Boingo Wireless, Inc.
Q1 2016 Earnings Call Transcript

Published: 7 May 2016

[Operator:]

Greetings and welcome to the Boingo Wireless First Quarter 2016 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. At this point, I'd like to turn the conference over to your host, Ms. Kimberly Orlando of Addo Communications. Thank you, Ms. Orlando, you may begin.

[Kimberly Orlando:]

Thank you and welcome to the Boingo Wireless first quarter 2016 earnings conference call. By now, everyone should have access to the earnings press release, which was issued today at approximately 4 o'clock PM 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 it is available for replay. In our remarks today, we will include statements that are considered forward-looking within the meanings of securities laws. 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, May 5, 2016 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 year ended December 31, 2015 filed with the SEC on March 11, 2016. 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 flow 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 investors section of our website at www.boingo.com. And with that, I'll hand the call over to Boingo's Chief Executive Officer, David Hagan.

[David Hagan:]

Thanks, Kim. Good afternoon everyone and thanks for joining us today. I'm pleased to report that Boingo's momentum continues and once again, we delivered very strong quarterly performance. Our first quarter revenue grew 17.4% year-over-year to $34.5 million, which is near the high-end of our guidance range. This represents the sixth consecutive quarter of double-digit year-over-year revenue growth and the ninth consecutive quarter of reporting revenue at the high-end or above our guidance range. Adjusted EBITDA for the quarter grew 61% year-over-year to $5.1 million, which exceeded the high-end of our guidance range and demonstrates the increasing operating leverage in the business. It's our third consecutive quarter of year-over-year EBITDA margin expansion and as we shared last quarter, we expect to generate positive free cash flow in the second half of this year. These strong financial results reflect focused execution against our long-term strategy to leverage exploding mobile data growth by investing in high density wireless networks and monetizing those networks through innovative products such as DAS, Military Broadband, and Carrier Offload. So with that in mind, let's dive into some of the highlights for the quarter starting with DAS and Offload. According to the Cisco Visual Networking Index, mobile data traffic will increase nearly eightfold over the next four years and this strain can't be solved by macro network capacity upgrades like 4G or 5G alone. The solution requires high density, small cell networks in places where people congregate and tower signal struggle to penetrate. That's why our focus remains on large scale indoor venues like airports, stadiums, arenas, and military bases. We continued our strong momentum with DAS by signing 12 DAS carrier contracts in the first quarter. We're particularly excited to announce that all four Tier 1 carriers have signed on to the World Trade Center in New York City, our largest DAS network. We now have 30 DAS venues deployed with 12,500 DAS nodes live representing nearly 15% growth over the prior quarter and 40% growth over the first quarter of 2015. Even with this accelerating rate of deployment, our pipeline still grew to an additional 5,200 nodes. Based on these numbers, we believe we're the largest operator of indoor DAS networks in the US. The strength of DAS demonstrates the ongoing macro trends towards network densification as a way to keep up with the exponential data demand. Alan Law, Chairman of the Small Cell Forum recently told Fierce Wireless that he expects the densification story to really accelerate in 2016 and our experience is consistent with this observation. The next natural extension of DAS is small cell and we're very pleased to announce we've begun small cell market trials with two Tier 1 carriers. Small cells act as an extension of the macro cellular network by providing coverage and capacity to smaller or more focused areas. Deploying the small cell networks in lieu of a full DAS deployment can be a game-changer in smaller venues or where the economics of a DAS deployment maybe challenging. These market trials are enabling us to test two different OEM solutions and understand the implications for how small cells become part of our product portfolio going forward. We intend to share more details with you as they emerge. In addition, we continue to be at the forefront of emerging technologies like MulteFire. MulteFire is a LTE-based technology for small cells operating solely in unlicensed spectrum initially targeting the 5 gigahertz band. MulteFire is an important step toward co-existence and convergence of licensed and unlicensed spectrum and we are actively engaged with the MulteFire Alliance's work in defining interoperability and co-existence specifications. It was just about a year ago that we announced our first carrier offload deal with Sprint and over the past 12 months, we've worked together to extend carrier offload at the size and scale no other carrier in the world is doing. We have learned a tremendous amount about delivering carrier grade Wi-Fi networks that are capable of seamless handoff whether its data or voice. We continue to be in active discussions with other carriers and cable companies and expect to sign with another Tier 1 carrier over the summer. We have active negotiations going on with multiple parties. So the interest is high. So, as we've discussed, progress with carriers always takes time. We continue to work with Sprint to certify additional venues on which to put their traffic and we're seeing nice usage growth on our network. We are delivering 40 megabits per second on average to Sprint customers in our Passpoint certified networks, which is a dramatic improvement over what any of the carriers can deliver over 3G and 4G networks in these venue environments. Turning to our military product, Boingo Broadband is now live on 51 bases covering more than 250,000 beds. In Q1, we launched 6,000 beds at two new and five existing bases, which is right on plan. We finished the quarter with 69,000 subscribers and our subscriber penetration rate was up to 27.6% from 23.4% at year-end. As you may recall, we had a number of bases launched right at the end of 2015, which had a dilutive effect on our overall penetration last quarter. So we're very pleased with these results, which show we have not only caught up to but surpassed our prior penetration rate. In addition, the deployment has been going extremely well for our first international bases, which we intend to launch in Japan at the end of Q2. We're also encouraged by the fact that our presence on military bases represents an opportunity to overlay wholesale business as well, as we've seen interest from carriers for both Wi-Fi offload and small cell deployments on the military bases. These are future revenue opportunities that show the power of our venue-focused multi-product monetization platform. And speaking of wholesale, we are very pleased to share that Comes with Boingo program continues to expand. As many of you know, Comes with Boingo is a repackaging of our traditional retail Wi-Fi product sold as a member benefit or perk to payment card companies, service providers, and device manufacturers. We've recently signed, but not previously announced a significant new Comes with Boingo deal that has the potential to reach millions of consumers as the program is rolled out globally. We'll have more to communicate about this partnership once the brand is ready to launch later this year. The Comes with Boingo subscriber growth is really compelling because the product is identical to our retail Wi-Fi product, it's just that the billing party is a partner rather than the consumer. So, if you combine our Comes with Boingo and retail subscribers, the story is not one of subscriber decline, but rather significant growth. We now have more than 500,000 consumers with a Boingo subscription and we expect this to continue to grow with the increase that Comes with Boingo partners. All-in-all, we're extremely pleased with our first quarter results, which reflected six straight quarters of year-over-year double-digit revenue growth, three straight quarters of year-over-year EBITDA margin expansion, and after several years of strategic investment, every indication we expect to be cash flow positive in the second half of 2016. We continue to deliver great traction on DAS in our military business. Carrier offload continues to grow and we're excited by the prospect of a second carrier signing on over the summer. We're energized by the small cell trials taking place with two carriers and we're very excited by the expansion of our subscription Comes with Boingo product. With that in mind, let me turn it over to Pete Hovenier, our CFO for a detailed look at our first quarter financial results. Pete?

