Boingo Wireless, Inc.
Q3 2016 Earnings Call Transcript

Published: 4 Nov 2016

[Operator:]

Greetings, and welcome to Boingo Wireless Third Quarter 2016 Earnings Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to Kim Orlando with Investor Relations. Thank you, Ms. Orlando, you may begin.

[Kim Orlando:]

Thank you, and welcome to the Boingo Wireless third quarter 2016 earnings conference call. By now, everyone should have access to the earnings press release, which was issued earlier 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, November 03, 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-Q for the quarter ended June 30, 2016 filed with the SEC on August 08, 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 investor relations 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 am pleased to announce Boingo has delivered another strong quarter, and we are excited to share our results, starting with the fact that we hit a very significant milestone this quarter. When we began the year, we stated that we expected to be cash flow neural for 2016 and we would begin generating positive free cash flow in the second half of the year. So I am very pleased to share that we hit that milestone by generating $10.1 million in free cash flow for the third quarter. Since we consumed approximately $9 million in cash during the first half of the year, we are now free cash flow positive for the first nine months of 2016. We believe achieving this important milestone validates the strength of our business model and our ability to execute on our strategy. To better put this into context, it's important to understand how our business has transformed over the last three years. In 2013, we laid out a strategic plan for the company to leverage the exploding growth of mobile data. Our plan was to invest in high density wireless networks inside large venues and then to monetize those networks through innovative products such as DAS, military broadband and, carrier offload. Since 2013, we have invested significant capital in the build out of our high density wireless networks, and we are seeing this strategy pay off both in terms of revenue, where we have delivered seven out of eight quarters of double-digit revenue growth as well as margin growth where we have delivered five straight quarters of year-over-year EBIDTA margin expansion. I would be remiss if I didn't give a shout out to the team of Boingo who delivered some amazing accomplishments over the last three years. For starters, we have launched 18 new DAS venues, which more than doubled our DAS network and have built or upgraded over 100 carrier networks, which we believe makes Boingo the largest provider of indoor DAS in the U.S. The team also launched high speed Wi-Fi and IPTV service on more than 50 military bases. To-date, this project encompasses more than 62,000 access points and 1,700 buildings. To put that into perspective, that's the equivalent of building out more than 182 airports besides the Chicago O'Hare in less than three years; pretty incredible. Speaking of airports, the team also launched Wi-Fi offload with two Tier 1 carrier partners, which we believe represents the world's first large scale carrier offload program. These are all remarkable accomplishments. So now we had a chance to discuss these milestones, let's dive into the quarter in more detail. I am pleased to report that Boingo's momentum continues and once again we delivered strong revenue growth of 9.7% year-over-year to $40.8 million, adjusted EBIDTA for the quarter grew 36.5% year-over-year to $11.6 million which was at the high end of our guidance and demonstrates the increasing operating leverage of the business. In addition to the free cash flow milestone, we had a number of other successes in the quarter including DAS carrier offload and military. Now let me share some of the highlights. First we continued our strong momentum with DAS by signing eight new venues which makes this the largest quarter for new DAS venues in the history of Boingo. In addition our pipeline is very robust with several major deals in the final stages of negotiation. As I shared with you, last quarter, based on what we have achieved year-to-date, combined with our visibility into Q4 we believe that 2016 will be strongest venue acquisition year in Boingo's history. We now have 35 DAS venues deployed and 17,700 DAS nodes live representing 31% growth over the prior quarter and 72% year-over-year. We have an additional 5,200 nodes in the pipeline. It's compelling to note that even though we had a very large quarter, in terms of nodes deployed, we actually grew our backlog. This is an example of the velocity that we are experiencing in our DAS business. In terms of carrier acquisition on a DAS networks, we more doubled the number of carrier contract signed in Q2 by closing 17 Tier 1 carrier agreements in Q3. This brings our total year-to-date to 37. The strength of our DAS business demonstrates the ongoing macro trend towards network densification as a way to keep up with the exponential data demand. The next natural evolution of DAS are small cell networks which act as an extension of the macro cellular network, by providing coverage and capacity to smaller or more focused areas. Deploying small cell networks in lieu of a full DAS deployment could be a game changer in small venues over the economics of the DAS deployment maybe challenging for the carrier which increases our overall opportunity. Tom Keathley, AT&T's SVP of Wireless Network Architecture and Design said in a recent interview that small cells will see an uptick in deployment as LTE networks continue to evolve to include unlicensed spectrum as well as the means of adding site density ahead of 5G. He noted "The small cells you are seeing deployed today are really laying the foundation for what we will do in 5G. The work is happening right now. We are going to be able to use sites for 5G as well. It's going to be evolutionary, but it really starts today." So it's clear that small cells are going to be foundational to the carriers for 5G and we have an important role to play in helping build on that foundation. To that point, we have been in small cell market trials with Tier 1 carriers, and I'm pleased to share that we've now moved one of these trials into full market deployment. We are now live with the small cell networks for Tier 1 carrier with the Donald E. Stephens Convention Center in Rosemont, Illinois; our first commercial small cell network. We are also in discussions with multiple carriers looking to partner with us to replace small cell networks as part of their network densification strategies. We expect small cell network deployments will play a vital role in our strategy moving forward. Before I take it away from DAS and small cell, I want to give a quick update on carrier offload. As I shared with you on the last call, we are live in offloading traffic with our second Tier 1 carrier now at three airports, and expect this will allow to continue into 2017. We anticipate an acceleration of this carrier's offload traffic in 2017 as our full airport footprint has enabled, and today enable pass point across their handset base. We are very encouraged by the early results and we clarify more color on our 2017 rollout plans on our next call. Turning now to our military product, we are now live on 55 bases covering more than 286,000 beds at army, air force, and marine bases around the country, as well as Japan. We finished the quarter with 86,000 subscribers, which translate into a subscriber penetration rate of 30.1%. This is an increase of 1.3 percentage points over Q2. We are really pleased with the growth we are seeing in this business as the 30% penetration rate reflects the entire footprint of basis, including brand new basis we just launched to more matured basis where penetration exceeds 50%. It also reflects the different penetration rates we see based on the unique attributes of the base, such as its competitive set, whether it's based in urban or rural, or whether the base is used primarily for training or long-term housing. The other thing to keep in mind is that with the highly mobile user base, subscriptions are only part of the story. We do a very robust transactional business for customers in short-term solution for service. So when we think our user base, we factor in both subscribers as well as transactional customers. No matter what type of base we are marketing to, we are focused on driving growth in unique ways, and the industry is starting to take notice. Cablefax recently named Boingo as Marketing Team of The Year for our work with the military, and we are excited to keep the momentum going. So all in all, we are extremely pleased with our Q3 operating results. Now, let me turn it over to Pete Hovenier, our CFO, for a detailed look at our third quarter financial results. Pete?

