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Edited Transcript of WIFI earnings conference call or presentation 3-Aug-17 8:30pm GMT

Thomson Reuters StreetEvents

Q2 2017 Boingo Wireless Inc Earnings Call

LOS ANGELES Aug 13, 2017 (Thomson StreetEvents) -- Edited Transcript of Boingo Wireless Inc earnings conference call or presentation Thursday, August 3, 2017 at 8:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* David Hagan

Boingo Wireless, Inc. - Chairman and CEO

* Kimberly Orlando

ADDO Investor Relations - SVP

* Peter Hovenier

Boingo Wireless, Inc. - CFO and Secretary

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Conference Call Participants

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* Anthony Joseph Stoss

Craig-Hallum Capital Group LLC, Research Division - Partner & Senior Research Analyst

* James Dennis Breen

William Blair & Company L.L.C., Research Division - Communication Services Analyst

* Mark Nicholas Argento

Lake Street Capital Markets, LLC, Research Division - Head of Capital Markets and Senior Research Analyst

* Scott Goldman

Jefferies LLC, Research Division - Equity Analyst

* Scott Wallace Searle

The Benchmark Company, LLC, Research Division - Research Analyst

* Timothy Kelly Horan

Oppenheimer & Co. Inc., Research Division - MD and Senior Analyst

* Walter Paul Piecyk

BTIG, LLC, Research Division - Co-Head of Research and MD

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Presentation

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Operator [1]

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Greetings, and welcome to the Boingo Wireless Second Quarter 2017 Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded.

I would now like to turn the conference over to Ms. Kim Orlando of Addo Investor Relations. Thank you, Ms. Orlando. You may now begin.

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Kimberly Orlando, ADDO Investor Relations - SVP [2]

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Thank you, and welcome to the Boingo Wireless Second Quarter 2017 Earnings Conference Call. By now, everyone should have access to the earnings press release which was issued today at approximately 4:00 p.m. 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 is available for replay.

In our remarks today, we will include statements that are considered forward-looking within the meanings of securities laws, including forward-looking statements about guidance and future results of operations, business strategies and plans and market and potential growth opportunities.

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 3, 2017, and are subject to certain risks and uncertainties that may cause actual results to differ materially from the forward-looking statements.

A detailed discussion of such risks and uncertainties are contained in our most recent Form 10-K for the year ended December 31, 2016, filed with the SEC on March 13, 2017, and Form 10-Q for the quarter ended March 31, 2017, filed with the SEC on May 8, 2017, and our other filings with the SEC. 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 flows 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.

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David Hagan, Boingo Wireless, Inc. - Chairman and CEO [3]

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Thanks, Kim. Good afternoon, everyone, and thanks for joining us to discuss Boingo's second quarter 2017 financial results.

I'm very pleased to share that our strong results and momentum continue. After posting what was arguably our best quarter to-date in Q1, our second quarter results continued to be strong, and as a result, we are updating and raising our full year guidance.

For starters, we extended our streak of double-digit revenue growth to 11 consecutive quarters with revenue up 25.5% year-over-year to $49 million. This exceeded the high end of our guidance range of $47.5 million.

This top line growth is a result of consistent execution against our strategic plan. Leveraging explosive mobile data growth by obtaining long-term wireless rights at large venues, deploying DAS, WiFi and small cell networks at those venues, and then monetizing the networks with Boingo's unique mix of products and services.

In addition to exceeding the high end of our revenue guidance, I'm pleased to share that adjusted EBITDA for the quarter also exceeded the high end of our guidance range.

Adjusted EBITDA grew 76% year-over-year to $16.3 million. This is our eighth consecutive quarter of year-over-year EBITDA margin expansion and that margin growth is helping to generate positive free cash flow.

After generating $8 million of free cash flow in the first quarter, we added an additional $7 million in the second quarter, bringing our year-to-date total to over $15 million. This is the direct result of the capital investments we made in our business over the past several years that are now making a significant impact.

We're extremely pleased with our Q2 financial results, which points to the strength of our overall business and the products and services driving these results; in particular, DAS, military and carrier offload.

So let me take a minute to update you on each of those products, starting with DAS. DAS continues to be very robust in Q2, as another strong quarter for venue acquisition, with the addition of 14 new DAS venues, including PATCO, the transportation system connecting Philadelphia and lower New Jersey.

We ended the quarter with 20,300 nodes live with another 11,000 nodes in backlog. In just the last 3 quarters alone, we've added 57 new venues under contract, which is more than we currently have deployed. This backlog will keep us building and growing our DAS product for years to come. We continue to believe we're the largest provider of indoor DAS networks in the world.

Military continues to overperform. As I shared on our last call, we reached and then exceeded our overall military subscriber penetration goals much earlier than our forecast predicted. So we're very pleased with our current subscriber penetration.

We added 3,000 new military subscribers in Q2, bringing our total number of subscribers to 131,000. We also added another 6,000 beds in Q2, bringing the total number of beds installed to 324,000.

While our major construction days are behind us, we plan to continue to add coverage to buildings where it makes economic sense.

We're also excited about leveraging our military venues for revenue beyond our direct-to-consumer business. For example, we were recently awarded the long-term multimillion dollar wholesale services contract with MCCS, a Marine Corps contracting unit, which leverages our existing infrastructure into new areas of the base such as hotels, restaurants and recreational centers.

In addition, we continue to be actively engaged in discussions with multiple carriers for both carrier offload and small cell deployments on the military bases.

As we have shared many times in the past, our overarching strategy is that we are venue-centric and that our military bases are another venue category into which we can apply multiple products and services. So it's exciting to see that vision come into reality.

