SBA Communications Corp (SBAC) 2003 Q2 法說會逐字稿

At this time I would like to welcome everyone to the SBA second-quarter results conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a Q&A period. (CALLER INSTRUCTIONS). I would now like to turn the call over to Pam Kline, Vice President of Capital Markets.

Thank you for joining us this morning for SBA's second-quarter 2003 earnings conference call. Here with me today are Jeff Stoops, our President and CEO, Kurt Bagwell, our Chief Operating Officer, and JOHN FIEDOR, our Chief Accounting Officer.

Before we get started, I need to get the standard SBC disclosure out. Some of the information we will discuss in this call is forward-looking, including, but not limited to, any guidance for 2003 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 31, 2002, 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. 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 the other information required by Regulation G, is included in our earnings press release, which has been posted on our websites -- www.SBAsite.com. Jack, would you please comment on the second quarter results?

All of the operational results we will discuss for the second-quarter of 2003, first quarter of 2003 and prior comparable periods, reflect discontinued operations treatments for the sale of 801 and the intended sale of 51 towers in our rest Western region, most of which we completed in second-quarter. Site leasing revenues for the quarter were 31.7 million, up 12 percent over the second-quarter of last year. Tower cash flow was 21.1 million, up 13 percent over the year earlier period. Both leasing revenue and cash flow were up sequentially. Total revenues were $50.4 million, a 21 percent decline over the second-quarter of 2002. The decline was due entirely to our services business.

Services, or site development revenues, were 18.7 million, down 47 percent over the second-quarter of 2002. Adjusted EBITDA was 15.9 million, up 5 percent from the first quarter and down due to services 8 percent from the year earlier period. We continue to work hard on controlling tower expenses, and in the second-quarter were able to hold tower leasing expenses flat with the first quarter. Tower cash flow margins were 66.6 percent, up 120 basis points from the first quarter. Margins in the services business have begun to stabilize. Services margins were essentially flat with the first quarter, with gross profit margins of 9.3 percent for the second-quarter, down from 19.3 percent in the year earlier period. Kurt will discuss the services business in more detail shortly.

We continued to reduce overhead expenses. SG&A expenses were 7.2 million for the second-quarter of 2003, our 10th straight quarterly decline, driven primarily by reductions in headcount and successful cost control initiatives. Our adjusted EBITDA margin in the second-quarter was 31.6 percent, 440 basis points higher than the year earlier period and 230 basis points higher sequentially. The adjusted EBITDA margin improvement was driven by continuing shifts in our revenue mix the higher margin leasing business, which comprised 63 percent of total revenue in the second-quarter, our highest ever. Leasing contributed 92.4 percent of our gross profit in the second-quarter.

We continued to restructure the services side of our business to address changing market demand and the change in the way we will approach the business, which is to rely on a higher percentage of subcontract labor going forward. Restructuring and other charges in the second-quarter of approximately $400,000 was related to further downsizing activities in our services business. Based on additional downsizing activities we have undertaken in the third quarter in our services segment, we expected to incur additional restructuring charges of up to $1.5 million, most of which we expect to recognize in the third quarter. The downsizing activities were additional layoffs and office closings, and are expected to save approximately 2.5 million in annual expenses, some of which will be cost of revenue and some of which will be SG&A expense.

In the second-quarter, we recognized a non-cash asset impairment charge of 10.3 million related to approximately 40 towers which we determined to be impaired based on future lease up potential of those towers specifically. Net loss was 56.4 million for the quarter. Net loss per share for the second-quarter from continuing operations was 89 cents. Net loss per share was $1.10. Excluding the asset impairment charge, net loss per share from continuing operations was 69 cents and net loss per share was 90 cents. Weighted average shares outstanding for the quarter were 51.1 million. Cash flow used in operations improved to 2.8 million, down from the 4.8 million used in the first quarter. Cash capital expenditures in the first quarter were approximately $3 million, down from 6.1 million in the first quarter. We completed construction of 4 towers in the quarter. Capital expenditures for our new builds, including trailing costs and development costs for those completed in prior quarters, were approximately 1.1 million. We expensed an additional 300,000 on general corporate CapEx, 800,000 on maintenance tower CapEx and 800,000 for augmentations and rebuilds.

