SBA Communications Corp (SBAC) 2007 Q1 法說會逐字稿

Ladies and Gentlemen, thank you for standing by, and welcome to the SBA first quarter results conference call. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session. Instructions will be given at that time. If you should require assistance during the call, please press star then 0. Also, today's conference is being recorded.

And I would now like to turn the conference over to our host , Pam Kline, Vice President of Capital Markets. Please go

Thank you for joining us this morning for SBA's First Quarter 2007 earnings conference call. Here with me today are Jeff Stoops, our President and Chief Executive Officer; Kurt Bagwell, our Chief Operating Officer; and Tony Macaione, our Chief Financial Officer.

Before we get started, I need to get the standard SEC disclosure out. Some of the information we will discuss on this call is forward-looking, including but not limited any guidance for 2007 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 fourth in our Form 10K for the fiscal year ended December 31, 2006, 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.

Our statements are as of today, May 8th and 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 directly 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 website at www.sbasite.com. Tony, would you please comment on first quarter results?

Thanks, Pam, and good morning, everyone. Our first quarter results were very solid, and we met or exceeded the high end of our guidance on leasing revenue, Tower Cash Flow, adjusted EBITDA, and equity free cash flow. We had a very straightforward quarter with no material, unusual, or one-time items. Total revenues were $95.8 million, up 39.2% over the year earlier period, primarily due to the inclusion of our AAT acquisition. Site leasing revenues for the first quarter were $76.5 million, up 69.9% over the first quarter 2006. Site leasing segment operating profit was $55.9 million, up 71% over the year earlier period. Our site leasing contributed 95.9% of our total segment operating profit for the first quarter.

Tower Cash Flow for the first quarter of 2007 was $55.8 million, a 68.2% increase over year earlier period. Tower Cash Flow margin was 75.2% compared to 75% in the year earlier period. Since our AAT acquisition, Tower Cash Flow margins have continued to increase, and we have now caught up with and surpassed pre-AAT Tower Cash Flow margins. There are three factors that are driving margin growth. First, very high incremental margins from additional leasing revenues, good expense control, and our ground lease purchase program. The impact of these three factors is outweighing the impact of our portfolio growth, where we added tower's typically -- where added towers typically start at Tower Cash Flow margins below the portfolio average.

Our services revenues were $19.3 million, compared to $23.8 million in the year earlier period, reflecting in large part a slowdown in the first quarter for a couple of our large service customers. Services segment operating profit was $2.4 million, compared to $1.8 million in the year earlier period. The Services segment operating profit margins were 12.5% in the first quarter, a nice improvement compared to the 7.8% in the year earlier period, and even when compared to the 11.8% margin in the fourth quarter of 2006. SG&A expenses for the first quarter were $10.8 million, when $9.4 million on cash basis excluded non-cash compensation charges of $1.4 million. This compares to SG&A expense of $8.9 million in the year earlier period, while $7.9 million on a cash basis when you exclude non-cash compensation charges of $1 million. Our overhead structure is set at this time, and we expect quarterly cash SG&A expenses to range from $9.3 million to $9.5 million per quarter for the remainder of this year.

Net loss was $16.4 million, compared to a net loss of $9.2 million in the year earlier period. Our net loss per share for the first quarter was $0.16, our weighted average shares outstanding for the quarter were 105.7 million. Adjusted EBITDA, which excludes non-cash leasing revenue and ground lease expense and non-cash compensation, was $49 million in the first quarter, up 79% over the year earlier period. Adjusted EBITDA margin was 52.5%, up from 40.3% margin in the year earlier period.

Equity free cash flow increased materially in the quarter, reflecting strong EBITDA growth, low weighted average cost of our debt, and stable non-discretionary Capital Expenditures. Equity free cash flow for the quarter was $24.7 million, an increase of 113% over the year earlier period. Equity free cash flow per share increased 64.3% from $0.14 per share to $0.23 per share in the current period. We built nine towers in the quarter, acquired 142, and ended the quarter with 5,702 towers owned, and the right to manage over 5,700 additional or potential communication sites.

Cash Capital Expenditures in the quarter were $57.6 million, of which we spent $1 million on maintenance CapEx, $1.5 million on augmentations and rebuilds, and $500,000 on general corporate CapEx. We also spent $51.8 million of cash on acquisitions, ground lease purchases and earn-outs, and $2.8 million on new tower builds and new build work in process. With respect to the land underneath our towers, in total, we spent $4.3 million in cash to buy land and easements and to extend ground lease terms. We now own or control in excess of 50 years the land under 20% of our towers. During the quarter, we spent $91.2 million of cash to repurchase and retire 3.24 million shares of our common stock, reducing our share count to 102.8 million as of March 31. And at this point, I'm going to turn things over to Pam who will provide an update on our Balance Sheet.

