Spok Holdings Inc (SPOK) Q4 2018 Earnings Conference Call Transcript

SPOK earnings call for the period ending December 31, 2018.

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Spok Holdings Inc  (NASDAQ:SPOK)
Q4 2018 Earnings Conference Call
Feb. 28, 2019, 10:00 a.m. ET

Contents:

Prepared Remarks:

Operator

Good morning, and welcome to Spok's Fourth Quarter Investor Call. Today's call is being recorded. On line today we have Vince Kelly, President and Chief Executive Officer; Mike Wallace, Chief Financial Officer and Hemant Goel, President of Spok's operating Company. At this time, for opening comments, I would like to turn the call over to Mr. Wallace. Please go ahead, sir.

Michael W. Wallace -- Chief Financial Officer

Thank you, and good morning. Thank you for joining us for our 2018 Fourth Quarter and Full Year investor update. Before we discuss our operating results, I want to remind everyone that today's conference call may include forward-looking statements that are subject to risks and uncertainties relating to Spok's future financial and business performance.

Such statements may include estimates of revenue, expenses and income as well as other predictive statements or plans, which are dependent upon future events or conditions. These statements represent the Company's estimates only on the day of this conference call and are not intended to give any assurance as to actual future results.

Spok's actual results could differ materially from those anticipated in these forward-looking statements. Although these statements are based on assumptions that the Company believes to be reasonable, they are subject to risks and uncertainties. Please review the risk factor section relating to our operations and the business environment in which we compete, contained in our 2018 Form 10-K, which we expect to file later today and related documents filed with the Securities and Exchange Commission.

Please note that Spok assumes no obligation to update any forward-looking statements from past or present filings and conference calls. Also, on January 1st, 2018, Spok adopted Accounting Standards Codification, ASC 606. Revenue from contracts with customers using the modified retrospective method applied to those contracts which were not completed as of January 1st, 2018. Unless otherwise stated results for reporting periods beginning after January 1st, 2018 are presented under ASC 606, while prior period adjustments would have not been adjusted and continue to be reported in accordance with the Company's historical accounting under ASC 605.

Please refer to the tables provided in yesterday's press release to obtain revenue, net income, earnings per share and EBITDA results under both ASC 606 and 605 formats.

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

Vincent D. Kelly -- President and Chief Executive Officer

Thank you, Mike and good morning everyone. Thanks for joining us on today's call, we are encouraged with our performance in the fourth quarter of 2018 and believe it provides a solid basis for continued improvement in 2019.

We were particularly pleased with our growth in software bookings and the continued improvement in our wireless trends. Noteworthy was our performance in the second half of the year, as software revenue grew nearly 10%, compared to the first half of 2018 and fourth-quarter sequential wireless revenue declines slowed to a record low 0.7%. These metrics give us confidence as we start the New Year and launch the next evolution of our Spok Care Connect platform.

Before we get into the details of the quarter and full year. I want to underscore, where we are strategically and with respect to our business plan and outlook.

For the past few years, we've laid out a strategy for you. Were Spok would pivot from a telecommunications Company to a provider of software solutions with an initial primary focus on the North American healthcare market that transformation included substantial investment in the evolution of our Care Connect solution, and I'm proud to report that our transformation is on track and we continue to see the benefits from the investments in our software solutions platform.

Last October, the announcement of the introduction of that platform was well received by over 150 of our customers at our Annual Connect Conference. A couple of weeks ago, we continue to build on our industry-leading reputation when we publicly launch the next evolution of the Spok Care Connect platform at the HIMSS Conference in Orlando. The announcement and our progress was incredibly well received and we continue to receive positive feedback on it.

Let me take this opportunity to thank our investors for joining us in this ongoing transformation and for your continued support. We are a Company with the majority of our revenue is still coming from our wireless paging base. We believe this will change over time as software revenue increases, combined with our already low planned wireless revenue attrition and we moved from a flat top line to a growing top and bottom lines over time.

