SBA Communications Corp (SBAC) 2003 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the SBA third quarter results conference call. At this time, all participants are in a listen-only mode. Later, there will be an opportunity for your questions with instructions given at that time. (Operator Instructions). 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 third quarter 2003 earnings conference call. Here with me today are Jeff Stoops, our President and Chief Executive Officer; Kurt Bagwell, our Chief Operating Officer and Jack Fiedor, our Chief Accounting Officer. Before we get started, I need to get the standard SEC disclosure out.

Some of the information we will discuss on this call 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 that 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. Any other information required by regulation G is included in our earnings press release which has been posted on our web site, www.sbacite.com. To properly assess our third quarter results, we recommend that you also review our press release of last night detailing the results of the re-audit of our 2001 financial statements and the adjustments to our 2001, 2002 and June 30, 2003 financial statements. Jack, would you please comment on our third quarter results?

Thanks, Pam. All of the operational results we will discuss for any period reflect discontinued operations treatment for the sale of 784 towers and intended sale of 60 towers in our western (ph) region. Site leasing revenues for the quarter were 32.2 millions, up 8.3 percent over the third quarter of last year and a quarterly record for us. Site leasing gross profit, or tower cash flow, was 21.7 million, up 16.2 percent from the year earlier period, also a quarterly record. Both site leasing revenue and site leasing gross profit were up sequentially.

Total revenues were 52.4 million, a 13.8 percent decline from the third quarter of 2002. The decline was entirely to our services business. Services, or site development revenues, were $20.2 million, down 35 percent over the third quarter of 2002, but up from the second quarter of 2003 which is our first sequential increase in services revenues in five quarters. Net loss from continuing operations was 32.6 million and net loss was 19.7 million for the third quarter. Net loss per share for the third quarter from continuing operations was 62 cents and net loss per share was $0.38 cents. Weighted average shares outstanding for the quarter were 52.4 million. Adjusted EBITDA was 15.8 million, approximately flat with the year earlier period.

We continue to work hard on controlling tower expenses and in the third quarter, were actually able to reduce tower leasing expenses sequentially from the second quarter. As a result, we posted record tower cash flow margins of 67.5 percent, up 90 basis points from the second quarter of 2003 and 460 basis points from the year earlier period. We had a challenging quarter with respect to services margins. Services margins were 4.2 percent for the quarter, down from 16.7 percent in the year earlier period. Kurt will discuss the services business in more detail shortly. We continue to reduce overhead expenses. SG&A expenses for the third quarter were 7.9 million, or 6.8 million excluding nonrecurring and non-cash items of 1.1 million, our 11th straight quarterly decline driven primarily by continued successful cost control initiatives. Our adjusted EBITDA margin in the third quarter was 30.1 percent, 380 basis points higher than the year earlier period. The adjusted EBITDA margin improvement was driven by a continuing shift in our revenue mix to the higher margin leasing business which comprised 61.4 percent of total revenue in the third quarter. Our leasing segment contributed 96.2 percent of our gross profit in the third quarter, our highest ever.

As we said last quarter, we incurred a restructuring and other charge in the third quarter of 1.1 million related to further changes in the way we run our services business as we continue to move towards -- more towards subcontract labor and centralized operations. Cash, capital expenditures in the third quarter were approximately 3.1 million. We completed construction of 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 1.7 million. We spent an additional 200,000 on general corporate CapX, 800,000 on maintenance tower CapX and 400,000 for augmentations and rebuilds. At this point, Pam is going to provide some information about our capital position.

We ended the quarter with cash and restricted cash of 58.3 million, total debt of 875.9 million, down from a little over a billion at year end. Net debt was 817.6 million, down from 957.9 million at year end. Net cash interest expense was 21.4 million and non-cash interest expense was 1.4 million. We had 166.8 million outstanding under our credit facility at September 30th. We had the remainder of the full 195 million available to us and we were in full compliance with all covenants. Total liquidity at September 30th, including restricted cash, was approximately 86 million and does not include any asset sale proceeds received in the fourth quarter.

