Boingo Wireless' (WIFI) CEO David Hagan on Q2 2016 Results - Earnings Call Transcript

| About: Boingo Wireless (WIFI)

Boingo Wireless (NASDAQ:WIFI)

Q2 2016 Earnings Conference Call

August 04, 2016 04:30 PM ET

Executives

Kimberly Orlando - Investor Relations, Addo Communications

David Hagan - Chief Executive Officer

Pete Hovenier - Chief Financial Officer

Analysts

Scott Goldman - Jefferies

Mark Argento - Lake Street Capital

Walter Piecyk - BTIG

Operator

Greetings and welcome to Boingo Wireless Second Quarter 2016 Earnings Call. At this time, all participants are in a 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, Kim Orlando of Addo Investor Relations. Thank you, Kim, you may begin.

Kimberly Orlando

Thank you and welcome to the Boingo Wireless second quarter 2016 earnings conference call. By now, everyone should have access to the earnings press release, which was issued today at approximately 4 o'clock PM Eastern Time. In addition, an earnings supplement has been made 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 it 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 04, 2016 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-Q for the quarter ended March 31, 2016 filed with the SEC on May 09, 2016. The Company undertakes no obligation to update any forward-looking statements. On this call, we will refer to non-GAAP measures such as adjusted EBITDA and free cash flow that when used in combination with GAAP results provide us with additional analytical tools to understand our operations. We have provided reconciliations to the most directly comparable GAAP financial measures in our earnings press release and which will be posted on the investor relations section of our website at www.boingo.com.

And with that, I'll hand the call over to Boingo's Chief Executive Officer, David Hagan.

David Hagan

Thanks, Kim. Good afternoon everyone and thanks for joining us today to discuss our second quarter 2016 results. We’ve got a lot of exciting news to share with you this quarter, so let's dive right in.

To begin with, we've extended our streak of double-digit revenue growth to seven consecutive quarters with Q2 revenue growing 14% year-over-year to $39.1 million, which was above the midpoint of our guidance. This top line growth reflects consistent execution quarter-after-quarter against our strategic plan. I’m equally pleased to share that adjusted EBITDA for the quarter grew 32% year-over-year to $9.3 million which is our fourth consecutive quarter of year-over-year EBITDA margin expansion and at the high end of our guidance range. The investments we’ve made in the business over the past two years particularly in our military product are paying off.

As I shared in the last couple of calls, we expect to begin generating free cash flow in the second half of this year and based on the results year-to-date we believe we are right on plan. As you know, Boingo’s strategy centres around securing long term wireless rights at major venues and then monetizing those rights through a variety of products. We are leveraging the exploding growth of mobile data traffic through innovative products like DAS, Wi-Fi offload and military broadband. So with that in mind, we’d dive into some of the highlights for the quarter starting with Wi-Fi offload.

I know there has been a lot of anticipation by this announcement, so I’m pleased to share that we have launched Wi-Fi offload with the second tier 1 carrier. We are now live in offloading traffic at a major U.S. airport and are working with them to develop a roll out schedule. Like our Sprint deployment, we expect it will take several months to complete a full roll out but we are excited to be underway. In addition to Passpoint authentication, we are also going to explore an additional technical approach to seamless handoff that they requested called Layer Two network integration. This allows a carrier to enable Wi-Fi offload without being beholden to the device manufacturer. We're still big supporters of Passpoint because it scales better at an industry level, but see this as potentially attractive alternative to some carriers.

Utilizing carrier-grade Wi-Fi to offload traffic from licensed spectrum to unlicensed spectrum enables forward-thinking carriers and other mobile operators to easily and economically solve their capacity crunch. It’s a sign of what's to come is the 5G specification for the first time in mobile industry history will feature both the use of licensed and unlicensed spectrum. And also why we find the trend toward Wi-Fi calling so compelling. Services like Google 5, Republic Wireless, and Freedom Pop have built businesses based on Wi-Fi first calling platforms and AT&T's President of Technology Operations, Bill Smith, recently told Pierce Wireless that they are already routing more than 4 million calls per day over Wi-Fi.

Comcast, after activating their MVNO agreement with Verizon last year, is launching its own mobile business which reportedly will be a Wi-Fi first service. And recently, Charter CEO Tom Rutledge talked about leveraging the same MVNO agreement to potentially launch a nationwide wireless service. All of these favourable industry trends are positive for Boingo and we are on the cutting edge of network conversions for a Wi-Fi offload and DAS experience. In fact, industry trade publication Light Reading recently awarded Boingo the leading lights award for most innovative wireless service for our offload deployment with Sprint. We are excited to put that know-how to work with carrier number two and we’ll keep you updated with our progress.

