SBA Communications Corporation — Q3 2014 Form 10-Q
Reporting period: Three and nine months ended September 30, 2014. Amounts below are in millions of U.S. dollars unless otherwise noted. SBA owns and operates wireless communications sites; site leasing is its principal business.
Financial results and key metrics
| Metric | Q3 2014 | Q3 2013 | First 9 months 2014 | First 9 months 2013 |
|---|---|---|---|---|
| Total revenue | $393.3 | $332.1 | $1,122.3 | $969.5 |
| Operating income | $89.5 | $63.9 | $239.9 | $170.2 |
| Operating margin | 22.8% | 19.2% | 21.4% | 17.6% |
| Net income (loss) | $(16.6) | $21.5 | $(24.7) | $(36.7) |
| Adjusted EBITDA | $254.3 | $203.7 | $732.1 | $587.8 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $503.2 | $343.0 |
- Q3 revenue rose 18.4%; site leasing revenue increased 21.4% to $349.0 million, while site development revenue was nearly flat at $44.3 million.
- International site leasing revenue more than doubled to $55.2 million in Q3 and increased 144.9% to $144.8 million for the nine-month period. Domestic site leasing grew 9.8% and 9.3%, respectively.
- Q3 net results turned to a loss despite higher operating income. Total other expense increased to $105.1 million, including a $14.9 million debt-extinguishment loss; prior-year Q3 included $34.2 million of other income, including gains not repeated in 2014.
- For the first nine months, net loss narrowed by $12.1 million year over year. Adjusted EBITDA, a non-GAAP measure, increased 24.5% to $732.1 million; management attributed growth primarily to higher segment operating profit.
- Nine-month investing cash outflow was $1,181.9 million, largely reflecting $1,048.7 million of acquisitions and $131.3 million of capital expenditures. Financing activities provided $990.4 million.
Balance sheet, debt and liquidity
- At September 30, cash and cash equivalents were $450.3 million; restricted cash was $46.3 million and current assets were $674.4 million. Current liabilities were $1,346.2 million, including $1,078.3 million of current debt maturities.
- Total debt carrying value was $7,550.1 million, compared with $5,876.6 million at December 31, 2013. Shareholders’ equity shifted from $357.0 million to a deficit of $297.6 million, reflecting, among other items, warrant settlements, foreign-currency translation losses and the period’s net loss.
- Operating cash flow improved to $503.2 million from $343.0 million for the nine months. Cash increased to $450.3 million from $122.1 million at year-end.
- Financing included a $1.5 billion 2014 Term Loan and $750 million of 4.875% Senior Notes due 2022. SBA used the notes proceeds in part to redeem its 8.25% Notes and fund convertible-note settlements.
- After quarter-end, $367 million principal of 4.0% Convertible Notes was settled on October 1, 2014, and the remaining $680 million 2010-1 Tower Securities and $300 million revolver balance were repaid using proceeds from $1.54 billion of new Tower Securities. As of the filing date, the revolver had no borrowings and $770 million of availability. These subsequent events are not reflected in the September 30 balance sheet.
Material changes, outlook and risks
- Growth reflected acquisitions, new tower builds, new leases, contractual rent escalators and lease amendments. The March 2014 acquisition of 2,007 towers from Oi S.A. accounted for $673.9 million of nine-month cash acquisition expenditures. The filing also describes a planned additional purchase of 1,641 Oi sites for approximately R$1.2 billion, expected to close before year-end.
- Management expects 2014 cash capital expenditures of $1,772.2–$1,782.2 million, primarily discretionary spending including the Oi transactions, new builds, acquisitions, upgrades and ground-lease purchases. Expected non-discretionary maintenance and general corporate cash spending is $26.5–$27.5 million. Funding sources are expected to include cash, operating cash flow and financing.
- Management expects 2015 non-iDEN churn to be at the high end of its historical 1.0%–1.5% range. It expects long-term site-leasing growth from wireless data use, network expansion and additional tenant equipment; these are forward-looking expectations, not guarantees.
- Management stated that cash, operating cash flow, revolver capacity and future financing should be sufficient to service debt over the next 12 months. Debt service remains substantial; the filing’s estimate based on September 30 balances was $1,356.4 million, excluding the later-issued 2014 Tower Securities and certain warrant settlements.
- Key risks include high leverage and refinancing or covenant risk; floating-rate exposure; foreign-exchange and international operating risks; wireless-carrier consolidation and customer spending; acquisition integration and execution; land rights and permitting; and changes in wireless technology or tenant demand.
- Customer concentration is material: AT&T, Sprint, T-Mobile and Verizon each represented at least 14% of domestic site-leasing revenue in Q3. Oi generated 46.2% of international site-leasing revenue, compared with 1.3% a year earlier, reflecting the expanded Brazilian business. Q3 comprehensive loss included a $128.5 million foreign-currency translation adjustment.
- The company reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. No specific earnings or revenue guidance was provided.
Investor verification priorities
- Confirm completion, financing and expected returns of the additional Oi site acquisition, and assess the concentration of international revenue with Oi.
- Review debt maturities, covenant terms, refinancing needs and post-quarter financing and repayment activity, including the remaining warrants scheduled to settle in 2015.
- Reconcile reported GAAP losses with Adjusted EBITDA and assess interest expense, debt-extinguishment charges and acquisition-related costs.
- Track cash capital spending against management’s full-year range and its funding assumptions.
- Monitor customer concentration, carrier consolidation, churn and foreign-currency exposure, particularly in Brazil.