Towerstream Corporation's (TWER) Jeff Thompson on Q1 2014 Results - Earnings Call Transcript

May.12.14 | About: Towerstream Corporation (TWER)

Start Time: 17:00

End Time: 17:31

Towerstream Corporation (NASDAQ:TWER)

Q1 2014 Earnings Conference Call

May 12, 2014, 17:00 AM ET

Executives

Joseph Hernon - CFO

Jeff Thompson - President and CEO

Analysts

Sanford Lee - Canaccord Genuity

Donna Jaegers - D.A. Davidson

Operator

Good day, ladies and gentlemen, and welcome to the Towerstream Reports First Quarter 2014 Financial Results Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. (Operator Instructions). As a reminder, this conference call is being recorded.

I would like to introduce your host for today's conference, Joseph Hernon. You may begin.

Joseph Hernon

Thank you, operator. During the course of this conference 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 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.

Before I begin a discussion of our first quarter results, I'd like to remind everyone that we'll refer to several non-GAAP metrics during the call. Please refer to our earnings release issued this afternoon for a reconciliation of these non-GAAP measures to the comparable GAAP amounts.

I will now provide a financial and operating update. Shared Wireless segment revenues rose 14% compared to the fourth quarter of 2013, as we continued to add access points on additional rooftops in our Manhattan network for our large cable customer. In addition, we signed our second rent based Wi-Fi contract early in the second quarter.

Fixed Wireless revenues declined slightly on a sequential basis due to a particularly tough winter, which made new installs more difficult. We did see strong demand for our new 100 megabyte service and signed several new customers in the quarter. We expect this offering to continue to ramp over the course of the year and contribute positively to revenue growth.

Total customer ARPU declined modestly from a record 761 in the fourth quarter of 2013 to 758 for the first quarter of 2014, a decline of less than 1%. New customer ARPU of 636 was below the record levels that we reported in Q4 2013, but was comparable to the levels that we reported for the first three quarters of 2013.

We reduced our operating expenses, sales and marketing, customer support, general and administrative by 12% compared to the first quarter of 2013. These expenses increased by less than 2% on a sequential basis and payroll taxes which are always highest in the first quarter represented the entire sequential increase. We continue to work diligently to control our operating expenses.

Adjusted EBITDA profitability for the Fixed Wireless segment was a solid 3.6 million in the first quarter of 2014 and free cash flow equaled 2.1 million. Adjusted EBITDA loss for the Shared Wireless segment for the first quarter of 2014 increased by 1% to almost 3 million as strong growth in revenues was offset by higher costs as we continue to expand the rollout with our cable customer.

Adjusted EBITDA loss for the corporate group which includes centralized operations that support both of our operating segments increased from 2.8 million in the fourth quarter of 2013 to almost 3 million in the first quarter of 2014 with substantially all of that increase related to higher payroll taxes associated with the new calendar year.

Overall capital spending declined to 2.5 million in the first quarter compared to 3.3 million during the fourth quarter of 2013. We expect capital expenditures for the Fixed Wireless segment to remain within a fairly tight range 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 21 million. We continue to feel very comfortable that we have sufficient capital to execute our business plan. As Jeff will describe in more detail, we believe that debt is available to give us the flexibility to pursue larger M&A transactions than we have in the past.

Turning to our guidance for the second quarter. We expect Shared Wireless revenue to increase to a range of $800,000 to $900,000 driven by the initial ramp of rent based revenue with our newly added customer. We project Fixed Wireless revenues in the range of 7.5 million to 7.8 million and adjusted EBITDA for the Fixed Wireless segment in the range of 3.4 million to 3.6 million. We expect to grow our Fixed Wireless business in 2014 both organically as our new 100 megabyte service ramps and through additional accretive acquisitions.

I will now turn the call over to Jeff Thompson, our President and CEO.

Jeff Thompson

Thanks, Joseph. We achieved several important milestones in the first quarter for our HetNets' Shared Wireless segment. Most notably we signed our second rent based customer for our Manhattan network, which also became our first anchor tenant for our Chicago, San Francisco and Miami networks. This is exciting in that we have our second Wi-Fi lease turned up in Manhattan, we will have Wi-Fi nodes that are producing per node cash flow.

