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Towerstream Corporation (NASDAQ:TWER)

Q2 2014 Earnings Conference Call

August 11, 2014 05:00 p.m. ET

Executives

Joseph Hernon – CFO

Jeff Thompson – President and CEO

Analysts

Donna Jaegers – D.A. Davidson

Kevin Dede – HC Wainwright

Sanford Lee – Canaccord Genuity

Operator

Good day, ladies and gentlemen, and welcome to the Towerstream Reports Second 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 follow 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, Mr. Joseph Hernon, Chief Financial Officer. Sir, 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.

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

Jeff Thompson

Thank you, Joseph. We have reached a major milestone in our HetNets' business with the completion of a master lease agreement for small cell deployments, is one of the largest wireless carriers in the world.

As indicated during our first quarter earnings conference call, we have been working on this agreement for several months and are pleased to announce that we completed the process just last week. This 25-year agreement is a crucial step as it establishes the detail terms and conditions on which individual orders will be governed and designed to expedite the deployment process. We believe this agreement combined with our vendor partnerships will enable us to ramp quickly as small cell moves to the implementation phase.

Additionally, we are working on indoor trials with the equipment vendors that could further leverage our 400,000 plus lit buildings as indoor small cell develops. We believe that over 100 megabyte service combined with small cell will be a significant advantage to leverage our bandwidth capabilities.

Turning to our Wi-Fi offering, our HetNets share wireless segment continues to ramp revenues and customer locations. Since the launch our first rent based anchor tenant on our Manhattan network four months ago, we have expanded Wi-Fi locations for our large cable customer by approximately 20%. Wi-Fi offers a substantial competitive advantage for service providers and helps to increase revenue by lowering churn. Our customers reported a surge in usage since they expanded their Wi-Fi network with unique users and data consumption up threefold in June compared to the prior year period.

The MSO continues to see a strong correlation between Wi-Fi usage and lower customer churn, based on the success we expect cable Wi-Fi rollouts to accelerate into new geographies and rooftops.

In our fixed wireless business, we continue to see good uptake on our new 100 megabyte service which is priced at a very competitive $699 per month. The service is now available in all of our markets with their particular focus on our major metropolitan areas of New York, Los Angeles, Chicago and Boston. Although we are still in the early stages of marking the service, we are seeing particularly good traction in buildings of approximately 250,000 square feet that have 10 prospects or more.

These buildings are in a very underserved segment of the market because they are not connected to fiber and laying new fiber is cost prohibitive. We have a little competition in these buildings as a value leader for a large, high quality broadband pipes.

As you wrapped our sales efforts from the first quarter, we nearly doubled the number of contracts signed for the service. The majority of these new customers will be installed and contribute to a revenue in the third quarter.

We are on track in Q3 to double the contracts of Q2. We are very pleased with the performance of this new offering and continue to expect this part to be incremental to our fixed wireless business.

We are also optimistic about the SEC’s recently revamped E-rate subsidiary program which helps schools and libraries pay per telecom services and equipment. The newly approved plan to spend at $2 billion over the next two years to modernize facilities with Wi-Fi and VoIP technologies as a positive development and could drive additional demand for our fixed wireless business.

Currently, our customers include more than 50 education related deployments with K-12 college, university and library institutions in major cities including Boston, Chicago, San Francisco and Los Angelis. Many of which received funding support under the E-Rate program.

In summary, we are very pleased with the progress we have made in the second quarter. Our new 100 megabytes service is gaining traction and the pipeline is building quickly, not to mention every lit buildings and opportunity have a very cost effective second and third customer installations with almost a 100% incremental margins.

These lit buildings will also provide a sizable indoor small sale opportunity. Our shared wireless subsidiary is perfectly positioned as carriers are starting to run out of spectrum and will soon start the densification phase. Now that the wireless carry consolidation seems to have stabilized, we believe it will turn the focus to densification.

With that I will hand the call over to Joseph.

