Boingo Wireless, Inc.
Q4 2015 Earnings Call Transcript

Published: 26 Feb 2016

[Operator:]

Greetings and welcome to the Boingo Wireless Fourth Quarter and Full Year 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 fourth quarter and full year 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. 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, February 25, 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 September 30, 2015 filed with the SEC on November 9, 2015 and our 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 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 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 to discuss our fourth quarter and full year 2015 financial results. 2015 was an incredible year for Boingo, our best year ever. I’m incredibly proud of the Boingo team and our financial results. We delivered an all-time revenue high of $139.6 million, an increase of 17% over 2014. This marks the second year in a row of double-digit revenue growth and was at the high end of our guidance range. Adjusted EBITDA was $29.6 million for the year, an increase of 46% compared to 2014, and was also at the high end of our guidance range. The past two years of investments we’ve made into our military network build-out are paying off. We anticipate 2016 will be free cash flow neutral and we expect to begin generating positive free cash flow in the second half of the year. This week we secured an additional $23.25 million of available capital through an amendment of our credit agreement, bringing the total amount of our revolver to nearly $70 million. We believe our borrowing capacity, coupled with our cash and positive free cash flow that we expect to begin generating in the second half of the year provides us with sufficient working capital to run our operations, as well as to make the necessary investments in our business. As a result, we have pulled the shelf registration that we filed back in September. Pete will share additional details with you in just a few minutes. For those of you who have been following Boingo for some time, two consecutive years of double-digit revenue growth and our increasing EBITDA margin will come as no surprise. It’s the result of the strategy, investment and execution we have communicated to investors over the past three years. But for those of you who may be new to the Boingo story, I think it’s important to take a step back and examine how we’ve transitioned to this point, and why we believe Boingo will continue to deliver top line growth, and EBITDA margin expansion, as well as generate positive free cash flow for years to come. It all begins with the macro trends that have been driving our business for the past few years, starting with the explosion of mobile data. According to the most recent Cisco Visual Networking Index, mobile data traffic grew 74% in 2015 and is expected to increase nearly eightfold over the next five years. This increase, which is driven by more and more mobile devices using more and more bandwidth-intensive activities like video streaming, is putting incredible stress on cellular networks. Small cell technologies, like Wi-Fi, DAS and Femto cells are leading the way toward critical network densification and Boingo is well positioned to take advantage of this macro trend. Over the past three years, we’ve grown the number of venues in which we have DAS networks live by 63%, and we’ve grown our overall DAS nodes by 73%, from 6,300 in 2013 to 10,900 in 2015. This growth is the result of an aggressive focus on DAS business development that we launched three years ago. We built a sales team to specifically to target DAS venue opportunities, as well as a team focused on driving revenue from existing DAS networks via network upgrades and additional carriers. Today, we believe we are the largest operator of indoor DAS networks in the US, and 2015 was our biggest year ever for DAS. We booked in excess of $150 million in carrier contracts. On top of that, we launched our first major Wi-Fi offload deal with a Tier 1 carrier in 2015. Today, more than 20 million Sprint customers are automatically shifted off of cellular and onto Wi-Fi at Boingo airports. We expect a second Tier 1 carrier to be added to the fold in the first half of 2016. So between the significant growth of DAS over the past three years, and the momentum we are seeing with carrier offload, Boingo is taking advantage of the mobile data growth trend head-on. The second macro trend we’ve managed through over the past three years was the transition of paid Wi-Fi networks to free. This business model shift caused us to reexamine our retail strategy, and we responded by acquiring three companies to help us pivot our business faster, as well as expand distribution of our retail products to wholesale customers. The first acquisition was Cloud 9 Media, an advertising technology company that enabled us to better monetize free Wi-Fi sessions through advertising and sponsorship. Now called Boingo Media, our ad tech platform sold nearly 40 million sponsored Wi-Fi sessions in 2015, and revenue has grown nearly 70% since 2013. The Boingo Media platform enables venues that want to provide free Wi-Fi to their guests a way to help defray the cost of the network. This becomes a key differentiator as we compete to win new venues as few, if any, of our competitors currently have this capability. We made two acquisitions in 2013, starting with Endeka, a provider of Wi-Fi and IPTV services to military bases. From a single initial contract, we’ve been able to sign long-term global contracts with the US Marines, US Army and US Air Force to provide residential high-speed Wi-Fi and IPTV to our soldiers at military barracks. Over the past three years, we’ve grown the number of military bases where Boingo service is available from one to 49. We’ve increased the number of beds covered from 22,000 to 244,000 and are actively moving towards our target of 300,000. And we’ve grown our military subscriber base from 2,000 to 57,000. There is also an opportunity with wholesale as well, as we’ve seen interest from carriers for both Wi-Fi Offload and small cell deployments on the military bases. Net-net, we believe these long term contracts will continue to deliver great value for us, and expect the military vertical will be a very important part of Boingo’s growth story for years to come. Finally, we acquired Advanced Wireless Group, the second-largest airport Wi-Fi provider in the United States behind Boingo. This acquisition enabled us to add an additional 17 airports to our venue portfolio, cementing our position as the world’s largest operator of Wi-Fi and DAS networks at airports and providing us with a more valuable national advertising network. In addition to these acquisitions, we also responded to the shift in hotspots from paid to free by repackaging our retail offering and selling it to wholesale partners through a program called Comes With Boingo. Perhaps the best known of these partners is American Express, where Boingo is a card member benefit to Platinum card holders worldwide. If you combine our retail subscribers with the number of consumers who have a Boingo account through a partner like American Express, there are more than 500,000 consumers with a Boingo subscription today, the highest in our history. We expect significant expansion of the Comes With Boingo program in 2016. There is no doubt that the changing Wi-Fi ecosystem posed significant headwinds to our legacy business model, but I am very pleased with how our team was able to execute and evolve through the transition and emerge as an even stronger company with significant long-term growth potential. As part of our transformation, we have had two and half years of heavy investment in our network operations. These investments are now fueling Boingo’s growth, both in revenue and adjusted EBITDA. As I shared earlier, we expect 2016 to be a close to breakeven year in free cash flow, with positive free cash flow generation expected to occur in the second half of the year. And more importantly, we believe we’re positioned to drive positive free cash flow for years to come based on the network investments we’ve made. We are incredibly well positioned to continue to grow in this high growth, wireless infrastructure market by securing rights at strategic venue locations and building and operating small cell wireless networks. With that, I’d like to turn it over to Pete for a detailed look at our fourth quarter financial results, as well as our outlook for 2016. Pete?

