SBA Communications Corp (SBAC) 2002 Q2 法說會逐字稿

Thank you for standing by. And welcome to the SBA 2002 second quarter results conference call. At this time all participants are in a listen-only mode. Later we will conduct a question and answer session. The instructions will be given at that time. If you should require any assistance during today's call, press the zero followed by the star key on your touchtone telephone. As a reminder, today's conference is being recorded. I would now like to turn the conference over to Pam Kline, vice president of capital markets. Please go ahead.

Thank you for joining us this morning for SBA's second quarter 2002 earnings conference call. Here with me today are Jeff Stoops, our president, chief executive officer; John Marino, chief financial officer; and Kurt Bagwell, chief operating officer. Before we get started I need to get the standard SEC disclosure out. Some of the information we will discuss in this call is forward-looking, including all of our guidance for third quarter 2002, fiscal year 2002 and beyond. These forward-looking statements may be affected by the risks and uncertainties in our business. Everything we say here today is qualified in its entirety by cautionary statements and risk factors set forth in last night's press release and our SEC filings, particularly those set forth in our Form 10-K for the fiscal year ended December 31st, 2001, which document is publicly available. These factors and others have affected historical results, may affect future results, and may cause future results to differ materially from those expressed in any forward-looking statement we may make. We have no obligation to update any forward-looking statement we may make. Now we can get started. John, would you please start with our financial results.

Thanks, Pam. Good morning. Once again, we posted solid financial results, demonstrating both strong revenue growth and expense control. Total revenues were 69.6 million, a record for us, and up 20.5 percent over the second quarter of 2001. Site leasing revenues for the quarter, also a record, were 34.2 million, up 37.4 percent over the second quarter of last year. Site development revenues were 35.4 million, up 7.7 percent over the second quarter of 2001. Power cash flow of 22.5 million was a quarterly record for us, up 42.5 percent over the year earlier period. EBITDA, or earnings before interest, taxes, depreciation, amortization, noncash charges and unusual or nonrecurring expenses was 20.8 million, our highest ever, up 53.3 percent over the year earlier period, and 7.7 percent sequentially. Revenue gains and continued success and expense control drove EBITDA to a new high. SG and A expenses calculated before noncash comp dropped to 8.5 million. Our fourth straight sequential quarterly decline, driven primarily by reductions in head count and related development costs as we continue to reduce our new tower build operations. As a percentage of total revenues, SG and A expense dropped to 12.3 percent, a new low for SBA. Our cash flow margin improved by 30 basis points from last quarter and 240 basis points from the year earlier period to 65.8 percent. As expected, services margin dropped somewhat to 19.3 percent, down approximately 200 basis points from the first quarter, and 400 basis points from the year earlier period. The primary contributing factor was increased price competition. Our EBITDA margin in the second quarter was 29.9 percent, 640 basis points higher than the year earlier period. Going forward, we currently believe that three things will continue to drive increases in both EBITDA and EBITDA margin year-over-year. Leasing revenue growing faster than services revenue growth. Second, tower cash flow margin increases, and third SG and A expense declining as a percentage of revenues. We recognize restructuring in other nonrecurring charges in the second quarter of 21.1 million, approximately 7.7 million of the charge relates to the completion of our previously announced restructuring, as comprised of the additional write-offs of work in process, employee reductions and office closings. We do not anticipate any material additional restructuring or other special charges related to the downsizing of our new tower build operations. The remaining approximately 13.4 million relates to our implementation of FAS142 and the assessment of goodwill as of June 30th, 2002, and the resulting write off of all goodwill placed on our books since January 1st, 2002. We have now fully implemented FAS 142, goodwill and other intangible assets which establishes a new method of testing goodwill and intangible assets for impairment. As a result of this implementation, we recorded a noncash charge in the first quarter related to a change in accounting principle in amount equal to 80.6 million, which was the entire amount of goodwill carried on our books as of January 1st, 2002. Including the previously mentioned 13.4 million charge recognized in the second quarter, total charges recognized by SBA due to the implementation and application of FAS 142 in the six months ended June 30th, 2002, were 94 million. After taking these charges, goodwill on our books was reduced to zero as of June 30th, 2002. Net loss per share for the second quarter was 94 cents, including a restructuring of FAS 142 related charges. Excluding the FAS 142 related charges, net loss per share was 67 cents, which was above first call consensus estimates of a net loss per share of 71 cents. Weighted average shares outstanding for the quarter were 50.4 million. Cash capital expenditures in the second quarter were approximately 20.6 million. We built 47 towers in the quarter and had no tower acquisitions. Capital expenditures for our new build including trailing costs for those completed in prior quarters in amounts included in the restructuring charge was approximately 16.6 million. We spent an additional two million on land and tower augmentation, half million dollars on earn outs from prior acquisitions and about a million dollars on ongoing tower cap ex and half million dollars per general corporate purposes. If you exclude discretionary capital expenditures and the restructuring of FAS 142 charges, our free cash flow in the second quarter would have been a positive 5.1 million. As you can see, with the winding down of our new builds, we're getting close to our goal of positive free cash flow. Curt, would you please provide an update on our operations.

