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Edited Transcript of FTNW earnings conference call or presentation 20-Nov-18 4:00pm GMT

Q3 2018 FTE Networks Inc Earnings Call

LOUISVILLE Dec 19, 2018 (Thomson StreetEvents) -- Edited Transcript of FTE Networks Inc earnings conference call or presentation Tuesday, November 20, 2018 at 4:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Mike Cole

MZ Group North America - IR

* Michael Palleschi

FTE Networks, Inc. - Chairman, President, and CEO

* David Lethem

FTE Networks, Inc. - CFO

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Conference Call Participants

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* Malcolm McGuire

Malcolm McGuire & Associates, LLC - Analyst

* Gary Sacks

RHK Capital - Analyst

* Suji De Silva

ROTH Capital Partners - Analyst

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Presentation

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Operator [1]

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Good day, everyone, and welcome to the FTE Networks third-quarter 2018 investor conference call.

At this time I would like to turn the conference over to Mike Cole of MZ Group. Please go ahead, sir.

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Mike Cole, MZ Group North America - IR [2]

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Thank you, operator. Before handing the call over to management, I'd like to remind listeners that during today's call, management may make forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, which statements are based on current expectations, forecasts, and assumptions regarding anticipated levels of future performance. Forward-looking statements involve risks, uncertainties, and other factors that could cause actual outcomes and results to differ materially from those discussed today.

We refer you to a more detailed discussion of these risks and uncertainties in the Company's filings with the SEC. Any forward-looking statements should be considered in light of these factors. Furthermore, any outlook presented is as of today's date, and management does not undertake any obligation to update these projections in the future as market conditions change.

Additionally, our discussion this morning may contain certain non-GAAP financial measures. These measures should not be considered replacements for GAAP results. Reconciliations of the non-GAAP measures to GAAP measures are provided in the Company's earnings release, available on the Company's website.

On the call that it are Michael Palleschi, FTE Networks' President and Chief Executive Officer; and David Lethem, Chief Financial Officer.

With those comments complete, it is my pleasure to turn the call over to Michael Palleschi. Michael, the floor is yours.

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Michael Palleschi, FTE Networks, Inc. - Chairman, President, and CEO [3]

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Thank you, Mike, and thank you all for joining today. We had a fantastic quarter. Revenues have increased quarter over quarter, in line with our $350 million in guidance for 2018, and EBITDA growth is on track. We have 21 contracted buildings for CrossLayer, and that seven more than we've brought on since our most recent public announcement. And we'll have more than $500 million in new infrastructure contracts by year-end.

Before I highlight our impressive growth and achievements and the tremendous opportunities within our sites, I want each of you to know that I'm keenly aware that our progress will be measured by our sales, our profitability, our innovation, and also our share price.

I'm deeply aware that our stock price is an important measure of the progress that we will make in the weeks, months, and years to come. The catalyst for this progress will be continued growth of our infrastructure business and also the advancement in revenue and profit recognition from CrossLayer, our technology segment. We are planning a number of strategic initiatives that will allow us to recognize an increasing larger percentage of our revenues (technical difficulty) CrossLayer.

As many of you are aware, we've been reinvesting our profits into CrossLayer, a confident bet on our future which we plan on demonstrating during an Investor Day at our corporate headquarters here in Naples, Florida, in which our technology that we believe will command a significantly higher valuation for our Company in [2009], given the momentum that we see continuing in the fourth quarter and beyond.

During this quarter, several of our growth initiatives gained significant traction, both internally and with strategic partners, and we are anticipating an even stronger fourth quarter. It is undoubtedly the most exciting time in our history, as CrossLayer adoption rates are accelerating and our infrastructure segment continues to fire on all cylinders.

Before we dive into the third-quarter review, I'd like to take a moment to revisit the vision we had when forming the Company and how that relates to where we are today.