Joseph Hernon

Thanks, Jeff. Before I begin the discussion of our second quarter results, I would 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 were essentially flat during the second quarter as compared to the first quarter. During the quarter, we were slightly impacted by the unexpected bankruptcy of Gowex, a Spanish Wi-Fi company. Our relationship with Gowesx started in March 2013 and they had consistently paid us during the first year of their contract. In April of this year, we signed larger and more expansive agreement with them.

Unfortunately, less than three months later, they filed for bankruptcy. We recorded a modest bad debt right-off and quickly terminated their network access.

Revenues with our cable company customer experienced double digit growth sequentially in the second quarter compared to the first quarter and we continue to built out new locations in New York City metro area and continue to discuss expanding our relationship into other markets. The Shared Wireless segment would have reported at the mid-point of our revenue guidance for the segment if not for the Gowesx bankruptcy.

Fixed Wireless revenues declined slightly on a sequential basis. We are in the process of evaluating new locations for our second satellite sales office in order to expand the geographic area from which we recruit talent and sales professionals. We expect to have a second office of established by the end of the year and believe that action combined with the continued success of our new 100 mega offering, will return the fixed wireless segment to organic growth mode.

We experienced strong demand for the new offering during the second quarter and signed a number of new customers. Our installed customer base rose to 13 and close the quarter with 9 lit buildings. We are pleased with the early success of this offering and expect a continued ramp over the balance of the year.

Total customer ARPU rose modestly from 758 in the first quarter to 760 in the second quarter. New customer ARPU 626 declined sequentially from 636 but remained in the 625 to 650 range where we have generally been over the past six quarter. We continue to keep tight control over our operating expenses. In the second quarter, sales and marketing customer support, general and administrative expenses declined by 2.4% from 5.3 million in the second quarter to 5.2 million in the second quarter of this year. These expenses decreased by slightly more than 1% on a sequential basis.

Adjusted EBITDA profitability for the Fixed Wireless segment was 3.3 million in the second quarter and free cash flow totaled almost 2million.

Overall capital spending declined to 2.1 million in the second quarter from 2.5 million during the first quarter. 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 with approximately 17 million in cash and cash equivalence. We continue to believe that our valuable network assets located in 12 major cities across the country will provide a necessary collateral if we decide to access a debt market to fund strategic acquisitions, small cell deployments or other working capital purposes.

Turning to our guidance for the third quarter, we expect Shared Wireless revenues to increase to a range of 800,000 to 1 million. We project Fixed Wireless revenues in the range of 7.4 million to 7.7 million and adjusted EBITDA for the Fixed Wireless segment in the range of 3.1 million to 3.4 million.

Operator, we will now take questions.

Question-and-Answer Session

Operator

Thank you sir. (Operator Instructions). And our first question comes from Donna Jaegers of D.A. Davidson. Ma’am your line is open.

Donna Jaegers - D.A. Davidson

Hi, guys. Thanks for taking my questions. Jeff on the master lease agreement, you talked about 25 year term. Can you talk about any other specifics as far as what does on the typical – is there a typical rooftop rental that it talks about and is backhaul included in the master lease agreement and then I guess the key question is when do you expect that carrier to start moving forward in densifying the network?

Jeff Thompson

The agreement is for the master lease agreement and is not for pricing on every single location because in small cell you will have different antenna prices from market to market. It just outlines all the parameters and the all legal lease which enables you to do many smaller agreements under all the legal lease of the much larger agreements, the terms the SLAs, all of the things around it except for basically the pricing for each individual site which we don’t want to lock down because it is very—it is market specific.

But it does have the SLAs for deployments installations, maintenances, all the things that you have seen the standard macro-cell master lease agreement. And it does include some backhaul pieces. We think this is one of – it was a critical step for us because it took over five months to get this done. A lot of work went into it and we have learned quite a bit from it and how they want us to deploy from them. So we think that this was a big hurdle to get over that, we finally get over and since we signed it we already seen progress. So we think that this will, we are not going to say anyone is going is faster with these carriers but we are starting to see some more urgency with the possibility of some of the carriers running out of spectrum next year.

