FiberTower Corporation F2Q09 (Qtr End 06/30/09) Earnings Call Transcript

FiberTower Corporation (FTWR)

F2Q09 (Qtr End 06/30/09) Earnings Call

August 7, 2009 11:30 am ET

Executives

Gus Okwu - Investor Relations, DRG&E

Kurt Van Wagenen - CEO and President

Thomas Scott - CFO and Senior VP

Analysts

Presentation

Operator

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to FiberTower's second quarter earnings call. During today's presentation, all parties will be in a listen-only mode. (Operator Instruction). This conference is being recorded today, Friday, August 07, 2009.

I would now like to turn the conference over to Gus Okwu of DRG&E. Please go ahead.

Gus Okwu

Thank you, Britney. Good morning everyone. Thank you for joining us for FiberTower Corporation’s second quarter 2009 conference call. Joining me today on the call are Kurt Van Wagenen, FiberTower’s President and Chief Executive Officer; and Thomas Scott, the company’s Senior Vice President and Chief Financial Officer.

FiberTower issued a press release yesterday 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 at the completion of this call until 11:59 pm Eastern Time on August 14, 2009. The replay may be accessed by dialing 303-590-3030 and providing the access code ID number 4124282.

Please note that information reported on this call speaks only as of today, August 7, 2009, and therefore you are advised that time sensitive information may no longer be accurate as of the time of any replay. Additionally, please note that this conference call is being broadcast live through an internet webcast system that can be accessed on the company’s website at www.fibertower.com.

I should also mention that our comments today will contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Information about the potential facts that could affect the company’s financial results are available in the Risk Factors section as updated in the company’s SEC filings.

The financial highlights for the quarter were revenue growth of 6% quarter-over-quarter, 31% year-over-year; gross profit improvement of 118% quarter-over-quarter; adjusted EBITDA loss improvement of $1.7 million quarter-over-quarter and $6.5 million year-over-year. Debt repurchases were approximately $71 million of par value and cash and cash equivalents balance of $89.7 million as of June 30, 2009.

Now let me turn the call over to Kurt Van Wagenen.

Kurt Van Wagenen

Thanks Gus. Good morning everyone and thank you for joining our second quarter earnings call. It's a fascinating time to be a participant in our industry. Wireless carriers are deploying next generation 3 and 4G network and rolling out new devices. Consumer data usage is continuing to grow rapidly. New Smartphone applications are appearing on a regular basis and the government is progressing with the implementation of the National Broadband Initiative. This is a promising environment for FiberTower because it provides numerous opportunities for us to capitalize on the backhaul of networks that we have been designing, building and operating for over six years. These networks provide open access, middle mild broadband solutions to wireless carrier customers and increasingly to wholesale and government customers as well.

We believe our solution and track record have positioned us to benefit from the large and growing bandwidth demands placed on networks across the country. I will discuss this positioning in the context of our second quarter results, wireless industry trends and the other initiatives we are developing. After my comment, I'll turn the call over to Tom who will provide more detail on our financial results.

We had a solid second quarter highlighted by improvement in our key financial metrics, continued growth in our core cell site backhaul business, progress in our recently launched wholesale and government lines of business, solid service delivery and network performance, continued focus on managing expenses and further progress delevering our balance sheet.

I am pleased with our performance during the second quarter relative to our internal target and would like to thank our employees for maintaining focus on delivering these results or developing new lines of business and preparing the company to submit applications next week for stimulus funding under the National Broadband Initiative.

Financial performance was strong in the second quarter. We realized 6% revenue growth, which is an increase from the 3% revenue growth we experienced in the first quarter, an increase of 31% on a year-over-year basis. Margins on incremental revenue continued to be solid and this coupled with decreased operating expenses resulted in a $1.7 million improvement in adjusted EBITDA.

Much of the revenue growth we realized in the second quarter was attributed to our core cell site backhaul business, which experienced another quarter of strong organic growth. Specifically, revenue per site grew 5% to $1,860 and we added 65 new customer locations on our existing sites.

It's important to note that this growth was not a result of constructing new sites, but we do expect to add new sites in the future and we are continuing to evaluate opportunities to invest growth capital to expand our network.

It's also worth noting that during the first half of 2009, we won new business from all nine of our wireless carrier customers. We believe that these results demonstrate that we are benefiting from overall developments in wireless industry that I mentioned at the beginning of the call.

Specifically, demand for wireless services and bandwidth intensive applications continue to grow, requiring wireless carriers to meet this demand with new products, devices and services that leverage their respective data networks.

As indicated by the two largest carriers, second quarter results data now represents approximately 30% of total revenue. Verizon reported that the PDAs and Smartphones accounted for approximately 40% of new device sales during the second quarter, while AT&T stated that more than 50% of its post-paid subscribers now have monthly recurring data plans.

