Boingo Wireless, Inc.
Q3 2015 Earnings Call Transcript

Published: 5 Nov 2015

[Operator:]

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

[Kimberly Orlando:]

Thank you and welcome to the Boingo Wireless third 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, November 5, 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 June 30, 2015 filed with the SEC on August 10, 2015. The Company undertakes no obligation to update any forward-looking statements. On this call, we will refer to adjusted EBITDA, a non-GAAP measure that when used in combination with GAAP results, provides us with additional with additional analytical tools to understand our operation. We have provided a reconciliation to the most directly comparable GAAP financial measure 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 welcome to the call. I am pleased to share that our momentum from the first half of the year continued and once again we’ve delivered very strong quarterly performance. Our third quarter revenue grew 21% year-over-year to a record $37.2 million and exceeded the high end of our guidance range. Adjusted EBITDA grew 27% year-over-year to $8.5 million at the high end of our guidance range and shows the operating leverage in the business. As I have shared a number of times, we believe Boingo has all the strategic assets in place to drive continued growth. Our biggest challenge will be executing against all the opportunities that are in front of us. In that regard, we have been performing extremely well. We continue to execute against our key growth initiatives in the DAS, Military and Carrier Offload verticals. So, let’s dive into some of the highlights for the quarter. To begin, DAS outperformed our expectations during the first half of the year and remained robust through the third quarter. The third quarter is when the market has in some years experienced a slow down as carrier’s have often committed their CapEx budgets for the year, but that didn’t happen this year and we continued our momentum signing seven new carrier contracts. That brings us to 37 contracts for the year, our largest DAS year ever with the quarter still to go. We have 22 DAS venues deployed representing 10,300 live nodes and another 24 venues under contract that are in the design build or carrier contract process. Our sales pipeline also remains very strong. The strength of DAS demonstrates the macro trend towards network densification. The industry is building more small cell nodes closer to customers in order to keep with the exponential data demand. According to a new study from the IAB, more consumers are turning to their mobile devices to watch bandwidth consuming long form video than ever before and new research from e-marketer suggest the times now watching video on mobile devices will increase 30% this year alone. At the Goldman Sachs Communacopia Conference, Comcast’s CEO, Brian Roberts said, “Video over the internet is more friend than foe”. The more you rely on video, the more you need Wi-Fi. I agree with Brian and this is a good indicator for our business. Another great indicator is the recent trend we’re seeing from venues that want to augment their existing DAS networks with Wi-Fi and are willing to pay for it. This is a major business model shift that we believe will unlock many new venue opportunities. In the past, venues you wanted an operator to pay for the cost and operations of the network, but also frequently wanted to offer free to their guests. That was a tough economic model and caused us to lead with DAS because carriers would fund it. Now, what we’re seeing from venues is an understanding that they have to invest in the customer experience or risk losing out on business. In many cases, the DAS network at venues only serves a single carrier, especially if it was built by a carrier, which means the majority of patrons may have an unsatisfactory guest experience, unable to text, upload photos to social media, or sometimes even make a call. Adding Wi-Fi to these DAS only venues not only improves the guest experience, but enables carrier offload to unlocking incremental revenue for Boingo. It also exhibits the unique and strong position that Boingo has in the market as the only neutral host company with deep domain experience in DAS and Wi-Fi. And speaking of carrier offload, we reached another major milestone in Q3. With the launch of iOS 9, we are now able to extend seamless Passpoint connectivity to more than 12 million Sprint iOS users at our airports. Sprint iPhone customers are now auto connecting via Passpoint onto our network. Wi-Fi calling has been in the news quite a bit off late, and one development we find quite compelling is the announcement that Comcast will launch a wireless service similar to Google's Project Fi. By triggering an MVNO agreement with Verizon and combine it with their network of 10 million hotspots, Comcast will be able to create a Wi-Fi for its phone service that competes head-to-head with the carriers. And will certainly put more pressure on the remaining big three carriers to move to a carrier offload solution. We continue to have positive conversations in new lab work with multiple industry players regarding Passpoint technology and carrier offload and we’re excited to see the cable companies expand into wireless as well. Turning to military, I’m happy to report our base construction continues. We added 18,000 beds during the quarter bringing our total to 178,000 beds on 36 basis. There are now 46,000 active users for an average subscription penetration rate of 26%, which is in-line with our projections. We also re-launched our IPTV service in the third quarter moving from a traditional cable line-up to a skinny bundle called Core TV. The product which is value priced at 1995 per month offers a tight line-up of highly targeted programming with the ability to add on additional tiers. This is clearly the trend in the MVPD industry with the introduction of new services like Dish Network's Link TV and Comcast dream product. Our military vertical remains strong because it is structured to uniquely serve the soldier. Our offering is priced at what we believe is a good value and is seamless and that it can move with the soldier from base to base. It's why the Army, Air Force, and Marine selected Boingo in the first place and the industry has noticed too. The wireless broadband alliance recently named Boingo Broadband the best Wi-Fi service for vertical markets honoring our innovative use of technology to serve the enlisted person's needs. As you can see the team is executing extremely well against our strategic initiatives. We’re operating effectively and efficiently in all of our key growth drivers, DAS, Military, and Carrier offload continues to perform. We are extremely well positioned to capitalize on the industry trends of mobile data growth and the resulting network densification. With that I’d like to turn it over to Pete Hovenier, our Chief Financial Officer for a detailed look at our third quarter financial results, as well as our outlook for the rest of 2015. Pete?