Thanks, John. Second quarter 2002 was solid for SBA on the lease up and services front. Let's talk about lease up. We added new tenant revenue in the quarter at a gross rate of .38 BBE and turned off .03 BBE for a net .35 rate. This equates to 68 hundred dollars per tower per year of gross revenue growth, slightly below our expectations of at least $7,000 on an annualized basis. Churn fell back to what we consider a normal level of approximately one percent of leasing revenues on an annualized basis. As expected, the majority of the churn was from smaller local operators of all types, including paging and two-way systems. The paging industry now accounts for less than four percent of our total tower revenues on a run rate basis. Same tower revenue growth on the towers we owned at June 30th, 2002, was 19 percent net of churn. And same tower cash flow growth was 24 percent net of churn. 88 percent of the new leases we received were from the Big Six and their affiliates. 95 percent of the total was from the Big Six affiliates and the big regional players like U.S. Cellular and Altel. Average rents for new full installations were about the same as the first quarter, at an average of 1,781 dollars per month, and amendment revenue from sectorrization, GSM overlays and capacity augmentations was our highest ever. The most active players in the market in Q2 were AT and T, Cingular, Verizon and VoiceStream. Less active were Sprint and Nextel. The new broadband installations were a mix of capacity, fill-in and coverage expansion sites for those carriers. For third quarter 2002 we expect a similar lease-up rate in second quarter and we were adjusting our guidance to 6200 to 7,000 of gross revenue added per tower per year for the remainder of 2002. On the services front, Q2 was very steady for SBA with revenues exceeding 35 million and profit margins just above 19 percent, this portion of our business continues to add value on all fronts. Service is not only earns profits but also keeps us out there in daily contact with the carriers that they continue their network augmentations. We believe these ongoing relationships through our services work contribute materially to our lease-up success. As with past quarters, the majority of our services business came from our core operating and site acquisition and construction. This is the business we've been in for years. We think it's the right mix, services mix for these times, and we continue to be pleased with our execution capability. The current times are certainly challenging, however in the services environment right now is mixed by carrier. Similar to lease-up, the most active carriers are AT and T, Cingular, Verizon and VoiceStream followed by Sprint and Nextel. The acquisition and installations we're performing are also spread across a variety of capacity fill in and coverage expansion sites. The GSM overlay activity continues to be high at AT and T, and picking up steam with Cingular. Our forecast for Q3 services is 31 to 37 million, with margins in the mid to high teens. Our backlog right now is steady. There are a couple of reasons why we believe we can continue to perform in our current level on the services side, even though, even through difficult business conditions. First is this reference on many carriers earnings calls this quarter. And is conclude in virtually almost every customer service satisfaction. Network quality has room for improvement although it's becoming clear that total carrier cap ex will shrink in the foreseeable full-time, carriers continue to spend billions of dollars on their networks. Carriers have recently indicated they tend to spend approximately 50 percent more in cap ex in the second half of 2002 than they did in the first half, or approximately an additional 13 billion dollars from the Big Six. In addition, the services business remains highly fragmented. While that fragmentation has led to increased pricing competition it also provides ample opportunity for increases in market share. While total services industry data is impossible to track exactly, given the large numbers of private participants. We believe we've increased our market share over the last couple of quarters as weaker competitors fall by the way side in these tough times. We believe there are additional opportunities to increase market share in the future that we will try to capitalize on in the face of an overall shrinking market. On the new tower development front, SBA built 47 towers in the second quarter. This puts our current ending tower count at 3,858. All new towers had anchor tenants and a portion of them had multiple leases signed day one. Our current new tower development backlog stands at 52, with 27 to 35 of those expected to go on line in Q3 and the remainder by the end of the year. These numbers put us on track with our planned reduction in new tower development activity and our final march towards positive free cash flow. While we're not currently pursuing additional new build opportunities, we continue to see strong demand for new tower sites in the marketplace. We view this as more positive evidence of the favorable long-term demand for our industry. On a cost side we continue to experience positive cost savings in the company. We've reduced head count by over 400, or approximately one-third since the end of the third quarter of last year, and reduced total offices nationwide by approximately 50 percent. Head count is now down to year 2000 levels. Efficiency and cost controls continue to be the top priorities and we believe there are opportunities to realize additional savings as we move forward. At this point I'd like to turn it over to Pam, who will provide an update on our capital position.