Now on to carrier offload. Carrier offload continues to expand with our 2 carrier partners. We've rolled out additional locations, including for the first time, beyond our MNO airport network, into hotels and malls as well as the trial we're doing at 2 military bases.

Carrier #2's network rollout remains on track. We're excited about the progress and interest that we're seeing from our carrier partners and we expect offload to be an important part of carrier strategies to reduce the load on overburdened cellular networks.

Unlimited data plans are exacerbating this issue for all of the carriers, as consumers have less economic incentive to switch off of cellular, so usage of cellular networks has increased even more with all 4 carriers marketing unlimited data plans.

Unlimited plans are great for our business, both for WiFi offload and network densification in general.

Another strategy to reduce network to stress is through small cells and we remain very encouraged by the amount of interest we're seeing from carriers regarding small cells. We're in talks with all 4 carriers and have specific proposals for deployments involving thousands of locations. Activity is very high and we expect to be able to report on specific installations in the quarters ahead.

Small cells are very exciting because they effectively expand our addressable market for venues and allow us to pursue new venues that may not have made financial sense in the past. We remain very enthusiastic about how small cells can help drive growth in our business in future years.

All in all, we're extremely pleased with the financial results, which exceeded the top end of our guidance range for revenue and adjusted EBITDA as well as the cash flow we are now generating to fuel our growth.

Now I'd like to turn it over to Pete Hovenier, our Chief Financial Officer, to walk you through the second financial results in detail. Pete?

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Peter Hovenier, Boingo Wireless, Inc. - CFO and Secretary [4]

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Thanks, Dave. I will begin by reviewing our financial results and key operating metrics in the second quarter ended June 30, 2017 and will conclude with a financial outlook for the third quarter and full year of 2017.

Total revenue for the second quarter was $49 million, an increase of 25.5% over the prior-year period.

Revenue growth reflected strength in wholesale WiFi, military and DAS, which was partially offset by declines in retail and advertising and other revenue.

As a percentage of second quarter revenue across our diversified revenue streams, DAS represented 38%; military was 28%; wholesale WiFi was 15%; retail was 13%; and advertising and other, accounted for the remaining 6%. This compares to the second quarter of 2016 in which DAS represented 36% of revenue; military was 25%; retail was 17%; wholesale WiFi was 13%; and advertising and other, accounted for the remaining 9%.

In terms of total second quarter revenue contribution by category, DAS revenue was $18.6 million, representing a 33.5% increase over the comparable period last year. Total DAS revenue was comprised of $13 million of build-out project revenue and $5.6 million of access fee revenue. The year-over-year improvement in total DAS revenue was primarily related to the increase in revenue from new DAS build-out projects, coupled with increased access fees from our telecom operator partners.

Military revenue was $13.5 million, representing an increase of 39.1% versus the prior year period. Growth was driven primarily by an increase in military subscribers which was partially offset by a decrease in average monthly revenue per subscriber as well as a decline in single use revenue.

The shift from military single use revenue to subscriber revenue was mainly due to the removal of our nonrecurring monthly service offering which contributed to higher sign-ups for our monthly recurring subscription plan.

While we have continued to experience growth in military subscribers, with our average subscriber penetration rate of 40.4%, up slightly from 40.3% in the prior quarter, we do not anticipate aggressive sequential subscriber growth given that we have exceeded top end of our stated estimated range for subscriber penetration.

We extended our military network by adding 6,000 beds during the quarter, for a total footprint of 324,000 beds. We continue to expect the military vertical to be a strong driver of recurring cash flow and we're encouraged by the additional incremental opportunities they're starting to develop on these bases.

Wholesale WiFi was $7.3 million, representing an increase of 40.2% over the prior year period, primarily due to higher partner usage-based fees. Retail revenue was $6.4 million, representing a 3.2% decline over the prior year period, due to a decrease in retail single use revenue which was partially offset by an increase in retail subscriber revenue.

As a reminder, while we expect retail revenue to continue to decline, the rate of decline continues to moderate. In fact, our retail subscriber base slightly increased both sequentially and year-over-year. Most importantly, we are still able to monetize any foregone customers through our WiFi wholesale service offerings, specifically our WiFi offloading agreements [incomes with] Boingo program.

Advertising and other revenue was $3.3 million, representing a 10.7% decrease over the prior year period, primarily due to a decline in the number of premium ad units sold.

Now turning to our second quarter costs and operating expenses. Network access costs totaled $21.1 million, representing a 24.8% increase over the second quarter of 2016, primarily due to increased depreciation related to DAS build-out projects as well as higher revenue share paid to our venue partners.

Gross margin, which is defined as revenue less network access cost, was 57%; up 25 basis points from the prior year period. The increase in gross margin was primarily driven by growth in our higher-margin revenue streams, such as military, wholesale WiFi, as well as DAS access fee revenues.

Network operations expenses totaled $11.7 million, an increase of 12% from the comparable 2016 quarter, primarily due to a higher depreciation and other operating expenses.

Development and technology expenses were $6.7 million, an increase of 26.5% from the prior year period, due primarily to increases in depreciation, personnel-related and other expenses.

Selling and marketing expenses were $5.1 million, reflecting an increase of 4.3% from the comparable 2016 quarter. The increase was primarily due to increased personnel-related expenses, which was partially offset by a decrease in other marketing expenditures.

General and administrative expenses were $11.3 million, a 46.3% increase from the comparable 2016 quarter. Included in G&A expense for the quarter was a onetime $2.8 million settlement expense accrual due to a claim from our venue partners.

