Boingo Wireless, Inc.
Q2 2015 Earnings Call Transcript

Published: 7 Aug 2015

[Operator:]

Greetings, and welcome to the Boingo Wireless Second Quarter 2015 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. [Operator Instructions] As a reminder, this conference is being recorded. At this point, I’d like to turn the conference over to host Ms. Kimberly Orlando of Addo Communications. Thank you, Ms. Orlando. You may now begin.

[Kimberly Orlando:]

Thank you and welcome to the Boingo Wireless second 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 Web site 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, August 6, 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-Q for the quarter ended March 31, 2015 filed with the SEC on May 11, 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:]

Thanks Kim. Good afternoon everyone, and thank you for joining us to discuss our second quarter results. I’m pleased to announce that Boingo’s strong momentum continues. In fact Q2 was a record breaking quarter in a number of ways. To begin we’ve exceeded the high end of our guidance range and revenue and adjusted EBITDA. Revenue for the period totaled 34.3 million and adjusted EBITDA was 7 million. This is the second quarter in a row and which we’ve exceeded the high end of our guidance range which provides us with incremental flexibility to reinvest in our growth initiatives. While the back half of our plan continues to ramp, we’re very pleased with this accomplishment and look forward to building on this success. The trends that are driving the market and our performance continue to provide strong tailwinds. The market is coming to us with unprecedented interest in Wi-Fi from carriers, Internet companies, MVNOs and hardware manufacturers. The agreement with Sprint announced last quarter has sparked interest from various industry players. As a result, we have Boingo pastpoint certified Wi-Fi network nodes with multiple companies in their labs, doing interoperability testing. This is the first step in the process of getting these companies into market with Wi-Fi offload solutions, so we’re encouraged by the level of industry activity. The amount of traffic moving to Wi-Fi from cellular is skyrocketing. According to the CTIA, cellular data traffic grew 26% in 2014 over 2013, while traffic on Boingo’s Wi-Fi network grew over 60%, more than double the cellular growth rate. This is further evidence that a Wi-Fi first world is here. The second major trend is small cell proliferation and network densification. According to the CTIA the number of towers actually declined by 2% in 2014 while the number of small cells grew exponentially. Boingo’s real estate assets, which are large venues with large numbers of people passing through them, will continue to be critical for carriers to access via our DAS and Wi-Fi network infrastructure. And, according to a recent JP Morgan analyst report, cable industry consolidation should drive even more Wi-Fi first initiatives as the cable industry places increased emphasis on wireless by utilizing Wi-Fi as a replacement for cellular. All of these trends are good for our business. Turning to some highlights from the quarter. Each of our three key business growth drivers – DAS, Carrier Offload, and Military Wi-Fi, set records in Q2. Let’s take a look at how each played a part in the success of the quarter, starting with DAS. As you may recall, last quarter I mentioned we had our best quarter ever for DAS carrier sales. Well, our second quarter was even larger. Since the beginning of 2015, we’ve signed more than 30 long-term DAS contracts with the big four Tier One carriers, making this the biggest year ever for DAS contracts. The first half of 2015 is already larger than any full year in the company’s history for DAS deals. Our pipeline of DAS venues continues to be strong as well. We currently have 9,500 DAS nodes live, with an additional 4,600 in the pipeline. Also encouraging is the fact that we’re seeing carrier capital expenditures rebound following last fall’s temporary slowdown and we’ve signed carrier deals with each of the big four US carriers. With exploding mobile data growth, DAS remains a key opportunity for carriers to extend their networks into locations of high density, and it goes hand in hand with our second major business growth driver, Carrier Offload. Carrier offload had a record breaking quarter of its own. We announced a major Sprint offload deal last quarter and offload traffic is growing week-over-week as millions of customers move for offload enabled airports and are seamlessly connected to Wi-Fi as easily and safely as cellular. And just last week, we announced a long term relationship with Deutsche Telekom to provide Wi-Fi on laptops and smartphones for their business customers as they travel around the world. 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. We believe the Sprint deal is just the tip of the iceberg for offload as we're now pastpoint trials with multiple Tier 1 carriers and several major technology companies with more in the pipeline. While DAS and carrier offload fuel our wholesale growth military Wi-Fi has been busy breaking records of its own. During the second quarter Boigo’s military Wi-Fi ended the quarter at just over 160,000 beds on Army, Air Force, and Marine Corp bases around the country in 14 states plus the District of Columbia. We believe our success in the military market is due to our delivery of products and services a whole new way. For example, high speed internet is available instantly. No installation appointment, equipment or truck roll is required. We provide all our of subscribers with unlimited access to Boingo’s network of more than 1 million premium hotspots, enabling them to stay connected while traveling or deployed. And perhaps most importantly, we make Boingo 100% portable, so the soldiers don’t have to cancel service when they re-locate to a new base. They simply login at their new location and it seamlessly transfers. This is a big benefit to our soldier customers as well as to our military partners. Initial response to our Boigo Wi-Fi service has been extremely enthusiastic. Our military subscriber base has continued to expand with exponential growth year-over-year. So all-in-all this is a very strong quarter and a record breaking first half for the year. With that I'd like to turn it over to Pete Hovenier, our Chief Financial Officer for detailed look at our second quarter financial results as well as our outlook for the third quarter and full year 2015. Pete?