A few years back, we became convinced that a trend was developing known as edge computing, which would drive most of the significant change to our network infrastructures in the industry, and as seen in the last two decades. In the past, and a relatively low number of data centers in major metropolitan cities delivered content to end-users' phones, tablets, or desktops and the geographic distance between that user and the data was often significant. This created an inherent problem because the greater the distance between the two, the greater the latency, or the time it takes to send and receive data.

Relentless pressure has been placed upon traditional networks to deliver ever-increasing amounts of data to devices while the complexity of applications used regularly has increased at an unprecedented rate. It was inevitable that data centers would need to be located geographically closer to the end user to satisfy the elevated flow of data.

As we nurtured our CrossLayer product from concept to prototype to commercialization, we became increasingly convinced that we could effectively locate a micro data center on-site in a cost-effective, carrier-agnostic way that would provide significant benefits to the property owner and tenants.

While comparing CrossLayer with major carriers' offerings, quite simply we outperformed in every important facet. We are superior to our competition in pricing as well as the speed in which we can deliver a complete data center on-site with a smaller physical footprint than our competitors. Frankly, we are the best-in-class provider, and there is an enormous addressable market. And we are aggressively capturing market share with 21 contracted buildings since our January 2018 launch, and many more expected in the fourth quarter.

CrossLayer offers advanced network speeds with additional features, functionality, and reliability, all at a lower cost than the competition. CrossLayer customers begin to recognize value immediately, which compares to a 30- to 60-day lead time from traditional providers. This is a huge component of the credibility we are rapidly establishing in the marketplace. We can [turn up] customers real-time upon move-in, supporting landlords' ability to secure tenant contracts.

Turning to edge computing, according to a study from IDC Research Group, 45% of all data created by IoT devices will be stored, process, analyzed, and acted upon close to or at the edge of a network by 2020. The market opportunity is simply massive, and the current surge in CrossLayer contract activity reflects that reality.

As we are bringing on new buildings on-net, meaning that we can sell our services to tenants within these buildings, we are getting consistent reports from property owners confirming their ability to realize higher rates per square foot as a result of the appeal that CrossLayer has with prospective tenants. This is not surprising, as businesses are increasingly ranking network functionality and reliability as critical factors in their decision-making.

By offering turnkey network accessibility, owners see reduced lead times to tenancy; and, therefore, higher occupancy rates. When coupled with resulting higher rent rates per square foot, this is a very powerful combination that is extremely appealing to building owners. Building infrastructure has largely remained static for years, but that is no longer the case. Tenants are now seeking advanced network capabilities and intelligent building functionality, and property owners are viewing CrossLayer as a cornerstone in that service offering.

We are taking an increasing leadership role in this hot growth area; and our infrastructure business, which I will address shortly, has allowed us to hit the ground running. The vast majority of our recent CrossLayer implementations are with building owners that have large property portfolios. With these enthusiastic owners recognizing the positive impact of our technology on their properties' economic performance, their return on investment, this should equate to additional CrossLayer contract wins spanning entire property portfolios in the very near future.

We are experiencing a surge in recent contract activity associated with CrossLayer, and we expect this growth to expand even further in the near term. As previously announced, we had 14 buildings currently on-net. And I'm also very proud to announce, for the first time today, that we have contracted with seven additional buildings that are currently in the implementation phase. We are also in late stages of negotiations with respect to significant number of additional contracts which we expect to close in the coming weeks, many in the fourth quarter.

We expanded our CrossLayer footprint this quarter, entering new major metropolitan markets, including Chicago and Arizona, with a global real estate development company. We also entered into a partnership with a large Canadian construction company where we are finalizing contracts at various desirable properties.

We have invested significant resources to educate our partners, sales teams; and, as a result, our business pipelines are growing at an unprecedented rate. Expansion of our CrossLayer sales teams and partnerships and will yield ever-increasing long-term recurring revenue streams that are very sticky as tenants become accustomed and dependent to CrossLayer's technology, which allows them to remain (technical difficulty) multiple buildings across corporate campuses. We expect to introduce CrossLayer to multiple additional major metropolitan markets by year-end.