[Pete Hovenier:]

Thanks Dave. I will begin by reviewing our financial results in key operating metrics for the third quarter ended September 30, 2015 and will conclude with our financial outlook for the full year 2015. All revenue for the third quarter was $37.2 million, representing 20.6% increase over the prior year period. The increase reflects strength in Military, DAS, advertising and Wholesale Wi-Fi revenue, which was partially offset by a decline in retail revenue. Across our diversified revenue streams, DAS represents 35% of third quarter revenues, retail represented 21%, advertising and other represented 15%, Wholesale Wi-Fi represented 15%, and military accounted for the remaining 14%. This compares to the third quarter of 2014, which DAS represents 34% revenues, retail represented 33%, Wholesale Wi-Fi represented 15%, advertising and other represented 15%, and military accounted for the remaining 3%. In terms of total revenue contribution by category, DAS revenue for the quarter totaled $13.1 million, representing a 26% increase over the comparable period last year. The improvement was related to increased revenues from new DAS build-up projects and DAS access fees. Retail revenue was $7.8 million, representing a 23.6% decline over the prior year period. The decrease is primarily due to a decline in our regional subscriber base coupled with reduced retail single use revenue during the third quarter. It’s important to note that our retail revenues have been impacted by increased Wholesale Wi-Fi revenue, specifically our success comes with Boingo program with American Express and Wi-Fi off-line agreement with Sprint. Advertising and other revenue was $5.6 million, representing a 21.4% increase over the prior year period, primarily due to increased advertising sales in our managed and operated locations. Wholesale Wi-Fi revenue was $5.5 million representing of 15.8% increase over the prior year period, due primarily to increased partner usage-based fees, partially offset by a decrease in Wi-Fi build-out revenues related to projects completed in the third quarter of 2014. Military revenue was $5.3 million, representing an increase of 450% versus the prior year period, primarily due to increased subscribers from our build-out of Wi-Fi Networks at military bases across the U.S. Our military network now covers 178,000 beds and counting. Now to into our cost and operating expenses. Network access cost totaled $ 17.5 million, representing a 16.3% increase over the third quarter of 2014. The increase was primarily due to increased depreciation, bandwidth, and other direct cost of sales. Gross margin, which is defined as revenue plus network access cost was 52.9%, up 180 basis points from the prior year period. As previously stated, we expect growth in military revenue will help further increase our gross margins over time. Network operations expenses totaled $8.2 million, an increase of 31.6% in the comparable 2014 quarter, primarily due to increased depreciation and personnel related expenses as we got headcount to support the rollout of our new DAS and military contract, in addition to increased call centre cost, network maintenance and connectivity expenses. The development and technology expenses were $5 million, an increase of 26.1% for the prior year period, due primarily to higher personnel related and depreciation expenses. Selling and marketing expenses was $4.8 million or 26.9% increase in the comparable 2014 quarter, primarily due to increased personnel related expenses from our investments in our sales and business development teams coupled with increased marketing program expenses. General and administrative expenses was $5.5 million or 27.1% increase in the comparable 2014 quarter, due primarily to increased personnel related expenses, as well as depreciation, professional fees, and other operating expenses. Now turning to our profitability measures for the quarter, net loss attributable to common stockholders was $4.8 million or $0.13 per diluted share