SBA Communications Corporation — Q2 2011 Form 10-Q
Reporting period: Three and six months ended June 30, 2011. Dollar amounts below are in millions, except per-share data. Comparisons are with the corresponding 2010 periods unless noted.
Business context
SBA owns and operates wireless communications towers, principally in the United States, and also operates in Canada, Costa Rica, El Salvador and Panama. Site leasing is its primary business and accounted for 87.8% of Q2 revenue. At quarter-end, SBA owned 9,574 tower sites and managed or leased approximately 4,800 additional sites, about 500 of which generated revenue.
Financial performance and liquidity
| Metric | Q2 2011 | Q2 2010 | First half 2011 | First half 2010 |
|---|---|---|---|---|
| Total revenue | $171.1 | $154.5 | $338.8 | $302.5 |
| Site leasing revenue | $150.2 | $131.7 | $296.7 | $259.7 |
| Operating income | $27.2 | $20.0 | $51.1 | $36.9 |
| Operating margin | 15.9% | 13.0% | 15.1% | 12.2% |
| Net loss attributable to SBA | $(29.8) | $(83.7) | $(64.1) | $(121.0) |
| Loss per share, diluted | $(0.27) | $(0.72) | $(0.57) | $(1.04) |
- Q2 Adjusted EBITDA, a non-GAAP measure, was $109.5, up from $95.5. Management attributed the increase mainly to improved site-leasing operating profit.
- First-half cash from operations was $123.0, versus $98.1; investing cash use was $220.6, versus $171.0; financing provided $311.1, versus $139.5. Cash increased by $213.5 to $277.7.
- At June 30, total debt carrying value was $3,324.4, including $5.0 current debt; long-term debt was $3,319.4. Cash was $277.7, while restricted cash was $36.0 in total across current and noncurrent balance-sheet classifications. Shareholders’ equity was $112.9, down from $317.1 at year-end.
- The amended credit agreement added a $500.0 term loan and extended the $500.0 revolving facility to June 2016. The revolver had $500.0 available at quarter-end. The term loan matures June 2018. SBA reported compliance with credit-agreement financial covenants.
Material changes and notable items
- Revenue increased 10.7% in Q2 and 12.0% for the first half. Site-leasing revenue grew 14.0% and 14.2%, respectively, reflecting acquired and constructed towers, new leases, contractual rent escalators and tenant equipment additions. Site-development construction revenue fell 10.4% in Q2, which management attributed to lower work volume.
- Operating income improved, although depreciation, accretion and amortization rose 11.4% in Q2 and 11.2% in the first half, primarily as the tower portfolio expanded. Q2 SG&A increased 10.0%, with higher compensation and international expansion costs cited.
- Net loss narrowed substantially versus 2010, primarily because the comparable 2010 periods included debt-extinguishment losses of $48.9 in Q2 and $49.0 for the first half. SBA recorded a $1.7 first-half loss on extinguishing debt in 2011, associated with repurchasing $15.0 principal amount of its 1.875% convertible notes for $17.0 cash.
- SBA acquired 306 completed towers in the first half for approximately $151.7 cash and constructed 186 towers. It also spent on ground-lease extensions and land/easement purchases. The tower portfolio increased from 9,111 sites at year-end 2010 to 9,574 at June 30.
- The company repurchased 3.74 million shares for $150.1 during the first half. In April, the board replaced the prior program with a new $300.0 authorization; $225.0 remained available at quarter-end.
- A $0.3 long-lived-asset impairment was recorded in the first half. The filing says tax-loss carryforwards are largely reserved because management does not consider future realization more likely than not.
Outlook, risks and contingencies
- Management expects long-term site-leasing growth from wireless data usage, network expansion and coverage needs, and cites recurring leases, low churn and capacity to add tenants. These are expectations, not a quantified revenue or earnings forecast; the filing provides no specific revenue or EPS guidance.
- For 2011, management estimated non-discretionary cash capital expenditures of $14–$17 and discretionary expenditures, based on current obligations, of $320–$340, mainly for new towers, acquisitions, augmentations and ground-lease purchases. It expected to fund expenditures with cash, operating cash flow and revolver borrowings. The company also reported a subsequent acquisition of 33 towers for $14.5 cash.
- Management believed cash on hand and operating cash flows would be sufficient to service debt over the next 12 months. Floating-rate term-loan and revolver borrowings expose SBA to interest-rate changes; the company noted its substantial fixed-rate debt. The filing lists covenant limits, customary restrictions and events of default.
- Key risks include wireless-carrier spending and consolidation, tenant additions and retention, tower acquisition and construction execution, zoning and permitting, international and foreign-exchange exposure, refinancing and covenant compliance, inflation, natural disasters, and new technologies that could reduce demand for tower space.
- Customer concentration is material: AT&T, Sprint, Verizon and T-Mobile together represented 76.1% of Q2 site-leasing revenue. Five customers accounted for 56.8% of gross accounts receivable at quarter-end. A failed hedge counterparty left 55% of the potential shares underlying the 1.875% notes unhedged, creating potential dilution or cash-settlement costs if conversion conditions are met and the share price exceeds the conversion price.
- Disclosure controls were deemed effective as of June 30, 2011; the company reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Reconcile debt principal, carrying values, maturities and interest costs, including the new term loan and convertible-note conversion exposure.
- Track covenant headroom and revolver availability as acquisitions, buybacks and capital spending proceed.
- Assess whether site-leasing growth and tenant additions continue to offset higher depreciation, interest and operating costs.
- Compare actual 2011 capital expenditures and tower additions with management’s estimates, and test expected acquisition returns and ground-lease savings.
- Monitor major-carrier concentration, accounts-receivable exposure, and site-development construction volume and margins.