Boingo Wireless, Inc.
Q1 2015 Earnings Call Transcript

Published: 7 May 2015

[Operator:]

Greetings, and welcome to the Boingo Wireless First Quarter 2015 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. I would now turn the conference over to Ms. Kimberly Orlando of Addo Communications. Thank you, Ms. Orlando. You may now begin.

[Kimberly Orlando:]

Thank you and welcome to the Boingo Wireless first quarter 2015 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. If you have yet to receive the release, it is 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 7, 2015, 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, 2014 filed with the SEC on March 16, 2015. The company undertakes no obligation to update any forward-looking statements. On this call, we will refer to non-GAAP measures that when used in combination with GAAP results, provide us with additional analytical tools to understand our operation. We have provided reconciliations of non-GAAP to GAAP measures in our earnings release. And with that, I’ll hand the call over to Boingo’s Chief Executive Officer, David Hagan.

[David Hagan:]

Good afternoon everyone, and thanks for joining us today to discuss Boingo’s first quarter results. 2015 is off to a great start. We have exceeded the high end of our guidance range in all categories. First quarter revenue totaled $29.4 million and adjusted EBITDA was $3.2 million. We are incredibly excited about the year, not only for the work we’re doing at Boingo, but also because of the mobile industry transformation that is happening right before our eyes. As many of you know – Boingo is one of the pioneers of the Wi-Fi industry. When we started out – now 14 years ago – the technology wasn’t even called “Wi-Fi”. It went by the rather awkward name of “802-dot-eleven.” So as early believers in what the future could hold for Wi-Fi, it’s incredibly gratifying to watch carriers, cable companies and technology companies across the spectrum embrace the power of Wi-Fi that we imagined more than a decade ago. These days, seemingly not a week goes by without a major announcement that underscores the pivotal role Wi-Fi is playing within the mobile ecosystem. In January, Cablevision launched FreeWheel, a Wi-Fi only phone that leverages the fact that 80% of mobile traffic takes place on Wi-Fi today. Cablevision CEO James Dolan said he believes Freewheel will disrupt the cellular industry and Cablevision will be putting more emphasis on its Wi-Fi initiatives going forward. In April, Sprint announced Wi-Fi calling on the iPhone, enabling customers to get coverage anywhere they have Wi-Fi connectivity. This comes on the heels of T-Mobile announcing it now has more than 7 million customers using Wi-Fi calling. And just a couple of weeks ago, Google introduced Project Fi. This Wi-Fi-first mobile offering promises to shake up the industry and help drive the marketplace toward converged Wi-Fi and cellular networks. While Project Fi on its own isn’t likely to threaten AT&T or Verizon, analysts are predicting that Project Fi could pave the way for cable companies to launch a wireless business of their own - much like Cablevision has done. Of course, the news we’re most excited about was Boingo’s, as just last week we announced the signing of Sprint to the industry’s first major carrier offload deal. This agreement will enable up to 40 million Sprint handsets to seamlessly offload traffic onto Boingo’s Wi-Fi network – starting at 35 airports nationwide. As mobile data traffic continues to sky rocket, the pressure on cellular networks intensifies. In fact, Cisco predicts that mobile data traffic will increase nearly ten-fold over the next four years. By offloading mobile traffic to unlicensed spectrum – in this case, carrier-grade Boingo hotspots – forward-thinking carriers like Sprint will deliver a better mobile experience to their customers. As Sprint CTO Stephen Bye said, “With Wi-Fi being the world’s largest wireless ecosystem, we view it as a highly complementary layer to our network. By enabling our customers to move seamlessly between secure Wi-Fi and cellular, our customers will have a better mobile experience in more locations, all while lowering the cost of data usage.” So it’s been a very exciting quarter for the industry, and it’s been a strong quarter for Boingo, as well. We’ve built on the momentum of 2014 with a number of key wins in DAS venues, DAS carrier contracts, and the Military base build out. For starters, we added two new DAS venues to our lineup – Lambert St. Louis International Airport and the North Charleston Coliseum. In addition, our backlog of DAS networks in development remains strong, with 24 networks in the design/build phase. We now have a total of eighty-nine hundred DAS nodes live with more than forty-five hundred DAS nodes in development. DAS was very active on the carrier front as well with T-Mobile and Sprint leading some venues for the first time. As we discussed on last quarter’s call, this is a very positive development and should speed the DAS design and build process. In all, 15 DAS carrier contracts were signed in Q1, including five at new venues, making this our best quarter ever for carrier sales. Our military build-out also continued. We have plans to launch more than 100,000 incremental beds in 2015. Like last year, the majority of these bases will launch in the latter part of the year. But we’re off to a good start with the launch or expansion of five bases and 7,000 new beds in Q1, bringing the current bed count to 137,000. Response to the product remains strong and we are now at 23% subscriber penetration across all bases. All in all, a very strong quarter to start the year. With that, I’d like to turn it over to Pete Hovenier, our Chief Financial Officer for a detailed look at our first quarter financial results, as well as our outlook for Q2 and full year of 2015. Pete?