versus a net loss of $3.8 million or $0.11 per diluted share in the prior-year quarter. Adjusted EBITDA was $8.5 million, an increase of 27.4% for the comparable 2014 quarter. In terms of our operating metrics, we ended the third quarter with connects or paid usage on a worldwide network for approximately $27.8 million, up 26.9% in the prior-year period and up 7.7% in the second quarter of 2015. Our retail subscriber base was 212,000 subscribers at the end of the third quarter, which is down 24% from the prior year period and down 5.8% from the second quarter of 2015. Our military subscriber base was 46,000 subscribers at the end of the third quarter, an exponential increase versus the prior year period and a 15% increase from the second quarter of 2015. The number of DAS nodes in our network for the third quarter was 10,300, up 27.2% from the prior year period and up 8.4% from the second quarter 2015. Moving on to discuss our balance sheet, as of September 30, 2015, cash and cash equivalents totaled $8.6 million as compared to $20.5 million at June 30, 2015. Total debt was $21.5 million and we had approximately $31.5 million available in our credit facility as of September 30, 2015. Capital expenditures were $30.1 million for the third quarter which included $17.5 million utilized for DAS infrastructure build-out projects that are reimbursed by telecom operating 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. I will now turn to our outlook for the full year of 2015. For the full year ended December 31, 2015, we are reiterating guidance as follows. We expect total revenue to be in the range of $136 million to $141 million, representing year-over-year growth of 14% to 18.2%; 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 $0.59 per diluted share. We will maintain our tax valuation allowance established in the fourth quarter of 2015 and as such do not expect to accrue material tax benefits or tax expenses on our income statement for the remainder of 2015. As such, we will continue to expect a nominal full-year tax rate as well as fully diluted shares outstanding of approximately 37 million. In summary, 2015 has been a year of investment. We continue to expect we’ll end up approximately $40 million to $45 million on non-reimbursed capital expenditures for the year which is inclusive of $25 million to $30 million to support our military base network build-outs. While we filed the universal shelf registration statement with the SEC in September to provide us with a flexibility to raise additional capital in the form of either debt or equity, should the need arise to fund additional network build above and beyond their current plan. We believe our cash balance and cash held up from operations in combination for a bank line of credit will be sufficient to meet our anticipated capital needs concluding the remainder of our 300,000 bed military base build out we expect to complete in 2016. Overall, we are very pleased with our record third quarter results which exceeded our expectations. With that, I’ll turn it back over to Dave for closing remarks.

[David Hagan:]

Thanks, Pete. As our results show, our business is very strong. Fundamentals for continued growth and increasing profitability are in place and the team is executing according to plan. Boingo is having its best year ever and we expect our momentum will continue. With that, I’d like to open up for questions. Operator?

[Operator:]

At this time, we will be conducting a question-and-answer session. [Operator Instructions] Our first question is from James Breen with William Blair, please state your question.

[James Breen:]

Taking the question, which is couple of things, one, on the military side I think you’re expected to cut over a number of beds this quarter. Can you just talk about what’s going on there? The penetration rates seem to be just north of 25%, almost 26% now and have any changes happened there? And then with the IPTV offering, how do you think about that getting adopted across that base? Thanks.