In addition, our first MSO Wi-Fi customer contract continues to grow and we expect to lease up those locations with our second rent based contract. To help accelerate and expand our small cell opportunity, we signed a partnership agreement with Alcatel which includes joint selling and marketing activity. Together, we offer carriers a single end-to-end solution and believe this will lead to a strong lease pipeline for HetNets. We hope to have similar agreement in place with Nokia and Ericsson which will give us complete coverage of all carrier vendor preferences and technical needs.

In our Fixed Wireless business, we introduced our 100 megabyte service for $699 per month during the first quarter. The strategy is to offer this product to customers in non-Cogent buildings and Cogent off-net buildings. This product is faster and much more economical than fiber-based services and is targeted at underserved segments of the market, specifically buildings with 250,000 to 1 million square feet. We signed several new customers for this service in the quarter and saw momentum building for the offering across all of our markets. We expect this – to a product to help accelerate organic revenue growth and cash flow generation in our Fixed Wireless business.

We also intend to grow our Fixed Wireless business to additional acquisitions and wholesale transactions. We have established a strong track record of successful acquisitions where we significantly improved the cost structure and cash flow characteristics of acquired properties. We believe we can replicate this success with larger transactions.

We have started to work on some transformational acquisitions in our Fixed Wireless business. In the first quarter, we were pursuing a CLEC that was running a formal process and we were one of the final bidders. We had a substantial portion of the purchase price committed with debt financing.

The industrial logic behind the transaction is that CLECs are not facilities-based providers, meaning they do not own the last mile network and have no control of their customers and rent the last mile from the ILEC, their competitor. As a result, non-facility based CLECs had EBITDA margins in the low teens. They are also limited by small copper-based broadband pipes that are no longer competitive or wanted by small and medium-sized businesses. We can solve the sales problem with fiber-like performance delivered in days not months.

By converting these CLEC customers to our own facilities-based network, we believe we can double their EBITDA margins and increase their cash flow by eliminating their dependence on the ILEC, a longstanding business model flaw. Leveraging the network we have already built we have the capacity to grow from 3,500 existing customers currently to over 25,000 without any significant increase in cost of goods sold.

We believe we have developed a very attractive formula for generating substantial cash flow by converting non-facilities-based carriers to our own network. The debt markets are very receptive to the cash flows generated by these types of transactions. Towerstream is uniquely positioned to leverage its already built network.

Our strategy to grow our Fixed Wireless business both organically and through acquisition also complements our HetNets division. First, the buildings we are targeting for our 100 megabyte service line up very well with carriers indoor strategies. As you know, wireless carriers will be aggressively rolling out indoor solutions to boost coverage. However, distributed antenna systems are very expensive and can't economically serve buildings below 75,000 square feet. Adding small cell to our Fixed Wireless buildings enables us to further leverage our investment in a backhaul and offer a much lower cost solution, which could in turn accelerate small cell deployments.

In summary, we are very pleased with the progress we have made in the first quarter. We believe there are transformational acquisitions that can generate substantial free cash flow. We continue to ramp our rent based Wi-Fi revenue by adding new customers and expanding our deployments to additional rooftops. We expect this activity to generate double-digit sequential revenue growth for HetNets over the course of the year. We are more confident than ever before that we will see initial small cell deployments and contracts in the second half of this year helped by our partnerships with leading 4G equipment vendors.

With that, operator, we'll turn it over to questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). Our first question comes from the line of Sanford Lee of Canaccord Genuity. Your line is now open.

Sanford Lee - Canaccord Genuity

Hi, gentlemen. Thanks for taking the call. First of all, congratulations on the second rent based contract signing. That's great. Can you give me a little more details just in regards to maybe the ramp of what you're expecting? Is it going to be similar to what we saw with the first cable Wi-Fi deal or sort of trickles in initially until you get it fully installed?