Turning now to venue acquisition, I'm pleased to share that we had a very strong quarter as we’ve been awarded the wireless rights to seven new airport venues. In addition, our new venue pipeline is very strong with several more venues at the final stages. Based on our pipeline visibility, we believe 2016 will be the strongest venue acquisition year in Boingo’s history. We now have 31 DAS venues deployed with an average rate of 2.4 carriers per venue. At venues that have been live longer than three years, we average 3.3 carriers per venue. We believe these are industry leading figures and reflect our disciplined approach to venue acquisition. We only target venues that we know the carriers are interested in, thus we have a more rapid uptake than other small-cell companies. This approach puts us in a strong position as we present our capabilities to new venues because we have proof of our ability to bring carriers on. This is becoming known in the marketplace and a strength of Boingo's.

On the carrier acquisition side of our DAS business, we closed 8 tier 1 carrier contracts in Q2 bringing our total to 20 for the first half of the year. Our footprint now includes 13,500 DAS nodes live representing nearly 8% growth over the prior quarter and 42% growth year-over-year and we have 5,000 nodes in the pipeline. We believe Boingo is the largest operator of indoor DAS networks in U.S. One thing worth mentioning and we’ve had this question come up recently is that unlike the outdoor DAS market, we do not have significant acquisition costs to secure venue contracts. Outside of the expense of our business development team, we typically do not have to pay the venue rights any fees or any other venue cost until we have a carrier committed to join the venue.

Turning now to military, we had another strong quarter with our military offering. We are now live on 54 bases covering more than 274,000 beds, an increase of 24,000 beds for the quarter. We had 10,000 new subscribers in Q2 bringing our total subscribers to 79,000 and our subscriber penetration rate to 28.8%. This is an increase of 1.2 percentage points over Q1 which is excellent considering the large number of the bed launched late in the quarter.

We introduced our first international deployment in Okinawa, Japan, this quarter, which is something we've been working on for well over a year. Interestingly, we are finding that there are plenty of users on base who are already bringing their Boingo broadband accounts to Okinawa from our U.S. basis. This demonstrates one of the most powerful features of our military product, it’s mobility. Since an account automatically works on any Boingo base, it’s perfectly positioned for the frequently deployed military customers. A subscriber does not have to cancel their service when they move to a new base with Boingo, they just log on at the new base and their service picks them up at the new base instantly.

As you know, the strength of our business model is that we take a venue and apply multiple product lines to drive accretive returns. To this point, our military venues have been monetized exclusively by consumer Wi-Fi, but we are now in discussions with multiple carriers about deploying small cell networks to amplify cellular coverage at military venues. Cellular coverage is traditionally weak on military basis and the carriers see small cell deployments as an opportunity to leverage our infrastructure to improve their performance.

Let me provide a quick update on Comes with Boingo, one of wholesale offerings. I'm excited to announce that we signed American Express to a new multiyear agreement. We have also begun launch preparations with the second major global brand that we announced last quarter. What we've discovered in working with our various partners is that demand for connectivity, this idea of the consumer who is always on means that Wi-Fi access is one of the most sought after loyalty program perks and we’ve certainly seen that in our enrolments as we now have more than 0.5 million Comes With Boingo members bringing the total number of consumer with the Boingo subscription to 700,000.

All in all, we are extremely pleased with our second quarter results, which reflect seven consecutive quarters of year-over-year double-digit revenue growth and four straight quarters of year-over-year EBITDA margin expansion. And as promised, after several years of strategic investment, we believe we will become cash flow positive in the back half of 2016.

Before wrapping up, I would like to send my welcome to three new members to the Boingo board of directors; Maury Austin, David Cutrer and Kathleen Misunas joined the board in June. All three are already highly engaged and we look forward to benefitting from their expertise in areas of small cells, financial oversight and corporate governance.

I will now turn the call over to Pete Hovenier, our CFO, for a detailed look at our second quarter financial results.

Pete Hovenier

Thanks, Dave. I will being by reviewing our financial results and key operating metrics for the second quarter ended June 30,2016 and we will conclude with our financial outlook for the third quarter and full year 2016.

Total revenue for the second quarter was a record $39.1 million representing a 14% increase over the prior year period. The increase reflects strength in both military and DAS revenue, which was partially offset by declines in retail, wholesale Wi-Fi revenue, and advertising and other revenue.