So critical first step and we are continuing progress since we got it signed last week and as we get deployment with them, we will report that right away.

Donna Jaegers - D.A. Davidson

Okay. Then with your relationship with Alcatel-Lucent, is that included in this master lease contract or this is just between you and the carrier?

Jeff Thompson

No, this is just between us and carrier. The folks at Ericsson and Alcatel were glad that we have got this done. This is a getting factor, we won’t have to deal with them.

Donna Jaegers - D.A. Davidson

Okay. And then another carrier Sprint, obviously some of the tower companies are talking about starting to see Sprint in the market more, to secure sites for the 2.5 gigahertz spectrum - the Clearwire spectrum. Are you seeing any activity with Sprint? Are you trialing with any of the carriers?

Jeff Thompson

We are not going to comment on any trials right now but we are seeing activity with all of carriers except for T-mo right now. And with them going into some of the lower band for the auctions we expect to start seeing them in the small cell world next year. So there is activity with everybody right now.

Donna Jaegers - D.A. Davidson

Okay and then I guess on financing, because obviously your burn rate slowed down in Q2 but if the carriers continue to stretch out their deployment, then you are going to need to do some financing, where are you at in conversations with the banks as far as putting more leverage on your fixed wireless assets?

Jeff Thompson

We are pretty far down the road. I would say we are in about the (inaudible) with the few folks. So we have done some work over the summer on that.

Donna Jaegers - D.A. Davidson

And then can you give us any – on rooftops you have under lease for Wi-Fi, any firm numbers in New York City or in total?

Jeff Thompson

We did not prepare any numbers as these numbers are – they are still pretty quick but the deployment with Time Warner, we are continuing to have some build outs and we think as we get new geographies and different geographies even up New York that will start to change quite quickly month to month.

Donna Jaegers - D.A. Davidson

Okay and then on the fixed wireless side, sorry I don't know if anybody's behind me in the queue, but on the fixed wireless side you're talking about adding more buildings with the 100 mega offering, any sort of numbers there that's a goal?

Jeff Thompson

When you look at the competition in this space, it has been lighting buildings with the similar offer for over 10 years. They do about little over 30 buildings per quarter. We are already a third of the way there and expect that to double this quarter. So I think we will be able to catch that type of rate and so impossibly surpass that per quarter rate and it open ups quite a bit of customers per building.

So I think that we will at least get to that rate over the next few quarters, if not surpass it. We have a, because of the cost of our deployments is much less than our fiber deployment, the size of the building that we can actually get a return on investment is much smaller and the competition in those buildings is much less.

We are typically seeing we are the only possible alternative to fiber and there is not fiber in this building. So going for that 250,000 square feet plus to the 700,000 is a much bigger pie in the million square feet plus and because of the cost of our deployment compared to fiber is significantly lower. We think we can gain traction and continue to see very steady progress with our new offering for lit buildings every quarter and definitely I think we can at least catch our competitor with 30 or so buildings per quarter.

Donna Jaegers - D.A. Davidson

Any thoughts of possibly offering there sort of last mile fixed wireless access to the competitive carrier that's focused more on big buildings rather than smaller buildings, I mean any sort of resale.

Jeff Thompson

Dona, we have actually been working on wholesale now as we were working through the bid that we worked on the winter. We realized that we are great wholesale provider of this CLEC industry or competitive fiber folks that have a lot of near-net that is, that can cost $50,000 to connect to a near-net building. So we are actually working right now on developing our wholesale program with some of the CLECs and fiber providers.

Donna Jaegers - D.A. Davidson

One last question then I will let someone else ask. On the new sales office, what expense are you thinking about, I mean you guys are pretty bare-bones in Providence, so what's the typical expense that you are looking at for a new sales office?

Jeff Thompson

We are not going to give out our line items on sales salaries but I will say that we are going to start the office at the new location with about 10 or 12 sales reps.

Donna Jaegers - D.A. Davidson

Okay, alright. Great, thanks Jeff.