Next, an update of our tower sale. The final number of towers sold to AAT was 784, all of which have been transferred. 137 of those towers were sold in the third quarter and 16 were sold in the fourth quarter. 7.5 million of the gross proceeds remains in escrow and part of our restricted cash to cover certain potential purchase price adjustments in indemnities to be determined between now and the end of April. Upon final adjustment, we expect approximately 5.5 million to be released to us, resulting in aggregate gross proceeds of approximately 194 million.

There were 17 towers excluded from the original 801 towers being sold to AAT. These 17 towers, together with the other 51 towers in our Western region, continue to be held for sale. The liquidity figures I gave earlier do not include any proceeds that we may receive from the sale of these 68 towers. In the third quarter, we continued repurchasing some of our high yield debt in the open market. We bought 25 million of principal amount of our 12 percent senior discount notes for cash of approximately 25.5 million, plus accrued interest. Year-to-date, we have retired 50 million of our 12 percent senior discount notes and we have focused on that issue as it is the first callable by us (ph) which we can do early next year. We also issued 2.95 million shares of our class A common stock in exchange for 10 million in principal amount of our 10.75 senior notes, plus accrued interest. As a result of these activities, we have reduced our cash interest expense in the third quarter and we expect another decline in the fourth quarter. 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?

Thanks, Pam. As you just heard, the third quarter continued a strong trend for our site leasing business in both the top-line revenue and gross profit growth areas. We continue to be pleased with the growth of our customers' network and the associated lease-up on our towers coming from both new cell sites and additional equipment. We continue to be very pleased with the location and quality of our towers.

Our customers are taking network expansion, capacity and quality very seriously and we believe that there is a direct correlation with our results. We feel that higher than desirable turn rates and the potential related issue of local number portability are major driving factors in the carrier's quest to improve and expand our networks. We believe that in the long run, a focus by our customers on their networks will be healthier for both their industry and our industry.

In the third quarter, 80 percent of our new leasing revenue came from the big six, our highest this year. When counting other major voice carriers like Alltel, U.S. Cellular and the big six affiliates, over 97 percent of our new revenue came from these types of tenants. As we have stated before, over 90 percent of our total run rate leasing revenues come from major commercial voice carriers with a large percentage of the remaining 10 percent coming from local, state and federal agencies and system providers like Mekon (ph).

Our mix in the third quarter between new revenue from new installations and new revenue from amendments was essentially the same as in Q2. Eighty-six percent came from new installations while 14 percent came from amendments. Our most active tenants in Q3 were Cingular, T-Mobile, Nextel and AT&T. Verizon was steady as usual and the activity from Sprint is growing.

New lease rates held firm in the quarter and we expect that fact, along with the steady volume, to continue to support high single-digit to both double-digit same tower revenue growth and gross profit or cash flow growth that will exceed revenue growth. Our maintenance OpEx and CapX for our tower portfolio was held to models that met our internal levels and we continue to feel very confident in our ability to continue maintain these numbers on a going forward basis.

In our services business, top-liner revenue improved sequentially from Q2 to Q3, but the gross margin continued to be an area of focus for us. In Q3, top-line revenue was 20.2 million and gross profit was 4.2 percent. We expect top-line revenue to be roughly flat to slightly up in Q4 over Q3 and then begin to climb again in 2004 as our backlog continues to grow and our spring contract in the Northeast region moves into the construction phase. We believe that the gross margins in Q3 will be our low point and our goal is to move margins back to the high single-digits by the end of Q4. We're working hard to get there and believe there's enough carrier demand and appreciation for quality and timely service to allow us to accomplish this goal. We continue to manage the size of our local services operations and continue to manage closely the changing relationships between ourselves, the carriers and the other major services providers in an ever-increasing outsourcing environment.