[David Hagan:]

Jim, thanks for the question. I’ll start and then Pete may want to add some color commentary. So as we’ve talked about, we do have big cutovers in Q4. It’s going to be our biggest quarter for new beds of the year. And so there is potential for diluting our penetration percentage a little bit in the short term as we sort of absorb those and then market to those prospective customers. But we don’t expect a significant drop, there could be a little but again we think the – we believe the absolute number of subscribers will continue to grow. In terms of IPTV, we think we’ve got a great skinny bundle. As we talked about in our prepared remarks, it will be very interesting to our military target audience. We don’t expect a huge change driven by it, but we do think it’s the right product for the target audience but again this target audience is really all about high speed internet and gaming and other things with television quite secondary. I think it’s the right product but we are not forecasting any big movement as a result of that. Pete, did I miss anything?

[Pete Hovenier:]

You’re digging everything Dave. The only other piece I’m touching on Jim is the penetration rates in Q1 we are 23%, Q2 we were 25% and Q3 here now we are 26%. So we are showing modest improvement as Dave alluded to given the large cutover, we may see a slight drop in Q4 in terms of the rate but absolute subscribers, we absolutely expect to increase.

[James Breen:]

And then can you just remind us on the CapEx side, how much CapEx you have left to spend in military and when will that drop off?

[Pete Hovenier:]

Sure. For this year, we projected between $25 million and $30 million. We’ve spent almost $20 million year-to-date through Q3, so we will do the balance of that here in Q4. And then exiting the year we’ll have about 230,000 beds fully covered to leave around 70,000 beds we need to build out in 2016 and so call that around $50 million.

[James Breen:]

Great. Thank you very much.

[David Hagan:]

Thanks, Jim.

[Pete Hovenier:]

Thanks, Jim.

[Operator:]

Our next question comes from James Mormon with D.A. Davidson, please state your question.

[James Mormon:]

Yes. I guess first as a follow-up on the last question in terms of the build out, I think you said it before that you had a bunch of basis that the only provider is going out of business. So again is that more of a Q1 impact where you could start to see maybe a higher penetration from those? And then also just in terms of cash, it sounds like when cash flow should start ramping and then you’d be able to meet your needs and then eventually fit on the crisis and how do you’re going – can you just give a little more detail on that on your cash flow and your needs?

[David Hagan:]

Jim, I’ll take the first one and I’m going to hand it off to Pete on the cash flow. So on the cutover for the military, you’re right. We’ve got a significant number of this major cutover that we are doing in Q4 that is a handoff from another provider and we are hopeful that, that will actually ramp up faster than a normal fresh marketing where we don’t have a cutover where we got to earn every customer through marketing effort. So we do expect a quicker pickup on it. But that said, it’s a large number of bed that we are cutting over so we could still see a little bit of a dip in our penetration level. Pete, why don’t you handle the cash flow?

[Pete Hovenier:]

Sure. I’m touching on cash, Jim. So what we’ve communicated I think pretty clearly over the last year is 2015 is a year of investment and we’re going to exit 2015 still with a decent amount of beds to put on the military. As I mentioned just a minute ago about 70,000 beds which is almost $15 million of CapEx. Once we get through get, we should be a larger generator of cash. We do expect that we have guidance yet in 2016 but we do expect in 2016 to be a modest consumer or a modest generator primarily because of the incremental cash we’re going to use to fill up these military beds. But in 2017 that’s when we really start to generate free cash flow again because we now have the military build out behind us and will be generating and harvesting free cash flow from operation. And we’ll go back to historical levels of CapEx which is in typically this 7% to 10% of revenue range.

[James Mormon:]

Perfect. Thanks.

[Operator:]

Our next question comes from Anthony Stoss with Craig-Hallum, please state your question.

[Anthony Stoss:]

Hi, guys. I got three part, if you don’t mind give us an update on where you stand in the Wi-Fi offload lab test and also if you have any cable operators that are not participating in that. And then Pete if you don’t mind just kind of go through your DSOs being up, accounts receivable being up and also what your thoughts are on OpEx spend if it’s going to set a level out in 2016. Thanks.