Jeff Thompson

Thanks, Donna.

Operator

Thank you (Operator Instructions) our next question comes from Kevin Dede of HC Wainwright. Sir, your line is open.

Kevin Dede - HC Wainwright

Hi, Jo.

Joseph Hernon

Hi, Kevin.

Kevin Dede - HC Wainwright

Congrats on continuing to push it through and congrats on that MLA.

Joseph Hernon

Thank you.

Kevin Dede - HC Wainwright

Can you give us more insight on your CapEx plans? Granted it is as you see it, as you see that you'll need it on the shared wireless side, but I guess I'm more curious about how you intend to match that 30 building lit per quarter run rate and balance a CapEx budget that you don't expect to increase?

Joseph Hernon

Actually if you look at our traditional deployments, we would spend a certain amount of CapEx on one customer in a building and it’s very expensive if you are not going to have any, if it just a one customer to a building deployment which we have done ten years, mostly with our multi-point product. When you look at lighting a building that has the right profile to put a larger broadband pipe on that rooftop and put a router to breakout the 100 megabyte service, it’s not that much more and the fact that we can serve five or six customers or actually if we can serve 8 to 10 customers with the equipment that we put in there, you realize that the CapEx is actually less than the traditional one to one basis.

So in our modeling, we don’t think that lighting 30 building for this product is going to make our CapEx go up or down, it’s pretty natural. It possibly even bring it down because the smaller customers are more expensive to get paid back, if you are just doing a T1 service, so we are going up market and we are getting a bigger opportunity with our equipment in our CapEx.

Kevin Dede - HC Wainwright

Okay. Have you thought about a timeline that you might be able to articulate with regard to what signals we might be able to see in terms of seeing the fixed wireless business turn? And have you set a location on your new office yet, or is that something that you are reviewing currently still? And when might you be able to offer more detail on that?

Joseph Hernon

We are looking to get this thing running by the end of the year. We are pretty much settled down in Florida, kind of near lot of where the tower companies are and what we have found – we have done some analysis on being able to get a deep pool. We don’t want to want to run into what we did in Newport and go to a place where the pools are not deep enough to continue to build sales folks. So as if we continue to get traction on a success rate, we would like to be able to go from 12 to 20 or 30 or continue to grow the sales force down there. So, probably in Florida, we are almost 100% on the Florida location. It will have some synergies with our HetNets' business. And we hope to have that at the end of this year.

Kevin Dede - HC Wainwright

Okay. How about with regard to well—let's go back to the 30 building per quarter objective, Jeff, if you don't mind, are these buildings that you've already have rooftop access to and you are just going to—I guess install newer equipment that can handle higher bandwidth? Is that the plan and is that why you think you'll be able to go as quickly as you plan to?

Jeff Thompson

No, these are actually brand new buildings that are not our existing customer base. We haven’t looked to go and cannibalize our existing buildings yet. So these are brand new buildings. And you could remember when we light up anywhere from 40 to 60 customers a month. We are typically lighting new locations. It might be with a less expensive multi-point technology but it’s almost the exact same install because you have to run a cable to the telecom room, you have to mount an antenna on the rooftop, and then you point it back to a multi-point location with our fixed wire—with our new product we are actually going to have, the only difference is that we are point back to a single antenna on the point of presence. So that's the only thing that makes it much different than our traditional installations. So, for us to do 30 a quarter is not very difficult, whatsoever considering that we have been doing 90 or so of the smaller versions.

Kevin Dede - HC Wainwright

Okay, alright. So...

Jeff Thompson

It’s really not much different Kevin than a point to point installation, our biggest pipes.

Kevin Dede - HC Wainwright

Understood. But I guess I wasn't aware that there was that much of a differential with regard to your past set up rate. So it seems to me that that would potentially be a hurdle but given it is not and you're consistent in deploying that type of customer access quarter to quarter then that's great. Can you just give us a little more insight on how we see that business trending, say for the next 6 to 12 months, given the new office at the end of the year, given new service, based on what you've seen so far this year?

