Boingo Wireless (NASDAQ:WIFI)
Q1 2014 Earnings Conference Call
May 8, 2014 4:30 p.m. ET
Kimberly Orlando – IR
David Hagan – CEO
Peter Hovenier – CFO
James Breen - William Blair
Donna Jaegers - D.A. Davison
Greetings, and welcome to the Boingo Wireless First Quarter 2014 Earnings Conference. (Operator Instructions) As a reminder, this conference is being recorded.
I would now like to turn the conference over to your host, Ms. Kimberly Orlando with Addo Communications. Thank you. You may begin.
Thank you, and welcome to Boingo Wireless’ first quarter 2014 earnings conference call. By now, everyone should have access to their earnings release which was issued today at approximately 4’o clock PM Eastern Time. If you are yet to receive the release, it is available on the investor relations portion of Boingo’s website at www.boingo.com by clicking on the investor tab. This call is being webcast and is available for replay. In our remarks today, we will include statements that are considered forward-looking within the meanings of securities laws. In addition, management may make additional forward-looking statements in response to your questions.
Forward-looking statements are based on management’s current knowledge and expectations as of today, May 8, 2014, and are subject to certain risks and uncertainties that may cause the actual results to differ materially from the forward-looking statements. A detailed discussion of such risks and uncertainties are contained in our most recent Form 10-K for the year ended December 31, 2013, filed with the SEC on March 17, 2014. The company undertakes no obligation to update any forward-looking statements.
On this call, we will refer to non-GAAP measures that when used in combination with GAAP results provide us with additional analytical tools to understand our operations. We have provided reconciliations of non-GAAP to GAAP measures in our earnings release.
And with that I will hand the call over to Boingo’s CEO, David Hagan.
Thanks, Kim. Good afternoon everyone. Thanks for joining us today to discuss our first quarter 2014 results.
We kicked off the year with a strong quarter financially with major venue contract wins that helped build the foundation for continued long-term growth. We saw significant contributions from our strategic growth opportunities and continue to believe that we turned the corner and that the headwinds of 2012 and 2013 are behind us. The emergence of DAS, advertising and military broadband as our key growth drivers will not only further diversify our revenue streams but will also help us realize double-digit growth overall for the business.
Revenue for the first quarter grew 14% year-over-year to nearly $27 million which exceeded our guidance. Adjusted EBITDA for the quarter also exceeded guidance at $3.1 million. Pete will provide more color on the financials later on the call.
At of the core of our growth strategy is the acquisition of long-term wireless rights at large venues. As data demand continues to grow unabated, these are the locations in which users and carriers will run headlong into the capacity crunch. By securing venue rights and installing small cell networks, both DAS and Wi-Fi, we provide the additional capacity to help carriers and venues, keep pace with demand and deliver optimal customer experience.
As a sign of our momentum in the first quarter of 2014 we signed DAS venue deals with more than we did in all of 2013 and our sales pipeline remains very robust. These are long-term contracts, usually 7 to 10 years which provide revenues from the build, from carrier rent through life of the contract and additional revenue when carriers get through network upgrade cycles.
New DAS contracts signed or announced during the first quarter include 3 universities, an NBA sports arena, two multi-use sports and convention complexes, a major domestic airport and largest airport in Latin America. Several of the agreements include Wi-Fi rights as well.
In addition to the new DAS contracts, we added almost 1000 new operational DAS nodes with the launch of service at Pinnacle Bank Arena in Nebraska and at the University of Arizona, bringing our total live nodes to 7300. This represents 16% growth in live notes quarter over quarter.
In addition to the DAS and Wi-Fi wins at John Wayne and Sao Paulo International Airports, we announced a Wi-Fi agreement with Dubai International Airport, which just last week overtook London Heathrow as the world’s biggest airport for international passengers.
Among wholesale initiatives gaining momentum is our Comes with Boingo product offered in major handset and device manufacturers as well as other product and service providers that want to extend public Wi-Fi connectivity to their customers as a differentiating amenity. Last year we saw Samsung offer complimentary Boingo accounts to customers who purchase select android devices through their Galaxy Perks program. This year, American Express announced that it's offering this benefit to Platinum cardmembers on a global basis. We have seen increased interest in these products and believe that there is additional opportunity for future wholesale growth.
Our advertising team generated triple digit growth in the quarter after posting an 80% increase for all of 2013. We believe that advertising revenues can continue to post strong double-digit growth. This is due to the sustained demand for complimentary advertiser supported Wi-Fi access across both our managed and operated and partner networks.
As expected, our retail business remained relatively flat as most of our airports have transitioned to a tier premium model. Our future growth in retail will be primarily driven by our military offering. The long-term contracts that cover Army, Air Force and Marine Corps bases in the U.S. and abroad provide us access to a sizable audience of potential customers who rely on internet access as their primary source of communication and entertainment.
