Boingo Wireless, Inc.
Q2 2017 Earnings Call Transcript

Published: 4 Aug 2017

[Operator:]

Greetings and welcome to the Boingo Wireless Second Quarter 2017 Earnings Conference Call. At this time, all participants are in a listen-only mode. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to Ms. Kim Orlando of Addo Investor Relations. Thank you, Ms. Orlando, you may now begin.

[Kim Orlando:]

Thank you and welcome to the Boingo Wireless second quarter 2017 earnings conference call. By now, everyone should have access to the earnings press release, which was issued today at approximately 4 o’clock p.m. Eastern Time. In addition, an earnings supplement has been made available on the Investor Relations portion of Boingo’s website at www.boingo.com by clicking on the investor tab. This call is being webcast and is available for replay. In our remarks today, we will include statements that are considered forward-looking within the meanings of securities laws, including forward-looking statements about guidance and future results of operations, business strategies and plans and market and potential growth opportunities. In addition, management may make additional forward-looking statements in response to your questions. Forward-looking statements are based on management’s current knowledge and expectations as of today, August 3, 2017 and are subject to certain risks and uncertainties that may cause the actual results to differ materially from the forward-looking statements. A detailed discussion of such risks and uncertainties are contained in our most recent Form 10-K for the quarter ended December 31, 2016 filed with the SEC on March 13, 2017 and Form 10-Q for the quarter ended March 31, 2017 filed with the SEC on May 8, 2017 and our other filings with the SEC. The company undertakes no obligation to update any forward-looking statements. On this call, we will refer to non-GAAP measures such as adjusted EBITDA and free cash flows that when used in combination with GAAP results provide us with additional analytical tools to understand our operations. We have provided reconciliations to the most directly comparable GAAP financial measures in our earnings press release and which will be posted on the Investor Relations section of our website at www.boingo.com. And with that, I will hand the call over to Boingo’s Chief Executive Officer, David Hagan.

[David Hagan:]

Thanks, Kim. Good afternoon, everyone and thanks for joining us to discuss Boingo’s second quarter 2017 financial results. I am very pleased to share that our strong results and momentum continue. After posting what was arguably our best quarter today in Q1, or second quarter results continued to be strong and as a result we are updating and raising our full year guidance. For starters, we extended our streak of double-digit revenue growth to 11 consecutive quarters, with revenue up 25.5% year-over-year to $49 million. This exceeded the high end of our guidance range of $47.5 million. This top line growth is a result of consistent execution against our strategic plan leveraging explosive mobile data growth by obtaining long-term wireless rights at large values deploying DAS, WiFi and small cell networks at those venues and then monetizing the networks with deploying those unique mix of products and services. In addition to exceeding the high-end of our revenue guidance, I am pleased to share that adjusted EBITDA for the quarter also exceeded the high end of our guidance range. Adjusted EBITDA grew 76% year-over-year to $16.3 million. This is our eighth consecutive quarter of year-over-year EBITDA margin expansion. And that margin growth is helping to generate positive free cash flow. After generating $8 million of free cash flow in the first quarter, we added an additional $7 million in the second quarter bringing our year-to-date total to over $15 million. This is the direct result of the capital investments we made in our business over the past several years that are now making a significant impact. We are extremely pleased with our Q2 financial results, which point to the strength of our overall business in the products and services driving these results, in particular, DAS, military and carrier offload. So I am going to take a minute to update on each of those products starting with DAS. DAS continues to be very robust in Q2 as another strong quarter for venue acquisition with the addition of 14 new DAS venues, including PATCO, a transportation system connecting Philadelphia and lower New Jersey. We ended the quarter with 20,300 nodes live, with another 11,000 nodes in backlog. In just the last three quarters alone, we have added 57 new venues under contract, which is more than we currently have deployed. This backlog will keep us buildings and growing our DAS product for years to come. We continue to believe we are the largest provider of indoor DAS networks in the world. Military continues to over-perform. As I shared on our last call, we reached and then exceeded our overall military subscriber penetration goals much earlier than our forecast predicted. So, we are very pleased with our current subscriber penetration. We added 3,000 new military subscribers in Q2 bringing our total number of subscribers to 131,000. We also added another 6,000 beds in Q2 bringing the total number of beds installed to 324,000. While our major construction days are behind us, we plan to continue to add coverage to buildings where it makes economic sense. We are also excited about leveraging our military venues for revenue beyond our direct to consumer business. For example, we were recently awarded the long-term multimillion dollar wholesale services contract with MCCS, the Marine Corps contracting unit, which leverages our existing infrastructure in the new areas of the base such as hotels, restaurants and recreational centers. In addition, we continue to be actively engaged in discussions with multiple carriers for both carrier offload and small cell deployments on the military basis. As we have shared many times in the past, our overarching strategies that we are venue-centric and then our military bases are another venue category into which we can apply multiple products and services. So, it’s excited to see that vision come into reality. Now, on to carrier offload, carrier offload continues to expand with our two carrier partners. We rolled out additional locations including for the first time beyond our MNO airport network into hotels and malls as well the trial we are doing at two military bases. Carrier number two is network rollout remains on track. We are excited about the progress and interest that we are seeing from our carrier partners and we expect offload to be an important part of carrier strategies to reduce the load on overburdened cellular networks. Unlimited data plans are exacerbating this issue for all of the carriers as consumers have less economic incentive to switch off of cellular. So, usage on cellular networks has increased even more with all four carriers marketing unlimited data plans. Unlimited plans are great for our business both for WiFi offload and network densification in general. Another strategy that proves network stress is through small cells and we remain very encouraged by the amount of interest we are seeing from carriers regarding small cells. We are in talks with all four carriers and have specific proposals for deployments involving thousands of locations. Activity is very high and we expect to be able to report on specific installations in the quarters ahead. Small cells are very exciting, because they effectively expand our addressable market for venues and allow us to pursue new venues that may not have made financial sense in the past. We remain very enthusiastic about how small cells can help drive growth on our business in future years. All-in-all, we are extremely pleased with financial results, which exceeded the top end of our guidance range for revenue and adjusted EBITDA as well as the cash flow we are now generating to fuel our growth. Now, I would like to turn over to Pete Hovenier, our Chief financial Officer to walk you through the second quarter financial results in detail. Pete?