[David Hagan:]

Tony, I’ll start. So on Wi-Fi offloading, just really strong activity as we talked about last quarter and in the conferences in-between extremely high interest levels both from carriers and non-carriers kind of across industry segments. We are very encouraged by what we are seeing out of the cable cos. Obviously they’ve been deploying Wi-Fi for a number of years now but it’s been the partial announcement that Comcast has come out was that, it looks like they’re going to actually compete against the operators, the Telco operators with their own mobile service. We see that as a very good sign and we think other cable cos will probably follow. So that’s all just good energy around Wi-Fi becoming the priority network if you will with cellular as a backup in-between hotspots, the Wi-Fi first kind of approach. So all of that we think is just extremely good news. I know everybody wants to know when we’re going to sign carrier number two, so I don’t have that news for you today but the activity level is high and we continue to be encouraged by the activity and to us it’s not a question of if but when, we’re working hard at that. Pete, do you want to handle the DSO and AR?

[Pete Hovenier:]

Sure. So Tony, on our AR as you know and most people know, the vast majority of our ARs are from carriers and the majority of it really comes from our DAS build projects. So we will typically get paid in the 90-day window. If you look at our 50 million-ish of AR that we have I’d say 75% to 80% of it is in that 90-day window which is typically when we get paid. So nothing that we are overly concerned on, it’s within the normal cycle but it is something we put an intense amount of focus on to make sure we bring this in so we can keep our operating cash flow moving. In terms of OpEx and when you think about OpEx for us, what we really focusing on is improving EBITDA margin expansion. So we expect OpEx this year to on the cash based portion to grow 14 points to 15 points on a year-over-year basis with about another 10 points of D&A. So if you really think about the cash usage, 14 points, 15 points which is below our revenue growth rate which is important to us because we need to keep operating expenses growing at a rate above revenue. So we hope we will make sure EBITDA margin expansion.

[Anthony Stoss:]

Okay. Thanks, Pete.

[David Hagan:]

Does it answer your question, Tony?

[Anthony Stoss:]

Yeah. I think so. Thank you.

[David Hagan:]

Thank you. Sorry, Jim. Oh, it was Tony. Sorry, Tony.

[Operator:]

Our next question comes from Jon Hickman with Ladenburg Thalmann, please state your question.

[Jon Hickman:]

Hi, could you repeat the number for how many Sprint people are being cutover automatically on the Passpoint with iOS 9?

[David Hagan:]

Sure, Jon. So we are up to 22 million in total, 12 million that are on the iOS 9 Passpoint deployment.

[Jon Hickman:]

Okay. And then could you talk a little more about the - leading with Wi-Fi, are you going to go back to these DAS only venues and that Wi-Fi in and can you talk a little bit more about that?

[David Hagan:]

Sure. It’s going to be a bit of a long answer. So as you know, we have a lot of venues that have both Wi-Fi and DAS, and that’s been our core competency as a company, that’s where we’ve deployed a lot of networks overtime. And most of those are in the early days of our history of the airport, so we have a lot of combined airport DAS and Wi-Fi implementation. And then what we saw overtime is that, as the trend towards Wi-Fi became free, so the venue wanted free to their guests, it became a more challenging business model unless the venue was willing to pay for it. In many cases, the venues wanted the operator to pay for it and offer free to the guest that’s a tough economic model. And so about two years ago and we’ve communicated this with the folks that have been following us and with investors, we’ve really started leading with DAS in most venue acquisition because carriers were funded, so we knew we could get a good economic return by leading with DAS and then it was always our strategy to be able to go back in and retrofit in Wi-Fi. So we have a whole base of some DAS only venues that we’ve talked about that, that we have an opportunity to go back and put in Wi-Fi. And then what we are seeing on new venue acquisition is that, even if a venue may have a DAS network not from Boingo and typically it’s a carrier implementation as I mentioned in my prepared remarks and very often we see there is just one carrier on the DAS network. The venue is frustrated, they need to have a great guest experience and they’re now stepping up to pay for Wi-Fi network. So instead of trying the guest I’m going to pay for the network and then offer it free to their patrons, they are quite willing to write the check to get it up and running and to pay that have someone operate it so their guests have a great experience. So it’s a very fundamental market shift that is quite real time so the last several RFPs that we’ve seen come through that weren’t DAS specific, that we are Wi-Fi specific or a combination were structured in that way. And at the beginning of this year, we didn’t see RFPs structure that way, so it’s kind of a real-time change and again we think it’s a very positive change and an appropriate change and just continues to reflect and reinforce our position with having deep domain experience in both DAS and Wi-Fi. So we are really unique in that way. We can go to the venue and help them with what they’re trying to solve which is giving them a great guest or patron experience. So we think it’s a great trend and especially good for us.