[Pete Hovenier:]

Thanks, Dave. I'll begin by reviewing our financial results and key operating metrics for the third quarter ended September 30, 2016, and we will conclude with financial outlook for the full year of 2016. Total revenue for the third quarter reached a record 40.8 million, and increased 9.7% from the prior year period. Revenue growth reflected strengthened DAS, military, and wholesale Wi-Fi, while was partially offset by declines in both retail and advertising and other revenue. As a percentage of third quarter revenues across the diversified revenue streams, DAS represented 39%, military is 25%, retailers 16%, wholesale Wi-Fi is 15%, and advertising and other accounted for the remaining 5%. This compares to the third quarter of 2015, in which DAS represented 35% of revenues, retailers 21%, wholesale Wi-Fi and advertising were each at 15% and military accounted for the remaining 14%. In terms of total revenue contribution like category for the quarter, DAS revenue was 16 million, representing a 21.4% increase over the comparable period last year. Total DAS revenue comprised of 10.8 million of build up project revenue, and 5.2 million of access fee revenue. For year-over-year improvement, total DAS revenue was primarily related to increased revenues from new DAS build up projects coupled with increased access fees from telecom operated departments. Military revenue was 10.1 million, representing an increase of 92.8% versus the prior year period, primarily due to increased subscribers and single used customers coupled with increased average monthly revenue per subscriber. Our military network now covers 286,000 beds, representing an increase of 12,000 beds as compared to the end of the second quarter 2016, and very close to our goal of 300,000 beds. Our penetration rate also improved to 30.1% for the quarter, which was in line with our expectations. Retail revenue was 6.6 million, representing a 14.6% decline over the prior year period. The decrease was primarily due to a decline in our average monthly revenue per subscriber, and our retail subscriber base in addition to reduce retail single use revenue. However, for the first quarter in over two years we were able to grow retail revenue by nearly a percent over the previous quarter due to a slight increase in our retail subscriber base. More importantly though we expect retail revenues will continue to decline year-over-year as we are able to monetize these customers to our whole Wi-Fi service offerings, specifically [indiscernible] agreements. Wholesale Wi-Fi revenue is 5.9 million, representing an increase of 8% over the prior year period, primarily due to higher partner usage base fees, which were partially offset by decrease in our wholesale service provider revenues. As Dave mentioned, our carrier offloading agreements with two Tier 1 carriers continues to ramp while we plan to provide additional color on our 2017 expectations for this revenue steam in our fourth quarter call. Advertising and other revenue is 2.2 million, representing a 60.7% decrease over the prior year period, primarily due to a 66% decline in the number of premium ad units sold during the quarter, as compared to the prior year period. In addition to the changing dynamics in the digital ad space in general our Boingo Group has been challenged by high employee turnover by small ad sales team, and thus reduced productivity which has severely impacted our sell-through. While it will absolutely take some time for us to navigate these challenges, we remain optimistic in our ability to monetize our premium advertising inventory. Now, turning to our cost and operating expenses, network access cost totaled $18 million a 2.7% over the third quarter of 2015, primarily due to increased depreciation, bandwidth and high revenue share paid to our venue partners. The increase is partially offset by a reduction in other direct costs. Gross margin which is defined as revenue less network access costs was 55.9% up 300 basis points from the prior year, driven primarily by the rapid growth in military, our fastest growing line of revenue. This marks our fifth consecutive quarter of year-over-year gross margin expansion of more than 150 basis points. The network operations expenses totaled $10.7 million an increase of 35.2% over the comparable 2015 quarter, primarily due to higher depreciation and personnel related expenses. Development and technology expenses were $5.4 million an increase of 7.9% in the prior year period also due primarily to higher depreciation expenses. Selling and marketing expenses were $4.6 million representing a decrease of 5% in comparable 2015 quarter, the decline was due primarily to decreased personnel related expenses. General and administrative expenses were $6.7 million a 22.5% increase from the comparable 2015 quarter also primarily due to increased personnel