Thanks, Kurt. We have cash and restricted cash of 31.8 million at June 30th. And total debt of 959.9 million. Our net cash use was eight million in the quarter, compared to a net cash use of 72 million in the first quarter. Net debt to quarterly EBITDA annualized at June 30th was 11.2 times. At year-end we expect our net debt to EBITDA ratio to be in the high nine times range. At June 30th, we were in full compliance with all of our bank covenants and we expect to stay that way as we move through 2002 and beyond. Net cash interest expense for covenant purposes for the second quarter was 14.2 million. For purposes of bank covenant calculations, adjusted EBITDA in the second quarter was 22.2 million, which was three million in excess of acquired EBITDA levels. Leverage under the senior credit facility at June 30th was 2.3 times compared to a permitted ratio of 5.5 times. At June 30th, the full remaining 92 million under the senior credit facility was immediately available to us subject to reductions for letters of credit outstanding from time to time. And we expect full availability to continue through 2002. Total liquidity at June 30th was 124 million, excluding 17.6 million which we had outstanding on letters of credit. We borrowed no money on our senior credit facility in the second quarter. We did borrow an additional 40 million in July, which is all we expect to borrow this quarter. Actually, under our current plan we're projecting no additional borrowings other than possibly immaterial amounts to maintain cash balances. As we've stated for some time now we expect bank debt to peak in the third quarter of 2002 at approximately 250 million. Stay flat for a couple of quarters, and then begin to decline in the second quarter of 2003. At peak bank debt we continue to expect available liquidity to be approximately 80 million dollars, less amounts that may be outstanding from time to time under letters of credit. We recently renegotiated the financial covenants under our senior credit facility for the 2002 to 2005 time frame. The major covenants loosened were cash, interest coverage, fixed charge coverage and debt service coverage in 2003 to 2005. As a result, our compliance cushion has been substantially increased particularly in 2003 when our 12 percent senior discount notes initially go cash cash. In exchange for these covenant reductions, SBA agreed to reduce permitted senior leverage and debt per tower levels immediately to increase the interest margin over LIBOR by 25 basis points. We view these covenant reductions as an extremely positive development in our long-term liquidity picture. The full text of the amendment to our credit facility will be attached as an exhibit to our form 10-Q. Now let's turn to third quarter 2002 and full year 2002 guidance. The following estimates are based on a number of assumptions that management believes to be reasonable and reflects the company's expectations as of August 13th, 2002. Please refer to the cautionary language previously described and that in included in yesterday's press release when considering this information. The company undertakes no obligation to update this information. For the third quarter, total revenues are expected to be between 65 and 73 million. Site leasing revenues are expected to be between 34 and 36 million. Site development revenues are expected to be between 31 and 37 million. Earnings before interest, taxes, depreciation, amortization, noncash charges and unusual or nonrecurring expenses are expected to be between 21 and 23 million. Net interest expense is expected to be 22 and 24 million. Cash interest expense is expected to be between 14 and 16 million. With this EBITDA and cash interest guidance we would remain in full compliance with our bank covenants. Basic and diluted net loss per share is expected to be between 50 cents and 60 cents per share. We expect to add 27 to 35 towers to the portfolio in the third quarter, all new builds. We expect to spend cash, capital expenditures of 10 to 20 million, including ongoing tower and general corporate capital expenditures. Because we have more visibility today on full year activity than we had three months ago, we are now able to tighten our full year guidance. Full year 2002 guidance is now as follows: Site leasing revenues, 135 to 145 million. Services revenues, 130 to 145 million. Total revenues, 265 to 290 million. EBITDA, 83 to 90 million, net interest expense, 85 to 95 million. Cash interest expense 52 to 62 million. Cash capital expenditures, 85 to 100 million. Amortization and depreciation, 98 to 108 million. Net loss per share, $5.10 to $5.45. Expected cash capital expenditures have been reduced materially as we've cut back on the number of expected new tower builds. Leasing revenue guidance has decreased due to fewer expected towers and lease-up results expected at the low end of our prior guidance of 7,000 to 8,000 gross revenue added per tower for the full year. For the last six months of 2002 we're projecting we add gross revenue per tower at the rate of 6200 to 7,000 per year. Based on all we know today, including our leasing backlog, carrier activity, public and private discussions with the carriers and all other factors we continue to believe that amount of revenue growth per tower will be achieved. At this time I'd like to turn it over to Jeff.

