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Towerstream Corporation (NASDAQ:TWER)

Q4 2013 Earnings Conference Call

March 17, 2014 5:00 PM ET

Executives

Joseph Hernon – CFO

Jeff Thompson – President and CEO

Analysts

Marc Albanese – Evercore

Donna Jaegers – DA Davidson

Operator

Good day, ladies and gentlemen, and welcome to the Towerstream Fourth Quarter 2013 Financial Results Conference Call. At this time all participants will be in a listen only mode. Later we will conduct a question-and-answer session which instructions would be given at that time. As a reminder, today’s conference is being recorded.

I would like to turn the conference over to your host, Joseph Hernon, Chief Financial Officer. Joseph, please go ahead.

Joseph Hernon

Thank you, operator. During the course of this call, we may discuss some of the estimates, assumptions and other factors that our management currently anticipates may influence our business and results going forward. These forward-looking statements include expressed or implied statements regarding our business, including, without limitation, our future operating results and business developments based on limited information currently available to us.

This information is subject to change, and all forward-looking statements are inherently speculative and are subject to risks and uncertainties that could cause actual results to differ materially from those anticipated in forward-looking statements. Such statements are subject to risks and uncertainties, including those described in the press release announcing this call, and those discussed in the risk factors sections of our periodic filings with the SEC. These forward-looking statements are intended to qualify for the Safe Harbor from liability, established by the Private Securities Litigation Reform Act of 1995. We undertake no obligation to publish, update or revise any forward-looking statement as a result of new information, future events or otherwise.

I’ll now turn the call over to Jeff Thompson, the company’s President and Chief Executive Officer.

Jeff Thompson

Thank you, Joseph. 2013 was a transformative year for Towerstream. We established Hetnets Tower Corporation, our Wholly Owned Shared Wireless Infrastructure subsidiary at the beginning of 2013. And ended the year with beach front roof tops built out in four major urban markets, Manhattan, San Francisco, Chicago and Miami.

We achieved a major milestone in the second quarter of last year, when our Manhattan Network became one of the first to be certified next-generation hotspot or Passpoint 2.0 compliant by the WBA’s interoperability compliance program. This effort has helped speedy adoption of the common set of requirements for seamless Wi-Fi user experience and put our Hetnets Network one step closer to being integrated to the radio access networks of carriers.

Our second major milestone was the addition of our first rent based anchor tenant in our Manhattan Network at the end of June, which ramped up over the second half of the year.

We expanded the deployment to additional roof-top access points in the fourth quarter to meet strong demand. Network usage has grown substantially and our network performance has remained scalable and reliable. Customers of multiple cable companies have been utilizing our Manhattan network through the cable Wi-Fi consortium. Their experience combined with our throughput capabilities has advanced our discussions with several cable companies providing similar services in other markets where we’ve already built networks.

Lastly, we are currently in discussions to convert our usage based Wi-Fi customers to lease based contracts. This would begin with positive node cash flow on over 1,000 nodes if we convert them in Manhattan.

In our Fixed Wireless business, we completed the acquisition of Delos Internet in Houston in the first quarter of 2013, which expanded our national presence to 13 markets, including 9 of the 10 largest in the country. We grew our ARPU, each and every quarter, driven by strong demand for higher balanced services by new and existing customers.

More recently, improvements in equipment performance and cost have enabled us to introduce a new product in our Fixed Wireless business, a 100 megabit service for $699 per month. This offering is faster and much more economical than fire based services in this targeted underserved segments of the market, specifically buildings with 250,000 to 1 million square feet.

We watched this service just a few weeks ago and we’re also seeing great traction. We expect this offering to accelerate our growth in our Fixed Wireless business.

In summary, we are pleased with our accomplishments over the last year. Our carrier class Hetnets Network is performing superbly and it’s proven its scalability. The demand for outdoor carrier Wi-Fi remains robust and we see increasing interest from a wide range of service providers and the internet platform players.

According to industry research firm Wi-Fi, rapid growth in mobile data consumption resulted in 875% increase in Wi-Fi offloading in the U.S. during 2013. To keep pace with this growth, a number of public commercial grade Wi-Fi hotspots have expected to reach 10.6 million by 2018.

We believe that we have positioned Towerstream to become significant beneficiary of this large market opportunity. Our fourth quarter performance demonstrates our growth potential, their first full quarter of rent based revenue from our first large Wi-Fi customer, we recorded 21% sequential growth in our Hetnets business.