related expenses which are inclusive of stock based compensation. Now I will turn to our profitability measures for the quarter. Net loss attributable to common stockholders was $5.7 million or $0.15 per diluted share versus a net loss of $4.8 million or $0.13 per diluted share in the prior year quarter. Adjusted EBITDA was $11.6 million an increase of 36.5% for comparable 2015 quarter. As a percent of total revenue, adjusted EBITDA was 28.4%, up from 22.8% of revenue in the comparable 2015 quarter. The third quarter marks our fifth consecutive quarter of year-over-year EBITDA margin expansion. Now turning to our key metrics, the number of DAS nodes on our network for the third quarter was 17,700 up 71.8% for the prior year period and up 31.1% from the second quarter of 2016. 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 third quarter were 5,200, up 6.1% from the prior year period and up 4% from the second quarter of 2016. Our military subscriber base was 86,000 subscribers at the end of the third quarter an 87% increase versus the prior year period and 8.9% increase from the second quarter of 2016. Our retail subscriber base was 185,000 subscribers at the end of the third quarter, which was down 12.7% from the prior year period and up 0.5 percentage point, from the second quarter of 2016. Connects or paid usage on our worldwide network were approximately $40.3 million, up 44.9% increase from the prior year period and up 26.2% from the first quarter of 2016. Moving on to discuss our balance sheet, as of September 30, 2016, cash and cash equivalents totaled $13.2 million, down from $14.7 million as of December 31, 2015. Total debt was $23.8 million and we had approximately $54.8 million available on our credit facility as of September 30, 2016. Capital expenditures were $27.8 million as of -- for third quarter, which included $19 million utilized for DAS infrastructure build-out projects, which are reimbursed by telecom operator partners. Our non-reimbursed capital expenditures were driven primarily by new network builds mainly related to the rollout of our military based networks, managed and operated network upgrades, and various infrastructure upgrades and enhancements. As a reminder, we estimate our annual maintenance CapEx which excludes our growth capital to be approximately 3% to 5% of revenue. Free cash flow was a positive $10.1 million for the third quarter versus negative free cash flow of $15.1 million during the third quarter of 2015. For the first nine months, of 2016 free cash flow was also a positive $1.6 million versus a negative free cash flow of $13.6 million for the first nine months of 2015. We expect to maintain positive free cash flow for the full year 2016 and going forward we believe both the income statement and cash flow statement will reveal the benefits of our multi-year investment cycle. Turning to our outlook for the full year ended December 31 2016. We are reiterating our guidance as follows. We continue to expect total revenue to be in the range of $158 million to $164 million representing year-over-year growth of approximately 15.3% at the midpoint of the range. Net loss attributable to common stockholders to be in the range of $30 million to $26 million or a loss of $0.79 to $0.68 per diluted share, adjusted EBITDA to be in the range of $38.5 million to $42.5 million, which implies an EBITDA margin of 25.2% and four points of the EBITDA margin expansion at the midpoint of the range. We remain focused on adjusted EBITDA expansion and continue to expect we'll go up by approximately two points to three points each year for the next few years eventually getting us back to a historical 30% levels. We will maintain our tax valuation allowance established at the fourth quarter of 2013 and as such do not expect to accrue material tax benefits or tax expenses on our income statement throughout the remainder of 2016. We continue to expect a nominal full year tax rate as well as fully diluted shares outstanding of approximately $38 million. In addition, we continue to expect our non-reimbursed annual capital expenditures will be approximately to $35 million to $40 million for 2016, which is inclusive of $15 million to $20 million to support the mainly our military based network build out. In summary, we delivered an excellent third quarter and I am very pleased with our overall financial position, I will echo Dave's comment of our strong operating performance is a direct result of a strong team we have here at Boingo. The significant investments we have made over the past few years have enabled our vision to materialize by expanding footprint at key strategic venues and capitalizing on the exponential growth of mobile data consumption driven by consumers and [indiscernible] demand for wireless connectivity. With will, I will turn it back over to Dave for closing remarks.