Thanks, Tony. In the quarter, we issued $350 million of 0.375% Convertible Senior Notes which will mature December 2010. Net proceeds from the notes were $341.5 million. We used $49.9 million of the proceeds and the proceeds from the sale of warrants to purchase convertible, certain convertible note hedges. The effect of the convertible note hedges and the warrants was to generally increase the conversion price of the note from $33.56 to $55 per share. As Tony mentioned, we also used $91.2 million of the proceeds to simultaneously repurchase and retire 3.24 million shares of our stock. Upon conversion, we have the right to sell our obligations under the notes in cash, stock, or a combination of both.

SBA ended the first quarter with $1.555 billion of commercial mortgage-backed pass-through certificates outstanding, $350 million of 0.375% Convertible Senior Notes, $252.6 million of cash and restricted cash, and a net debt of $1.65 billion. All of our debt is fixed rate debt with a weighted average cash coupon of 4.9%. As of March 31, 2007, we had no borrowings under our $160 million senior credit facility, and we terminated the senior credit facility effective April 3rd, due to our strong cash position following the convertible note offering, and the fact that the facility was scheduled to mature in December of this year. We expect that our cash balances combined with our growing cash flows from operations will be more than sufficient to meet our liquidity needs through the end of the year. We may look to secure a new credit facility prior to the end of the year. The Company's net debt to Annualized Adjusted EBITDA of leverage ratio was 8.4x at March 31, 2007. Kurt, would you provide an update on operations?

Thanks, Pam, and good morning. As you can see by the numbers, Q1 was very good for us here at SBA. Revenue growth and margins were strong, costs were in line or better than expectations, we continued to steadily grow the asset base, and we finished the quarter with strong backlogs. As you have heard from our customers over the past two weeks , their subscribers remain very active in terms of wireless usage on both the voice and data fronts. This continued subscriber activity and increased adoption of wireless voice, and especially wireless data, into the daily usage patterns of both personal and business users is encouraging. These users are also demanding in terms of the quality of service they receive, and our carrier customers continue to satisfy this need through network growth and enhancement to keep their churn levels to a minimum.

Overall, carrier activity in Q1 was solid, although several of our customers were not as busy as they were last year. In Q1, we saw good activity from Verizon, Sprint Nextel, Metro PCS, Cricket, and Clearwire. We're fully engaged with these carriers as they work on new markets, new technologies and general network improvement. We expect Q2, Q3, and Q4 to pick up for T-Mobile and Cingular as they work on technology upgrades in more new cell builds, and we have started to work in that regard. Some of our current activity relates to Auction 66 Spectrum, and we expect this activity to increase throughout the year and into 2008. We are very excited about what's yet to come.

In Q1, 73% of the new leasing business signed on our towers were derived from new tenant agreements, while 27% came from amendments to existing agreements. We expect this mix to remain at similar levels throughout 2007, fluctuating up and down a few points each quarter. 90% of the new revenues signed on our towers came from Telephony and other major broadband carriers including Clearwire, a very active carrier. Rental rates for new tenant leases remain solid, and average tenant rates across our entire portfolio increased yet again to a rate of $1,752 per month, up from $1,728 per month at the end of the fourth quarter. At the end of the quarter, we had 13,866 signed leases, putting us at an average of 2.4 tenants per tower. We expect this pattern of increasing average monthly rents to continue each quarter.

We had another quarter of solid double digit organic growth. Same tower revenue -- same tower year-over-year revenue growth on the towers we owned for more than a full year at March 31st was 10% net of churn and 11.5% excluding Cingular churn, which we view is related to the AT&T merger, one-time in nature, and different from ordinary churn. Same Tower Cash Flow growth was 14% net of churn for the same period, and 16% excluding Cingular churn. Based on the first quarter results of our peers, our organic growth rates once again lead our industry and reflect the high quality and desirability of our towers.

Operationally, we continue to excel in terms of customer service in regard to the leasing process. We constantly get high marks and are viewed as a tower company that can get applications turned into executed agreements and installed antennas efficiently and accurately. The operational cost of our tower portfolio also continues to be a bright spot for us, with continued expansion of our ground lease purchase and extension program supporting this trend nicely. In addition, we've been able to squeeze cost out of our repair and maintenance line items and have lowered our actual expenses in this area on a per tower, per year basis.

