Boingo Wireless, Inc.
Q3 2014 Earnings Call Transcript

Published: 7 Nov 2014

[Operator:]

Greetings, and welcome to the Boingo Wireless Third Quarter 2014 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. (Operator Instructions) As a reminder, this conference is being recorded. I would now like to turn the conference over to Ms. Laura Bainbridge of Addo Communications. Thank you Ms. Bainbridge. You may now begin.

[Laura Bainbridge:]

Thank you, and welcome to Boingo Wireless third quarter 2014 earnings conference call. By now, everyone should have their access to the earnings press release which was issued today at approximately 4

[David Hagan:]

Thanks, Laura. Good afternoon, everyone and thanks for joining us today to discuss our third quarter 2014 results. We had another strong quarter exceeding our guidance on both revenue and adjusted EBITDA. Our military deployments made a major milestone well ahead of schedule. We signed a major DAS agreement for one of country’s most visible construction projects. We launched WiFi service at the 10th busiest airport in the U.S. and we saw the first significance steps towards carrier offload onto our WiFi network. In short, we continue to deliver on our strategic priorities, acquiring long-term wireless rights in large venues, building state-of-the-art networks and monetizing the networks of retail wholesale and advertising products. For the quarter, revenue came in at $30.8 million, an 8% increase year-over-year for the period. Adjusted EBITDA totaled $6.7 million, a slight decline year-over-year reflecting the ongoing investments we’re making in the military network build-outs. We’ve now completed network build-outs at 21 military bases, covering more than 100,000 beds. This is a key milestone for us. As more bases come online, we expect the military broadband networks to support future revenue growth in our retail products. Early response is promising with initial penetration rates exceeding projections. We believe military sales will build momentum this quarter and begin to contribute meaningful revenue in 2015. I cannot overstate the amount of effort, construction management and cross-functional coordination that has gone into this roll out. To date this year we’ve lit up 25,000 access points across more than 500 buildings, using an estimated 400 miles of cable. To put that in perspective that’s the equivalent of building out more than 80 airports the size of O’Hare. October 1 was a key launch date with nine bases launching on the same day. Our engineering and operations teams have done a phenomenal job of setting up the networks and I want to commend them on their extraordinary effort. On the DAS front, we signed an agreement with the Port Authority of New York and New Jersey to apply DAS and Wi-Fi at the World Trade Center Transportation Hub. This is one of the highest profile construction projects in the country. Once completed our DAS network will cover more than 1.5 million square feet in common areas that are expected to serve more than 100 million visitors each year. This is a great addition to our portfolio of managing operated networks and testament to our long-term relationship with the port authority. We’ve already started constructing this network, which will help keep visitors connected in one of the country’s largest central transit hubs. DAS continues to be a growth opportunity for us as carriers look for ways to help better manage daily use. Leveraging their licensed spectrum through DAS has become a priority for them over the last couple of years. It is a very efficient way to increase the capacity from mobile users in large venues. As we’ve discussed on prior calls, DAS represents Phase One of carrier offload. We now have 8,100 nodes live, up 6.6% over last quarter and up 37.3% over the prior year. But we’ve also seen a tide change this quarter in carriers’ willingness to use Wi-Fi to address network capacity issues. During CTIA Super Mobility Week, T-mobile used Apple’s iPhone 6 launch to showcase Wi-Fi calling support across all flagship devices. In short order, all of the major U.S. carriers announced some intent to support Wi-Fi calling as well. We believe that shows that carriers are beginning to embrace Wi-Fi networks as part of their overall service package. In that vein, we are pleased to announce we have partnered with one of the top tier U.S. carriers in a market trial to activate millions of handsets for Wi-Fi offload onto our network. These devices are beginning to generate significant megabytes of data offload and select point to hotspot across the country. We anticipate that this carrier will continue to expand both the number of activated handsets and the number of hotspots being used in 2015. As always the customer experience is at the forefront of our network strategy with depending exponential increase in network use, our network must be reliable and available giving users the high speed, high quality experience. Over the last couple of years, we’ve upgraded many of our hotspots to be 802.11ac or ac ready. Earlier this year, we were the first Wi-Fi operator in the world to rollout Passpoint-enabled hotspots and make that seamless experience available to consumers. And recently we announced our new smart network design, which completely re-imagine how we build networks to optimize user experience. All of this has done with the user in mind, but we control the network, we will maintain a laser focus on providing a great user experience. And in hotspots where we don’t control the network we will work with our partners to share this focus. In LA, we launched an upgraded network in the third quarter at the 10th busiest airport in the country Phoenix Sky Harbor International. The airport had long operated cell network and discovered how difficult it is to keep pace with users demand for data, and thus decided the better long-term strategy with the partner with Boingo. Our upgraded network is designed to meet that need and provides another quality hotspot that carriers can rely on for Wi-Fi offload. Our advertising team had another strong quarter. The quality of the airport demographic combined with the captive audience gives major brands unique opportunity to engage consumers in an immersive experience. It is an appealing offer to time when digital advertising overall is challenge to guaranteed premium inventory advertisers. With that, I’d like to turn it over to our CFO Pete Hovenier to discuss our third quarter financials in greater detail. Pete?

