SBA Communications Corporation — Q2 2019 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2019. Amounts below are in U.S. dollars; financial statement amounts are unaudited. SBA owns and operates wireless communications sites, with site leasing its principal business. At quarter-end it owned 29,845 towers.
Financial performance
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Revenue | $500.1 million | $456.3 million | $993.4 million | $914.6 million |
| Operating income | $136.5 million | $125.9 million | $275.7 million | $255.8 million |
| Net income (loss) | $32.0 million | $(57.4) million | $58.0 million | $(25.8) million |
| Diluted EPS | $0.28 | $(0.50) | $0.51 | $(0.22) |
| Adjusted EBITDA, non-GAAP | $347.2 million | $318.9 million | $692.8 million | $637.7 million |
Q2 revenue increased 9.6% year over year. Site leasing revenue grew 6.8% to $459.0 million; site development revenue grew 55.6% to $41.1 million. Six-month revenue rose 8.6%. Management reported constant-currency revenue growth of 10.8% for Q2 and 10.3% for the six-month period. Adjusted EBITDA increased 9.9% in Q2 and 10.1% for six months on a constant-currency basis; this is a company-defined non-GAAP measure.
Operating income was 27.3% of Q2 revenue, compared with 27.6% a year earlier. Site development growth reflected increased carrier work, which management attributed primarily to Sprint and T-Mobile network expansion. Site leasing growth reflected acquired and newly built towers, additional tenant equipment and leases, and contractual rent escalators, partly offset by lease non-renewals.
Cash flow, debt and liquidity
- Cash flow, six months: Operating cash flow was $466.1 million, versus $425.1 million. Investing used $255.5 million and financing used $264.5 million. Cash, cash equivalents and restricted cash totaled $126.8 million at June 30, down from $178.3 million at year-end 2018.
- Debt: Principal debt was $9.771 billion at June 30, down from $10.028 billion at December 31, 2018. Long-term debt, net of current maturities, was $8.749 billion; current maturities were $943.2 million. The $920 million 2014-1C Tower Securities issue had an anticipated repayment date of October 8, 2019. The company estimated $1.310 billion of debt service over the 12 months ending June 30, 2020.
- Borrowing capacity and covenants: $80 million was drawn on the $1.25 billion revolving facility at June 30, 2019; $30 million was outstanding as of the filing date after subsequent activity. The company reported compliance with its credit and mortgage covenants and expected cash, revolver capacity and operating cash flow to cover debt service for the next 12 months.
- Interest-rate exposure: Two four-year swaps cover $1.95 billion of the 2018 Term Loan, with fixed rates of 4.495% and 4.08%. The swaps had a $51.6 million fair-value liability at quarter-end. Six-month cash interest paid was $195.7 million.
Material changes, outlook and notable items
- Q2 net income improved from a loss to profit. The comparison was materially influenced by foreign-exchange remeasurement of Brazilian intercompany loans: the prior-year quarter included a large loss, while 2019 included a gain. Higher interest expense and a larger tax provision partly offset operating growth. The six-month tax provision increased mainly due to Brazilian deferred tax expense.
- SG&A rose 55.5% in Q2, including a $13.1 million increase in noncash compensation. For the six months, noncash compensation was $47.9 million, versus $21.7 million. The company attributed much of the increase to its employee equity retirement policy, including accelerated recognition of compensation expense.
- Adoption of the new lease accounting standard on January 1, 2019 added $2.6 billion of right-of-use assets and approximately $2.5 billion of lease liabilities. Management said adoption did not materially affect operating results, liquidity or covenant compliance. The new balance-sheet presentation makes direct comparison with 2018 less meaningful.
- Management expected organic site leasing revenue in domestic and international segments to increase in 2019, partly as carriers deploy unused spectrum. Its 2019 cash capital expenditure estimate was $29–39 million for maintenance and general corporate spending and $425–445 million for discretionary spending, including anticipated investment in Atlas Tower South Africa. These estimates were to be funded through cash on hand, operating cash flow and borrowings or new financings.
- The company intended to acquire all but 6% of Atlas Tower South Africa in Q3 2019, subject to closing. It anticipated investing approximately $140 million cumulatively through closing and estimated first-full-year revenue of $31 million and Adjusted EBITDA of $21 million, based on then-current exchange rates and company-provided assumptions. The acquisition would add approximately 900 sites and bring the venture’s results into consolidation.
- After quarter-end, the board authorized a new $1.0 billion share repurchase plan and declared the company’s first quarterly dividend of $0.37 per share, payable September 25, 2019. Future dividends remain subject to board approval. The company also disclosed 59 tower acquisitions after quarter-end for $17.9 million and an agreement to buy 125 additional sites for $45.7 million.
Risks and contingencies
- Wireless-carrier consolidation, including the proposed Sprint–T-Mobile merger, could affect leasing revenue; customer consolidation and technology shutdowns have contributed to past non-renewals.
- Foreign exchange is a material source of earnings variability. A hypothetical 10% adverse move in the Brazilian real was estimated to reduce six-month revenue by about 1.0% and operating income by about 0.6%. A 10% change in exchange rates affecting unsettled intercompany debt could have resulted in approximately $43.3 million of gains or losses.
- Other stated risks include interest rates and refinancing, acquisition and integration execution, international political/economic and currency risks, tower demand and technology changes, land rights, construction and permitting, and REIT qualification and tax matters.
- Eight customers represented 98.0% of contract assets net of contract liabilities at June 30, 2019. This is contract-balance concentration, not a disclosed percentage of revenue.
Important facts for investors to verify
- Whether the October 2019 anticipated repayment of the $920 million 2014-1C Tower Securities was refinanced or repaid, and the resulting effect on liquidity and interest expense.
- Whether the Atlas SA transaction closed on the expected terms, and whether its operating results and currency exposure matched management’s estimates.
- How organic leasing growth, carrier activity and lease non-renewals developed, particularly in light of potential carrier consolidation.
- Whether the planned capital expenditures, repurchases and dividend are consistent with cash generation, debt covenants and stated leverage targets.
- How foreign-exchange movements, Brazilian deferred taxes and intercompany-loan remeasurement affect reported earnings relative to operating performance.