FiberTower Corporation Q1 2008 Earnings Call Transcript

FiberTower Corporation (FTWR)

Q1 2008 Earnings Call

May 9, 2008 9:00 am ET

Executives

Augustine Okwu, Jr. - Managing Director, Analyst, and IR Counsel, DRG&E

Kurt Van Wagenen - President and Chief Executive Officer

Thomas Scott – Senior Vice President and Chief Financial Officer

Analysts

Seth Potter - Merriman Curhan Ford

Mark DeRussy - Raymond James

Romeo Reyes – Jefferies

Presentation

Operator

Welcome to FiberTower Corporation’s 2008 first quarter earnings conference call. (Operator Instructions) I would now like to turn the conference over to Gus Okwu of DRG&E.

Augustine Okwu, Jr.

Thank you for joining us for FiberTower Corporation’s first quarter 2008 conference call. Joining me today on the call are Kurt Van Wagenen, FiberTower’s President and CEO, and Thomas Scott, the company’s CFO.

The agenda for today will be as follows. Kurt will first provide an overview of industry trends and highlights of the company’s first quarter results, Tom will then follow with a detailed look at FiberTower’s financial and operational results. And finally, Kurt will offer closing comments and open the call up to questions.

FiberTower issued a press release last night with details of the company’s quarterly financial and operating results. This document is available in the newsroom section of the company’s website at www.fibertower.com. A replay of the call will be available beginning one hour after the completion of this call until 11:59 a.m. Eastern Time on Sunday, May 18. The replay maybe accessed by dialing 303-590-3000. The access code for the replay is 11113508#.

Please note that information reported on this call speaks only as of today May 9, 2008, and therefore you are advised that time-sensitive information may no longer be accurate at the time of any replay.

I should also mention that our comments today contain forward-looking statements within the meanings of the Private Securities Litigation Reform Act of 1995. Our use of words such as anticipate, expects, intends, plans, believes, may, will and other similar expressions are intended to identify forward-looking statements.

Forward-looking statements include, by way of example, revenue and margin expectations or projections and various references to trends in the industry and to FiberTower’s business. Such statements reflect our current views with respect to future events and are subject to risks, uncertainties and other factors, some of which are beyond our control that could cause the company’s actual results to differ materially from those anticipated in these forward-looking statements.

There are many risks, uncertainties and other factors that can prevent the company from achieving its goals or cause the company’s actual results to differ materially from those expressed or implied by the forward-looking statements contained in our comments today. These factors and others are more fully discussed in the risks factors, which are located in FiberTower’s readily available Forms 10-K and 10-Q as filed with the SEC.

I would finally advise you that this conference call is being broadcast live through an internet webcast system that can be accessed in the company’s webpage at www.fibertower.com.

And now, I’d like to turn the call over to Kurt Van Wagenen.

Kurt Van Wagenen

Thank you for joining us for our first quarter 2008 earnings call. Before I enter into the formal part of my discussion, let me first say, that I am excited to be here with you. It’s been exactly one month since I joined FiberTower as President and CEO, and it’s certainly been an eventful month.

But, it’s also been very productive. I have had the opportunity to work closely with the FiberTower team on key initiatives as well as to assess the opportunities for the business going forward. I can confidently say that I am looking forward to working with my colleagues, and that I feel good about our ability to deliver on the goals and objectives that have been set forth on previous calls.

I believe that FiberTower offers a very compelling solution for wireless carriers, especially as they prepare for the next phase of the wireless industry’s development, which includes the transition to 4G networks. I became quite familiar with the growing importance of wireless backhaul during the time I spent as President and CEO of NEON Communication and in my previous positions, running operations for NEON and NEON’s predecessor Globex Corporation.

During those years, we successfully implemented a business model that consisted of providing outsourced network services to wireless carriers and other customers. NEON operated as an alternative service provider to the wireless industry and provided the carriers with fiber base services that enabled them to extend their footprints.