While our wireless base is low in its year-over-year erosion and out performed our own forecast on a regular basis. We still believe that it will continue to shrink over time. And that we need to invest in the growth potential of our healthcare software initiative. However, in the near term. Let me reiterate that the high yielding wireless revenue base is key to our strategic footprint and transformation as it gives us the financial flexibility to invest in our software communication solutions and has provided valuable customer relationships to leverage.

We've seen over the past few years, that many physicians want smart devices and secure messaging and it's a natural fit for them, but they also want to keep their pagers because they have long trusted them or want to separate their personal smartphone communications from their work communications relying on a pager.

Also, as you know, on a two emergency situation such as weather (ph) like what we saw from the recent devastating hurricanes last fall, in event involving rapid deployment of first responders. Some of the networks tend to get overloaded and message delivery can fail or be interrupted. If an organization utilizes only smartphone, communications can be at risk.

Pager are still work in these scenarios because we use a separate high power simulcast network and multiple satellite control of our transmitters for redundancy. As a result of these dynamics, we believe that migration from wireless pages will continue to occur at a slower pace than in the past.

So with that said, our focus is to create, sell and service industry leading clinical communication and collaboration solutions to our Spok Care Connect platform.

We believe that we are starting to see the benefits of the investments that we've made and we believe that the investments, we continue to make in our systems and people positions us well to capture a large portion of the market opportunity that we see out there.

Now, turning to the 2018 fourth quarter and full year results. We were particularly pleased to see fourth quarter software bookings improved more than 20% from prior year levels and annual software bookings increased nearly 5% from prior year levels. Record low levels of wireless unit and revenue attrition also contributed to our performance.

We believe these results -- direct result of the investments we've made in our sales team and infrastructure. Overall, we continue to generate EBITDA, enhance our product offerings and maintain the strength of our balance sheet.

Our ability to continue to generate healthy cash flows allowed us to execute against our capital allocation strategy, returning more than $23.6 million to our stockholders in 2018. In the form of dividends and share repurchases.

Mike and Hemant will provide details on our financial performance and operating activity shortly, but before that I want to highlight a few key results for the 2018 fourth quarter and full year.

First, continued demand for our software solutions and wireless services resulted in consolidated revenue of $169.5 million for 2018, down approximately 1% from the prior year, but sharply -- a sharply slower decline than the nearly 5% reduction we saw in 2017.

Year-over-year performance was driven in large part by consistent annual levels of software revenue as we continue to invest in our industry-leading clinical communication and collaboration platform Spok Care Connect and slower than anticipated attrition of wireless revenue.

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

Next, wireless subscriber and revenue trends continue to improve in 2018 as we again exceeded our expectations for growth additions, net unit churn, revenue and Average Revenue Per Unit or ARPU. Our year-over-year rate of paging unit erosion was slower than 2017 levels as the net number of units lost during the year totaled 57,000, down 8% from the prior year.

Our year-over-year rate of wireless revenue erosion was 6.8% for 2018, a 90 basis point improvement from the prior year and a sharp reduction from the double-digit declines we saw prior to 2016. We were especially pleased to see these positive trends continue on our top-performing healthcare segment, our best performing market segment in the fourth quarter, the highest rate of gross placements and the lowest rate of unit disconnects.

Third, consolidated operating expenses, which exclude depreciation, amortization, accretion and impairment, were up less than 9% from 2017 and we're at the midpoint of the guidance that we had provided at the beginning of the year. Noteworthy, was that our team was able to achieve this performance as we saw a nearly 31% increase in product research and development expenses over the same period in order to support our investment in the Spok Care Connect platform.

Mike will review details in a few minutes, but essentially the lower year-over-year operating expenses reflected a cost structure that is fully aligned with the demand levels we saw during the year. We continue to manage operating expenses closely and the efficiencies we have been able to implement across our cost structure provide a solid financial platform as we continue to make investments in areas that support our strategy for long-term growth.