Thanks, Pam. And good morning everyone. I want to start by thanking our employees for very good results in difficult times. We continue to execute well in a challenging environment for our customers, and result for our industry. Once again, we posted financial results within our guidance. We're one of very few companies in the telecommunications sector that experienced year-over-year revenue growth, which we enjoy on both the leasing and services side of our business. Four important things have happened at SBA since our last call which we believe bode well for our future. Strong revenue growth, expense reduction, liquidity improvement, and we are now one quarter closer for a positive cash flow. I want to address a primary concern in our industry which is the rate of future wireless service provider expenditures on additional cell sites. While there's clearly uncertainty, we think it's important to understand what is driving the issue, because we think the answer is very important for our long-term prospects. The current rate of expenditures is in our opinion more the result of capital markets pressure and not to any technical or operational issue. While the capital markets pressure has made the current environment challenging, we believe these issues will be resolved over time and we continue to take great comfort in the operational side of our business and what we expect it to produce long-term. Our long-term optimism is rooted in one simple belief, wireless minutes of use will continue to grow. They're currently no meaningful substitutes for antenna sites and therefore towers, as the means for delivery of wireless signals. We know that increasing minutes of use requires additional cell sites to maintain network quality. And in the next year or so we expect to have confirmed that increasing data transmission speeds requires cell density. To date smart antennas, shared networks, capacity upgrades, vote coder improvements and other improvements have not materially slowed the need for additional cell sites in the face of increasing minutes of use. We're close to all the carriers and all agree that the single best thing to improve network quality is to add more cell sites. In our industry, we have demonstrated that the tower model works. It is a model that's produced and should continue to produce sequential increases in tower revenue, tower cash flow and tower cash flow margin, this is because churn is minimal and less than the rate of the annual contractual rent escalators, we've seen no indications of overcapacity in our industry. And we have maintained pricing strength and integrity for tower space, notwithstanding some market rumors to the contrary which are simply wrong. We expect pricing strength and integrity to continue as required cell densities for network quality continue to increase over time. Finally, we think we have demonstrated the operational leverage in the business as overhead costs continue to decline as a percentage of revenue. We are very comfortable with the operational technical aspects of our business and its growth drivers over the long-term. Short-term, however, the tower industry is feeling the squeeze being put on our customers by the capital markets for positive cash flow. In the face of this pressure, because growth and operating profits by the carriers is currently perceived as not enough, capital expenditures are being curtailed by the carriers, notwithstanding in some cases detrimental effects on network quality. This is a financial issue as opposed to an operational one we think as reflected by current market activity. The carriers that are most active today are active not because their networks need the most work but because they have the money. We believe these financial pressures will get resolved over time. Carriers will need to continue spending on their networks to stay competitive and they will need to do it in a way that satisfies the involvement community. We believe carriers will race prices, consolidate or take other steps to produce other free cash flow because they have no operational choice except to invest further in their networks as minutes of use continue to grow. While these financial issues play themselves out with our customers, we continue at SBA to focus on execution, staying flexible, converting opportunities, our liquidity and our balance sheet. We feel very good about our prospects here at SBA. Our primary goal continues to be achieving positive free cash flow in the first quarter of 2003. We're now one quarter closer to that goal and have better visibility between now and the beginning of 2003 than we had 90 days ago. Our secondary goal, once we achieve positive free cash flow, our primary goal is to reduce leverage. Along the way we expect to stay a growth company. And given our history and prospects, we're confident of continued growth going forward. We think 53 percent EBITDA growth at 24 percent same tower cash flow growth is pretty good for any business. Operationally we have a number of things going for us. We continue to lead or be near the top of the industry in many metrics, including lease-up tower cash flow margin and other things. We believe we're executing well. Sequentially we expect continued growth in leasing revenue, tower cash flow and tower cash flow margin. Our towers have demonstrated over the years that we will get our fair of leasing activity. We take a lot of comfort in that because we believe there will be continue steadying leasing demand by carriers. Our current backlog and industry sources tell us that. Drivers for continued activity over the next six months are continued GSM overlays, a 911 deployment for those carriers choosing network based solutions, various state homeland security initiatives, constant additional voice capacity, fill in and coverage needs. And the rollout of data products and services. On the services side we will continue to be opportunistic. Carriers still have a lot to do and we believe we can continue to get our fair share of this business particularly as these tough times continue to take their toll on some of our competitors. Our backlog continues to be steady. Notwithstanding our current success, however, we are staying very flexible on the services side given current market conditions. Through our history we've demonstrated the ability to scale our services business up or down quickly as the business environment warrants and we continue to watch our expense base very carefully. Our business mix continues to move the way we want it to. Year-over-year our leasing and EBITDA margins continue to improve materially and we believe those trends will continue. We are confident EBITDA and EBITDA margin will continue to improve year-over-year because leasing will continue to be increasing part of our revenue mix. Leasing margin will continue to improve, and we expect to continue to reduce SG and A expense as a percentage of revenue. Tower cash flow continues to increase as a percentage of total gross profit, representing 77 percent in the second quarter. Perhaps our greatest accomplishment since our last call was the improvements in our liquidity position which were many and outlined by Pam earlier. With these steps the favorable amortization schedule of our bank debt and the strength of our organic leasing growth, we believe we have an improved path to sustain growth, delevering and increasing positive free cash flow. Even in the face of what we expect to be a difficult environment for the next six to 18 months or so. I want to spend the last minute on our debt structure and in particular our senior credit facility, because I believe debt structures will become even more important in 2003 as the focus shifts to free cash flow after debt service. We have a very favorable amortization schedule over the next two and one half years with $5 million due in the second half of 2003, and 15 million dollars due in all of 2004. Our revolver representing 200 million of the 300 million dollar facility does not amortize. It's not due until 2007. Perhaps even more importantly than the amortization schedule is the amount of leverage under our senior facility and what that means as a practical matter in terms of flexibility. We are and expect to continue to be less than three times levered at the single bank level. This relatively low level of leverage played an important and positive role in our recent successful renegotiation of our bank covenants. The banks rightly perceived their level of risk was much lower than it would have been with the higher senior leverage ratio. As a result, the banks were able to be very helpful to us at a time when the senior bank market for telecom credits was otherwise in turmoil. We view our relative leverage at the senior bank level as a real positive for future flexibility. Should we ever choose to refinance, we will obviously be much better off than would be the case with a higher senior leverage ratio. In closing, we continue to have great confidence in our business plan and in our ability and resources to carry it out. While we acknowledge the business environment will probably remain challenging for the foreseeable future. We believe today there will continue to be more than enough demand for our tower space and services to allow us to accomplish our goals. Our tower cash flow and EBITDA continues to grow sequentially and we have recently materially improved our liquidity position which will serve us well as we navigate through difficult times to get to positive cash flow. We have a stable management team and employee base whose strengths and experience are in operations and execution in the wireless infrastructure business. We feel fortunate to be in a position we're in. And we look forward very much to sharing our results for the third quarter with you. And now we'd like to open it up for questions 00:29:52