[Peter Hovenier:]

Thanks, Dave. Today I’ll begin by reviewing our financial results and key operating metrics for the third quarter ended September 30, 2014 and we'll then conclude with our financial outlook for the full-year 2014. Total revenue was $30.8 million, representing a 7.7% increase over the prior year period. The increase reflects strength in advertising retail single use in wholesale revenue, which was partially offset by a decline in retail subscription revenue. Across our diversified revenue streams, also represented 49% of third quarter revenues, retail represented 36%, and advertising accounted for the remaining 15%. This compares to the third quarter of last year were wholesale represented 50% of revenue, retail represented 39% and advertising accounted for the remaining 11%. Wholesale revenues totaled $15.1 million, representing a 5.7% increase over the comparable period last year. The improvement was primarily related to increased DAS access fees, partner usage base fees and wholesale service provider revenues which were partially offset by decreased revenues related to new build-out projects. The modest decline in build-out projects was due to $2.5 million one-time build-out project that was recognized in the 2013 quarter. We saw subscription revenue was $8.4 million representing a 4.9% decline over the prior year period, primarily due to a decline in our retail subscriber base during the third quarter as compared to the prior year quarter, partially offset by an increase in average monthly revenue per subscriber. Advertising and other revenue was $4.6 million, representing a 51.6% increase over the prior year period, owing to continued strength in advertising sales, primarily from the strong performance of our ad sales team and investments in the Boingo media advertising platform. Retail single use revenue was $2.7 million, representing a 11.5% increase over the prior year period. Advertising and retail single use revenue for the quarter continued to benefit from the sales at venues acquired from AWG last October. Now, turning to our cost and operating expenses. Network access costs totaled $15.1 million, representing a 10.2% increase over the third quarter of 2013. The increase is primarily due to increased depreciation, revenue share paid to our managed and operated locations, as well as increased venue at connectivity expenses. These increases were partially offset by decreased direct cost of sales and customer usage of partner venues. Gross margin, which is defined as revenue less network access cost was 51.1%, down for 52.2% in the prior year period. The decline in gross margin largely reflects the shift in the diversified revenue stream driven by reduced higher margin of retail subscription revenue, coupled with increase in our lower margin advertising revenue. Network operation expenses totaled $6.2 million, an increase of 38.9% for the comparable 2013 quarter, primarily due to increased personnel related expenses as we had headcount to support the rollout of our new DAS and military contracts as well as increased depreciation, network maintenance and other operating expenses. Development and technology expenses were $4 million, an increase of 51.2% over the prior year period, due primarily to 400,000 impairment charge related to the change of use in certain software development internal use, as well as increased depreciation, hardware and software maintenance and other operating expenses. Selling and marketing expenses were $3.8 million, a 14.7% increase over the comparable 2013 quarter, primarily due to increased personnel related expenses from investments in our sales and business development teams. General and administrative expenses were $4.3 million, a 34.5% increase over the comparable 2013 quarter due primarily to increase personnel related expenses which are inclusive of a stock-based compensation, as well as increased consulting and other operating expenses. Now turning to our profitability measures for the quarter. Net loss attributable to common stockholders was $3.8 million or $0.11 per diluted share versus net income of $354,000 or $0.01 per diluted share in the prior year quarter. We will maintain our tax valuation allowance established in the fourth quarter of 2013, and as such do not expect to accrue material tax benefits or tax expenses