SBA Communications Corporation — Q2 2013 Form 10-Q
Reporting period: Three and six months ended June 30, 2013; financial statements are unaudited. Dollar amounts below are in millions unless stated otherwise.
Business context
SBA owns and operates wireless communications towers and leases antenna space to wireless carriers. It also provides site-development services. At June 30, 2013, the company owned 17,587 tower sites and managed or leased 4,900 other communications sites, about 500 of which were revenue-producing. Site leasing generated 86.2% of Q2 revenue and about 96% of year-to-date segment operating profit.
Financial performance and liquidity
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Total revenue | $324.3 | $229.1 | $637.4 | $421.6 |
| Operating income | $49.5 | $34.7 | $106.3 | $75.0 |
| Net loss attributable to SBA | $(35.9) | $(53.5) | $(58.3) | $(76.1) |
| Loss per share | $(0.28) | $(0.44) | $(0.46) | $(0.66) |
| Adjusted EBITDA | $196.4 | $142.9 | $384.1 | $264.4 |
| Cash from operating activities | Not separately stated | Not separately stated | $228.2 | $148.8 |
- Q2 total revenue increased 41.5%; site-leasing revenue rose 37.3% to $279.5 million, and site-development revenue rose 75.2% to $44.8 million.
- Q2 operating margin was approximately 15.3%, compared with 15.2% a year earlier. Adjusted EBITDA margin was approximately 60.6%, versus 62.3%; Adjusted EBITDA is a non-GAAP measure.
- For the first half, operating cash flow less reported cash capital expenditures of $326.9 million was approximately negative $98.8 million. Cash and cash equivalents were $189.4 million at June 30, down from $233.1 million at year-end 2012. Restricted cash was $36.4 million on the balance sheet; additional restricted balances are described in the notes.
- Principal debt was $5.694 billion ($5.641 billion carrying value), versus $5.440 billion principal at year-end. The company reported $770 million of undrawn revolving-credit availability, subject to covenant compliance. Total assets were $6.485 billion and shareholders’ equity was $435.7 million.
- Management estimated $262.2 million of debt service over the next 12 months and said cash, operating cash flow, and available revolver capacity should be sufficient to meet it.
Material changes and notable items
- Revenue and segment profit growth reflected acquired TowerCo and Vivo portfolios, the earlier Mobilitie acquisition, new tower construction, new leases, contractual rent escalators, and tenant equipment amendments. Site-development growth was associated in part with carrier network deployments, particularly Sprint’s Network Vision initiative.
- Q2 depreciation, accretion, and amortization increased 50.1% to $141.1 million, reflecting the larger acquired and constructed tower base. Interest expense increased 43.8% to $63.1 million, while the prior-year period included a larger debt-extinguishment loss.
- The company issued $1.33 billion of 2013 Tower Securities at a blended 3.218% rate. Proceeds funded repayment of the revolver and portions of term loans and obligations on the 1.875% convertible notes. Those notes matured in May 2013; conversion settlements included $794.8 million in cash, partly offset by $182.9 million received from related hedges.
- Q2 impairment and decommission costs were $6.5 million; first-half charges were $10.2 million, primarily related to tower-site assets and decommissioning 131 towers year to date. Foreign-currency translation reduced comprehensive results by $17.0 million in the first half.
- The 4.0% convertible notes had $500.0 million principal outstanding and mature in October 2014. They were convertible under their terms as of June 30, 2013. Warrants on 10.4 million underlying shares remained after a partial cash unwind; settlement was scheduled to begin August 1, 2013.
Outlook, commentary, and risks
- For the remainder of 2013, management expected $478–$518 million of discretionary cash capital expenditures, mainly for tower construction, acquisitions, augmentations, and ground-lease purchases, plus $6–$10 million of maintenance and general corporate expenditures. Expected funding sources included cash on hand, operating cash flow, and revolver borrowings.
- Forward-looking statements described an intended 5%–10% tower-portfolio expansion and plans to build 380–400 towers in 2013. These are targets, not guarantees.
- Management characterized site leasing as a recurring-revenue business with generally predictable costs and low tenant terminations, while noting its expectation that the company would continue to incur losses.
- Key risks include high customer concentration, carrier consolidation or reduced network spending, competition and execution risks in acquisitions and construction, land and zoning issues, international political, economic and currency exposure, floating-rate debt and covenant compliance, and potential changes in technology or tenant business models. Sprint, AT&T, T-Mobile, and Verizon together represented 75.3% of Q2 site-leasing revenue.
- Management reported that disclosure controls were effective as of June 30, 2013, with no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether acquired-tower contributions and organic leasing growth continue to support revenue and Adjusted EBITDA growth, and how margins develop as costs rise.
- Execution and funding of the remaining 2013 capital-spending and tower-build plans, including the expected returns on acquisitions and ground-lease purchases.
- Debt-service capacity, covenant headroom, refinancing or settlement plans for the $500 million 4.0% convertible notes due October 2014, and the effects of floating rates.
- Customer concentration and the degree to which site-development revenue depends on carrier projects such as Sprint Network Vision.
- Impacts of tower impairments, decommissioning obligations, foreign-currency movements, and the remaining warrant settlement on future results and share dilution.