Thank you. At this time if you would like to ask a question at this time, press the 1 on your touchtone telephone. You will hear a tone indicating that you have been placed in queue and you may also remove yourself from that queue at any time by pressing the pound key. If you are using a speaker phone, we ask you please up your handset before pressing the number. The first question is from the line of Ian Safino [ph] With CSFB.

I want to probe in on two and a half G a little bit here, some of the overlays. What part of the contract language is being triggered as the carriers go to do some of the two and a half G upgrades that would allow you to go ahead and charge additional rent or when you do it what is your basis? Is it per se more room that's required in the shelter? Is it the amount of wind loading the antennas put on the towers? What exactly allows you to do it and if you could, by technology, just talk about that a little bit. Thanks.

It is a change in the physical use of the tower site. So whenever they change anything on the tower, that would increase the load or add things on the ground that would increase their usable space. That's a change in the lease that requires that that issue be addressed.

That's happening on the GSM side particularly with AT and T and Cingular. That did not happen really last year, when Sprint upgraded to 1XRTT because that was merely just a software upgrade inside the cabinet, which we did not benefit from on the leasing side. In terms of the rates, there's really no hard and fast rule. We negotiate every site specifically as we've always done and the amendment increases that we're getting are loading specific. I mean if somebody is adding a brand new transmitter or a base station or if they're going from nine to 15 antennas, it's going to be in some cases as high as a thousand dollars or more increase. In some cases if they're just adding a line or two, maybe it's down at the 400 dollar level. And then there's everything in between. Does that answer your question?

It is helpful. Just one other question here. On the churn issue, what percentage was from actually paging and dispatch and what percentage was from two G voice? And then going forward, to think about this, I guess there was something mentioned that one percent of revenues will churn off per year and you have about four percent of your revenues coming from this paging. Is this something that we should assume is going to go away in four years or is there going to be something else that's going to pop up to keep this churn at the level we're seeing now? I know I'm asking you to look at a crystal ball, but -

I think as our revenue mix continues to move more and more toward Big Six and affiliates which has been now for well over a year, you will continue to see churn reduced, because the vast majority - and I don't have the specific number, but the vast majority of the churn was on the paging side. And through the fact that it's the paging stuff that's primarily churning off and the fact that paging is not really adding incrementally, you continue to see that. That's why that number is now down below four percent and you know we expect that to continue to decline as we move forward. But we believe, based on the current state of Big Six and where we think they're likely to be, one, two, three years out, that as they're percentage of our revenue rate revenue increases, churn will decrease pro port nationally. So that's not where the churn is coming from.

Thank you.

Our next question comes from the line of Nevine Sarma [ph] With Deutsche Banc.