[Pete Hovenier:]

Thanks, Dave. I will begin by reviewing our financial results in key operating metrics for the second quarter ended June 30, 2017 and we will conclude with a financial outlook for the third quarter and full year of 2017. Total revenue for the second quarter was $49 million, an increase of 25.5% over the prior year period. Revenue growth reflected to strengthen wholesale WiFi, military and DAS, which was partially offset by declines in retail and advertising and other revenue. As a percentage of second quarter revenue across our diversified revenue streams, DAS represented 38%, military is 28%, also WiFi was 15%, retail was 13% and advertising and other accounted for the remaining 6%. This compares to the second quarter of 2016 in which DAS represented 36% of revenue, military was 25%, retail was 17% also WiFi was 13% and advertising and other accounted for the remaining 9%. In terms of total second quarter revenue contribution by category, DAS revenue was $18.6 million representing a 33.5% increase over the comparable period last year. Total DAS revenue was comprised of $13 million of build out project revenue and $5.6 million of access fee revenue. The year-over-year improvement in total DAS revenue is primarily related to the increase in revenue from new DAS build out projects, coupled with increased access fees from our telecom operator partners. Military revenue was $13.5 million representing an increase of 39.1% versus the prior year period. Growth was driven primarily by an increase in military subscribers, which was partially offset by a decrease in average monthly revenue per subscriber as well as a decline in single used revenue. The shift from military single used revenue to subscriber revenue is mainly due to the removal of our non-recurring monthly service offering which contributed to higher sign-ups for monthly recurring subscription plan. While we have continued to experience growth in military subscribers with our average subscriber penetration rate of 40.4%, up slightly from 40.3% in the prior quarter. We do not anticipate aggressive sequential subscriber growth given that we have exceeded top end of our stated estimated range for subscriber penetration. We expanded our military network by adding 6,000 beds during the quarter for a total footprint of 324,000 beds. We to continue to expect the military vertical to be a strong driver of recurring cash flow and we are encouraged by the additional incremental opportunities they are starting to develop on this basis. Wholesale WiFi was $7.3 million, representing an increase of 40.2% over the prior year period, primarily due to higher partner usage base fees. Retail revenue was $6.4 million, representing a 3.2% decline over the prior year period due to a decrease in retail single used revenue which was partially offset by an increase in retail subscriber revenue. As a reminder, while we expect retail revenue to continue to decline, the rate of decline continues to moderate. In fact our retail subscriber base slightly increased both sequentially and year-over-year. Most importantly, we are still able to monetize any foregoing customers through our WiFi wholesale service offerings specifically our WiFi offloading agreements and Comes with Boingo program. Advertising and other revenue was $3.3 million, representing a 10.7% decrease over the prior year, primarily due to a decline in the number of premium ad units sold. Now turning to our second quarter costs and operating expenses. Network access costs totaled $21.1 million representing a 24.8% increase over the second quarter of 2016 primarily due to increased depreciation related to DAS build-out projects as well as higher revenue share paid to our venue partners. Gross margin which is defined as revenue less network access costs was 57%, up 25 basis points from the prior year. The increase in gross margin was primarily driven by growth in our higher margin revenue streams such as military, wholesale WiFi, as well as DAS access fee revenues. Network operations expenses totaled $11.7 million, an increase of 12% from the comparable 2016 quarter, primarily due to higher depreciation and other operating expenses. Development and technology expenses were $6.7 million, an increase of 26.5% from the prior year period, due primarily to increases in depreciation, personnel related and other expense. Selling and marketing expenses were $5.1 million reflecting an increase of 4.3% from the comparable 2016 quarter. The increase was primarily due to increased personnel related expenses which was partially offset by a decrease in other marketing expenditures. General and administrative expenses were $11.3 million, a 46.3% increase in the comparable 2016 quarter. Included in G&A for the quarter was a one-time $2.8 million settlement expense accrual due to a claim from one of our venue partners. During the quarter, we also incurred a one-time $1 million increase in stock based compensation expense as a result of our over performance of revenue and adjusted EBITDA as compared to our