on our income statement till appropriate level and profitability is attained. Adjusted EBITDA was $6.7 million, a decrease of 10.4% from the prior year quarter. In terms of our operating metrics, we ended the third quarter with connects for paid usage on our worldwide network of approximately $21.9 million, up 101% from the prior year period and up 8% from the second quarter of 2014. As compared to the prior year, in addition to significantly increased connects from advertising sponsorships, we also continue to benefit from connects at the venues acquired from AWG. The increase from the prior quarter is primarily due to increased connects from advertising sponsorships. Our retail subscriber base was 286,000 subscribers at the end of the third quarter, which is down 8.6% from the prior year period and down 4.7% from the second quarter of 2014. Our monthly churn rate for the third quarter was 11.4% versus 10.2% for the comparable 2013 quarter and 10.9% last quarter. Our churn was impacted by a significant number of reissued credit cards, which occurred during the quarter and an increase to our mobile pricing plan from 795 to 995, which in addition to causing a modest increase in churn also increased our average monthly revenue per subscriber. The number of DAS nodes in our network for the third quarter was 8,100, up 37.3% from the prior year period, and up 6.6% from the second quarter 2014, primarily due to the upgrades of our neutral-host DAS networks at Chicago Soldier Field and Midway Airport or Dallas Love Field Airport. Moving on to discuss our balance sheet. At September 30, 2014 cash, cash equivalents and marketable securities totaled $21.3 million. While we remain essentially debt free, we are continuing to evaluate financing alternatives and have received debt financing term sheets from leading commercial banks to assist with the funding of our strategic initiatives mainly to build-out Wi-Fi and DAS networks. Capital expenditures were $19.1 million, which included $5.1 million utilized for DAS infrastructure build-out projects they have reimbursed by telecom operative partners. Our non-reimbursed capital expenditures were driven primarily by new network builds, mainly related to the roll out of our military based networks, managed and operated network deployments, and various infrastructure upgrades and enhancements. I will now turn to our outlook for the full year 2014. For the full year ended December 31, 2014, we are narrowing and updating our guidance as follows. We now expect total revenue to be in the range of $117 million to $120 million or year-over-year growth of 10% to 12%. We now expect adjusted EBITDA to be in a range of $23 million to $24.5 million, and net loss attributable to common stockholders is now expected to be in a range of $17.5 million to $16 million, or a loss of $0.50 to $0.46 per diluted share. As I mentioned earlier, we do not expect any material tax benefits or expenses during 2014, so accordingly we expect a nominal full year tax rate, as well as fully diluted shares outstanding of $35 million. As we’ve discussed previously, 2014 was a year of investment and the work completed in 2014 sets the stage for accelerated top line growth in 2015 while we will be providing formal guidance as usual course on our Q4 conference call, we currently expect acceleration of revenue growth for fiscal 2015 of approximately 15% over fiscal 2014 supported by strategic growth initiatives. With that, I’ll turn it back over to Dave for closing remarks.

[David Hagan:]

Thanks, Pete. Overall, we continue to be pleased with our performance this year. Our military deployments have stayed on track and we’re now generating revenue from our base launches. DAS continues to be a growth opportunity for the company as we hope care is better managed user data demand and we’re beginning to see the advent of true care offload on to our Wi-Fi networks. We continue to believe that our strategic initiatives will help drive double-digit growth opportunities and that we’re currently well positioned to take advantage of continued mobile data growth. The entire management team in 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, we would now be conducting a question-and-answer session. (Operator Instructions) Our first question is from James Breen of William Blair. Please go ahead.

