FiberTower Corporation Q3 2008 Earnings Call Transcript

FiberTower Corporation (FTWR)

Q3 2008 Earnings Call

November 7 2008 11:30 am ET

Executives

Kurt Van Wagenen - President and Chief Executive Officer

Tom Scott - Chief Financial Officer

Gus Okwu - Investor Relations, DRG&E

Analyst

Romeo Reyes - Jefferies & Company

Mark DeRussy - Raymond James

Kevin Roe - Roe Equity Research

Chris Cook - Zazove

Chris Lasso - Oppenheimer

Steve Lampe - Lampe Conway

Presentation

Operator

Good morning ladies and gentlemen, thank you for standing by. Welcome to FiberTower’s third quarter earnings conference call. During today’s presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be opened for questions. (Operator Instruction) This conference call is being recorded today, Friday November 7, 2008. I would now like to turn the conference over to Gus Okwu with DRG&E; please go ahead, sir.

Gus Okwu

Thank you. Good morning everyone. Thank you for joining us for FiberTower Corporation’s third quarter 2008 earnings call. Joining me today on the call are Kurt Van Wagenen, FiberTower’s President and Chief Executive Officer; and Thomas Scott, FiberTower’s Chief Financial Officer.

The agenda for today will be as follows. They will first provide an overview of the company’s third quarter results and then highlight key industry trends. Tom will then follow with a detailed look of FiberTower’s financials and operating results and finally Kurt will offer closing comments and open the call up to questions.

FiberTower issued a press release last night with details of the company’s quarterly financial and operating results. This document is available in the newsroom section of the company’s website at www.fibertower.com. A replay of today’s call will be available beginning one hour after the completion of this call until 11:59am Eastern Time on Saturday, November 15. The replay may be accessed by Dialing 303-590-3000. The access code for the replay is 11121554#.

Please note that information reported on this call speaks only as of today, November 7, 2008 and therefore you are advised that time sensitive information may no longer be accurate at the time of any replay. I should also mention that our comments today contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

Our use of words such as anticipate, expects, intends, plans, believes, may, will and other similar expressions are intended to identify forward-looking statements. Forward-looking statements include by way of example revenue and margin expectations projections and various reference of the trends in the industry and in FiberTower’s business. Such statements reflect our current views with respect to future events and are subject to risks, uncertainties and other factors, some of which are beyond our control, but could cause the company’s actual results to differ materially from those anticipated in these forward-looking statements.

There are many risks, uncertainty and other factors, that can prevent the company from achieving its goals or cause the company’s actual results to differ materially from those expressed or implied by the forward-looking statements contained in our comments today. These factors and others are more fully discussed under risk factors, which are located in FiberTower’s readily available forms 10-K and 10-Q filed with the SEC.

I would finally advise you that this conference call is being broadcast live through an internet webcast system that can be accessed on the company’s web page at www.fibertower.com.

Now I’d like to turn the call over to Kurt Van Wagenen.

Kurt Van Wagenen.

Good morning, everyone and thank you for joining us today. We released our 2008 third quarter financial results last night and are very pleased that we reached an important financial milestone by achieving positive monthly field EBITDA. In addition, we are on track to meet our other key financials and operational targets for 2008.

Specific progress in the third quarter as it follows: First, we achieved positive field EBITDA on a consolidated basis across our markets, beginning in July. At the start of 2008, the company established a goal of being field EBITDA positive in the second half of the year. This goal was achieved by delivering high margin incremental revenue and through diligent cost cutting efforts.

I’m proud of our employee’s sacrifice and focus, which were both instrumental in enabling us to achieve this critical financial objective. With this important milestone met, we now focus our efforts on our next key financial goal, which is to reach positive corporate leveled EBITDA.

Second, we saw continued growth in T1 equivalents at our sites, driven largely by our focus on adding new customer co-locations and penetrating deeper in our existing markets. Our progress during the third quarter was almost exclusively driven by leveraging our network in the company’s 13 markets.

