SBA Communications Corp (SBAC) 2003 Q1 法說會逐字稿

Good morning. My name is Wendy, I'll be your conference facilitator. At this time, I would like to welcome everyone to the SBA first quarter 2003 conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer period. If you would like to ask a question during this time, simply press star and the number one on your telephone keypad. If you would like to withdraw your question, press star and the number two on your telephone keypad. I will now turn the Call over to Miss Pam Kline, Vice President of Capital Markets. Miss Kline, you may begin your conference.

Thank you for joining us this morning for SBA's first quarter 2003 earnings conference call.

Here with me today are Jeff Stoops our President and CEO, Kurt Bagwell our COO, and Jack Theodore our Chief Accounting Officer.

Before we get started, I need to get the standard SEC disclosure out. Some of the information we will disclose in this call is forward-looking statements. Including but not limited to any guidance for 2003. 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 SCC filings, particularly those set forth in our form 10K for fiscal year ended 2003. Which document is publicly available. These factors and others have effected historical results, may effect future results and may cause future results to differ materially from those expressed in any forward-looking statements we may make. We have no obligation to update any forward-looking statements we may make. Our comments will include non-GAAP financial measures as defined in regulation G. The reconciliation of these non-GAAP financial measures to their most comparable GAAP financial measures and other information required by regulation G is included in our earnings press-release which has been posted on our website at www.SBAsite.com. Jack, would you please comment on our first quarter results.

Thanks, Pam. Results were as expected. And within our guidance for all measures.

Total revenues were $58.2 million, a 9% percent decline over the first quarter of 2002. Tower leasing revenues for the quarter were a record $37.5 million up 15.4% over the first quarter of last year.

Site development revenues were $20.7 million down 34.2% over the first quarter 2002. Tower cash flow was $24.6 million was a record, up 15.4 % over the year earlier period.

Adjusted EBITDA was $19.2 million. Relatively flat with the year earlier period and fourth quarter of 2002. Improvements on the leasing segment in SG&A expense reductions offset reduced profits from our services business.

Tower cash flow margins were 65.5% up 170 basis points from the fourth quarter. We continue to work hard on controlling tower expenses and we believe our efforts are starting to show. We believe we'll be able to continue to sequentially improve tower cash flow margin in the future.

As anticipated services revenues and margins continue to decline. With gross profit margins of approximately 10 % for the quarter. The primary factor continues to be increased competition for declining amount of available business. Kurt will discuss the services business in more detail shortly.

We have continued to make good progress on reducing overhead expense. SG&A, calculated before $269,000 of non-cash compensation and $805,000 of nonrecurring professional and advisory fees dropped to $7.4 million, our ninth straight quarterly decline driven primarily buy reductions in head count and successful cost control initiatives.

Our adjusted EBITDA margin in the first quarter was 32.9%. Two hundred basis points higher than the year earlier period. Adjusted EBITDA margin improve improvement was driven by a continuing shift in our revenue mix to the much higher margin leasing business which comprised 64.5 % of total revenue in the first quarter, our highest ever. Leasing contributed 92.5 % of our gross profit in the first quarter.

The restructuring and other charge in the first quarter of $1 million was related to further downsizing activities particularly with respect to the services business. As of January 1, 2003, we adopted FAS 143, accounting for asset retirement obligations, and recorded a cumulative effect adjustment of approximately 545,000 based on our estimates of the present value of our future restoration obligations arising under the ground leases for our towers.

Net loss per share for the first quarter was 66cents including 1cent per share related to the change in accounting principle for the adoption of FAS 143.

Weighted average shares outstanding for the quarter were $51.1 million.

Cash flow used in operations improved to $4.8 million substantially down from the $33.4 million used in the year earlier period, primarily due to positive variances in working capital.

Cash capital expenditures in the first quarter were approximately $6.1 million. We completed construction on three towers in the quarter. Capital expenditures for our new builds, including trailing costs and development costs for those completed in prior quarters, were approximately $4 million. We spent an additional $400,000 on general corporate cap-ex, $800,000 on maintenance tower cap-ex and $800,000 for augmentations and rebuilds.

During the quarter, we also paid out it $2.3 million in previously accrued earn-outs from prior acquisitions. And have reduced our potential remaining earn-out obligations to less than 1 million dollars.

At this point, Pam is going to provide some information about our capital position and the pro forma effect of our tower sale.

Thanks, Jack.

We ended the quarter with cash of a $47.9 million at March 21st, and total debt of slightly above a billion dollars.

