Boingo Wireless Inc. (NASDAQ:WIFI)
Q2 2014 Earnings Conference Call
August 7, 2014 4:30 PM ET
Laura Bainbridge – IR
David Hagan – Chairman and CEO
Peter Hovenier – CFO
James Breen – William Blair
Donna Jaegers – D.A. Davison
Greetings, and welcome to the Boingo Wireless Second Quarter 2014 Earnings Conference Call. At this time, all participants are in listen-only mode. A question-and-answer session will follow the formal presentation. (Operator Instructions) As a reminder, this conference is being recorded.
I would now like to turn the conference over to your host, Ms. Laura Bainbridge with Addo Communications. Thank you. You may now begin.
Thank you, please wait for the tone and your recording will begin.
My apologies Ms. Bainbridge, you may now begin your presentation.
Thank you, and welcome to Boingo Wireless second quarter 2014 earnings conference call. By now, everyone should have their access to their earnings release which was issued today at approximately 4:00 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, August 7, 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 quarter ended March 31, 2014, filed with the SEC on May 12, 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’ll hand the call over to Boingo’s Chairman and CEO, David Hagan.
Thanks, Laura. Good afternoon, everyone. And thanks for joining us to discuss our second quarter 2014 results.
I’m pleased to announce that our team delivered another strong quarter above our expectations. Revenue grew 8% year-over-year to more than $28 million, exceeding the high end of our guidance. Adjusted EBITDA for the quarter also exceeded the high end of our guidance at $6 million. And even with the numerous network builds underway for military DAS and existing airport network upgrades, our aggressive expense management allowed us to reduce our net loss by approximately $800,000 at the high end of our guidance range.
Underpinning our strong performance in the quarter was our continued focus on our strategic priorities, acquiring long-term wireless rights in large venues, building state-of-the-art small cell networks, mobile data capacity, and monetizing these networks for our retail, wholesale, and advertising offerings. The increased number of concurrent network build-outs we have underway is a direct result of the success we’ve had in securing long-term rights to deploy wireless networks in large strategic venues; among them airports, stadiums, arenas in universities, as well as army, air force, and marine bases, these build-outs include both, licensed and unlicensed spectrum and reflect a continued growth and demand for mobile data.
Our traction and security in long-term venue rights to build and operate wireless networks continued in the second quarter with six more contracts to deploy new gas wireless networks, including two universities, two airports an MBA arena, and large exhibition centre. In the case of the two airports, the DAS agreements were coupled with renewals or extensions of the existing Wi-Fi contracts providing an expanded role for Boingo in delivery and wireless services at existing locations. These combination DAS and Wi-Fi networks show the value of Boingo’s unique capability in both, licensed and unlicensed spectrum, something most of our competitors don’t possess whether they are carriers, cable cars, tower cars or system integrators.
During the quarter, the Board of Commissioners for the port authority of New York and New Jersey approved a proposal to upgrade the Wi-Fi Networks as JFK, LaGuardia, and New York airports as part of an amendment to the 10-year contract extension we currently hold. This proposal calls for Boingo upgrade the airport Wi-Fi networks in order to support the basic free service, and a premium service for power users enrolling partners. We believe that the proposed network design for the New York and New Jersey airports will serve the model for the industry, and establish a user experienced benchmark for commercial Wi-Fi networks.
We are also upgrading the DAS networks to LTE across these venues to add even more data capacity for travelers in the airports. DAS continues to be one of our key long-term growth drivers. The major carriers are increasingly relying on in-building license spectrum networks to boost their mobile data capacity in the most congested locations. Airports, stadiums, arenas, and universities, where we have a strong presence today are typically on their shortlists. Our long standing relationships with carriers help us identify more locations of interest to align our new venue of pursuit with their small sale strategies.
At the end of the quarter, we had more than 7,600 live DAS nodes, up 36% over last year with another 4,600 notes from 17 new networks that are in process of deployment. This is an unprecedented amount of DAS network buildings for the company. We added carrier leasing and DAS operations personal during the quarter to keep up with the market demand and maximize revenue potential for each DAS deployment.