[Jon Hickman:]

So why doesn’t the venue just go with the carrier that set up with DAS and not them do the Wi-Fi?

[David Hagan:]

Sorry, so why don’t they go away with…

[Jon Hickman:]

With DAS only and the carrier did it, the AT&T, why doesn’t the venue just have AT&T set up the Wi-Fi for them instead of involve you?

[David Hagan:]

So, great question. So typically if that’s the scenario and I’m not picking on any particular carrier here but if there is a DAS network that’s been deployed for a number of years which is what we’re seeing with the case and it’s one carrier. That venue is typically not very happy with that carrier because the venue bought the DAS system with the expectation that it would be for all of their guests. And they are now sitting there a few years later and there is just one carrier’s customers getting great treatment, and so the venue sees the opportunity to go with Wi-Fi because it’s universal, it’s cross carrier, it’s all devices and so it gets them out of the clutches of the carrier in that scenario and that’s what we’ve been seeing repeated over and over in these RFPs.

[Jon Hickman:]

Okay. Pete, could you give us any idea of where you think your stock-based compensation might be for the quarter coming up?

[Pete Hovenier:]

Yeah. I think stock-based comp should be, you’re not going to see it grow significantly Jon. So it’s going to be in the same general ranges where you’ve seen it about for two years.

[Jon Hickman:]

Okay. That’s it from me. Thanks.

[Pete Hovenier:]

Thanks, Jon.

[Operator:]

Our next question comes from Stephen Ju with Credit Suisse, please state your question.

[Unidentified Analyst:]

Hi guys, it’s Chris on for Stephen. Congratulations on the quarter, so in terms of military, it looks like you guys showed an annual and sequential growth in average revenue per subscription. Was that driven by ability to up sell customers or things like the core TV product that you talked about? And then how should we think about monetizing the subscriptions going forward? Are there going to be other ways where you can continue to up sell them?

[David Hagan:]

Thanks, Chris. So on the ARPUs it’s really mix between the $30 plan and the $50 plan on broadband. A little bit of IPTV and it was so late in the quarter that I’d shocked that actually move the needle very much on it, plus more just a mix overtime. We constantly try to get our subscribers on to the higher plan and certainly after they frequently commit on lower plan and then they want more bandwidth and all move up, so I think that’s the dynamic but it’s pretty small in overall ARPU impact. And then in terms of what we’re going to do down the road with our subs, we think there is a great opportunity with this military solider audience to do facilitate gaming for them. So we are looking a product development around that idea. They are definitely into bandwidth, they are definitely into gaming in a big way and we think we’ve got an opportunity to grow the sub base and kind of the product portfolio with them overtime but job one is, we got to get all the basis installed.

[Unidentified Analyst:]

Okay. Thanks guys.

[David Hagan:]

Thanks, Chris.

[Pete Hovenier:]

Thanks, Chris.

[Operator:]

Thank you. I would now like to turn the conference back over to Mr. Hagan.

[David Hagan:]

Thanks for your questions today and we appreciate your time. We will be attending various upcoming investor conferences before the end of the year including the Jefferies Small Cap Mid Cap Telecom Summit in New York. We hope to see many of you there. Thanks again for joining us today.

[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.