On the asset growth front, we purchased 142 towers and built nine more in Q1, bringing our total owned tower base to 5,702. The M&A activity should continue to maintain a good pace, and we expect the new tower build activity to increase throughout the year. On both classes of new assets, the subsequent leasing activity has been very strong, and the operational results have been better than initially expected. We are very pleased with the quality of results here and continue to seek out more quality assets.

In the Services segment of our business, Q1 revenue was $19.3 million, and Segment Operating Profit was $2.4 million or 12.5%. Q1 revenue was 19% below the year-ago quarter, but Segment Operating Profit was up 31%. Revenue decline was due to a couple of our customers being much less active this quarter than a year ago. This is our fourth consecutive quarter of margin expansion in this business. We attribute these increases mainly to better price points in the marketplace, the mix of work in our backlog, rolling off of older, less profitable work, and continued solid execution by our field teams. Again, we expect services revenue to increase sequentially each quarter of 2007, as the carriers become more active, particularly those that were less active in the first quarter, and we expect margins to stay in the low double digit range. Overall, our operations at SBA are strong, and we believe 2007 will be a solid year for the industry and especially our Company, as our clients continue to invest in growing and enhancing their core product, the underlying wireless networks. At this point I'll turn it over to

Thanks, Kurt, and good morning, everyone. We're very pleased with our first quarter results and believe they foretell very good results for the full year. We continue to be a high growth Company. We posted good results in the quarter, notwithstanding the fact that some of our large customers were not as active in the quarter, and that's actually encouraging because we believe those customers will be more active as the year progresses and join other of our customers who were very busy in the first quarter, and who we expect to stay busy. We see tangible evidence of improving activity.

Our leasing backlog is the highest it has been since we acquired AAT. We recently were awarded several large services projects, and we are projecting higher services revenue in the second quarter, and even higher services revenue in the second half of the year. We continue to operate in a favorable environment. The operating and financial results of our wireless customers have generally been good. Subscribers and minutes of use continue to grow, and data continues to increase as a percentage of overall wireless use. Capital continues to flow to the industry, most recently evidenced by the very successful IPO of Metro PCS. Our customers continue to affirm their intent to invest material amounts of capital into network expansion and improvement. All of this is happening ahead of any material development of the AWS Spectrum auctioned last year, and obviously ahead of any development of the 700 megahertz Spectrum scheduled to be auctioned later this year or early next year. In short, carrier demand for our tower space and services is strong now, and expected to increase even more as we move through the rest of 2007 and into 2008.

In this favorable customer demand environment, we have been executing very well operationally. A portion of our financial success in the first quarter was due to strong cost controls that allowed us to post better than expected Tower Cash Flow margins, services margins, and lower than expected SG&A expense. Our employees did a great job of keeping our customers happy and growing our EBITDA line at the same time, and I thank all of them for it. With the AAT integration now fully behind us, I expect that we'll continue to execute efficiently and effectively.

With organic growth as strong as it is, and our expectations that it will stay strong, we have a continued interest in growing our tower portfolio with high quality tower assets. We had very good success in that regard in the first quarter. We have a large number of towers pending acquisition under contract and are actively pursuing additional opportunities. We continue to focus on acquiring towers that, on average, have less tenants per tower than our current portfolio, and as good or better growth prospects at acquisition prices that we believe will, in the long-term, produce returns materially above our cost of capital. We are also continuing to stay busy building towers and buying land under our towers. Excluding the AAT acquisition, this year we expect to invest materially more capital in each area of acquiring towers, building towers, and buying land than we did in 2006 at prices that we are very pleased with. Based on where we are at this point of the year, I'm very confident that we will meet our goal of expanding our tower portfolio by 5% to 10% this year. We are well ahead of last years pace.

We have plenty of resources to pursue our growth goals. We have a strong cash position. We are generating increasing amounts of cash from operations, and we have good access to additional capital should we need it. We are thrilled with the results of our recent Convertible Note offering. It's a great example of an opportunistic financing that we believe will create material additional value for our shareholders. By structuring and executing the transaction as we did, including the share repurchase component, we have materially increased future equity free cash flow per share, and you can clearly see this impact reflected in our increased equity free cash flow guidance. We increased the mid point of our equity free cash flow guidance by $9.5 million or 9.1%, and reduced our shares outstanding. We are very confident that we will be able to invest the remaining proceeds on an accretive basis, all while exceeding our goal of 2.0 times or greater adjusted EBITDA to cash interest coverage, and reducing our leverage by year-end to below 8 times net debt, annualized adjusted EBITDA. In short, we accessed very low cost capital on very favorable terms that we expect to be able to invest for returns materially above our cost. We believe that will be good for our shareholders.