Jeff Thompson

I don’t want to get ahead of ourselves. This is a brand new product. We have seen good traction in the first four quarter. Like I said, two installing almost a third of this amount of buildings that a competitor in this space has been doing for years, that's a pretty good first quarter and good barometer. So other than saying that we think we can get to at least that 30 buildings per quarter if not more, we think we will see the same type of uptick in those buildings once it is let with our service, because we don’t like the building until we get our first customer in the buildings, so everyone of those buildings that we let has a customer and in the sales force we’ll obviously attack that building and find out when the long term when the long-term will be up. Just like our competitors are doing with this type of an offering and as those long-term deals come up, we expect to gain traction in that the already let building. And as you, if you’re modeling that going forward, we expect to get twice as many building let this quarter than we did last quarter, even if we just get to that 30, the roll forward is pretty exciting over the next couple of quarter to get us to a good rate and you add a sales force at the end of the year. And you can see we could be going into 2015 with a strong trend on our product that’s –it’s an easier sell in competing in the T1 space is what I’ll say.

Kevin Dede - HC Wainwright

Okay. Can we just look at it from a physical presence perspective for just a sec, Jeff? Given a pretty large antenna at your point of presence, do you feel you might be limited given that these are all point-to-point connections with a number of antennas that you can go with at that top? Do you see what I mean, if you're going to try to add 30 more connections, each one almost requires its own antenna at the point of presence, am I right?

Jeff Thompson

Well, if you look at, this is a perfect example of leveraging the fixed wireless business and the small cell business, you have, when the roof top is let the network starts to get viral as in the roof top that we showed you Kevin, could actually support a 250,000 square foot building across the street. So as you keep adding buildings, your capability of antennas just keeps going up, so your network starts to become wireless as you build this. Let’s just say if that wasn’t the case, we’ve almost 60 pops in Manhattan, that’s less than half of them getting a new antenna every quarter that’s a small uptick rate for us to worry in the amount of capacity we have for our antenna addendums. It will be years before we ride out of space.

Kevin Dede - HC Wainwright

All right. On shared wireless apologies for skipping around, but on shared wireless talk a little bit about in-building versus street equipment requirements and CapEx that you'll see you'll need in order to address the upcoming MLA?

Jeff Thompson

Very interesting about the indoor small cells is that when you have a, if you look at some of the traditional cell sites, the macro sites, one of the ways to alleviate stress is to go on a building with a few thousand people in a urban environment and to offer small cell in that building. And if you can off load them up at the macro network, you might be able to actually get the same economics because the cell size is typically serving thousand people.

So, if you can off load the macro by doing the indoor sites that’s a very elegant way for the carriers to get some of that load off of their macro sites and save some of their spectrum. So, we think that you’re not going to see this full economics of a small cell deployment for renting to the carriers, but it will be a decent return because it will basically be doing almost the same load as the traditional macro site.

The indoor trails that we’re looking at, there is not a ton of indoor equipment that is multi carrier which would alleviate our need to continue to do lot of cable runs for every carrier. So, we’re working with a multi vendor, I mean, a multi carrier vendor right now and we’re also dealing with one of the traditional carriers that has a very small, but it’s a one carrier per device installation. They would – in these trials they’re bringing the customers and we would be supplying the locations to backhaul the cabling and everything else. Lots of times if it’s a single carrier deployment on a single device, it can only handle one carrier, the carriers will be bringing that equipment and we’ll just be deploying it for them.

So, there is two ways, we’re looking at indoor, one is the multi carrier capability of the box and that would be more like a duff deployment for us, but much less expensive and are requiring the fiber to every single box because its small cell and we’ll know that’s a reason people don’t want to deploy that they want small cell because it’s so much less expensive because of the fiber, not needing a fiber pole. So, the indoor is a great way to alleviate macro, macro stress and we’re pretty excited to structure all that to leverage, all the buildings that we have let because we have the bandwidth that they need for it.