Finally, in 2018, we returned more than $23.6 million to our stockholders inline with prior year totals. In 2018, we continued to remain focused on returning value to our shareholders through our capital allocation strategy which I'll talk about later in the call. Overall, we are pleased with our operating performance in the fourth quarter and the Company's substantial progress in 2018.

We met or exceeded our expectations on a number of key operating measures and we achieved these results as we continue to make key strategic investments in our business. However, we had many other accomplishments in addition to our financial performance. I'll call out a few of those for you.

We announced key strategic partnerships with companies such as Zebra, Spectralink and Bernoulli. Our management were keynote speakers at numerous C-suite conferences.

We received recognition as the number one provider of secure communications by Black Book Market Research and we continue to provide solutions and services to all of the US News & World Report best adult and children's hospitals.

Our team intends to carry this momentum throughout 2019 to stimulate long-term growth. I'll have additional comments on our 2019 outlook and strategy in a few minutes.

But, first, Mike Wallace our Chief Financial Officer, will review financial highlights for the quarter and then Hemant Goel, President of our operating Company, will provide more detail on bookings, trends, our new Care Connect cloud platform and some large customer wins. Mike?

Michael W. Wallace -- Chief Financial Officer

Thanks, Vince. Before I review our financial highlights for the fourth quarter and full year 2018. I would again encourage you to review our 2018 Form 10-K, which again we expect to file later today. Since it contains far more information about our business operations and financial performance, than we will cover on this conference call.

As Vince noted, we were pleased with our overall operating performance for the fourth quarter and full year of 2018, along with the progress we made toward meeting our long-term business goals.

A 7.4% increase year-over-year and software revenue and record-low attrition of wireless revenue combined with continuously focused expense management to generate approximately $10 million in net cash provided by operating activities in 2018.

Spok was able to achieve this performance as we continue to return cash back to our shareholders in the form of dividends and share repurchases and invest in our business for the long term.

Our balance sheet remains strong. With a cash, cash equivalent and short-term investments balance of $87.3 million at December 31st 2018 and we continue to operate as a debt free Company.

We believe this provides a solid financial platform and are well positioned to execute against our long-term goals in 2019 and beyond. In the interest of time today, I will not review our fourth quarter and full-year 2018 income statement on a line by line basis. Since much of that information is contained in our news release schedules and SEC filings.

However, to the extent you have specific questions about our quarterly financial results, I would be glad to address them during the Q&A portion of this call. Rather, I want to focus instead this morning on four specific areas. These include revenue, operating expenses, a brief review of our balance sheet and our financial guidance for 2019.

With respect to revenue in the fourth quarter of 2018, total revenue of $43.3 million was in line with the prior year quarter, and up from $42.5 million in the third quarter of 2018.

Total fourth quarter software revenue reflected increases from the prior quarter and the fourth quarter of 2017 by approximately 5% for both periods as we recorded, record levels of software operations revenue and sustained maintenance revenue levels.

The record level of software operations revenue reflects our continued focus on professional services, with maintenance renewal rates of approximately 99% as well.

Wireless revenue for the fourth quarter remains solid, declining by a record low 0.7% from the prior quarter. Noteworthy, in the second half of 2018, wireless revenue erosion slow to an historical low of 3.3%. This result reflected another impressive performance by our sales team to again generate significant wireless gross additions, while minimizing churn and maintaining stable unit pricing.

Turning to operating expenses. For the full year 2018, operating expenses, excluding depreciation, amortization and accretion, totaled $161 million versus $148 million -- $148.8 million in the prior year. This primarily reflects the increased level of investment in our Spok Care Connect platform.

For the full year 2018, operating expenses increased approximately $13 million or 9% from prior year levels. This was driven by a planned increase in annual R&D expenses of $5.8 million on a year-over-year basis as well as a $4 million increase in cost of revenue resulting from the 7.4% increase in year-over-year software revenue.