Net debt to quarterly adjusted EBITDA annualized at March 31st was 12.7 times.

Net cash interest expense was $17.7 million and non-cash interest expense was $5.1 million.

As we previously announced, we have an agreement to sell 679 towers to AAT Communication Corp for $160 million or at the election of AAT, 801 towers for $203 million. AAT may elect to purchase the additional 122 towers which are all located in Wisconsin by June first.

On May 9th we closed the first portion of the transaction selling 631 towers for approximately $145 million. The remaining 48 towers under the agreement are anticipated to be sold on or before July 1, 2003 for additional gross proceeds of approximately $15 million dollars.

For purposes of the following pro forma information, we've assumed net proceeds of $156 million on the 679 tower sales. The 679 tower sales pro forma operating information for the first quarter is as follows.

It assumes the sale took place January 1, 2003. Site leasing revenues of $32.4 million, tower cash flow of $21.2 million, tower cash flow margins of 65.4 %, adjusted EBITDA of $16.2 million and adjusted EBITDA margin of 30.5 %.

Same tower revenue growth on the 3,120 towers owned pro forma as of March 31, 2002 was 15 %. Pro forma total debt at March 31, 2003 was $964 million, net debt was $828 million and cash and restrict cash was $136 million. The loss of the sale will be approximately $8 million dollars.

There's a lot of detail here and we would be happy to review this material off line. This tower sale will result in discontinued operations accounting treatment which will apply in the second quarter. We will be filing detailed pro forma information with the SEC with respect to this tower sale within the next few weeks.

The new credit facility is -- again with our wholly owned subsidiary, SBA Telecommunications consists of a $100 million revolving line of credit, and a $95 million term loan. The balance on the revolving line of credit converts to a term loan no later than June 30, 2004. Borrowings under the facility bare cash interest at LIBOR plus 400 basis points, plus additional interest at 350 basis points which is payable at maturity.

The facility begins amortization in 2004 at 10 %, increasing to 15 % in each of 2005, 2006 and 2007 with the final 45 % due at maturity on December 31, 2007. Permitted uses of proceeds under the new facility are very flexible and given us the ability, subject to certain dollar limitation, to build towers, buy towers, repurchase bonds or use for any other valid corporate purchase.

The financial covenants under the new facility are calculated only at the borrower level and exclude the effects of any holding company debts. As a result, we have a great deal more cushion under the covenants of the new facility than we would have had under the prior facility as amended.

Tests under the new facility are leveraged tests of 2.9 times or below. Debt per tower of $75,000 dollars or less. Cash interest coverage of 4.0 times or better. Pro forma debt service coverage of 1.1 times or better. And 6 charge coverage of 1.5 times or better. Remember, these are all tested only at the borrower level.

We can pre-pay refinance the new facility at any time and it permits us the continued use of all additional proceeds we receive under the AAT transaction, including the Wisconsin option.

I want to clarify a couple of points on our guidance.

First the second quarter and full year guidance assumes that we have sold all 679 towers at the beginning of the periods presented, including the 48 towers we have not yet closed on. It does not include the sales of the122 towers which are part of the Wisconsin option.

And finally, the non-cash interest guidance for the full year is just for the pick portion of our new credit facility. Did does not include the approximately $5 million of amortization of original issue discount we incurred in the first quarter related to our 12 % notes.

Kurt, would you please provide us with an update on our operations.

Thanks, Pam. The first quarter was good as it related to the leasing business. We were pleased with carrier activity in the first quarter and see a stable leasing environment for the foreseeable future.

Same tower revenue growth net of ten at termination on the 3,797 towers owned as of March 31, 2002, was 15 %. Same tower cash flow growth on these same 3,797 towers was 16 %. For the full year, we expect same tower revenue growth to be in the 11% to 16 % range.

Amendment revenue continued to be strong for us as carriers continue to add microwave technology overlays E-911 and capacity equipment to many sites. The average new broad band lease rate held steady in the first quarter.

We continue to believe that our marketing methods and operation is as sound as anyone in the business. Our data on our sites is excellent. Our knowledge of the carriers' needs is good and we continue to maintain strong personal contacts with the carriers RF engineering personnel as well as property management personnel.

We continually revise our site rating tool and work hard to craft custom win/win solutions for each prospective tenant to balance proposition.

Lastly, the turnaround time on processing applications continues to excellent according to the feedback we receive from our clients. One a search is funded by one of our clients and put out for development, we understand their need to move quickly and crisply to completion.