[Pete Hovenier:]

Thanks Dave. I will begin by reviewing our financial results and key operating metrics for the second quarter ended June 30, 2015 and will conclude our financial outlook for the third quarter and full year 2015. Total revenue for the second quarter was $34.3 million, representing a 20.7% increase over the prior year period. The increase reflects strength in wholesale Wi-Fi, Military and DAS revenue, which was partially offset by declines in Retail and advertising revenue. Across our diversified revenue streams DAS represented 35% of second quarter revenues, Retail represent a 24%, wholesale Wi-Fi represent 60%, advertising and other represent 13% and military is accounting for the remaining 12%. This compares to the second quarter 2014 in which DAS represent 33% of revenues, retail represent 37%, wholesale Wi-Fi represent 12%, advertising and other represent 16% and military accounting for the remaining 2%. In terms of total revenue contribution by category, DAS revenue for the quarter totaled 12.1 million representing a 28.9% increase over the comparable period last year. The improvement was related to increased revenues from DAS build-out project and DAS access fees. Retail revenue was 8.1 million, representing a 21.4% decline over the prior period. The decrease was primarily due to a decline in our retail subscriber base coupled with reduced retail single-use revenue during the second quarter. The decrease was partially offset by an increase in average monthly revenue per subscriber. Also Wi-Fi was 5.5 million representing a 58% increase over the prior year period primarily due to increased partner usage base fees. Advertising and other revenues was $4.3 million representing a 5.1% decrease over the prior year period primarily due to reduced advertising sales in our managed and operated locations. Military revenue was $4.2 million representing an increase of nearly six times over the prior year period, primarily due to the increase in retail subscribers resulting from our military build-out of the Wi-Fi network at military bases across the U.S. Our military network now covers 160,000 beds and counting. Now turning to our costs and operating expenses. Network access costs totaled $16 billion representing a 20.9% increase over the second quarter of 2014. The increase is primarily due to increased appreciation, bandwidth and other direct costs of sales. Gross margin which is defined as revenue less network access cost was 53.3% which is equal to the prior year period. As previously stated we expect growth in military revenue, will help increase gross margins overtime. Network operations expenses totaled $7.9 million, an increase of 36.4% of the comparable 2014 quarter primarily due to increased personnel related expenses as we had headcount to support the rollout of our new DAS military contracts, in addition to the increased depreciation, network maintenance and connectivity expenses. The development and technology expenses were $4.8 million, an increase of 51% from the prior year period due primarily to higher personnel related depreciation expenses. Selling and marketing expenses was $4.8 million, and 20.5% increase over the comparable 2014 quarter primarily due to increased personnel related expenses from investments in our sales and business development teams coupled with increased marketing program expenses. General and administrative expenses were $5.7 million, a 22.5% increase in the comparable 2014 quarter due primarily to increased depreciation and personnel related expenses. Now turning to our profitability measures for quarter. Net loss attributable to common stockholders was $5.9 million or $0.16 per diluted share versus a net loss of $3.7 million to $0.10 per diluted share in prior quarter. Adjusted EBITDA was $7 million, an increase of 17.8% from the comparable 2014 quarter. In terms of our operating metrics, we ended the second quarter with connects, or paid usage in our worldwide network of approximately $25.8 million, up 27.2% the prior year period and up 13.1% for the first quarter of 2015. Our retail subscriber base was $225,000 subscribers at the end of second quarter which is down 24% from the prior year period and down 4.3% at the first quarter of 2015. Our military subscriber base was 40,000 subscribers at the end of the second quarter, an exponential increase versus the prior year period and a 25% increase in the first quarter of 2015. The number of DAS nodes in our network for the second quarter was 9,500 up 25% from the prior year period and up 6.7% from the first quarter of 2015. Moving on to discuss our balance sheet. As of June 30th 2015, cash, cash equivalents and marketable securities totaled $20.5 million as compared to $10.6 million at March 31, 2015. Total debt under our credit facility was $13.1 million with approximately $36.5 million available as of June 30, 2015 of our credit facility. Capital expenditures was $16.7 million for the second quarter which included 4.4 million utilized with DAS infrastructure build-out projects that are reimbursed by telecom operating partners. Our non-reimbursed capital expenditure was driven primarily by new network builds mainly related to a rollout of our military based networks, managed and operated network upgrades and various infrastructure upgrades and enhancements. I will now turn to our outlook for the third quarter and full year 2015. For the third quarter ending September 30, 2015, we are initiating guidance as follows. We expect total revenue to be in the range of $34.5 million to $36.5 million; adjusted EBITDA to be in the range of $7 million to $8.5 million; and net loss attributable to common stockholders to be in the range of $7 million to $5.5 million or a loss of $0.20 to $0.15 per diluted share. For the full year ending December 31st 2015, we are updating our revenue guidance by increasing our range to reflect outperformance during the second quarter primarily from DAS and Wholesale Wi-Fi. Our profitability guidance remains unchanged. We now expect total revenue to be in the range of $136 million to $141 million or a year-over-year growth of 14% to 18.2%. We continue to expect adjusted EBITDA to be in the range of $27 million to $30 million and net loss attributable to common stockholders to be in the range of $28 million to $25 million or a loss of $0.77 to $0.69 per diluted share. We will maintain our tax valuation allowance establish in the fourth quarter of 2013 and as such do not expect to accrue material tax benefits or tax expenses on our income statement during 2015. As such, we continue to expect a nominal full-year tax rate as well as fully diluted shares outstanding of approximately 37 million. In addition, we continue to expect to spend $40 million on non-reimbursed capital expenditures in 2015 which is inclusive of $25 million to support our military base network build-outs. We are highly pleased with our second quarter results which reflects solid progress on our initiatives to accelerate growth. With that, I’ll turn it back over to Dave for closing remarks.