performance targets. This over performance results in an increase in our expected payout on certain performance based restricted stock units. These one-time expenses incurred during the quarter were partially offset by a decreased professional service fees compared to the prior year quarter. Turning to our profitability measures in the quarter, net loss attributable to common stockholders was $8 million or $0.20 per diluted share versus a net loss of $7.3 million or $0.19 per diluted share in the prior quarter. Adjusted EBITDA, a non-GAAP measure was $16.3 million, an increase of 76.3% from comparable 2016 quarter. As a percent of total revenue, adjusted EBITDA was 33.3%, up from 23.7% of revenue in the comparable 2016 quarter. The second quarter marks our fifth consecutive quarter of year-over-year EBITDA margin expansion. Turning now to our key metrics, number of DAS notes in our network for the second quarter was 20,300, up 50.4% from the prior year period and up 2.5% from the first quarter of 2017. Number of DAS notes in backlog, which represents the number of DAS notes under contract, but not yet active as of the end of the second quarter was 11,000, up 120% from the prior year period and up 4.8% from the first quarter of 2017. Our military subscriber base with approximately 131,000 subscribers at the end of the second quarter reflecting a 65.8% increase versus the prior year period and 2.3% increase from the first quarter of 2017. Our retail subscriber base was 195,000 subscribers at the end of the second quarter, which was up 6% from the prior year period and up half a percentage point from the first quarter of 2017. Connects or paid usage in our worldwide network were approximately $52.1 million, up 63.4% from the prior year period and up 21% from the first quarter of 2017. Moving on to discuss our balance sheet, as of June 30, 2017, cash and cash equivalents totaled $22.3 million, up from $9.3 million at June 30, 2016. Total debt was $15.2 million reflecting a reduction of $4.7 million from our debt levels at March 31, 2017. As of June 30, we had $64.8 million available on our credit facility. Capital expenditures were $14.4 million for the second quarter, which included $7.8 million utilized for DAS infrastructure build out projects that are reimbursed by our telecom operator partners. Our non-reimbursed capital expenditures were driven primarily by new network builds, mainly related to the rollout of a military based networks, manage and operate network upgrades and various infrastructure upgrades and enhancements. As a reminder, we estimate our annual business capital requirements which excludes our growth capital to be approximately 3% to 5% of revenue. Free cash flow was $7.4 million for the second quarter, which is a negative $4.1 million for the second quarter of 2016. I will now turn to our outlook for the third quarter and full year 2017. For the third quarter ended September 30, 2017, we are initiating guidance for total revenue to be in the range of $48 million to $52 million. Net loss attributable to common stockholders to be in the range of $7 million to $4 million or a loss of $0.18 to $0.10 per diluted share. And adjusted EBITDA to be in the range of $15 million to 18 million. For the full year ended December 31, 2017, we are raising our guidance as follows. Total revenue is now expected to be in the range of the $192 million to $198 million, representing year-over-year growth of approximately 22.4% at the midpoint of the range, which represents $11 million or 690 basis points of additional growth as compared to the midpoint of our previously issued guidance range. We expect net loss attributable to common stockholders to be in the range of $28 million to $24 million or a loss of $0.71 to $0.61 per diluted share. And we expect adjusted EBITDA to be in the range of $60 million to $64 million, which implies an EBITDA margin of 31.8% or 620 basis points of EBITDA margin expansion at the midpoint of the range. We will maintain our tax valuation allowance and as such we do not expect to accrue material tax benefits, tax expenses on our income statement through 2017. We continue to expect a nominal full year tax rate as well fully diluted shares outstanding of approximately 39 million. In addition, our budget for non-reimbursed annual capital expenditures remains unchanged at approximately $20 million to $25 million for 2017 with majority of CapEx allocated to support WiFi network build and upgrades at our managed and operated venues. In addition to the finalization of our military base network build-out. In summary we delivered an excellent first half of 2017 with our strongest two quarters to-date which were characterized by a record quarterly revenue and strong venue acquisition driving our vision to our financial problems in the full year of 2017. Our strong free cash flow generation has enabled us to continue investment into the growth of our networks and our pipeline for future opportunities remains robust. With that I will turn it back over to Dave for closing remarks.

