SBA Communications Corporation — Q3 2012 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2012; comparisons are with the corresponding 2011 periods. Amounts below are in U.S. dollars. SBA owns and operates wireless communications towers; recurring site leasing is its core business.
Financial performance
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Total revenue | $238.6 million | $175.5 million | $660.2 million | $514.4 million |
| Operating income | $41.1 million | $27.6 million | $116.1 million | $78.7 million |
| Net loss | $52.7 million | $33.4 million | $128.8 million | $97.7 million |
| Adjusted EBITDA (non-GAAP) | $146.6 million | $112.5 million | $410.9 million | $327.6 million |
| Operating cash flow | Not separately provided | Not separately provided | $237.5 million | $186.4 million |
- Q3 total revenue rose 35.9%; nine-month revenue rose 28.4%. Site leasing supplied 87.5% of Q3 revenue and 88.7% of nine-month revenue.
- Q3 operating margin was approximately 17.2%, versus 15.7% a year earlier; nine-month operating margin was approximately 17.6%, versus 15.3%.
- Site leasing growth reflected acquired and newly built towers, new leases, contractual rent increases, equipment-related lease amendments, and Sprint Network Vision-related revenue. Site development revenue also increased, largely on higher project activity.
- Net loss widened despite higher operating income. Key pressures included greater interest and non-cash interest expense, higher depreciation and amortization, acquisition costs, and debt-extinguishment losses. Q3 debt-extinguishment loss was $22.6 million; the nine-month loss was $49.8 million.
Cash, debt, and liquidity
- At September 30, cash and cash equivalents were $1.441 billion, versus $47.3 million at December 31, 2011. This was before the October 1 TowerCo acquisition, which used $1.2 billion in cash plus 4.6 million shares.
- Nine-month cash flow: $237.5 million provided by operations, $965.2 million used in investing, and $2.119 billion provided by financing. Investing outflows included $983.0 million for acquisitions and related earn-outs.
- Debt carrying value was $5.306 billion at quarter-end, compared with $3.354 billion at year-end 2011; stated principal was approximately $5.410 billion. Current maturities included $535 million principal of 1.875% convertible notes due May 2013.
- The revolving credit facility had a $700 million commitment and no balance outstanding at September 30; availability was subject to covenant and other borrowing conditions. The company reported compliance with its financial covenants.
- Management expected cash on hand, operating cash flow, and revolving-facility availability to cover debt service for the next 12 months. Estimated debt service over that period was $775.1 million. This expectation preceded the TowerCo cash payment.
Material changes and significant events
- On April 2, SBA acquired Mobilitie-affiliated entities owning 2,281 towers, with 36 more in development, and DAS assets. Consideration was $850 million cash and 5.25 million shares; reported transaction value was about $1.1 billion. The acquired assets contributed $55.4 million revenue and a $17.7 million net loss through September 30, including discontinued DAS operations.
- On October 1, after the reporting date, SBA completed its acquisition of TowerCo II Holdings, which owned 3,256 towers. Consideration was $1.2 billion cash and 4.6 million shares.
- SBA issued $800 million of 5.75% senior notes due 2020, $500 million of 5.625% senior notes due 2019, and $610 million of 2.933% tower securities. It also obtained $200 million and $300 million term loans. Proceeds funded acquisitions, repaid bridge/revolver borrowings, and refinanced higher-coupon notes. It redeemed all $375 million principal of its 8.0% notes and $131.3 million of its 8.25% notes.
- SBA sold DAS networks in New York, Chicago, and Las Vegas on September 6 for $94.3 million cash and a $25 million promissory note. It sold the Auburn, Alabama network for $5.7 million cash on October 23. Related results were reported as discontinued operations.
- SBA agreed with T-Mobile to extend the remaining term on approximately 2,800 leases to an average of about seven years and provide certain network-upgrade rights. The company expected higher non-cash rental revenue and increased annual cash escalations.
Outlook, risks, and unusual items
- Management described site leasing as a source of recurring revenue, with typical lease escalators averaging 3–4% annually, and expected growth from adding tenants, lease amendments, acquisitions, and construction. No numerical revenue or earnings guidance is provided in the filing.
- For the remainder of 2012, management expected $3–4 million of non-discretionary cash capital expenditures for tower maintenance and general corporate needs, in addition to discretionary spending for construction, acquisitions, upgrades, and ground-lease purchases. Funding was expected from cash, operating cash flow, and revolver capacity.
- Customer concentration is material: AT&T, Sprint, T-Mobile, and Verizon together represented 74% of Q3 site-leasing revenue. The filing cites wireless-carrier consolidation or lower network investment, tenant retention, acquisition integration and returns, access to financing and refinancing, covenant compliance, interest-rate exposure, land rights, permitting and construction execution, and international risks among factors that could affect results.
- Convertibility of both the 1.875% and 4.0% notes had been triggered under their terms. Conversion or refinancing of the $535 million 1.875% notes is a near-term funding consideration. A portion of the hedge for the 1.875% notes had been terminated following the Lehman bankruptcy, potentially exposing SBA to dilution or cash settlement costs.
- Other notable items included a $4.6 million partial Lehman-related settlement recorded as other income, $13.2 million of Mobilitie acquisition transaction costs year to date, and impairment charges of $2.6 million year to date for certain tower sites.
Key facts for investors to verify
- Post-quarter TowerCo funding, integration, and resulting leverage and liquidity; the September 30 cash balance predates the $1.2 billion cash consideration.
- Repayment, refinancing, or conversion plans for the $535 million 1.875% notes due May 2013, and the potential dilution or cash impact of convertible notes.
- Whether acquisition-driven revenue growth translates into durable cash generation after debt service, integration costs, and capital spending.
- Performance of the T-Mobile lease extensions and Sprint-related activity, alongside exposure to a concentrated group of wireless customers.
- Debt covenant headroom and the conditions attached to the stated $700 million revolver availability.