Moreover, we are after a great start in 2014 except Hetnets Wi-Fi revenue to continue to grow at double digit sequentially over the course of the year. We projected this growth will be further enhanced in the second half of the year as carriers begin initial deployments of small-cell architectures.

With that, I will hand the call over to Joseph.

Joseph Hernon

Thanks, Jeff. Before I begin a discussion of our fourth and year-end results, I’d like to remind everyone that we will refer to several non-GAAP metrics during my points. Please refer to our earnings release, issued this afternoon, for a reconciliation of these non-GAAP measures to the comparable GAAP amounts.

Total revenues of $8.5 million for the fourth quarter increased almost 2% from the third quarter and almost 4% from the fourth quarter of 2012. As Jeff mentioned, revenues for our Shared Wireless segment rose 21% in the fourth quarter of 2013 compared to the third quarter, primarily related to the recognition of a full quarter of revenue from our cable company contract which was launched in the third quarter. We expect revenues for our Shared Wireless segment, to report double-digit growth in the first quarter as well.

Fixed Wireless revenues rose modestly in the fourth quarter on a sequential basis. Customer upgrade activity remained very strong during the fourth quarter and the year as a whole. Total customer ARPU rose for the seventh consecutive quarter to a record $761.

New customer ARPU also continues to increase, reaching $663 in the fourth quarter. Customer churn was 1.9% during the fourth quarter which is above our historical level of approximately 1.7% but below telecom industry standards of around 2%.

During the latter stages of the fourth quarter, we saw two developments emerge which we believe will tend well for zooming the growth of our Fixed Wireless segment. First, we took advantage of technology enhancements to launch our new product offering of 100 megabits of service at a monthly cost of $699.

We have received strong initial response to this new offering and expect it to gain traction and generate increasing sales throughout 2014. Secondly, after a relatively quiet period following our acquisition of Delos in the first quarter, we are beginning to see new opportunities emerge.

These Fixed Wireless providers are similar to the five acquisitions that we have completed in the past although larger in size. These opportunities if closed could help drive revenue growth to be accretive. In summary, we expect revenues for the Fixed Wireless segment to grow in 2014.

Consolidated gross margins continue to reflect a significant investment that we have made in our Shared Wireless Infrastructure over the past two years. The decrease in gross margins in our Fixed Wireless segment is attributable in part to network enhancements that we have made to enable the Fixed Wireless network to provide backhaul for the Shared Wireless segment.

Over the past year, we have been very focused on reducing our general operating expenses, sales and marketing, customer support, general and administrative. These costs decreased by 15% in the fourth quarter of 2013 totaling $5.8 million as compared to $4.9 million in the fourth quarter of 2013. We will remain vigilant and controlling non-revenue based expenses.

Adjusted EBITDA profitability for the fixed wireless segment was a $3.8 million in the fourth quarter and free cash flow equaled $2.6 million. These metrics for the segment were essentially flat with the third quarter.

Adjusted EBITDA loss for the Shared Wireless segment was also basically flat compared to the third quarter of 2013. Adjusted EBITDA loss for the corporate group, which includes centralized operations that support both of our operating segments, improved by 3% in the fourth quarter to $2.8 million.

Capital spending for 2013 as a whole totaled approximately $8 million which decreased sharply from almost $25 million in 2012 when we were constructing our Shared Wireless network. We expect capital expenditures for the Fixed Wireless segment to remain essentially flat going forward, while capital expenditures for the Shared Wireless segment will remain success based in nature with additional outlays closely tied to customer deployments.

We ended the quarter on a strong financial position with cash and equivalents of approximately $28 million. Total cash burn in the fourth quarter was approximately $4.6 million. We remain confident that we have sufficient capital to execute our business plan.

Turning to our guidance for the first quarter of 2014, we expect Shared Wireless revenue to increase to a range of $650,000 to $750,000. We expect Fixed Wireless revenues in the range of $7.8 million to $8 million. And adjusted EBITDA for the Fixed Wireless segment in the range of $3.5 million to $3.7 million.

Operator, we will now take some questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). Our first question comes from the line of Marc Albanese of Evercore. Your line is now open.

Marc Albanese – Evercore

Great, thanks for taking the question guys. First, on just fourth quarter results, I noticed you came in slightly below the mid-point for the Hetnets guidance, 600 to 900. I was wondering if there was anything that kind of drove just becoming slightly below that if there is anything that didn’t materialize or it was a slower ramp than expected.