We will continue to invest heavily in this effort and currently have more than 25 bases targeted for network build and service rollout this year. By the end of the year, we should have networks in place that cover more than 100,000 beds and we will be able to start monetizing them through recurring subscriptions with each successive base launch.
These buildouts will continue throughout 2015 in order to take advantage of the more than 300,000 beds covered by our master contracts with the military. The build costs average about $200 per bed with an expected ARPU of $30 to $50 per month. Based on our calculations on penetration, we believe the investment will be paid back in three to four years on contracts that average 10 years.
And finally, during the quarter we also activated Hotspot 2.0 networks at 23 of our managed and operated airports. Hotspot 2.0 is a standards based method of authenticating users that is both seamless and secure. Once a user has a profile installed on their device it will automatically identify supported network and negotiate a secure connection, much like what happens on a password-protected network at your home or office. This provides a tremendous user experience as it is usually connected before the user is even aware the network is available.
Much like a DAS network is invisible to the user, Hotspot 2.0 makes Wi-Fi connecting just the seamless. This technology is readily available on iPhones, iPads and Macintosh laptops and is emerging on a variety of Android devices.
It provides OEMs, carriers and other service providers a simple means to support Wi-Fi bundling, roaming and offload. On the heels of our Hotspot 2.0 launch, Time Warner Cable activated more than 30,000 hotspots with the same capability showing further industry support from leading service providers as this important technology gains momentum in the marketplace. We believe that Hotspot 2.0 adoption will continue this year with increased contributions from wholesale access and offload agreements as a result in 2015.
With that, I’d like to turn it over to our Chief Financial Officer Pete Hovenier for more detailed look at our financials. Pete?
Thanks, Dave. Today I will begin by reviewing our financial results and key operating metrics for the first quarter ended March 31, 2014 and will then conclude with a financial outlook for the second quarter and full year 2014.
Total revenue was $26.5 million representing a 14.3% increase over the prior year period. The increase reflects strength in advertising and retail subscription revenue, partially offset by a decline in wholesale and retail single use revenue.
Across our diversified revenue streams, also represented 42% of first quarter revenues, retail represented 41% and advertising accounted for the remaining 17%. This compares to last year, the wholesale represented 50% of revenue, retail represented 46% and advertising accounted for the remaining 4% of revenue for the quarter.
Wholesale revenue totaled $11.1 million, representing a 3.7% decrease from the comparable period last year. The decrease in wholesale revenue was mainly due to decreased partner usage base fees which were partially offset by increased DAS build-out projects and DAS access fees in our managed and operated locations.
Retail subscription revenue was 8.3 million, representing a 2.8% increase over the prior year period. Our retail subscriber base and our average monthly revenue per subscriber remained essentially flat to prior year quarter.
Advertising other revenue was $4.5 million, representing a 396% increase over the prior year period. The significant increase was driven by strong performance from our advertising sales team and our investments in the Boingo media advertising platform. As we discussed in the past, sponsored access at many of our managed and operated locations is continuing to contribute to shift in revenue mix from retail single use to advertising sales.
Advertising during the quarter also continued to benefit from additional ad sales at the venues acquired from AWG. Retail single use revenue was $2.5 million, representing a 1.9% decline from the first quarter of 2013. The decline primarily reflects a transition to certain paid managed and operated locations to tiered or free pricing model.
Now turning to our cost and operating expenses. Network access costs totaled 12.9 million representing a 33.7% increase over the first quarter of 2013. The increase is primarily due to increased revenue share paid to our venue partners at our managed and operated locations as well as increased depreciation and venue expenses. These increases were partially offset by decreased customer usage of partner venues.
Gross margin, which is defined as revenue network access cost, was 51.1%, down from 58.2% in the prior year period. The decline is gross margins largely reflects the shift in our diversified revenue stream driven by a reduced higher margin retail single use and partner usage base fee revenue coupled with significant increased growth to our lower margin wholesale DAS building advertising revenues.
Network operation expenses totaled $5.8 million, an increase of 47.4% for comparable 2012 quarter, primarily due to increased personnel related expenses driven by the new headcount to support the rollout of our new military contracts as well as increased depreciation and network repair and maintenance expenses.
Development and technology expenses were $3.7 million, an increase of 17.1% from the prior year period due primarily to increased depreciation and hardware and software maintenance expenses.
Selling and marketing expenses were $3.9 million, a 29.9% increase in the comparable 2013 quarter primarily due to increased personnel related expenses resulting from our investments in our Boingo media and Boingo broadband sales and business development teams.