[Peter Hovenier:]

Thanks, Dave. I will begin by reviewing our financial results and key operating metrics for the fourth quarter ended December 31, 2015, and will conclude with our financial outlook for the full year and first quarter of 2016. Total revenue for the fourth quarter was $38.8 million, representing a 15.3% increase over the prior year period. The increase reflects strength in Military, Wholesale Wi-Fi and DAS revenue, which was partially offset by a decline in retail and advertising and other revenue. Across our diversified revenue streams, DAS represented 30% of fourth quarter revenues, Retail, Military and Wholesale Wi-Fi each represented 18%, and Advertising and other accounted for the remaining 16%. This compares to the fourth quarter of 2014 in which DAS represented 32% of revenues, Retail represented 28%, Advertising and other represented 22%, Wholesale Wi-Fi represented 11%, and Military accounted for the remaining 7%. In terms of total revenue contribution by category, DAS revenue for the quarter totaled $11.6 million, representing a 9.3% increase over the comparable period last year. The improvement was primarily related to increased revenues from new DAS build-out projects. Our DAS revenue has two major components

[David Hagan:]

Thanks, Pete. In summary, 2015 was Boingo’s best year ever. The great results you’re seeing, two years of double-digit revenue growth, expanding EBITDA margin and an expected return to positive free cash flow are a testament to the quality of our business. We believe, and many of you have shared with us you agree, that over the long term, the stock price will follow business results. In addition, we have strengthened our balance sheet and removed the potential equity overhang by withdrawing the shelf registration. We are excited by the incredible results we had in 2015 and believe we’re poised for an even better year ahead. With that I’d like to open up the call to questions. Operator?