[David Hagan:]

Thanks, Pete. We are extremely pleased with our third quarter results, we continue to deliver strong revenue and EBIDTA growth and return to positive free cash flow by generating over $10 million in free cash flow for the quarter. DAS has had a historic quarter, in terms of new venue wins and we anticipate next quarter will be even bigger. We launched our first small cell network with the Tier 1 carrier and we expanded the deployment on Wi-Fi offload with carrier number two to three airports. We are making great traction with our military product and are delighted by the small gains we have been able to win back on our retail business. With that, I would like to open it up for questions, operator?

[Operator:]

Thank you. [Operator Instructions] Our first question is coming from the line of Scott Goldman with Jefferies. Please proceed with your question.

[Scott Goldman:]

Hi guys, thanks for taking the questions. I guess two, if I may. One, Dave, obviously a very strong quarter on the DAS side, I think you just made the comment you expect that to continue into 4Q, maybe you can just talk a little bit about what you are seeing activity-wise that drove the strength in 3Q? I mean we just -- didn't seem like a timing event, particularly with the backlog growing at the same time, but just love to hear what you are hearing from your carrier partners around DAS and how long that momentum can continue? And then Pete, on the free cash flow side, obviously absent the 10-Q, a little bit hard to see the granularity on the free cash flow. I am wondering maybe if you can just talk a little bit about some of the drivers of the free cash in the quarter [indiscernible] or maybe working capital may have been a benefit, and any considerations we should have as we go into 4Q on the free cash flow side as well. Thanks.

[David Hagan:]

Thanks, Scott. Let me start. So, on the DAS front, obviously, it was a very strong quarter really across all of the elements of our DAS business. So eight new DAS venues signed, biggest quarter we ever had, 18 DAS Tier 1 carrier contracts signed, again very big quarter for us. That takes us to 37 year-to-date. If you look at the nodes that deployed, we deployed a large number of nodes yet our backlog grew slightly, that's an encouraging sign. So there is just tremendous opportunity in cell network densification. The carriers are moving aggressively down that path and obviously key to our strategy is securing rights at these great large venues. Where the carriers want to be, so we are hitting at out of the park on all fronts on the DAS business, just one last comment before I handed it off to Pete, we see a general uptick in market activity. So we always try to get deals direct. In other words not going through an RFP process, but often many venues do go through an RFP process and so just the number of RFPs that we see coming our way is by far and away an all-time high, so, again another indication of the need of those venues and carriers to get better coverage in their venues. Pete?