[Pete Hovenier:]

Thanks, Dave. I will begin by reviewing our financial results and key operating metrics for the first quarter ended March 31, 2015, and will conclude with our financial outlook for the second quarter and full year of 2015. Total revenue for the first quarter was $29.4 million, representing an 11.1% increase over the prior year period. The increase reflects strength in DAS, Military, and Wholesale Wi-Fi revenue, which was partially offset by declines in Retail and Advertising revenue. Across our diversified revenue streams, DAS represented 33% of first quarter revenues, Retail represented 30%, Wholesale Wi-Fi represented 14%, Military represented 12% and Advertising and other accounted for the remaining 11%. This compares to the first quarter of 2014 in which DAS represented 30% of revenues, Retail represented 39%, Wholesale Wi-Fi represented 12%, Military represented 2% and Advertising and other accounted for the remaining 17%. In terms of total revenue contribution by category, DAS revenue for the quarter totaled $9.6 million, representing a 22.7% increase over the comparable period last year. The improvement was related to increased revenues from new DAS build-out projects and DAS access fees. Retail revenue was $8.7 million, representing a 15.9% decline over the prior year period. The decrease was primarily due to a decline in our retail subscriber base coupled with reduced retail single-use revenue during the first quarter as compared to the prior year quarter. The decrease was partially offset by an increase in average monthly revenue per subscriber. Wholesale – Wi-Fi revenue was $4.2 million, representing a 26.2% increase over the prior year period primarily due to increased fees from our partnership with American Express and our new Wi-Fi offloading contract with Sprint. Military revenue was $3.5 million, representing an increase of over 600% from the prior year period. The increase was directly related to the build-out of our military base networks, as Dave discussed earlier. Our military network now spans 31 domestic bases covering 137,000 beds and counting. Advertising and other revenue was $3.4 million, representing a 24.4% decrease over the prior year period primarily due to reduced advertising sales at our managed and operated locations. Although we had strong results in the prior year period, our advertising business is historically seasonal and the first quarter of each year is typically our softest quarter. Advertising sales for the quarter ended March 31, 2015 were right in line with our expectations. Now, turning to costs and operating expenses… Network access costs totaled $13.6 million, representing a 5.4% increase over the first quarter of 2014. The increase was primarily due to increased depreciation, bandwidth and other direct cost of sales. These increases were partially offset by decreased revenue share expenses in our managed and operated locations and decreased customer usage at partner venues. Gross margin, which is defined as revenue less network access costs, was 53.7%, up from 51.1% in the prior year period. The increase in gross margin largely reflects the shift in our diversified revenue streams as Military revenue offset the reduction in retail revenue. This was in addition to a greater contribution from lower-margin advertising revenue in the prior year quarter. We expect the growth in Military revenue will continue to help increase gross margins over time. Network operations expenses totaled $8.0 million, an increase of 38.0% from the comparable 2014 quarter, primarily due to increased depreciation expense, personnel related expenses, which is inclusive of stock-based compensation, as we added headcount to support the roll-out of our new DAS and military contracts, as well as increased connectivity and network maintenance expenses. Development and technology expenses were $4.2 million, an increase of 14.2% from the prior year period due primarily to increased depreciation expense. Selling and marketing expenses were $4.4 million, a 13.7% increase from the comparable 2014 quarter, primarily due to increased personnel-related expenses from investments in our sales and business development teams, coupled with increased marketing expenses. General and administrative expenses were $5.8 million, a 32.7% increase from the comparable 2014 quarter due primarily to increased rent and personnel expenses, which are inclusive of stock-based compensation, as well as increased professional and other operating expenses. Now turning to our profitability measures for the quarter… Net loss attributable to common stockholders was $7.9 million, or $0.22 per diluted share, versus a net loss of $5.4 million, or $0.15 per diluted share, in the prior year quarter. 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 until an appropriate level of profitability is attained. Adjusted EBITDA was $3.2 million, an increase of 4.1% from the comparable 2014 quarter. In terms of our operating metrics