Across our diversified revenue streams, DAS represented 36% of second quarter revenues, military was 25%, retail was 17%, wholesale Wi-Fi is 13%, and advertising and other accounted for the remaining 9%. This compares to the second quarter of 2015 in which DAS represented 35% of revenues, retail was 24%, wholesale Wi-Fi was 16%, advertising and other was 13% and military accounted for the remaining 12%.

In terms of total revenue contribution by category, DAS revenue for the quarter totaled $13.9 million representing a 14.6% increase over the comparable period last year. The improvement was primarily related to increased revenues from new DAS build-out projects coupled with increased access fees from our telecom operator partners.

For the second quarter of 2016, DAS build-out project revenue was $9 million and DAS access fee revenue was $4.9 million. Military revenue was $9.7 million representing an increase of 138% versus the prior year period primarily due to increased subscribers and single-use customers coupled with increased average monthly revenue per subscriber.

Our military network now covers 274,000 beds representing an increase of 24,000 beds as compared to the first quarter of 2016 and approaching our target of 300,000 beds. Our penetration rate also improved to 28.8% for the quarter, which was in line with our expectations.

Retail revenue was $6.6 million representing a 19.4% decline over the prior year period. The decrease was primarily due to a decline in our retail subscriber base and average monthly revenue per subscriber coupled with reduced retail single-use revenue. As a reminder, while retail revenues have continued to decline, we are still able to monetize these bolt-on customers through our wholesale Wi-Fi service offerings, specifically, our Comes with Boingo program and Wi-Fi offloading agreement.

Wholesale Wi-Fi revenue was $5.2 million representing a 4.9% decline over the prior year period. This decline was due to decreased partner usage based fees primarily from a contract that was terminated in the second half of 2015, the legacy wholesale roaming customer added minimum usage commitment of 700,000 per quarter. Excluding the impact of this customer in the prior year period, wholesales Wi-Fi revenue would have increased 10.2% year-over-year. Further we expect usage from our carrier offload customer and further expansion of our Comes with Boingo product to more than offset this customer loss in the future quarters.

Advertising and other revenues was $3.7 million representing a 14.6% decrease over the prior year period primarily due to a decline in the number of premium ad units sold during the quarter.

Now, turning to our costs and operating expenses. Network access cost totaled $16.9 million, a 5.6% increase over the second quarter of 2015 primarily due to higher revenue share paid to our venues as well as higher bandwidth and other direct costs.

Gross margin, which is defined as revenue plus network access cost, was 56.7%, up 342 basis points from the prior year period, driven primarily by our rapid growth in military, our fastest growing line of revenue. This marks our fourth consecutive quarter of year-over-year gross margin expansion of more than 150 basis points.

Networks operation expenses totaled $10.4 million, an increase of 31.8% for the comparable 2015 quarter primarily due to higher depreciation, personnel-related, and consulting expenses. Development and technology expenses were $5.3 million, an increase of 10.1% from the prior year period also due primarily to higher depreciation expenses. Billing and marketing expenses were $4.9 million, reflects an increase of 2.1% to the comparable 2015 quarter due primarily to higher consulting costs.

General and administrative expenses were $7.7 million, a 35.3% increase in the comparable 2015 quarter due primarily to increased personnel-related expenses, which are inclusive of stock-based compensation as well as increased professional fees, which are inclusive of 900,000 expanded contested proxy election. Excluding the impact of the contested proxy election costs, general and administrative expenses were $6.8 million, an increase of 19.5% from the 2015 quarter.

Now turning to our profitability measures for the quarter. Net loss attributable to common stockholders was $7.3 million or $0.19 per diluted share versus a net loss of $5.9 million or $0.16 per diluted share in the prior year quarter. Adjusted EBITDA was $9.3 million, an increase of 32.1% for the comparable 2015 quarter. As a percent of total revenue, adjusted EBITDA was 23.7%, up from 20.5% of revenue in the comparable 2015 quarter. The second quarter marks our fourth consecutive quarter of year-over-year EBITDA margin expansion.

Now turning to our key metrics. The number of DAS nodes on our network for the second quarter was 13,500, up 42.1% from the prior year period and up 8% from the first quarter of 2016. The number of DAS nodes in backlog, which represents the number of DAS nodes under contract, but not yet active at the end of the second quarter were 5,000, up 8.7% from the prior year period and down 3.8% from the first quarter of 2015.

