Boingo Wireless, Inc.
Q4 2013 Earnings Call Transcript

Published: 26 Feb 2014

[Operator:]

Greetings and welcome to the Boingo Wireless Fourth Quarter and Full Year 2013 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]. Now, I’d like to hand the call over to your host, Kimberly Orlando of Addo Communications. Thank you. Ms. Orlando, you may begin.

[Kimberly Orlando:]

Thank you, and welcome to Boingo Wireless’ fourth quarter and full year 2013 earnings conference call. By now, everyone should have access to their earnings release which was issued today at approximately 4’o clock PM Eastern Time. If you are 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 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, 2014, 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, 2013, filed with the SEC on November 12, 2013. 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 operations. We have provided reconciliations of non-GAAP to GAAP measures in our earnings release. And with that I will hand the call over to Boingo’s CEO, David Hagan.

[David Hagan:]

Thanks, Kim. Good afternoon everyone. Thanks for joining us to discuss our fourth quarter and full year 2013 results. Overall, a very good year. Our progress included all-time highs in revenue and significant new contracts that we believe will generate long-term recurring revenue for the company in both our wholesale and retail parts of the business. As we said a year ago, 2013 mark the beginning of a transformation. The expansion of advertising sponsored free access in many of our managed and operated airports, contributed to the shift in revenue from single use Wi-Fi sales, advertising sales. This shift also increased load on our networks as user volumes and data demand increased which are quite investment and network upgrades. These upgrades will provide the platform to enable next generation technologies of standardize roaming and offloading for customers, partners and carriers alike. The progress made in 2013 establishes the foundation for accelerated growth starting in the back half of 2014 and beyond. DAS, military broadband and advertising are expecting to be key growth drivers for Boingo going forward. I’ll share more details in a bit, but first let’s review financial highlights for the year. Revenue for the full year came in at 107 million which is 4% in year-over-year growth compared to 2012. This was in line with expectations in all three lines of business were contributors while DAS and advertising provides the largest contribution to growth. For the full fiscal year, EBITDA was 24 million, a 22% decline year-over-year but was in line with expectations. This reflects heavy investments in key growth initiatives along with the impact of a restructured Verizon contract renewal, which Pete will speak to in a moment. We have several strategic growth initiatives to gain traction in 2013 and will continue to drive growth this year and beyond. Let me begin with a small cell part of our business more commonly known as DAS. We’ve been in the DAS business for more than a decade and a put a renewed emphasis on it by expanding our business development and operational teams in 2013. As a result, we drove meaningful revenue in the year through upgrade projects as well as securing future recurring revenues through new venue wins. Carriers are looking at DAS network for the near-term offload traffic in congested areas as LTE macro networks to reach saturation. This has provided boon not only to our existing DAS installations where legacy 3G networks are being upgraded to 4G by participating carriers, but also in many high traffic locations currently not served by small cell systems. Last year, we secured several nice venue wins including DAS rights in Memphis International Airport, University of Arizona, Lincoln, Nebraska Pinnacle Bank Arena and another major university. Already this year, we’ve announced additional DAS build out for Brazil, Sao Paulo International Airport, the largest airport in Latin America and the village of Rosemont in the Greater Chicago area. As of December 31, our DAS network included approximately 6,300 DAS nodes installed, an improvement of 13% over 2012. Further, we currently have additional 1,400 DAS nodes in the process of being deployed, setting the stage for significant increases in DAS coverage for the second straight year. DAS agreements are typically long, seven to 10 years, with both recurring revenues from carrier rents and incremental revenue opportunities from service upgrades over life of the contract. They are highly profitable and currently in high demand among peers and venues alike. We believe that our core expertise in large venue DAS combined with increased market demand for in-venue cellular support, will continue to provide significant growth opportunities for the company’s wholesale revenue over the next several years. Likewise, we believe the long-term military broadband contracts the army, the