Additional sales and marketing expense of $1.7 million, reflects the increased presence at industry trade shows and activities surrounding the launch and the evolution of our Care Connect platform.

Depreciation, amortization and accretion decreased in both the fourth quarter and full year 2018 compared to the same periods in 2017, primarily due to the lower amortization expense associated with our intangible assets. As you may remember, due to our rebranding in 2014, we have revised the amortization period for the intangible assets associated with the Amcom acquisition, which resulted an increase amortization expense in that year.

Turning to capital expenses, in the fourth quarter of 2018. They were approximately $0.8 million and were incurred primarily for the purchase of pagers and infrastructure to support our wireless customers. For the full year, capital expenses totaled $5.9 million, down from $9.2 million in 2017.

Reflecting the decreased capital needs to support the Spok Care Connect platform development. We believe we are past the major portion of our CapEx requirements to support our strategy and that level should generally remained flat over time.

Taking a look at our deferred tax assets or DTAs, we had approximately $46.5 million in DTAs at year-end, down $1.2 million from the prior year-end level. The DTAs consists primarily of net operating losses, which will expire in the years 2025 to 2029. Based on the availability of these DTAs, we do not expect to pay a significant amount in federal income taxes for the foreseeable future as these DTAs allow us to shelter virtually all of our regular federal taxable income.

With respect to our financial guidance for 2019. As is typical with our fourth quarter earnings release, we have included an additional schedule detailing the components of our annual guidance for this year. Included in that guidance are Spok's expectations for software and wireless revenue generation in 2019.

We expect total revenue to range from $156 million to $174 million. Included in that total, we anticipate software revenue to comprise $75 million to $85 million, also we expect operating expenses, excluding depreciation, amortization and accretion to range from $155 million to $165 million and capital expenses to range from $3 million to $7 million.

I would remind you once again that our projections are based on current trends and that those trends are always subject to change. With that, I will turn the call over to Hemant Goel, who will update you on our fourth quarter sales and marketing activities. Hemant?

Hemant Goel -- President of Spok, Inc.

Thank you Michael and good morning. On today's call, I'll start by reviewing software bookings for the fourth quarter. I'll then update you on our software development progress. I'll give you some details on two key customer wins recap the success of our wireless efforts and provide an update on our Professional Services seen.

I'll conclude by remarks with a few comments on our marketing initiatives, before turning the call back over to Vince. Our sales and maintenance teams delivered software bookings in the fourth quarter of 2018 totaling $23.1 million. Fourth-quarter quarter performance was up 7% from $21.6 million in the previous quarter and increase more than 20% from prior-year quarter. Our maintenance revenue, renewal rate remained strong at 99%.

Healthcare remains a key part of our growth and primary focus making up 96% of overall software bookings in the US for the fourth quarter. We completed 29, six-figure healthcare deal including three with customers who have never worked with us before.

During the quarter we added 17 new healthcare customers to more than 1,900 hospitals and health systems that rely on Spok solutions. Our software development team exceeded expectations in the fourth quarter, delivering the first phase of the next evolution of Spok Care Connect. As Vince mentioned earlier, we believe our cloud native platform is a game changer in healthcare communications. I'd like to discuss the distinction between cloud native which we are developing at Spok, and cloud hosted, which is what many of our competitors are doing.

To take full advantage of cloud technology, we are collaborating with Amazon Web Services to build up software from the ground up. We're not simply hosting our existing software in the cloud, but designing a complete cloud services solution, which will give us customers the most and security, majority and breadth, and depth of services with the real-time cloud-based communications solutions.

Our cloud native platform will integrate with our existing software as we continue to provide our customers with solutions to help them solve some of their biggest communication challenges. We have a clear roadmap for providing a more than 1,900 healthcare of customer support for the solution they rely on today, and guidance for taking advantage of the simplified product installation, configuration and customer self service capabilities, our cloud native architecture will provide.