During the quarter, we also incurred a onetime $1 million increase in stock-based compensation expense, as a result of our overperformance of revenue and adjusted EBITDA, as compared to our performance targets.

This overperformance results in an increase in our expected payouts on certain performance-based restricted stock units. These onetime expenses incurred during the quarter were partially offset by decreased professional services fees compared to the prior year quarter.

Turning to our profitability measures for the quarter. Net loss attributable to common stockholders was $8 million or $0.20 per diluted share versus a net loss of $7.3 million or $0.19 per diluted share in the prior year quarter.

Adjusted EBITDA, a non-GAAP measure, was $16.3 million, an increase of 76.3% to comparable 2016 quarter.

As a percent of total revenue, adjusted EBITDA was 33.3%, up from 23.7% of revenue in the comparable 2016 quarter. This second quarter marks our eighth consecutive quarter of year-over-year EBITDA margin expansion.

Turning now to our key metrics. Number of DAS nodes in our network for the second quarter was 20,300, up 50.4% from the prior-year period and up 2.5% from the first quarter of 2017.

Number of DAS nodes in backlog, which represents the number of DAS nodes under contract but not yet active, as of the end of the second quarter, was 11,000, up 120% from the prior-year period and up 4.8% from the first quarter of 2017.

Our military subscriber base was approximately 131,000 subscribers at the end of the second quarter, reflecting a 65.8% increase versus the prior year period and a 2.3% increase from the first quarter of 2017.

Our retail subscriber base was 195,000 subscribers at the end of the second quarter, which was up 6% from the prior year period and up 0.5 percentage point in the first quarter of 2017.

Connects, or paid usage on a worldwide network were approximately $52.1 million, up 63.4% from the prior year period and up 21% for the first quarter of 2017.

Moving on to discuss our balance sheet. As of June 30, 2017, cash and cash equivalents totaled $22.3 million, up from $9.3 million at June 30, 2016.

Total debt was $15.2 million, reflecting a reduction of $4.7 million from our debt levels at March 31, 2017. As of June 30, we had $64.8 million available on our credit facility.

Capital expenditures were $14.4 million for the second quarter, which included $7.8 million utilized for DAS infrastructure build-out projects that are reimbursed by our telecom operator partners. Our nonreimbursed capital expenditures were driven primarily by new network builds, mainly related to the rollout of our military-based networks, managed an operated network upgrades, and various infrastructure upgrades and enhancements.

As a reminder, we estimate our annual maintenance capital requirements, which excludes all growth capital, to be approximately 3% to 5% of revenue.

Free cash flow was $7.4 million for the second quarter versus negative of $4.1 million for the second quarter of 2016.

I will now turn to our outlook for the third quarter and full year of 2017. For the third quarter ended September 30, 2017, we're initiating guidance for total revenue to be in the range of $48 million to $52 million; net loss attributable to common stockholders to be in a range of $7 million to $4 million or a loss of $0.18 to $0.10 per diluted share; and adjusted EBITDA to be in the range of $15 million to $18 million.

For the full year, ended December 31, 2017, we are raising our guidance as follows: total revenue is now expected to be in the range of $192 million to $198 million, representing year-over-year growth of approximately 22.4% at the midpoint of the range, which represents $11 million or 690 basis points of additional growth, as compared to the midpoint of our previously issued guidance range.

We expect net loss attributable to common stockholders to be in the range of $28 million to $24 million or a loss of $0.71 to $0.61 per diluted share; and we expect adjusted EBITDA to be in a range of $60 million to $64 million, which implies an EBITDA margin of 31.8% or 620 basis points of EBITDA margin expansion at the midpoint of the range.

We will maintain our tax valuation allowance and as such, we do not expect to accrue material tax benefits or tax expenses on our income statement through 2017. We continue to expect a nominal full year tax rate as well as fully diluted shares outstanding of approximately $39 million.

In addition, our budget for nonreimbursed annual capital expenditures remains unchanged at approximately $20 million to $25 million for 2017, with majority of CapEx allocated to support WiFi network builds and upgrades at our managed and operated venues, in addition to the finalization of our military base network build-out.

In summary, we delivered an excellent first half for 2017 with our strongest 2 quarters to date, which were characterized by record quarterly revenue and strong venue acquisition, driving our upward revision to our financial outlook for the full year of 2017.

Our strong free cash flow generation has enabled us to continue investing into the growth of our networks and our pipeline for future opportunities remains robust.

With that, I'll turn it back over to Dave for closing remarks.

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David Hagan, Boingo Wireless, Inc. - Chairman and CEO [5]

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Thanks, Pete. We're extremely excited about these results, which reflect strong operational execution with our highest quarter ever for revenue and adjusted EBITDA in the company's history.

Our DAS and military products are showing strong growth. We expect carrier offload will grow nicely in 2017, as Carrier #2 continues to ramp, and we roll out more locations for both partners. And we remain excited about the opportunity of small cell deployment to enable our business to expand into new venues.

We believe the investments we have made over the past few years, coupled with our ability to leverage significant favorable industry dynamics, provide us with a long runway for continued growth.

I'd also like to take this opportunity to thank our lead Independent Director, Chuck Boesenberg, for his years of service to Boingo's Board of Directors. Chuck is retiring from Boingo's board as of this week's board meeting. He was our first outside Independent Director, prior to our IPO in 2011, and served the interests of shareholders incredibly well over the last 6 years. We wish him the best of luck.

With that, I would like to open up for questions. Operator?

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question is from Scott Goldman of Jefferies.

