Q3 2015 Pacific DataVision, Inc. Earnings Conference Call
Brian McAuley, Chairman, Morgan O’ Brien, Vice Chairman, John C. Pescatore, Chief Executive Officer, and Timothy Gray, Chief Financial Officer will host the call to discuss the financial results and provide a business update. Investors can participate in the earnings call by dialing into the conference lines 888-267-2860 or 973-413-6102 and using the conference code 774894.The earnings call will also be available for replay until March 19, 2015 and can be accessed by dialing into the conference lines 800-332-6854 or 973-528-0005 and using the conference code 774894.
Pacific DataVision Earnings Update – Call Transcript
02/19/15 – 4:30 PM EST
OPERATOR: Good afternoon ladies and gentlemen and welcome to the Pacific Data Vision Third Quarter Earnings Update. At this time all participants have been placed on listen only mode and we’ll open the floor for your questions and comments after the presentation. It is now my pleasure to turn the floor over to your host, John Pescatore. Sir, the floor is yours.
MR. PESCATORE: Thank you. Good afternoon everyone and welcome to Pacific Data Vision’s earning call for the third quarter ended 12/31/15. Joining me today to discuss our results are Brian McAuley, our Chairman. Morgan O’Brien, our Vice Chairman and Tim Gray, our Chief Financial Officer.
Before we begin, I’ll hand it over to Tim to remind everyone of a few items and of course I meant 12/31/14.
MR. GRAY: Thanks John. I would like to remind everyone that during the course of this conference call we will make forward looking statements which are subject to various risks and uncertainties. These include: statements relating to regulatory initiatives and the build out and development of our dispatch business. Our actual results may differ materially from the results predicted or suggested by any forward looking statement. A discussion of the risks and uncertainties related to our business is contained in our filings with the FCC; including our quarterly report on form 10Q for the period ended December 31, 2014 that we filed with the FCC earlier this afternoon. You should not place undue reliance on our forward looking statements which speak only as of the date of this call. Except as required by applicable law, we do not intend to update any of the forward looking statements, to confirm these statements, to reflect actual results, later events or to reflect the occurrence of unanticipated events. Also I’d like to remind you that during the course of this conference call we will discuss some non-GAAP measures such as adjusted EBITDA in talking about the company’s performance. Reconciliations to the most directly comparable GAAP financial measure, net loss, are provided in the tables in our press release. Adjusted EBITDA should not be considered isolation, as a substitute for or as superior to financial measures calculated in accordance with GAAP.
With that, I will turn the call back over to our CEO, John Pescatore.
MR. PESCATORE: Thank you Tim. I’m extremely pleased to inform everyone that PDV has made some significant advances in the last quarter as we’re building the foundation to become the only private wireless carrier dedicated to business and critical infrastructure companies. I’d like to highlight some of those advances.
As most of you know this is our first earnings call as a public company. On February 3rd, PDV started trading on the NASDAQ capital market under the symbol PDVW. On behalf of our entire team and shareholders we rang the NASDAQ closing bell. We are all proud of this accomplishment and it’s due to the hard work of our team that we were able to achieve this milestone. More importantly though, being listed on NASDAQ meant that we met a commitment we made to shareholders who invested in our 144A equity offering last year. Beyond meeting that commitment, being public provides PDV with a potentially larger shareholder base and provides our investors with opportunities for liquidity.
During the past 9 months we, it’s been a remarkable period for PDV; during that time we’ve set the company on an exciting path to become the only nationwide licensee of spectrum, dedicated solely to serving dispatch centric businesses and critical infrastructure entities. That path started with raising more than two-hundred million dollars which allowed us to acquire Sprint’s 900-megahertz spectrum position nationwide.
Further, we secured a strategic investment and spectrum lease agreement with our technology provider Motorola Solutions. We began the process of prioritizing and building out our next generation dispatch networks. We launched our regulatory initiatives aimed at allowing us to increase the efficiency of our spectrum while providing for the broadband requirements of our future customers. We also assembled a very strong leadership team including former Nextel executives who know this space and were instrumental in developing Nextel.
Looking forward our plan has two phases. Our initial base plan targets the traditional dispatch market while we work to re-purpose the 900 MHz band. Re-purposing the 900 band, if successful, will allow us to provide the critical infrastructure community with priority access to broadband in phase two of our plan. In the meantime we’re excited to launch our next generation dispatch networks in twenty markets over the next couple of years.
