SBA Communications Corporation — Q3 2016 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2016. Dollar amounts below are in millions unless stated otherwise. SBA owns and operates wireless communications towers; recurring site leasing is its main business, while site development provides project-based services.
Financial performance
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Revenue | $411.3 | $410.7 | $1,216.6 | $1,231.5 |
| Operating income | $108.2 | $43.1 | $279.9 | $230.3 |
| Net income (loss) | $(15.4) | $(155.9) | $71.0 | $(206.7) |
| Operating cash flow | Not provided by quarter | Not provided by quarter | $514.2 | $534.7 |
| Adjusted EBITDA (non-GAAP) | $283.2 | $275.2 | $819.5 | $820.5 |
- Revenue mix: Q3 site leasing was $388.2, up 4.3%; site development was $23.2, down 40.2%. For the nine months, leasing revenue was $1,144.5, up 2.9%, while development revenue fell 39.5% to $72.2.
- Margins: Approximate GAAP operating margin was 26.3% in Q3 versus 10.5% a year earlier, and 23.0% for the nine months versus 18.7%. Adjusted EBITDA margin was approximately 68.8% and 67.4%, respectively, in 2016.
- Cash flow and investment: Nine-month operating cash flow declined $20.6. Investing cash outflow was $300.2 versus $566.7; cash capital expenditures were $295.7 versus $571.0, including acquisitions of $144.5 versus $358.7.
- Liquidity: Cash and cash equivalents were $165.2 at September 30. Current assets were $858.2 and current liabilities $738.8; current assets included $552.5 of restricted cash, including $528.1 held in escrow for the subsequent redemption of notes. $150.0 was drawn on the $1.0 billion revolving facility, and the company reported covenant compliance.
- Debt: Debt principal totaled $9.14 billion at September 30, compared with $8.56 billion at December 31, 2015; carrying value was $9.03 billion. The company issued $1.1 billion of 4.875% senior notes and $700 million of 2.877% tower securities, using proceeds in part to refinance higher-rate debt. After quarter-end, it redeemed the remaining $500 million of 5.625% notes, funded with note proceeds, revolver borrowings and cash.
- Other balance-sheet items: Shareholders’ deficit was $1.67 billion. The company repurchased 2.0 million shares for $202.3 million during the first nine months.
Changes versus prior period
- Q3 revenue was nearly flat, but operating income improved substantially, mainly because the prior-year period included a $56.7 million fiber-asset impairment and the current period included a $9.0 million gain on sale of fiber assets. Q3 net loss narrowed to $15.4 million.
- Nine-month revenue decreased 1.2%, reflecting sharply lower site development activity, particularly work related to Sprint, partly offset by growth in domestic and international leasing. Operating income increased, while adjusted EBITDA was essentially flat before considering the Oi reserve.
- The nine-month 2016 net-income comparison benefited from an $89.0 million gain on remeasurement of intercompany loans, versus a $180.4 million loss in 2015. Foreign-exchange remeasurement is volatile and does not represent recurring operating performance.
- Adjusted EBITDA excluding the $16.5 million Oi reserve was $836.0 million for the nine months, up from $820.5 million; this is a non-GAAP measure and the reserve exclusion is management’s adjustment.
Outlook, commentary and risks
- Management expects site leasing to benefit over time from wireless network upgrades, added equipment, new leases and contractual rent escalators. It describes the leasing business as having recurring revenue and relatively predictable operating costs. No specific revenue or earnings guidance is provided.
- For full-year 2016, management estimated $32.6–$33.6 million of non-discretionary maintenance and general corporate cash capital expenditures, plus $346.1–$356.1 million of discretionary spending based on current obligations and plans, with additional acquisitions possible. Funding sources identified include cash, operating cash flow and borrowings or new financing.
- Management stated available cash, revolver capacity, operating cash flow and future financings should be sufficient for debt service over the next 12 months. Its $856.8 million estimated debt-service figure was based on September 30 balances and includes the 5.625% notes subsequently redeemed; it should not be treated as a post-redemption estimate.
- On October 3, 2016, the board authorized steps toward REIT taxation beginning with tax year 2016 and proposed a merger subject to shareholder approval. The company cited approximately $1.2 billion of federal NOLs at December 31, 2015, which could reduce or defer required REIT distributions. REIT qualification, distribution requirements, debt covenant limits, tax treatment and potential index-related share selling are material uncertainties.
- Oi, SBA’s largest Brazilian customer, filed for judicial reorganization in June. Oi represented approximately 7% of total site leasing revenue for the first nine months and 44.1% of international site leasing revenue. SBA recorded a $16.5 million reserve for amounts owed or potentially owed as of the filing date; it reported receiving post-petition payments but cannot assure Oi will continue to pay.
- Customer concentration is significant: AT&T, T-Mobile, Sprint and Verizon together represented 74.2% of nine-month total revenue. Other risks include wireless-carrier consolidation or reduced spending, foreign exchange and international operations, refinancing and floating-rate exposure, acquisition execution, and the ability to qualify and remain qualified as a REIT.
Important facts for investors to verify
- Progress and shareholder approval for the proposed REIT conversion and merger, including the likely distribution policy and effect of NOLs and debt covenants.
- Oi’s reorganization outcome, payment performance and any exposure beyond the recorded $16.5 million reserve.
- Debt balances and liquidity after the October 2016 redemption, including revised near-term debt service and revolver usage.
- Whether tower-leasing growth continues to offset lower site development activity and customer concentration, particularly Sprint-related lease churn.
- Execution of the stated 2016 capital-spending plans and the assumptions supporting management’s liquidity assessment.