air force and the marines announced in the fourth quarter, will become the primary growth driver for retail moving forward. The military contracts represent a captive audience with numerous network devices that are hungry for Internet access. In order to capitalize on the opportunity, we’re currently building our infrastructure that will eventually cover about 300,000 across hundreds of military basis and thousands of buildings. This will require the installation of 35,000 to 40,000 Wi-Fi access, greatly eclipsing the total number of access points in our entire managed and operated network today. The upfront hardware backhaul cost will be substantial, as well as those costs from increased personnel required for the roll out. This directly affected last year’s fourth quarter profitability. These costs will become even more apparent in the first half of 2014, as we aggressively ramp up deployments and advance the network launches we can monetize them by marketing subscription services the [inaudible]. Several key bases are targeted to come online with the second half of this year which will help drive revenue of deployment costs. We’re very excited about the growth opportunity at the military and broadband networks provide, but it’s important to remember that it’s just getting underway Pete will provide more color on the financials in a few minutes. Another strategic initiative for us is the continued expansion of our managed and operated networks. Our business relies on a strong core networks and maximized revenue opportunities, from wholesale to roaming and platform services to advertising for our traditional retail life like products. To that end, we acquired Advanced Wireless Group, AWG, last year to consolidate domestic airport Wi-Fi market and increase the value of our managed and operated networks to customers and partners alike. AWG brought 16 new airports to Boingo, including op 25 airports Los Angeles, Miami, Charlotte and Minneapolis. AWG contributed nominal revenue in the fourth quarter, which was mostly offset by costs associated with the acquisition and subsequent integration. The ongoing integration is being closely coordinated with our new airport partners as well as combining best practices for both companies to maximize the value of the acquisition. In addition to expanding the domestic managed and operating network, we continue to seek opportunities internationally to establish strong footholds for Boingo’s products and services. Most recently, we announced agreements with Sao Paulo International Airport, Latin America’s largest airport, to provide DAS and Wi-Fi services to the more than 35 million passengers that arrive and depart each year and divides two airports that serve 66 million passengers. Dubai International is currently the second biggest airport in the world in terms of international passengers. Advertising has been another bright spot of showing significant growth opportunities. In 2013 alone, the advertising group delivered nearly 8% year-over-year growth when compared to ad revenue generated in 2012. And we see advertising continuing to grow at rates faster than the digital media industry itself. Essential to the growth has been the ramp up in our sales force, creating a fully staffed team that has great relationships with major brands and agencies, as well as the addition of new advertising and industry partners and network inventory including AWG airports. We believe advertising can continue to contribute significant year-over-year growth, new monetization opportunities that we can leverage across our managed and operated network as well as on advertising partner networks. The last strategic initiative I’d like to address is carrier offload. We entered into a new offload agreement with tier one carrier during the fourth quarter. With that agreement and the resigning of Verizon, we now have carrier offload agreements with three of the four tier one carriers in the U.S. We’ve also invested significant resources for parent network to support the capacity and quality needs that offload requires. However, we believe that carrier offloads Wi-Fi is still a long-term play and will not be contributing significantly to our financials in the near term. We remain true believers that carrier offload will come. The latest Cisco’s Visual Network Index reinforces that mobile data traffic will continue to grow exponentially increasing a eleven fold over the next five years, putting an unmanageable burden on the networks. Cisco also projects that by 2018, more than half of all traffics for mobile connected devices will be offloaded to Wi-Fi and other small cells. With our emphasis on DAS in the short-term and building for Wi-Fi offload in the long-term, we should be well positioned for the tide change as it comes in. Now I’d like to turn it over to Pete Hovenier, our Chief Financial Officer for a detailed look at our fourth quarter financial results and outlook for 2014. Pete?