[David Hagan:]

Thanks Steve. We are extremely excited about these results which reflect strong operational execution with our highest quarter ever for revenue and adjusted EBITDA in the company’s history. Our DAS and military products are showing strong growth. We expect carrier offload to grow nicely in 2017 as carrier number two continues to ramp and we were more locations for both partners and we remain excited about the opportunity of small cell deployments to enable our business to expand into new venues. We believe the investments we have made over the past few years coupled with our ability to leverage significant favorable industry dynamics provide us with a long runway for continued growth. I would also like to take this opportunity to thank our lead Independent Director, Chuck Boesenberg for his years of service to Boingo’s Board of Directors. Chuck is retiring from Boingo’s board as of this week’s board meeting. He was our first outside independent director prior to our IPO in 2011 and served the interest of shareholders incredibly well over the last 6 years. We wish him the best of luck. With that, I would like to open up for questions. Operator?

[Operator:]

Thank you. [Operator Instructions] Our first question is from Scott Goldman of Jefferies. Please go ahead.

[Scott Goldman:]

Hey, good afternoon guys. Just a couple of questions. One on guidance, one on the business side, I guess on the guidance, it will be helpful it was a pretty healthy uptick on the full year, it will be helpful just to sort of get a sense from you guys to where the key drivers were, you obviously talked about a few different segments in strength. But as you look out in the back half of the year which of those were the biggest drivers of the guidance move and just in that same vein, 3Q looks like there is a scenario where maybe it’s relatively flat or even down, just wondering what would cause that scenario to play out? And then just on the fundamental side, just maybe you can talk a little bit on the DAS venue side, obviously continued success on venue acquisition, I wondering if you can talk a little bit about the success you are getting in terms of multi-carriers early on as you bring some of these DAS venues live? That would be helpful. Thank you.

[David Hagan:]

Thanks, Scott. Pete, why don’t you take the first two and then I will pick up the business side.

[Pete Hovenier:]

Sure, Scott. So, talk on guidance, the key drivers are really the key drivers in the business in general, so which is DAS, military and then wholesale so – and we have talked previously about what you should be thinking for growth of those lines of revenue and we expect DAS to be growing in the 30% on a year-over-year basis, which is up from what we had before in the mid-20s, same thing with military, which we think we will be growing in the 30% range, which we also had previously in the say the 20% range and even wholesale we have started to see more growth on wholesale. And so we are putting that into the 30% range as well. That’s really driving the upward guidance and it’s consistent with what we are seeing in the business overall. As it pertains to Q3 and potentially being down, I think what you can look at there is some conservatism. We are feeling very good about the business. We are being a little cautious on what potentially could happen at the retail and the decline part, but overall we are incredibly bullish. We are seeing great growth across the board and hence the overall guidance increase.

[David Hagan:]

And then on the venue acquisition side, Scott, so yes, we had another great quarter. Last year was our biggest year ever in venue acquisition. Q1 was fantastic. Q2 came in really strong again. We keep telling you guys not to keep expecting those double-digit quarters every quarter, but we will still tell you that, but we have three great quarters in a row. In terms of once we launch, we still – no change there. So, we still typically launch with two carriers. We work hard to start with two carriers occasionally. We will launch with one. If we do that typically, we have carrier number two coming in very quickly on appeals. So, no real change there, it’s still the same strategy and still same approach.

[Scott Goldman:]

Great. And just a quick follow-up I mean, you said sort of not to expect double-digit, so curious what is the pipeline for venue that you are bidding on look like going forward. Have you seen any change in terms of that opportunity set or is still as strong as it’s been?

[David Hagan:]

It’s still really strong. And the reason we caution on the double-digit is we benefited the last three quarters from an individual contract in each of the quarter that will bring us multiple venues. The vast majority of the market is not really built that way is one contract, one big venue. So that’s what we caution about that. But in terms of the number of venues we have our rolling 200 that we have talked about consistently over time. We are always talking to the big 4 carriers on what their priorities are both by market and type of venue. Those discussions continue. So, we feel like we have got a good handle on what they are interested in and we feel like our pipeline is incredibly strong.

[Scott Goldman:]

Great. Thanks a lot.

[David Hagan:]

Thanks a lot, Scott.

[Operator:]

Thank you. The next question is from Anthony Stoss of Craig-Hallum. Please go ahead.

[Anthony Stoss:]

Hi, guys. Nice results. Great execution. On the OpEx side guys, I mean give us what your most recent headcount was – that was up in the prior quarter and your ability to turn a bunch of backlog on the DAS side into revenue. How quickly can you hire to try to turn that also not putting on the spot for 2018 revenue growth, but any kind of view as to what you think either speeding up, slowing down, I just love to hear your thoughts on that? Thanks.

[David Hagan:]

Pete, you want handle the headcount number with 25?