To sum up operations right now, we continue to be optimistic about the environment that exists today and the prospects for the future. Our core business -- tower leasing -- is performing well and we see no reason why that won't continue. We know we need to improve our services margins and we believe we can. We think the improvement environment will help out all aspects of our business. The continued effort by the carriers to develop ubiquitous, high-quality coverage for all of their product offerings, both voice and data, is a key fundamental that bodes well for wireless infrastructure companies, like SBA. At this point, I will turn it over to Jeff.

Thanks, Kurt, and good morning everyone. Our core business of tower leasing is doing well and we believe it will continue to do well through the fourth quarter and into 2004. Our backlog is strong, pricing is stable, churn is low, non-renewals from operating voice carriers are virtually nonexistent and through our services segment, we expect that leasing demand will continue well into 2004. Network quality is increasingly the focus of our customers and local number portability. Both wireless to wireless and as announced today, wireline to wireless, should keep network quality in the forefront for a long time. Carrier activity as a whole is stronger than it has been in the first half of 2002, and we think it should stay that way for while. We expect to continue to capture our fair share of this activity. Our towers are well located with a lot of remaining capacity, low ongoing CapX requirements and efficient operating expense structures. As a result, we expect continued strong topline and tower cash flow growth for the foreseeable future. We're very pleased with the tower ownership side of our business and believe that our assets have great value and future growth potential.

On the services side, activity is picking up, but we need to do a better job on profitability. Being in the services business in the third quarter cost us an estimated approximately $1.5 million in loss adjusted EBITDA and cash flow, and that is not a situation we want to continue obviously for very wrong. As we have always said, we like the strategic operational and customer importance of the services segment, but we continue to evaluate its financial impact. We had a few isolated projects that we believe contributed to the lower third quarter margins. Services margins were better in October, but we need to finish the year strong and produce the high single-digits margins Kurt discussed earlier.

Operationally, our fourth quarter guidance reflects our optimism for our leasing segment and continued caution for the services segment. Reducing our interest expense and delevering the Company remain top priorities for us and a means by which we expect to accelerate our organic path to positive free cash flow. We made additional progress on those goals in the third quarter with the retirement of $35 million of additional high-yield debt and we want to do more. Our 12 percent senior discount notes are callable early next year and we believe we will have some very beneficial refinancing opportunities in the current market environment, with respect to both rate and maturity.

In a nutshell, we're very happy with our core tower ownership business and believe we will continue to see strong growth in that segment for the foreseeable future. Operational expenses and capital expenditures remain under control and are expected to stay that way. Our customers are active and have compelling reasons of their own to stay active with their network development. We need to improve our services profitability and reduce our interest expense and leverage and those goals have and will continue to have a tremendous amount of our attention and focus.

Before questions, I'd 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. At this time, operator, we're ready for questions.

(Operator Instructions). Ric Prentiss, Raymond James.

Good morning. A couple questions for you guys. I heard some -- sounded like guidance for 2004 in there on revenue growth, high single-digit to low double-digit and has flow growth greater than revenue growth. Was that the '04 guidance just in percentage terms, (multiple speakers) in absolute dollar terms yet that you're wanting to put out there?

No, that would be in percentage terms, Ric, and that would be confined to our leasing revenue and tower cash flow line items.

So that was tower cash flow, not EBITDA?

Correct.

If you look at the ability to grow revenues, now that you have (indiscernible) clean base of towers with the AAT transaction finalized, what do you think your operating leverage is, as far as if you're able to grow revenues that high and tower cash flow higher than revenue growth? What would you expect EBITDA growth to be? In other words, how do we look at the G&A? Is it kind of flat now, and so you should have higher operating leverage as you go forward?