Our military subscriber base was 79,000 subscribers at the end of the second quarter and 97.5% increase versus the prior year period and a 14.5% increase from the first quarter of 2016. Our retail subscriber base was 184,000 subscribers at the end of the second quarter, which was down 18.2% from the prior year period and down 1.6% from the first quarter of 2016. Connects or paid usage on our worldwide network were approximately $31.9 million, up 23.6% from the prior year period and up 5.1% from the first quarter of 2016.

Moving on to discuss our balance sheet. As of June 30, 2016, cash and cash equivalents totaled $9.3 million, which is down from $14.7 million at December 31, 2015. Total debt was $28.1 million and we had approximately $49.8 million available under our credit facility as of June 30, 2016.

Capital expenditures were $18.7 million for the second quarter, which included $12.6 million utilized for DAS infrastructure build-out projects, which are reimbursed by telecom operator partners. Our non-reimbursed capital expenditures were driven primarily by new network builds mainly related to the rollout of our military based networks, managed and operated network upgrades, and various infrastructure upgrades and enhancements. As a reminder, we estimate our annual maintenance capital requirements, which exclude our growth capital to be approximately 3% to 5% of revenue.

Free cash flow was a negative $4.1 million for the second quarter versus positive free cash flow of $5.7 million during the second quarter of 2015. We believe we are rapidly approaching an inflection point for the significant investments we have been making in our business for the past couple of years. Going forward, we believe the income statement and cash flow statement will begin to show the benefits of our multi-year investment cycle, which we anticipate will be even further enhance in 2017 as we scale the business and complete our military base network build out.

I will now turn to our outlook for the third quarter and full year of 2016. For the third quarter ended September 30, 2016, we are initiating guidance as follows: We expect total revenue to be in the range of $39.5 million to $42.5 million, net loss attributable to common stockholders to be in the range of $7 million to $5 million or a loss of $0.19 to $0.13 per diluted share and adjusted EBITDA to be in the range of $10 million to $12 million.

For the full year ended December 31, 2016, we are reiterating our guidance as follows: We expect total revenue to be in the range of $158 million to $164 million representing year-over-year growth of 15.3% at the midpoint of the range. Net loss attributable to common stockholders in the range of $30 million to $26 million or a loss of $0.79 to $0.68 per diluted share.

Adjusted EBITDA to be in the range of $38.5 million to $42.5 million, which implies a EBITDA margin of 25.2% or 4 points of the EBITDA margin expansion at the midpoint of the range. We remain focused on adjusted EBITDA expansion and continue to expect we’ll go up by approximately 2 points to 3 points each year for the next few years gains back to our historical 30 levels.

We will maintain our tax valuation allowance established in the fourth quarter of 2013 and as such do not expect to accrue material tax benefits or tax expenses on our income statement throughout the remainder of 2016. We continue to expect the nominal full year tax rate as well as fully diluted shares outstanding of approximately $38 million.

In addition, our non-reimbursed annual capital expenditures remains unchanged at approximately to $35 million to $40 million for 2016, which is inclusive of $15 million to $20 million to support the mainly our military based network build out.

Before I conclude, I would like to spend a few moments talking about some guiding principles that support our confidence that our strategy is driving shareholder value. Every day we are analyzing executing and managing the economics of individual contracts which formed the three primary categories, airports, stadiums and arenas, and military.

For each venue, we are acutely aware of and intensely focused on the return characteristics of each particular deal as each venue tends to be unique. We are very disciplined on our approach and strive to ensure that each new deal meets our return targets prior to moving forward.

In summary, I am very pleased with our second quarter results, which reflects a strong operating performance and a highest revenue quarter in the company’s history. The investments we have made over the past few years provide us with a long runway for continued growth.

We believe our strategy is well considered and delivers strong significant ways to entry and that Boingo is very well positioned to benefit from the significant favorable industry dynamics.

With that I will turn it back over to Dave for closing remarks.

David Hagan

Thanks Pete. In summary, Q2 is another strong operating quarter for Boingo and with that operator we would like to open up for questions.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] Thank you. Our first question is coming from the line of Scott Goldman with Jefferies. Please proceed with your question.