My years of experience provided a solid foundation related to understanding carrier’s backhaul needs and meeting those needs economically. I am excited about having the opportunity to leverage this experience and foundation at FiberTower.

Over the last year, the company has identified for you key drivers of our business as well as specific areas that we focus on in order to meet our requirements and enhance shareholder value. We believe that the results reported over the last few quarters demonstrate our progress.

The first quarter of 2008 represented another strong quarter of operational and financial performance for FiberTower, highlighted by the company’s continued focus on driving revenue, providing a high level of customer service and managing costs. The company reported its seventh consecutive quarter of sequential revenue growth and added more T-1 equivalents in customer locations than in any other quarter in its history.

Let me note that the term T-1 equivalents reflect the company’s migration to the delivery of Ethernet circuits in addition to TDM circuits. FiberTower also increased the percentage of deployed sites that are billing to over 80%, an increased average revenue per billing site to over $1,500 per month indicating continued improvement in operational efficiency.

Our management team will continue to focus on a number of key initiatives to further our progress. These include leveraging the company’s existing network and customer relationships, continuing to develop innovative solutions that meet our customers’ needs, allocating capital efficiently with respect to new site deployment and market growth, ensuring high quality network performance and customer service, and driving towards optimizing our operating cost structure.

With respect to this last initiative, we also announced the implementation of a reduction in force or what I like to call a rightsizing of the company. While an initiative like this is always difficult and particularly so in our case since we are coming off a record quarter and will be letting go good employees who have made valuable contributions to the business, we fully believe that this is a necessary and appropriate action at the right time for the company.

FiberTower successfully built networks in 13 major markets over the past few years. As a natural evolution of our business, it’s now time to refocus our efforts on growing existing markets and reaching EBITDA positive. The reduction in staffing levels will better position in the company to accomplish these goals while we continue to serve the current and future needs of our customers.

FiberTower expects to record charges related to this reduction in workforce over the next two quarters, and we expect to yield between $10 and $12 million in annual cost savings. Despite the force reduction, we are confident that FiberTower remains well positioned to take advantage of significant market opportunities before us.

Now, let me share some industry trends and positive developments, which we believe are representative of this market opportunity. I’ll start by commenting on the recent news relating to Sprint Nextel, Clearwire and their strategic partners.

The company has announced an agreement on Wednesday to create a joint venture aimed at deploying a nationwide WiMAX network, while it’s our company policy not to speculate on the developments of other companies, we believe that this news is another positive event for the industry and for FiberTower.

It’s reassuring to see an existing FiberTower customer secure funding in a challenging economic environment. This deal along with industry developments provides further validation of FiberTower’s business model, which is focused on deploying high capacity, reliable backhaul services that meet the dramatic increase in capacity requirements for our wireless carriers.

While it’s much too early to comment on the specific impact of this joint venture, we have made significant progress delivering Ethernet circuits across multiple markets for Sprint, and we expect to continue delivering circuits with the added goal of expanding our relationship over time.

Our management team spent a great deal of time understanding customers’ network and technology deployment plans, as well as assessing the revolving service offerings and the impact on current and future backhaul growth rates.

Recent events clearly indicate that carriers are preparing for the next phase of mobile data growth. The 700-megahertz spectrum option was used by major carriers to prepare for a migration to a common technology platform geared towards mobile data deployment. Both Verizon and AT&T clearly stated their intentions for this spectrum on their Q1 earning calls.

AT&T laid out their technological path to LTE that is expected to ultimately deliver peak speeds as high as 100 megabits. Verizon also spoke of their commitment to deploying a 4G LTE network in order to provide a global broadband experience for their customers.

In addition, the results from the recent launch of unlimited voice and data plans by carriers confirms that the industry is migrating to a more robust broadband consumer experience, and we believe that this will benefit both our company and the broader industry. These benefits are evidenced by AT&T and Verizon’s first quarter results, which indicated a pattern of more premium services being ordered under these plans resulting in less churn as well as data growth.

In addition, the demand for Smartphones like the iPhone will continue to support consumer demands for these new plans. We expect these trends to continue and as demonstrated by our first quarter performance, FiberTower is actively taking advantage of these market opportunities.