[Peter Hovenier:]

Thanks, Dave. I will begin by reviewing our financial results and key operating metrics for the first quarter ended March 31, 2016 and will conclude with financial outlook for the second quarter and full year 2016. Total revenue for the first quarter was $34.5 million representing a 17.4% increase over the prior year period. The increase reflects strength in military, also Wi-Fi and DAS revenue, which was partially offset by decline in advertising and other and retail revenue. Across our diversified revenue streams, DAS represented 32% of first quarter revenues, military was 27%, retail was 20%, wholesale Wi-Fi was 14%, and advertising and other accounted for the remaining 7%. This compares to the first quarter of 2015 in which DAS represented 33% of revenues, military was 12%, retail was 30%, wholesale Wi-Fi was 14%, and advertising and other accounted for the remaining 11%. In terms of total revenue contribution by category, DAS revenue for the quarter totaled $11.1 million representing a 15.7% increase over the comparable period last year. The improvement was primarily related to increased revenues from the new DAS build-out projects coupled with increased access fees from our telecom operator partners. In the first quarter of 2016, DAS build-out project revenue was $7 million and DAS access fee revenue was $4.1 million. Military revenue was $9.1 million representing an increase of almost 160% versus the prior year period primarily due to increased subscribers and single-use customers coupled with increased average monthly revenue per subscriber. Our military network now covers 250,000 beds representing an increase of 6,000 beds as compared to the fourth quarter of 2015 and approaching our total addressable market of 300,000 beds. Penetration levels of 27.6% for the quarter were also in line with our updated expectations. Retail revenue was $6.9 million representing a 20.6% decline over the prior year period. The decrease was primarily due to a decline in our retail subscriber base and average monthly revenue per subscriber coupled with reduced retail single-use revenue. However, while retail revenues have continued to be negatively impacted, we are still able to monetize these bolt-on customers through our wholesale Wi-Fi service offerings, which we have been experiencing strong growth. Specifically, our Comes with Boingo program and Wi-Fi offloading agreement with Sprint. Also, Wi-Fi revenue was $4.9 million representing an 18.4% increase over the prior year period primarily due to increased partner usage based fees, based on fees driven by our agreements with Sprint and American Express. Advertising and other revenues were $2.4 million representing a 28.2% decrease over the prior year period primarily due to a decline in the number of premium ad units sold during the quarter. Now, turning to our costs and operating expenses. Network access cost totaled $14.7 million representing a 7.7% increase over the first quarter of 2015. The increase was primarily due to higher depreciation, bandwidth, and increased revenue share paid to our venues. This was partially offset by a decrease in customer usage based fees at our partner networks. Gross margin, which is defined as revenue plus network access cost, was 57.5%, up 380 basis points from the prior year period, which was the third consecutive quarter of year-over-year gross margin expansion of more than 150 basis points. As previously stated, our fastest growing lines of revenue, military and carrier offload are helping to steadily increase our gross profit margin. Networks operation expenses totaled $10.5 million, an increase of 30% in the comparable 2015 quarter primarily due to increased depreciation, personnel-related, and consulting expenses. Development and technology expenses were $5.4 million, an increase of 27.7% from the prior year period also due primarily to higher depreciation, personnel-related, and consulting expenses. Billing and marketing expenses were $4.7 million, a 5.7% increase in the comparable 2015 quarter primarily due to increased personnel-related expenses as a result of increased headcount. General and administrative expenses were $8.2 million, a 39.8% increase in the comparable 2015 quarter primarily due to increased personnel-related expenses, which is inclusive of stock-based compensation as well as increased professional fees. Now turning to our profitability measures for the quarter. Net loss attributable to common stockholders was $10 million or $0.27 per diluted share versus a net loss of $7.9 million or $0.22 per diluted share in the prior year quarter. Adjusted EBITDA was $5.1 million, an increase of 60.8% to the comparable 2015 quarter. Now turning to our key metrics. The number of DAS nodes on our network for the first quarter was 12,500, up 40.4% from the prior year quarter and up 14.7% from the fourth quarter 2015. The number of DAS nodes in backlog, which represents the number of DAS nodes under contract but not yet active as of the end of the first quarter was 5,200, up 13% from the prior year period and up 6.1% from the fourth quarter of 2015. The average number of carriers per DAS location at the end of the first quarter was 2.3, which was down from 2.7 in the prior year quarter. This was an expected decrease as we continue to deploy new DAS venues at a rapid pace over the past year, which typically initially launch with only one or two carriers. That said, if you look at the average number of carriers per DAS locations and venues that been alive over three years, it was 3.2 at the end of the first quarter, which was up from three in the prior year quarter. Our military subscriber base was 69,000 subscribers in the first quarter, 115.6% increase versus the prior year period and a 21.1% increase from the fourth quarter of 2015. Our retail subscriber base was 187,000 subscribers at the end of the first quarter, which was down 20.4% from the prior year period and down 8.3% from the fourth quarter of 2015. Connects or paid usage on our worldwide network was approximately $30.4 million, up 33% from the prior year period and up 5% from the fourth quarter of 2015. Moving on to discuss our balance sheet. As of March 31, 2016, cash and cash equivalents totaled $14.7 million, which was essentially the same as our balance at December 31, 2015. Total debt was $26.3 million and we had approximately $49.8 million available on our credit facility as of March 31, 2016. Capital expenditures were $45.5 million for the first quarter, which included $34.8 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 military based networks, managed and operated network upgrades, and various infrastructure upgrades and enhancements. Free cash flow was a negative $4.5 million for the first quarter versus negative free cash flow of $4.1 million during the first quarter of 2015. We define free cash flow as net cash provided by operating activities less purchases of property and equipment. I will now turn to our outlook for the second quarter and full year of 2016. For the second quarter ended June 30, 2016, we are initiating guidance as follows. We expect total revenue to be in the range of $37.5 million to $40.5 million. Adjusted EBITDA to be in the range of $7.5 million to $9.5 billion, and net loss attributable to common stockholders to be in the range of $9 million to $7 million or a loss of $0.24 to $0.19 per diluted share. For the full year ended December 31, 2016, we are reiterating our guidance as follows. We expect total revenue to be in a range of $158 million to $164 million representing year-over-year growth of approximately 15.3% at the midpoint of our guidance range. Adjusted EBITDA in the range of $38.5 million to $42.5 million, which implies a EBITDA margin of 25.2% and 4 points of the EBITDA margin expansion at the midpoint of the range and net loss attributable to common stockholders to be in a range of $30 million to $26 million or a loss of $0.79 to $0.68 per diluted share. We will maintain our tax valuation allowance established in the fourth quarter of 2013, and as such, do not expect to accrue material tax benefits or tax expenses on our income statement through 2016. We continue to expect a nominal full year tax rate as well as fully diluted shares outstanding of approximately 38 million. Furthermore, our non-reimbursed capital expenditure budget remains unchanged at approximately $35 million to $40 million for the year, which is inclusive of $15 million to $20 million to support the remainder of our military base network buildout. In summary, our first quarter financial results reflect the significant progress we've made over the past few years as we executed on our strategic business plan to deliver improved growth and revenue, adjusted EBITDA, and margin expansion. We've invested heavily in building out our high density wireless networks including DAS and Wi-Fi networks, and believe we are well positioned to capitalize on these investments and continue our positive momentum throughout the year and beyond. With that, I'll turn it back over to Dave for closing remarks.

