating expenses	$	40,311		$	39,326		$	120,287		$	117,927
Less: Depreciation, amortization and accretion	(2,775		)	(3,229		)	(8,849		)	(9,787		)
Less: Severance	(51		)	(12		)	(51		)	(9		)
Less: Stock based compensation	(862		)	(700		)	(2,815		)	(2,067		)
Adjusted operating expenses (as defined by the Company)	36,623			35,385			108,572			106,064
Plus: Purchases of property and equipment	1,816			1,396			7,020			4,378
Adjusted operating and capital expenses (as defined by the Company)	$	38,439		$	36,781		$	115,592		$	110,442

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Interest Rate Risk

As of September 30, 2017, we had no outstanding debt and no revolving credit facility.

Foreign Currency Exchange Rate Risk

We conduct a limited amount of business outside the United States. The financial impact of transactions billed in foreign currencies is immaterial to our financial results and, consequently, we do not have any material exposure to the risk of foreign currency exchange rate fluctuations.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Our management carried out an evaluation, as required by Rule 13a-15(b) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), with the participation of our principal executive officer and our principal financial officer, of the effectiveness of our disclosure controls and procedures, as of the end of our last fiscal quarter. Disclosure controls and procedures are defined under Rule 13a-15(e) under the Exchange Act as controls and other procedures of an issuer that are designed to ensure that the information required to be disclosed by the issuer in the reports that it files or submits under the Exchange Act (i) is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and (ii) is accumulated and communicated to the issuer’s management, including its principal executive officer and principal financial officer, or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure. Based upon this evaluation, our principal executive officer and our principal financial officer have concluded that our disclosure controls and procedures were effective as of September 30, 2017.

Changes in Internal Control Over Financial Reporting

There were no changes made to the Company’s internal control over financial reporting during the three months ended September 30, 2017 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II. OTHER INFORMATION

ITEM 1. 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 results or statement of income.

ITEM 1A. RISK FACTORS

The risk factors included in “Part I – Item 1A – Risk Factors” of the 2016 Annual Report have not materially changed during the quarter ended September 30, 2017.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND THE USE OF PROCEEDS

The following table presents information with respect to purchases made by the Company during the nine months ended September 30, 2017:



Period	Total Number of Shares Purchased	Average Price Paid Per Share		Total Number of Shares Purchased as Part of the 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					$	10,000
Three Months Ended June 30, 2017	572,550	$	17.47	572,550	—
Total	572,550	$	17.47	572,550

For additional details regarding purchases made by the Company refer to Note 7, "Stockholders' Equity".

ITEM 6. EXHIBITS

The exhibits listed in the accompanying Exhibit Index below are filed or incorporated by reference as part of this report.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



	SPOK HOLDINGS, INC.

Dated: October 26, 2017	/s/ Michael W. Wallace
	Name:	Michael W. Wallace
	Title:	Chief Financial Officer
		(Principal Financial Officer and duly authorized officer)

EXHIBIT INDEX

Incorporated by Reference

Exhibit Number

Exhibit Description

Form

File No.

Exhibit

Filing Date

Filed/Furnished Herewith

31.1

Certification of Chief Executive Officer pursuant to Rule 13a-14(a)/Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended, dated October 26, 2017

Filed

31.2

Certification of Chief Financial Officer pursuant to Rule 13a-14(a)/Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended, dated October 26, 2017

Filed

32.1

Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350 dated October 26, 2017

Furnished

32.2

Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350 dated October 26, 2017

Furnished

101.INS

XBRL Instance Document*

Furnished

101.SCH

XBRL Taxonomy Extension Schema*

Furnished

101.CAL

XBRL Taxonomy Extension Calculation*

Furnished

101.DEF

XBRL Taxonomy Extension Definition*

Furnished

101.LAB

XBRL Taxonomy Extension Labels*

Furnished

101.PRE

XBRL Taxonomy Extension Presentation*

Furnished



*	The financial information contained in these XBRL documents is unaudited.