SBA Communications Corporation — Q3 2010 Form 10-Q
Business context and reporting period
The unaudited quarter and nine months ended September 30, 2010. SBA owns and operates wireless communications towers, with site leasing as its principal business. It owned 8,705 tower sites at quarter-end; site leasing generated 85.5% of Q3 revenue and 97.5% of Q3 segment operating profit.
Financial performance and liquidity
| Metric | Q3 2010 | Q3 2009 | Nine months 2010 | Nine months 2009 |
|---|---|---|---|---|
| Total revenue | $158.6m | $139.3m | $461.1m | $410.5m |
| Operating income | $20.7m | $15.0m | $57.6m | $42.9m |
| Net loss attributable to SBA | $34.5m | $50.1m | $155.5m | $97.4m |
| Adjusted EBITDA (non-GAAP) | $97.7m | $84.9m | Not provided | Not provided |
Q3 GAAP operating margin was approximately 13.0%, versus 10.7% a year earlier. Q3 revenue increased 13.9% and operating income 38.2%; site leasing revenue rose 12.6%. Nine-month revenue increased 12.3%, but the net loss widened, principally because of refinancing-related debt-extinguishment costs and higher interest and depreciation, accretion and amortization.
- Nine-month operating cash flow was $142.4m, down from $169.8m. Investing cash flow was negative $249.5m, including $171.4m for acquisitions and earn-outs; financing cash flow was positive $143.1m. Cash and equivalents ended at $197.2m.
- At September 30, total debt carrying value was $2.823bn, including $30.1m of current maturities; long-term debt was $2.792bn. Total debt carrying value was $2.489bn at December 31, 2009.
- Current assets were $278.2m and current liabilities $155.2m. Restricted cash was $30.1m on the balance sheet; additional restricted amounts were classified in other assets.
- The $500m revolving credit facility was undrawn, with approximately $500m available. The company reported compliance with its financial covenants. Management believed cash and expected operating cash flow would cover debt service over the next 12 months.
Material changes and unusual items
- In April, SBA issued $1.23bn of secured Tower Securities at 4.254% and 5.101% coupon rates, and used proceeds to repay the remaining $938.6m of 2006 CMBS Certificates and related costs. The refinancing generated a $49.1m nine-month loss on extinguishment of debt.
- The company acquired 307 completed towers in the first nine months for approximately $150.7m, and acquired an equity interest in DAS provider Extenet Systems for approximately $32.3m cash plus contribution of its existing DAS business. Subsequent to quarter-end, it bought 80 towers for $40.7m.
- SBA repurchased and retired 2.90m shares for $97.1m in the first nine months; $151.3m remained authorized. No shares were repurchased in Q3.
- The $30.4m 0.375% convertible notes mature December 1, 2010. On October 5, SBA notified holders that it elected to settle 100% of its conversion obligation in cash.
Outlook, commentary and risks
Management expected continued site-leasing growth from acquired and newly built towers, additional tenant leases, contractual rent escalators and equipment additions. It described site leasing as recurring, with relatively predictable operating costs and low incremental costs to add tenants. For 2010, it estimated $9m–$10m of non-discretionary cash capital expenditures and $342m–$352m of discretionary expenditures, primarily for tower construction, acquisitions, upgrades and ground-lease purchases. These are estimates, not guarantees.
Key risks include substantial leverage and refinancing needs; debt covenants and securitization cash-trap triggers if debt-service coverage weakens; reliance on wireless-carrier demand and spending; significant customer concentration (AT&T, Sprint, Verizon and T-Mobile together represented 78.6% of Q3 site-leasing revenue); exposure to interest rates on potential revolver borrowings; acquisition, construction, permitting and international-operation risks; and long-term lease escalators that may not keep pace with inflation. Management reported effective disclosure controls and no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Whether site-leasing growth, tenant additions and carrier network investment support the company’s outlook.
- Debt maturities, cash interest burden, covenant headroom and performance of the 2010 Tower Securities against their coverage thresholds.
- Actual 2010 capital spending and acquisition returns, including the post-quarter tower purchase and Extenet investment.
- Customer concentration, lease renewal and churn trends, and exposure to inflation in ground rents and operating costs.
- The cash impact and settlement of the December 2010 convertible notes, and any further use of the remaining share-repurchase authorization.