Our advertising team posted another strong quarter as our travel audience continues to be highly desirable for major brands. Our media platform provides major brands and opportunity to deliver the more [ph], engage in experience that provides a win-win-win for advertisers, venues and consumers. Our comes with Boingo program has seen great success for our previously announced American Express wholesale agreement where AmEx provides select cardholders with three Boingo Wi-Fi access as a privilege membership. American Express has announced that they are marketing this to millions of their cardholders and the response has been tremendous. The customer redemption rate has outperformed American Express expectations. This provides a highly successful example partnering with leading brands to bundle Wi-Fi access as a value add to existing products. We believe this will continue to be a growth opportunity for wholesale.
Our military broadband team is building out high speed wireless networks on army, air force, and marine bases across the country. We currently have more than 30 military bases in the design and construction phase, with some of them ready to go live this quarter, and the balance in Q4. As we’ve launched service for the troops on new basis, we’ve seen adoption rates exceed our expectations, demonstrating pent-up demand for broadband service that caters to the unique needs of the enlisted men and women of our armed forces. We believe that we’ve tuned our product mix to provide a service that specifically meets those needs.
As previously announced in the first quarter of this year, we launched Passpoint-enabled networks at 23 airports, covering more 450 million passengers. A few weeks later, Time Warner Cable launched Passpoint-enabled networks at more than 30,000 hotspots. These were the first public deployments of this new technology that we believe will revolutionize public Wi-Fi access. In the second quarter we announced the next logical step, bilateral roaming agreement with Time Warner Cable that gives our customers and wholesale roaming partner’s access to Time Warner Cable Wi-Fi hotspots, as well as making our core managed and operator Wi-Fi hotspots available to millions of TWC home broadband subscribers as part of their service package.
We believe the agreement heralds the beginning of more Passpoint network deployments, and more Passpoint roaming agreements, bringing us one step closer to global accessible single software [ph].
With that I’d like to turn it over to Pete Hovenier to discuss our second quarter financials in greater detail. Pete?
Thanks, Dave. Today I’ll begin by reviewing our financial results and key operating metrics for the second quarter ended June 30, 2014 and will then conclude with our financial outlook for the third quarter and full year 2014.
Total revenue was $28.4 million representing an 8.2% increase over the prior year period. The increase reflects strength in advertising couple of with a modest increase in wholesale revenue, which was partially offset by a decline in retail subscription revenue. Across our diversified revenue streams, also represented 45% of second quarter revenues, retail represented 39%, and advertising accounted for the remaining 16%. This compares to the second quarter of last year, wholesale represented 47% of revenue, retail represented 44% and advertising accounted for the remaining 9%.
Wholesale revenue totaled $12.9 million, representing a 4.3% increase in the comparable period last year. The increase is primarily related to new DAS build-out projects and DAS access fees which were partially offset by decreased partner usage base fees. Retail subscription revenue was $8.2 million, representing a 6.5% decline over the prior year period. Our retail subscriber base and average monthly revenue per subscriber both decreased during the second quarter as compared to the prior year quarter. The decline was primarily from review subscriber sales that are managed and operated locations which have transitioned from end-user page to a tiered or free pricing model.
The upgrade of our networks at JFK, LaGuardia, and New York airports as Dave mentioned earlier, represent the last of our major contracts to go through this transition. Accordingly this headwind which we’ve experienced over the past few years is now behind us.
Advertising and other revenue was $4.5 million, representing a 93.8% increase over the prior year period, owing to the continued strong performance of our advertising sales team and our investments in the Boingo media advertising platform. Advertising during the quarter also continued to benefit from additional ad sales at the venues acquired from AWG last October. Retail single use revenue was $2.8 million, which was flat through the second quarter of 2013. As we discussed in the past, sponsored access at many of our managed and operated locations has continued to the shift in revenue mix from retail single use to advertising sales.
Now turning to our cost and operating expenses. Network access costs totaled 13.2 million, representing a 20% increase over the second quarter of 2013. The increase is primarily due to increased depreciation, revenue share paid to our managed and operated locations, as well as increased venue expenses. These increases were partially offset by decreased customer usage of partner venues. Gross margin, which is defined as revenue plus network access cost, was 53.3%, down from 57.9% in the prior year period. The decline in gross margin largely reflects the shift in the diversified revenue stream driven by a reduced higher margin retail and partner usage base fee revenue coupled with a significant increase in our lower margin wholesale DAS and advertising revenue.