[David Hagan:]

Thanks Pete. This momentum we’re seeing echoes the strength that we see in the overall wireless infrastructure market, particularly around network densification, Wi-Fi proliferation, and network traffic growth. As I’ve shared previously, we have all the pieces in place to drive continued growth. And Extenet’s recent sale demonstrates the value in the opportunity of building wireless infrastructure and networks in strategic locations. Our biggest challenge going forward will be execution against all of the opportunities that are in front of us. That’s why I’m so pleased with the year we’ve achieved so far. The entire Boingo team is firing on all cylinders. I very much want to thank everyone at Boingo. Our performance is really a testament to the commitment, dedication, and hard work of the whole team. With that, we’d like to open up for questions.

[Operator:]

Thank you. We will now be conducting a question and answer session. [Operator Instructions]. Our first question is from James Mormon of D.A. Davidson. Please go ahead.

[James Mormon:]

Yes, thanks. Nice quarter. First, can you give us any more details kind of on the Sprint traffic that you're seeing, it sounds like you're seeing a pretty good traffic and then also it sounds like you're talking more about things you're seeing in development labs can you just give us an idea of how that works if that is any kind of lead time that you might -- carriers are really getting serious and -- did you have any trials before, just kind of new activity, just any more color you give us would be appreciated.

[David Hagan:]

So on the Sprint traffic, your first question; the traffic is ramping up nicely. We're on a similar number of handsets that we were on last quarter. The big initiatives right now with them and with Apple is doing a joint testing for iOS. So we're in the middle of that and that will continue for a few more months. So our hope is that that will go ultimately well and we will launch on iOS late in the year. So that'll take that number up quite a bit. The other thing that we did within the quarter is we've expanded the number of Boingo Passpoint locations that the Sprint traffic is now going on to. And so that's also helping with the traffic, so we're pleased with the traffic. It's about where we expected it to be, nice growth over the course of the quarter. And then we would expect a ramp up probably in Q4 once we get iOS on to the network. Then your second question about kind of the lab activity as I said in my prepared remarks, the level of interest I think largely is a result of the Sprint announcement, was pretty amazing, pretty awesome after last quarter. So we've engaged with several companies, as I said both carriers and other types of companies, technology companies, hardware companies, Internet companies, MVNOs. So there is a lot of interest in testing passpoint technology and understanding how seamless handoff works from cellular on to Wi-Fi. And so our process is we actually send them a Boingo passpoint certified, Wi-Fi access point or in some cases many access points that they can put on their lab, they can put in their offices, they can put in their campuses and they can actually test it and experience how it works. So the process is that's generally where these things start. We did the same thing with Sprint over a year ago. Then that turned into a field market trial and then ultimately it turned into a true long term contract. So I would just caution everyone while we're very excited and very bullish, on carrier offload this is still early stages of getting number two, number three, et cetera into the market. But we're excited; a lot of interest, but it does take quite a period of time. And the big driver is frankly that the carriers having the business strategy like Sprint yet to want to go down that path. So we think it'll come but we can't commit a timeline at this point.