Yes. SG&A, I would look at as flat. We've been reducing it now for 11 quarters in a row. Hopefully we can continue that trend. But on the conservative side, I'd say you ought to look at it as flat into next year. Toward expense is something that we've focused on quite a bit and have made really good progress there, hence the margins that we are experiencing. I would feel comfortable that you kind of look at us dropping 90 percent or more of new leasing revenue down to the tower cash flow line.

On CapX, it seems like maintenance CapX keeps coming in very low. Can you talk a little bit about your thoughts as far as what maintenance and augmentation CapX will look like over the next couple of years? Is that the .8, .4 million a quarter added together number, something that seems reasonable looking out into the future?

Yes, it is.

My final question -- you've mentioned the services business several times on the margin side. Given that there has been some outsourcing contracts going on out there with Sprint and some others, what gives you the comfort that margins can go up? Is it the carrier's need for speed or what helps the pricing environment there I guess that gets you comfortable that you can hopefully move it up?

The volume has declined over time and we just kind of stopped that decline this past quarter at the same time we were trimming our back office and centralizing things. And the speed at which you do that kind of defines what your margins looks like in those quarters. We're basically through that process now. We think we have a better operating structure. That, combined with the volume moving back up, plus we have not only with the Sprint project but with a couple of others, we have some high-volume projects contained in certain geographic areas that are just flat out more efficient than getting daily work spread out all over the area. So there is really a combination of things.

I would also say that the backlog that we have been adding here recently has been coming on at a higher estimated gross profit margin. That is probably the single most important reason for optimism going forward.

And the Sprint contract, that kicks in fourth quarter, or as far as being sizable?

Yes, a little more in the fourth quarter. We're still -- third quarter was the start of it, fourth quarter we're still very heavy in the site ac (ph) phase and leasing phase, and then first quarter's when you're really going to really see some volume of sites move into construction, and that's when you will see it translate into service revenue dollars in a bigger way.

And that should help that margins next year as well, then?

Absolutely. Because the back office efficiency, when you're doing these high-volume projects, is tremendous.

Good luck, guys.

Alex Rygiel, Friedman Billings Ramsey.

Thank you. Over and above the 68 towers identified as being held for sale, are you considering any other tower sales or any other asset sales?

No, Alex. We really like the portfolio that we have now, primarily located in the eastern third of the U.S., and we have no current plans for anything beyond the 68 towers that are still out west.

Perfect. Thank you.

(Operator Instructions). Ric Prentiss, Raymond James.

Can't let you go that easy, can't believe no one else is queueing in. You mentioned pricing was fairly stable. Can you talked a little bit about escalators? We've been watching that with particular interest out in Vegas at the tower show at the end of October. The carriers were clearly interested in leasing a lot of sites this year, but concerned that some of the escalators from earlier contracts, the ones kind of in the 3, 4 and even 5 percent range had become quite large, and it seemed like they were wanting to press down the escalator side. Could you talk about what is going on in the escalator side and how it might impact pricing going forward?

There has always been a good, healthy back and forth between the tower companies and the carriers on those issues. I don't -- I would not characterize things today at any more or less heated than where they have been. From our perspective, we feel that the escalators have kind of calmed down a little bit and any changes that have been made to the master agreements on those issues have kind of been done. And I really don't -- we have always told people that our escalators average between 3 and 4 percent, and I think we are comfortable expecting that that continues.

One of the other thing they brought up at the conference was a strong interest in looking to tower companies like yourself to provide other services like back haul. We have not really asked for an update on that recently, but you guys had been active in the back haul business previously, a little update on what you're looking at there?

We're still active there. We think we have a better mousetrap for the carriers in many respects than their wireline solutions. Ultimately, it comes down to two issues for them -- price and operational ease of switching -- and that is really where the devil is in the details. I think theoretically, everyone continues to believe that there is a great opportunity there, and we just have to go out and slug through on a project-by-project and case-by-case basis, but we continue to believe that that is going to be a future -- or an area for future growth for our industry.

Okay so stay tuned is what it sounds like there.

Yes.