[Peter Hovenier:]

Thanks, Dave. Today I’ll begin by reviewing our financial results and key operating metrics for the fourth quarter ended December 31, 2013, and will then conclude with a financial outlook for the first quarter and full year 2014. Total revenue for the fourth quarter was 28.8 million, representing a 2.7% increase of the prior period. The increase reflects strength in advertising and retail subscription revenue, partially offset by decline in wholesale and retail single use revenue. Across our diversified revenue streams, also represented 41% of fourth quarter revenues, retail represented 38% and advertising accounted for the remaining 21% of revenue for the quarter. In comparison to last year, wholesale represented 52% of fourth quarter 2012 revenue, retail represented 39% and advertising accounted for the remaining 9%. Wholesale revenue totaled 11.7 million, representing a 20% decline from the comparable period last year. The decrease in wholesale revenue was mainly due to a short-term DAS build out project that one of our managed and operated locations in the prior year period and our restructured agreement with Verizon, which previously included minimum volume commitments. As Dave discussed, we are excited to announce our renewed Verizon agreement, now includes terms for carrier offloading. Retail subscription revenue was 8.7 million, representing a 5.3% increase over the prior year period. This increase was due to growth in our retail subscriber base, partially offset by decrease in average monthly revenue per subscriber, resulting from increase from promotional[ph] offers and a growing mix of our lower priced smartphones and tablet owned subscriptions. Retail single use revenue was 2.3 million representing, a 11.5% decline in the fourth quarter of 2012. The decline primarily reflects transition of certain paid managed and operated locations to a tiered of pricing model, as well as increase in customers who opted for subscriptions. Advertising other revenue was 6.1 million, representing a 144% increase over the prior year period. The increase was due primarily to the strong performance from our advertising and sales team and our investments in the Boingo media advertising platform. As Dave mentioned earlier, sponsored access in many of our managed and operated locations is contributing to the shift in revenue mix from retail single-use to advertising sales. Advertising during the quarter also benefitted from additional ad sales acquired from AWG. Now turning to our fourth quarter costs and operating expenses. Network access costs totaled 12.9 million representing a 1.2 % increase over the fourth quarter 2012. Gross margin, which is defined as revenue network access cost, was 55.3% up 70 basis points from 54.6% in the prior year period. Network operation expense totaled 5 million, an increase of 38.5% for comparable 2012 quarter, primarily due to increased personnel related expenses driven by new headcount to support the roll out of our new military contracts and increased depreciation expenses. The development in technology expenses were 2.9 million, down 1.1% for the comparable quarter last year, due primarily to decreased consulting and personnel related expenses, offset by increased depreciation and maintenance expenses. Selling and marketing expenses were 4.1 million, a 37% increase in the comparable 2012 quarter, primarily due to increased personnel related expenses resulting from our investments in our Boingo media and Boingo broadband sales and business development teams and increased advertising expenses. General and administrative expenses were 3.5 million, a 7.7% increase from the comparable 2012 quarter, due primarily to increased personnel related expenses, partially offset by decreased professional and other expenses. Now turning to our profitability measures for the quarter. Net loss attributable to common stockholders was $2.8 million or $0.08 per diluted share versus net income of $1.4 million or $0.04 per diluted share in the prior year period. As a result of our ongoing investments in growth, we established a tax valuation allowance which resulted in a one-time, non-cash tax expense in the amount of 2.1 million in the current quarter. We will maintain this valuation allowance and no longer accrue material tax benefits or tax expenses in our income statements until appropriate level of profitability is obtained. Adjusted EBITDA was 6.9 million, a decrease of 4.9% from the comparable 2012 quarter. Please refer to our earnings release for the definition or reconciliation as it’s a non-GAAP measure. In terms of our operating metrics, we ended the fourth quarter with connects of paid usage on our worldwide network of approximately 22.4 million, up 185% from the prior year period and up 106% from the third quarter of 2013. The increase versus prior year and prior quarter is primarily due to