At this point, Pam is going to provide some information about our capital position and the status of our tower sales.

cash and restricted cash 45.1 million at June 30. Total debt is 889.8 million, down from 1.019 billion at year-end. Net debt to quarterly adjusted EBITDA annualized at June 30 was 13.2 times, but does not reflect the benefit of approximately 58 million of additional gross tower sale proceeds that would reduce the ratio to 12.3 times, most of which we have already received.

Net cash interest expense was 22.4 million and non-cash interest expense was 0.7 million. We had 145.7 million outstanding under our new under our new credit facility at June 30. We had the remainder of the full 195 million available to us, and we were in full compliance with all covenants. Total liquidity at June 30, including restricted cash, was approximately 95 million, and pro forma to reflect the additional net asset sale proceeds and note repurchases post-June 30 was approximately 133 million.

Next, an update on our tower sales. As previously announced, AAT has elected to proceed with the full 801 tower purchase for gross proceeds of approximately 203 million. On May 9, we closed the first portion of the transaction, selling 631 towers for approximately 145 million of gross proceeds. On July 1, we sold another 98 towers for approximately 36.5 million of gross proceeds. The remaining 72 towers under the agreement are anticipated to be sold on or before October 1, 2003, for additional gross proceeds of approximately 21.5 million, subject to certain potential purchase price adjustments.

To improve efficiencies and fully exit non-core ownership markets, we also decided in the second-quarter to sell the 51 remaining towers in our Western region not sold in the 801 tower transaction. The results of those towers, including an anticipated loss on the sale of approximately 4 million, have been accounted for in discontinued operations. Pro forma leverage and liquidity figures I gave earlier do not include any proceeds that we may receive from the sale of these 51 towers.

In the second-quarter, we took advantage of some of the flexibility in our new credit facility and began to buy some of our high yield debt in the open market. We bought 25 million in principal amount of our 12 percent senior discount notes in the second-quarter, and have bought an additional 20 million in principal amount in the third quarter. We paid cash at an average price of 100.5 plus accrued interest. Cash interest savings on the repurchased notes will be 5.4 million per year. We intend to continue to take steps to reduce our cash interest, total interest and overall leverage at SBA, and exactly what we do and when we do it will depend on market opportunities and our liquidity position at the time.

Kurt, would you please provide an update on operations?

The second-quarter was a good, steady quarter for our core leasing business. We were pleased to see the continued growth in new sites deployed by the carriers, the continued amendment of existing leases to add new equipment, and, we believe, a promising outlook for the foreseeable future.

As you have heard recently from our industry peers and our customers, the wireless business is getting healthier everyday, and their and our results really support this. Network quality and expansion has become more of a focus for all of the carriers, and we believe we will benefit from this increased focus. We had our best leasing quarter since the second quarter of last year in terms of gross revenue added per tower, based on signed leases and amendments. 86 percent of our new leasing revenue added in the quarter came from new tenant installations, with the other 14 percent coming from amendments to existing leases. 75 percent of our total new revenue came from the big 6, while other broadband tenants like ALLTEL and Nextel Partners took this number to 98 percent.

Overall, the credit quality of our portfolio has never been higher. 90 percent of our run rate revenues come from commercial voice carriers, and of the remaining 10 percent, the majority comes from local, state and national governmental agencies. Lease rates for new installations stayed stable. Cingular and ALLTEL were our most active new tenants, with AT&T and Verizon very active as well. We expect Nextel and Sprint to have a much more significant amount of activity moving forward, as both have launched new build plans and are aggressively pursuing getting these new cells on the air.

The new leases are coming from all areas -- urban, suburban and rural, capacity sites, performance sites, fill-in sights and coverage expansion sites. The lease amendments continue to come from a variety of areas as well, including E911, microwave wireless back call, GSM overlays, capacity antenna additions and performance-related amplifier additions and antenna swaps. We believe we will grow revenue on a same-tower basis in the 10-14 percent range for the remainder of 2003, and the tower cash flow growth will continue to exceed revenue growth. We continue to meet regularly with the RF engineers and property personnel with all of the carriers in each area. Our processing speed and production quality remains top-notch within the industry to facilitate completed transactions.