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Scott Goldman, Jefferies LLC, Research Division - Equity Analyst [2]

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Just a couple of questions: one on guidance; one on the business side. I guess, on the guidance, it would helpful, it was a pretty healthy uptake on the full year. Be helpful just to get a sense from you guys as to where the key drivers were. You obviously talked about a few different segments and strength, but as you look out in the back half of the year, which of those were the biggest drivers of the guidance move? And just in that same vein; 3Q looks like there is a scenario where maybe it's relatively flat or even down. Just wondering, what would cause that scenario to play out? And then just on the fundamental side, just maybe you could talk a little bit on the DAS venue side. Obviously, continued success on venue acquisition. Wondering if you could talk a little bit about the success you're getting in terms of multi-carriers early on, as you bring some of these DAS venues live, that will be helpful?

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David Hagan, Boingo Wireless, Inc. - Chairman and CEO [3]

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Thanks, Scott. Pete, why don't you take the first 2, and then I'll pick up the business side.

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Peter Hovenier, Boingo Wireless, Inc. - CFO and Secretary [4]

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Sure, Scott. So talk on guidance are the key drivers -- are really the key drivers in the business in general, so which is DAS, military and then wholesale. So we -- and we've talked previously about what you should be thinking for growth of those lines of revenue. And we expect DAS to be growing in the 30% on the year-over-year basis, which is up from what we had before in the mid-20s. Same thing with military, which we think will be growing in the 30% range, which we also had previously in the, I'd say, the 20% range. And then even wholesale, we've started to see more growth on wholesale and so we're putting that into the 30% range as well. So that's really driving the upward guidance and it's consistent with what we're seeing in the business overall. As it pertains to Q3 in potentially being down, I think what you can look at there is some conservatism. We are feeling very good about the business. We are being a little cautious on what potentially could happen with the retail in the decline part. But overall, we're incredibly bullish. We're seeing great growth across the board and hence the overall guidance increase.

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David Hagan, Boingo Wireless, Inc. - Chairman and CEO [5]

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And then on the venue acquisition side, Scott. So, yes, we had another great quarter. Last year was our biggest year ever in venue acquisition. Q1 was fantastic; Q2 came in really strong again. We keep telling you guys not to keep expecting those double-digit quarters every quarter, but we will still tell you that. But we had 3 great quarters in a row. In terms of, once we launch, we still -- no change there. So we still typically launch with 2 carriers. We work hard to start with 2 carriers. Occasionally, we will launch with 1. If we do that typically, we have Carrier #2 coming in very quickly on its heels. So no real change there. It's still the same strategy and still same approach.

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Scott Goldman, Jefferies LLC, Research Division - Equity Analyst [6]

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Great. And just a quick follow-up, I mean, you said sort of not to expect double digits. Just curious, what does the pipeline, for venues that you're bidding on, look like going forward? Have you seen any change in terms of that opportunity set, or is it still as strong as it's been?

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David Hagan, Boingo Wireless, Inc. - Chairman and CEO [7]

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So it's still really strong. And the reason we caution on the double-digit is, we've benefited the last 3 quarters from an individual contract, in each of the quarters, that will bring us multiple venues. The vast majority of the market is not really built that way. It's 1 contract, 1 big venue. So that's why we caution about that. But in terms of the number of venues, we have our rolling 200 that we've talked about, consistently over time. We're always talking to the big 4 carriers on what their priorities are, both by market and type of venue. Those discussions continue. So we feel like we've got a good handle on what they're interested in. And we feel like our pipeline is incredibly strong.

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Operator [8]

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The next question is from Anthony Stoss with Craig-Hallum.

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Anthony Joseph Stoss, Craig-Hallum Capital Group LLC, Research Division - Partner & Senior Research Analyst [9]

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On the OpEx side, guys, I mean, give us what your most recent headcount was, what that was up from the prior quarter, and your ability to turn a bunch of backlog on the DAS side into revenue, how quickly can you hire to try to turn that? Also, not putting you on the spot for 2018 revenue growth, but any kind of view as to what you think, either speeding up, slowing down, I'd just love to hear your thoughts on that?

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David Hagan, Boingo Wireless, Inc. - Chairman and CEO [10]

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Pete, you want to handle the headcount number, 325?

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Peter Hovenier, Boingo Wireless, Inc. - CFO and Secretary [11]

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Yes, so headcount's about three-and-a-quarter, so 325, deploys at the end of June.

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Anthony Joseph Stoss, Craig-Hallum Capital Group LLC, Research Division - Partner & Senior Research Analyst [12]

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And up, that was what, up?

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Peter Hovenier, Boingo Wireless, Inc. - CFO and Secretary [13]

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That was up, I want to say at about -- on a year-over-year basis, about 20 heads. And that was really been driven by growth initiatives across the board, as we do more in DAS and we're starting to think about small cell.

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David Hagan, Boingo Wireless, Inc. - Chairman and CEO [14]

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And then on 2018, we're obviously not giving guidance on 2018. We're very bullish on the business. All the indicators are quite strong, as you saw from our Q2. But we'll get to 2018, when we give you year-end.

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Peter Hovenier, Boingo Wireless, Inc. - CFO and Secretary [15]

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Yes, and your question on backlog and turning into revenue and really that materializing. What we've historically said there is, it takes some time between the new acquisition to then winning the carrier and then watching the carrier and then seeing revenue rec. So it's -- what you should be thinking of is, on average 18 to 24 months from venue signing, to ultimately having a venue live and generating revenue. So that's not fundamentally changed.

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Anthony Joseph Stoss, Craig-Hallum Capital Group LLC, Research Division - Partner & Senior Research Analyst [16]

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Got it. And then as a follow-up on your WiFi customer #2, any update on when the Android Passpoint will be pushed?

