Press Release

Don't Use Cash for Capital Expenditures
(07/24/2006)

FOR IMMEDIATE RELEASE
Contact: Bill MacNamara, VP of Business Development
billmac@agilitysolutions.net
(928) 541-0771

"The cash you have, whether it's your own savings, loans from family, or investment capital should be used as your working capital," says Bill MacNamara, consultant for Agility Solutions, WISP financing specialists. "It's crucial to properly manage your cash in the beginning, when you're first starting up your WISP business. One of the best ways to do that is by leasing most of your network equipment and preserving your cash for working capital." Capitalization constraints has been a constant barrier to sustained growth within this industry, Agility with their team of industry professionals sees a ever expanding opportunity to provide fuel to this market. Agility also offers consulting services for business plan development, system engineering, backoffice applications, marketing and staffing needs.

Agility Solutions' WISP financing experts recommend that initial capitalization not be used for infrastructure, network equipment or any hardware at all. It makes much more financial sense to lease things such as customer premises and network operating center equipment, bridge links, and towers.

No Loans for Operating Costs
One of the primary reasons is simply that it is almost impossible to get a loan or any kind of financing for operating costs. A WISP must spend money on employee payroll, rent, and sales and marketing and all other operating expenses. The business can’t grow or operate otherwise. But those expenditures which build up crucial but intangible assets, comes out of the owner’s pocket, from an up-front cash investment or from monthly profits. The tremendous need for capital to add customers to your network can only be met by these sources. Loans or financing are typically available only for hardware not working capital.

Avoid Shared Ownership
Capital investments can be available from investors who require some ownership of the company. The WISP founder and owner thus gives up some control and some rights over the business. It could mean that the owner continues to struggle and work 24/7 to keep the business functioning, while a co-owner simply collects profits. Non-participating, non-operating partners are often not very attractive for these reasons.

Investment money that is hard to get therefore has its own intangible costs that the owner must consider.

Critical Company Size
A company must reach a critical mass to be self-sustainable and able to grow. That size, depending on factors such as income per customer, geography, growth options, and cost for bandwidth, is between 500 and 700 customers. At that point, the company will be able to grow based on its existing business.

Hal Hayden, VP of Operations, notes “If you run out of cash before you’ve reached that critical size, it’s unlikely that the company can grow to a point of profitability. You need to have the working capital to pay the cost of bandwidth, pay rent, pay salespeople, and fund marketing efforts.”

If the company is in a position where it needs to use capital to pay those operating expenses, it is unlikely to be able to get any type of loan. The company must push those precious dollars to where they’re more effective. If working capital is used to increase subscriber count, the business is better able to hit that spot of self-sustainability.

Business Growth
If a business has enough capital to do both, buy equipment and fund operating expenses, what is the best approach? Even if a company has a large amount of working capital to purchase equipment, the cost of money used that way would be higher than the cost to lease equipment. Most company owners would like to move beyond sustainability, to greater growth. The balance between leasing equipment and spending capital on customers will provide a greater ROI, or payback in the very near future.

MacNamara provides a simple example. "If you had $300 to spend, you could choose between spending that money on equipment or on gaining and maintaining customers. A typical customer is worth $500 to $1000 over the course of time, so you’ve spent $300 to gain $500. If you were to spend that $300 on equipment, within a couple of years, that equipment could be worth less than half what you spent on it.

“ Wouldn’t it be better to spend the $300 to increase value of your business by at least $500? Spend cash on business growth, and use financing to fill equipment needs.”

Investment and Company Value
Another consideration in the financing versus cash expenditure decision is whether the investment in equipment still has value two years from now. It often does not. Once money is sunk into equipment, the capital value diminishes quickly, because technology continues to change at a feverish pace.

MacNamara advises, “Treat that money carefully; conserve it. That will have a greater impact on your future success than anything else you do. If you manage that cash carefully you’ll be able to stay in business, and grow your company to a critical mass where you’ll be able to have positive cash flow and profits.”

So leasing can make a significant impact on the long term value of your company. In estimating the value of a WISP business, a buyer would look at quality of the network, but would look more closely at the value of ongoing business. The buyer would consider the services the WISP provides, number of customers and churn rate, brand recognition, RPU (revenue per unit), and geography to determine value. Although the physical distribution network itself would be evaluated, it has a limited life due to rapidly changing technology and would have to be replaced at some point. Although it is key to the business, it is not of lasting value, thus, unbalanced investments in the network versus the customers do not pay off.

The customer is never worth less and should always be the most cherished asset of the company.

Hayden says that, “Leasing allows you to keep your network operating equipment up-to-date, because you have never actually purchased the equipment. You only lease it for three years and as long as it is functional it can remain in place. Then you can easily upgrade to newer equipment as it becomes available.”

He makes an analogy to a vending machine, saying, “Customers pay for the fruit juice and granola bars they buy from it. I can rent the machine for a far lower cost than I can buy it. I keep the goodies stocked, and people keep buying them. I don’t need to buy the machine; it’s just a tool I use to make money. If I happen to like the WISP business, I use the network and other equipment as a way to make money. I can run the business and make profits without owning the hardware.”

Master Lease Allows Better Planning
Agility Solutions’ Master Lease arrangement also turns the balance in favor of leasing over buying. The Master Lease lets a business owner know in advance how much financing he qualifies for.

MacNamara says, “If you have a well defined business plan and you know what your capex (capital expenditures) requirements are going to be long term, you can build a network of higher quality that’s more expandable, knowing that the funding for growth will be available as needed.

“For example, a company can plan on serving 2000 customers, and buy equipment of the grade that can service or be expanded to serve 2000 customers. If you know that $500,000 or $1 million will be there for you, you start out with that intention of growth and you prepare for that type of operation. That Master Lease is like a line of credit.

“We’re not talking about building a network for 2000 and selling it to 20, a ‘build and they will come’ idea. But we’re talking about building a solid foundation that’s expandable, not constrained by what you set up for 100 customers. The scalable solution may indeed cost more initially, but you can add modules as you grow. You can build a stronger, higher quality network, by spending the money you need to,” says MacNamara.

This is makes business planning and presales critical to the successful wireless operator. In addition, the knowledge that funding is available for network growth allows the business owner to focus on the customer.

Why Agility Solutions Can Do This
Why is Agility Solutions willing to do this when no one else is? Why would a bank hesitate to make affordable loans while Agility is willing to jump in? “Simply because we know the WISP business, and can evaluate risks and the likelihood of success better than they can,” says Hayden.

Banks look at past and present when they decide whether to loan money. They check credit history, length of time in business, and money in bank, as well as business plans. Hayden explains that Agility Solutions looks at the future. “We look more at where you are going and how you’re going to get there. “We understand if your plan is workable, and if it’s not, we can help you fix it.”

A banker typically doesn’t have the experience to look at the potential of a WISP; to know whether it can add subscribers as planned, whether the employees can handle the required number of installations, or if the company has a billing system that works for the WISP business. Banks base lending decisions on fixed assets, or collateral. “Because we have the experience of starting and operating WISPs ourselves, we can read these things more accurately,” says Hayden.

Agility Solutions specializes in financing and consulting exclusively to wireless broadband companies. Founded and managed by successful pioneers of the wireless broadband industry, they serve the fast growing community of Wireless Internet Service Providers across the United States. Visit them at http://www.agilitysolutions.net.