We believe that the power to automate clinical workflows is what set Spok apart from our competition. Providing real-time actionable information to support care team collaboration and help improve patient outcomes. To ensure this we have worked closely with our innovation partners to guarantee that Spok Care Connect streamlines communication to lead to clinicians focus on what they do best, taking care of patients.

Two of our innovation partners have successfully deployed our cloud native solution and are already expanding its use throughout their organizations. Confidence in our organization's direction was a pin with our fourth quarter sales and bookings. The deal value continues to grow and our partner alliance have strengthened, offering further indication that we are moving our enterprise solutions in the right direction.

One of the six figures deals during the quarter was with a 284-bed private hospital in the East Coast, already a Spok contact second wireless customer, this organization expanded its business through a partnership with antenna technology partners Spectralink.

A solid relationship with the customer and a strategic partnership with Spectralink resulted in this expensive expansion of services, the partnership organization is already engaged and how to expand its Spok solutions in conjunction with Spectralink healthcare grade mobile devices to support additional clinical workflows and patient outcomes. The combined solutions will deliver critical information and updates from systems such as nurse call, patient monitoring and many others allowing clinical teams, team members to reach one another within seconds of a critical alert.

This improves overall workflow, staff productivity and the comfort and safety of every one in the facility. One of the new customers we brought on board during the fourth quarter of 2018 was a 184-bed hospital in the East Coast that was looking for secure messaging for its care teams. Although, Spok Mobile was a more expensive solution than some of our competitors the customers saw the long-term value of our enterprise solution.

In particular, the hospital was in the process of merging with a larger facility that was already a Spok customer. The fact that our solution will allow them to immediately communicate with other facilities within their IDM made Spok the perfect solution for them.

Another notable aspect of this agreement is that the customer made their decision in a much shorter time frame than our typical sales cycle. We see this as validation to our reputation, broad customer base of more than 1,900 hospitals and health systems enterprise solution position us well for the future.

Our wireless team continued to deliver positive risk sales results in the fourth quarter adding several new healthcare facilities to the Spok customer base. With more than a million subscribers on the Spok paging network, paging is still a relevant communication solution, in fact, our wireless customers send an average of 105 million messages each month. Spok has continue to invest in its paging network to increase reliability and value for our customers.

At the end of 2018, we completed a long-term project to replace all Glenayre paging terminals the standard for paging carriers since the late 1980s, with new technology that supports off-the-shelf server hardware and modern operating systems and interfaces.

Spok owns the intellectual property from (inaudible) so we are on the -- the only paging carrier capable of using the state of the art hardware, which serves as the backbone of the paging network. These new paging terminals provide a highly reliable platform that will take Spok paging into the future. And our team is committed to supporting paging to our fullest ability as far as long as our customers demand it.

With the introduction of our Cloud native platform and evolution to a software as a service basis -- business our Professional Services Group continues to evaluate our product delivery methodology.

The fourth quarter saw a tremendous progress on our SaaS operational readiness service model which we preparing to implement. We're making ongoing improvements with our backlog conversions, the number of projects we closed in Q4 was up 12% over the prior quarter. Project profitability continues to be in line with our goals, and we are seeing an increase in our billable utilization for our services team, a trend we expect to continue.

Before turning things back over to Vince, I want to provide a brief update on our recent marketing activities.

During the fourth quarter. We participated in 3C level events. CHIME CIO Fall Forum, CNO exchange and engine healthcare. These events contributed to our brand recognition, fuel our sales pipeline and help us forge relationships with healthcare leaders across the country.

As Vince mentioned we recently participated in HIMSS '19 in Orlando. Our Spok Care Connect announcement at the start of the trade show generated a lot of interest in Spok including growing nearly 500 healthcare leaders to our booth to learn more.

We were also represent this year in one off education sessions. University of Utah Health presenting surviving sepsis, how health ID saves one life per week. The session, which was presented to a full house included a discussion of how Spok solution support Utah's clinical workflows and help them realize it 20% reduction in mortality rate for patients who develop sepsis, as well as a 10% reduction in length of stay and total direct cost of the system.