[David Hagan:]

Thanks, Pete. In summary, Q1 was another strong operating quarter for the Company. We believe we're very well positioned to continue our strong revenue and margin growth for years to come. With that, I'd like to open the call for questions. Operator?

[Operator:]

[Operator Instructions] The first question is from James Breen of William Blair. Please go ahead.

[James Breen:]

Thanks for taking the question. Just a few on the expense lines this quarter, the non-cash comp stepped up quite a bit from the year-over-year period. Can you just talk about how you see that trending throughout the year. Is that more of a seasonal high in the first quarter and then additionally, as you sort of look at some of your expense lines, the G&A was up quite a bit from the fourth quarter to the first quarter, can you just talk about how that trends, because obviously we saw and I think you'd said, you would need about a third of your EBITDA in the first half of the year and two-thirds in the back half. So that would imply that some of the expense margins would improve in the back half of the year and I have a follow-up. Thanks.

[David Hagan:]

Thanks for the question, Jim. Pete, why don't you take that one?

[Peter Hovenier:]

Absolutely. So, Jim, the first thing that you touched on was stock-based comp, and yes, it did step up and that is a trend that will continue throughout 2016. So when we did the larger grants recently that were three-year grants for 2016, 2017, and 2018, we're amortizing three years worth of stock-based comp over this three-year period, but there will be no new grants in 2017 and 2018 and so as the prior grants roll off, you'll start to see stock-based comp be reduced in 2017 and 2018. So think of it as bringing some expense forward in 2016, but over the three-year period, it'll be substantially the same.

[James Breen:]

Okay. And then just on some of the other expense items like G&A and network operating costs were up in the quarter?

[Peter Hovenier:]

Yes, so in G&A, stock-based comp was the biggest piece. The other was -- we always have larger audit fees in Q1 in G&A and then of course, we had some additional legal and professional fees that happened in Q1, which we'll see some in Q2, but then that was in the later half of the year. In terms of network ops, it was really headcount as we continue to deploy at bases.

[James Breen:]

And so as you deployed a lot of beds obviously in the fourth quarter and so that cost starts to roll over into the first, you've seen networks ops continue to move up a little bit more throughout the year, but not nearly the step up that we've seen over the last couple of quarters?

[Peter Hovenier:]

Yes, it's going to trend up slightly, but the bulk of it you already saw. So Q1 was a step-up and you'll see slight trends throughout the balance of the year.

[James Breen:]

Great. And then just on the revenue items, advertising was obviously down quite a bit year-over-year. We are going to sort of see at this level now sort of the $2 million to $2.5 million level going forward as more -- but prior to this, you were sort of catching the retail roll-off in advertising? Are you catching more of that in wholesale now?