Jeff Thompson

Yes, hi, thanks Marc first, for jumping on the last day of earnings. Yes, it’s just to be very frank, it was just – we didn’t see the usage that we see in the previous course, the usage based revenue. The rent based revenue was exactly what we thought it was but the usage based revenue came in a little light so this is basically almost all ramp based revenue from the cable deal. We don’t know if it was related to the weather or not, yeah, I know it’s been fourth quarter, it is an outdoor network. But it was basically, that little bit would have helped in getting us over that half way point.

Marc Albanese – Evercore

Okay, okay, that makes sense. Another question, you had previously indicated that you were pretty close to signing another cable partner. I was just wondering if that was limited or perhaps as the recent Comcast Time Warner Cable, you had any impact on that timing?

Jeff Thompson

That probably gave us a hick-up for a couple of weeks but everyone realizes that these consortiums we have to – they need to build out another couple hundred hotspots. And they all need to get moving. And there was – we were at conferences last two weeks and the cable companies were there with us.

And they resolve to continue to build out at a rapid clip even with this consolidation. Since we don’t have any overlap, we expect it to continue with those conversations. But slightly slowed down but we’re still on track.

Marc Albanese – Evercore

Okay, great. And just one last one, I just noticed that over the – really the last three months seen the noise level around hotspot to a Wi-Fi offload and small cell to really pick up sharply. And I’m wondering on your end, have you seen any meaningful lifting activity in terms of either RPs or trials with new customers?

Jeff Thompson

Yes, let me just start with Wi-Fi before I talk about small cell because obviously having Barcelona, the World Congress just a few weeks ago and a couple of other conferences, there has been quite a significant buzz about it and I’ll talk about small cell in a second. But on Wi-Fi, we have a pretty good pipeline right now as we mentioned in our prepared remarks to continue with sequential growth, without even having pure carrier offload.

So we think we’re setup with some other additional companies and migrating them to rent based situations whether it’s Microsoft and Skype guys and some other folks are doing usage base. It looks like people are understanding that Wi-Fi is going to be an important tool going forward. So, we’re pretty excited that even without carrier Wi-Fi offload, we think we’re going to have a video with Wi-Fi on the Wi-Fi antennas.

Now, let’s just switch over to pure LTE small cell offload. There has been quite a bit of activity where people are looking at getting a bunch of small trials going, and to really focus on bringing small cell into a full-on product that can be provisioned quickly. There is a lot of goals that are starting to happen out there. The traditional route to get on a tower is 200 days, they want small cell to be 30 days. There are six provisioning points for small cell now that didn’t exist a year ago.

But there are – it is quite a bit of activity with two or three of the carriers right now and with the Ericssons and the Alcatels of the world trying to help them bring us to fruition. So we think we got a good team at Hetnets in front of the right people at all these companies, whether it’s the consulting companies at Ericsson or Alcatel or the direct rental teams that the major carriers. So Hetnets is up and on its feet, it’s got some growing revenue and it’s in a great position as these deployments happen.

Marc Albanese – Evercore

All right, great. Thanks for taking the question.

Jeff Thompson

Thanks Marc.

Operator

Thank you. (Operator Instructions). Our next question comes from the line of Donna Jaegers with DA Davidson. Your line is now open.

Donna Jaegers – DA Davidson

Hi guys, thanks for taking the questions. On the Fixed Wireless business, the churn popped up to 1.9%. Can you talk about what the most – what the most common reason is for the churn, and you think your new plan with 100 mbps will solve that?

Jeff Thompson

Yes, it’s a little bit higher than we like. A lot of it’s due to us, obviously we churned the growth of your business is important too. And we’re focusing back on the growth side of that which naturally brings down your churn. But it’s a great, great point you made with the new product. The new products we sell is only a three-year deal and has such a price advantage that there is no reason that people are going to change or competitor that there is a same pricing has not had to change their pricing in over 10 years.

So, having – once we get this new product which really mocks up a lot of the smaller based products that we have, it will embed churn at this three-year a churn reduction program, just by being three-year deals.

Donna Jaegers – DA Davidson

And can you talk a little – there is some worry that all your existing customers will move to the new product which of course is a lot more usage for a little more price. So can you talk a little about how you’re focusing the new products so that you’re not just cannibalizing your base?