Kevin Dede - HC Wainwright

I know in your due diligence you reviewed very carefully the expense in preparing indoor and small cell for each building. I'm just kind of curious on how you might suggest we compare it to what you need to spend in order to deal with a building from a fixed wireless perspective? I'm trying to get my arms around the capital requirements that you are going to face in preparing your locations to deal with these service extensions. I guess when you think about indoor in a building that can be anywhere between 50 and 80 stories, it could be a pretty extensive build out?

Jeff Thompson

Correct and the party of that would be Towerstream side of that build out would be putting the backhaul link on the rooftop, getting our easements like we do for the new 100 megabyte service or for our small cell rooftops and then doing the cable runs and then the CapEx for the actual boxes would typically be covered by the carrier.

Kevin Dede – HC Wainwright

Okay, and then how about the installation? Because I could imagine that would be probably the most expensive aspect?

Jeff Thompson

Yes, it’s that’s one of the issues that, some of the network vendors are running into troubles there’s not a lot of people that are up and running on small cell installation that have been certified, our teams are running – a bunch of certification, we are getting our outsourced partners ready for this there’s already kind of an angst of not enough installation people ready to do small cell for some of these folks, we are trying to get ahead of that now but that’s typically paid back by the carrier.

Kevin Dede – HC Wainwright

Okay. When I was fortunate to meet you in July, Jeff, you made what I thought was a very astute point. That you don't seem to be running into anyone else who's trying to provide the type of service that you are by leveraging the assets that you have in buildings and providing small cell and in-building coverage.

Now given that you've got Time Warner and the cable alliance and master license agreement with another major carrier, can you give us an idea on the road to profitability, when you might be able to start demonstrating that? Given that I think you said that you only really needed two customers per building or per location to start showing pretty strong cash flow?

So I'm wondering when you think that happens given that you've got almost a handful of customers now? And whether or not you are seeing other people's interest peak by the type of business model that you've presented here?

Jeff Thompson

Well, everyone is frustrated with the pace of small cell, not only myself and all the people on this call but I was.

Kevin Dede – HC Wainwright

I'm not that frustrated, Jeff. I just started. I'm pretty impressed based on what I've seen so far.

Jeff Thompson

Well, where I was going was, I was at dinner at a small cell symposium with about 10 or 12 small cell vendors from duff people, the people from the SEC to actual carriers and I think we’re overall of the large hurdles that was slowing the deployment.

So I was starting to get some of the gating factors out of the way contractually as we get our first master lease agreement. But, you are correct when we model a rooftop if we have one small cell customer and one Wi-Fi customer that entire rooftop not on just a per node basis throws off cash flow.

Kevin Dede – HC Wainwright

Okay. Then how about that expectation vis a vis competitors or potential competitors? Given that you've participated in some conferences recently, what have you seen around the industry and what sort of feedback are you getting?

Jeff Thompson

Yes, if you look at some of the competitors in the space right now, the two biggest right out there right now are Crown Castle with their acquisition of NextG and you have got Extranet which has got a consortium some of the other Tower folks and some of the large investors behind it.

And they have done very and they have ramped, but the gas is not a great does not solve your capacity issues they have very limited capacity but something has been around for years and it can be deployed in almost like a small cell fashion and now it’s been called small cell, but it’s very expensive and everyone wants to get to the next stage and which is through metro cell devices that Ethernet based compared to that fiber cost.

So if you are looking at, if you started to see, you are seeing a lot of gas deployments that’s probably the result of stuff that was going on a year ago and you now seeing that tale. If you fast forward a year all you are going to be hearing about in my opinion is mostly small cell deployment as this equipment started to ship this year. So this is going to be a huge shift and now if heard all the Tower parent companies over the last quarter and all the carriers talk about densification of the network.

Densification is going to happen once going from the large macro environment and adding, not replacing but adding your small cell densification and that’s going to get going to very end of this year into next but once you start it’s going to be a pretty large scale deployment by all carriers.

Kevin Dede – HC Wainwright

I'm as hopeful as you are, Jeff. Thank you for entertaining all my questions, and I will turn the floor over at this point. Thanks.