[David Hagan:]

Thanks, Pete. As you can see, 2015 is off to a great start. The heavy investments we’re making in both DAS and military are paying off, and will continue to do so for years to come. Carrier-Wi-Fi is here and we expect the Sprint deal to be just one of many that will occur with the convergence of cellular and Wi-Fi. Hotspot 2.0 and Passpoint – Wi-Fi industry standards that Boingo helped pioneer and was first to market with – are rapidly rolling out across the ecosystem. The Sprint Wi-Fi offloading deal will leverage Passpoint connectivity to ensure seamless handoff from cellular to Wi-Fi, providing an encrypted layer of security for consumers as well as delivering the fastest speeds possible. Our first bi-lateral Passpoint roaming deal with Time Warner Cable now includes more than 70,000 Passpoint hotspots throughout the United States. And Boingo engineers have been working with Apple, Microsoft and Google to help them implement Passpoint on their handsets, which will speed the ability of other carriers to add Wi-Fi to their offerings. This work leverages Boingo’s status as the original Wi-Fi pioneer and continues to position us as the thought leader in the space, while the entire industry gains momentum toward ubiquitous, converged networks. We believe we are extremely well positioned to take advantage of these trends. Thanks for listening today. With that, I’d like to open it up for questions. Operator?

[Operator:]

Thank you. We’ll now be conducting a question-and-answer session [Operator Instructions] our first question is from James Breen of William Blair. Please go ahead.

[James Breen:]

Few questions now with DAS projects that you signed this quarter, can you just remind us how many are actually live and then how many projects are in build at this point. And then with respect military added 7,000 beds this quarter, can you just talk about how you see the other 93,000 or so getting launch throughout the year? Thanks.

[David Hagan:]

Thanks for the question James. On the DAS front you’re asking about nodes or number of locations?

[James Breen:]

Number of locations.

[Pete Hovenier:]

Jim, this is Pete. I believe it’s around 22, 23 right, they’re live. In terms of backlogs it’s similar number.

[James Breen:]

Okay and one more, I guess Dave had opened the question of what about nodes.

[Pete Hovenier:]

So as Dave mentioned in his prepared comments we have without 4,600 nodes in backlog and 8,900 nodes live today.

[David Hagan:]

Great. And then on the military roll out which is your second question, it is back loaded much like last year so heavy Q3 and Q4 base launch.

[James Breen:]

Okay. So, price not but you can allow the second quarter and then more so towards the back half of Q3 and Q4?

[David Hagan:]

That's correct.

[James Breen:]

Great. Thank you.

[Operator:]

Thank you. The next question is from James Moorman of D.A. Davidson. Please go ahead.

[James Moorman:]

Yeah. Thanks for taking the question. And I guess to little bit more on the WiFi offload contract. I want to know what you can see so far and just kind of the traffic you are seeing so far with Sprint, is it kind of typical or little bit better than you are expecting and then do you will treat it like a [prisoners] dilemma in terms of other carriers, no you've gone public with the name Sprint, it might push others to kind of move faster and an along with that I know you already have contracts with the Verizon and AT&T, what exactly is there much work they would have to kind of make those active so you could start doing something similar to with Sprint? Thanks.

[David Hagan:]

Thanks for the question Jim. So, from the traffic we expected we we're very pleased. We’re on about 10 million hands at this points and moving towards 40 million by year end were on 23 of our Passpoint enabled 35 airport, so good progress being made there. And then obviously even beyond the 35 airports there is the whole network beyond that Sprint has the rights to when they so choose. Just so this early traffic looks very strong, we're quite pleased with this and as this Sprint. So that's all good from that perspective. Second question was do I think Sprint will move the market along? We've often spoken about once someone goes we think that convergence will happen faster so were really pleased that Sprint is coming up with what we think is a very customer centric solution in leading the market on converging cellular and WiFi. So we've already seen increased activity from the other carriers lots to discussions going on, so -- and I think that's driven by that announcement but it's also driven by all of the other things that we talked about in my prepared remarks, whether it's a the Cable doing WiFi obviously, Projects Fi from Google is a nice stimulus to the market, so they are just in great industry trends that are going on and our Sprint announcement is just to one of those. So, we see really a strong momentum right now. And the third question is -- did I cash all three Jim?