Third, our Q3 results continued to reflect the positive impact made by the reduction in force that we initiated in the second quarter of 2008 as well as our other SG&A cost savings initiatives. We were fortunate to begin implementing these activities prior to the onset of the current economic slowdown.

As a result our sales and marketing and general and administrative expenses have decreased significantly since the first quarter of 2008 and we believe we are appropriately positioned in the near term to manage through the existing economic and credit market challenges. In addition, we remain on track to achieve cost savings of approximately $10 million to $12 million on an annualized basis.

Finally, we have remained focused on growing the business in our markets by making targeted capital investments with appropriate financial returns to enhance the value of our company. As a result, we are revising our 2008 full year capital spend to no more than $50 million from our previously stated target of $60 million.

You may have seen we recently announced that the FCC either renewed or extended all of our area-wide licenses in the 39 to 40 gigahertz spectrum bands. As a result, these 566 licenses have either been fully renewed for another 10 years or we now have construction extensions until June 1, 2012.

In addition, it is important to note that our 24-gigahertz licenses are not subject to renewal until at least 2011. These combined licenses cover virtually the entire continental US and allow us to continue our efforts to realize the value of this spectrum by developing back haul solutions that leverage this asset.

Since my appointment as CEO, I have spent a great deal of time meeting with our existing customers. I could say that on the whole, these discussions confirm our belief that trends in the wireless industry should continue to benefit FiberTower’s long-term plans. However, given the uncertainty as to how the economic and capital environment might impact carrier and consumer spending, we believe a more cautious sales outlook is prudent for our business over the next few quarters.

This view is consistent with some of the major wireless carriers, who have recently expressed caution with respect to how the current economic environment will impact their near term operating results and network development plans. Nevertheless, we do continue to believe that back haul is an essential component in the delivery of high capacity applications and that growth and demand is inevitable.

Though it is difficult to anticipate, we also expect that wireless carriers will fare relatively well in the current economic environment for several reasons. First, wireless devices are essential communication tools for businesses and consumers. These devices have become a primary financial driver for our large carrier customers, such as AT&T and Verizon.

Second, as we mentioned on our last quarter’s earnings call, our wireless customers remain well capitalized and are seeking opportunities to continually grow their revenue base and ensure the prospect of delivering consistent quarterly profit. Thus, we believe it’s unlikely that carriers will drastically cut investments in innovative devices or their networks, both of which present them with ways to grow revenue and reduce customer churn.

In addition to achieving monthly positive field EBITDA starting in July, we reported a $1.5 million increase in revenue and a $3.4 million reduction in adjusted EBITDA loss in the third quarter as compared to the second quarter of 2008. These achievements are largely a result of realized cost savings from the workforce reductions we implemented in the second quarter and the continued turn up of our revenue backlog.

The third quarter also included an immaterial charge related to recovery costs from hurricane Ike. While the financial impact to the company from hurricane Ike was minimal, the operational efforts associated with getting our network backup in a relatively short time were significant.

FiberTower’s positive response to hurricane Ike was a real testament to the dedication and professionalism of our workforce and the cooperation with customers and service providers. For those of you who don’t know, Ike was the third most destructive hurricane in recent US history and essentially brought down the entire power grid in the Houston area for several weeks.

By quickly deploying additional personnel and generators, which were either staged in Houston in advance or delivered in the immediate aftermath of the storm; FiberTower was able to bring up all its sites in a relatively short period of time. While not an event that we would wish to repeat, the Ike disaster presented an opportunity to test both our technology and workforce and I am very pleased to say that FiberTower performed well.

On an operating basis, our results continued to be strong. Billing T1 equivalents in the third quarter grew 12% sequentially to 22,522, representing year-over-year growth of 87%. Billing customer locations grew 10% sequentially to 5,832, representing year-over-year growth of 79% and billing sites grew 6% sequentially to 2,730, representing year-over-year growth of 37%.