As a reminder, our differentiated push to talk service targets dispatch centric small and medium sized businesses within key vertical’s; such as transportation, distribution, construction and field services. We will combine Motorola’s state of the art digital dispatch technology with PDV’s mobile resource management solutions creating a business bundle we call Dispatch Plus. These solutions are aimed at improving workforce efficiency and productivity. We expect to have service in our first four markets by the end of June 2015. These markets were selected based on a variety of factors such as assessing the local market opportunity, assessing capabilities of potential distribution partners, reviewing the competitive environment, the coverage requirements and build out complexity. Our launch markets are spread across a couple of regions which will allow us to develop and trial different marketing programs and approaches. This will lead to best practices to be used in future markets.
I will now hand it over to our Vice Chairman, Morgan O’Brien who’ll provide an update on our regulatory initiatives.
MR. O’BRIEN: Thanks John. Good afternoon everybody. In November, a few months ago, we joined with the Enterprise Wireless Alliance which is one of the major trade associations and filed at the FCC a petition, requesting a re-alignment of the 900 MHz band; that band just as a refresher is 5 MHz-by-5 MHz, right below 1 Gig. We proposed to the FCC that, that band be re-purposed so that, and realigned so that there could be a segment of the spectrum which provides broadband and in a section, in a segment that provides only narrowband. This would permit us, if we’re successful, to provide broadband services and in particular, broadband services to critical infrastructure on a priority basis.
As I say, the petition was filed in November and as is normal, the first step in a proceeding like this, the first step of the FCC was to put the rule making petition out on public notice and to set a comment and reply comment cycle. Both of those cycles are now over as of the end of January; so, the FCC now has a record on which to decide whether or not to launch a so-called Notice of Proposed Rule Making which would be the next step in this process.
You can’t emphasize too much the importance in a, in an existing band like this where there are a number of incumbents that operate very serious operations using these channels; that any changes, particularly after an allocation that’s been in place for about 30 years, any proposal to change, no matter how many benefits, is a serious matter and has to have close FCC scrutiny and, as the appropriate first way of beginning that is for the FCC to get comments and reply comments. In this proceeding, as expected, essentially the comments and reply comments were filed by incumbents raising a variety of concerns about what would happen in a process of re-tuning and re-purposing the spectrum. None of these comments was a surprise to us. We actually started long before we even got FCC consent to the transfer of the licenses to PDV. We started a process through EWA and other trade associations of identifying the likely issues that would be involved in something like this kind of realignment.
So, in the comment reply comment cycle we see a number of comments, a number of issues raised, none of which is a surprise to us, and now the process is working through those and, in anticipation of the FCC taking the next step, which would be to issue another Notice of Proposed Rule Making. I think that’s about the summary of that process and I guess I turn it over now to you Tim?
MR. GRAY: Thanks Morgan. I would now like to walk everyone through the key financial highlights for the fiscal year 15′, third quarter, ending December 31, 2014. PDV’s revenue for the quarter decreased to $836,000 compared with $930,000 the previous year. For the nine months ending December 31, 2014, PDV’s revenue was approximately 2.4 million compared to 2.6 million the prior year. This is a result in the expected decline in our lower margin international operations in Mexico and higher churn in our domestic businesses. We’re now focused primarily on our US businesses.
PDV incurred a net loss of approximately 3.5 million for the quarter. This loss included non-cash compensation expense of 1.4 million in the quarter which is a result of the grants of restricted stock and stock options in connection with the company’s June 2014 private placement. The increase in expenses was also affected by planned higher head count and higher legal and accounting fees as the company moved to become publically listed. In the quarter, PDV incurred adjusted EBITDA losses of 2.1 million as compared with a negative one-hundred and fifty thousand in the prior year. For the nine months, adjusted EBITDA was a negative 3.8 million as compared with a negative 600,000 for the prior year. The increase in EBITDA losses in the third quarter was caused by the combination of the decrease in gross margin and higher SG&A costs in the quarter due to some of the same operating expense items I discussed on our net loss for the quarter.
PDV has a strong cash position of a 122.7 million in cash at the end of the quarter. This is a result of the more than 200 million in equity funding raised in June 2014, in a private placement, the acquisition of Sprint Corporation Spectrum assets and transactions with Motorola Solutions. I will now hand it over to John for final comments.
MR. PESCATORE: Thank you Tim. Overall this has been a solid quarter for the company and as we prepare to rollout our dispatch service and push the regulatory process forward. While we have much work ahead of us, we’re excited about the opportunity and have assembled a dedicated and passionate team who are ready to take on those challenges ahead and expect 2015 to be a banner year for the company. I want to thank you for listening and will now turn it back to the operator so that we can take your questions.