The first quarter results for FiberTower were impressive. The company added more T-1 equivalents and customer locations than in other quarter in its history. In addition, billing T-1 equivalents grew by 21% to 17,153, representing year-over-year growth of 106%. Billing customer locations grew by 17% to 4,500 representing year-over-year growth of 104%, and billing sites grew by 9% to 2,347 representing year-over-year growth of 48%.

Efficiency metrics for the company improved during the quarter as billing sites per site deployed grew to 81%. In addition, billing T-1 equivalents for billing sites increased from 6.61 at the end of 2007 to 7.31 at the end of the first quarter, as the company continued to focus on improving site density through deeper penetration in existing markets and at existing sites. This commitment was further evidenced by improvements in the billing customer location rate, which increased from 1.79 at 2007 year-end to 1.92 at March 31.

Let me note a few more items with respect to the growing maturity of our sites and markets. As of March 31, the Top 100 sites had 22.8 T-1s on average compared to the previous quarter mark of 21.3. The Top 200 sites had 20 T-1s on average compared to 18.1 at year-end 2007. In addition, the mix of revenue across our top customers continued to diversify as well.

In summary, the company had a very good first quarter highlighted by another quarter of strong sequential revenue growth and operating improvements, continued focus on achieving objectives that were outlined on previous earnings calls, on-going secular trends in the wireless space that indicate a growing demand for capacity and network coverage, and a rightsizing that is part of our ongoing effort to control costs and reach EBITDA positive.

I’ll now turn the call over to Tom for greater detail on our financials.

Thomas Scott

Last night, we released our results for the first quarter ended March 31, 2008. We believe they demonstrated continued improvement in quarter-over-quarter reflecting ongoing cost control, greater market penetration and increased network efficiency.

Our results for the first quarter of 2008 represented our seventh consecutive quarter of increased revenue growth. Revenues increased by $1.4 million to $9.7 million representing an increase of 17% from the fourth quarter of 2007. The increase in service revenues was driven by the addition of new billing T-1 equivalents at existing customer locations, new billing customer locations at already constructed sites and continued expansion in new sites billing.

Operating expenses in the first quarter of 2008 decreased by $9.5 million from the fourth quarter of 2007. Our net loss of a $120 million for the first quarter compared to a net loss of $129.1 million for the fourth quarter of 2007. Note that, net loss in the first quarter included a charge to goodwill of $86.1 million. Our fourth quarter 2007 net loss included a charge to goodwill of $86.5 million. Our first quarter net loss per share was $0.83 compared to a net loss per share of $0.90 in the fourth quarter of 2007.

On an adjusted EBTIDA basis, our first quarter loss was $12.5 million compared to a loss of $14.2 million in the fourth quarter. Capital expenditures for the first quarter of 2008 were $16.7 million compared to $25.4 million in the fourth quarter of 2007.

We continue to believe that we have substantial flexibility in managing our capital spend given that most of our network build-up will be conduct through customer locations rather than deploying additional sites. Pursuant to that, we are currently reviewing our capital spending requirements for the remainder of the year. Our current capital expenditure budget for 2008 remains unchanged at $75 million.

Our consolidated cash, cash equivalents and certificates of deposit at March 31, 2008 were $198.2 million. We continue to expect to end 2008 with cash liquidity in excess of $100 million. We maintain a conservative investment approach whereby all of our investments are deployed in non-asset backed commercial paper programs that are highly liquid and short-term in nature.

As for pricing, we saw average monthly revenue per site increase from approximately $1400 at year-end to more than $1500 at the end of the first quarter. We expect our average monthly revenue per site to continue to grow as we add customer locations to our sites.

Additionally, we reported that average MRC decreased in the first quarter primarily as a result of volume discounts on March contracts with our customers. Management regards average revenue per site as a more relevant metric than our average MRC given that increasing revenues on a per site basis demonstrates our ability to scale and leverage our network.