[Operator:]

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

[Anthony Stoss:]

Do you think however with the carriers in Sprint, in the Wi-Fi offload having already established the systems and platform and its reliability? Do you think that the field test will take a shorter period of time than with Sprint? And then lastly on your DAS side, are you seeing any changes to the mix in terms of the accessories or maybe six months ago?

[David Hagan:]

So on your first question; the kind of the timing on lab testing. The good news is from a technology perspective, the passpoint technology speeds the path to market. And as we’ve discussed on prior calls, we have offload agreements in terms of the economics and on how they would pay us for traffic, they will pull on to Wi-Fi network in place with three of the of the big four. So there is not, as I said just a moment ago, it’s more about the carrier and their strategy and if and when they want to pull the trigger, more than anything it's from a technology development perspective because that’s pretty well baked obviously or from a contract perspective. So it’s really all up to the carriers and their strategies. So I know I’m not giving you probably more specificities as you would like. But that’s the reality. We’ll have to see how it goes and hopefully we’ll have more to report on next quarter. In terms of the DAS business obviously we reported really strong quarter in DAS, and we put out the press release a few weeks ago talking about all of the activity there, been a pretty amazing first half of the year. In terms of fees versus access on the fees side -- build fees versus access fees, we’re still in that 60-40 split. We do expect that to increase on the access side overtime, but nothing really reported on this quarter in terms of different from the past.

[Operator:]

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

[James Breen:]

Just on the military side, you had 40,000 subscribers this quarter, so it looks like penetration is 25% now. Can you talk about -- are we seeing any change in terms of the uptake. Is that improving maybe sort of the ARPU range there? And then as you look out for the rest of the year, how do you think about bed ads in the third and fourth quarter? And then lastly; with respect to the CapEx around military, that 60 million total, how much of that you spent and how much do you think you have left to spend?

[David Hagan:]

I’ll start off and I’m going to hand off to Pete on the last couple. So as you said on the military front, we ended the quarter 160,000 beds covered 40,000 subs, so 25% penetration, up a couple of points from last quarter which is great since we expanded the number of beds. It has a dilutive effect on penetration yet we were still able to grow penetration. So we see that as a real positive. The take rate is incredibly strong. As I mentioned in my prepared remarks that the offer that we have, the differentiation of it from what they may have from a local cable operator is pretty distinct and we’re getting great feedback on that. So that’s all positive. ARPU is still in the kind of low to mid-30s range. No big change there. In terms of bed ads for Q3 and Q4, and then our CapEx; Pete would you likely to handle those?

[Pete Hovenier:]

Yes, so Jim on the bed ads, as we’ve said earlier we expect it will add at least 100,000 beds throughout 2015, and then the balance we will deliver at 2016, the 300,000 total opportunities. So we’re not seeing that change. So we still expect it will by the end of this year. We’ll exit the year with somewhere around 222 total beds live by the end of the year.

