FTE Networks Earnings Call Transcript

FTE Networks

Fourth Quarter and Full Year 2017 Investor Conference Call

April 18, 2018

Operator

Good day everyone and welcome to the FTE Networks Fourth Quarter and Full Year 2017 Investor Conference Call. Today’s call is being recorded.

At this time, I would like to turn the conference over to Steve Silver of KCSA Strategic Communications, Please go ahead, sir.

Steve Silver – KCSA Strategic Communications

Thank you, operator. Before turning 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 today 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.

Michael Palleschi, Chief Executive Officer

Thanks, Steve. It is my pleasure to address FTE Networks’ loyal shareholders and, hopefully, many potential new shareholders as well. We are pleased to share our progress executing against the Company’s market position and business objectives.

2017 was truly a transformational year for FTE Networks, and a year that positioned the Company for what we expect will be a dynamic future for growth and value creation. During 2017, FTE acquired and integrated Benchmark Builders, a tier one general contractor with a powerful industry brand and strong presence in the coveted New York City market. Later this week, on April 20, we will mark the one-year anniversary of the closing of the Benchmark acquisition. In addition to enhancing our top-and-bottom lines, Benchmark also provides an ideal sales channel for our first to market compute-to-the-edge technology powered by CrossLayer, which we officially launched in the fourth quarter of 2017.

We enter 2018 with  three synergistic entities that will enable FTE to meet the markets demands for innovative buildings designed with superior technology that brings faster high tech, low cost connectivity.   Through Benchmark, we have a robust sales channel for the CrossLayer platform as part of a multi-prong sales strategy. Third, our legacy Jus-Com subsidiary, which provides end-to-end network infrastructure and data center solutions, provides the installation and operations channels for CrossLayer. So, as you can see, these complementary businesses position FTE in the market as a technology and infrastructure services company.

These accomplishments were instrumental in the achievement of a key corporate milestone of uplisting to the NYSE-American in December 2017. This distinction allows for the potential of greater liquidity and access to capital, and a larger platform for us to communicate our progress to a broader audience. As a result, we believe we are now better positioned to attract a broader range of institutional investors.

So, as you can see, the Company has accomplished a great deal over a short period of time. Over the past 12 months, we have successfully integrated a $300 million revenue generating business into a GAAP compliant, public entity; began the launch of the innovative CrossLayer technology platform into Benchmark’s installed sales channel; and uplisted to a prominent stock exchange. These accomplishments fuel our optimism in our ability to capitalize on the growth opportunity that lies before us.

The FTE Strategy

As a result of these strategic initiatives and our successful execution, FTE today is a technology company that is leveraging its market presence in the network infrastructure and general contracting verticals as sales and operations channels for its advanced edge computing technology, powered by CrossLayer. This business model is notable in that it spans multiple growth market segments.

In addition to enabling adaptive and efficient smart network connectivity platforms, infrastructure, and buildings, FTE provides end-to-end design, build, and support solutions for state-of-the-art networks, data centers, and residential and commercial properties.

Our business is now comprised of three complementary businesses whose combined operating benefits provide cutting-edge technology solutions to our rapidly expanding client base, and, in turn, contribute to improved margins and enhanced profitability.

Operations

As of December 31, 2017, our backlog stood at $434 million, which we believe underscores the underlying strength of our business and further validates the market’s adoption of FTE’s product and service suite. Earlier this month, we announced that FTE has been awarded approximately $133 million in new project contracts to date. Additionally, the Company continues to be awarded re-occurring infrastructure projects in strategic markets across the United States under existing master service agreements, through which FTE helps create intelligent workplaces by providing state-of-the-art technology, infrastructure and fit-out services.

These awards are bolstering our footprint in existing markets, led by the New York City metropolitan area, but are also providing opportunities to establish a presence in new markets, given our access to more than 200 REITS and an impressive reoccurring Fortune 100/500 customer portfolio with a national footprint.