Let me provide some additional detail on the reduction in force that was announced yesterday. We expect to record severance related and other charges of approximately $1.5 to $2 million in the second and third quarters of this year related to the reduction of approximately 60 full-time positions, which represents roughly 28% of our current workforce.

We expect the vast majority of these charges will be taken in the second quarter. As part of this initiative, we will also reduce a reliance on contract services. We expect to generate annual cost savings of approximately $10 to $12 million from this initiative and expect to see the initial impacts of these cost savings by the end of the third quarter.

We view this as part of our natural transition as a company to leveraging our existing network of profitability. We do not believe this decision will adversely impact our ability to continue to grow the company or diminish our ability to serve our customers’ current and future needs. To the contrary, we feel that this decision places us in a stronger position to meet our operational and financial goals and objectives over the intermediate term.

With that, let me turn the call back to Kurt for closing remarks and Q&A.

Kurt Van Wagenen

As discussed first quarter results were solid highlighted by the seventh consecutive quarter of increased revenue growth. The company’s best quarter ever with respect to adding billing T-1 equivalents in customer locations, continued improvements in market penetration resulting in better efficiency and density metrics, and continued control over costs. We remain on track to meet our goals and objectives for 2008.

Before we begin the question and answer session, I’d like to remind you that a replay of this teleconference will be available beginning an hour after we conclude the call, and we will provide that number again at the end of the call.

Now, let me turn it back to the operator for questions and answers.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Seth Potter - Merriman Curhan Ford.

Seth Potter - Merriman Curhan Ford

The cost reductions, are there any changes in timing of reaching field EBITDA positive? And also, Tom in regards to the contract services, is this more of a CapEx savings or where should we look for it there?

Kurt Van Wagenen

In terms of EBITDA positive guidance, we are not changing our guidance with respect to our EBITDA positive goals. We still expect to be EBITDA positive on a consolidated basis across our markets by mid 2008. The force reduction was part of that profit and was also a result of the fact that we are completing the build-out phase of the 13 markets I discussed in the prepared remarks.

With respect to contract services, I think you can expect that a large portion of the cost related to contract services is capital related. But there certainly is a portion as well that’s expense, but that’s minor relative to the capital portion.

Thomas Scott

Yes. Seth, I would note that in the $10 to $12 million number that we put out there with respect to annual cost savings the overwhelming majority of that is P&L related.

Seth Potter - Merriman Curhan Ford

That just leads to reasonable expectations of a continued trend towards adjusted EBITDA loss from here, is that fair to assume?

Thomas Scott

It is fair to assume. We took this, I would characterize the action we took here as really trying to shorten the distance from giving our markets field level positive in the middle of the year as Kurt noted and really shortening the distance as could take the business to get the overall business to adjusted EBITDA positive over the next 18 months.

Seth Potter - Merriman Curhan Ford

In terms of backlog trend, from the fourth quarter up or down in the first quarter in terms of the directional?

Kurt Van Wagenen

We report backlog on a semi-annual basis so we are not going to share specific results with respect to the backlog. What I will note is that our backlog continues to be healthy, and we believe is sufficient to allow us to meet our goals for the year.

Operator

Your next question comes from Mark DeRussy - Raymond James.

Mark DeRussy - Raymond James

About EBITDA positive, we are talking about field level EBITDA positive in the middle of ’08. Tom should I interpret your 18 months to mean that we are looking to get the entire operation EBITDA positive by the summer of ‘09?

Thomas Scott

Yes, absolutely, what we are saying is, our goal remains for the middle of 2008 to get the markets to field level EBITDA positive and the objective for the overall entity is second half of 2009 to reach the breakeven on adjusted EBITDA. That’s correct.

Mark DeRussy - Raymond James

Obviously WiMAX is a significant opportunity for you on many fronts. So with the formalization of the new structure a couple of days ago, Clearwire, it looks like they are going to have operational control. Historically, you have not done much business with Clearwire, as they were not building inside your footprint.