[James D. Breen:]

Thanks. Just a few questions. One, can you give us an update on how many DAS projects went live in the quarter and how many you have in process right now? And then, Pete, on the financial side, was there any currency impact in the quarter, we’ve seen that from two companies? And then lastly, in terms of the guide for full year your EBITDA guide came down a little bit. Just wondering what are some of the reason behind that. I know that you hit the 100,000 beds sooner than what you had anticipated. I wonder if that was some of the reason. Thanks.

[David Hagan:]

Thanks for the question, Jim. I’ll start with that. This is Dave, and then I’ll hand it off to Pete. So on the first one, the DAS projects, we had one major implementation. As I mentioned in my script, we increased our number of live nodes to 8,100, up over last quarter and just anticipating the pipeline question. We have around 4,500 nodes in the development process. So as we’re getting new networks built, we’re continuing to replenish the pipeline. Pete you want to handle the other two?

[Peter Hovenier:]

Sure. So, Jim on the currency impact, we had modest impact, really related to our investments in Brazil and you will see when we file our Q, statement comprehensive income which will capture that, but nothing material. In terms of our EBITDA guidance, we did come down a little bit and you’re right a good portion of that is really tied to our military base deployment. As we brought the basis live earlier, there is a fixed cost infrastructure on their military basis as we ramp up into our fixed cost infrastructure.

[James D. Breen:]

Great, thanks. And just to clarify, you mentioned you give us a little bit your guidance for 2015, just to clarify you said that do you expect that 2015 revenue will be at least 15% above 14% is the correct.

[David Hagan:]

Yes, we said that, based upon our thinking right now and the planning we have in place, given our growth initiatives primarily from DAS military and advertising, we expect to see revenue increase in 2015 over 2014 of 15%.

[Peter Hovenier:]

We’ll come up with further guidance on our next call.

[James D. Breen:]

Great, thanks very much.

[Peter Hovenier:]

Thanks, Jim.

[Operator:]

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

[Tudor Mustata:]

Hi, can you please discuss the Wi-Fi uploading market trial in more detail, how longer the discussions last, what kind of content is viewed, how much data is transferred. And then with respect to the military contract, what secrets are you seeing, how should we think of ARPU versus what you’re seeing before and how many exists customers do you have live.

[David Hagan:]

Thanks for the question Tudor. On the offload question, what we’ve communicated so far is that we’re on millions of handsets with one career partner, those and we’ll call it a few million for purposes of this call. For those few million handsets are connecting to just a handful of our Hotspot, so it’s not on to our entire network. So it is truly a market trial. We expect both of those numbers to increase, so the few million will grow in size as they roll out to more platforms and as we roll it out to more Hotspots. So it’s really just the beginning and so that sizing of the second part of the answer to your question, which is we’re not ready to release information yet. We’ve only be in market for about a month, and it’s really just ramping up. So as we get more information we will be excited to publish our findings on that, but that’s all we’re going to commit to at this time. On the military front, as we talked about in our script, we’ve hit our 100,000 bed threshold. We’re about a quarter ahead of plan which is great that increase some of the capital spend as Pete talked about in his script. The initial penetration rates are already at the bottom end up of the range that we’ve communicated to the market. So I’m sure you are familiar with those percentages what we’ve said, we expect penetration rates overtime to be in the 15% to 30% range of beds and we’re really encouraged by the initial results, we’re already in the low end of that range, at a very early stage literally just started market on some basis. So our early penetration results are better than our internal business case for the military build outs, we’re really excited about that.

[Peter Hovenier:]

In terms of ARPU, ARPU is coming in the mid 30s.

[Tudor Mustata:]

Thank you.

[Peter Hovenier:]

Thanks.

[Operator:]

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

[James Moorman:]

Hi, thanks for taking the question. Just a little bit more in terms of DAS, can you say like what areas or venues are you kind of seeing the most growth now its airports, arenas, colleges and then also how about in terms of multiple tenants per site where you kind of progressing with there. Thanks.