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David Hagan, Boingo Wireless, Inc. - Chairman and CEO [17]

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Yes, still same schedule. Second half of the year. So we're now in that second half. But we don't have the specific dates for it at this point.

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Operator [18]

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The next question is from James Breen of William Blair.

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James Dennis Breen, William Blair & Company L.L.C., Research Division - Communication Services Analyst [19]

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Dave, why don't you just talk about the military side; the opportunity in the DAS, and some of the more common areas. And how you think, from a timing perspective, that could materialize? And then just to clarify, Pete, you were talking about the growth rates in DAS, military and wholesale, 30%. Are you talking about the EBITDA growth rates or revenue?

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David Hagan, Boingo Wireless, Inc. - Chairman and CEO [20]

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Why don't you take that first, Pete?

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Peter Hovenier, Boingo Wireless, Inc. - CFO and Secretary [21]

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Yes, Jim, we're thinking revenue growth rates.

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James Dennis Breen, William Blair & Company L.L.C., Research Division - Communication Services Analyst [22]

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Okay. And over what time frame?

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Peter Hovenier, Boingo Wireless, Inc. - CFO and Secretary [23]

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Yes, so year-over-year revenue growth rate, so think about is 2017 as compared to 2016.

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David Hagan, Boingo Wireless, Inc. - Chairman and CEO [24]

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And then on military, Jim. So we're really stoked about the opportunity that we have on all these military bases. We're around 60 bases that we've built out thousands of buildings and that's all with WiFi infrastructure. And so we're now looking, and in discussions with all 4 carriers for various opportunities. There's WiFi offload opportunity, I mentioned in my script that we've got 1 of the 2 carriers putting traffic on 2 military bases right now. We're also in discussions with the carriers on small cell deployment. Typically, cell coverage on these military bases is quite weak. So both from a soldier end-user perspective and from the military management, they're very interested in getting better coverage. We also mentioned the new award with MCCS, which is a wholesale deal. They're going to be paying us to build out, what will become literally hundreds of public buildings with -- on the military bases, so that can be restaurants and hotels and literally it's everything: rec centers; bowling alleys, you name it. Those are places that have typically bad coverage today. And we're going to be building WiFi coverage on all those locations. So the military business will remain very robust. It's going to be more of a wholesale opportunity in terms of a lot of growth instead of the sub-business that we've had over the last couple of years.

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James Dennis Breen, William Blair & Company L.L.C., Research Division - Communication Services Analyst [25]

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Okay, great. And then just on the margin side; obviously, you're still building some beds on the military side, CapEx is coming down, OpEx seemed to be sort of more fixed on that. So as revenue grows there, how do you see the margin progression happening in military?

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Peter Hovenier, Boingo Wireless, Inc. - CFO and Secretary [26]

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So as we had talked about historically, so the beautiful thing about the military business is the vast majority of our costs are fixed [or sunk] and so every new customer on average has about 80 points of contribution margin. So as we continue to add new customers, that incremental customer is highly accretive. So we continue to see the military line of revenue generating additional free cash flow. As we did say, and Dave just commented on, we don't expect a lot of additional growth in sub penetration rate, but we absolutely, continue to see it grow.

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James Dennis Breen, William Blair & Company L.L.C., Research Division - Communication Services Analyst [27]

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So if the penetration rates aren't going up, where is the revenue growth coming from?

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Peter Hovenier, Boingo Wireless, Inc. - CFO and Secretary [28]

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Well, we'll see some modest growth. There'll still be modest growth in penetration rate and then it's going to be on what we're seeing from the -- this new contract. And then also, too, we expect some ARPU improvements over time.

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David Hagan, Boingo Wireless, Inc. - Chairman and CEO [29]

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And then the overlay of small cell and WiFi offload on the military bases.

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Operator [30]

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The next question is from Mark Argento of Lake Street Capital Markets.

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Mark Nicholas Argento, Lake Street Capital Markets, LLC, Research Division - Head of Capital Markets and Senior Research Analyst [31]

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I just wanted to revisit the military piece a little bit quickly about 3,000 subs added. I mean, was there any programs that you ran in Q1 that you didn't run in Q2 and just maybe drill down on that a little bit more. Then also just, continue to see some M&A in the space, wanted to get your opinion on, are you guys buyers out there, are there any other assets out there that could be complemented for what you guys are doing right now?

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David Hagan, Boingo Wireless, Inc. - Chairman and CEO [32]

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Yes, so on the military front, no special programs, Q1 versus Q2. Yes, we do consistently over time, we partner with the services branches of the military and do programs in partnership with them to market the Boingo brand and Boingo service to our -- to the soldier base. So no big change there. It's really -- we've gotten most of the build-out behind us, so there aren't large numbers of new beds, which are new soldiers coming in as an opportunity to market too. So it's going to be slower growth from here on out on the sub front, but it's a great cash generating business with strong margins. So that's why we're saying, the future of growth in military largely is going to come from wholesale opportunities on top of the incremental sub growth. In terms of M&A, we don't comment on M&A. Obviously, there are all sorts of interesting companies potentially out there. We've done some M&A in the past. We've taken the last 3 years off to just make sure we've got the organic growth engine working and that's obviously working very well. So -- and we're always looking and talking to people but, obviously, nothing imminent.

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Mark Nicholas Argento, Lake Street Capital Markets, LLC, Research Division - Head of Capital Markets and Senior Research Analyst [33]

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And could you just quickly remind us of the CapEx model on the small cell side of the house as that ramps up?

