SBA Communications Corporation — Q2 2014 Form 10-Q
Reporting period: Three and six months ended June 30, 2014. Amounts below are in U.S. dollars; financial figures are in millions unless otherwise noted.
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, 2014, it owned 22,305 towers and managed or leased approximately 5,500 additional actual or potential sites. Site leasing generated 96.3% of six-month segment operating profit. Beginning this quarter, the company separately reported domestic and international site leasing.
Key financial metrics
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Total revenue | $383.4 | $324.3 | $729.0 | $637.4 |
| Operating income | $83.3 | $49.5 | $150.5 | $106.3 |
| Net loss | $(9.5) | $(35.9) | $(8.1) | $(58.3) |
| Adjusted EBITDA (non-GAAP) | $251.1 | $196.4 | $477.7 | $384.1 |
| Cash from operating activities | Not separately provided | Not separately provided | $352.8 | $228.2 |
Q2 revenue increased 18.2%; site-leasing revenue rose 21.8% to $340.5 million, while site-development revenue declined 4.1% to $43.0 million. Q2 operating margin was approximately 21.7%, versus 15.3% a year earlier; net loss margin improved to approximately 2.5% from 11.1%. Adjusted EBITDA increased 27.8% in Q2 and 24.4% for the six-month period.
At June 30, cash and cash equivalents were $107.7 million, restricted cash was $36.4 million, and current assets were $314.0 million against current liabilities of $1.340 billion. Total debt principal was $6.872 billion ($6.859 billion carrying value), including $1.080 billion classified as current maturities. Shareholders’ equity was $159.3 million.
Six-month investing cash outflow was $1.045 billion, including $967.5 million of acquisitions; financing activities provided $659.0 million. Cash and cash equivalents decreased by $14.5 million during the period, ending at $107.7 million.
Changes versus the prior period
- Domestic site-leasing revenue grew 9.8% in Q2, driven by acquired and newly built towers, new leases, rent escalators, and lease amendments.
- International site-leasing revenue rose 180.0% in Q2, mainly reflecting acquisitions and builds, including the expansion in Brazil. Foreign exchange movements reduced international revenue growth by $0.6 million in Q2 and $1.7 million in the first half.
- Site-development revenue fell as carrier project activity shifted from the prior-year Sprint Network Vision work; management also cited higher-margin direct work, including Sprint’s 2.5 GHz initiative.
- Operating income increased despite higher depreciation and amortization, SG&A, and acquisition costs. Net loss narrowed, helped by higher segment profit and lower non-cash interest expense.
- Other income for the six months included a $17.9 million realized gain on foreign-currency contracts related to the Oi acquisition.
Debt, outlook, risks, and unusual items
- In February, the company obtained a $1.5 billion secured term loan due 2021, used in part to repay prior term loans and revolving borrowings and to fund the Oi tower acquisition. At June 30, $100 million was drawn on the $770 million revolving facility; after quarter-end it was repaid, leaving $720 million available under the facility’s specified covenants as of the filing date.
- On July 1, after quarter-end, SBA issued $750 million of 4.875% senior notes due 2022. Proceeds were intended to fund convertible-note settlements, redeem the 8.25% notes, and support general corporate purposes. SBA gave notice to call the remaining $243.8 million of 8.25% notes, with a $10.1 million call premium, effective August 15.
- The 4.0% convertible notes mature October 1, 2014. At June 30, $378.4 million principal remained; $121.5 million was converted and settled during Q2, and further conversion notices were expected to settle in Q3. The company also paid $276.2 million during Q2 to early-settle part of the related warrants, with an additional $66.5 million paid after quarter-end.
- Management estimated 2014 non-discretionary cash capital expenditures of $24–29 million and discretionary expenditures of $1.732–1.762 billion, primarily reflecting acquisitions, including a planned purchase of 1,641 additional Oi sites for approximately $527 million, expected to close before year-end. Management expected to fund expenditures with cash, operating cash flow, and borrowings or other financing.
- Management expects long-term site-leasing growth from network expansion, additional tenant equipment, rent escalators, and lease amendments, and described the business as having recurring revenue and relatively predictable costs. It also stated that the company expects to continue incurring losses; no specific earnings guidance was provided.
- Key risks include high leverage and refinancing needs, floating-rate exposure, carrier consolidation and spending changes, acquisition integration and valuation, international political, legal and currency risks, and tenant concentration. Q2 domestic leasing revenue was concentrated among AT&T (29.6%), Sprint (26.3%), T-Mobile (19.2%), and Verizon Wireless (13.9%); international leasing revenue included Oi (49.5%) and Telefónica (26.0%).
- Impairment and decommission charges were $4.0 million in Q2 and $7.6 million for the first half. U.S. federal and state net operating loss carryforwards remained subject to a full valuation allowance. Management reported disclosure controls were effective and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Completion, funding, and expected returns of the planned additional Oi site acquisition, and integration results from the Brazil tower acquisition.
- Settlement of remaining 4.0% convertible notes and warrants, and completion and cost of the 8.25% note redemption.
- Debt-service capacity and covenant headroom after the financing and acquisition activity; restricted cash is not generally available for unrestricted corporate use.
- Whether international revenue growth, carrier demand, and customer concentration evolve as expected, including exposure to foreign currencies.
- Actual capital expenditures versus management’s broad 2014 estimates and the effect on operating cash flow and leverage.