increased connects with advertising sponsorships next during the quarter also been included from the venues acquired from AWG. Our retail subscriber base was 310,000 subscribers at the end of the fourth quarter, which was up 9.2% in the prior year period and down 1% from the third quarter of 2013. As compared to the prior year period, our subscriber base continue to benefit from the growth of the installed base of smartphones and tablets and from the continued improvement in the conversion of single use customers to ramp our retail subscription plans. Our monthly churn rate for the quarter was 10.1% versus 10.6% in the comparable 2012 quarter and 10.2% last quarter. The number of DAS nodes in our network in the fourth quarter is 6,300, up 12.5% from the prior year period and up 6.8% from the third quarter of 2013. We do this metric as a benchmark at which to measure our growing DAS assets will provide this new metric on a go forward basis. Moving on to discuss our balance sheet. At December 31, 2013 cash, cash equivalents and marketable securities totaled $60.3 million or $1.70 per diluted share outstanding and we remain essentially debt free. Capital expenditures were 10.4 million which included 6 million utilized for DAS infrastructure build out products that were reimbursed by a telecom operative partners. A non-reimbursed capital expenditure were driven by primarily by new network builds mainly relate to the roll out of military bases and upgrades and system enhancements in preparation of increased traffics and carry offload. I will turn to our outlook for 2014 shortly however, given the evolution of our business model over the past year I want to take a couple of minutes to discuss the future growth drivers of our business. As we touched upon earlier, 2013 was a year of transformation for Boingo, as we build to set a foundation for reaccelerated growth in the back half of 2014 and beyond. Looking ahead, we’re confident in the value and the growth opportunities available to us based upon our small cell technology platform and strategy. We believe we can drive significant sustainable growth as we build out a solid solution on military bases and through our strategic acquisitions of the other largest player in the airport space AWG, all of which support the retail part of the business. At the same time, our wholesale growth initiatives including DAS and longer term carrier offload, will fuel significant growth as mobile data growth continues to drive the industry to increase small cell infrastructure. And finally our powerful advertising platform allows us to monetize free Wi-Fi locations. Our outlook contemplates acceleration revenue growth from recent levels that we can differ to expand the wider half of 2014, particularly as military bases come online. As Dave touched upon, anticipated the way our 2014 year-over-year growth comparable will be the transition of our Verizon Wi-Fi relationship into a true carrier offload customer which is not materially factored into our guidance at this point. In order to drive our anticipated growth we’ll continue to make significant investments in business this year. These investments will primarily include new network builds higher system to support our growth, additional backhaul circuits primarily military bases, and upgrades to existing networks to meet the needs of our customers rapidly growing data consumption demands. I will now turn to our outlook for the full year and first quarter of 2014. For the full year into December 31, 2014 we are initiating guidance as follows; we expect total revenue to be in the range of 116 million to 121 million or year-over-year growth of 9% to 13%. Keep in mind, that if you were to exclude Verizon from the prior year period, growth would be approximately seven points higher or 18% year-over-year at the midpoint of our guidance range. We expect adjusted EBITDA to be in the range of 24 million to 27 million and net loss attributable to common stockholders to be in the range of 14 million to 11 million or a loss of $0.40 to $0.31 per diluted share. As noted earlier we did not expect any material tax benefits or expenses during 2014. Accordingly, we expect a nominal full year tax rate and fully diluted shares outstanding of 35 million. For the first quarter ended March 31, 2014 we’re initiating guidance is follows. We expect total revenue to be in the range of 24 million to 26 million or year-over-year growth of 8% at the midpoint of our range. We expect adjusted EBITDA to be in the range of 1.5 million to 3 million and net loss attributable to common stockholders to be in the range of 6.5 million to 5 million or a loss of $0.19 to $0.14 per diluted share. Our full year and first quarter 2014 guidance reflects our investments in our business as significant acceleration in our revenue growth rates as compared to 2015. With that, I’ll turn it back over to Dave.