AT&T also mentioned that it carried more than 1 billion multimedia messages during the second quarter. We expect these trends to continue as carriers aggressively enhance their network to better serve their customers. Both AT&T and Verizon recently provided updates on how they plan to upgrade their networks. AT&T announced a rollout of an HSPA network later this year, while Verizon announced that they will conduct LTE trials in several markets this year with a commercial launch in 30 markets in 2010.

We continue to believe that our solution will play a key role in the successful deployment of backhaul networks. Given our hybrid fixed wireless in fiber network architecture which offers time to market and economic advantages over wireline only network while providing operational flexibility in carrier class service.

Now, I will turn my comments to our new growth initiative. We launched our wholesale initiative during the first quarter of this year. Our wholesale business represents a service distribution channel that is largely targeted at fiber based companies that are seeking to extend their networks by employing a proven fixed wireless solution. This channel allows us to leverage our accessing capabilities such as our nationwide spectrum over a broader geography in partnership with other bandwidth service providers.

Since the beginning of the year, we have executed a half dozen contracts with wholesale customers, that we view as partners in offering backhaul and transport services. These contracts cover a wide range of services including DS3s, OC3s and Ethernet.

We are pleased to report that not only are we in the process of delivering recently sold service, but we also have posted our revenue billing. Our progress to-date has provided initial validation of the growth opportunity that we believe exists for FiberTower in this new line of business. We are encouraged by the response we've received from our partners and we believe this response stems from our direct and extensive experience delivering bandwidth over a hybrid fixed wireless and fiber network.

In addition, we are responding to new merge proposal to deliver both fixed wireless and fiber based services in existing and new markets and we remain confident that our wholesale business will constitute a material portion of our future growth. Nevertheless, we remain conservative with respect to the near-term financial impact given the inevitable lack of visibility associated with the new service.

We also made progress in our government business during the second quarter. We previously indicated that we had agreements in place with two major carriers that are pursuing business under the General Services Administration Networx contract. These agreements identify FiberTower as the fixed wireless partner for delivering bandwidth to the 185 federal agencies covered by the networks procurement vehicle.

We've seen an uptick in activity as we respond to numerous proposals for delivering service in existing and new markets with both prime partners. In addition, during the past quarter we worked closely with both partners to ensure that these orders are executed under the Networx contract, our joint deployment and operational platforms deliver seamlessly.

Let me also note that our service is currently deployed in certain government agencies not related to the Networx contract, so we are comfortable in our ability to deliver bandwidth solutions that meet the requirements of federal contracts.

I will now take a moment to update you on our efforts associated with the National Broadband Initiative or NBBI that I previously mentioned on our last earnings call. The NBBI is part of the federal stimulus package and was designed to enhance and improve broadband capability and availability in unreserved and unserved areas of the United States.

The program include $7.2 billion in grants and loans that will be made available through the Commerce Department and Agriculture Department. The National Telecommunication and Information Administration or NTIA will act as the primary conduit for the Commerce Department while the Rural Utilities Service or RUS will act as a the conduit of funds for the Agriculture Department.

Under the NTIA pool of $7.2 billion, $1.2 billion will be available for projects that deliver broadband service through last-mile, for middle-mile facilities with the ultimate beneficiaries being commercial mobile, commercial wireline, public safety and community anchor institutions such as medical centers, municipalities, schools, libraries and local businesses.

We plan on applying for funds that if approved we will use to deploy open access middle-mile backhaul solutions using our nationwide spectrum in a hybrid fixed wireless fiber solution very similar to our approach in our existing markets. While we plan to submit applications directly, we expect to use a partnership model in deploying these networks to best leverage the assets and capabilities of the various types of service providers that support broadband infrastructure. We believe that we are well positioned to participate in this national initiative given our existing network infrastructure, spectrum assets, partners and operating performance.

The first round of funding requires that applications be submitted by August 14th, one week from today. We plan on submitting applications in this round and our applications will target a handful of eligible, underserved and unserved communities that are either adjacent to some of our existing markets or are in new geographies. Applications for round one are expected to be ruled on no later than November 7, 2009. Additional funds will be made available in subsequent rounds with all awards expected to be made no later than September 30, 2010. Please note that there is no guarantee that our applications will be approved for stimulus funding. We will provide updates on the status of our applications, once we are informed by the relevant entities.

Finally, we continue to opportunistically deploy capital in order to improve our balance sheet. During the quarter, we bought back an additional $71 million in par value debt which brings us to a total of approximately $142 million of debt that was repurchased and retired in the first half of this year. Tom will provide greater detail on our financial results including these debt purchases, but let me say that we continue to be extremely, financially disciplined as we consider the best uses of our cash resources. Specifically, we carefully evaluate how to optimize capital to maximize returns by balancing our goals associated with network investments, step repurchases and maintaining cash balances. We will continue to exercise financial discipline as we pursue opportunities to maximize returns going forward.