Jeff Thompson

Thanks Kevin.

Operator

(Operator Instructions) Our next question comes from Sanford Lee of Canaccord Genuity, your line open.

Sanford Lee – Canaccord Genuity

Hi, guys. Congratulations on the first contract, but forgive me for my lack of total enthusiasm because I think we've been here before. Most of my questions have been answered. But is there anything at all in the master lease agreement in regards to exclusivity? Can this carrier go to other small cell providers?

Jeff Thompson

San, for master lease agreement, if you look at the Tower industry typically, we’ll have master lease agreements with different multiple tower companies, so they’re not going to just do exclusivity. Where we do have some exclusivity is on some of the rooftops where we have either Wi-Fi exclusivity which is already built into all small cells.

So, we actually do have exclusivity rights on our rooftops that’s where we have protection on that. The carriers right now are looking all of the above and ways to plug these hose, it’s going to be more macros, it’s going to be more small cells, it’s going to more gas, they need more spectrum, but there is only 20% available coming their way and bandwidth going up 600%.

So, I mean, there is a huge gap coming and the carriers are doing things like they did with us on this 25 year master lease agreement, which San, we’ve never signed a 25 year master lease agreement, so I don’t think we’ve done here before.

Sanford Lee – Canaccord Genuity

In the sense of it being a national agreement, so this would cover again at least speed up the process if you're already in and expand into new markets as well that you currently don't have a small cell or Wi-Fi --?

Jeff Thompson

It covers all the United States.

Sanford Lee – Canaccord Genuity

Right. Sorry, I think you sort of alluded to, are you expecting specific revenues to come through on this contract and more than H1 2015 or is it possible that you will see some in Q4 2013?

Jeff Thompson

We haven’t given any guidance on this master lease agreement, we just got last week, no.

Sanford Lee – Canaccord Genuity

Okay. The other thing then in regards to guidance, one thing I'm not following right now at this stage is, so you've got decent fixed wireless ARPU growth. The churn has been declining. Why are we not expecting, or if you look at your rate of declines of revenue, say for guidance for Q3, why are you still not expecting improvements in that?

Jeff Thompson

The main reason is, we’ve hovered under 40 sales reps because we can’t any here in Newport

and we weighted to get the second sales because as our modeling, any models that we looked at through due diligence process whether it was some of the fixed wireless guys that we bought, some of the (inaudible) been looking at, it’s all driven by the amount of sales person, sales person productivity and we have had some of our best productivity in the last few months on a per sales rep basis the problem is we just don’t have enough of them.

So as we weighted on, as we are going through a process over the winter we would actually acquired quite a few new sales people and could have converted them to more of a facilities based model, we did not want to deploy our brand new sales center in the middle of that process in case we won that bid. So now that bid is over and we can't guarantee other deals going through, we have decided to build that second sales center which will fix this problem.

Sanford Lee – Canaccord Genuity

Great. So then obviously with the new sales center, new sales force, time to train and ramp their productivity as well, are you hoping to be back into actual EBITDA growth mode within the next year or so, or is that still maybe a little aggressive?

Jeff Thompson

I mean, it is aggressive but what we are finding is that there is a huge demand for this type of product in the market that we’re in, for instance there is over 5,000 building in Manhattan and people can only get before we started offering this, can only get this offering in 222 buildings.

So the pent up demand has been there and so far sales reps instead of having to worry about competing with this, they don’t have to compete with this offering anymore they actually have a better offer and the time deploy is quicker and the return on invested capital is fantastic. So I know it sounds a bit aggressive, but I think next year we’ll definitely be on the path that you are looking for with the fixed wireless business with this product.

Sanford Lee – Canaccord Genuity

Okay. And then on the HetNets revenue guidance, $0.8 million to $1 million implies a 8% to 35% quarter-over-quarter improvement, which is a pretty big range. Is this generally all coming from the existing cable Wi-Fi deal? You mentioned 20% or so increase in hotspots?