Our infrastructure segment highlights include strong top-line growth. And the pace of new contract wins is robust and growing, month over month. We expect to end 2018 with more than $500 million in new contract wins, which is exceptional by any measure. We have established a strong brand and we're recognized for delivering the highest quality work product, on time and on budget.

While we recognize that shareholders have expressed concern over our debt, we retired $7.5 million, in aggregate, debt last month alone. And additional debt is not coming due until March and April of 2019. Although debt has increased on a short-term basis, the sheer volume of new projects this quarter involved additional upfront costs which we determined that non-dilutive debt financing would be less costly than capital markets alternatives.

Our CFO, David Lethem, will expand more on these points in the financial section. But with strong demand, the near-term increase in cost is largely a function of our exponential growth. Over the lifetime of these contracts, we expect margins to be consistent with traditional levels. We have a strong mix of reoccurring work with existing long-term Fortune 100 customers, and we continue to regularly add new high-profile clients.

The financial business communities are taking note of our rapid growth. Last week we received recognition and congratulations from the New York Stock Exchange as Deloitte named us the 95th fastest-growing company in North America with a 1,388% year-over-year growth; and a 2018 technology fast 500 winner. The technology fast 500 is a leading technology awards program combining technological innovation, entrepreneurship, and rapid growth.

Now I'll go ahead and hand it over to our CFO, David Lethem, who will cover the financial results. David, please go ahead.

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David Lethem, FTE Networks, Inc. - CFO [4]

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All right. Thank you, Michael, and good morning, everyone. I will now provide you with a summary of our financial results for the third quarter ended September 30, 2018. For more detailed results, please refer to the Company's earning release which was sent out this morning, along with (technical difficulty) Securities and Exchange Commission.

Our revenues for the three months ended September 30, 2018, were $92.2 million as compared to revenues of $79.1 million for the three months ended September 30, 2017, which is an increase of $13.1 million or 17%. Also during the third quarter of 2017, Benchmark began to build up its backlog after completing some large projects during the first half of 2017 and has continued to increase its backlog through the third quarter of 2018.

For the three months ended September 30, 2018, our gross profit was $15.9 million as compared to $15.5 million for the three months ended September 30, 2017. It's an increase of $0.4 million or 2%. For the three months ended September 30, 2018, our gross profit margin did decrease a little bit, by about 1%, from 20% to 19% compared to the three months ended September 30, 2017, primarily due to the change in product mix, timing of scheduled project costs, and start-up costs associated with starting new contracts.

Total operating expenses for the third quarter of 2018 were $19.3 million compared to operating expenses of $10.7 million in the third quarter of 2017, representing an increase of about $8.6 million or about 80%. The increase in operating expenses year-over-year is primarily attributed to the continued investment in growth in the technology segment, leading to higher compensation, [SGN] expenses, reserved for other assets (technical difficulty) costs.

Operating loss was approximately $3.4 million in the third quarter of 2018, which included approximately $5.6 million in one-time expenses compared to the prior-year-quarter pro forma operating income of $4.8 million, which included approximately $1.5 million in one-time expenses.

Other expense for the third quarter of 2018 totaled $8.4 million compared to $1.3 million in the third quarter of 2017, representing an increase of $7 million or about 546%. The increase is primarily attributable to the amortization expense in deferred financing costs, debt discounts. There was a significant decrease in the change in warrant fair valuation of about $2 million due to these option of accounting regs which no longer exist. Financing costs of $1.3 million, and about $0.6 million in settlement expenses related to certain contractual obligations. And we also had a slight increase in interest expense of about $0.3 million.

To reiterate, our increase in expenses is related to the exponential growth we have experienced over the past 12 months and our stated goal of cleaning up the balance sheet. We remain intensely focused on managing our operating expenses, yet cognizant expenditures are necessary to support our growth.