To summarize, the fundamentals of our business remain strong as confirmed by the wireless carriers recent results as well as our own. We are very encouraged by the early results from our new revenue initiative and look forward to providing you with further updates.

I will now turn the call over to Tom for further review of our financial performance.

Thomas Scott

Good morning. My discussion topic today will focus on cash flow improvements, debt changes and capital expenditures. As we've discussed in the past, one of our primary objectives is to ensure that the company is in a stronger financial and operating position as the economy improved in order to capitalize on any business opportunities that arise.

Pursuant to those objectives, we've dedicated a great deal of our time on enhancing the companies operational flexibility to aggressive cost management while continuing to drive organic and high margin incremental revenue growth at our sites. We've also focused on improving our ability to scale by leveraging our existing network.

On a year-over-year basis, revenues grew by approximately 31% while operating expenses decreased by 29%. Over the same period of time, average monthly revenue per site increased by 16% from $1,605 in the second quarter of 2008 to $1,860 in the second quarter of 2009. Adjusted EBITDA continue to improve in the second quarter with our loss improving by $1.7 million from $4.9 million in Q1 to $3.2 million in Q2. This improvement was driven by a combination of high margin revenue growth that that flow direct to the gross profit and decreases in operating expenses. The decrease to operating expenses were primarily a result of seasonal declines versus first quarter items such as annual audit expenses.

On a year-over-year basis, quarterly adjusted EBITDA improved by $6.5 million, a decrease of 67%. Cash consumption for the quarter was $4.7 million as compared to $5.8 million in the first quarter of 2009. Year-over-year cash consumed net of debt purchases, showed an improvement of $16.1 million.

All of our markets continued to show growth on an adjusted EBITDA basis with the majority of markets filled EBITDA positive. Reaching adjusted EBITDA positive continues to be the top operating objective at the Management Team.

During the second quarter of 2009, the Company repurchased $71.3 million par value of its senior secured convertible notes at an average price of approximately $43 for $100 of par value. Including accrued interest payments, we spent $30.9 million on repurchasing debt in the second quarter of 2009. Additionally, retiring the notes resulted in a recognition of a gain on extinguishment of debt in the second quarter of $44.6 million.

Through the six months of 2009, the Company has repurchased and retired a total of a $142.2 million of par value debt, while spending $52.2 million including accrued interest statements. The early retirement of debt will result in a reduction of annualized interest expense of approximately $12.8 million. We will also record a $400,000 income tax expense in the second quarter as a result of the gains associated with early extinguishment of debt.

The Company intends to defer gains with respect to Federal income taxes via provisions included in a 2009 Stimulus act. However, not all states where we operate have elected to follow Federal guidance. As such the Company expects to pay a minor income tax, for tax year 2009.

As of June 30, 2009 the Company's outstanding debt including accretion was $304.5 million. We will continue to evaluate opportunities to address our capital structure. As we stated on our last call and as Kurt reiterated earlier, we are very focused on exercising financial discipline and continuing to drive higher margins incremental revenue this year. Doing so will enable us to move further down the path towards profitability and adjusted EBITDA positive. Maintaining this track will also put the Company in a position to react quickly to attractive business opportunities.

Leveraging our existing assets and scaling the network efficiently has improved our flexibility and enabled us to pursue new revenue opportunities while conserving our cash position. The second quarter 2009 capital spend was $2.4 million, compared to $2.3 million for the first quarter. As discussed earlier, we have been very carefully managing our network projects, balance sheet improvements and cash optimization.

We continue to look for attractive network deployment projects and now expect our capital spend to range between $15 million and $20 million for 2009, and we will continue to carefully mange our capital spend and look for the right mix in capital projects that will provide the Company with a growth platform beyond this year.

Now, let me turn the call back to Kurt for closing comments.

Kurt Van Wagenen

Thanks Tom. To summarize, we are pleased with our second quarter results. We remained focused on driving scale, leveraging our network assets and identifying new ways to grow shareholder value. Thank you for joining us today. I will now turn the call back to Gus.

Gus Okwu

Thanks for participating in FiberTower Corporation second quarter 2009 conference call. As a reminder this call will be available for replay beginning an hour after the call is ended and maybe accessed until 11:59 PM Eastern Time on August 14th. Dialing 1303-590-3030 you can access the replay and the ID code for the replay is 412-4282. Thank you.

Operator

Thank you ladies and gentlemen. This concludes our conference for today. You may now disconnect.

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