[Pete Hovenier:]

Yes, so I will just start on the free cash flow growth we are obviously incredibly pleased with the $10.1 million of free cash flow for the quarter and the drivers were really a couple of things. First-off, we had $11.6 million of EBIDTA which we continue to grow, positive EBIDTA and in this quarter we spent $8.8 million of CapEx that was related to our Wi-Fi and network builds, so we were positive on EBIDTA as compared to our CapEx and then we did have some benefits of working capital. So all that combined to a great free cash flow quarter and equally important we are positive free cash flow for the year and anticipate staying that way for the balance of 2016 and beyond.

[Scott Goldman:]

Great, thank you so much guys.

[David Hagan:]

Thanks, Scott.

[Pete Hovenier:]

Thanks, Scott.

[Operator:]

Our next question is from the line of James Breen with William Blair. Please proceed with your question.

[James Breen:]

Thanks for taking the question. Just a follow up on the cash flow side, can you just talk about the CapEx trends and how you see that now as you are getting towards the end of this military rollout? And then just around the ad business, the level that we are at right now, in terms of revenue, should we expect that to be sort of in the same range over the next several quarters until you feel like you turn that around? Thanks.

[Pete Hovenier:]

Sure, so on the -- first question on cash, we expect free cash flow to continue to be positive in Q4 not to the same extent than we have experienced in Q3. In Q3 did have some timing benefit which was great, but we will be nicely positive for the full year 2016. On the ad business, we already have had more ad sales and our booking are greater in Q4 than what we had all of Q3. So we are seeing a pickup which you anticipate in a typical Q4 but when you look at it year-over-year basis, we do expect it to be down, thinking in the healthy, the 30% range. So on -- for the quarter we are down significantly more but we will bounce somewhat from where we were in Q3, but we will still be down. On a go-forward Q1, we should be down a bit but to the same extent that we were in Q3 again but more line with what we expect in Q4.

[James Breen:]

And then just on the military CapEx is that sort of going away now, since your -- you have about 14,000 away from being completing the build out?

[Pete Hovenier:]

Yes. So there is some timing still there. So what we said earlier in the year, we will spending between $35 million and $40 million to complete our military base network build out. We spent a little under $30 million and we will have somewhere between 7.5 and 10 that we will spend here in Q4. So there is some timing, even though there is less beds to fill, there is some timing of the payments of CapEx.

[James Breen:]

Great. And then for Dave just sort of big on the DAS business, you said, you are seeing a lot of more RFP activity. You look at the number of venues you are in now, what's the addressable market there, are there 50 more venues or there 100 more venues that you potentially could be in, just trying to think about the timeline of how long the DAS business continue to grow? Thanks.

[David Hagan:]

Yes, and we have talked about this both the conferences and live one-on-one with the investors. So we think the DAS business even before we start talking about small cell has a lot of runway left. Airports that certainly the top 20 or top 30 airports are largely built out and we got a large share of those, but second tier and third tier airports are not built out and those are very attractive to the carriers, we use [indiscernible] as an example of that. We signed that couple of years ago, when we are able to launch with two carriers, so there is a lot of interest in transportation, whether it's an airport of other types of transportation hubs regardless of size, because we have a lot of people going through; so, high interest there. So we think there is a lot of runway left. We have a rolling 200 list of venues that we know the carriers want, we also have list from the carriers, that number north of 6,000 each there is a lot of overlap between carriers but not entirely. So you think about where are here sitting here end of - near the end of 2016 with 34, 35 venues deployed and we got a rolling list of 200 that we are actively pursuing and we have carrier list of 6,000 so there is just a ton of runway ahead and then you had small cells on to that, which opens up smaller types of venues and specialty venues, we are in the early innings of, what I would call a 10-year cycle.

[James Breen:]

As you think about those 6,000 venues, the largest venues are O'Hare, a large shopping center, something like that, what's the small venue.

[David Hagan:]

Small venue is a maybe a collegian basketball stadium. We did the stadium for Gonzaga. I think that's seated 10,000 or 12,000, I was looking at Pete, he is saying yes, that's close. So it's not an NBA type of that doesn't have the number of events that an NBA clearly but on a regional basis, that's an important venue and the carriers want better coverage there.