[Pete Hovenier:]

Yes, headcount is about 325 deployed at the end of June.

[Anthony Stoss:]

And up that was what, it’s up.

[Pete Hovenier:]

That was up, I want to say is about on a year-over-year basis about 20 heads and that was really being driven by growth initiatives across the board as we do more in DAS and we are starting to think about small cell.

[David Hagan:]

And then on 2018, we are obviously not giving guidance on 2018. We are very bullish on the business. All the indicators are quite strong as you saw from our Q2, but we will get to 2018 when we give you year end.

[Pete Hovenier:]

Yes, your question on backlog and turn it to revenue and really that materializing. What we have historically said there is take some time between the new acquisition that then winning the carrier and then at launching the carrier than seeing revenue rec. So, what you should be thinking of is on average 18 to 24 months from venue signing to ultimately having a venue live and generating revenue, but that’s not fundamentally changed.

[Anthony Stoss:]

Got it. And then as a follow-up on your WiFi customer number two, any update on when the Android Passpoint will be pushed?

[David Hagan:]

Yes, still same schedule second half of the year. So, we are now in that second half, but we don’t have the specific dates for at this point.

[Anthony Stoss:]

Okay, great job guys. Thank you.

[David Hagan:]

Thanks, Tony. Thank you.

[Operator:]

Thank you. The next question is from James Breen of William Blair. Please go ahead.

[James Breen:]

Thanks for taking the question. Dave, why don’t you just talk about the military side, the opportunity in the DAS and some of the more common areas and how you think from a tiring perspective that could materialize? And then just to clarify, Pete, you are talking about the growth rates in DAS not only wholesale 30%, you are talking about the EBITDA growth rate through revenue?

[Pete Hovenier:]

Yes, Jim, I am thinking revenue growth rates.

[James Breen:]

Okay. I am sorry, what timeframe?

[Pete Hovenier:]

Yes. So, year-over-year revenue growth rates, so think about 2017 as compared to 2016.

[James Breen:]

Okay perfect.

[Pete Hovenier:]

And then on the military, Jim, so we are really stoked about the opportunity that we have on all of these military bases, where we are around 60 bases that we have built out, thousands of buildings and that’s all with WiFi infrastructure. And so we are now looking in discussions with all four carriers for various opportunities. There is WiFi offload opportunity I mentioned in my script that we have got one of the two carriers putting traffic on two military bases. Right now, we are also in discussions with the carriers on small cell deployment typically cell coverage on these military bases is quite weak. So, both from a soldier end user perspective and from the military management, they are very interested in getting better coverage. We also mentioned the new award with MCCS which is the wholesale deal. They are going to be paying us of the build out, but we will become literally hundreds of public buildings with on the military bases. So that can be restaurants and hotels and I think literally it’s everything, rec centers, bowling alleys, you name it, those are places that have typically bad coverage today and we are going to be building WiFi coverage on all those locations. So, the military business will remain very robust. It’s going to be more of a wholesale opportunity in terms of a lot of growth instead of the sub business that we had over the last couple of years.

[James Breen:]

Okay, great. And then just on the margin side obviously you are still billing some beds in the military side, CapEx is coming down to OpEx seemed to be sort of more and so as revenue grows there, how do you see the margin progression happening in military?

[Pete Hovenier:]

So as we have talked about historically so beautiful thing about the military business is the vast majority of our costs are fixed or something, so every new customer on average has about 80 points of contribution margin. So, as we continue to add new customers that incremental customer is highly accretive. So, we continue to see the military line of revenue generating additional free cash flow. As we did say – and Dave just commented on, we don’t expect a lot of additional growth in sub-penetration rate, but we absolutely continue to see a growth.

[James Breen:]

So, as the penetration rates aren’t going up, where is the revenue growth coming from?

[Pete Hovenier:]

Well, we will see some modest growth. There will still be modest growth in penetration rate and then it’s going to be on what we are seeing from new contract and then also we expect some ARPU improvements over time.

[David Hagan:]

It’s been in the overlay of small cell and WiFi offload on the military bases.

[James Breen:]

Okay, perfect. Thank you.

[David Hagan:]

Thanks, Jim.

[Pete Hovenier:]

Thanks, Jim.

[Operator:]

Thank you. The next question is from Mark Argento of Lake Street Capital Markets. Please go ahead.

[Mark Argento:]

Yes. Hi, guys. I just wanted to revisit the military piece little bit quickly about 3,000 subs added, I mean, was there any programs that you ran in Q1 that you didn’t run in Q2 and just maybe drill on that a little bit more? Then also just continue to see some M&A in the space, wanted to get your opinion on guys fires out there, are there any other apps that’s out there that could be complemented for what he does right now?