[Peter Hovenier:]

We're catching more in wholesale, but the other thing to remember is Q1 is our lightest quarter. So while we saw the $2 million, $2.5 million range that you talked about it in Q1 of this year, if you looked at what happened last year, Q1 was around, I believe it was $3 million in Q4, stepped up to around $4 million. So you'll see Q2 step up in Q1 and Q3 step up a bit more than Q4 being the strongest. So for the full year, we're expecting advertising to be about flat.

[James Breen:]

Okay. Great. And then just on sort of the two larger growth areas, military and DAS, on the military side you added 69,000 subs, you are at 250 now in terms of beds. How do you see the beds coming on to get to that 300 number throughout this year?

[David Hagan:]

So, we are building as fast as we can. We are trying to bring as many in forward, but it's going to take the balance of the year just giving the base rollout schedules that we've worked out with the military. So, it's not to be as back-end loaded like it was the last couple of years, but think of it as pretty equal over the balance of the year.

[James Breen:]

And so, do you still anticipate the CapEx will sort of peak in the second quarter and start to come down and as such turn the free cash flow in the back half?

[David Hagan:]

So CapEx will meet -- when we think about our non-DAS CapEx, which we've said previously of between $35 million and $40 million for the full year. So think of it as almost about $10 million a quarter of non-DAS CapEx. We're trying to bring some more into Q2 that may or may not happen. It depends on the time frame with the military, but about free cash flow, it's much less about the CapEx rolling off, it's much more about becoming free cash flow from the incremental leverage and the incremental revenue that we get from our customers specifically the military and offloading customers and you noticed our 380 basis points of margin expansion this last quarter. That's the sort of thing that's driving the visibility to free cash flow. We will see much more free cash flow in 2017 as the military build is complete, but this year the free cash flow is really driven more from what you see from margin expansion.

[James Breen:]

It's really scaling of the business, right? So scaling of the business in 2016 is driving that margin expansion and ultimately neutral on cash flow and then you'll see a nice step up in 2017?

[David Hagan:]

I think we've talked about this in the past. When you think about a new customer coming on, the incremental cost to add a new military customer for example is only about 20 points of variable cost. So 80% incremental EBITDA contribution for every new customer, and that's the power of the leverage of the model.

[James Breen:]

Okay. Great. And then just on the trends in the military in general, ARPUs were up over $3 sequentially. Can you just talk about what the soldiers are taking in terms of plans and how do you expect that to continue going forward?

[Peter Hovenier:]

Yes, it was nice improvement. I don't see a dramatic change from where we are today. We are seeing our soldiers skewing slightly towards our larger products. We have two main plans, a $30 a month plan for five megs throughputs and a $50 a month plan for 30 megs of throughput and so the guys are skewing towards the larger plan, but I don't expect to see $3 of ARPU change next quarter for example.

[James Breen:]

Great. Thank you.

[Operator:]

[Operator Instructions] The next question is from James Moorman of D.A. Davidson. Please go ahead.

[James Moorman:]

Thanks. In terms of the Sprint contract, it sounds like you're adding more sites, but I know in terms of adding -- getting to that 40 million handsets, I know that's kind of the some of the prepaid brands, but I know there's some kind of a shake up with those brands and they are re-doing the Virgin brand. Does that have any impact on the pace that, that might happen? And then could you add any details because it sounds like before you were kind of saying the second carrier might be spring or early summer and now it sounds like a little bit later and is it just typical carriers taking a little longer or just any more insight would be great? Thanks.

[David Hagan:]

Sure. Thanks, Jim. So on the first one on how do we get to 40 million? There's been no change in what's going on there. That's the agreement that we signed with Sprint. I'm not going to provide more specifics at their request on sort of timing on how that all rolls out, but traffic on the network is very strong. We continue to work with them to certify additional networks. Just recently, we put them on to Philips Arena in Atlanta where the Hawks play. So, we continue our work with them. So really no change from that perspective. Regards timing of carrier number two, again no news there. Incredible amount of discussion, negotiation going on with multiple carriers. We're still very bullish on the prospects and we still hope to close here in Q2 on carrier number two. So no change there.

[James Moorman:]

Perfect. Thanks.

[Operator:]

Thank you. That is all the time we have for questions. Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day.