Our operational efficiency metrics also improved during the quarter as the company continued to focus on improving site density through deeper penetration in existing markets and at existing sites. Billing sites per sites deployed grew from 86% to 88% during the third quarter. Billing T1 equivalents per billing site increased from 7.79 to 8.25 during the third quarter and billing customer locations per site increased from 2.04 to 2.14 during the third quarter.

In summary, we had a solid third quarter, highlighted by achieving positive field EBITDA, solid sequential revenue growth, continued improvement in managing our operating expenses, ongoing and efficient focus on capital investments, all supported by promising trends in the industry that we expect will produce additional business opportunities. We also continue to believe that FiberTower’s hybrid fiber microwave architecture is the ideal solution for capitalizing on these trends.

I’ll now turn the call over to Tom for greater detail on our financials.

Tom Scott

Thanks Kurt and good morning everyone. Last night we released our results for the third quarter ended September 30, 2008. We believe that our third quarter results demonstrated several key attributes of our business, including an ongoing ability to successfully leverage our existing network resulting in greater overall efficiency as well as ongoing control of our fiber network costs and general expenses on a market and overall basis. As a result, we achieved positive consolidated field EBITDA in the third quarter as we projected at the beginning of the year.

We utilized field EBITDA as a measure to monitor our market operating cash flow performance. Field EBITDA takes into account recurring service revenue and includes all market specific expenses including field SG&A and site operating costs such as fiber network expenses, site rent and site maintenance.

Most importantly, field EBITDA does not include any corporate overhead allocations. As Kurt mentioned earlier, we take a great deal of pride in having met this initial benchmark; however, we remain steadfast in seeking additional ways in we can further improved our operating efficiencies. After achieving positive consolidated field EBITDA this quarter, we are now focused on meeting our next financial goal of positive corporate EBITDA.

With respect to our operating results, revenues increased by $1.5 million to $13.4 million representing an increase of 13% from the second quarter of 2008. The increase in service revenues during the third quarter of 2008 was primarily driven by new billing customer locations at existing sites and greater penetration in our existing markets. Our average monthly revenue per billing sites increased by 4.6% to $1,679 during the third quarter from $1,605 in the previous quarter. T1’s for top 500 sites increased to 17.8 at September 30 from 16.8 at June 30.

Operating expenses in the quarter decreased by $14.6 million from the second quarter of 2008, and was highlighted by continued reduction in one-time charges as well as ongoing quarterly reductions in sales and marketing and general and administrative expenses.

Our net loss improved $25.7 million in the third quarter, compared to a net loss of $41.5 million for the second quarter of 2008. Net loss in the 2008 third quarter included impairment charges to property and equipment and restructuring charge collectively totaling $1.3 million or $0.01 per share.

Our 2008 second quarter net loss included impairment charges to property and equipment and a restructuring charge totaling $14.1 million or $0.10 per share. We reported a third quarter net loss per share of $0.18 compared to a net loss per share of $0.29 in the second quarter of 2008.

On an adjusted EBITDA basis, our third quarter loss improved by 34% to $6.4 million compared to a loss of $9.7 million in the second quarter of 2008. As we stated on our last conference call, we expect to see continued improvements in adjusted EBITDA on a quarterly basis.

During the third quarter, we continued to benefit from the reduction in force that was implemented in the second quarter. We’ve been able to reduce sales and marketing and general and administrative expenses significantly in the second and third quarters, partially due to the effects of the workforce reduction.

Capital expenditures for the third quarter were $7.5 million compared to $9.8 million in the second quarter of 2008. The bulk of our third quarter capital spend was applied to continued build-out of existing markets and adding incremental customers to existing sites. We continue to have substantial flexibility in managing our capital spend and now anticipate spending no more than $50 million on capital expenditures in 2008.

Our consolidated unrestricted cash, cash equivalents and certificates of deposit at September 30 were $166.6 million. We continued to maintain a conservative investment approach with all of our unrestricted cash invested in US Government securities. We expect to finish 2008 with unrestricted cash in excess of $125 million.