One primary example of the model we are seeking to replicate broadly is our recently awarded contract to build a gigabit fiber-optic network across the 35-acre development at Industry City, a historic shipping and warehouse complex, located on the Brooklyn, New York waterfront. Industry City is a preeminent and progressive creative hub for local businesses, manufacturing, media, artists, and retailers that has more than 450 commercial tenants, including ABC Carpet, Brooklyn Kitchen, and Conde Nast. The complex has been cited as an innovation ecosystem that benefits its tenants and the wider community, and we are proud to have been selected to be a part of this project.

FTE’s CrossLayer will bring carrier-like functionality across Industry City’s multiple buildings and campus, and to its tenants, many of whom are in the media, design, creative arts, production, and technology sectors, essentially building an ultra-fast, highly secure data network with unlimited connections that Industry City will own, with CrossLayer then managing the carrier-neutral network across the entire development, from sign-up to service.

The expansion of the integrated FTE operating model nationwide, in multi-use real estate settings, is a primary objective, and one we believe we are well equipped to achieve.

CrossLayer

Thus far, we have mentioned CrossLayer quite a bit, which is understandable, given it is the foundation of our technology service offering. But, I want to briefly highlight some of the platform’s key features and characteristics that have driven its market acceptance since launch that has us excited about our future.

FTE developed CrossLayer to fill a need in the marketplace, enabling building owners to implement a cost-effective intelligent building and network infrastructure.  Today, businesses are becoming more data-driven and are looking for lease space that is highly innovative and supports on-going high-tech demands for their always connected workforce.

CrossLayer addresses these demands by delivering open source technologies and processes deployed in a software-driven, mobile edge compute platform that is scalable.

Additionally, the platform features multi-layer security with built-in redundancy that prevents service disruption an offers new revenue streams for building owners. We look forward to sharing more details on CrossLayer’s potential applications and opportunities as its rollout continues.

FTE will continue to invest in its technology solutions and to protect these technologies by building a robust patent estate around their key features. In addition, FTE has made additional investments in CrossLayer to increase its sales force and establish partnerships with globally recognized firms to support and expand its pipeline throughout the United States, and to ensure its sustained momentum. 

High-Level Financial Results

David Lethem, our CFO, will provide a review of our financials shortly, but I want to point out that the operational achievements just highlighted, have already produced exceptional results for FTE, and we believe, will continue to provide sustainable value to our shareholders. In the fourth quarter of 2017, FTE generated record revenues of $110.5 million and a record backlog of $434 million at year-end. In just a moment, David will provide additional insight into the investments we have made into CrossLayer as well as the non-recurring transaction fees incurred in 2017 that, when placed in their proper context, further underscore the momentum in the FTE business.

We remain confident that FTE’s integrated model, through which we equip our clients with innovative, technology-oriented solutions to offer their commercial tenants with a cutting-edge networking experience, will provide the Company with enhanced efficiencies and margins, driving sustainable profitability.

With that, I will now turn the call over to David Lethem, our CFO, who will review our financial results for the fourth quarter and full year 2017.

 

David Lethem, Chief Financial Officer

Thank you, Michael, and good morning everyone. I will now provide you with a summary of our full-year 2017 results.  For the more detailed results, please refer to the Company’s earnings release we issued this morning, along with our annual report on form 10-K filed with the Securities and Exchange Commission.

Q4 2017 Results

For the quarter ended December 31, 2017, revenues totaled $110.5 million, compared with $3.3 million in 2016. This represents year-over-year growth of approximately 97%, and was driven by the acquisition of Benchmark and steady growth in our legacy business Jus-Com.

In the fourth quarter of 2017, cost of sales was $97 million, representing a gross margin of 13%. This compares with $3.2 million and a gross margin of 1% in the same period in 2016.  The increase in costs were primarily related to the revenue generated by Benchmark Builders expense.

General and administrative expenses for the fourth quarter of 2017 were $4.8 million, from $1 million in the corresponding 2016 period. The increase in expenses was largely attributable to costs related to increase in G&A as a result of the acquisition of Benchmark Builders.