[David Hagan:]

Jim, is the question related to DAS specifically or just venue acquisition in general?

[James Moorman:]

More DAS specifically.

[David Hagan:]

Okay. So the venue verticals that we’re targeting from obviously the airport vertical where we have historical strength and we’re doing a lot in the University space, which generally starts with stadiums and arenas. We’re also doing non-University stadiums and arenas but we do have a focus on the University market. We get to our toe end of the market a little bit into the hospital market which we think is a huge opportunity for us on DAS and then obviously, the military build out is a massive market opportunity and we’re not doing DAS there at this point but we certainly think there could be longer term opportunity to overlay some DAS network operations there on our WiFi.

[James Moorman:]

And in terms of your – in terms of the carriers per location, for penetration there, so in locations where we have there have been live for three years or longer we are averaging more than three tenants per location and locations that we’ve had wireless we’re averaging just a bit under two carriers per location.

[Peter Hovenier:]

And that intends to increase over time.

[David Hagan:]

And I think is there – our focus is on really large venues. So we’re very aligned in venue acquisition strategy with where the carriers want to deploy on DAS networks and ultimately we think WiFi offload like the largest venues where the most people congregate where you have the most conjunctional in the network. So that’s our venue strategy and that winds up really well with where the carriers want to deploy their dollars as well.

[Operator:]

Thank you. The next question is from Jon Hickman of Ladenburg Thalmann. Please go ahead.

[Jon Hickman:]

Can you hear me okay?

[David Hagan:]

Yes, sound good Jon.

[Jon Hickman:]

Okay. As far as the military business goals, you would expect that the ads from military, from the personal there two overcome the decline in subscribers in retail subscribers kind of starting now in the fourth quarter.

[Peter Hovenier:]

So you are asking if we expect that the military subs will overtake the flattish to in the case of this quarter decline in our traditional retail subs. We are not communicating that, yet. But we do think over time that the military business will allow us to grow our retail sub business yes. That’s correct.

[Jon Hickman:]

Okay. And then, if you – the number how you connect, could you tell me right now.

[Peter Hovenier:]

Connects in the quarter were 21 million connects.

[Jon Hickman:]

21 Million, okay. And then the on the offloading, you mentioned in your comments that Boingo will started this with their advertising campaign and then the other carriers have kind of followed. My question is that if you are I’m curious say 18C of horizon and you wanted do offloading, apart from Boingo, there are so many independent networks where you can get scaled, right. I mean decency is not going to use of horizon network offload for their customers.

[Peter Hovenier:]

Right. Yes. Let me start to answer a little bit strategically and that is that the carrier offload deal the trial that we have in market was actually a deal that we signed about a year-ago and we are still not naming the carrier as their request. And when we announce that we say we’ve signed another carrier. So we have three of the top four. Now, signed onto potential care offload deals. So we’re active in working on this for a long time of period from an engineering operation perspective getting – get ready to be in market. So this is the trial the manifestation of actually a deal we signed almost a year-ago, we certainly nine months ago. And then, though what's interesting is – so that is not a result of the T-mobile carrier on carrier seven initiative. But their announcement with wipe over Wi-Fi increased the interest level of carriers in Wi-Fi in general and you saw pretty quickly that the other three carriers came out with similar type announcements that they are going to support wipe over Wi-Fi in all of that to us signals that the carriers are starting to embrace Wi-Fi more and more just part of their network fabric, which we believed what happen over time. And so, we’re very encouraged that we see that happening now, but they are somewhat separate. We signed one deal, the trial about a year ago and the good news is with that momentum in market and with T-Mobile shaking up the market. I think it’s getting the carriers to I think more significantly and strategically about WIFI.

[Jon Hickman:]

Well, I guess my question is if somebody want to do this in a scale in size, they are almost (indiscernible)

[Peter Hovenier:]

Yeah, I mean we…

[Jon Hickman:]

(Indiscernible) network, right?