[James Breen:]

Great, thanks a lot.

[David Hagan:]

Thanks, Jim.

[Pete Hovenier:]

Thanks, Jim.

[Operator:]

Our next question is from the line of Mark Argento with Lake Street Capital. Please proceed with your question.

[Mark Argento:]

Yes, good afternoon guys. Quick question focused on the second offload partner, Tier 1 offload partner, sounds like you are live in three airports, so it must be going well. How quickly do you anticipate that, being able to kind of reach full penetration, at least in your airport venue base?

[David Hagan:]

Yes. Thanks, Mark. So yes, it's going well, we are at three airports now. So the rollout continues. We are on a very limited number, handsets with them that have a pass point profile. So they are working on their plans to do, what is their rollout for pass point, that will be a big part of it and then we are also working with them on, more network live rollout of our network. So there are kind of two elements to it, our network and them getting pass point profile out. We hope to and expect to provide more clarity on the 2017 roll out plan on the Q4 call. So I can't say lot more than that at this point, but it's going well.

[Mark Argento:]

And this is pass point -- enabling pass point on the handset, I mean that's fairly the technology, the ability to do that. I know every network and handset obviously is unique. But for the most part that's been standardize at this point, so that shouldn't be too much of a technical hurdle, is that accurate?

[David Hagan:]

That's accurate and the other I think element on carrier number two is that you'll see iPhone or iOS and the Android platform go out together, where we did this when we did the Sprint roll out those were actually separate initiatives and which added time and complexity frankly to it. So we've learned a lot in deploying carrier number 1 and we are applying those learning with in partnership with carrier number two.

[Mark Argento:]

Great. And then last question it's encouraging to see first small-cell vendor agreement could you just remind us a little bit of the economic model, they are relative to DAS, how that -- obviously smaller -- quite smaller in scale, but what's the kind of the high level of economics behind small-cell deployment?

[David Hagan:]

I'll start it then Pete may want to add some color. So much smaller CapEx on the front end, it'll be much more the economics of small cell they're much more driven by the ongoing recurring revenue streams of the small cells. The pricing that we are talking to carriers about currently is a see to deploy and then a hertz [ph] node recurring revenue streams are ongoing. So not unlike DAS except if not new is a front end CapEx and built cost, these are much quicker implementation in many cases will leverage the cabling infrastructure that we already have in place where we already have a Wi-Fi network. So there will be quicker, less CapEx on the front end and more weighing towards recurring rent on access fees or rent on the backend. Pete, did I miss anything?

[Pete Hovenier:]

No, you hit everything. The only thing is really worth adding is the rents will be both access into the venue. There're also be time which we'll provide backhaul, which we did not do in the DAS since to date and so we provide backhaul the rents will be higher to compensate this for that additional service.

[Mark Argento:]

All right. That's very helpful. I appreciate guys. Congrats on a nice quarter.

[David Hagan:]

Thanks, Mark.

[Pete Hovenier:]

Thanks, Mark.

[Operator:]

Next question is from the line of Walter Piecyk with BTIG. Please proceed with your question.

[Walter Piecyk:]

Thanks. Pete, could you help I guess go through the reimbursable CapEx line, I'm just trying to look at of the some of the commentary on the DAS and the backlog and the DAS node which was nice pick up this quarter. And then relates that the 19 million it was booked relative to let's say 35 in the first quarter and 31 in last year's fourth quarter. And then same token do you expect -- do you still expect to hit a 100 million for the year as far as the reimbursable CapEx?

[Pete Hovenier:]

Sure. So that the CapEx timing one of it's really is timing with the carriers and how aggressive we and they are is the dual process, and of course on how we pay our suppliers. So in the quarter we had 19 million of reimbursable CapEx for the DAS business that compares to last quarter's 12.6 and previous quarter before that which was significantly higher, just almost 35. For the fourth quarter it will be north of where we are in Q3 is what we are anticipating. I don't think it will be enough to get this to the 100 million range, but it should be similar close to our odd 20 million, 25 million that is still right inline with our expectations and then absolutely outstanding DAS build here. As Dave mentioned on his prepared comments, eight new venue [indiscernible] in Q3 and we expect Q4 to be even stronger. So the demand we are seeing is there. It's really how fast we build and we fast we align it for the carrier progress.