[Operator:]

[Operator Instructions] Our first question is from James Breen of William Blair.

[James Breen:]

Pete, can you talk about the progression in terms of CapEx for the year? Obviously, it increased from $14 million to $15 million with the military build. As you guys think about that, how will that move throughout this year? And if there’s any sort of absolute guidance you can give on that, it would be terrific. And then just on the data side, just wondering from a competitive standpoint, maybe Dave could talk about this, just there seem to be four or five big players within the space. Are you seeing that many players in each of these bids? And how do you feel about it in terms of the target venues that are left out there to go after?

[Peter Hovenier:]

So, I’ll take the first part on the CapEx piece. So as we said on our prepared comments here that CapEx will be between $35 million to $40 million that is non-reimbursed by our telecom operator partners, and $15 million to $20 million of that really coming from the military. We’re trying to build the military as fast as possible. The bulk of it we are looking to get in the first half of the year, but there’ll be some that still lingers into the second half. So I think you should be thinking about 50% of our CapEx spend in the first half of the year and about 40% in the second half. But what’s also important as we think about becoming free cash flow positive, which we have talked about prior to this call as well as on this call, it’s really driven by the growth in the business. So if you remember, last year, we said about a third of our adjusted EBITDA would be coming in the first half of the year and two-thirds in the second half of the year. That’s how things turned out. And we’re seeing essentially the exact same this year, where about a third of the adjusted EBITDA will happen in the first half of the year and two-thirds in the second half. And that’s really the driver for free cash flow on a go-forward basis.

[David Hagan:]

And then, Jim, on your DAS competitive question, so I mean typically the most we’ll typically see would be four to five other competitors. Two to three would be probably more common, just regions of the country, type venue. Not everybody bids on every venue. But it has been consolidating, and so there are a handful of major players, of which Boingo is one. I feel like we’re really differentiated when we’re competing because of our capability both with DAS and Wi-Fi. That’s still pretty unique. The tower co certainly don’t have Wi-Fi expertise. And we’re seeing, from a venue perspective, we’ve talked about this in past calls. From a venue perspective, they’re increasingly requesting Wi-Fi because it’s a very consumer facing proposition, where DAS is a little bit more invisible and not as well understood by managers of venues. So we like the way we’re positioned there. In terms of size of the market, which I think was the last part of your question, and we’ve talked about this in the past, there isn’t great data on the total number of venues to be covered. But we do know one of our carrier partners has a list of 7,000 venues that they’re targeting. And each of the carriers, the big four certainly, have a similar type of list. Now, I would expect on a list of 7,000 venues that there’s a lot of overlap, or significant overlap. But, I think it’s still – when you think about us with 26 venues live and the size of business that we have and the market share that we already have, which is around 30%, there is just a ton of roadway ahead of us and for the whole industry. So as we’ve said, we think we’re in the early innings of the build out, and it’s a massive market.

[Operator:]

Our next question is fro Anthony Stoss of Craig-Hallum.

[Anthony Stoss:]

A two-part question, if you wouldn’t mind taking us through kind of an update on where you stand lab trial wise on the Wi-Fi offload side, I think you’ve been talking about Internet companies, et cetera, are in the labs testing. And secondly, if you wouldn’t mind also related to Wi-Fi offload, take us through what you’re seeing from Sprint in terms of traffic and data, et cetera.