Let me turn the call back to Kurt for closing comments.

Kurt Van Wagenen

Thanks, Tom. In conclusion, we had a solid quarter, highlighted by continued revenue growth, cost management and achieving positive field EBITDA. We remain confident in our ability to reach our 2008 financial targets and to pursue attractive growth opportunities.

Before we begin the Q-and-A session, I would like to remind you that a replay of this teleconference will be available beginning an hour after we conclude the call and we will provide that number again at the end of the call.

Now, let me turn it back to the operator for questions-and-answers.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Romeo Reyes - Jeffries & Company.

Romeo Reyes – Jefferies & Company

Just one question with several parts; can you Tom, talk a little bit about cash conservation. Based on your comments there it seems like you’re going to be burning about $38 million in Q4; that just doesn’t sound right to me. Based on your guidance of $125 million of cash, a little bit more than 125, if you could clarify that and then if you could just talk a little bit about the components of the burn. CapEx was only $7.5 million this quarter, is that sort of like the new run rate number?

Then with respect to your construction in progress, as of the end of June you had about $52 million of construction in progress. I guess if you were spending $75,000 per site that would equate to something like 700 sites from construction in progress. Can you talk a little bit about that and maybe how much additional CapEx you need to finish that construction in progress? Thanks.

Tom Scott

Romeo, with respect to your question on cash conservation, as we said in multiple calls throughout the course of the year, we are looking across all levers to free up cash for the business.

Number one, we implemented the reduction in force in the second quarter. We are well on our way to getting the $10 million to $12 million and reductions that we stated on our first quarter call. We’ve also consistently been pushing on capital projects to bring down the capital spend and as you noticed, we saw a roughly $2 million reduction in capital spend in the third quarter relative to the second quarter.

With respect to how we’re going in the year-end, we stated on a call that we believe we will end in excess of $125 million in cash and we’ll continue to push on all those levers that we have already identified on prior calls.

Romeo Reyes – Jefferies

Going back into the burn, you only burned about $14 million of cash in Q3. Based on this guidance, it seems like you’re going to burn two to three times as much cash in Q4; that doesn’t sound right.

Tom Scott

We’re not going to comment any further than we believe that we will have in excess of $125 million in cash at the end of the fourth quarter.

To finish up on the other questions that you raised, with respect to construction in progress, there is $52 million in construction and progress that is broken out in fixed assets for FiberTower. We had some sites that are already constructed that are not yet revenue ready that are broken out in CIP. We also have spares on the network, as well as sites that are still in construction.

So the 700 number, that’s not actually 700 in new sites that are in that number; it’s a component of spares, equipment, as well as sites that are already in construction. We’ll continue to build sites at kind of the rate that we’ve been building over the last few quarters and expect that the business will continue to build sites in 2009.

Kurt Van Wagenen

Let me just add Romeo, that we’re pleased with our performance in terms of cutting costs and conserving cash, but we remain a growth oriented business and we continue to believe that we have attractive investment opportunities in our core business and we will continue to evaluate those and believe that those are critical. It’s critical that we continue to invest in the business profitably to reach our next financial target, which is to be corporate EBITDA positive.

Romeo Reyes – Jefferies

And just I have a follow-up. The customer location additions in the quarter I think is 553. Can you breakout Tom, what percentage are those going into new billing sites versus existing sites?

Tom Scott

We don’t breakout which ones of those; there’s a bit of a timing matter in terms of which ones come on to new sites versus existing; for the third quarter we can say that majority of those went onto sites that were already constructed at the beginning of the third quarter.

Operator

(Operator Instruction) Your next question comes from Mark DeRussy - Raymond James.

Mark DeRussy - Raymond James

Hearing more and more from ILACs cable MSOs, fiber based CLECs, about the back haul opportunity, we’re seeing some of those participants disclose numbers and Kurt I was just wondering if you could talk on the competitive environment out there. Hearing some statistics from some of those folks that it’s getting cheaper to run laterals, they’re talking about hitting a higher percentage of sites with the direct fiber connection.