Good numbers, guys. I'm impressed to see good numbers in this environment. I get if sense, what kind of visibility do you have into the second half of the year? You've kind of lowered your gross revenue at per tower, 6200, 7,000, what kind of visibility and confidence do you have in that kind of activity in the second half of the year.

We're halfway through almost the third quarter, and in the site leasing side we've also had a good 90 to 180 day visibility. So we have good visibility on the second half, which is good in one sense, but because it is good and it's a little bit less than it was last year, that's also caused us to adjust our guidance. So we feel pretty good about our ability to hit the guidance through the remainder of this year based on where we are in the third quarter and our backlog.

And then I guess maybe it's a little early for the next year, but do you think that number will go back to the seven to $8,000 per tower per year next year?

We think it could. I think a lot of where we are will depend on the capital markets. I mean it's no longer a useful exercise in our opinion for people to try and necessarily tie in lease-up to subscriber adds and minutes of use. Because operationally that's all kind of being pushed aside by cap ex pressure. So I would come back to you and say it certainly could be there and the operational demand will be there to support kind of operational lease-up, but we need to see where the budgets are going to be coming for next year before we get more specific on that.

Thanks.

Our next question is from the Rick Prentiss with Raymond James. Please go ahead.

Good morning, guys. I'll echo on Nevine's comments a little bit. It's nice seeing a business growing same tower revenue 19 percent and cash flow is 24 percent. I think we lose track of that every now and then a lot of internal growth going along in this business. You're right the capital markets have squeezed the carriers we follow also. My questions are two fold, also. One is on visibility. Within the quarters, is there a shift towards the last month of the quarter as far as the lease-up activity goes? One of your fellow tower operators suggested that on one of their calls last week. And along with visibility, I think Kurt mentioned that Sprint was one of the ones that was not as active and another tower company mentioned they had seen the same thing, that Sprint was not as active. Yet when we talk to Sprint they say you're right we did 700 towers in the first half of the year - excuse me, cell sites. And we want to do 1700 cell sites in the second half of the year. Given that visibility when would you see Sprint kind of pressing the gas. When would you know it's coming?

I'll let Kurt handle the Sprint question. The lease-up, it's always been kind of the last month is about 50 percent of the quarter. And it's been that way through years now. And it's a function of both tower companies and carriers, structuring bonus plans around quarters. I mean it's the old fashioned human motivation, and when the carrot to the stick gets applied. With that in mind we might go to daily bonuses. But I'll let Kurt handle the Sprint question.

Rick, on Sprint, I think what really the context to put it in is the service revenue is the biggest piece of it from Sprint derived by us is the construction revenue, which we do expect to increase during the second half, because a lot of their lease-up is now completed, a lot of the other due diligence on the site is completed and they're ready to move them into construction. That's why they can do two-thirds of their sites on the air in the second half because a lot of the lease-up is behind them. So the sites they picked and prioritized for this year were pretty far down the path.

So given if Sprint has signed leases, does that mean the Sprint number is in the BBE and is it in the revenues yet?

It's in the BBE. It's not in the financially reported revenues. BBE is reported in our industry based on signed leases. The financial statements only, of course, reflect revenues that have begun to be recorded under GAAP.

That makes good sense. So we actually have some good visibility. So when you were giving us your third quarter and 2002 guidance, that's obviously factored into that.

Yes, I'll speak broadly, that's why a company in our industry should never really not know what its site leasing revenues are going to be next quarter out because essentially it's already done.

Exactly. Final question on back haul. We've heard from some of the carriers as they've been doing their overbuilds that back haul continues to be an issue for them. Are you guys still working on providing alternate forms of back haul?

Yes, we are. We still have our broadband group intact. They're very active. Working with everyone, basically, trying to figure out different solutions. We have signed another contract to put another recurring network in place for a carrier, utilizing exclusively our towers, where their sites fall on it. And that continues to be an area that I think as the networks mature, and as things settle, the growth settles down, that's really the next big frontier that they've gotta go after, because their back haul charges as a percent of their network operating budget is still gigantic.

Good luck on the path to free cash flow.

Our next question comes from the line of Shawn Munson with Legg Mason.

A couple of questions. The first is you mentioned that the average rent for broadband stayed about the same. But it looked like when you calculate the new revenue divided by the new tenants, it looked like, at least in my numbers, that the average rent went up at least a few hundred dollars. I was wondering what I was missing there. And also if you, you had mentioned the .38 to .35 net of churn. Do you have a number net of churn but also excluded lease escalations?

We don't have the latter part because it varies depending on timing and it's - over time you should, everyone should model a three and a half percentish annual escalator for SBA. And on the first question, what we do there is we count all of the amendment revenue and we put that in the revenue side but it doesn't add to the denominator on the tenant side. So what you have there, you clearly see higher averages if you just take organic and divide by tenants, but what you really have there is you have a higher percentage of our organic this time that came from amendment revenue.