[David Hagan:]

I’ll start and then I’ll have Pete chime in at the end on some of the more specifics on traffic. So we’ve had multiple carriers and multiple vendors in our labs for a number of months now. As I said in my prepared comments, we’re confident that we’ll get the second Tier 1 carrier onto a Wi-Fi offload deal in the first half of the year. So that would lead you to think that things are progressing there and that we would be comfortable with that. So we’re beyond the trial and now are talking about go-to-market strategy and agreement and all of those types of things. So we’re quite optimistic there. In terms of offload traffic from Sprint, it continues to ramp up. It’s been quite strong. We’re very pleased with it. We don’t give out specific information on that, but it’s progressing as we would expect. Pete, is there anything you’d like to add to that?

[Peter Hovenier:]

Yes. I mean, we really can’t talk specifically on Sprint, as Dave said. One thing we have talked about in the past is the traffic that we see from a Boingo consumer on our network in terms of megabytes that the average consumer has and that continues to increase dramatically. If we look back at 2013, the average Boingo consumer was consuming about 35 megs per session. That 35 increased to about 75 megs in 2014, which then jumped up to about 150 megs in 2015, and now here we are in 2016, we’re over 300 megs per session per Boingo user. The duration of time has not changed. What’s changed is what people are doing, which is really mobile video. So we expect these trends to increase for our user base, and we expect to see the same thing from our carrier offload customers. But until we can start aggregating carriers together and talking about them as a unit versus individual, we really won’t be sharing this information.

[Anthony Stoss:]

And then, as a follow up on the DAS side, is LTE-U or any other flavor, is that slowing things on the DAS side? Help us understand kind of where you stand contract wise quarter-to-quarter on the DAS side.

[David Hagan:]

LTE-U specifically is – just for everybody on the phone who may not have read a lot about it, it is potentially the use of non-licensed spectrum in combination with licensed spectrum for the carrier. So we’re supporters of it. We’re active in trials with major players, whether they’re carriers or on the OEM side. So we’re bullish on that. And what it’ll lead to once it gets ratified and finalized, and we’re not there yet, is it’ll become an upgrade cycle to our DAS business. So just the way we upgraded networks from 2G to 3G and 3G to 4G, which is LTE for the most part, which is where we are now on the majority of our DAS networks, LTE-U will be another upgrade cycle. So that’s good news for us. I think as everybody knows, we charge the carriers for upgrades. We have the opportunity to increase the rent at that point. So it should trigger a great upgrade trend for us.

[Operator:]

The next question is from James Moorman of D.A. Davidson.

[James Moorman:]

First, in terms of going back to Sprint, can you say – I know that eventually you’re supposed to get to 40 million. And I know that the 20 was the iPhone. Is the rest just going to more and more airports? And just kind of what will get us to that? And I guess is there anything that you’ve learned so far from the Sprint contract that you can take to the next carrier contractor or keep in mind when you start to sign that contract?

[David Hagan:]

Jim, let me take that. So the Sprint deal, we’re still at around 22 million handsets. So we basically have all of the iOS and Android phone customers for them that are under the Sprint brand. The next series of developments that we’re working with them on is their sub-brands, so non-Sprint branded parts of their business. So that’ll equal the rest of up to 40 million. I don’t think it’ll be quite at 40 million, but that’s the difference between the two sets of numbers that we’ve communicated and we’re actively working on that. But it’s going to be a little more time-consuming just because we have different management teams that we have to work with. In terms of learnings, I think the big learning has been the notion of carrier quality or carrier grade is a critical component to rolling this out. And so in our dealings with Sprint and their third party testing firm, we literally test venue by venue, platform by platform for quality of service, including being able to do VoIP over Wi-Fi as you’re walking through one of our venues without call loss. So we’ve worked hard to get to carrier grade level. I think we’ve done that with Sprint. I think the traffic shows that. And so as we talk to the other carriers, we have nice examples and proof of concept that we’ve passed that test on carrier grade. And ultimately that should speed our process to market once we sign agreements.

[Operator:]

The next question is from Scott Goldman of Jefferies.