At HIMSS, Spok also participated in the Interoperability Showcase which attracted more than 11,000 attendees, a new record according to HIMSS and many large hospital and health systems and groups of leaders to throw the showcase together. During the interoperability showcase technology leadership show specific use, use case of how systems exchange and use data in real time to improve care and outcomes.

Spok has taken on a key role in the HIMSS Interoperability Showcase for more than 10 years each year we expand our footprint as other members look to us as a leader in delivering care critical come information to the nation of health systems.

In conclusion 2018, was a banner year of achievement for Spok. The introduction of our cloud native Spok Care Connect hubs further solidify our platform vision and our ongoing investment in our enterprise healthcare communication platform is propelling us forward.

We will continue to provide leading-edge technology that supports our customer's evolution to real-time health systems to secure about technology that makes Care collaboration easier.

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

Vincent D. Kelly -- President and Chief Executive Officer

Thank you, Hemant. Okay. With respect to our key goals and business outlook. Let me take a few moments to outline our strategy. As I mentioned in my opening comments about three years ago, we embarked on a transformation that was a title shift in our strategic direction for healthcare, our largest customer segment.

The strategy pivoted is a five-year plan that signaled a very intentional move from offering our customers point solutions or single product solutions or call center software, alarm management and secure messaging to offering them a cloud-based single, integrated clinical communication and collaboration platform called Spok Care Connect.

As we previously outlined our decision to make this shift and focus on the Spok Care Connect platform resulted for many reasons including customer needs. As our healthcare customers were telling us they needed a more unified approach to communications across their enterprise. The large market potential, an opportunity as we further penetrate the multi-billion dollar healthcare IT communications market.

Business simplification as we've been offering our customers too many different products in multiple versions on several different platforms, and competitive positioning as we concluded that no one else offers a single integrated platform for healthcare communications. Listening to what our customers have been telling us and as a result of our work with our innovation partners at the HIMSS '19 conference we were proud to introduce the next generation of our Spok Care Connect platform.

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

So, with that as background, and with respect to our 2019 guidance, this year we continue our commitment in investing to address near-term opportunities and to achieve long-term organic growth. We believe these investments are critical and supporting our strategy to deliver our industry-leading, clinical communication, collaboration platform, Spok Care Connect and drive long-term stockholder value. However, well we believe that we need to continue investing in our future. We have completed the bulk of our investments as we launch the evolution of our Spok Care Connect platform, for that reason we are holding our 2019 guidance range for consolidated operating expenses essentially flat to the guidance range we provided for 2018.

As a backdrop in 2016, R&D expenses totaled approximately $13.5 million, an increase of nearly one third from prior year levels. In 2017, R&D expenses totaled $18.7 million, an increase of nearly 40% from 2016 and in 2018, R&D expenses totaled $24.5 million, an increase of 31% from 2017.

We believe that R&D expense increases will continue to slow in 2019 and approach a more steady state level. Included in the expense guidance range that Mike outlined a few minutes ago, in 2019, we anticipate R&D expenses will intend -- will continue to increase in 2018 levels, although at a much slower pace and will primarily be offset by expense reductions in other categories.

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

For 2019, we are committed to continue, continuing to pay our $0.125 per share quarterly dividend. Our existing share repurchase plan remains in effect. We will continue to evaluate our capital allocation strategy on a quarterly basis and communicate our plans to you with respect to dividends, share repurchases and other uses of the capital each quarter when we report our earnings.

Finally, we believe it is important to give our investors a closer look at what we've been investing in over the past three years. So in May, we will be running an Investor Day program in New York that will showcase our Care Connect platform. After a presentation from management, we will be providing a product demo, similar to what was presented at HIMSS '19 as well as customer testimonials.

If you're interested in attending this event, please contact Al Galgano for details. His contact information is in the Investor Relations section of our website.