During the quarter, we built 4 new towers in the Northeast region. In the third quarter, we also expect to complete construction on 4 more towers in the Northeast region, leaving one remaining, which we will expect to be completed in Q4. On the maintenance CapEx side, we spent roughly $1000 per tower on an annualized basis in Q2. We expect that number to remain steady for the foreseeable future. On the maintenance OpEx side, we ran at a rate that averaged $1200 per tower on an annualized basis. We believe we can keep maintenance operating expenses low. The geographic focus provided to us by the recent sale of our Western assets to AAT has helped us gained efficiencies on the maintenance front as well, with all of our remaining towers in continued operation in the Eastern third of the US.

In our services business, revenue and margin began to stabilize compared to the first quarter. Topline revenue for Q2 was 18.7 million with gross margins of 9.3 percent. We believe we are finally starting to see some improvement in the business, but we think the improvement will be slow, gradual and still subject to variability. We continue to perform site acquisitions nationwide, zoning and construction for all of the big 6 wireless carriers and many other related wireless . Our broadband group continues to perform design builds for wireless backhaul systems for a variety of customers as well as microwave OEMs.

During Q3, we were awarded a large portion of Sprint PCS' next build program, and we'll be providing turnkey services for hundreds of new cell sites in the critical Northeast region. We expect this award to generate 70-$90 million in revenue for us over the next 18-24 months. With this award, we have a larger and steadier backlog than we have had at anytime in the past several years. We also have 2 very large site acquisition projects in progress for two of the big 6 carriers in California. Our services backlog is now over $100 million. The Sprint project just began and will be in full swing by the end of the year and throughout 2004. We expect these projects to be profitable over their lives in the 12-17 percent gross profit range, with some quarterly variations in results due to the nature of the contract and payment milestones.

We also continue to watch our spending in all areas of the Company very closely. As Jack mentioned earlier, we continue to restructure our services business, notwithstanding what appears to be an improvement in the market. Moving forward, we intend to rely on a greater percentage of subcontract labor. With this approach, we believe we will help our margins, reduce risk and minimize necessary capital investment.

To sum up operations right now, we like what we see out there. We believe the carriers are exhibiting much healthier stats and fundamental growth in all the right areas, lower churn, continued MOU and subscriber growth and ARPU increases are all great things for them, and, we think, for us. The carriers also appear to be very seriously focused on differentiating themselves with their network. The need for ubiquitous, consistent coverage for all of their product offerings to excel is greater than ever. We believe this continues to bode well for infrastructure companies, like SBA, as we fulfill a fundamental role in the growth of wireless.

At this point, I will turn it over to Jeff.

Good morning, everyone. We accomplished a lot in the second-quarter. You have heard about the details, but the big picture is that we have dramatically improved the position of the Company going forward. Much of what we have done and will do this year is to improve stability and to build a solid base for future growth. We have removed all short to intermediate-term liquidity issues, we've increased our flexibility to improve our balance sheet, we've improved the quality of our asset portfolio and we have become leaner on the cost side, particularly in the areas of overhead and capital expenditures. Most importantly, we have in place a core team of managers and employees that have stuck together and persevered through the last several years. While we can do more and we intend to, we are very pleased with where we have brought SBA in the last 12 months.

We believe we now have all the tools in place to accomplish our four primary financial goals here at SBA -- one, grow tower cash flow and adjusted EBITDA at double-digit rates; two, reduce our cash interest and total interest expense; third, attain and then grow positive free cash flow; and fourth, deleverage the balance sheet. It also appears that the business environment and the capital markets are improving, and in the immediate future may help us achieve these goals. Carriers are serious about network quality issues and appear to have the funding and access to funding to address them. The big 6, plus the large regional carriers such as ALLTEL and US Cellular, are now more uniformly active with network development projects than at any time in the last 18-24 months.

Our customers are also serious about choosing companies that they know will help them accomplish their goals. This is an area where we have excelled for the last 14 years, and we believe our experience, ability and asset quality will give us an edge as markets continue to improve. On the capital markets side, we are evaluating many alternatives. We are working towards multiple refinancings over the next couple of years. Our 12 percent notes are callable early next year. Our senior credit facility is refinancable at any time, and we have an active market for our high yield debt to pursue which we have already pursued to some degree. We have demonstrated the value of our assets with the tower sale and new senior credit facility, which value continues to grow as we increased our cash flows. We believe we are well positioned with valuable assets, and we'll be able to take advantage of one or more capital markets opportunities as they arise.