So just curious as to your thoughts on the environment right now and of those players that I mentioned, the MSOs, the fiber based CLECs, are those always competitors to you or are they partners to you, are they vendors to you? If you could just give us some color there, that would be great.

Kurt Van Wagenen

Sure, Mark. First of all, we believe and continue to believe that the back haul opportunity is significant today and growing and that there’s a significant opportunity not only for FiberTower but perhaps for other players who want to enter this space and who have indicated that they are entering this space.

As many of our large customers have said, there is no one solution that addresses all of there back haul needs over the long-term, so we continue to believe that FiberTower is positioned well with our hybrid fiber microwave architecture to take advantage of the growing demand in the back haul space as well as leveraging the significant experience we have in the back haul space and have developed over the last several years.

With respect to the second part of your question, as to whether some of these entrants are always competitors or whether they could perhaps be suppliers and partners, many of these players are suppliers to us today. We currently have over 20 fiber service providers that we purchase services from on a regular basis, and we are in active discussions with many of these players around what the opportunities are for us to grow our business as well as for us to work with them to jointly take advantage of some of the back haul opportunities that we see together.

So I guess the answer to your question is they are not always competitors. They are currently suppliers today and we do believe that perhaps there is an opportunity for them to be partners going forward to address the significant demand with respect to back haul.

Mark Derussy - Raymond James

I think that the public comments they’re making helped to sort of validate the opportunity that you guys have out there. Tom over to you; do you continue to see opportunities to drive down your transport costs? I know that over the last year or so you’ve talked about reducing your fiber expense per site, per month, can you give us an update on your thoughts there?

Tom Scott

We absolutely continue to believe that there are opportunities for us to reduce our fiber transport costs as well as gain additional scale around it. We’ve gone after that in really two key ways.

(1) We continue to build density in our existing 13 markets, which enables us to put more traffic onto the same facilities and leverage our cost per unit down.

(2) As we talked about on prior calls, we continue to look at opportunities to buy higher speed transport services at our aggregation points, most noticeably our leasing of dark fiber to enable us to get the best really unit cost. We are actively pursuing both those and expect that will continue into 2009.

Operator

Your next question comes from Kevin Roe - Roe Equity Research.

Kevin Roe - Roe Equity Research

Following up on the last question on competition, did you see additional pricing pressure in the third quarter or has pricing somewhat stabilized.

Second question would be on backlog. Assuming you stay in this cash preservation mode and we don’t see a lot of new site builds in 2009 for whatever reason, because of continued pressure on the macroeconomic environment; how long can your current backlog drive sequential growth or how many quarters do you think you can continue to drive revenue growth without new market launches?

Lastly, on CapEx, I know you’re not giving ‘09 guidance or did not give ‘09 guidance, but directionally do you expect CapEx to be up or down versus ‘08? Thanks.

Tom Scott

Kevin, let me handle your first question on pricing pressure and Kurt will refer to backlog and then I’ll try to finish up on capital. So on the pricing pressure, we continue to look at opportunities across all of our markets and they all have various degrees of pricing attributes with respect to them. I don’t believe we are seeing any heightened pricing pressure relative to what we’ve seen in the past and continue to pursue deals where we can get an attractive financial return for FiberTower. Kurt, you want to comment on the backlog?

Kurt Van Wagenen

Sure, Kevin. We’re not currently commenting on our backlog. What I will say is we’ve had significant success turning up our backlog over the past several quarters, but what I will comment on, with respect to your comments about the cash preservation mode and no new site builds, I’m not sure that correctly reflects our position.

Yes, we’re trying to manage cash very wisely, but we are continuing to seek attractive investment opportunities in our existing 13 markets and in our core business, our existing 13 markets that we’ve been building those out over the last several years, and since we’re not launching new markets, that’s why we had the opportunity to scale back capital investment, but we continue to invest in our existing markets and we are seeking to increase coverage in our existing markets by adding new sites to our existing networks.