[David Hagan:]

Thanks, Pete. To sum up the year, we’re very pleased with the company’s direction. Multiple lines of business are showing tremendous growth or growth potential advertising, DAS and military broadband. The change in business model headwinds we faced in the airport Wi-Fi market, have largely run their course and we’re now properly oriented to capitalize on our growth and data demand, working with our airport partners to optimize the customer experience. We expect to continue investing in our business, especially the military broadband opportunity which will place a near term drag on, which should lay the foundation for accelerated future growth starting in the second half of this year and more meaningfully, in the years to come. We continue to evaluate the business for both near term and long-term growth opportunities and invest the resources necessary to strengthen the both our competitive and financial position for the long term. We couldn’t be more excited about the direction of the company. Thanks for listening today. With that I’d like to open up for questions. Operator?

[Operator:]

Thank you. Ladies and gentlemen at this time, we will be conducting our question-and-answer session. [Operator Instructions]. Our first question is coming from the line of Mr. James Breen from William Blair & Company. Your line is now open. You may proceed with your question.

[James Breen:]

Great. Thanks. Just a few questions on the numbers themselves can you may be – can you give us a little color in terms of spending? Obviously, it seems like you’re going to see some pressure on EBITDA, EBITDA margins are beginning this year and you look at your guidance it seems like half almost half the EPS loss comes in the first quarter. Any thoughts there or any color you can give us on to what you’re expecting for CapEx in the first two quarter just for Endeca[ph] and the operating cost associated with that, so you can think of how EBITDA margins ramp up throughout the year? And then secondly on the sort of bigger picture, there’s been chatter from guys like Facebook and Google about you wanting some control on the access side. Any thoughts of in terms of partnering some of those companies to build over services? Thanks.

[David Hagan:]

Let’s take the numbers, Pete.

[Peter Hovenier:]

Sure. So Jim, first off on the CapEx for the military vertical. We’re expecting to see throughout the year about 25 million of CapEx expenditures to build out the military vertical and our OpEx as you called out, we’re expecting to see double-digit OpEx growth during the year. And definitely skewed in the first half as we build out the military vertical and there is lot of these expenses are coming upfront while we build out this vertical and we start to see contribution in the second half of the year.

[David Hagan:]

And Jim one more – sorry go ahead.

[James Breen:]

I just wanted to say when will you start marketing on the military bases so we could start seeing some revenue from that as well?

[Peter Hovenier:]

So as I said really in the second half, we are doing some as we speak, but you’ll see to a bigger extent in the second half of the year and really skewed more towards Q4.

[David Hagan:]

But first half of the year Jim, is really building, getting the networks build, lighting them up doing all the testing so then we can start marketing. So we’re rough and running with Pendleton as you know, but the rest of the base has come on and over the next couple of quarters again skewed towards the second half of the year when we’ll start marketing.

[James Breen:]

Great. Thanks.

[David Hagan:]

Regarding your other question on Facebook, Google and others, I think as we talked about you in the past, we think there is obviously a lot of interest in the marketplace about Wi-Fi and using it in many different ways. And we’ve had a lot of discussions with Internet companies like Facebook and Google with OEMs who you could certainly name, we did a deal with Samsung that we announced last quarter. We did a lot of activity in that area and we remain bullish that there’s some interesting partnerships available to it, but obviously nothing to announce today on this call.

[James Breen:]

Great. And then just one follow up on the DAS business David, in your comments you talked about the nodes that you added and Pete referenced the new metric that you’re going to start talking about. As you look at that, can we look at sort of growth in nodes as a reflection of the growth in the revenue in that business that sort a fair representation?

[David Hagan:]

It’s a good, yes.

[Peter Hovenier:]

Yes, exactly Jim.

[James Breen:]

Okay, great. Thank you very much.

[David Hagan:]

Thank you, Jim.

[Operator:]

Thank you. [Operator Instructions]. Our next question is coming from the line of Mike McCormack with Jefferies. Your line is now open. You may proceed with your question.

[Michael McCormack:]

Hey guys. Thanks. Just watching the [inaudible] from yesterday and a Hotspot 2.0 roll out at the airports I’m thinking about technologies well Passpoint. Do you guys see a real opportunity here to move more of those single used customers into retail subscription based upon some of the new technologies? And then secondly, a thing on the carrier offload side, what are the key push backs you’re hearing from carriers with respect to moving more to a Wi-Fi offload model?