We have spent considerable time fine tuning our tower maintenance operations over the past six months and the results continue to improve. In Q1 we held maintenance op ex to an annualized rate of $1100 per tower or less than $100 per month despite the worst winter conditions in the past several years. This number showed solid improvement over previous quarters and we expect this to continue to be an efficient operating area for us going forward.

On the maintenance cap ex side we held total expense in Q1 to $800,000, which across our 3,877 towers in the period amounted to an annual rate of less than $900 per tower. We also continue to maintain an excellent grasp on this portion of our business.

During the first quarter, we worked most often with AT&T wireless and Cingular on their lease up projects followed closely by Verizon and ALLTEL. Those four broad band tenants accounted for 66 % of our new leasing revenues.

Looking forward it's expected that AT&T will continue to remain active followed by Cingular and Verizon. We expect T-Mobile to remain steady with their recent activity, while Sprint and Nextel are expected to increase activity in Q2, Q3 and Q4 by twice their margin over the recent past.

The big six and their affiliates ALLTEL and US Cellular accounted for 91 % of our new leasing revenue. With other broadband tenants accounting for another 5 % for a total of 96% of our incremental leasing revenue added in the quarter. These carriers currently compromise about 89 % of our recurring tower revenues.

Turning, Q1 held the low levels and the majority from older narrow band installations. There's been more activity recently from the carriers with microwave back haul implementation and some initial interest in lease up occurring from wireless ISP's.

The big six carriers continue to work a variety of projects in the field and continue to deploy all site types. Coverage expansion, capacity enhancement and fill-in cells. We're seeing quite a mix of deployments by the carriers in urban, suburban and rural arias. We view the recent roaming announcements as ways for the carriers to move to more quickly enhance service offerings and coverage areas.

We applaud our clients' efforts to better themselves financially by whatever means are available to them. We also see many of the big six coming back to certain suburban and rural areas and expanding their own systems in an effort to differentiate their service to more efficiently service their own customers' minutes of use.

The recent transaction with AAT for 679 of our towers has gone very smoothly on the operation side. With all site maintenance and operations handed off timely and orderly. This deal will help us continue to refine our focus by geographically consolidating the number of areas our towers of based in. At the end of this transaction the remaining 80 % of our towers will be concentrated in the Eastern third of the United States plus Puerto Rico and at U.S. Virgin Islands.

As you have heard from other companies at this point, activity in the services area continues to be characterized by steep competition and pricing pressure. The lower levels of activity are somewhat disconnected with the tower leasing business. As the numbers of competitors and in the service arena make it a much less exclusive business.

While we continue to be one of the largest providers in the full service site development business nationwide, we continue to watch this business closely and adjust its size if necessary as the volumes have continue to drop about the margins have stayed under pressure.

In Q1 we achieved $20.7 million of top line revenue at a 10 % gross margin. Some of the lower top line revenue results in Q1 is from the seasonality. Some of this from pulling out of less profitable markets and the remaining from lower levels of work generally available.

A couple of the carriers have awarded large turnkey deployment efforts to some of the big program management firms, like Bechtel and General Dynamics. We continue to work well with these firms but also continue to win work directly from the carriers themselves.

For Q2 2003 we expect services to remain fairly flat with Q1 and are providing the revenue guidance range of $19 million to $22 million for the quarter. For the full year of 2003, we expect services to come in between $82 million and $90 million with gross margins in the low double digits.

As Jack mentioned earlier, we built three towers in the first quarter. This puts our current ending tower count at 3,876. Our current new tower development backlog stands at only 8 with all of those expected to be complete in 2003.

On the cost side we continue to experience positive cost savings in the company. Efficiency and cost control are the top priorities as evidenced by our 15 % year over year FC&A (ph) reduction in the first quarter. This will continue to be a focus in 2003 and we believe we may realize some additional savings as we move forward.

At this point I would like to turn it over to Jeff.

Thanks, Kurt. Good morning, everyone.

We've had a couple of very busy and productive months here at SBA. We closed on substantially all of the tower sales to AAT, received gross proceeds of $145 million of the $460 million expected to be received, and along the way demonstrated substantial value for our towers. We've refinanced our senior credit facility and demonstrated continued access to capital for our business.

Through the two events we were able to reduce our net debt on a pro forma basis at March 31, by about 15 % and approximately double our liquidity to $136 million dollars. We now have in place a long-term stable capital structure that we believe will firmly support our tower ownership business and that will not be tripped or otherwise materially adversely effected by variability in the services business.