On a GAAP basis, net loss was approximately $12 million or $1.89 a share for the three months ended September 30, 2018. For the three months ended September 30, 2017, we had net income of $2.5 million. Most of that was driven by the valuation analysis for $0.47 a share.

On a non-GAAP basis, net income was approximately $0.3 million or $0.04 per share for the three months ended September 30, 2018, compared to a gain of $7.5 million or $1.36 per share during the same period in 2017. Adjusted EBITDA for the three months ended September 30, 2018, was approximately $7.8 million compared to $8.9 million for the prior period.

Our primary sources of liquidity have been cash provided by operations, the strategic use of debt. Our principal uses of cash have been for working capital, capital expenditures, and debt service requirement. Knowing this, we anticipate our principal uses of cash in the future will be for debt service, working capital, capital expenditures, and potential acquisitions.

As of September 30, 2018, we had cash and cash equivalents of $5.7 million, which is a decrease of $7.2 million from June 30, 2018. However, on a comparative basis, our trade accounts receivable was at $75 million at the end of September 30, 2018. Our working capital deficit was $41 million, which is primarily due to the reclassification of our senior debt.

As of September 30, 2018, we had a backlog of unfulfilled contracts and master service agreements of approximately $474 million, which includes $285 million of Benchmark's backlog. We believe with our current revenues of $263.7 million and backlog and orders under master services agreements of approximately, again, $474 million as of September 30, 2018, our sources of cash will be sufficient to (technical difficulty) operations and working capital requirements for at least the next 12 months.

This concludes my prepared financial commentary. Operator, please proceed with the question-and-answer portion of the call.

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Questions and Answers

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Operator [1]

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(Operator Instructions). Malcolm McGuire, Malcolm McGuire & Associates.

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Malcolm McGuire, Malcolm McGuire & Associates, LLC - Analyst [2]

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Michael and David, we appreciate very much sharing what looks like very strong performance for this last quarter. I think the thing that's on the mind of a lot of people is that the performance looks very good, and the stock obviously has not performed well. And I think that question in a lot of people's minds is: what are we missing here? Why are the dots not being connected?

A second question -- and just to have both of those out -- is with significant revenues and the explanation, David, that you have given, can you maybe give a little bit more explanation to the reported loss? So it actually would be one question for Michael and one for David. And what are we missing here in terms of the stock prices as compared to the performance?

And David, just maybe a little bit more explanation on the accounting losses that we're taking, and how long this goes into the future.

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Michael Palleschi, FTE Networks, Inc. - Chairman, President, and CEO [3]

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Great. Thank you, Malcolm. Thank you for your time. Thank you for joining. So I'll address the first part of that question regarding stock price. It's as painful to our shareholders as it is to me. And quite frankly, the overall market conditions have been deteriorating this year, with the major indexes giving up all of their gains for [2008]. In the most recent days, I think it was actually announced this morning that all the 2018 gains were lost. So, one thing is the market. But that said, this too shall pass. And we believe investors will recognize the opportunity that we are now creating at a significant discount to book value.

We believe this is a misconception with regards to the understanding of our financials, given that we're investing heavily in our technology, which is CrossLayer; and we believe will be one of the key growth drivers for 2019.

With that, I'll turn it over to David to explain more about the losses you had mentioned.

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David Lethem, FTE Networks, Inc. - CFO [4]

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Yes. First I'll address that significant revenue portion, Malcolm. You know that quarter over quarter we've shown gains in our top-line revenue. Third quarter was not a record quarter for FTE. If everybody remembers, fourth quarter of 2017 was our record quarter. I think we had about $110 million of top-line revenue. So we're close, but maybe fourth quarter, we'll see what will happen then.