You do not count those as tenants like some of your competitors do.

No, we don't. We think, when you talk about tenants we think it's actual tenants that makes the most sense.

When are you going to file the 10-Q? Are you going to wait until Thursday?

We expect to file that today.

So we'll see the new covenants today?

Yes.

Thanks.

Next question comes from Greg Gorbatanko [ph] With Luke Capital Markets.

Thanks. And good quarter. My question is regarding the liquidity side. You said you pulled 40 million dollars down in July. Any idea what the ending cash balance might be at the end of the quarter, the FCF number, so we can use it for liquidity models?

I think ending cash balance is going to be roughly the same, somewhere between 30 and 40 million. The 40 million dollars went to, 26 or so of it went to our high yield interest payment which we made August 1st, then we'll use the rest for some of the cap ex. We had more cash cap ex in the second quarter than we had net cash used. So we'll be paying some of that. But at the end of the day, as Pam said, we think we're done. Certainly materially done borrowing money

Okay. That's good. We computed like a pretty good favorable working capital increase for this last quarter. Is that something that might happen going forward?

The working capital changes are timing differences, really. I mean at the end of the day we expect to pay all of our payables and collect all of our receivables. I can't promise you that you'll see sequential working capital improvements time after time. But we did see some benefits that are really the result of the restructuring and the reduction in our business from the new build. That's really what's driving those changes. I think you will see steady working capital starting in the third or fourth quarter.

Steady meaning out of cash use or cash source?

Yes.

Thanks, guys.

Our next question is from the line of Alex Ragel [ph] With Friedman Billings and Ramsey.

First of all, with regard to acquisitions, do you have any plans in the next one to two years to make any acquisitions?

We don't, really, Alex, as long as the capital market environment is as it is. I mean at the end of the day we'll look into provide the maximum value for our shareholders. And right now we don't think - I mean I say that. I guess if somebody wanted to give us something in two times and it was a great deal we'd certainly be looking at it. But the market as it exists today, while it's gotten a lot better for acquisitions and there are certainly good ones to be done, it doesn't really fit right now into our free cash flow plans.

That's good to hear. My next question is, if you look at the incremental gross profits per dollar of incremental site leasing revenue, looks like that incremental gross profit has been relatively flat over the last four quarters or so. Would you anticipate that to trend up closer to 100 percent like some of your peers have reported in the last one or two quarters, or do you think the level of the low 70 percent range is about appropriate?

The only way you can get the 100 percent is if you count people costs in the costs of revenues, which that particular company does. But we've never calculated people cost in that statistic for us. For us it's basically just five things. It's ground lease, property taxes, maintenance utilities and insurance. We think it will continue - we think it will go up. We will continue to see better than the incremental margin you've seen over the last quarter or two. We have some pretty high cost sites in Puerto Rico that we ran over on some maintenance expenses which we think we've fixed and are not going to be repeated over the next couple of quarters. But I don't think you'll ever see 100 percent from us because of the fact that we've never accounted for people costs in our cost of revenue. The way those people are getting there is they're reducing head count.

Great. Thank you very much.

Our next question is from the line of John Bentz from Lehman Brothers.

I was intrigued by your comment that the slow downs in activity at carriers are driven more by their cash, not thier needs necessarily, if you were to rank them in order. I wondered if you could elaborate, what sort of data points you see that give you that piece of information. Is it traffic that you somehow are measuring on sites or is it anecdotally being picked up from the field?

It's more anecdotal and it's based on people's perceptions, actually more than perceptions, people who pretty well judge network quality. I'll use the example of Verizon. Verizon is one of the most active companies out there today. And they're not doing a GSM overlay. So you can't really attribute it to that. And they're just active today because they have made the decision that they're going to really work on maximizing network quality and they have the money to do it. So it's more anecdotal than it is - I don't have statistics that are supplied by a network quality expert or anything like that. But I could - maybe the opposite extreme, the Sprint affiliates have gotten less active and we all know that they kind of rolled out just what they needed to do to satisfy their obligations to Sprint and they still have tremendous network quality needs. And they're not pursuing those because of capital market pictures.

Got it. The other question, I think someone hit on it a little earlier, is an incremental number level of 7,000 you talked about quite a while is being sustainable for a several year horizon. Do you think you might get there for 2003 or would it be more prudent in industry cap ex spins down 2003 versus 2002 to assume it's below the 6200 to 7,000 range for 2002?

I think it would be prudent to use the 62 to 7. I'm not sure, without evidence, that capital expenditures will be more robust next year, that we should bank on seven to eight. But at this point, based on everything we know, John, we think the right number is 62 to 7.

