SBA Communications Corp. — Q1 2016 Form 10-Q
Business context and reporting period
Quarter ended March 31, 2016; comparisons are with the three months ended March 31, 2015 unless stated otherwise. SBA owns and operates wireless communications towers, primarily in the United States, with international operations in the Americas and Canada. Site leasing is its core business and generated 98.2% of total segment operating profit.
Key financial metrics
- Revenue: $399.8 million, down 2.5% reported; excluding foreign-currency effects, revenue increased 1.0%. Site leasing revenue was $374.5 million; site development revenue was $25.3 million.
- Operating income: $97.6 million, versus $89.1 million. Operating margin was approximately 24.4%, versus 21.7%.
- Net income: $53.6 million, or $0.43 per diluted share, versus a net loss of $79.0 million, or $0.61 per share. Results included a $44.8 million gain from remeasuring intercompany loans, compared with an $84.0 million loss in Q1 2015.
- Adjusted EBITDA: $274.7 million, versus $271.0 million; the company reported an $11.7 million increase on a constant-currency basis. This is a non-GAAP measure.
- Cash flow: Operating cash flow was $144.9 million, down from $178.4 million. Investing activities used $132.3 million and financing activities used $33.3 million. Cash and cash equivalents ended at $103.3 million, down from $118.0 million at year-end.
- Debt and liquidity: Total debt principal was $8.57 billion; carrying value was $8.47 billion. Current maturities were $20.0 million. The $1.0 billion revolving facility had $20.0 million drawn and $980.0 million of capacity at quarter-end; the drawn balance was repaid after quarter-end. The company reported compliance with financial covenants.
- Balance sheet: Total assets were $7.37 billion and shareholders’ deficit was $1.63 billion. Current assets were $282.6 million and current liabilities were $233.1 million. Restricted cash, including securitization escrow balances, totaled $28.4 million across current and noncurrent classifications.
- Interest and tax: Interest expense was $83.8 million, compared with $77.7 million; cash interest paid was $98.4 million. Income tax provision was $2.2 million. The company maintained a full valuation allowance on U.S. net deferred tax assets.
Material changes versus the prior comparable period
- Domestic site leasing revenue rose 3.0%, supported by acquired and newly built towers, lease amendments, new leases and contractual escalators. International site leasing revenue grew 15.6% on a constant-currency basis, but fell in reported dollars due to currency effects.
- Site development revenue declined 37.3% as wireless carriers reduced network investment activity. Site development operating profit fell to $5.5 million from $9.5 million.
- Operating income increased as site leasing growth and lower depreciation and impairment costs more than offset higher acquisition-related expenses and SG&A. Reported net income also benefited materially from the intercompany-loan currency remeasurement swing.
- Operating cash flow declined, which management attributed principally to working-capital outflows, higher SG&A and increased cash interest payments.
- Cash acquisition spending increased to $91.8 million from $53.3 million. SBA acquired 117 completed towers during the quarter for $74.8 million and repurchased approximately 507,000 shares for $50.0 million at an average $98.65 per share.
Outlook, commentary, risks and unusual items
- For full-year 2016, management expected $30–$40 million of nondiscretionary cash capital expenditures and $255–$275 million of discretionary expenditures, including acquisitions under current obligations, new builds, tower augmentations and ground-lease purchases. Additional acquisitions not yet under contract could add spending. Funding sources identified include cash, operating cash flow, the revolver and new financings.
- Management expected cash on hand, revolver capacity, operating cash flow and future financings to be sufficient for debt service over the next 12 months. Estimated debt service for that period was $354.0 million.
- Management expects long-term site leasing growth from wireless data use, network expansion and equipment upgrades, with recurring revenues and relatively predictable operating costs. It noted that Sprint-related non-renewals in 2015 were expected to affect year-over-year growth rates during the first three quarters of 2016.
- Key risks include wireless-carrier consolidation and reduced network spending, tenant churn, acquisition integration and pricing, access to financing and covenant compliance, foreign-currency and international operating exposure, floating-rate debt, land rights, zoning and permitting, and technology or business-model changes that could reduce demand for tower leasing.
- Foreign currencies represented approximately 10.3% of revenue and 11.9% of operating expenses. A hypothetical 10% adverse move in the Brazilian real was estimated to affect quarterly revenue by 0.9% and operating results by 2.5%. A 10% move in exchange rates on unsettled intercompany debt could produce approximately $44.4 million of unrealized gain or loss.
- Quarterly asset impairment and decommission costs were $6.2 million, including $4.2 million of tower carrying-value write-offs and $2.0 million of other decommission costs. No specific revenue or earnings guidance was provided in the supplied filing text.
Important facts for investors to verify
- How much of reported earnings growth reflects recurring operations versus the intercompany-loan foreign-exchange gain, and how that exposure may fluctuate.
- Whether site leasing growth offsets continuing weakness in carrier-funded site development and the expected near-term effect of Sprint-related non-renewals.
- Whether planned discretionary capital spending and acquisitions are funded without materially increasing leverage or pressuring cash flow.
- Debt maturities, refinancing requirements and floating-rate exposure, including the tower securities’ anticipated repayment dates and covenant conditions.
- Foreign-exchange sensitivity, acquisition integration outcomes, and the durability of tower tenant demand and land access.