SBA Communications Corporation — Q2 2016 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2016; unaudited. Unless noted otherwise, dollar amounts are USD millions. SBA owns and operates wireless communications towers; recurring site leasing is its principal business.
Financial performance and position
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Revenue | $405.5 | $410.7 | $805.3 | $820.8 |
| Operating income | $74.1 | $98.2 | $171.7 | $187.2 |
| Net income (loss) | $32.7 | $28.3 | $86.3 | $(50.7) |
| Diluted EPS | $0.26 | $0.22 | $0.69 | $(0.39) |
- Q2 operating margin was approximately 18.3%, down from 23.9%; net margin was approximately 8.1%, compared with 6.9%. First-half operating margin was approximately 21.3%, versus 22.8%.
- Q2 site leasing revenue was $381.8 million, up from $370.5 million; site development revenue fell to $23.7 million from $40.2 million. On a constant-currency basis, total Q2 revenue grew 0.3%; reported revenue declined 1.3%.
- Q2 Adjusted EBITDA was $261.6 million, or $278.1 million excluding the $16.5 million Oi reserve; the latter compared with $274.3 million in Q2 2015. First-half Adjusted EBITDA excluding the reserve was $552.8 million versus $545.3 million. These are non-GAAP measures.
- First-half operating cash flow was $354.6 million, versus $375.5 million. Investing activities used $229.4 million and financing activities used $124.3 million. Cash increased to $134.0 million from $118.0 million at year-end, including a $15.0 million favorable exchange-rate effect. Restricted cash was an additional $25.4 million on the balance sheet.
- At June 30, principal debt was $8.575 billion (carrying value $8.483 billion); current debt maturities were $568.9 million. Cash and cash equivalents were $134.0 million. Shareholders’ deficit was $1.608 billion.
Material changes versus the prior comparable period
- Site leasing remained the core earnings driver: domestic and international leasing operating profit grew on a constant-currency basis, supported by acquired and newly built towers, lease amendments, new leases and escalators. Site development revenue and operating profit declined, chiefly due to lower project volume, particularly work associated with Sprint.
- Q2 operating income fell $24.1 million. SG&A increased $19.4 million, primarily reflecting the Oi reserve and higher personnel and support costs; impairment and decommission costs rose to $14.7 million from $4.0 million.
- Net income rose in Q2 despite lower operating income, in part because other income included a $47.4 million gain from remeasurement of intercompany loans, versus a $15.7 million gain a year earlier. For the first half, the comparable remeasurement was a $92.1 million gain in 2016 versus a $68.3 million loss in 2015; this materially affected the year-over-year net income comparison.
- First-half acquisitions were $148.7 million, down from $323.1 million; capital expenditures were $70.7 million, down from $118.4 million. The company acquired 159 completed towers in the first half.
- The company repurchased 1.5 million shares for $150.0 million in the first half at a weighted-average $98.08 per share; $550.0 million remained authorized under the repurchase program as of the filing.
Outlook, risks and unusual items
- Management expects long-term site leasing growth from wireless network expansion and upgrades, including lease amendments and new leases. No specific revenue or earnings guidance is provided.
- For full-year 2016, management estimated non-discretionary cash capital expenditures of $32–37 million and discretionary expenditures of $295–315 million, including acquisitions, new builds, augmentations and ground-lease purchases; additional acquisitions could increase spending. Management expected to fund spending with cash, operating cash flow and financing.
- Oi, SBA’s largest Brazilian customer, filed for judicial reorganization on June 20. SBA recorded a $16.5 million reserve for amounts owed or potentially owed through the filing date. Oi represented approximately 7% of first-half site leasing revenue and 44.1% of international site leasing revenue. SBA said it had received post-petition payments, but cannot assure Oi will continue paying under contract or successfully reorganize.
- Customer concentration is substantial: AT&T, T-Mobile, Sprint and Verizon Wireless together represented 74.6% of first-half total revenue. Customer consolidation, reduced network spending, non-renewals, or financial distress could adversely affect results.
- Subsequent financing: SBA issued $700 million of 2.877% 2016-1C tower securities on July 7 and repaid the $550 million 2010-2C securities on July 15. It priced $1.1 billion of 4.875% senior notes on August 1, intending to redeem $800 million of 5.75% notes and $250 million of 5.625% notes and pay call premiums. The $30 million revolver balance outstanding at quarter-end was repaid after quarter-end.
- Management stated it expected available cash, revolver capacity, operating cash flow and future financings to be sufficient for debt service over the next 12 months. The filing’s June 30 estimate of $899.4 million of next-12-month debt service included the $550 million securities later repaid; it excluded $19.9 million of service on the new 2016-1C securities.
- Key risks include approximately $8.6 billion of debt, refinancing and floating-rate exposure, currency fluctuations and the sensitivity of reported earnings to intercompany-loan remeasurement. A hypothetical 10% adverse move in the Brazilian real would have affected first-half revenue and operating income by approximately 0.9% and 2.9%, respectively.
Important facts for investors to verify
- Oi’s reorganization progress, collections, and treatment of pre-petition receivables; confirm whether the reserve remains adequate.
- Underlying operating trends apart from the Oi reserve, foreign-exchange effects and intercompany-loan remeasurement gains.
- Customer concentration, Sprint-related lease non-renewals and site development demand.
- Debt refinancing and repayment execution, covenant compliance, interest costs and the timing of maturities.
- Actual cash capital spending, tower acquisitions and share repurchases compared with management’s estimates and remaining authorization.