[David Hagan:]

And it's about 220, 230.

[James Breen:]

220 - 230?

[Pete Hovenier:]

Yes, 220 - 230,000 beds by the end of the year. And then the balance will actually deploy in 2016. In terms of capital left to spent, we’re little more than halfway through. So we expect that we'll spend another call of 22 million to 24 million to build up the balance of Military network, given 300,000 total opportunities.

[James Breen:]

In terms of the bed ads, so you're 140, so let’s say you get the 220, that’s another 80,000 this year. How do you think about that following between third and fourth quarters?

[Pete Hovenier:]

The vast majority is going to be in Q4 and I think we’ll be talking to people in the past about this. There is a cut over that will be taking over in the Q4 timeframe. So that we expect that we’ll be launching a significant number of beds in the Q4 timeframe. And that we're building as we speak. But they will be going live in Q4. Most of it, just for some clarity on that -- some color commentary on that, most of the base launches that we do, we become the second operator if you will. It is typically a local regional cable Co that's already providing service and has for years. But we have a quite a few bases that in Q4 as Pete mentioned, we’re actually taking over from a prior non-cable Co-supplier. So they are literally going out of business, after we won that contract. And so we're flipping a bunch of bases over from one provider to us. And so we're working with -- each base provides seamless transition for those soldiers. So it's a little bit unique. We haven't done it like this in the past. So that's why we have such a large number going kind of at the same time in Q4.

[James Breen:]

And just a follow-up on that; in terms of the cut over, let's say that you cut over 70,000 wage or something in October, November. Since you are cutting over customers that already are on the system, will that -- it won't require the same amount of time to get up to 25%, 30%, 40% penetration? Would you automatically have penetration on day one once you make that cut over?

[Pete Hovenier:]

We don't. So they actually have to re-sign up -- not re-sign, they have to sign-up for our service. The difference is that if they don't they'll be without some level of service. So we're expecting a little bit quicker ramp-up with those folks than what we would typically see that our ramp-up is pretty darn fast. I think this we’ve shared with everybody. But these are unique and it should be a little bit faster than normal because of that dynamic.

[James Breen:]

And because the goal for you guys is to make it easy as possible for those guys to switch over and they walk?

[Pete Hovenier:]

Absolutely, we're going to have walk people pull feet on the basis facilitating, creating the awareness, doing sign ups, we'll have a lot of awareness and visibility on those basis that cut over.

[Operator:]

Thank you. [Operator Instructions]. The next question is from Tudor Mustata of Jefferies. Please go ahead.

[Tudor Mustata:]

Just a question on the guidance. First, where are the moving pieces to next quarter's expectations? And then in the fourth quarter, the guidance kind of implies some really meaningful improvement in margin. Is that the run rate which we are expecting or how should we think of margins in the next year?

[David Hagan:]

Pete once again you got to take that.

[Pete Hovenier:]

So the moving piece is that Tudor; so really it's consistent what we’ve been saying all along. The drivers really become DAS Wi-Fi offloading and military. And that continues to be the driver of guidance for Q3 as well as the ramp in Q4. Now what you are seeing in Q4 in terms of the margin improvement, on top of I’d say continued expansion in military which is higher margin business. You're also seeing a stronger advertising quarter. And you're seeing what we expect to be a continued ramp in offloading as we think that the offloading contract we have a spread. We will have similar numbers in Q3 versus our Q2. But as we go in hopefully into more handsets, you will see more driving forces of offloading traffic in Q4. So that's primarily the drivers.

[Tudor Mustata:]

And what you think?

[Pete Hovenier:]

And in terms of what you think we should carry forward into next year, well you should be looking at there is -- really look at year-over-year, and what we've been saying is a few points of gross margin expansion and overall a few points of EBITDA margin expansion each year for the next few years getting back-up to the 30% EBITDA margins, which is what we had historically. But it can take a couple of years.

[Operator:]

Thank you. We have no further questions at this time. I’d like to turn the conference back over to Mr. Hagan for closing comments.

[David Hagan:]

Thanks for the questions everyone. Before we sign off, Pete and I want to let you know that we’ll hit the road again in September with a full fall schedule of investment conferences and we look forward to seeing you there. Thanks again for joining us today.

[Operator:]

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