General and administrative expenses were $4.4 million, a 2.1% decrease in the comparable 2013 quarter due primarily to decreased professional and other expenses, partially offset by increased personnel related expenses which are inclusive of stock based compensation.
Now turning to our profitability measures for the quarter. Net loss attributable to common stockholders was $5.4 million, or $0.15 per diluted share versus net loss of $1.1 million or $0.03 per diluted share for the prior quarter. As I mentioned last quarter, we established tax valuation allowance in the fourth quarter of 2013 due to our ongoing investments in growth. We will maintain this valuation allowance, no longer accrue material tax benefits or tax expenses in our income statements until appropriate level of profitability is obtained.
Adjusted EBITDA was $3.1 million, a decrease of 15.9% in the comparable 2013 quarter. Please refer to our earnings release for the definition and reconciliation of non-GAAP measures.
In terms of our operating metrics, we ended the first quarter with connects of paid usage on our worldwide network of approximately 17.5 million, up 179% from the prior year period and down 22% from the fourth quarter of 2013. The decreases versus prior quarter is primarily due to decreased connects from advertising sponsorships which were less prevalent during the first quarter relative to the fourth quarter of 2013 which is typically our strongest quarter for ad sales.
As compared to the prior year, in addition to significantly increased connects with advertising sponsorships, we also benefitted from the connects at the venues acquired from AWG.
Our retail subscriber base was 296,000 subscribers at the end of the first quarter, which was flat to prior year and down 4.5% from the fourth quarter of 2013.
Our monthly churn rate for the first quarter was 12.3% versus 9.9% in the comparable 2013 quarter and 10.1% last quarter. Our churn has been recently impacted by the significant number of reissued credit cards which occurred during the quarter.
The number of DAS nodes in our network for the first quarter was 7,300, up 30.4% from the prior year period and up 15.9% from the fourth quarter of 2013 primarily due to the launch of our mutual hosted DAS networks at the University of Arizona and Pinnacle Bank Arena.
Moving on to discuss our balance sheet. At March 31, 2014 cash, cash equivalents and marketable securities totaled $50.8 million or $1.44 per diluted share outstanding and remain essentially debt free. Capital expenditures were $16 million, of which $11.8 million were utilized for DAS infrastructure build-out projects that were reimbursed by telecom operative partners. The non-reimbursed capital expenditures were driven by primarily by new network builds mainly related to the roll out of our military based networks, new managed and operated network deployments and various infrastructure upgrades and enhancements.
I will now turn to our outlook for the second quarter and full year of 2014. For the second quarter ended June 30, 2014, we are initiating guidance as follows. We expect total revenue to be in the range of $26 million to $28 million. We expect adjusted EBITDA to be in a range of $3.5 million to $5 million and net loss attributable to common stockholders to be in a range of 6 million to 4.5 million or a loss of $0.17 to $0.13 per diluted share.
For the full-year ended December 31, 2014 we’re reiterating guidance as follows. We expect total revenue to be in a range of 116 million to 121 million or year-over-year growth of 9% to 13%. We expect adjusted EBITDA to be in a range of 24 million to 27 million and net loss attributable to common stockholders to be in a range of 14 million to 11 million or a loss of $0.30 to $0.31 per diluted share.
As I mentioned earlier, we do not expect any material tax benefits or expenses during 2014 and so accordingly we expect a nominal full year tax rate, as well as fully diluted shares outstanding of 34 million.
As we discussed on our last call, keep in mind that the transition of the Verizon Wi-Fi relationship into a true carry offload customer is anticipated to weigh in our 2014 year-over-year growth comparable and is not materially factored to our guidance at this point.
If you were to exclude Verizon entirely from second quarter 2013, year-over-year revenue growth would be approximately 12 points higher or 15% year-over-year to midpoint of our guidance range. And if you were to exclude Verizon entirely for the full year 2013, year-over-year revenue growth would be approximately seven points higher or 18% year-over-year at the midpoint of guidance range.
With that, I will turn it back over to Dave for closing remarks.
Thanks, Pete. Overall we’re very excited with the start of our year. Both revenue and EBITDA exceeded our guidance expectations and demonstrated the kind double-digit revenue growth we believe is sustainable now that we are clear of the industry change that required a transformation of our business and public facing Wi-Fi.
Because of the magnitude of the military deployments, our profitability figures will continue to be suppressed while we build networks in advance of revenue contribution from subscribers. At the basis of [ph] our service, our recurring subscription model will begin offset those costs and provide lift for overall profitability.
Our strategic focus remains the same: acquire long-term wireless rights at large venues, build high capacity small cell networks and monetize those networks through a variety of wholesale, retail and advertising products. We believe DAS will play a prominent short-term role in carrier offloads to augment wireless capacity and that we are well-positioned to also capitalize on that trends with Wi-Fi in the longer-term.