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David Hagan, Boingo Wireless, Inc. - Chairman and CEO [34]

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Go ahead, Pete.

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Peter Hovenier, Boingo Wireless, Inc. - CFO and Secretary [35]

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Yes, so it's still early, but CapEx and small cell, we expect to be significantly less than what we've been experiencing for DAS. And the model on small cell deployments, unlike DAS, will be much more skewed towards recurring access fee versus the upfront build fees. So I don't see the CapEx being a profit center so -- the build portion being a large profit center like it is in our DAS business. But there will be incremental CapEx, as we start deploying more and more small cell locations. Did that address your question, Mark?

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Mark Nicholas Argento, Lake Street Capital Markets, LLC, Research Division - Head of Capital Markets and Senior Research Analyst [36]

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Yes, all good.

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Operator [37]

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The next question is from Scott Searle of Benchmark.

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Scott Wallace Searle, The Benchmark Company, LLC, Research Division - Research Analyst [38]

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Just to quickly follow-up on the military front. In deploying some of those additional services, I thought you were looking at running some pilots in the not-too-distant future for small cells. Is that still progressing for the second half of this year in terms of that initial introduction? And then a little bit more on the small cell front. What's the size and magnitude of the revenue that you're seeing today? Is that kind of being captured in some of the node numbers that you're putting out there? And really, how big is that opportunity, as we start to look out into 2018, 2019, because it really brings you into some, I'll call them nontraditional venues, and where you've historically participated, could really grow the addressable pie in terms of what you're doing over the next couple of years? And will you report that in your DAS revenue or will that be its own line item?

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David Hagan, Boingo Wireless, Inc. - Chairman and CEO [39]

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Let me -- I'll start, and Pete you can fill in if I miss anything. So on the military front, small cell trials, yes, still very active there. So no change. It's going very well. We hope to talk more about that, more specifically down the road. From a small cell perspective, size of market, you've seen the -- you probably see the same analyst reports that we do. Huge opportunity, literally millions of small cells will be deployed over the next several years. So it's a massive opportunity. The way we look at it is it's a market expansion opportunity, venues that in the past wouldn't have made sense from a CapEx perspective for carriers to spend on DAS, suddenly makes sense in a small cell world, where it's a lot less CapEx. So the kind of the rule of thumb venue size that we're using is, if it's a $1 million DAS build or over $1 million, it's probably for DAS. If it's less than $1 million, it's most likely going to go to small cells. So as we're out talking to venues and doing venue acquisition, we've got a whole suite of services from DAS to small cell to WiFi that we can cover them with. So it's another product offering that we can use in venue acquisition. So, the size of the market's a little bit tough to call at this point, but you can see from all the carrier activity and you're listening to what the carriers are saying, what the tower cos are saying, there's a ton of activity in small cell.

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Scott Wallace Searle, The Benchmark Company, LLC, Research Division - Research Analyst [40]

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Dave, one quick follow-up if I could. In terms of the competitive landscape. A little bit of different competition on that front, maybe than you've historically seen. I wonder if you could just comment on that? And then just your thoughts on shared spectrum initiatives. A lot of talk at the industry level going on in the SEC about CBRS and otherwise. Just wanted to get your high-level thoughts in terms of how you're seeing that opportunity really creating incremental opportunities for you in the next couple of years?

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David Hagan, Boingo Wireless, Inc. - Chairman and CEO [41]

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Yes, competition really doesn't change. So the way we define competition is based on venue acquisition, right, because that's where the point of competition is. So we're still competing with the same cast that we've talked about in the past. It can be a tower co, it I can be system integrator, it can occasionally be a telco, occasionally a cable co. So that isn't changing because of small cells. So no change on that front. In terms of 5G, shared spectrum, CBRS, we participate in many, if not all, of the industry standards groups. Our CTO, Derek Peterson, is involved with most of those. And so we're participating in trials. We're participating in what's going on from an SEC perspective, at least as part of those organizations. And we're very bullish on what 5G will represent for us as an opportunity. 5G, like 4G before it, like 3G before it, was a major upgrade cycle in all of our DAS networks. CBRS 3.5 spectrum as a part licensed, part unlicensed, structure means that if carriers want to deploy that with us in our venues, again that's an upgrade cycle. On the end license side, it's another network like WiFi is today for us that we can deploy and then have carriers come on to it for offload and then other industry players that may be interested in putting traffic on. So we're really bullish on what 5G represents for Boingo going forward.

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Operator [42]

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(Operator Instructions) The next question's from Walter Piecyk of BTIG.

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Walter Paul Piecyk, BTIG, LLC, Research Division - Co-Head of Research and MD [43]

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Did you say you had not -- the reimbursable CapEx was $7.8 million for the quarter?

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Peter Hovenier, Boingo Wireless, Inc. - CFO and Secretary [44]

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Yes, it was $7.8 million for the quarter.

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Walter Paul Piecyk, BTIG, LLC, Research Division - Co-Head of Research and MD [45]

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Got it. So when we're looking for the year, I think when we've -- Pete, when we've talked about this on prior calls, the thought was that, that was probably going to be at last year's levels. Maybe I misremember that. But is there any update on what you think reimbursable CapEx will look like this year?

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Peter Hovenier, Boingo Wireless, Inc. - CFO and Secretary [46]

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Yes, no, we're not changing that, Walt. So we do expect this year to be in the same general range as what we had last year, which was about $80 million. So that definitely implies that the second half of the year, we go through an increased upgrade cycle and increased building cycle. Year-to-date, I believe we're about $20 million in terms of reimbursable CapEx.

