SBA Communications Corporation — Q3 2015 Form 10-Q
Business context and period: The filing covers the quarter and nine months ended September 30, 2015. SBA owns and operates wireless communications sites, primarily in the U.S., with international operations. Site leasing is its core business; the company reported 25,111 owned sites at quarter-end. Unless noted otherwise, amounts below are in U.S. dollars.
Financial results and key metrics
- Revenue: Q3 revenue was $410.7 million, up 4.4% year over year. Site leasing revenue rose 6.6% to $372.0 million; site development revenue declined 12.5% to $38.7 million. For the first nine months, revenue was $1.232 billion, up 9.7%.
- Profit and margins: Q3 operating income was $43.1 million, versus $89.5 million; net loss was $155.9 million, versus $16.6 million, and diluted loss per share was $1.23 versus $0.13. Q3 operating margin was approximately 10.5%, compared with 22.8%. For the first nine months, operating income was $230.3 million versus $239.9 million and net loss was $206.7 million versus $24.7 million.
- Adjusted EBITDA: The company’s non-GAAP measure was $275.2 million in Q3, up from $254.3 million, and $820.5 million for the first nine months, up from $732.1 million. Management attributed growth primarily to higher domestic and international site leasing segment profit.
- Cash flow and investment: Nine-month operating cash flow was $534.7 million, compared with $485.3 million. Investing cash outflow was $566.7 million, including $408.7 million of acquisitions and $162.3 million of capital expenditures. Financing provided $78.5 million. Cash and cash equivalents were $73.3 million at September 30.
- Debt and liquidity: Total debt principal was $8.50 billion (carrying value $8.49 billion), up from $7.87 billion at December 31, 2014. Current maturities were $40.0 million. The $1.0 billion revolving facility had $280.0 million drawn at quarter-end; the company subsequently repaid that balance using proceeds from a $500.0 million tower securities issuance. The company reported compliance with credit-facility covenants and estimated $367.8 million in debt service over the next 12 months.
- Balance sheet: Total assets were $7.40 billion and shareholders’ deficit was $1.70 billion at quarter-end. The company repurchased $250.0 million of shares during Q3 and had $750.0 million of authorization remaining under its $1.0 billion program.
Material changes versus the prior comparable period
- Q3 and nine-month revenue growth was driven by acquired and newly built towers, organic leasing growth, contractual rent escalators, and equipment amendments. International revenue growth was substantially offset by adverse currency effects: $14.3 million in Q3 and $29 million for the nine months.
- Q3 operating income fell sharply despite revenue and segment operating profit growth, primarily because of a $56.7 million impairment of fiber assets acquired in the 2012 Mobilitie transaction and higher depreciation, amortization, and decommission costs. Total Q3 impairment and decommission costs were $63.4 million, versus $6.0 million.
- Other expense included a $112.1 million Q3 foreign-exchange loss on remeasurement of an intercompany loan to a Brazilian subsidiary. The nine-month loss was $180.4 million. Management said currency movements contributed $108.8 million to the year-over-year increase in Q3 net loss and $175.7 million to the nine-month increase.
- For the nine months, interest expense rose $22.7 million, reflecting higher average debt balances; acquisition spending declined to $408.7 million from $1.05 billion, which included the prior-year Oi tower acquisition.
Outlook, management commentary, and risks
- Management expects long-term site leasing growth from increased wireless network use, expansion, and coverage needs, and describes leasing revenues as recurring with relatively predictable costs. These are expectations, not guaranteed results.
- For full-year 2015, the company expected $32.6–$33.6 million of non-discretionary cash capital expenditures and $801.4–$811.4 million of discretionary expenditures, plus possible tower acquisitions not yet under contract. Planned uses include acquisitions, new builds, upgrades, and ground lease purchases. Funding was expected from cash, operating cash flow, the revolver, and new financings.
- Management believed cash on hand, revolver capacity, operating cash flow, and future financings would be sufficient to service debt for the next 12 months. The filing also states that the U.S. deferred tax assets carry a full valuation allowance because realization was not considered more likely than not.
- Key risks include high debt and refinancing costs, floating-rate exposure, foreign currency volatility and international operating risks, wireless-carrier consolidation or reduced network spending, tenant retention and leasing demand, acquisition integration, and zoning, permitting, and land-rights issues.
Important facts for investors to verify
- Whether the $56.7 million fiber-asset impairment reflects further deterioration in the acquired assets’ expected cash flows or a broader strategic change.
- The size and continuing effect of Brazilian intercompany-loan currency exposure; the filing estimates a 10% exchange-rate move would produce approximately $46.4 million of unrealized gains or losses.
- Debt maturities, covenant headroom, refinancing needs, and the effect of floating interest rates; the company had $8.50 billion of debt principal at quarter-end.
- Whether planned discretionary capital spending and acquisitions generate returns consistent with management’s expectations, given the company’s $750.0 million remaining share-repurchase authorization.
- How much reported growth is organic versus acquired, and how international currency movements affect reported results and cash flows.