As we've talked about before, and I've explained to -- on other calls and people that I talk to on the phone, it's kind of difficult to wade through some of these things that we deal with on a quarterly basis. And I think from a top-level approach, people have to remember that when we acquired Benchmark Builders back in April of 2017, there was a significant amount of intangible assets that we are required to book according to GAAP in order to complete the booking of that acquisition, which we did, from an accounting perspective, as of 12/31/17.

Those assets have definitive lives. Some are three years. Some are four years. Some are two years. And every quarter, we have to recognize an expense, depending on what line item it is. Some goes to COGS because some of the intangibles were associated with the generation of revenue. Some goes to SG&A because some of those intangibles are required to be recorded in the SG&A. And some goes below the line.

We will continue, for example, every quarter as I've said before we recognize $1.3 million in our cost of goods sold every quarter until that intangible asset is off the books sometime, I believe, in 2020. We do know about $1 million in intangibles in SG&A. And the reconciliation table that we do every quarter to provide to investors -- we want to paint the clearest picture we can to the investors on what's the true health of this company.

And if we back out interest expense, which I'm happy to say if you look quarter to quarter has gone down due to the efforts of cleaning up the balance sheet. You add back the amortization, depreciation, and the other liable, we have EBITDA again of $7.8 million, which I think very consistently, first-quarter and second-quarter, we been around $7.3 million, $7.5 million in EBITDA. We're at $7.8 million, which makes sense because revenue is higher this quarter than it was last quarter.

So I think if the Company -- if the investors kind of understood and took that picture back with them, they would actually see an operating income for the Company which I think would change the way that some people view this Company and how we do on a quarter-by-quarter basis.

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Michael Palleschi, FTE Networks, Inc. - Chairman, President, and CEO [5]

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Malcolm, I'll say one thing as well. Into 2019, we believe CrossLayer will have a significant impact on our P&L. And we're actually going to take the appropriate steps to segment both technology and infrastructure so that very clear representation of each segment will be visible to the individual shareholders starting in 2019.

At that point, we believe it will be material enough to make that change. And we've made the investment. We've worked hard to get it to where it's at. And it's time to report it as such.

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Malcolm McGuire, Malcolm McGuire & Associates, LLC - Analyst [6]

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This is really, really helpful, Michael and David both.

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Operator [7]

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Gary Sacks, RHK Capital.

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Gary Sacks, RHK Capital - Analyst [8]

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Can you please address the share issuance for the past 6 to 9 months? It seems like there's been a lot more supply coming into the market. Will that be ending soon? Thank you.

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David Lethem, FTE Networks, Inc. - CFO [9]

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Yes. I think you're referring to the additional issuances that were done after September 30. We do issue -- and we have issued, as reported in Q1, Q2, and we reported Q3 -- that for a variety of contractual obligations, we have issued shares. And that has actually decreased from Q1 to Q2 to Q3, so we've been very cognizant of the impact of issuing more shares.

Now those shares -- just so we're clear, those shares are restricted shares. So there's typically a six-month, sometimes a 12-month waiting period that's required by the SEC before those shares are allowed to go to the market. So, since we've been issuing these in -- since the first quarter of 2018, I can tell you that there are not a significant amount of those shares that were issued that actually are going to the market, simply because they are still restricted.

Now, referring to the shares that were issued after the 9/30 quarter, need to understand that we're approaching the year-end. And as we have about 400 or so employees, this is the year-end time where everybody gets kind of an assessment, kind of a state of the health of the Company.

And quite frankly, we believe that the Company has performed, met, or exceeded expectations. We came out in January, said we'd do $350 million a year. We're on target to do that. We said we'd do $30 million in EBITDA. We're on target to do that. We had come out with 30 million -- or excuse me, 30 buildings on-net, and we're on target to meet or exceed the goal.

So for a company to issue shares, especially like we -- you kind of designate CrossLayer's construed as a startup company -- to save a little cost in salary expense, you compensate that with the ability to be issued shares. And, A, they benefit in the long term; and the Company benefits in the long term, because they have a long-term incentivized employee.