Maybe, Kurt, you could jump on this too. Are we changing the wrong number with regard to the carrier cap ex? When buildouts covered POPS are the driver of the cap ex, I can see the correlation to cell sites is pretty high. But is it your sense that the nature of the cap ex spend is changed or that somehow the linkage there, the telegraphing of direction of lease up activity isn't what it used to be?

No. I mean the cap ex is still - it's still a good mix between capacity fill in and expansion. Different carriers have different things going on. Different carriers are in different spots in their maturity life cycle with what they need to do in different markets. And I don't see any defining trend at this point, a single direction. It's really carrier specific and market specific.

So the correlation is still strong, you think?

Yes.

Thank you very much, guys. Keep up the good work.

Ladies and gentlemen, as a reminder, if you do have a question press the 1. We will move on to our next question from the line of Steve Flynn with Morgan Stanley.

Good morning. My first question, and I'm sorry if I missed this, but the restructuring charge, the seven million that's not related to goodwill, can you break down what is cash and noncash and what is the cause exactly of that restructuring charge.

About $2 million, give or take, was cash related in the quarter, the remaining was noncash. The majority of that 7.7 million dollars really came about from the right off work in progress, sites that were in process at the beginning of the quarter and were written off during the second quarter. And actually we're going to provide a pretty good detail in the Q tonight of the breakout. But the majority of it was work in process or assets on the books.

Steve, that's the completion of the restructuring that we announced in the first quarter, took most of the charges then. We told everybody then we'd have a little bit more to go in the second quarter. And that's what that 7.7 million was.

You don't expect any additional restructuring charges in the second half of this year?

No, we do not. The second question, I know you guys have built a number of sites without tenants, as more speculative builds. Can you give us an update as to the percentage of your towers where there are currently no revenue paying tenants or have they all pretty much been filled up with at least one current revenue paying tenant?

Our current number of towers without tenants is about 140. And that's down substantially from where it was a year and a half ago.

Thank you.

Next question is from Gregory Lundberg with Morgan Stanley. Please go ahead.

With Sprint PCS we now have the all national packet data launches out there. I was wondering from an engineering or development perspective you guys have actually seen a real world example where someone has increased the density of their sites specifically to keep the data rates acceptable. And you talked about it as something going forward, but have you actually seen it happening out there in the field?

It's hard to say because the RF engineering groups don't necessarily share the exact reason for every site with us. Plus the data products are very new. Obviously with Sprint we haven't seen it yet. The cell density is more sensitive on the GSM side, to achieve the speeds they advertise than it is on the CDMA side. CDMA you'll typically get the same data speeds assuming the site covers the area. It is not as relational as it is to GSM coverage strength. So the answer is no, not directly. But we do expect to see that as the products roll out. And so -

The aging of the portfolio, how did that improve in the second quarter, or is that schedule going to be in the Q?

That's our every six months, Greg. That will be out September 30th, but it's still moving in the right direction.

Next question comes from Mark Darussi [ph] With Raymond James.

Kurt, a question for you about services, can you give us some more color on the competitive landscape? Are you seeing less people? Is pricing stabilizing? I think last quarter you expressed some concern about margins going forward. We were down sequentially as expected. Have we stabilized here? Should we expect to see more decline as we're going forward? And my next question is more of a general question, I guess Northrop Grumman is planning a two billion dollar government homeland security network. I was wondering if you have insight as to what's going on with that. If it might be an opportunity for you guys.

On your second question, we've heard and talked to people about bits and pieces of that. But still more to learn there. On your first question, our mid to high teen estimates for margins on the services side we think is where it's going to stabilize. So there's probably still a little more downward movement because of price competition and the lack of our anchor tenant installs as our new tower builds wane. Those are typically higher Margin. It's still tough out there, highly fragmented. A lot of little guys. We do think we're increasing market share as we've referenced earlier because we've been steady and stable in these markets for a long time, and we think we're doing a pretty good job. It's holding okay with a little downward pressure.

Thanks.

If there are any additional questions press the 1. We'll move to the line of Rick Prentiss with Raymond James. Go ahead. Your line is open. Please go ahead. Mr. Stoops, we have no additional questions. Please continue.

Great. We certainly appreciate once again the opportunity to share our progress with you. We look forward to the chance the next quarter, third quarter. Thank you, everyone.

Thank, will be available for replay beginning today, Tuesday, August 13th, at 5 p.m. eastern time and will run through Tuesday August 27th at midnight. You may access the system by dialing 1-800-475-6701, or international participants may dial 320-365-3844 and for either number enter 647865.

That does conclude our conference for today. Thank you for your participation and also for using AT and T executive teleconference. You may now disconnect.