OPERATOR: Thank you Ladies and Gentlemen, the floor is now open for questions. If you have any questions or comments please press “star one” on your touch-tone phone at this time. Pressing “Star two” will remove you from the queue should your question be answered. And lastly we ask that while posing your question, you please pick up your handset if listening by speaker phone for optimum sound quality. Please hold while I poll for questions.
Our first question is coming from Jason Bernstein from Odeon Capital; your line is now live.
MR. BERNSTEIN: Hi. Thanks for taking the question. Tim, can you maybe go through any of the CAPEX requirements for building out the initial markets and sort-of what a burn rate looks like a year out?
MR. GRAY: Thanks for the question. On average our markets will have ten sites each which, and the total market costs for those sites will be in a range between 1.5 and 2 million dollars.
MR. BERNSTEIN: Great. And, regarding the, you know the opposition on the docket thus far, it looks like a lot of them are sort-of incumbents in the energy industry who’ve had operations there for a long time. Has there been any sort-of proactive reaching out to any these companies to sort-of gauge what they may be looking for; if there are any middle-ground, you know, should the spectrum get re-purposed because it seems like it would benefit them as well in the long run?
MR. O’BRIEN: Sure Jason, this is Morgan. Let me take a stab at that. As I mentioned before, we started reaching out to the incumbents and to their trade associations long before we actually had FCC consent to the transfer, just too exactly determine the process that you just described, so. We have had conversations, extensively, with large and small players. You may note, if you look at the comments that were filed say by utility, telecommunications council that they say in their comments that they have members that fall on both sides of this. They have members who say the benefits outweigh any change in operations or challenges to operations versus others who say their current plans do not include broadband so they don’t see the same benefit for, for making the realignment.
As I said before, nothing surprising and of course we understand that no existing business, particularly considering how important radio is to operations, wants to make changes and it’s an unfortunate reality of spectrum in today’s world that no incumbent really is protected against, parts, efforts by the FCC and others to use spectrum more efficiently because, you know, of course below 1 GHz the amount of spectrum that’s going to be available is available is used and so to make more efficient use of the spectrum below 1 GHz always involves moving and shifting; and that’s the harsh reality of where we stand on spectrum shortages.
On the other hand, there is no, on the horizon, likely way that broadband services, the huge benefits of this global standard of LTE for example, will be available for critical infrastructure; that’s the utilities and petroleum railroads and others, particularly priority access with broadband services, other than this proposal of ours. We see nothing else on the horizon that would lead to that and there’s plenty of statements on the record at FCC about how important getting that would be for these industries. It just, of course, if you’re a current operator it’s not ideal to have to be re-tuned. We pay for it, that’s always the way it works but nevertheless nobody likes it.
MR. BERNSTEIN: Great and regarding the initial markets; what is a envision price point maybe for the service versus maybe what some of these users are paying at the moment?
MR. PESCATORE: Yes, it’s John Pescatore. We expect on average our pricing to be around $30 a month and for that 30 they will get, you know, unlimited access to a wide area push-to-talk product plus, you know, a suite of PDV’s mobile resource management solutions such as: workforce tracking and our intelligent queuing and mobile time and attendance. So, that $30 really a month per user, you know, represents a bundle that we think will be very attractive when compared to the competition for two way.
MR. BERNSTEIN: Great. Thanks for taking my question.
MR. O’BRIEN: Can I add one more point to that John? Jason I know you’re very familiar with this area but let me just make sure everybody understands. Many of the users of 900 MHz, particularly the larger ones, don’t use a recurring revenue monthly fee model. They, in the past, they would buy a system outright, install it and then, therefore they don’t have a concept of recurring charges for use of spectrum. They obviously have all the maintenance and other costs that are involved in running a private system but this, we’re sort-of at a cusp here where as we move along we’ll be injecting into the process a carrier, a spectrum based carrier, and that introduces the concept of these monthly recurring rates and of course, as we move to broadband as opposed to the initial narrowband it won’t be $30 a month, it would be significantly higher because the costs of putting in a purpose built system for broadband is significantly greater than the kind of capital that Tim was talking about for a, an initial build of narrowband.
MR. BERNSTEIN: Great, I appreciate the clarification there. Just a follow-up if I could; so it’s really, you know, a decision that end users or companies will make? Before they would have to set up a system on their own; the infrastructure from repeaters to equipment, maintain it and now the option is sort-of a, almost a “cloud” solution, per service, per user service that would be a lot more economical and inefficient. That’s sort-of the choice they have to make at this point, is that it?