Network operation expenses totaled $5.8 million, an increase of 21.9% for comparable 2013 quarter, primarily due to increased personnel related expenses as we had headcount to support the rollout of our new DAS and military contracts and increased depreciation expense. Development and technology expenses were $3.2 million, an increase of 16.3% from the prior year period, due primarily to increased depreciation in hardware and software maintenance expenses. This increase is partially offset by reduced personnel expense.
Selling and marketing expenses were $4 million, a 3.8% increase in the comparable 2013 quarter, due primarily to increased personnel related expenses from our investments in our sales and business development teams. This increase is partially offset by reduction in marketing spend, a trend that we expect to reverse as more military bases come on board. General and administrative expenses were $4.6 million, a 21.9% increase with the comparable 2013 quarter, primarily due to increased personnel related expenses which are inclusive of a stock-based compensation, as well as increased professional and other expenses.
Now turning to our profitability measures for the quarter. Net loss attributable to common stockholders was $3.7 million, or $0.10 per diluted share versus net loss of $399,000 [ph] or $0.01 per diluted share in the prior quarter. We will maintain a tax valuation allowance established in the fourth quarter of 2013, and as such will no longer accrue material tax benefits or tax expenses on our income statement until appropriate level of profitability is obtained. Adjusted EBITDA was $6 million, a decrease of 1.9% for comparable 2013 quarter.
In terms of our operating metrics, we ended the second quarter with connects for paid usage on our worldwide network of approximately $20.3 million, up 80.6% from the prior year period, and down 15.9% from the first quarter of 2014. As compared to the prior year, in addition to significantly increased connects from advertising sponsorships, we also benefitted from connects at the venues acquired from AWG. The increase from the prior quarter is primarily due to increased connects from advertising sponsorships. Our retail subscriber base was 300,000 subscribers at the end of the second quarter, which is down 4.2% from the prior year period, and up 1.4% over 2014.
Our monthly churn rate for the second quarter was 10.9% versus 10.2% in the comparable 2013 quarter, and 12.3% last quarter. Our churn substantially declined versus prior quarter which was indeed recalled, it was impacted by a significant number of reissued credit cards. The number of DAS nodes in our network for the second quarter was 7,600, up 35.7% from the prior year period, and up 4.1% from the first quarter 2014, primarily due to network instances [ph] which we completed during the second quarter.
Moving on to discuss our balance sheet. At June 30, 2014 cash, cash equivalents and marketable securities totaled $37.9 million and we remain essentially debt free. Capital expenditures were $19.9 million, which included $10.7 million utilized for DAS infrastructure build-out projects that are reimbursed by telecom operative partners. Our non-reimbursed capital expenditures were primarily driven by new network builds, mainly related to the roll out of military based networks, new managed and operated network deployments, and various infrastructure upgrades and enhancements.
I will now turn to our outlook to the third quarter and full year 2014. For the third quarter ended September 30, 2014, we are initiating guidance as follows. We expect total revenue to be in the range of $28 million to $30 million, adjusted EBITDA to be in a range of $5 million to $6.5 million, and net loss attributable to common stockholders to be in a range of $5 million to $3.5 million or a loss of $0.14 to $0.10 per diluted share.
Our guidance for the full year ended December 31, 2014 reflects updated net income profitability guidance ended 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 with common stockholders to be in a range of $17.5 million to $14.5 million or a loss of $0.50 to $0.41 per diluted share.
As I mentioned earlier, we do not expect any material tax benefits or expenses during 2014, so accordingly we expect a nominal full year tax rate, as well as fully diluted shares outstanding of 35 million.
With that, I’ll turn it back over to Dave for closing remarks.
Thanks, Pete. Most of you know, Boingo was found by serial internet entrepreneur Sky Dayton who founded Earthlink, Boingo, and several other successful tech companies. He believed in the power of wireless internet before most people knew it was possible.