We made progress in the second-quarter -- with solid leasing results, the tower sale and debt reduction, the credit facility refinancing, new services business, the open market note repurchases, continued cost-cutting and other positive developments -- but we have more to do, and we will do more. We believe the next 12 months will continue to be very active ones for us in terms of growth, balance sheet improvement and improving cash flows, and we look forward to sharing our progress with you along the way.

Before questions, I would like to recognize and thank all of our employees, who continue to perform above and beyond the call of duty as our company continues to progress forward. Operator, at this time, we are ready for questions.

(CALLER INSTRUCTIONS). Richard Prentiss of Raymond James.

It is certainly good to see the carriers getting active again and spending their money and increasing their cell sites. Two questions I have for you. First, on the Sprint PCS cell sites deployment contract -- can you talk about that as far as what you would will be doing? Is it site acquisition, is it project management? And also, what would the intended process be -- is it going to be more heavily skewed towards finding existing sites, getting new sites built? Just a little more detail on the Sprint contract?

The Sprint contract -- basically, our scope goes from site acquisition through A&E work, all of the due diligence, construction, construction management, all the way through getting the base stations bolted down and ready for integration. Sprint will perform the RF engineering, and Sprint will obviously then perform the network operations after the sites are built. The sites are a mix of capacity offload, of filling coverage, performance sites, a little bit of expansion. So you have really got a mix of rooftops, existing towers, and you're going to have some ground builds in there as well throughout the buildout.

If you had to take a rough swag at rooftop versus existing towers versus new builds, just a ballpark kind of percentage-wise, what is your thought process -- acknowledging that I guess you are in the Northeast region that you got the contract?

It really varies widely by geographic area. In New York, there's a very high percentage of rooftops. Move into a Philadelphia and it changes, once you get out of the core. In more of an average market up there, you are probably looking at in the 40 percent range on versus rooftops and ground builds; but again, that really varies wildly, based on the area.

Jeff, on your 4 financial goals -- obviously we have been pleased watching the growth in the tower cash flow and the EBITDA. When you say attain and grow free cash flow positive, what is your current thought process on when that positive free cash flow will be achieved, cognizant that there is a lot of multiple paths in your financing alternatives? What is your internal view of when you think you'll hit that?

Organically, without any capital markets activity -- which I don't think people should expect that we not do something -- but organically, we are projecting sometime between the end of 2004 and the middle of 2005 for positive free cash flow, but hope to accelerate that.

And that would be cash interest? That would not include total interest, right?

That would be cash interest. That's right.

Steve Flynn of Morgan Stanley.

Can you talk about the restricted cash from the balance sheet? What is that exactly restricted for?

it's restricted for -- we have an indemnity obligation under the AAT deal which secures our obligation to convey clear title. That will all get processed and released as we move through the transaction, and the rest of it would be for surety bonds, where we post cash collateral to secure some power removal bonds and some construction bonds; that is part of the restricted cash -- it's probably about $10 million. That is something that you will see on a regular basis, as we continue to move in and out of those bonds.

With regard to the carve out under the new secure deal, I understand -- the agreement -- I haven't seen it filed yet, but I understand there was a carve out for you to purchase high yield debt -- and it looks like you've purchased about 45 million worth of bonds so far. Can you talk about what that carve out is, how much flexibility you have there for additional repurchases of your high yield debt?

That carve out gives us the ability to repurchase an amount of bonds approximately equal to the amount of net asset sale proceeds that we would receive from the AAT transaction. So, we have a ways to go there before we would come close to using up our ability under the senior credit facility.

So it is as high as the gross proceeds from the AAT after-sale transaction?

Gross proceeds, less an amount that we used to repay the prior existing senior credit facility. For ballpark figures, you should figure in about a $165 million number.

What happens if you sell the 51 towers in the Western region? Is there any sort of formula or something to the secure debt, and then some of it you could use to --

No. We will be entirely -- we keep all those proceeds and use them as we see fit.

As you said, to reinvest in the business? Or that would include --

That would include anything, including additional open market debt repurchases.

With the new Sprint PCS network services contract, the towers -- the new sites that you're going to design for them -- will those include new cell sites on existing Sprint facilities, or are they all going to be on SBA towers or sites, or is there going to be somewhat of a mix?