MR. O’BRIEN: Let’s put it this way; all of what we are doing is an additional choice. We’re not taking any choices away. What we’re saying is an additional choice. One model is the carrier model, but there could also be like a, a long term lease of spectrum to some, to an entity, utility or otherwise that constructs its own broadband facility. So we’re, we’re offering a number of choices of how to implement this.
MR. PESCATORE: Yes. I think Jason was also; I think you’re asking about in the term, yes there is a private model that Morgan eludes to but, we also believe there are very many businesses in those vertical’s I mentioned earlier like: construction and field services and transportation that are used to paying recurring fees and when you think about those fees on a carrier, when you add in, you know, a voice dispatch plan plus a data plan plus location application plus, plus, plus; you know those fees can be, can be very expensive for a business.
So, I think our opportunity can pool from both segments but, you know, it is a niche business that we know well and a highly reliable, wide area, voice dispatch service, by Motorola which is a, the world leader in push-to-talk, plus, a set of automated business solutions kind-of bring you a next generation 2-way. But, anyway thank you for the question.
OPERATOR: Our next questions coming from Matthew Harrigan from Wunderlich Securities, your line is now live.
MR. HARRIGAN: Thank you. This is a very unusual circumstance in that it is such a large identifiable niche that Nextel serve that has really gotten orphaned; and I know, you make the point that some of the larger companies are just emphasized on the consumer and they have enough to do there; but are you seeing any ratchet-ting of potential entrants other than the Moms and Pops that you’re working with in a couple markets, or that you’ve seen in a couple markets and, I know this is an off, a little bit “off the ranch” but I’d love to get your thoughts on the AWS-3 auction?
MR. PESCATORE: Well, let me address the first question. Did you mean what we’re seeing in terms of competitive offerings in the local markets?
MR. HARRIGAN: I know it’s mostly smaller guys and there’s no one who has any scale that’s going up against you; but are you seeing any people who are getting a little bit more cognizant of the opportunity because it may not be a large market compare to, you know, Sprint or Verizon’s consumer business but it’s still a pretty material segment to say the least?
MR. PESCATORE: Yes and we share that view and I think that, you know, we really; you’ll look at competition from the standpoint of there are two-way radios networks up throughout the country and they’re typically small to medium sized businesses; local or regional and, you know, they can be spectrum constrained and, you know, so, they’re out there and there are users on those today and I think that they’ve seen some initial resurgence in business as the Nextel network was shut off and some of those customers were orphaned.
You know so; there out there and, you know, our product is, is differentiated; it’s a, you know, we can be very wide area because of our spectrum position and given our, you know, our existing business of providing mobile resource management solutions we can bundle in a lot of capabilities and create something different. But, we do believe there’s enough business out there for, you know for everyone and we’re going to lift the private radio community and; and of course the tier-1 carriers have their version of push-to-talk which is responsive to, you know, a sub-set, you know of the business market as well.
But, the second piece; I think, Morgan I don’t know if you want to make a brief comment.
MR. O’BRIEN: Sure. Yes, let me just make a brief comment. As you know, that auction was huge success to unexpected high numbers. We say, I think the only safe thing to infer from that is that everybody understands the scarcity. Everybody understands a spectrum and everybody understands the power of broadband and how it’s being adopted, so. I think it casts a favorable light on what we’re trying to do but I don’t think it’s really safe to say anything more. Our spectrum is in a super-valuable part of the spectrum below 1 GHz but it, it under current rules; it can’t support broadband; so that’s the whole point of the petition. What happens to the value of that spectrum and it’s an ability in our hands to provide new kinds of services, all depends on the FCC working its way through this process and coming to a conclusion that everybody can live with.
MR. HARRIGAN: Nice option-ality (ph), congratulations on the listing.
MR. PESCATORE: Thank you.
OPERATOR: Once again, if there are any more questions it is “star one” on your touch-tone phone at this time.
Okay, there appear to be no more questions on the phones at this time.
MR. PESCATORE: Well, then I want to thank everyone for their support and attendance today and we’ll look forward to talking to you in the future. Take care all.
UNKNOWN SPEAKER: Thank you.
OPERATOR: Thank you Ladies and Gentlemen. This does conclude today’s tele-conference. You may disconnect your lines at this time and have a wonderful day. Thank you for your participation.
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