[Pete Hovenier:]

Yes. On the military front, no special programs Q1 versus Q2. We do consistently over time. We partner with the services, branches of the military and do programs in partnership with them to market the Boingo brand and Boingo service to the soldier base. So, no, big change there. It’s really where we have got most of the build out behind us. So there aren’t large numbers of new beds which are new soldiers coming in as an opportunity to market too. So, it’s going to be slower growth from here on out on the sub front, but it’s a great cash generating business with strong margins. So, that’s why I was saying the future growth in military largely is going to come from wholesale opportunities on top of the incremental sub growth. In terms of M&A, we don’t comment on M&A, obviously there are all sorts of interesting companies potentially out there. We have done some M&A in the past. We have taken the last 3 years off to just make sure we have got the organic growth engine working and that’s obviously working very well. So we are always looking and talking to people, but obviously nothing imminent.

[Mark Argento:]

And could you just quickly remind us of the CapEx model on the small cell side of the house as that ramped up?

[David Hagan:]

Yes. So, it’s still early, but on the CapEx and small cell, we expect to be significantly less than what we have been experiencing from DAS. And the model on small cell deployments unlike DAS will be much more skewed towards recurring access fees versus the upfront build fees. So, I don’t see the CapEx being a profit center, so just the build portion being a large profit center like it is in our DAS business, but there will be incremental CapEx as we started deploying more and more small cell locations. Did that address your question, Mark?

[Mark Argento:]

Yes, all good.

[David Hagan:]

Thank you.

[Pete Hovenier:]

Thanks Mark.

[Operator:]

Thank you. The next question is from Scott [Indiscernible] of Benchmark. Please go ahead.

[Unidentified Analyst:]

Hey, good afternoon. Nice quarter. Just to quickly follow-up on the military front in deploying some of those additional services, I thought you were looking at running some pilots in the not too distant future for small cells. Is that still progressing for the second half of this year in terms of that initial introduction? And then a little bit more on the small cell front, what’s the size and magnitude of the revenue that you are seeing today? Is that kind of being captioned some of the node numbers that you are putting out there and really how big is that opportunity as we start to look out into 2018, 2019, because it really brings you into some, I’ll call, non-traditional venues and where you have historically participated could really grow the addressable pie in terms of what you are doing over the next couple of years and will you report that in your DAS revenue or will that be its own line item?

[David Hagan:]

Let me – I will start and Pete, you can fill in if I miss anything. So, on the other military front, small cell trials, yes, it’s still very active there, so no change going very well. We hope to talk more about that more specifically down the road. From a small cell perspective size of market, you have seen – you probably see the same analyst reports than we do huge opportunity, literally millions of small cells will be deployed over the next several years. So, it’s a massive opportunity. The way we look at it is it’s a market expansion opportunity, venues that in the past wouldn’t have made sense from a CapEx perspective for carriers to spend on DAS. It suddenly makes sense in a small cell world where it’s a lot less CapEx. So, the kind of rule of thumb venue size we are using if it’s a $1 million DAS build or over $1 million dollars, it’s probably for DAS. If it’s less than $1 million, it’s most likely going to go to small cells. So, as we are out talking to venues and doing venue acquisition, we have got a whole suite of services from DAS to small cell to WiFi that we can cover them with. So, it’s another product offering that we can use in venue acquisition. So the size of the market is a little bit tough to call at this point, but you can see from all the carrier activity and you are listening to what the carriers are saying, what the tower cos are saying there is ton of activity in small cell.

[Unidentified Analyst:]

Hey, Dave. One quick follow-up if I could. In terms of the competitive landscape, little bit of different competition on that front maybe then you have historically seen, I am wondering if you could just comment on that. And then just your thoughts on shared spectrum, a lot of talk at the industry level going on in the FCC about CBRS and otherwise, just love to get your high level thoughts in terms of how you are seeing that opportunity really create incremental opportunities through the next couple of years? Thanks.

[David Hagan:]

Sure. Yes, competition really doesn’t change. So, the way we define competition is based on venue acquisition right, because that’s where the point of competition is. So, we are still competing with the same cast that we have talked about in the past. It can be a tower co, it can be a system integrator, it can occasionally be a telco, occasionally be a cable co, so that isn’t changing because of small cells, so no change on that front. In terms of 5G shared spectrum, CBRS, we participate in many if not all of the industry standards groups, our CTO, Derek Peterson is involved with most of those. And so we are participating in trials, we are participating in what’s going on from a FCC perspective at least as part of those organizations and we are very bullish on what 5G will represent for us as an opportunity, 5G, like 4G before, like 3G before it was a major upgrade cycle on all of our DAS networks, CBRS 3.5 spectrum as a part license – part unlicensed structure means that as carriers wanting to play that with us in our venues. Again, that’s an upgrade cycle on the unlicensed side. It’s another network like WiFi is today for us that we can deploy and then have carriers come on to it for offloaded and then other industry players that maybe interested in putting traffic on. So, we are really bullish on what 5G represents for Boingo going forward.