No. There will be a mix. We have been hired to be their network developer, so we are charged with going out and executing their new cell site development plan. And we will find the sites for them that are the best fit for the customer, and that could be a -- it could be an SBA Tower, it could be a tower owned by another company, it could be a rooftop or it could be a raw land build. And the raw land builds at this point in time are funded -- are to be funded by Sprint, but there is a lot left to do on the there will be a lot of variations as we actually -- when the rubber hits the road -- of actually trying to deploy these and cells sites. But it is not geared around any one particular type of company structures, or even a type of co-location.

But you are likely to see some additional site leasing revenues through this business, but not necessarily ones you want?

I would venture to say we will, and the rest of the industry will as well.

Alex Rygiel of Friedman Billings Ramsey.

Are there any CapEx requirements recent Sprint network development network contract?

No. No recent requirement, no new requirements. We will probably see a slight tickup in working capital as we start to work through the billing process, but we do not expect to need any material amount of new hard assets to execute this business.

Can you talk a little bit, just generally, about the margins within that Sprint contract, versus maybe margins in the network services business two years ago?

We expect margins out of the Sprint business that are better than what we are showing today, but probably not still yet where they were a couple of years ago, when they were in the 30 percent range. The world has just gotten more competitive.

Can you also comment on how much of your business you expect to use for subcontracting in 12 months, versus how much you used maybe 12 months ago?

Kurt?

We used to self-perform our work a lot more than we will, and that is a real change. And that percentage probably goes from, in the neighborhood of 60-70 percent, down -- later this year and early next year will be in the 30-40 percent range. So we will still self-perform a good piece, and we will definitely stay very close to the work, but there's some key areas that leave themselves well to subcontracting.

Basically a flip-flop, from 60/40, 70/30 to the other way around.

Do you see any other opportunities out there on the horizon like the Sprint contract?

Yes, we do. It's a very different feeling out there today than it was 12 month ago. The carriers are all active to varying degrees, and there are a couple more large projects that have just been launched, and are rumored to be ready to be launched.

Jim Ballan of Bear Stearns.

I wanted to make sure I heard you right, in that you're thinking that your tower operating costs per tower were about flat? My numbers say that they actually came down pretty substantially. Maybe it's just my tower count is wrong, but if you could just talk about those costs a little bit more, and if they did come down, what the cause of that was? The other thing is -- you mentioned that you had about 75 percent of your new revenue from the big 6, but also mentioned that the regional guys are getting more active. Can you talk about where you think that number will go in the second half?

I will take the last one first. I think we continue to believe that it will be the combined basis of big 6 affiliates, ALLTEL, US Cellular, and that should be in the 85-90 percent range-plus going forward of incremental new revenue growth. As far as the expenses, you are looking -- you're pulling your analysis off the income statement, right? That includes a variety of components. The point Kurt was making was just a segment of our operating expenses, which is the maintenance side, there are five primary components to tower expenses -- ground rent, utilities, telco, insurance, property taxes and maintenance expense. How many is that?

Six.

And it was the maintenance expense portion of it that Kurt was focused on. So we are actually trying to hold costs down everywhere, attacking all of those areas, but the maintenance expense in particular was one that we felt like -- particularly on a year-over-year basis -- we have had a great degree of success in controlling.

Do you think that is a permanent reduction, or is that a push out, do you think, of those expenses?

No. We view it as a permanent reduction.

Jonathan Atkin of RBC Dominion Securities.

It's RBC Capital Markets. Can you clarify the distinction between maintenance CapEx and maintenance OpEx, kind of following on for the previous question? What is your total recurring OpEx per tower?

Total recurring OpEx per tower is -- it's pretty much what you see. Everything that is in that line item is of a recurring nature. The biggest variability over the last 12 months has been in the maintenance OpEx side, which we have been able to bring down quite a bit. But you're talking about things like ground rent, telephone utilities, insurance, property taxes and maintenance OpEx. All of that stuff is of a recurring nature. The difference between maintenance CapEx and OpEx is really, for any items in the neighborhood of equipment that cost, say, $500 or less, we expense that. Anything of $1000 or less we expense, and then more substantial items, like a brand-new tower lighting component. Or certainly, if we were beefing up a tower structurally by adding crossbeams or a section, that would be in the neighborhood of capital expenditures. Does that answer your question?

Yes it does. Thank you very much.

There are no further questions at this time.

We certainly appreciate everybody following our progress, and we believe that you can expect more, and we look forward to sharing that with you in our next call.

Thank you for participating in today's teleconference. You may now disconnect.

(CONFERENCE CALL CONCLUDED)