Scott Goldman

Hi guys, thanks for taking the questions. I guess two, if I could? First, maybe some thoughts on the second Wi-Fi offload? Dave, you spent a lot of time talking about it a little bit on the technology side, but some questions there. What have you guys learned from the first deal you did with Sprint that you think may be able to help you monetize this deal better? How, if at all, besides from some of the technology stuff you talked about, does this deal differ from that first one? And if there's any way to help us size the opportunity for this deal would be really helpful. And then, secondly, maybe a little bit more housekeeping. But just on the wholesale side, Pete, I think you mentioned a contract termination that impacted the growth on the wholesale side. I'm just wondering when we would anniversary that termination, to help us better understand the growth going forward?

David Hagan

Scott thanks for the question. I will go first on the carrier offload deal. So what do we learn from our first one with Sprint? We learned a lot. We did a lot of hardening of the network. We added voice to it, kind of mid-implementation. We weren’t planning on having voice as a part of it. So, we completely reconfigured our network so that we could do voice and data with the carrier. So, we’ve done a lot of preparation and we learned a lot. We did some network densification in areas where you are having the volume of handsets connecting with so much more than what we had had in the past. So, we feel like the network is really ready for this implementation. So we hope that that means it will move through the roll out faster than what we did in the past, but we still think it will take many months to get there. From a technology perspective it is no different assuming we go down the path of pass point which is what we are doing in the first airport and we will continue to roll out airports under the pass point methodology. We are going to investigate what we would call a layer 2 integration which is more of a direct network to network interface with the carrier, that’s a great thing for us. It is more challenged I think from an industry scale perspective. So, if this carrier wanted to connect into Wi-Fi networks all over the place it would be a lot more work on their part. That is the beauty of pass points in industry standard and everybody is starting to implement it on the network side, but for us it is all good. We will see how that kind of that the engineers are working on how that would look and what it would mean and we are excited to figure that out or may just be more of a standard pass point rollout. We will know in the coming months. Pete you want to handle the whole sale deal.

Pete Hovenier

Yes, so Scott on the wholesale customer the last full quarter where this customer is in our numbers for last year was Q2, so there is a partial quarter in Q3, but Q2 is the last quarter you will see the pulling back.

Scott Goldman

Great. That's helpful. And just to follow up, David, any way to help us size that Wi-Fi offload? I know there was some numbers floated around with the first one. Is that sort of the right way to think about this second deal?

David Hagan

Not sure which numbers you are talking about, but we’ve, I think as we’ve always communicated the carriers, any of the top four tier ones carry significant size to them and we are not naming the carrier under their consideration. But we expect this to be significant business for us. It will be 2017 before it is really impactful as we go through the rollout process and so it is already factored into our 2016 guidance because we have been knowing this was coming as we have discussed. Yes, we expect this to be significant business for us over the long term.

Scott Goldman

Understood. Thanks so much, guys.

David Hagan

You bet.

Pete Hovenier

Thanks Scott.

Operator

Thank you. [Operator Instructions] Our question comes from the line of Mark Argento with Lake Street Capital. Please proceed with your questions.

Mark Argento

Hi good afternoon, just a quick question around the military opportunity. It looks like you guys continue to drive some nice penetration there, which is good to see. Can you talk about the opportunity beyond Wi-Fi and, I guess, the current products offered? Is there opportunity to do small cell, other types of networks, enabling other revenue streams from that relationship?

Pete Hovenier

You bet Mark. So, I would categorize it as three additional opportunities, one that you point out so we think there is a great DAS into our small cell opportunity on the military basis, probably more small cells than DAS because of the kind of the distributed nature of those implementations. We have engaged with multiple carriers on that front. Typically cell coverage is pretty week on military basis, so they have an interest in improving service to our military personal and obviously we have great interest in helping aid them and get that done. The concept would be we add small cells to the Wi-Fi infrastructure that we’ve already deployed. So, leveraging that infrastructure that we have in place. So, we think it is a great opportunity, so that would be number one small cell. Number two, and we are already engaged in this with the military and that is they have an interest in covering, having better connectivity Wi-Fi coverage in public spaces on the military basis. So, I think you are aware that what we’ve covered up to this point is all barracks, right. So, we are going after the single soldier barracks that’s what our contract called for. That is what the 300,000 beds is all about, but there is also an opportunity to cover public space and so if you think about these military basis that larger ones are like small real communities. So they have barber shops and bowling alleys and convenient stores and you name it and typically those locations have really weak coverage, weak internet access. So, the military is interested in us providing services in those kind of venues and that would be more of a wholesale model. That would be where the military actually pays us to build and operate the network and then it would just an add-on free service to what we’ve already in the barracks. And the third category would be is there other additional beds to cover, I think we’ve communicated in the past there will probably be some, but we don’t expect really large numbers there. So, we don’t expect it to be a significant capital impact for us, but there could be some pockets of additional bed coverage that we may want to go after assuming we like the economics of those opportunities.