[David Hagan:]

Well Mike, so on your first question Hotspot 2.0 as it relates to single sales versus subscription, so we rolled it out for Boingo retail subscribers first, because the user experience is such that as soon as one of those subscribers locked into one of our locations, they will automatically authenticate on the network. They literally do nothing and so we think that’s a great experience for people that are paying a monthly referring fee. We didn’t roll it out for AYG customer because they wouldn’t incur expense. And so we didn’t want to be billing customers without their aware of it. We think there is an opportunity for some AYG customers to move over subscription, but the real primary driver of doing this is ultimately make Wi-Fi network as part of the fabric of cellular and wireless networks in general. And so that, instead of moving from a cellular macro cell network on to a DAS network which is invisible today, Hotspot 2.0 makes Wi-Fi look a lot like that and feel a lot like that.

[Michael McCormack:]

So whether you’re on a cellular network or Wi-Fi network it becomes seamless. So as the industry evolves, Hotspot 2.0 and Passpoint meet the standards of the industry is rattling around to make that all happen. We’re in a leadership role in the industry and we’ve chosen to upgrade our network Hotspot 2.0 we just announced yesterday 21 additional airports, some large airports in North America that we moved on to that platform. So with all in an effort to move the industry along, I mean obviously can’t make the carriers go to carrier offload, if you’re going to do it in their own time based on their own strategy and sort of based on their own network situation, they have incredible interest in DAS right now. So we think of DAS as the here and now opportunity for offloading from macro cell networks, with Wi-Fi still being a little bit longer term opportunity for them. But they’re all interested as we announce in my part of the scripted comments, we have now three of the four tier one U.S. carriers on carrier offload agreement. So all the pieces are getting put into place, we’re waiting for them to pull the switch.

[Michael McCormack:]

Sorry but from a push back perspective from the carriers though you’re sharing Verizon’s historically talked about network security. And I think frankly they’ve got concerns around authentication and how they get paid for various data products. But is security still a big concern for the carriers?

[David Hagan:]

I think in general carriers when they anything that’s not a network that they control, they have concerns. So, Wi-Fi would certainly fall into that category when it’s not a Wi-Fi note on their network. But in general Hotspot 2.0 and Passpoint, it addresses all of those issues, it addresses security, it addresses authentication. And so that’s the whole point of these industry changes so that those issues that kind of segment a Wi-Fi network from a cellular network, they become invisible and just become non-issues. So, I think all the right things are happening and as cellular networks continue to load up and as we continue to build out DAS nodes we get loaded up, Wi-Fi is the answer. And I don’t think there is really any debate about that, it’s just a question of timing.

[Michael McCormack:]

Right. And then thinking about the DAS business, have you identified areas where you do not have overlapped the traditional tower companies and their DAS deployments?

[David Hagan:]

Meaning have – communications

[Michael McCormack:]

Meaning like you guys were the single provider of infrastructure opposed to competing against the American Tower or Crown?

[David Hagan:]

The way that we segmented the market is if we go after venues that we know in our conversations with carriers is that they have high interest in getting coverage in, better coverage in. Those are typically very large venues. So you seem some of our recent wins in universities and arenas those type of venues have been good categories for us. The carriers have high interest in getting better coverage there. So that’s the way we look at the market, it’s not where we’re the – it’s not because not looking it from a lack of competition, but what are the best venues from a carrier participation perspective. We compete against the tower codes in some places we compete against the carriers themselves and winning those venues, but our neutral host approach is in line with the venue strategy so we seem to be winning a good share.

[Michael McCormack:]

Great. Thanks guys.

[David Hagan:]

Thanks, Mike.

[Peter Hovenier:]

Thanks, Mike.

[Operator:]

Thank you. At this time, there are no further questions in the queue. And with that we will be ending our conference. This does conclude today’s teleconference. You may disconnect your lines at this time. Thank you very much for your participation and have a wonderful afternoon.