[Peter Hovenier:]

Right, so we feel like we have great strategic locations where carriers are going to need not only distribution, Internet system, fast networks, but also in those kind of earnings we are even that is not enough and they want carrier offload onto WIFI. And that is why we focus our venue acquisition efforts on the largest type of venues where you have the biggest network congestion problems. And so again, we are really aligned our strategy on venue acquisitions, very much aligned where the carriers want to go. So when they are ready for WIFI offload, we are in a great position to capture a significant share of that.

[Jon Hickman:]

Okay, and one more question. On the call you re doing right now, is this a term that users (indiscernible)

[Peter Hovenier:]

Great question. And I should have clarified that on the front-end. And the exciting - so the exciting thing about this trial is the user doesn’t have to anything. The carrier is pushing out a profile to the user and then it’s just like what we talked about in terms of hotspot 2.0 in pass point. Even though technically that’s not the technology used in the trial, it’s what we are about to, but it’s automatic connect, so the carriers customer walks into one of our venues, their phone automatically connects onto our WIFI network, the carrier pays us for that traffic on our network. For whatever that customer then does from a data consumption perspective. So the user and so the user has to be very little and that is one of the reasons that we are really excited about it. This is truly what I would call carrier offload, the consumer doesn’t have to do anything that make it work.

[Jon Hickman:]

So in your opinion how you like approaching a carrier offloads filing going to be a revenue line for you?

[Peter Hovenier:]

(Indiscernible).

[Jon Hickman:]

Carrier offloads for I don’t 18 months now, so?

[Peter Hovenier:]

Yes, it’s interesting, I laugh a little bit and say only 18 months we have been talking about seven or eight years, but I think the good news is we are seeing real traction, not only we are in market with this one carrier, but we have seen increase in just some other carriers. As we talked about in our 2014 guidance that it was a very insignificant amount of revenue that we expected, when we come out with our 2015 guidance on our next call we will have more discussion about how much we are thinking we’ll see, I think we’re still going to be conservative in what we forecast, we’re in market with one trial it’s a significant trial, right millions of handsets. So it’s not a small trial, but it is still a trial. So we’re going to continue to be cautious until we can report, let the flood gates have opened in the traffic is hitting the network in a big way. So we will talk more about it on our 2015 guidance call.

[Jon Hickman:]

Okay. Thank you very much. Good quarter.

[Peter Hovenier:]

Thanks, John.

[Operator:]

Thank you. The next question is from (indiscernible) of Credit Suisse. Please go ahead.

[Unidentified Analyst:]

Hey, guys thanks for taking the question. The focus of last few quarters has been on the military base build-out as well as kind of the cadence of I guess (beds going live). And now that you have the 21 live now what are sign ups on a basis going like, in terms of is there a big initial bump and then it slows down, are you seeing kind of gradual more adoption over time. And just on the subscription increased where the current subscriber’s grandfather (indiscernible) or is it just kind of an increase across the board. Thanks?

[Peter Hovenier:]

Thanks Nick. On the military side, the encouraging thing is that we budgeted and we modeled out that there would be a very gradual uptick on sales when we launch a base. And what we’ve seen is there is actually a very immediate sales penetration rate. So as soon as we launch service, we’re getting the very nice pickup. And then we continue to see that growth. In the basis that we’ve been in market with the longest including the one that was live, one we acquired in [Deca] (ph) the company that we’ve acquired the penetration is still growing. Okay, so we’re encouraged we haven’t seen any basis has been out there long enough that it’s hit any flats bought in penetration rate. So we’re encouraged by that. So we think there is long-term growth opportunity here over time, but certainly in the short-term what we’re encouraged by as when we do the flash cut and we launch a base we see sales, we see signups on day one.

[David Hagan:]

Pete, do you want to handle the second part of that question?

[Peter Hovenier:]

Yes, so Nick, on the question about the increase, so it was across the board so it did went from 7.95 and 9.95, but to add some color to that it was about 30% of the subscriber base that was on the mobile plan have the increase.

[Unidentified Analyst:]

Got it, thank you.

[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.