[Walter Piecyk:]

So what is that mean relative to the build out project element of DAS, I know access fee is where it is, but the built out project there were some connection to that reimbursable CapEx. And obviously the number of nodes is one thing and there is dollars kind of math, if there is a connection there so if it's not heading to 100 what is that mean as far as the growth rate in that built out project revenue within DAS?

[Pete Hovenier:]

There is a connection, but you also too have your quarterly cut off, so in aggregate, we really don't think about the quarterly cutoffs. We're not seeing anything slowing down. What we're seeing here is just [indiscernible] on we were paying our suppliers. What we're collecting from our carrier customers have not changed at all. If we look at our deferred revenue has continue to grow year-over-year for the nine months ended September, we have almost $65 million of deferred revenue benefit. So we continue to see a lot of growth there that are DAS growth on a year-to-date basis is north of 20%, and Q4 we expect it to be significantly greater as we've left our headwind, we had our contract extension.

[Walter Piecyk:]

Right, so that that deferred revenue that implies about $20 million, which is up sequentially for the quarter - which is up sequentially, but still down from kind of a level that you saw in March right.

[Pete Hovenier:]

Yes.

[Walter Piecyk:]

So if you're reimbursement CapEx goes up and I guess you're deferred revenue will probably go up around the same amount $20 million, $25 million into the fourth quarter?

[Pete Hovenier:]

Yes, and also it's important to note that Q4 intends to be your largest quarter. That's when the carriers come back with their capital budgets and they're ready to go to work. We're doing a lot of work as we speak right now. I mean the reasons we had so many DAS knows go live is because of the amount of bills we had. We won a bunch of venues, but we also took a locations live and we finalized the account. So we were seeing it intends amount of demand and nothing in what we're seeing is causing us to have any questions or a feel like they're slowdown whatsoever.

[Walter Piecyk:]

Got it. And then on the military, it looks like you've got two quarters in a row with this ARPU, which is basically comedown. It looks like the military that ads, actually little slower this quarter than last quarter, so I'm not sure that that would have been an impact of the new ads. Where do you think I'm calculating, I think [indiscernible] like $41 which is down from $48 in the first quarter? Where does this bottom out or does that - at some point does it invert and start heading back up into the high 40s again?

[Pete Hovenier:]

Yes, so what you're seeing is a couple things, so on the actual subscribers, so we have two types of customers. We have our monthly recurring subscribers and that's the 86,000 subs we just - we mentioned here and we put in our press release. Those are on average paying us around the mid 30s in terms of ARPU. In addition we have transactional customers and those will be service men and women who have a daily, weekly or monthly plan. There's a non-recurring monthly plan and that's to be transactional, not to be counting as a subscriber, so that's the main reason you see ARPU move around. It tends to be somewhere in the $5 to $8 per quarter of "ARPU" but it's not really ARPU. The ARPU for our monthly recurring subs is in the mid 30s.

[Walter Piecyk:]

Got it. So then is there some reason activity levels were so much lower in the third quarter than the first quarter?

[Pete Hovenier:]

Nothing we can point to, we continue to see a good demand, great usage. Users continues to grow quarter-over-quarter, month-over-month. I think there is some seasonality that's going on. We're still earlier on in this business and that we've been building so much that we're starting to get trends on each individual basis, but in aggregate it gets lost a bit. But we do think there is some seasonality it happens that we see some a big pickup in Q1 and Q3 we saw it slowdown a little bit, I'd say in the transactional, but we expect that pick up.

[Walter Piecyk:]

Got it, thank you.

[David Hagan:]

Thanks, Wal.

[Pete Hovenier:]

Thanks, Wal.

[Operator:]

Our next question is coming from the line of Anthony Stoss with Craig-Hallum. Please proceed with your question.

[Anthony Stoss:]

Hi, guys, congrats on the impressive $10 million of free cash flow. Can you take us through kind of the cadence on your second Wi-Fi offload customer in terms of the number of sites that you think they can - are you guys can take live going forward and when you think you'll reach kind of the finality of the lease where they're expecting to launch now? And then also in the past, you've given us kind of an average carrier per DAS venue number, I'm wondering if you could update us on that? And then I had a follow-up afterwards. Thanks.