Jeff Thompson

Yes, it’s actually a great question. We’ve done a lot of work with our sales force. And we actually think the opposite now that we’re selling the product we’re starting to install it. We think the opposite it’s actually going to happen.

We think that customers that have 8 megabits for $500 or in the $400, $500, $600 range, who want to take this product. And if it’s a building, a single building customer that we think is a good building to become an on-net building because we only sell this in an on-net building. Then we can convert that lower ARPU customer up.

We’ve had lots of sales over $2,000 in the last quarter from places that are not on-net and not going to be on-net, because frankly if you look at a very large hospital or a hotel or some of the companies that are – large customers that are only entire building in a skyscraper, they’re not going to be on that building because we have to have certain financial parameters that we can sell that product to more than one customer.

So, we don’t actually think it’s going to bring our ARPU down, we think it’s actually going to bring our ARPU up.

Donna Jaegers – DA Davidson

Okay. And then on the number of Hetnets rooftops, can you give us, I mean we’ve been sort of using this 1,500 rooftop number for quite a while. Can you give us any better update on that?

Joseph Hernon

Actually, Donna, no we’re not. I don’t know if you’ve been listening to some of the buzz around small cell right now but the constant term that we hear even last week at the Deutsche Bank Conference or the week before at the Metro Connect is land-grab, land-grab, land-grab. We don’t want to release any information to our competitors who would be competing against rooftops.

As we get metrics, we’ll get the revenue on these nodes and which ones are producing node cash flow but there is some land-grab going on. We have been doing some additional building as we mentioned in the call. As we get out and we get a lead on everybody we’ll start getting back to rooftop metrics how many we have. But we’ll get to the revenues on those at least.

Donna Jaegers – DA Davidson

Okay. And then your projection Jeff was, as far as second half hopefully you could have some small cell revenue there. What sort of lead-time do you guys need to for carrier comes and so you say I need to use your rooftops in New York City. What sort of lead-time do you need to turn those on?

Jeff Thompson

Well, our rooftops we spent a lot of time and a little bit of extra money at the beginning in the initial investment to be ready for whatever small cell device they put up there. So, our lead time is almost instant, we could be ready the next day that we can handle both the Alcatel product and the Ericsson product if they want to install that on our rooftop. So, we’re ready.

But we’re being told by the people that are running a lot of the small cell, either trials or eventually the full-on provisioning is, they want us to be certified in the products and we got to be able to deploy within 30 days once they do ask for a small cell deployment.

Donna Jaegers – DA Davidson

Okay. And then, just one last question from me, on trying to get some of your usage based Wi-Fi customers to move to rent based, any backlash on that?

Joseph Hernon

No, they understand that we’re not going to continue to sell our usage based revenue. A good example would be fourth quarter. It’s not predictable, it’s hard to plan. These assets we think are very valuable. We think the customer base is there to take over those deals if they don’t want it.

So, and plus, they have – they don’t have any worries once they switch to a rent based contract, they have a full pour, they don’t have to worry about use of spiking are going down. So we think we’ll be pretty successful, at least a couple of them converting them to rent based contracts.

Donna Jaegers – DA Davidson

Okay. And then, just one last because – on the cable demand that you have – the customers renting it on a per port basis. Are they starting to run into usage constraints on those ports?

Jeff Thompson

I don’t want to give away my customers’ information. But we have had a very successful amount of customers, they’re very happy with it. As we have already said, we started to build out more. We have – the contract is growing already. And we think that with the whole consortium, there are another 200,000 nodes they want to build out. We hope to be a good partner for all of them because that’s a very significant number.

We’ve also had some other developments on other locations right out of Manhattan and New York, where we can actually find furniture that we can amount to, that can even be profitable with one customer. So, we’ve done a lot of work in the last three or four months and we’re seeing a lot of activity from the cable folks.

Donna Jaegers – DA Davidson

Okay, great. Thanks, Jeff.

Jeff Thompson

Thank you.

Operator

Thank you. I’m not showing any further questions at this time. I’d like to hand the call back over to Jeff Thompson for any further remarks.

Jeff Thompson

I know some folks were traveling today. And I wanted to say Happy Saint Patrick’s Day to everybody. Thanks for jumping on the call, the last day of earnings. And I look forward to your questions over the next couple of days. Thanks folks.

Operator

Ladies and gentlemen, thank you for participating in today’s conference. This does conclude today’s program. You may all disconnect. Have a great day everyone.

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