Jeff Thompson

Yes, we're not going to – in the guidance that we gave, we're not going to get the full benefit of the contract not only because we weren't deployed in all markets but we're also not getting a full quarter. We're not going to get a full ramp. So the guidance that we gave was just a little bit of that revenue. The next quarter will get a much larger ramp from this new rent based contract.

Sanford Lee - Canaccord Genuity

Okay. And I didn't see it in the release, but is the contract, the second one, is it similar to other tower leasing deals in the longer term, escalators, that sort of nature?

Jeff Thompson

Yes, it's very typical. It does have yearly escalators, so it helps cover our yearly escalators but it is very similar, correct.

Sanford Lee - Canaccord Genuity

Okay. And then one last one on the HetNets is you've mentioned in the past that the anchor tenant basically would pay for the costs of the network and any additional on top is gravy and you mentioned that in your comments basically for New York now having a second carrier on that. As far as – is the similar economic supply to your other Wi-Fi networks as well?

Jeff Thompson

Yes, I mean we look at it typically as a per node similar to the way they measure DAS systems. So, if you have an antenna and you pay a specific rent for that antenna, you typically get coverage by the first customer and then second customers can generate cash flow, correct.

Sanford Lee - Canaccord Genuity

Okay, great. And then if I can just switch gears to the Fixed Wireless business for a bit. Your guidance on the revenue side implying a 3% to 7% decline, you did the 6% decline in Q1. Obviously there was some extremely – effects to weather. Is there anything – we're halfway through the quarter now, is there anything that we should think about in regards to whether you may achieve either the low or the high end suggesting some stabilization in the business, but if you're at the low end signaling ongoing churn issues?

Jeff Thompson

No, I think Joe's team has a great view of churn. We have notification at least 60 days ahead of time, so I think that the stabilization of the churn is coming and we have a great view into it so far into the quarter, so we're pleased that we're going to get the churn back down. A lot of the churn in the first quarter was actually from one significant RFP that we didn't re-up. We lost this customer before and got them back in the past, so we're very confident that we'll get the churn back down to our traditional levels. On the organic growth of the Fixed Wireless business, we're ramping the business back up. We have a new product set that's actually doing very well. It's being received very well. We think it will be sought after, but we spent a lot of time getting HetNets up and running and now we're back in the mix simultaneously getting both businesses to ramp. So we're pretty excited what we can do with acquisitions for the rest of the year not only with some of the CLEC-based stuff that we mentioned in our scripts but also traditional fixed wireless deals that we've been very successful converting into free cash flow.

Sanford Lee - Canaccord Genuity

Great. And then one last one then on the – you I guess spoke in quite detail about the one specific CLEC that you actually had put an purchase offer in with committed debt financing. Is that still in your process or in the bidding process or where do you stand with that now?

Jeff Thompson

No, we did not win the bid. It got a little bit away from us but we weren't going to chase it. But what's exciting is the diligence and the thesis that we've been working on over the last six to nine months was definitely proven through our due diligence and once we could actually get in there and see how it would develop and how we can convert customers from one technology to our technology, give customers a bigger pipe, solve the sales solution, simplify the sales model and really actually give a entire space a solution to something that's not ILEC based where they can be more like a fiber-based facilities provider. So we did not win the bid. We weren't going to chase it, but we have a great group of investors that we went through the process with and we'll continue to look at things that we think can generate significant cash flow and it will leverage our existing business model that we've been doing for over 10 years.

Sanford Lee - Canaccord Genuity

Okay. All right, that's great. I will jump back in the queue. Thanks.

Jeff Thompson

Thank you.

Operator

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

Donna Jaegers - D.A. Davidson

Hi, guys. A few questions. On the second contract, can you tell us how many nodes they'll be renting from you guys?

Jeff Thompson

Almost all of them across our networks.

Donna Jaegers - D.A. Davidson

And so how many nodes is that, Jeff, since you haven't given us an update?

Jeff Thompson

I think it's over 3,000. Yes, correct.

Donna Jaegers - D.A. Davidson

Okay. And that's on still – can you talk about the number of rooftops that you have under these?