[Operator:]

Thank you. [Operator Instructions] The next question is from Walter Piecyk of BTIG. Please go ahead.

[Walter Piecyk:]

Thanks. Did you say that the reimbursable CapEx was $7.8 million for the quarter?

[Pete Hovenier:]

Yes, it was $7.8 million for the quarter.

[Walter Piecyk:]

Got it. So, when we are looking for the year, I think only Pete, when we have talked about this on prior calls, the thought was that, that was probably going to be at last year’s levels. Maybe I misremembered that, but is there any update on what you think reimbursable CapEx will look like this year?

[Pete Hovenier:]

Yes. And we are not changing that, Walt. So, we do expect this year to be in the same general range as what we had last year, which was about $80 million. So that definitely implies that the second half of the year we go through an increased upgrade cycle and increased building cycle. Year-to-date, I believe we are about $20 million in terms of reversal of CapEx.

[Walter Piecyk:]

Right. So, there is just going to be the slight massive jump, because you are going from 8 to 10, up to like 30 and that they are more depending on when it helps?

[Pete Hovenier:]

Yes. If you look at what we have done over the past call it about four quarters prior, those numbers are not surprising, so way to think about this it’s driven many times by very large scale builds. So in ‘15 and ‘16 in particular, we had two very large builds going on in O’Hare and also at the World Trade Center and we have some other big builds now starting to come. These builds take a little while to materialize. They are lumpy.

[Walter Piecyk:]

So, how does that work then, if you start – if you take record sign-ups on the venues, does it just take time to get the approval to start the building within the venues or because to have that kind of visibility in the second half of the year, because it seems odd to have it like that low for three straight quarters when you have been talking about getting all these venue is just the timing of when you can actually start to get the profits going up the actual venues and sell it?

[Pete Hovenier:]

Because if you think about it so we are talking about builds that are going to happen in the second half of 2017, those are deals that we signed in the second half ‘15, very early ‘16.

[Walter Piecyk:]

So what’s happened in that and what will you do over the years to get ready for those build, why did they a year to start the build?

[David Hagan:]

Yes. So once we get the contract in place with the venue then we reach out to the big four carriers and then it begins the negotiation on who becomes anchor or co-anchors. And that is a not a fast-moving project. We have to make sure were aligned our process. We have to make sure that we are aligned with each carrier’s CapEx budget. So there is a lot of negotiation that goes on, on the front end. The building part, the design build part is the easy part, the negotiation is on the front end, the hard part.

[Walter Piecyk:]

Got it. So when you talking about like record venue signups that’s on the let’s call it the real estate side of it and then there was some time I think where you got this location now you got to deal with all the operators and that takes some time and then you can actually start to build this stuff?

[David Hagan:]

Correct.

[Pete Hovenier:]

Mike I mentioned like earlier on this call, that’s 18 months to 24 months from venue acquisition to ultimately when you start seeing revenue coming in from a carrier.

[Walter Piecyk:]

Understood. So when you talk about very positively about the venues sign up that you have had in the last quarter or so, would that mean in 2018 we should see a similar level of reimbursable CapEx that we have seen in I guess 2016 and ‘17 now?

[David Hagan:]

That’s correct, it’s exactly how it works. So you see this record venue acquisitions that ultimately is going to be turned into increased capital expenditures or DAS builds on those type of venues.

[Walter Piecyk:]

And the only way that doesn’t happen is it basically once a while those operators don’t signup that’s kind of silly, if you got the exclusive there that they would sign up, so the expectation would be it may take some time we are ultimately going to get them?

[David Hagan:]

Correct and one other things that we focus on in our business development process is making sure that we are getting venues that are the types of venues within the markets where the carriers want to deploy capital. So it’s where the carriers tells us that they have network needs that we are cautious about the types of venues that we pursue on the front end.

[Walter Piecyk:]

Got it. One last question on the balance sheet, your receivables last year were in this, were really for 2 years like $40 million or $50 million range on a DSO level that’s like 90 days or 100 days, first half of this year it obviously dropped down significantly, is this the new level for receivable either it’s expressed on an absolute basis is like $28 million or DSOs or do they ever go back up to the $40 million level?

[David Hagan:]

Yes. So I think what you will see is they will continue to creep back up, particularly as we start these larger builds that I referenced they will be happening in the second half of this year. So we think that this $27 million which we of AR we had at the end of June is around the low point. We don’t necessarily see getting back up to the 40s in September reducing and creating backup and somewhere in the 32 to essentially as high as 40 in the next year or so.

[Walter Piecyk:]

Got it. So since you expressed your free cash flow numbers in your press release is based on operating cash flow which includes those working capital moves, did that have any impact in your outlook for the second half as far as your ability to generate free cash flow?