We believe we have eliminated the near term risks we were facing under the prior credit facility and can now appropriately return our full focus to long-term growth of tower cash flows and EBITDA, reducing leverage and attaining positive free cash flow.

We're very excited about the future. We believe the new credit facility and capital structure provides us with the liquidity and stability to obtain positive free cash flow solely through organic tower revenue and cash flow growth. It also provides us with the flexibility to pro-actively manage our balance sheet should we so choose to accelerate the process.

With the expected continued sequential growth of our tower cash flows and low leverage through the new senior credit facility, we believe we will have favorable opportunities in the future to finance on a senior basis and reduce total interest costs. The new facility provides us with the ability to repurchase holding company debt per cash, swap debt for equity, or refinance holding company debt, among other things. Any or all of which we may pursue from time to time if we believe it to be the best long-term interest of our shareholders.

While our new credit facility and long-term capital structure provide us with a favorable platform to grow and improve SBA, the real engine for our success will continue to be our tower assets. Subsequent to the tower sale, we will have about 3200 very attractive towers concentrated in Eastern third of the United States. Our remaining portfolio is high quality and on a pro forma basis we will have higher revenue per tower, higher cash flow per tower, higher rent per tenant, and higher historical lease-up rates.

With our tower assets and the current stable environment for carrier activity and cell site expenditures, we are confident about our ability to continue to deliver sequential growth and tower revenue and cash flow on our remaining portfolio. We also believe that we will continue to perform well in the parts of the business which make tower ownership so attractive. Stable operating expenses, low maintenance cap-ex and low churn.

On the corporate side, we continue to drive down overhead expense primarily as a result of adjusting the size of our services business. We are very quick to react in that regard. And we are well positioned to participate in any rebound on the services side and equally well positioned to further cut overhead should market conditions require.

We will stay very flexible on service and watch the market carefully and we now have the luxury of doing that with the new credit facility which doesn't need any support from a services business to support the debt structure. I expect us to continue to control costs at all levels and further reduce our quarterly SG&A expense as we move through 2003.

Needless to say, we're very pleased with our recent progress and the accomplishments here at SBA and we look forward to sharing our second quarter and future results with you.

I want to end by recognizing the extraordinary efforts of our employees over the last two months. The sale of 631 towers which is essentially 631 separate real-estate transfers was done in about six weeks. The refinancing of the credit facility was done in about three weeks. Many nights and weekends were worked by many people. And we would not be where we are today without amazing effort. I thank all of our employees for that.

Operator at this time, I think we would like to open it up to questions.

At this time I would like to remind everyone, if you would like to ask a question, please press star and the number 1 on your telephone keypad. We'll pause for just a moment to compile the Q&A roster.

Your first question comes from Ravi Devoy (ph) of U.S. Paine Webber.

Yes, gentlemen, Pam, thanks for your time this morning. I guess what the shareholders really want to know is what do you have planned in the near future to enhance shareholder value?

Well, we're going to continue to work very hard towards positive free cash flow. And that now becomes our primarily focus. We've got the capital structure in place to do that. We have it in place to do it organically and we're going to be watching carefully for opportunities to accelerate the path to positive free cash flow, but that is the primary task ahead and my goal to further increase shareholder value.

Cash flow positive then?

I'm sorry?

The question was are you cash flow positive now?

No, we are not.

Do you anticipate being cash flow positive?

We do anticipate it and we anticipate it in the-if we don't do anything to accelerate the process we expect to achieve it organically by some time in late 2004 or early 2005.

Are you still open to sell any additional towers?

Well, we have, of course, an option outstanding on the 122 towers left to Wisconsin and we will always consider any alternative or option if we think it's in the best long-term interest of our shareholders. We've been pretty creative here over the last six months and I don't think you should rule anything out for SBA.

In light of some of the competition winding up in dire straits, including going as far as filing bankruptcy and no longer trading publicly, some of your major competition -- and all of the adjustments that occur out of the these companies re-emerging -- the new and lower debt entity, how do you see that playing out in as far as the competition for you, going forward, if you have other major tower companies with a lot less debt due to going through bankruptcy and whatever else?

Well, one of the beauties of our business is the exclusive nature of our assets. And carriers lease tower space on an asset by asset basis because of the unique needs that they have in their RF engineering design.

So while capital structures, you know, may change, what has occurred here really does not affect the nature of our assets and their attractiveness to carriers and that really is what has served us so well for the last five years. And that's what we expect to serve us well as we go forward. It's really the asset quality and asset locations that drive carrier demand and future revenue growth and cash flow growth as opposed to the capital structures.