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

Questions and Answers:

Operator

Thank you. (Operator's instructions). We'll go first to the line of Ryan Vardeman from Palogic.

Ryan Vardeman -- Palogic Value Management, LP. -- Analyst

Hey guys, thanks for taking my question.

Michael W. Wallace -- Chief Financial Officer

Sure.

Ryan Vardeman -- Palogic Value Management, LP. -- Analyst

What is success criteria as it relates to the investment that we're making in Spok Care Connect 2.0 in 2019 and beyond?

Vincent D. Kelly -- President and Chief Executive Officer

The success criteria in 2019 is embedded in the guidance range that we gave for revenue and for operating expenses and for capital expenditures, which then you can imply are cash flow. But we're not going to see a lot of benefit or push on the upside or the top line in 2019 from this Care Connect platform. We're continuing to develop it, we are certainly be selling more of it by end of the year, you'll see more in 2020 and certainly a lot more in 2021 and next year when we report our fourth quarter earnings we'll give you the guidance for 2020 and we'll will do the similar thing in 2021. We don't provide multi-year guidance. So hopefully that answers your question. But what we're trying to do, Ryan, and I think, I've had this discussion is tap what we see is a very large total adjustable market with clinical communications, we see from Gartner that they've estimated it's anywhere from $2.5 billion to $4 billion. We have done some of our own estimates, we'll share those with you when we see you in May and we agree with that kind of range. We only need to access a little bit of that to make this a very, very good ROI for our shareholders and have a very good outcome here and we think it's entirely doable. We're on track, the Company is executing, our pipeline have qualified sales leads is up significantly right now from where it was a year ago, we got a lot of good things going on here, our research and development people are executing and we've got momentum. So yeah, I think these investments, although they were a hard thing from a Company that was traditional telecom Company to make this pivot. They are paying off and they're going to continue to pay off. Thanks for your question.

Ryan Vardeman -- Palogic Value Management, LP. -- Analyst

Yeah, Let me -- the follow up, I guess to that would be then in 2019, as relates to your guidance, what sort of embedded annual recurring revenue from the Spok 2.0 platform is embedded in that revenue guidance? -- kind of on an exit run rate? I think there's not going to hold our revenue but some bookings and kind of contracts like what would be embedded in that guidance on that exit rate?

Michael W. Wallace -- Chief Financial Officer

Yeah. Hey, Ryan, it's Mike Wallace. As Vince noted, I mean the majority of 2019 is going to be from a revenue standpoint, driven by, if you will our existing platform. What our expectations are, is that the new Care Connect platform as it begins to come online, we'll be able to begin selling that in the marketplace in the back half of this year. So, any amount in 2019 will de minimis at the end of the day, but it should provide a launching point as Vince mentioned for 2020.

Ryan Vardeman -- Palogic Value Management, LP. -- Analyst

Okay. I guess, I'll get back in the queue. Assuming that there's somebody else in there have got or would you prefer me, just ask one more question from you?

Michael W. Wallace -- Chief Financial Officer

I don't -- I can't see the queue. Operator, do we have anyone else? Because we can let Ryan ask his question if there's no one else in the queue?

Operator

Currently, we have no others in the queue. (Operator Instructions)

Michael W. Wallace -- Chief Financial Officer

Okay. Ryan, go ahead.

Ryan Vardeman -- Palogic Value Management, LP. -- Analyst

Yeah. So the service -- rental and maintenance ticked up meaningfully as a percentage of paging revenue. Is this a new run rate or what's that a function of?

Michael W. Wallace -- Chief Financial Officer

No, it's more a function of a reclass, if you will. So it's just a function of how we grouped expenses, but at the end of the day, we continue to spend a great deal of time, grooming our paging network to maintain the margins that we've got in that business. So there has been no fundamental uptick in the expense, its really just a classification issue.

Ryan Vardeman -- Palogic Value Management, LP. -- Analyst

Got it. And then in the Q3, 10-Q, there is an allowance for doubtful that went up a little bit, what side of the business is this relate to, and is that trend continued or is that one-time in nature. I'll wait and see the K later today, but...