Total operating expense for the fourth quarter of 2017 were $14.8 million over $1.4 in the same period in 2016.

Other expenses increased in 2017 to $9.9 million, from other expense of $1.6 million in 2016.

As a result, we generated a net loss in 2017 of $13.5 million compared to a net loss of $3.0 million in 2016.

Full-Year 2017 Results

Total revenue for the full year 2017 was $243.4 million, which includes the revenue contribution of Benchmark Builders from April 21, 2017, following the closing of its acquisition by FTE. On a pro-forma basis, full-year revenues including Benchmark from January 1, 2017 would have been $285 million. In 2016, total revenue was $12.3 million, solely from the legacy Jus-Com business.

Consolidated gross margin for 2017 was 15%, compared with 28% in 2016, as Benchmark Builders’ margin is lower than FTE’s legacy Jus-Com network unit.

Operating expenses for the full-year 2017 were $38.6 million, compared with $5.8 million in 2016. The increase in expenses is attributable to several factors related to the acquisition of Benchmark Builders, including higher stock compensation expense, increased selling, general and administrative expense, transaction-related expenses and amortization expense of intangible assets.

Operating loss for 2017 was $1.6 million for the full year 2017, compared to a loss of $2.4 million in 2016.

Other expense for the full-year 2017 was $17.8 million, compared with $3.8 million in 2016. The increase is primarily attributable additional interest expense, amortization of deferred financing costs, and higher financing costs all related to the acquisition of Benchmark Builders.

Net loss for 2017 totaled $20.1 million, or $4.23 per share, compared with a loss of $6.2 million, or $0.10 per share, in 2016.

Adjusted EBITDA was approximately $21.2 million for the year ended December 31, 2017, compared with $(1.9) million in 2016.*

As of December 31, 2017, FTE had $15.5 million in cash, working capital of $1.9 million.

2018 Guidance

Lastly, I’d like to provide select financial guidance for the full year 2018.

First, FTE expects revenues of approximately $350 million for the year, primarily driven by Benchmark Builders. We launched CrossLayer in the fourth quarter of 2017 and, while we are expect Crosslayer to be a vital contributor to FTE’s future growth, we plan to conservatively model its near-term revenue forecast until we are further into the year.

Next, Adjusted EBITDA of $30 million for the year, which is expected to be primarily driven by:

  • Revenue increases across all three operating entities;
  • The addition of CrossLayer revenues driving higher margins;
  • Expense consolidation across all 3 entities, and;
  • Realizing additional operating efficiencies across the business.

Next, FTE expects Operating Income of $30 miilion for the year, primarily driven by the same factors as just mentioned for adjusted EBITDA.

Lastly, buildings on-Net. In 2018, CrossLayer is focused on expanding the number of buildings on-net and increasing its monthly recurring revenue base. We anticipate having 30 buildings on-net in 2018.

We are laser focused on execution in 2018, and believe we are off to a strong start to the year, as evidenced by the $133 million in announced new contracts in the first quarter, into early April. In 2017, our financial results reflect the costs related to the acquisition of Benchmark, its integration into FTE, the launch of CrossLayer and the investments that made launch possible. As a result of these investments, we believe that the reported expenses in the fourth quarter do not accurately capture the underlying momentum of the business, and we look forward to retiring these non-recurring expenses. So, while 2017 was a year of investment and integration, setting the stage for 2018, where we expect to begin realizing the return on these investments.

Michael Palleschi, CEO – Closing Remarks

Thank you to everyone who has joined us on our call today. We look forward to updating you all on our progress moving forward.

FTE’s accomplishments in 2017 established a strong foundation that will enable the Company to capitalize on a multi-prong and multi-year growth opportunity. For 2018, FTE is focused on driving revenue growth by leveraging its three complementary business units to realize operating efficiencies, and to enhance margins, and profitability, as part of its long-term strategy.

Thank you for your ongoing support and we look forward to keeping you updated on our progress.

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