Jeff Thompson

Yes, we are going to get back to you releasing rooftop numbers for everybody. I've got a lot of request in the last few weeks about getting some updates on rooftops. We've been very busy trying to secure some of these initial small cell RFPs, working with our partners and some of the process that went through in growing the Fixed Wireless business. But we will start getting out some more rooftop metrics for everybody. We did get more rooftops over the quarter, but we haven't put out anything officially. As we get some of our other agreements across the board, maybe we'll just add that to the releases.

Donna Jaegers - D.A. Davidson

Okay, we'll be looking for it. And on this teaming arrangement with Alcatel-Lucent, can you describe that in a little more detail? Did they have any skin in the game or are they just reselling your rooftops for small cell services?

Jeff Thompson

Actually let me kind of just back everybody up on that. What's happening in the small cell industry is that it's a very confusing deployment compared to traditional tower deployments. So what we've seen with the vendors; Alcatel, Ericsson, Nokia is that they want to take all these moving parts that make is a little bit more difficult to deploy a small cell deployment and put it all under one roof. But our deployment is they can actually market our rooftops to the carriers. The carriers will have a direct contract with us and we will be doing most of the installations and we will get paid for those installations and the deployment of the equipment and depending if we would win any RFPs with them and they can continue to market our rooftops and we can continue to market their services for our design and everything that makes a one-stop shop for a small cell deployment.

Donna Jaegers - D.A. Davidson

Okay. You were hopeful about having something in the second half. Are you in consistent conversations with the carriers that you're hopeful on?

Jeff Thompson

Yes, there's actually real activity out there with real due dates coming up now which is great. There is two legitimate RFPs that are out there right now. We think we're well positioned. We think we have great partners for those RFPs, so we're very excited about seeing the first real outdoor deployments coming in the second half.

Donna Jaegers - D.A. Davidson

Great, we'll be anxiously awaiting that. You large cable customer rolled out HotSpot 2.0 network in New York City. Your nodes are not labeled like that on their map that they're HotSpot 2.0 compatible? Is there a plan for them to install those nodes for HotSpot 2.0 capability or what's the…?

Jeff Thompson

Yes, the nodes are HotSpot 2.0 – actually that network in Manhattan was the very first certified HotSpot 2.0 network in the country. So when they're ready to migrate to that technology on our Wi-Fi access nodes, they will be able to.

Donna Jaegers - D.A. Davidson

Have they given you – is there any bump up in the price that they'll pay for those nodes when they migrate?

Jeff Thompson

No, it actually simplifies and it actually opens up SSIDs for us, so it benefits us.

Donna Jaegers - D.A. Davidson

Okay. And then your pursuit of CLEC that had a process going on, you just don't offer voice capability though and if I'm thinking of the right CLEC I mean they offer both voice and data and voice has actually been much more important to them historically. So what are you going to do to offer voice capability?

Jeff Thompson

If you look at in acquisition of almost all the traditional CLECs, a lot of them are very regional, some of them have multiple markets across the U.S. They're not even connected. But if you look at all of them, they all have some sort of a voice over IP overlay over what has been traditionally T1s, very small amounts of bandwidth, bundled with a voice product and then a lot of the CLECs have got into a lot of different services to try to offset the decline of customers wanting their broadband products because they can't compete with T1s when the rest of the world wants 50 or 100 megabyte services. So for us we just swap out the T1 services and that voice product can stay on top of our IP product. So there are already IP voice systems, so all we're doing is getting rid of the legacy TDMA T1s or even the Ethernet over copper which already has a – it doesn't seem like it's solving the problems, it's not a big enough pipe either. So you basically just get – getting rid of the traditionally rented services from the ILEC replacing it with our network and just bringing up everybody's margins. We have lots of customers that already use VoIP over our systems.

Donna Jaegers - D.A. Davidson

Okay. And then one last question on funding. Obviously you got 21 million in cash. You burned about 7 million in the first quarter. You're saying your confident in debt financing for other CLEC or fixed wireless acquisitions, but what about any sort of debt funding on the HetNets operation, what would that require?