Jeff Thompson

Yes, we’ve had some of that, we had some folks coming to us to do some advertisings and things of that nature that we were hoping will materialize, people starting to use Wi-Fi networks for lot of different things.

The customer base for a Wi-Fi antenna in our deployments is very diverse. So we think that we gave a wide range because of the things that we are working on right now and some of the stuff that’s already started. So a good chunk of that from the MSO.

Sanford Lee – Canaccord Genuity

Great. Last one. I guess when you were preparing your existing Wi-Fi sites for small cell, we saw a bit of an OpEx CapEx bump on the fixed wireless side of things. Is there any more that you have to do in your existing Wi-Fi networks to prepare for the small cell, at least in the existing markets?

Jeff Thompson

No, we’ve got – the good news is we only have to do that work once when you are getting a small cell market ready for and it’s mostly having a lot of backhaul capabilities around the small cells which we’re finding also could be a great asset even if it’s not our rooftop or street furniture there is a lot things going on where we think we could possibly the only option for people to backhaul some of these small cell networks if we don’t get the small cell business ourselves. So all that work in the CapEx that we spent to beep up our backhaul capabilities and give us line of sight from very small distances is turning into a huge asset going forward for small cell.

Sanford Lee – Canaccord Genuity

All right. One last little follow up question, just on the specific markets. I noticed that Nashville doesn't have any revenues now being generated, at least I didn't see it on the release, is that market –

Jeff Thompson

Yes, we actually that market Sanford.

Sanford Lee – Canaccord Genuity

Okay. I'm done, thank you very much.

Operator

Thank you and our next question is a follow up from Donna Jaegers, your line is open.

Donna Jaegers – D.A. Davidson & Co.

Just two quick follow-ups. On interest from other Wi-Fi players. Obviously Skype used to be a custom of yours, and Google is doing some activity with free Wi-Fi. Can you just talk broadly about interest from internet carriers or internet content companies like those two that I just mentioned?

Jeff Thompson

We do it a lot of different tests with Skype right now, we had a great, great for us usage basic contract but people in the U.S. don’t use it like they do in other markets and now that they are owned by Microsoft, we have been looking at ways to opening it up to every single Microsoft device, it would be a really great contract if they let Microsoft device on, but they don’t want to have that expense.

So, we are working with them on some ways to monetize our network for all Microsoft products and possibly convert them to ramp based contract, but we are not there yet and when we do we’ll let you know. But there’s lots of other interesting start up models that are looking at using Wi-Fi from different players that we didn’t even expect six months ago, so whether people are using location based services, camera services, you have got, Facebook is looking at utilizing logons to get hyper local ads. There’s a lot of activity going on using Wi-Fi for that but nothing to report right now.

Donna Jaegers – D.A. Davidson & Co.

Do you have a team of people or how many people do you have addressing that need or those tests by the internet content companies?

Jeff Thompson

We have a small sales team on each side of it, carrier side and the Wi-Fi side two or three people each.

Donna Jaegers – D.A. Davidson & Co.

Okay, then on the possible leverage that a bank would give you guys on the fixed wireless business, 1 turn of leverage, 2 turns? Any color there?

Jeff Thompson

We don’t want to negotiate against ourselves on a conference call.

Donna Jaegers – D.A. Davidson & Co.

Okay. All right, thanks, Jeff.

Jeff Thompson

Thank you.

Operator

(Operator Instructions) At this time I see no further questions in queue. I would like to turn the call back over to you, Mr. Thompson.

Jeff Thompson

Great, thanks. Thanks for all the questions hopefully we’ll get you lot of information, this is an exciting time for us after getting some, all this work done last week. I know that we’ve a full schedule at the Canaccord conference, so we’ll be seeing a bunch of you on the call and I hope to see you there and thanks for joining us tonight.

Operator

Ladies and gentlemen, thank you for your participation in today’s conference, this concludes your program. You may all disconnect. Everyone have a great day.

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Source: Towerstream's (TWER) CEO Jeff Thompson on Q2 2014 Results - Earnings Call Transcript
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