After 13.5 years of direct involvement, Sky decided Boingo was in a great place and it was time to get back to what he loves, so he stepping down as our Chairman to focus all this time on his start-ups. I’ve worked closely with Sky from nearly the beginning, and on behalf of all current and former employees and myself, I’d like to thank him for his vision, his insight, and all his contribution to the company, and most importantly, for bringing me into Boingo back in 2001. I’m honored that the Board has named me Chairman, and I’m very happy to have Chuck Boesenberg as our seasoned Director.
Overall we’re very pleased with our performance in the first half of the year, and are poised for strong second half. We remain focused on our strategic growth initiatives to acquire long-term wireless rights in large venues, to build state-of-the-art DAS, Wi-Fi and small cell networks to address the wireless industry’s capacity crunch, and to monetize those networks for our retail wholesale and advertising offerings. We believe that DAS, advertising, and military broadband will provide double digit growth opportunities longer term. Carriers, advertisers, and enlisted troops are all responding positively to our offerings, and we will continue to enhance and extend our portfolio to better serve those customers.
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 it up for questions, operator?
(Operator Instructions) Thank you. Our first question comes from the line of James Breen with William Blair. Please proceed with your question.
James Breen – William Blair
Thanks for taking the question. Just a few – on DAS front in the quarter, I think you said you had 17 in-built and I think you were at 14 before, but you added six, does that imply that some went live in the quarter? And then, just driving the guidance, I mean you look at your third quarter guidance, the numbers you’ve put up this quarter, it sort of implies a little bit of revenue growth and actually a possible decline in the EBITDA sequentially because you’re just looking at mid-point in the margins. Can you talk about some of the quicker takes there? And lastly, with respect to military build one, if you talk about what percentage your CapEx came to the military side? And then two, you made commentary about penetration rates coming in better than what you had thought – I was wondering if you could give us a little color there? Thanks.
Thanks for the question James, I’ll start off on the DAS front, I’m going to let Pete pick up on the second too. So the DAS market is obviously very hard as we’ve talked about. Our pipeline has been incredibly robust, in Q1 we announced that we signed more deals than we did in all of 2013, this quarter we’re announcing 17 new networks in deployment, so – just incredibly amount of work going on in DAS. And so, we have to secure the venue rights, we have to get care participation, build the networks and bring the cares on to the networks. So it’s a pretty long cycle but we’ve got incredible momentum and we expect that node growth, network growth, all of those and obviously, revenue follows on. All of those things are going to continue to progress similar to a pace to what you’ve been seeing and what we’ve been reporting on. So I think I’ll leave you with that on the DAS front. Pete?
Yes, Jim, on our guidance – so, revenue for the quarter as you rightly said up 29 in the midpoint. And we actually as we want to take this important I think about as you look over year-over-year from last year, we had a $2.5 million one-time build project, so when you back that out from the comparable, it really became about 11% year-over-year growth to the mid. And the other things worth calling out is – I’m sure you’ve done the math on the implied Q4. And given the traction we’re seeing on the military, DAS and advertising front, our Q4 at the midpoint of our implied guidance is 20% year-over-year growth. So we’re seeing the traction on our investments and really starting to materialize more in the second half of the year as we’ve been saying. As it comes to EBITDA, it’s continued the investments that we’ve been making throughout the year, getting started to see that come through but also again, in the Q4 implied guide, that’s also significantly higher where EBITDA we grew about 60% on year-over-year basis.
On the military front CapEx, we spent about $10 million of non-reimbursed CapEx in the quarter, and the vast majority of that went to the military. On the penetration rates – our penetration rates as we’ve talked about in our modeling, initial penetration rates of around 15%, going up to as high as 30%, our longer term model. And our initial penetration rates we’re seeing on the handful of bases we have deployed have exceeded our expectations, really on penetration, ARPU, and then also churn.
James Breen – William Blair
Is there exceeded any other [ph] where we should be looking at on the year-over-year basis relative to then sequentially?
It’s early for us on true seasonality as we’re still ramping up one cycle. There will be some but we don’t think as much as we’re experiencing in the airport business.
