Description

Towerstream is an small-cap, under-followed stock that is trading at a significant discount to underlying asset value.  Historically a wireless broadband internet access company (providing wireless broadband to SMBs in major metropolitan areas in the U.S.) the company has transformed in the past several years by entering the small cell / Wi-Fi offload market.  The company has done so by leveraging its existing ISP network assets to expand its footprint for Wi-Fi offload in major metro sites throughout the county.  These sites will be highly valuable to carriers (or in a sale to an independent tower company) as wireless providers need to address increasingly congested networks from growing mobile data traffic in metro areas.  (Fundamentally, as carriers continue to build out their networks they will ultimately need to invest in small cell / Wi-Fi offload to increase capacity in dense urban areas where macro site usage alone will not address network needs).   

Currently public investors are ascribing almost no value to these Wi-Fi assets.  Just applying EBITDA from the fixed wireless business (i.e. excluding the wifi/corporate spend) the company is valued at ~7.5x EBITDA.   We think that at a public enterprise value of $93mm (equity value of $103mm, or $1.55/share) the value of the company’s Wi-Fi footprint alone could be worth as much as $200-$400mm (i.e. upside valuations of $3-$6/share or 2-4x return) which provides significant upside to this business.  On the downside (i.e. if you shut down the wifi effort) we think that company would trade for 6x the ISP business, or $1.25-$1.35/share.  Hence, we believe TWER has an assymentric risk-reward profile.

In 2013, TWER created a new division ( “Hetnet”) to invest in Wi-Fi / small cell infrastructure to provide services for major telecom carriers.  The division has been a major use of cash, and drag on earnings, as it generates limited cash flow today (in fact, burns cash as the company has built out the footprint).  However, today the company has arrangements with two carriers to provide these offload services and, imporantly, signed an MLA in August with a major carrier.  We believe as more carriers execute MLAs with Towerstream, earnings will continue to grow as will strategic interest in TWER's assets. 

TWER developed its fixed wireless presence on thousands of rooftops in major metro areas for over a decade (since 1999) and the company owns and operates its wireless metro network / backhaul, offering its customers internet speeds of T1-1.5gbps.  TWER secured long-term leases for rooftop access on prime major buildings in major metropolitan cities, developing a footprint that has fiber access to the rooftop of these buildings.  The company uses microwave radios to deliver a high capacity internet connection to customers within the metro region.  In the fixed wireless business, TWER competes on price (~30-50% discount to RBOCs), reliability (99.99% reliability), and speed to install (3-5 days to install new internet connections vs. 30-60 days for RBOCs).  Because the company connects urban locations wirelessly, buildings do not require a fiber line to each site (lower capex and easier to install services).   Securing roof leases for TWERs equipment requires substantial time to negotiate and permit access to (lease acquisition / site permitting to be diligenced).  Customers typically enter into annual contracts that last 1-3 years and are paid monthly. 

Currently the company has a customer base of ~3k which provides a solid base of cash flows as churn is low (management targets churn between 1.4%-1.7%).  In the past several years, the company has completed numerous acquisitions in new markets in order to expand the company’s geographic reach, network assets, and customer base.  The fixed wireless, while cash generative, is not an exciting business that is facing competition for SMB customers by fiber providers, and will ultimately decline over many years.  However, this segment provide cash flows and infrastructure that the company has leveraged for developing its Wi-Fi footprint.

Management refocused the business three years ago to capitalize on mobile traffic growth and carriers’ interest to alleviate network congestion.  By leveraging TWER’s existing leased rooftop presence and fiber backhaul assets, the company has deployed a Wi-Fi offload and small cell network for carriers.  TWER utilizes its infrastructure (i.e. the company already has the rooftop leases and internet access) to bring Wi-Fi broadband capacity to a location.  This allowed TWER to more rapidly deploy a Wi-Fi network than if they did not have an existing footprint. 

TWER installs a carrier grade Wi-Fi radio on its customer rooftops and can offload mobile data traffic from the surrounding neighborhood to their network.  The Wi-Fi offload takes mobile data traffic off cellular networks to alleviate congestions, while small cells (to be deployed by carriers) allow carriers to decrease the number of users accessing each cell tower to improve performance.   In addition, customers get much faster download speeds.  Two national wireless carriers have already signed up for TWER’s service, yet the carriers have only modestly started to use the service.  In August of 2014 the company disclosed it had signed an MLAs with a major carrier.  Revenues to date have been generated and there has not been much transparency in the contract.  However, the recent signing will likely drive earnings growth within the business. 

Currently, the company has rooftop leases (~20 year leases, exclusive Wi-Fi access, no revenue sharing) with a potential for 10,000 antennae locations. The company has deployed equipment for 3k nodes across its 1.2k rooftop footprint.  Management has provided limited information on the potential economics of the business however if the business at maturity generates similar economics to tower companies, then the company could generate meaningful cash flows.  Even at a discount to typical tower colocation rates, and assuming $1k per colo, even if these sites are contracted with only one tenant, these sites could generate upwards of $25mm of EBITDA.  Assuming a deep discount to tower multiples today, and assuming only 15x EBITDA, the company should be worth at least $375mm of enterprise value (vs. $90mm today).  Importantly, wireless infrastructure is a highly active private market with the three major independent tower companies acquiring smaller infrastructure assets throughout the U.S. (in fact CCI acquired NextG, a DAS provider valuing NextG’s 7K nodes for $1bn, or ~$143k per node.  This valuation alone would imply $428mm for TWER). 

We believe that TWER is a unique asset that has significant value as secular trends continue to force carrier to address rising mobile traffic needs.  As a result, we think that over time the assets that TWER has accumulated will be valued more appropriated and trade at a significant premium to today’s levels. 

Risks

• Nascent industry, with unproven business model, economics and technology risks
• Execution risk in securing additional rooftop leases and negotiating contracts with carriers
• Cash flow negative business with history of operating losses
• Declining fixed wireless business
• Robust valuation on current earnings

Catalyst

Growing demand by carriers to address network congestion

Highly active M&A activity for infrastructure assets (i.e. independent tower companies would be interested)

Momentum from recent MLA signing provides a leading indicatior for subsequent MLAs signings from other carriers

Earnings growth within wi-fi offload business