But on the other hand, you have got of lot of traction with Sprint in a couple of markets. What is your approach, your strategy going to be in dealing with the new entity that looks like it’s going to be controlled by Clearwire who has historically gone about managing backhaul in-house?

Kurt Van Wagenen

Specific strategy associated with the joint venture, it’s a little bit premature to share specific strategies. But what I will note is that as you are aware and as we’ve stated in our prepared remarks, we’ve had significant traction with Sprint in assisting them in the rollout of their WiMAX strategy. And we’ve read the press release and watched the call on the venture.

We do believe that, there is a combination here and that there’s Sprint personnel there as well, and we have a strong working relationship with Sprint. We also are operating under an existing contract and turning up circuits in many markets, Ethernet circuits in many markets for Sprint today to support this WiMAX effort. We believe that there is a significant opportunity for us here to continue working with Sprint to hopefully be working with this joint venture overtime.

And lastly, what I’ll state is that as we are all aware, there is a significant market opportunity here from backhaul services. And as been stated by some of the other companies there are significant challenges in meeting that backhaul requirement. This business is difficult. Meeting the backhaul needs is challenging. It requires a company and a team that can execute in an extremely disciplined and consistent manner, basically flawlessly on a day-to-day basis. That is very, very difficult to do.

And I think businesses that execute well will be able to take advantage of this significant market opportunity. I think what we also know is that, and companies have stated this, that there is no one solution. We expect that companies are going to build, buy, and lease in order to meet their backhaul requirements, and with that said provided FiberTower can continue to execute well, we really feel good about our opportunities to grow with these backhaul demand requirements.

Operator

Your next question comes from Romeo Reyes - Jefferies.

Romeo Reyes - Jefferies

Tom, can you talk a little bit about how you see that burn in the first half versus the second half of the year and specifically with respect to your CapEx guidance? Did you go through that $75 million CapEx number? Is that going to come down at all now that you are not building out as much and you’re rightsizing?

What percentage of your T-1 additions in the quarter would you say were Ethernet type of T-1s? And then lastly, as we look through the course of the year in terms of T-1 type of additions, what should be the total number be here? Is it like 2,500 a quarter on average, or are we looking at something closer to 3,000?

Thomas Scott

So with respect to our burn, we did roughly $12.5 million in EBITDA losses in the first quarter of this year plus just under $17 million in capital spending.

With respect to EBITDA losses, we expect that EBITDA losses are going to continue to improve throughout the course of the year and most notably, there is the SG&A savings related to the action that we conducted yesterday, which will have annualized cost savings of $10 to $12 million. The overwhelming majority of which will directly show up in EBITDA improvements. So, we clearly cash burn is going to continue to improve over the course of the year.

With respect to capital expenditure guidance, we reiterated $75 million in capital spend for the full-year 2008 on this call. We are in the process of going through a review, very comparable to the review that we just did for SG&A, and we’ll update that guidance as appropriate at future time.

With respect to what percentage of our T-1 additions are Ethernet we don’t break out on a customer-by-customer basis. I’ll note that our basic breakdown of revenue in the quarter for customers was we came in with 46% of revenue for AT&T, 28% related to Sprint and 14% related to T-Mobile.

So we continue to see diversification across our customer base, which we think is a very healthy trend. In terms of the last question with respect to what to expect for T-1 additions, we continue to believe that the rate that we grew at across the fourth and first quarter of 2008 is an appropriate net T-1 add to get to our rough objective of doubling the business over the course of 2008.

Romeo Reyes - Jefferies

So just to clarify, it’s around 3,000 per quarter over the next three quarters.

Thomas Scott

2500 to 3,000 correct.

Operator

We have no further questions.

Kurt Van Wagenen

Thank you again for participating in today’s call. We hope you will join us again for our next conference call to discuss the second quarter results.

Augustine Okwu, Jr.

As a reminder, this call will be available for replay beginning one hour after the call has ended and may be accessed until 11:59 AM Eastern Time on May 18. Dialing 303-590-3000 can access the replay. And the access code for the replay is 11113508#. Thanks.

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