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Walter Paul Piecyk, BTIG, LLC, Research Division - Co-Head of Research and MD [47]

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Right, so there's just going to be this like massive jump because you're going from 8 or 10 up to like 30 in that, or more, depending on when it hits? Why -- so how's that...

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Peter Hovenier, Boingo Wireless, Inc. - CFO and Secretary [48]

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Yes. If you look at what we have done over the past, call it, 4 quarters prior, those numbers are not surprising. So the way to think about this is, it's driven many times by very large-scale builds. So in '15 and '16 in particular, we had 2 very large builds going on in O'Hare and also at the World Trade Center. And we have some other big builds now starting to come, they -- these builds take a little while to materialize.

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David Hagan, Boingo Wireless, Inc. - Chairman and CEO [49]

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And they're lumpy.

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Peter Hovenier, Boingo Wireless, Inc. - CFO and Secretary [50]

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And they're lumpy.

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Walter Paul Piecyk, BTIG, LLC, Research Division - Co-Head of Research and MD [51]

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So how does that work then? If you -- you start -- have all these like record sign-ups on the venues, does it just take time to get the approvals to start the building within the venues or -- because to have that kind of visibility in the second half of the year. Because it seems odd to have it like that low for 3 straight quarters, when you've been talking about getting all these venue awards. Is it just the timing of when you can actually start to get the process going at the actual venues themselves?

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David Hagan, Boingo Wireless, Inc. - Chairman and CEO [52]

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Because if you think about it, so if we're talking about builds that are going to happen in the second half of 2017. Those are deals that we signed in second half '15, very early '16.

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Walter Paul Piecyk, BTIG, LLC, Research Division - Co-Head of Research and MD [53]

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So what's happened in that? What you do over that year is it -- to get ready for those builds? Why does it take a year to start the build?

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David Hagan, Boingo Wireless, Inc. - Chairman and CEO [54]

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Yes, so once we get the contract in place with the venue, then we reach out to the big 4 carriers, and then it begins a negotiation on who becomes anchor or co-anchors. And that is a -- not a fast-moving project. We have to make sure we're aligned for process. We have to make sure that we're aligned with each carrier's CapEx budget. So there is a lot of negotiation that goes on, on the front end. The building part -- the design build part's the easy part. It's the negotiations on the front end's the hard part.

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Walter Paul Piecyk, BTIG, LLC, Research Division - Co-Head of Research and MD [55]

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Got it. So when you're talking about like record venue sign ups, that's on the -- what's called the real estate side of it. And then there's some time, I think, great, you've this location, now you've got to deal with all the operators and that takes some time. And then you can actually start to build the stuff?

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David Hagan, Boingo Wireless, Inc. - Chairman and CEO [56]

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Correct.

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Peter Hovenier, Boingo Wireless, Inc. - CFO and Secretary [57]

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Exactly. Like I mentioned earlier on this call, it takes about 18 to 24 months from venue acquisition to ultimately, when you start seeing revenue coming in from a carrier.

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Walter Paul Piecyk, BTIG, LLC, Research Division - Co-Head of Research and MD [58]

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Understood. So when you talked about -- very positively about the venue sign-ups that you've had in the last quarter or so, would that mean that in 2018 we should see a similar level of reimbursable CapEx than we've seen in, I guess, 2016 and '17, now?

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Peter Hovenier, Boingo Wireless, Inc. - CFO and Secretary [59]

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That's correct. That's exactly how it works. So you see this record venue acquisition, that ultimately is going to be turned into increased capital expenditures for DAS builds on -- at those venues.

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Walter Paul Piecyk, BTIG, LLC, Research Division - Co-Head of Research and MD [60]

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And the only way that doesn't happen is if basically the wireless operator don't sign up, but that's kind of silly, if you've got the exclusive there that they would sign up. So the expectation would be, it may take some time, but you're ultimately going to get them.

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David Hagan, Boingo Wireless, Inc. - Chairman and CEO [61]

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Correct. And one of the things that we focus on in our business development process is making sure that we're getting venues that are the types of venues within the markets where carriers want to deploy capital. So it's where the carriers tell us that they have network needs. So we are cautious about the types of venues that we pursue on the front end.

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Walter Paul Piecyk, BTIG, LLC, Research Division - Co-Head of Research and MD [62]

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Got it. One last question on the balance sheet. Your receivables last year were in this -- well really for 2 years, were in like a $40 million or $50 million range, on a DSO level that's like 90 or 100 days. First half of this year, it's obvious you dropped down significantly. Is this the new level for receivables, either express on an absolute basis is like $28 million or DSOs or is there -- do they ever go back up to $40 million level?

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David Hagan, Boingo Wireless, Inc. - Chairman and CEO [63]

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Yes, so I think what you'll see is they'll continue to creep back up, particularly as we start these larger builds that I referenced, that will be happening in the second half of this year. So we think that this $27 million, which we -- of AR we had at end of June, is around the low point. I don't necessarily see it getting back up to the 40s in September, but we do see it creeping back up, in somewhere in the 30 to -- potentially as high as 40 in the next year or so.

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Walter Paul Piecyk, BTIG, LLC, Research Division - Co-Head of Research and MD [64]

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Got it. So since you expressed your free cash flow numbers in your press releases based on operating cash flow, which includes those working capital moves, does that have any impact in your outlook for the second half as far as your ability to generate free cash flow?

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David Hagan, Boingo Wireless, Inc. - Chairman and CEO [65]

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No, we're still very confident in our ability to generate positive free cash flow. If you look at this quarter in particular, for example, AR between June -- well really for end of June quarter, AR went down to about a little over $1.1 million, but our positive free cash flow is $7.4 million. So we're still -- it's the health of the business that's generating positive free cash flow. Increased AR collections absolutely helps but that's just more timing.