[James Moorman:]

The other one was even though you already have a contract's with AT&T and Verizon what would [indiscernible] much easily done if they wanted to do kind of the same things that’s Sprint's being done to make those more active?

[David Hagan:]

Okay. So, yes the good news is we already have commercial agreements in place that are per megabyte pricing so all of that’s in place. The testing that we've been doing with the handset manufactures that I talked about in my prepared remarks. So with Apple, with Google Android and with Microsoft and which covers most of the market from a less perspective all of that work in the Passpoint work that we've been doing industry wide really makes it easy for carriers to move forward when they want to. Though we feel like we've done a lot of the heavy lifting and lot of the kind of the industry infrastructure work to make it quicker to market and from a technology perspective. So it really just becomes a business strategy perspective more than a road lock on having a commercial agreement or from a technology perspective.

[Operator:]

Thank you. Our next question is from Tudor Mustata of Jefferies. Please go ahead.

[Tudor Mustata:]

Hi, guys. Two questions. First can you just explain the puts and takes regarding [indiscernible] this quarter, by maintaining it in a full year. What are the puts and takes? Is there a specific one timer we should be around and then second can you discuss how much of the Q1 DAS revenue was accessed versus reimbursement.

[David Hagan:]

Thanks, Tudor. Pete. I’ll let u take those.

[Pete Hovenier:]

Sure. In the puts and takes from the guidance -- actually this is a very clean quarter for Q2. We are seeing -- as we put together the quarter and our guidance we are seeing very nice contribution from military as we put this together. We are anticipating some contribution from our new Sprint deal, so the Sprint deal is starting to be good -- receiving good traffic and it’s in line with our projections, but that something were encouraged by. Our DAS has been continue to produce, so as we look at the quarter it's shaping us very nicely. And then the softness that we experienced in Q1 in terms of advertising compared to the prior year we don’t expect a decline in advertising on Q2. Retail, as we have talked about in the past we do expect retail to have some pressure over for the full year and you will see that in our Q2 numbers as well. In terms of the ratio between access fees and build its above a 60/40 split between build and access fees, so the last 50% of the actually the DAS revenue becomes build revenue and 40 is the excess revenue.

[Tudor Mustata:]

I was wondering how we should think about that progressing? At which point we see access growing a lot more?

[Pete Hovenier:]

Access will grow faster but it does take time because it’s a larger base on the build piece. So you’ll see modest improvement here there is nothing that would be dramatic. There are a couple of points for the full year.

[Operator:]

Thank you. [Operator Instructions] And the next question is from Jon Hickman of Ladenburg Thalmann. Please go ahead.

[Jon Hickman:]

Hi. Nice quarter. Can you elaborate on the decline in the network access cost; it seems pretty dramatically given the level of revenue.

[David Hagan:]

Jon, you’re referring to the gross margin improvement?

[Jon Hickman:]

Yes.

[Pete Hovenier:]

Yes, the gross margin improvement really is driven by our revenue mix. So the most important piece and we talked a lot a little bit on last call is the military business. When we deploy military base the vast majority of our costs are fixed. So for every military customer to come on board only about 20% of the ARPU is a variable cost structure the rest really becomes contribution margin. So you’re seeing that mix of retail. We did see some pressure on retail business but military is having very nice pick up and we did see some improvement there. The other piece that we’re seeing in compare on a year-over-year basis, in Q1 of 2014 we had disproportionate amount of advertising revenue and advertising lower margins that’s on year-over-year basis that’s also what you’re seeing.

[Jon Hickman:]

Okay. And then -- so with the ramp in military then revenue of the margin should -- I mean we should see this kind of improvement or this level of gross margin in the future?

[Pete Hovenier:]

Yes. So, as we’ve said in our last call we view year end 2014 as our low point in terms of gross margin and we expect our gross margins to improve throughout 2015.

[David Hagan:]

And again that’s really driven by the military business ramp up.

[Jon Hickman:]

Thank you. That’s it from me. I appreciate that.

[Operator:]

Thank you. I’d now like to turn the conference back over to Mr. Hagan for any addition or closing remarks.

[David Hagan:]

Thanks for your questions. It appears as though we have no more questions, but before we sign off, we want to let you know we’ll be presenting at the following conferences in the coming weeks

[Operator:]

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