[Scott Goldman:]

A couple questions on my side, I guess one on the Wi-Fi offload. I’m not sure if you can answer this. But can you give us any sense for what you may be building into your guidance re the second contract that you hope to sign or bring on in the first half of this year? And then second, on the DAS side of the equation, I understand the step down in 4Q given the extension. Just wondering if we’ve seen the full impact of that and what visibility we may have in 2016 for further extensions, which could cause some lumpiness in the DAS side. And then last one for Pete, just wondering if you can walk us through the impact on 1Q EBITDA and how that can ramp throughout the year to get to the full year guidance.

[David Hagan:]

I’ll start, Pete, and then hand off to you. So on Wi-Fi offload in terms of our guidance for 2016, it’s pretty small. We’re expecting to get carrier number two in the first half of the year, so that’s signing agreement and hopefully getting to market. We’ll have to see. We would expect to see some real traffic by the end of the year. But in terms of overall revenue and EBITDA guidance, it’s a pretty small piece. Pete, you want to do the DAS step down and Q1 EBITDA?

[Peter Hovenier:]

On the DAS piece, Scott, what you should expect is, for the full year, DAS to grow around the 15% plus range. And that’s going to be actually pretty ratable. We do not expect any significant contract extensions like what we experienced in the latter half of 2015. That was pretty unique to that one venue because it was a very important venue, so it had a larger impact than others. We don’t see that happening in 2016. So you should just continue to model out our DAS the way we typically have, where you’ll see the build revenue grow ratably as we continue to add more venues. And the access fee revenue will be at its lowest point in Q1 and ramp up through the year. And then it’ll drop down again, like we typically see, in Q1 of 2017. It’s a very natural cycle, and it’s one of the reason we felt it was important to start breaking out the components of DAS revenue. So you can see that the build fees [technically] ramp up on a ratable basis, but the access fee portion, there is some seasonality piece. And that’s in the supplemental part of our materials which is on our website. So the last piece, as you think about EBITDA, so Q1 is seasonally our weakest quarter in terms of revenue and in terms of EBITDA, driven really by the seasonality we experience in advertising in DAS in Q1 as well as some unique expenses we incur in the first half of the year around audit and compliance pieces. That typically happens in the first half. So as you think about EBITDA and seasonality, think of it as, for a full year basis, EBITDA about 10% of our EBITDA in Q1. Call it low 20% in Q2, being upwards like 30% in Q3 and like 37%-ish in Q4.

[Operator:]

And our last question comes from Steven Ju of Credit Suisse.

[Chris Ford:]

This is Chris on for Steven; two quick questions. As you’re up to about 25% penetration in the military bases, have you guys seen or do you expect to see any competitive response from the local cable operators in terms of trying to maybe undercut you guys on price? And then on DAS, can you guys try to frame the relative size of DAS venues that you expect to add in 2016 compared to the venues added in 2017, maybe in terms of the number of people that regularly traffic through the venue?

[David Hagan:]

So on the military bases in terms of competitive response, who we are competing with is different on each base. So it’s typically a regional cable co. It could be a national cable co or a regional telco, local telco. We haven’t seen a direct competitive response. We certainly haven’t seen any pricing changes that I’ve been made aware of. Our approach is very different. And typically for our competitors, this is a pretty small business for them and they haven’t necessarily done a lot of upgrades and paid a lot of attention to it because they have a much bigger business off the base. So we’re solving a – or we’re providing kind of a niche service, important to us but less important to the competitors there. So we haven’t seen any direct competitive response, so we’re still feeling good about things on that front. In terms of DAS venues, I don’t think we can provide any color on size of DAS venue this year versus last year. I mean, we’re seeing the same mix of types of venues. So sports and entertainment, both collegiate and professional, the occasional airport will come through even though most of those are now built out. So it’s the same mix of types of venues and this is similar size of venue as well.

[David Hagan:]

Thank you for your questions today. We have a very active Investor Relations schedule for 2016 and we look forward to seeing you at an upcoming conference. Thanks a lot.

[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.