With respect to the current market and what the opportunity is going forward with those existing 13 markets, we believe that those 13 markets allow us to scale sufficiently to achieve our next major financial target, which is to be corporate level EBITDA positive. You want to address CapEx, Tom?

Tom Scott

I’ll kind of ducktail on our comments there. We are not putting out ‘09 CapEx guidance at this point, yes, it kind of Kurt’s comments. We believe that there are significant investment opportunities that range from adding incremental customers to existing sites, as well as targeting new site builds that leverage the existing network infrastructure.

As we look at what the key goal for the business, it’s absolutely reaching EBITDA with the most positive EBITDA, with the most capital efficient plan forward, so we are absolutely keeping an eye on managing cash, as we strive to meet that objective.

Operator

Your next question comes from Chris Cook - Zazove.

Chris Cook - Zazove

I’m curious as to what you think maintenance CapEx is in the business?

Tom Scott

At this point in time we are still operating in a growth mode and we pushed out the capital expenditures, but we believe that given the relatively early stage of the business, that maintenance CapEx on an annual basis is less than $10 million a year at our current size.

Operator

Your next question comes from Chris Lasso - Oppenheimer.

Chris Lasso - Oppenheimer

You guys say, your next target is corporate EBITDA on positive. When do you expect to achieve corporate EBITDA positive?

Tom Scott

We’re not putting out formal ‘09 guidance as we look at this right now. We believe that we have opportunities in front of us that will enable us to reach that objective over the next 12 to 18 months.

Operator

Your next question comes from Steve Lampe - Lampe Conway.

Steve Lampe - Lampe Conway

One question I had was literally just asked, so that is out of the way and in case this was addressed before, I got a call off for a second, I apologize, but do you have any plans to address the debt issue that’s out in the near future?

Kurt Van Wagenen

Hi, Steve. Thanks for the positive comments. My comment on the debt situation is this; we’re constantly evaluating our business cash needs and our capital structure. We are in a period as you know of extreme turmoil in the financial markets and while there may be some sort of opportunity for the company, we clearly need to preserve our cash and use it to invest in our core operations going forward and as I stated earlier, we continue to believe that we have attractive investment opportunities in our core business and that’s where our focus is at this point.

Steve Lampe - Lampe Conway

Okay. That’s interesting, because by some measures, I guess the yield on some of the bonds at this point is almost 60%. So I guess the next logical question is, are the corporate investment opportunities paying back more than a 60% return?

Kurt Van Wagenen

We’re not going to comment on kind of where the corporate investments yield relative to where the debt is, but to just kind of reiterate that, the management and the Board continues to evaluate all options that are in front of us and pursues a value creation path for the shareholders.

Steve Lampe - Lampe Conway

No, that’s fine. Honestly I didn’t expect you to breakdown your investment returns on corporate stuff but I did want to table that as a concept for the Board and management to think about. It’s a logical trade-off on return on your cash invested, so it was really, we’re trying the [Cicrotic] method here. So thank you very much, guys. Just keep making this progress. Good things come to companies that are cash flow break-even.

Operator

(Operator Instruction) Management, I’m shown there are no further questions. I’ll turn it back to you for closing comments.

Kurt Van Wagenen

Thank you again for participating on today’s call. We hope you will join us again for our next conference call to discuss our third quarter 2008 results. I’ll now turn the call over to Gus.

Gus Okwu

Thanks, again for participating in FiberTower’s third quarter 2008 conference call.

As a reminder this call will be available for replay beginning an hour after the call has ended and maybe accessed until 11:59 am Eastern Time on November 15, dialing 1-303-590-3000 and can access the replay. The access code to the replay is 11121554#. Thank you.

Operator

Thank you. Ladies and gentlemen that will conclude today’s teleconference. We do thank you again for your participation and at this time you may disconnect. Have a nice day.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: [e-mail]. Thank you!