James Breen – William Blair
Thank you. Our next question comes from the line of Donna Jaegers with D.A. Davison. Please proceed with your question.
Donna Jaegers – D.A. Davison
Hi guys, lots of small questions. First of all, you’re talking too fast for me to write down, how many subs in the quarter?
Donna Jaegers – D.A. Davison
Okay, thanks. And then on the military, any further color as far as number of beds that you’ve rolled out so far?
Donna, we’ve talked about number of bases, our goal is – we’re in progress with 30 and we expect to have those completed by year end, that represents about 100,000 beds. And Pete said a handful of bases have been deployed so far, we haven’t communicated the number of beds but we feel great about where we are in the deployment cycle. On a CapEx basis, we’ve deployed about $15 million out of the $25 million that we expect to deploy this year on the military vertical, so that gives you an indication. So we’ve got just a whole lot of building going on right now, we’ve got about 400 people on the 30 bases doing network deployments. So it’s a massive build-out but we’re right on schedule, and again, our goal is to get those 30 bases up by year-end, representing about 100,000 beds.
Donna Jaegers – D.A. Davison
Okay. On stadium Wi-Fi, I’m certainly hearing rumors that are reports that AT&T is starting to use Wi-Fi offload in some of the stadiums where they do the DAS and the Wi-Fi for, are you guys seeing any activity on that yet?
We are – we’ve heard the same things and obviously, AT&T is a great partner of ours as are the other carriers, and I think that would – that should be expected, alright. So they are going to first offload onto Wi-Fi networks that are under their management, under their control, and then the next logical step which we would then participate in would be rolling onto non-AT&T Wi-Fi network. So I think it’s the first natural step and it’s a great sign.
Donna Jaegers – D.A. Davison
Great. And then the roaming agreement Time Warner Cable, is that – it would seem to me that that’s probably an agreement on sort of traffic rates, or how is that structured?
It’s a bilateral agreement, and it basically pay as you go. So each of us are paying for the traffic that we’re putting on one another’s network and it’s on a structure as all of the carrier offload agreements will be. So it’s on a per megabyte basis.
Donna Jaegers – D.A. Davison
Okay. And then one last question on Sky Datons holding, obviously, he is still a large holder in the stock, any color on what he’ll be doing with that holding once he leaves the board?
Obviously, Donna that’s not under our control but we can tell you that Sky has communicated to us that he is very bullish on the company, bullish on the position of the company, and he thinks we’re really undervalued, so he is not a seller at these prices but beyond that, it’s not under our control.
Donna Jaegers – D.A. Davison
Okay, thanks guys.
Thank you. Our next question comes from the line Nicolas Hienkwits [ph] with Credit Suisse. Please begin with your question.
Hey guys, congrats on the quarter. Just a quick couple of questions about the advertising revenue acceleration in the quarter, was there anything specific that drove that year-over-year, sales people ramping or platform improvements. And I didn’t catch the retail single use revenue, you guys were kind of firing off some numbers there, so if you could just reiterate that?
Thanks, Nick. On the advertising front, it’s really a ramp up of the sales team, we have just incredible response from advertisers on our platform because of its – kind of its nature, so we’re doing video, we’re doing app downloads in order to get on to three Wi-Fi networks. And so that’s a – it’s a high interaction type of advertisement which frankly is not easy in the mobile world, so we’ve got something pretty unique and we’re seeing good response to that. So it’s a general ramping up of our business, the sales people have now been with us for longer period of time, making greater contacts on both, management avenue and directly with big brands. So I think it’s just a general lift in the business if you will, and we continue to make investment there. Pete, you want to handle the other?
Sure. Single us Nick came in at $2.8 million, and it’s also worth calling out on a year-over-year basis, it’s the first quarter that we didn’t have a decline in single use over the last nine quarters. So, as we talked about, the headwinds are getting behind us, we really feel the headwinds are behind us.
Great, thanks guys.
At this time there are no further questions. I would like to turn the presentation over to management for any additional comments.
Thank you all for calling in today. We look forward to follow-ups. Thanks a lot. Bye.
At this time this does conclude today’s presentation. You may disconnect your lines at this time. Thank you for your participation.
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