Jeff Thompson

Yes, what's exciting is being in this process is a lot more to it than we're talking about in this call as you know. We've been going through this process for almost six months and to line up the financing, you work with some pretty sophisticated telecom investors. And because we're leveraging our entire business, even HetNets, HetNets leverages our existing business model we've been doing for more than 10 years and it has a real state asset that's ramping relatively quick even though it's only the Wi-Fi revenue, but with some of the conference calls from the tower companies and they carriers and actually Alcatel today, small cell deployments were just starting there. They're definitely at the price points that we expected if not higher and could ramp very aggressively. So a long answer to we think we have a lot of great financial partners that like our facilities-based network and like our real estate assets of HetNets.

Donna Jaegers - D.A. Davidson

And would you need a master lease agreement with a large carrier on small cell to secure more funding?

Jeff Thompson

No, actually – it was a couple of things. I want to talk a little bit about that. As we talked about, if you know the vendors and you know which carriers they typically work with, you've got Alcatel, you've got Ericsson, you've got Nokia, they typically lineup with specific carriers. And we're not having to have a master lease agreement with certain RFPs that we're working on because of our partnership with the vendors. But we are very far along with – actually Verizon was our first master lease agreement and when we get that over the wire, we'll put out a release and get everyone on board with that.

Donna Jaegers - D.A. Davidson

One last question. Obviously Crown Castle has won some small cell contracts already in New York City. They have metro fiber and that's what they're using for the backhaul. Do you find that – is that a big advantage and are the carriers not looking at fixed wireless backhaul because of just the technology and the fact that it could be a single point of failure?

Jeff Thompson

We can actually put a mesh architecture which can actually give us more reliability than a single strand going to a light pole. A lot of the stuff you're seeing from Crown Castle I would imagine is based on their DAS network probably not called – which they now call small cell. They have a great network. They have some great assets. They got through the next-g acquisitions and they already had fiber to those locations. So I'm assuming that those are additional lease-ups on those assets that they already had. When you look at traditional small cell that people are going to be putting out there, it's a much different deployment and you're basically replacing a macro cell with anywhere depending on what you believe in the marketing, 10 small cells for 30 small cells. The problem with fiber is you can't make fiber [one-twentieth] (ph) of the cost to make the economics in small cell to work. So we are seeing the carriers starting to look at fixed wireless or another way to bring the economics down because the only thing you're going to see in the wireless industry is they have to start lowering their cost or bid because the prices aren't going up anymore with this stiff competition for smartphones. So to lower your cost per bid, you need to lower your cost whether you're using Wi-Fi and starting to bring that into your network with HotSpot 2.0 to lower your cost per bid because Wi-Fi is so much less expensive, whether you're using lots of small cell in fixed wireless or with a cable plan to backhaul. They will take almost any backhaul they can get to certain locations and we are actually pretty excited with what we might get in our first RFPs for some of those small cells using our fixed wireless. We think our fixed wireless is a great asset to be able to get to certain locations.

Donna Jaegers - D.A. Davidson

Okay. And then on the other – there's two other cable MSOs that have been talking big about growing their Wi-Fi presence; Comcast growing from 1 million HotSpots to 8 million and Cablevision now talking about a much more disruptive model. Both of them use TW cables HotSpot network in New York City. Are you in conversations with both of those carriers to put them on their own separate networks or to leverage your network?

Jeff Thompson

Yes, they don't overlap with their franchises typically. And even in LA there's five of them and they're not overlapped, so it's really tough to put together anything – for them it's not very continuous coverage. So, yes, we are in conversations with those folks. We have been for some quite some time. The Time Warner deal has helped us quite a bit because they are using some of our network already. We expect to continue to get MSO success over the year.

Donna Jaegers - D.A. Davidson

Okay, great. Thanks, Jeff.

Jeff Thompson

Thank you.

Operator

Thank you. (Operator Instructions).

Jeff Thompson

Well, operator, I think that we're all done with questions. I know I'm going to see a lot of you next week at the Wireless Tower Show, so I hope to see you there and I'm sure I'll be talking to a few of you after the call. Thank you.

Operator

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

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