Okay. Can we move on to the next one, operator?

Your next question comes from Bob Purchase (ph) of CSFB.

Good morning, guys. A couple of questions, first of all, I wanted to make sure I heard the numbers right - ah, you guys were talking about your expectation for this year when you said same tower growth between 11% and 16%. Was that referring to revenue?

Yes.

That was revenue growth?

That was revenue growth, Bob.

Thanks, Jeff. And a little bit more follow-up if you guys could give us more color on the new facility. In the original press release it sounded as if the debt was only callable until '04. Are there other - June '04, are there over other restriction on it being called after that? And also, are there any fees involved in retiring it either before or after 2004?

Yeah, I mean the original press release set it was not callable for a year. But in the final deal the way we closed the deal, it's fully refinanceable by us, Bob, at any time on a 4, 3, 2, 1 premium basis.

Like 104 for the first year, basically?

Yes.

Okay. Thank you very much.

I would like to remind everyone in order to ask a question, please press star, then the number 1 on your telephone keypad.

Your next question comes from Mark Dursky of Raymond James.

Sounds like you had a pretty busy and productive quarter. About EBITDA guidance. What are your expectation from the contribution of your services business, A?

And then B, as far as activity levels on the leasing side, what do you kind of have baked into your guidance maybe relative to last year?

Yeah, what we're looking at, Mark, on the EBITDA is a very low nominal, I'll use the word, contribution from services. I mean we have not projected margins going out beyond at least for 2003 what we experienced in the first quarter. So the EBITDA that you see, it's I would venture to say close to 100 percent tower driven.

Uh-huh.

On the leasing considerations -- what we're looking at and what we experienced in the first quarter is a pace which was right about smack in the middle of what we did in the second half of last year.

Okay.

And that's the pace that we have -- we see -- we're comfortable with for the rest of 2003.

Okay. And then maybe just a clarification. Kurt, did you indicate that the on a gross margin basis that the services margins could improve throughout the year? You said double digits I think they were like nine-and-a-half in the first quarter?

No, we --we expect low double digits for the services margins. Basically flat with the first quarter.

Whether it's 10, 11, 12-ish and I'm not suggesting it could get that high, I mean the possibilities there, things are improving, but anywhere in that range, the EBITDA contribution would still be nominal.

Okay. All right. Thank you.

Your next question comes from Rick Prentiss of Raymond James.

Yes, good morning, guys.

You switched it up. It's star 1 instead of 1 on the questions. That explains why I was beating my finger against the wall. A few quickies for you, you mentioned maintenance cap ex, was it 900 per year per tower, was that for the maintenance cap ex?

Yes.

I wanted to make sure I had that right.

Secondly, thank you for giving us the detail of who has been active object carrier front. Can you talk about when you get the visibility for their leasing activity, the 11, the 16 percent same tower revenues, pretty broad range, obviously good, it's double digit in teens percent growth, but when will you have the visibility for the rest of the year to kind of narrow that range down?

Rick, this is Kurt it continues to be -- you know, as the applications come in and are processed. So to really turn that into hard numbers, it's a one to two quarter outlook in terms of more firm visibility. You know, we see a lot of RFPs out there, we talk to the carriers every day about the exact number of cell counts where they're issuing new search rings. Then it boils down to what percent of the time do they actually hit one of our sites. That's what we work with them every day on is to try to make sure as many of those lineup as possible.

So when you mentioned that PCS and Nextel picking up the pace, we should see some of that hopefully materialize into leases this year also.

Absolutely. You've seen their published numbers for sites this year. You know exactly where they stand in terms of hiring companies to start to deploy those sites and when the search rings hit the streets, so we're very close to that activity,.

And also can you update us on how much of your activity or how many of the same tower revenue growth you expect is coming from amendments versus new leases?

Well, actually, we did more in the first quarter than I think we might have ever done and that number, Rick, is about 25 %, at least it was in Q1. And that pace has continued into Q2.

We're starting to see some E - 911 deployments. We're seeing a lot of antenna additions and an awful lot of - well we need to add three antennas and six lines. That really has remained extremely solid for about the last 12 months now. And it continues to pick up in terms of activity levels.

So that part of the business has been very good.

Well, glad to see you got the flexibility to address the interest expense. Thanks, guys.

At this time, there are no further questions. Mr. stoops, are there any closing remarks.

I would like to thank everyone for tuning in today. We've really had a very, very big and productive last couple of months and very much look forward to the next time we get to share our progress with you. Thank you.

This concludes today's SBA first quarter 2003 conference call.