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Walter Paul Piecyk, BTIG, LLC, Research Division - Co-Head of Research and MD [66]

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Right. And you have to make accrued expenses which help by like $6.8 million, too, right?

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David Hagan, Boingo Wireless, Inc. - Chairman and CEO [67]

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It does, but that's also too, that's going to be future CapEx expenditures, which will be tied to when we get carrier payments coming in.

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Operator [68]

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Our next question is from the Timothy Horan of Oppenheimer.

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Timothy Kelly Horan, Oppenheimer & Co. Inc., Research Division - MD and Senior Analyst [69]

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I have about 2 dozen, but I'll keep it to like 3 here and maybe we can talk afterwards. Just looking at your balance sheet and the operating leverage that you're generating, why aren't you taking on more debt and accelerating the business model here? It just seems like next 5 years is kind of an incredible opportunity out there. And it looks an awful lot like a tower model to me.

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David Hagan, Boingo Wireless, Inc. - Chairman and CEO [70]

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Yes, I mean, that's certainly available to us. We have a credit line currently. You see we've actually been paying down each quarter as we are generating more cash flow. But it's certainly available and if we feel the need that we need more debt on the balance sheet, we think it's slowing it down anyway, that's certainly available to us. Do you want to add to that, Pete?

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Peter Hovenier, Boingo Wireless, Inc. - CFO and Secretary [71]

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Yes. I think the main thing there, Tim, is we think about capital allocation and just overall, but if we feel like adding some more debt to the balance sheet, allows us to grow significantly faster, that's something we're open to. But at this point in time, we have almost $65 million available on our line of credit. That is ample for our needs in the near term.

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Timothy Kelly Horan, Oppenheimer & Co. Inc., Research Division - MD and Senior Analyst [72]

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Just 2 more quick ones. So military, it's impossible for us to know from the outside. Are we thinking of this to be a 10% growth business for the next few years, 5%. I mean, I know you don't know yourselves exactly, but how -- maybe how you're thinking about it?

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David Hagan, Boingo Wireless, Inc. - Chairman and CEO [73]

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Yes, so the way I'm modeling it on a go forward basis, I'm doing in the low single -- low double digits, so that would be north of 10%.

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Timothy Kelly Horan, Oppenheimer & Co. Inc., Research Division - MD and Senior Analyst [74]

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Great. And then it looks like, this stuff is converging so rapidly, the unlicensed spectrum with the licensed spectrum and the WiFi with the LTE; do you have any build-outs where you've done kind of joint LTE, WiFi for the carriers? And on these military bases, what's the carrier's optimal choice? Why wouldn't they just use WiFi that's working fine, as opposed to small cell? Like how are they making these decisions? I know it's complex and we're just hearing it for the first time.

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David Hagan, Boingo Wireless, Inc. - Chairman and CEO [75]

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Actually, we have about a 1/3 -- correct me if I'm wrong, Pete -- about a 1/3 of our venues, we have both DAS and WiFi. In our core strategy, when we go-to-market, meaning when we go to the venues to get the wireless rights, we try to get license and unlicensed rights, doesn't always happen. But we do that frequently, and so about 1/3 of our venues have both. Now we also have carriers 1 on 2 in both types of venues. One where they don't have a DAS, and so they're only on WiFi, but also where they already have DAS and they want to augment the DAS with WiFi. So the fundamental answer to your question is, with mobile data growth growing at the rate that it's growing, the carriers really need to use all available potential capacity to solve the network congestion problem. That's why you see so much interest going on around 5G, that's why you see suddenly bands that were not viewed very positively not very long ago, like 3.5, suddenly is incredibly interesting to the carriers because there's insatiable appetite for increased bandwidth. So we benefit from that. We're technology-agnostic. We do both license and unlicensed. So either way, we're a partner with the carriers to help them solve that problem.

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Peter Hovenier, Boingo Wireless, Inc. - CFO and Secretary [76]

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I think that's a really -- sorry, Tim, but that's a really important point is, if you think about it, we really want to be the venue specialist, so if a carrier wants to use WiFi to venue or if they want to use 3.5 or if they want to use LTE, we want to be there to supply them with what they need at that location. And our rights give us the ability to do that.

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Timothy Kelly Horan, Oppenheimer & Co. Inc., Research Division - MD and Senior Analyst [77]

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That makes perfect sense. And like the hotels, it just makes perfect sense. Why would you have 2 or 3 different vendors in there; why not have just 1 guy operate all the infrastructure? And I guess, is anyone operating all the infrastructure like you guys are doing?

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David Hagan, Boingo Wireless, Inc. - Chairman and CEO [78]

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It's pretty rare to have the DAS and the WiFi capability in 1 company. The -- most of our competitors that we talk about, whether it's the tower cos or system integrators, they've been doing cellular networks of various types, DAS specifically for the long period of time, but very few of them have the deep domain experience in both license and unlicensed like Boingo does. That's one of our key benefits.

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Operator [79]

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There are no further questions in the queue at this time. I would like to turn the conference back over to Mr. Hagan for closing comments.

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David Hagan, Boingo Wireless, Inc. - Chairman and CEO [80]

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Thanks, everyone, for your questions and interest in Boingo. We will be presenting at Oppenheimer's 20th Annual Technology Internet and Communications Conference next week in Boston. We look forward to speaking with you soon. Thank you.

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Operator [81]

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Thank you, ladies and gentlemen. This does conclude today's teleconference. You may disconnect your lines at this time, and thank you for your participation.