Also at year-end, we did some truing up that were again for some directors, officer, employees that we are contractually obligated for employment contracts or employment agreements that we have to be true to our employees, and we have to tell them that we did what we're going to do. And that's what we did. We view our employees as our most valuable asset as we grow, and we asked them to do monumental things this year. We're going to ask them to do just as much, or more, in 2019 and 2020. So we want them incented. We want them to stay with the Company. And this is one of the vehicles that we're utilizing to do so.

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Operator [10]

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Suji De Silva, ROTH Capital.

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Suji De Silva, ROTH Capital Partners - Analyst [11]

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Congratulations on the progress here. So David, you gave a backlog total, number; and you gave, I think, a Benchmark number. Can you give those metrics again? And what was the non-Benchmark backlog, where that's coming from?

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David Lethem, FTE Networks, Inc. - CFO [12]

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You want a breakdown of the Benchmark numbers?

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Suji De Silva, ROTH Capital Partners - Analyst [13]

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Yes. I think you gave a backlog number total, David, and then a Benchmark backlog number.

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David Lethem, FTE Networks, Inc. - CFO [14]

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Yes, yes. $284 million was Benchmark, and $190 million was FTE Networks under its master services agreements.

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Suji De Silva, ROTH Capital Partners - Analyst [15]

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Okay, great. That's helpful.

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David Lethem, FTE Networks, Inc. - CFO [16]

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(multiple speakers) I think the total was, like, $474 million, so --

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Suji De Silva, ROTH Capital Partners - Analyst [17]

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Right. That's great news, great. And then, Michael, perhaps on the CrossLayer buildings on-net, at this point I think, to date, you've kind of gotten one building at a time, I'm presuming. As some of these partners kick in and you get some of these partners helping out, is it possible you'd get multiple buildings coming out at once? And if so, what's the size of those potential adds versus the one-offs you've been getting to date?

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Michael Palleschi, FTE Networks, Inc. - Chairman, President, and CEO [18]

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Absolutely. So great question. I'm glad you asked that, because we haven't been announcing it as such, and we will be here shortly after the holiday week. We'll be coming out with some new wins. But the recent wins in New York, just to give you some color. One of the property -- building owners owns 20 properties, and we're actively installing in about half a dozen of those. Another one owns 60 properties, and right now I can't announce how many that we've signed, but we have the full visibility of that 60. It's just a process of doing that surveys and turning them and getting the approvals. But we are going after large owners to have multiple wins, actually multiple bites at the apple with them.

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Suji De Silva, ROTH Capital Partners - Analyst [19]

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Okay, great. And are the metrics still supporting the $400,000 per building annual opportunity as you flesh out the CrossLayer model?

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Michael Palleschi, FTE Networks, Inc. - Chairman, President, and CEO [20]

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They are. As long as we can get to a saturation point of 60% or better; and we think that's a 6- to 9-month term, from the time that we actually get the building on-net. And what we're seeing right now is not too much of a deviation from that. But hopefully as we separate our financials into segment reporting in 2019, you can see that more clearly and have a better picture as to what CrossLayer itself on a standalone basis looks like.

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Suji De Silva, ROTH Capital Partners - Analyst [21]

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That's great, Michael. We do look forward to those detailed metrics. And then lastly, maybe for David, the OpEx and CapEx. Can you give us a sense of what the expected trend going forward is here? I know you are investing in some of the opportunity here, so it'd be good to know how those numbers trend into 2019. Thanks.

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David Lethem, FTE Networks, Inc. - CFO [22]

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Yes. I mean, the OpEx, on an adjusted basis, going forward, I think we've pretty much got CrossLayer handled for the time being. We did see an increase in employee headcount in the first and second quarter for CrossLayer. You're going to see that not accelerate. Actually, you'll see that level off and be more normalized.

The CapEx is going to be all for CrossLayer. Benchmark and JusCom, while they both have upfront costs when they start a new project, there's enough cash on hand; they are capitalized sufficiently to handle that. CrossLayer, again, like we said, we invested about $10 million in 2017.