Advertising will continue to provide growth as majority of our airport networks now offer some sort of ad supported free access. And the military broadband deployment to bases across the US will begin to contribute revenue in more meaningful way in the latter half of the year.
We believe the company is incredibly well-positioned to take advantage of mobile data growth and are excited about the direction of the company.
Thanks for listening today. With that, I would like to open up for your questions, operator?
(Operator Instructions) Our first question is coming from the line of James Breen with William Blair.
James Breen - William Blair
Thanks for taking the question. Just a couple things. One, it seemed like advertising was up a decent amount this quarter. You've sort of given some of the changes in the business. Will we see sort of less seasonality there relative on a quarter-by-quarter basis going forward?
Jim, thanks for the question. We still believe in the market certainly reflects that Q4 is traditionally a very strong advertising quarter, I don't think that’s going to change. I think the way to interpret that is we’ve been building momentum in our advertising business. We had a really nice Q4 and that momentum continued strongly into Q1 with a lot of advertisers continuing campaigns going. We got a nice lift above our own expectations for advertising. But we do expect Q4 to continue to be a larger quarter for advertising and that’s just the advertising market.
James Breen - William Blair
Great, and then just with respect to the overall growth in DAS, is it still fair to sort of look at the DAS metrics that you reported as a good indication of sort of future potential revenue growth there?
Absolutely, that’s why we decided to published that operating metric. We think that’s a great early indicator of future growth for that business.
Our next question is coming from the line of Donna Jaegers with D.A. Davison.
Donna Jaegers - D.A. Davison
Thanks for taking the questions and good quarter. On military, can you give us a little more of an update as far as how many bases you have built out so far and at Pendleton, where I know you built out, give us a little more color on what sort of take rates, ARPU is still running sort of halfway between $30 and $50?
Donna, thanks for the question. So we’re not giving specifics at this point on exactly how many bases have been launched, but we are on our launch schedule, we are feeling really good about things, the result that we have, when I say results, the penetration that we have against number of beds in the areas and the bases that have been launched up to this point are slightly ahead of our internal projections. So we’re feeling good that we’ve got a good handle on what we can expect out of the business and I think we have been conservative so far in our projections. So we are feeling good about it. There is obviously a lot of work to do and certainly the heavy lifting of building the networks is going on now with the monetization and the revenue ramp up coming in the latter part the second half of the year.
Donna, adding to the ARPU question we are still skewing towards the upper end of the range Dave talked about in his call between $30 and $50 ARPU.
Donna Jaegers - D.A. Davison
And the burden of the build-out in the first quarter, can you give us a little more color on that? And will that be similar or will that grow further in the second quarter as far as that up-front sort of burden?
It’s going to continue to accelerate, and we experienced a lot in this quarter and we’re going to continue to see happening in Q2 and even in Q3, it’s a large build. As I talked about CapEx, we spent about 5 million of CapEx of our own money this quarter, not reimbursed by telecom partners, the vast majority of that was build – military builds.
Donna Jaegers - D.A. Davison
And then New York, New Jersey Port Authority, can you -- obviously, we've seen or I've seen your letter to the Port Authority as far as 60% of volume is hybrid or is on and sponsored survey now. What are the next steps there? You guys have a 10-year contract with the Port Authority, airports. Obviously, they want to look more flexible to their customers and add more free Wi-Fi. What's the next step?
I am glad you noted that we do have a 10-year contract in place so that’s obviously a good news, we’re in a long-term relationship with them. We continue to work with the port to try and cover the solution that makes everyone happy, right, give the city what they want, give the airport what they want, give a great quality network experience, give to consumers what they want. So I can’t give you any more specifics than that, but we’re working with them daily to come up with the short-term and longer-term solutions.
Donna Jaegers - D.A. Davison
Since you're not answering directly, I get to keep asking more questions trying to hit one that I can get an answer on. On traffic increase on the Hotspot 2.0 networks, any color? Time Warner Cable, they mentioned that they're seeing I think a 30% boost in traffic because of easier activation or easier authentication. Any color from you guys on what you're seeing so far on the 23 airports as far as traffic increase?
Well, I mean we have seen nice increase, we’re not putting out a specific number but a very strong increase. I mean you just think about it right, instead of someone having to manually authenticate on the network it just happens for them in the background. So it’s a pretty small base of customers that we have the profile on their phones for. So small numbers but where we -- the customer, segment of the customers that have the profile on their device we see very high increased usage, similar to what Time Warner has published.
At this time there are no further questions in the queue. And with that we will conclude our teleconference this afternoon. I would like to thank everyone for their participation. You may have a wonderful day.
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