Mark Argento

Great. Thank you.

Operator

Thank you. Our next question comes from the line of Walter Piecyk with BTIG. Please proceed with your question.

Walter Piecyk

Thanks. Just, I guess, a follow onto that. On the military, I guess the way I'm looking at this is the revenue divided by your subs. And you added a similar amount to get an ARPU number. So, the subs, I think, were similar 10,000. I think last quarter you did 12,000. So, I'm calculating out an ARPU that dropped from $48 last quarter to $43 after you had obviously a nice growth in Q1 versus Q4. And then, obviously, there was really a ramping from the second quarter last year as you were, I guess, adding additional services and whatnot. Was Q1 an aberration? Is Q2 – is there any reason that might have been lower? And how should we think about this second half of the year and into 2017?

David Hagan

Pete, why don’t you take that one?

Pete Hovenier

Yeah, well, so the way to think about military, there is two pieces that go into the revenue stream, there is the recurring revenue, which we get from the soldiers, which is our subscription revenue and then there is incremental transactional type usage where a solider buys for a day or for a week.

Walter Piecyk

Got it.

Pete Hovenier

And so that’s going to have some variability. The way to be thinking about this is really in the mid-40s on a blended basis. So I would be accusing a mid of what you saw in Q2 and then also in Q1.

Walter Piecyk

So, was there some event in the first quarter that you had some like transactional – or any seasonal thing? Maybe people are visiting more in the first quarter and logging on to these networks?

David Hagan

I think it’s less of that. It’s also to – in Q1, we had more customers that had signed up in the first part of the quarter where in Q2, it was a little more evenly distributed and some of it actually happened in the later half. So you are seeing more contribution for the entire quarter from the new subs in Q1 versus Q2.

Walter Piecyk

Got it. Can you provide also the deferred revenue for the quarter? I know the cash flow statement, I guess, is not included until the 10-Q. But could you provide that number, if it's available?

Pete Hovenier

Yeah, let me see. Why don’t we do it follow-up, Wal?

Walter Piecyk

No problem. And then, just the last question as far as just getting back to the kind of the free cash flow. If you just look at the kind of the moving cash and the gross debt came down by, I think, $200,000, that calcs out to like whatever it is, like a net debt increase of like $5-point-something million. And then, you have this table in the press release that shows $4.1 million. So, when you're talking about free cash flow, what's in that difference between the $4.1 million and the actual change in the net debt of like $5.1 million? Is that just – are you excluding working capital items and it's all working capital issues?

Pete Hovenier

It will always be working capital. So what we provided is cash flow from operations, back out the CapEx to get to our working capital number. So debt for the quarter did not change in any material way with our bank debt. We did add some additional capital leases as we’ve acquired some additional [indiscernible].

Walter Piecyk

Right. But your cash dropped from – wasn't $14.7 million at the end of the first quarter to $9.3 million. Right? So that’s --

Pete Hovenier

Correct. Our cash flow is...

Walter Piecyk

So, that's – so, that's obviously more than $4.1 million. That's when you talk about free cash flow.

Pete Hovenier

No. I totally understand, but then you also – our ARR grew.

Walter Piecyk

Got it. Okay, so, working capital. So, when you talk about free cash flow in the second half of the year, we shouldn't even think about changes in working capital, or just – and do you have an expectation of what's happening on the balance sheet as far as will you need cash or will you be generating cash in the second half of the year, just from the balance sheet?

Pete Hovenier

Off of the balance sheet, we will be generating cash. It’s what we’ve communicated pretty much all the year is we expect this year to be cash flow neutral on a free cash flow basis, sockets we’ve consumed almost $9 million of free cash flow in the first half of the year, which would imply we are going to generate $9 million of positive free cash flow in the second half of the year.

Walter Piecyk

Got it. Thank you.

David Hagan

Thanks, Wal.

Operator

Thank you for your questions. I will turn the call back now to David Hagan for closing remarks.

David Hagan

Thanks for your questions and time today. We will be attending several upcoming investor conference including the Oppenheimer conference next week and four additional investor conference in September, so we will be buys. We look forward to seeing you soon. Again, thanks for joining us today.

Operator

This concludes today’s conference. Thank you for your participation. You may now disconnect your lines at this time.

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