[David Hagan:]

Yes, let me start, so on the second, but my customer will expect that over the course of 2017 again we don't have specifics for this call. We hope to layout more of that on the next quarter call when we do our guidance for 2017. But we expect it to look a lot like the Sprint rollout, but hopefully a little bit faster. We turned up three airports. It's going very well. We expect them to go network wide as Sprint has then continuing to grow as we grow our network and bring more venue wins with Wi-Fi networks. So we expect to see network wide and we'll get into more specifics on the next call. Regarding, what was your second question?

[Anthony Stoss:]

The carriers per location.

[David Hagan:]

Oh, the carriers per locations, Pete you want to -- it hasn't really changed.

[Pete Hovenier:]

No, it really hasn't Tony, so we took a few venues live this quarter, but one we wouldn't lie with the Word Trade Center which is another milestone for us. It was our first venue which went live with all four carriers of launch. So one we're quite [indiscernible] product is our largest venue that we've ever deployed and we went live in all four.

[David Hagan:]

Which is very rare.

[Pete Hovenier:]

It's very rare but it didn't really change the dynamic. We're still looking at 2.4 carriers per location live and we've seeing think 3.4 carriers per location after three years.

[Anthony Stoss:]

Okay. And then however you can answer this it will be helpful. On your small cell versus the current DAS models so clearly there is a small upfront fee on the equivalent from your perspective and probably in the reimbursement side you see a drop off or is there a drop off on the recurring aspect of it or maybe any comments on the ROI on the small cell versus existing DAS. Thanks.

[David Hagan:]

The small cell venue focus and kind of the targets for the carriers are smaller venues and DAS will still be used in the lager venues. It has the capacity, it's the right economic and technological solution for big venues, that's not changing. But it's opens up smaller venues where DAS can be challenging from a carrier CapEx perspective and again we utilize carrier CapEx on all these builds, right I know you know that. And so small cell will typically be smaller deals but the economics we expect to be every bit is strong as our DAS just smaller in size.

[Anthony Stoss:]

Okay, good job guys. Thank you.

[David Hagan:]

Thank you.

[Operator:]

Thank you. [Operator Instructions] The next question is coming from the line of John Heckman with Ladenburg Thalmann. Please proceed with your questions.

[John Heckman:]

Hi. Most of my questions have been answered but on the small cell side how many carriers do you expect to like you're not going to get three or four carriers on a small cell, right?

[David Hagan:]

Currently the current technology is single carrier notes. There is an awful lot of work though going in industry-wide from a technology perspective to get them to be multi-carrier and certainly we've worked with one OEM and we have them operated in our lab that is a multi-carrier it's kind of a plug-in module approach. So there is a lot of R&D going into it. It's definitely going to happen. I don't think it will be four carriers per small cell node in the next 12 months or anything like that but I do think we'll see two carrier nodes in market probably in the next 12 months, certainly the next 18 months. So it's moving in that direction but the ones that we have deployed both in trial and then the one that we've moved to a full operating network status those are single carrier nodes.

[John Heckman:]

Okay. And my last question, could you elaborate a little bit on the advertising the employee drop off, was that your choice or did these people just leave?

[David Hagan:]

It's a good question. So it's about 50-50 whether it was voluntary or involuntary. And so it's a typically highly incentive compensated meaning performance based ad sales force and we aggressively move people out who are performing because at that point then they're cost and not driving revenue. So we had some of both, about 50-50 where people left us and then where we managed people out of the organization. So it was a challenging year from that perspective. We don't have a large ad sales force, about nine people. So a couple underperformers makes a big difference and when you have the kind of turnover that we did and you see it in the results really impacted us. As Pete said, Q4 is already looking better but it does take about six months to ramp up the new sales person. So Q4 will be decent. We're expecting better performance in 2017.

[John Heckman:]

Okay, thank you.

[David Hagan:]

Okay John, thank you.

[Operator:]

Ladies and gentlemen, we have reached the end of our question and answer session and I would like to turn the call back to David Hagan for closing remarks.

[David Hagan:]

Thanks for the questions everyone and for joining us today. We'll be at a number of conferences this month including the Well Fargo Technology Medial and Telecom Conference on the 10th, the Jefferies Telecom Summit on the 14th, Craig-Hallum Alpha Select Conference on the 16th. We look forward to seeing you at one of these events. Thanks a lot.

[Operator:]

Thank you. This concludes today's teleconference. You may now disconnect your lines at this time and thank you for your participation.