Through the nine months ended September 30, we've invested just a little over $6 million in CrossLayer. And that includes engineers and programmers that are working on some significant enhancements to CrossLayer in order to be able to deploy that in a variety of different uses: MDUs, smaller buildings, campuses, et cetera, that we are exploring now.

OpEx, you'll see start to level off. We did have a couple increases this quarter that were one-offs that were related to the acquisition and a reserve for some other assets that we've had on the books for a couple years. One-time reserves that will take the hit this quarter, and when we collect or realize the asset, then it will be a pickup on the gain.

So you saw some of those anomalies in Q3. But that's to be expected since we announced, for the year 2018, we're on a mission to clean up the balance sheet. So that's what we're doing, and these things are going to happen. But I think we pretty much got this cleaned up for this year, so shouldn't see anything that extraordinary going forward.

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Suji De Silva, ROTH Capital Partners - Analyst [23]

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Okay. Helpful color. Thanks, David. Thanks, Michael.

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Michael Palleschi, FTE Networks, Inc. - Chairman, President, and CEO [24]

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Operator, I don't normally do this. But I was text a question and I think it's very, very, very important to inform the shareholders of this question. So I'm going to ask it, and direct the answer to David.

So, regarding our debt in Q3 that was reported, the question was: why has it increased? So why did the overall debt increase in this quarter? So I'm going to turn it over to David and have him explain through that. Because I believe it is a very important for our shareholders to understand why the financial statement says X, and then why we believe it's Y.

So David, go ahead, please.

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David Lethem, FTE Networks, Inc. - CFO [25]

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Sure. I mean there's two thresholds to take a look at. One is that there's two major components of the majority of our debt: that's the senior debt that's approximately, I think, a net book value of about $29 million, $30 million; and then the seller notes -- that since we paid off the $7.5 million seller C note, is down to about $42.5 million. So -- and again, the senior debt, as people know, they were with us way before the acquisition. They came on with the Company, supported us through the acquisition, and continue to support us through today.

We took on the $50 million of seller notes, which people say, wow, that's a pretty large number. But look, those rates are at about 3% or 4%. And if you look at taking on a seller note for $50 million, and then there was the acquisition involved stock and some cash, too; but if what I've got left is $50 million that is generating $300 million plus of revenue a year at an 18%, 20%, 22% gross margin, not a bad investment, not really terrible debt to have on the books.

And if you look at it, too, the senior note is a little more expensive. Again, it was a riskier deal, pre-acquisition, so it was priced appropriately when it was given to us at the time. But if you combine the senior debt with the debt on the seller notes, you got about a combined interest rate of about 9% overall.

So, again, this is such a dynamic Company that if you tend to focus on one number and one point in time, you're really going to lose sight of the big picture. And we caution investors not to do that; and, in fact, work with them quite a bit over these past several months to explain everything that's going on.

So back to the micro part of the debt, as we do have debt on the books, we've had debt for the last one year, two years, three years. We're a heck of a lot healthier company than we were two or three years ago. And we have opportunities to take equipment leases, truck loans, any old debt. If we are able to establish a new relationship and pay off a 20% car loan or truck loan for an 8% truck loan, we'll do that.

And if you can see the -- one of the positive results of that, look from Q2 to Q3, you'll see in our interest expense has actually gone down, okay? So while the debt's kind of stayed up, down, up, down, up, down from point in time to point in time, the resulting interest expense you've seen a decrease in that. So, that's the impact.

People are worried about the debt, and great question to ask about the debt. But you've got to understand what that component of debt is doing. And that's helping reduce the interest expense and continue to be accretive growth of CrossLayer, JusCom, and Benchmark.

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Michael Palleschi, FTE Networks, Inc. - Chairman, President, and CEO [26]

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And sorry to interrupt --

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David Lethem, FTE Networks, Inc. - CFO [27]

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No, that's all right.