Vincent D. Kelly -- President and Chief Executive Officer

Yeah, it's -- during 2018, we put in a more mechanical calculation if you will, from an allowance for -- for bad debt standpoint. So, we've been building that through 2018. We fundamentally don't believe it is significant in the context of our receivables, probably about 3% or so. So it's pretty much a one-time event in 2018, Ryan, of us just building what I felt was the appropriate allowance for doubtful accounts, kind of when I came onboard.

But as you would expect, it's primarily on the software side of the business, the wireless business has been pretty straightforward and stable as far as customers paying certainly with hospitals in today's day and age depending on the financial health of those hospitals you can, you can certainly have instances where you have some non-payers at the end of the day. So, it was primarily on the software side i.e., through hospitals and it's primarily a one-time event in 2018.

Ryan Vardeman -- Palogic Value Management, LP. -- Analyst

Thanks. And then directionally, how are you thinking about professional services next year? And what your target margins there?

Michael W. Wallace -- Chief Financial Officer

Yeah, you know, we brought in a new leader of professional services, about a year and a half ago. We've done a great deal of work to transition that's from, if you will, sort of a kind of departmental effort to really a business and we're finally at a stage where we're able to increase the utilization of people that we've got in that group.

We've got a lot better at the outset of deals getting statements of work that are aligned with our customers. At the end of the day in a software business, obviously you're PSG business, your Professional Services Group, is largely going to drive lower margins, simply because of the amount of people time embedded in that, but I would expect kind of a 30% to 40% margin in that business. And as we begin to make this evolution to the Care Connect platform, we should be able to see less time needed to implement our solutions from a professional services standpoint, such that a number of those expensive resources can be used more a consultative type of manner, which would be additional revenue producing. So we're going through a transition within PSG as Hemant mentioned in his comments as well, and it's getting better, each and every year.

Ryan Vardeman -- Palogic Value Management, LP. -- Analyst

Thank you. That's very helpful. And I guess my final one would be, as the bookings that you're seeing, how does that span across the various revenue line items, be it revenue, maintenance, hardware services, licenses?

Michael W. Wallace -- Chief Financial Officer

Yes, it's fundamentally at least right now with our current on-premise solution, it's a bit heavily focused as it relates to services. We're doing a lot of things internally to drive far more license revenue, such that obviously, it's a much higher piece of business, if you will. And then secondarily, you get the follow on maintenance component that comes from the license revenue, but it's a transition that we're going through as we're evolving into certainly a much more sophisticated software Company that our deals are being driven much more by license revenue as opposed to services. The hardware component is always going to be relatively smaller in the grand scheme of things, but as we move out into the future and what we are already beginning to see is deals where we can get a higher proportion of license revenue as opposed to the services.

Ryan Vardeman -- Palogic Value Management, LP. -- Analyst

Thank you very much. That's helpful. Good luck.

Michael W. Wallace -- Chief Financial Officer

Thank you.

Vincent D. Kelly -- President and Chief Executive Officer

Thanks for your questions, Ryan. Any other questions?

Operator

We have no further questions at this time. (Operator Instructions)

Vincent D. Kelly -- President and Chief Executive Officer

Okay. Well, look, operator if there's no more questions, I just want to thank everyone for joining us this morning and we look very much forward to speaking with you again when we release our first quarter earnings in April and then hopefully we'll see many of you in May at our Investor Day. So, everyone have a great day and thank you very much.

Operator

Thank you. And we'd like to thank everybody for their participation on today's conference. Please feel free to disconnect your line at anytime and have a good day.

Duration: 43 minutes

Call participants:

Michael W. Wallace -- Chief Financial Officer

Vincent D. Kelly -- President and Chief Executive Officer

Hemant Goel -- President of Spok, Inc.

Ryan Vardeman -- Palogic Value Management, LP. -- Analyst

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