[David Hagan:]

We are still very confident in our ability to generate positive free cash flow and if you look at this quarter in particular for example, AR between June – hopefully for the June quarter AR went down about a little over $1.1 million but our positive free cash flow was $7.4 million. So we are still, it’s the health of the business that is generating positive fee cash flow, increased AR collections absolutely helps but that’s just more timing.

[Walter Piecyk:]

Great. And you had some accrued expenses which helped by like $28 million right?

[David Hagan:]

It does but that’s also to that’s going to be future CapEx expenditures which will be tied to when we get carrier payments coming in.

[Walter Piecyk:]

Got it. Thank you very much.

[David Hagan:]

Great. Thanks Bob.

[Operator:]

Thank you. Our next question is from Timothy Horan of Oppenheimer. Please go ahead.

[Timothy Horan:]

Thanks guys. I have about two dozen but I will keep to like for a year maybe just looking at your balance sheet and the operating leverage that you are generating, why aren’t you taking on more debt and accelerating business model to like the next five versus kind of incredible opportunity out there and it looks also like a tower model to me?

[David Hagan:]

Yes. I mean that’s certainly available to us. We have a credit line currently you see we have been actually paying down each quarter as we are generating more cash flow, but it’s certainly available. And if we feel the need that we need more debt on the balance sheet, we think it’s slowing down anyway that’s certainly available to us. Do you want to add to that Pete?

[Pete Hovenier:]

Yes. I think the main thing there Tim is we think about the capital allocation in just overall. We feel like adding some more debt to the balance sheet allows us to grow significantly faster, that’s something we are open to. But at this point in time, we have almost $65 million available on our line of credit. That is ample for our needs in the near-term.

[Timothy Horan:]

Alright. Just two more quick ones, so military it’s impossible for us to outside, we think this could be a 10% growth business in the next few years 5% I know you don’t know yourselves exactly, but how – maybe how you are thinking about it?

[David Hagan:]

Yes. So the way I am modeling it on a go forward basis, I am doing in the low single - low double-digits so that would be north of 10.

[Timothy Horan:]

Great. And then it looks like the stuff is converging so rapidly, the unlicensed spectrum, the license spectrum in the WiFi with the LTE, do you have any build outs where you have done kind of joint LTE WiFi for the carriers and on these military bases what’s the carrier’s optimal choice why wouldn’t they just use WiFi that’s working fine as supposed to small cell, like how are they making these decisions, I know it’s complex and we are just here for the first time?

[David Hagan:]

Actually, we have about a third, correct me if I am wrong Pete. About a third of our venues we have both DAS and WiFi and are our core strategy when we go to market meaning when we go to the venues to get the wireless rights is we try to get license and on license rights doesn’t always happen, but we do that frequently and so about a third of our venues have both. We also have carriers one on two in both types of venues. One where they don’t have a DAS and so they are only on WiFi, but also where they already have DAS they want to argument the DAS with WiFi, so the fundamental answer to your question is with mobile data growth growing at the rate that it’s growing, the carriers really need to use all available potential capacity to solve the network congestion. That’s why you see so much interest going on around 5G, that’s why you see suddenly bands that were not viewed very positively, not very long ago like 3.5. Suddenly, incredibly interesting with the carriers, because there is insatiable appetite for increased bandwidth, so we benefit from that with technology agnostic. We do both license and unlicensed. So either way you will partner with the carriers to help them solve that problem.

[Timothy Horan:]

I think that’s really…

[David Hagan:]

Sorry Tim, I would say that’s really important point is think about it. We really want to be venue specialists. So if a carrier wants to use WiFi to venue or if they want to use [indiscernible] or they want to use LTE, we want to be there to supply them with what they need at that location and our rights give us the ability to do that.

[Timothy Horan:]

That makes perfect sense and like the hotels it just makes perfect sense why would you have to vendor in there, why don’t to you just have one guy operate the infrastructure and I guess as anyone else operating all the infrastructure like you guys are doing?

[David Hagan:]

It’s pretty rare to have the DAS and the WiFi capability in one company. Most of our competitors that we talked about whether it’s tower cos or system integrators they have been doing cellular networks of various types, DAS specifically for a long period of time but very few of them have the deep domain experience in both licensed and unlicensed, it’s one of our key benefits.

[Timothy Horan:]

Thank you.

[David Hagan:]

Thank you.

[Operator:]

Thank you. There are no further questions in the queue at this time. I would like to turn the conference back over to Mr. Hagan for closing comments.

[David Hagan:]

Thanks everyone for your questions and interest in Boingo. We will be presenting at Oppenheimer’s 20th Annual Technology Internet and Communication Conference next week in Boston. We look forward to speaking with you soon. Thank you.

[Operator:]

Thank you. Ladies and gentlemen, this concludes today’s teleconference. You may disconnect you lines at this time. And thank you for your participation.