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Michael Palleschi, FTE Networks, Inc. - Chairman, President, and CEO [28]

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One thing I'd like to say about our senior lenders. So for new investors that are here that are looking at our financial statements, they look and they say, wow, that's real expensive debt. What the heck are you guys thinking? Well, let me take you back to 2015. We found a fund that invested in the management team, those folks that are here today on this call and in the field around the country building our Company. And they said, hey, we'll take a chance on you, and we'll take a chance on your vision. And that vision has come to fruition. That's the vision that we're living today and that we're going to tomorrow. So they invested $8 million dollars in a company that was doing $12 million of revenue. So very, very, very risky, and it wasn't going to come cheap.

Now, the lender-borrower relationship isn't always the best, but they believe in the Company and they've been a true partner to us. When we had the Benchmark acquisition, they doubled down; they brought in more capital. When we have interest payments and we look at growing CrossLayer or doing something different with the cash we have on hand, they are very favorable to the Company. They are good partners and they'll say, well, let's just roll our interest payment, use the cash, get this done; makes more sense.

So, as far as the lender, they've been very good partner since the deal commenced in October of 2015, and they've grown with us. Again, they invested in the management team and our vision, and that's the vision that we're living today. That's CrossLayer; that's Benchmark; that's JusCom; the three subsidiaries that we have. And that's what we're executing on.

So people that have just gone into the deal look at it and say, wow, that's real expensive. But there is a history there and there's a story behind it, and we couldn't be happier. We have a very favorable lender and they believe in the growth of this Company; and we will continue to execute, with their support.

David, do you have anything else on that, on the debt? I mean I know I (multiple speakers)

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David Lethem, FTE Networks, Inc. - CFO [29]

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No. I just want to point out, too, that again, if you look at it from a point in time, you're not going to get the true picture. But if people take a look at what's happened to the change in debt through 9/30, we basically reduced payments -- excuse me, reduced debt by about $3.3 million through 9/30. And keep in mind, we also paid off -- I think it was about $4.6 million, $4.8 million in the remainder of the series C seller notes. So, through 9/30, we've had a net debt reduction of about $3.2 million. Plus, at the end of October, we paid off some more debt of $4.8 million.

So again, don't just look at those, up and down and up and down from one point in time. Take a look at what we're doing with our cash, what the utilization and cooperation of the (technical difficulty) lender, what we're doing with that and how it impacts the balance sheet, how it impacts the P&L, and you'll see all positive results, in our belief.

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Operator [30]

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Thank you. At this time, we've reached the end of our allotted time for question and answers.

I will hand the floor back to Mr. Palleschi for closing remarks.

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Michael Palleschi, FTE Networks, Inc. - Chairman, President, and CEO [31]

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Thank you, operator. So, first, I want to say I'm very excited with where we're going in 2019. I understand it's very frustrating time for our shareholders. It is a very frustrating time for us, as well. But (technical difficulty) into this and we all believe in the story. But we are very excited on where CrossLayer is going. We're very excited where Benchmark is going. There are some fantastic opportunities ahead of us. We continue to execute on those opportunities.

In my opinion, we're in a very great position. Our pipelines in each respective segment are the strongest in our history. While quarterly and annual reports and future updates will quantify our success, I'm going to take measurements daily so that we can anticipate areas of challenges, should they arise, and mobilize our business units and teams to take clear and decisive actions that will deliver results for our Company and for you, our shareholders.

We've laid the foundation for a great finish to 2018 and a strong start to 2019, which will be a monumental year for CrossLayer, Benchmark, and JusCom, during which we expect continued growth of our infrastructure businesses and our technology.

I want to thank you all for your support, for joining us on this evolution, for taking your time out of your day to be on this call with us, and we look forward to speaking to you soon.

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Operator [32]

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Thank you. Ladies and gentlemen, that concludes today's call. You may now disconnect.