With respect to additional share repurchases, we have a current Board Authorization in place to repurchase an additional 2.8 million shares from time to time through December 31, 2007. If and when we do so, will depend on our assessment from time to time of the availability and expected returns of additional tower and land investments compared to then current share repurchase opportunities. While it is too early in the year to predict how much of our cash will go to which use, it is our goal to spend our cash above a certain minimum level by year-end on either additional assets or share repurchases. We have touched on each of the three principle components for our value creation strategy here at SBA: Strong organic growth, additional portfolio growth, and active balance sheet management. We measured the success of our strategy by growth at equity free cash flow per share and ultimately, stock price appreciation. Right now, I believe we are very successful. We are making good progress on each of the three components, and equity free cash flow per share is growing materially.

Based on reported first quarter results, we continue to lead our industry in organic growth rates, and we are growing our equity free cash flow per share at a materially higher rate than our peers. Over time, we believe our shareholders should be rewarded for the rate of our growth in equity free cash flow per share. We feel SBA is in an excellent position for this growth to continue through the remainder of 2007 and into 2008. I believe 2007 is shaping up to be another very good year for us, and I look forward to reporting future results. And, Operator, at this time, we are ready for questions.

Thank you. (OPERATOR INSTRUCTIONS) And we'll go first to the line of Vance Edelson with Morgan Stanley. Please go ahead.

Okay, thanks a lot. So, the guidance implies that site development revenues will show a strong ramp late in the year, which is not the pattern last year, and you mentioned that the revenue decline in the first quarter was due to a couple customers being less active. Can you tell us what the drivers are that will contribute to the growth going forward, and is it primarily those two customers getting back on track?

Well, the decline in Q1 year-over-year was primarily Cingular, and what we expect going forward, Vance, is a pick up or a return to activity not only from Cingular, but also increased engagement by us on T-Mobile work, Sprint, WiMAX work, and some other things that we have kind of very good visibility on today.

Okay, great. And the implied price of the towers that you acquired or that you've agreed to acquire since March, I think was a little bit higher than what you normally pay. Can you walk us through what it is about these towers that makes them worth it, and maybe just remind us again what your parameters are when you look to acquire towers?

Yes, that particular pricing that you've referenced is driven by one 20-tower deal in the Northeast in markets of Massachusetts, Connecticut, extremely tough zoning, very desirable markets where we've had an excellent history of multiple tenant lease-up, so we did see our way clear to pay a little bit more for those towers, but we think they are going to be super performers over time.

Okay, that's helpful. And lastly, is there anything slowing you down on the tower builds? I think the nine that were built is a little bit lower than the recent run rate?

Yes, Vance, this is Kurt. With had some site-specific delays in Q1 with zoning and permitting. Those areas are as tough as ever, but we definitely feel it's going to ramp back up. We've been running about 15 a quarter, and we expect that to grow this year, and we think you'll see that jump back up in Q2 and beyond.

Okay. That's great. Thanks, guys.

Our next question is from the line of Michael Rollins with Citigroup. Please go ahead.

Yes, hi. Good morning. You talked a little bit about using some of the cash for buybacks at the end of the year potentially, and I guess the question I have is does that represent significant inflection point to the way that you're thinking about the business, because it's in the quarter, two quarters ago, the strict priority was more acquisitions and trying to find accretive opportunities, and does that suggest that either prices are too high for acquisitions for you at this point, or that the acquisition pool is drying up a little bit? Thanks.

No. It doesn't really reflect either, Michael. It reflects that we have a large amount of cash available to us, and to the extent we cannot satisfy our first priority which remains adding assets portfolio at good prices that will make money for our shareholders over time, then we will look to do share repurchases. But it should not signal a change in any view that we have. Our views are exactly the same. We just happen to be sitting on a lot more cash than we were when we first made those statements six months ago.

Great. Thank you.

Ladies and Gentlemen, (OPERATOR INSTRUCTIONS). Our next question is from the line of Mark DeRussy with Raymond James. Please go ahead.

Jeff, can we talk a little bit more about the portfolio you're about to acquire and the price paid? I understand that you'll pay more on a per tower basis for that growth opportunity, but can you talk about it in the context of Tower Cash Flow, which I think is probably more a meaningful metric?

Yes. We are seeing pricing, Mark, ranging, pretty wide ranging multiples, anywhere from 12 times for the more mature assets to 20 times for an asset that is essentially a new build. And we will pay any and all of those multiples if we believe that the tower over a five year period of time will provide returns to us materially above our cost of capital. So, you could generally assume that the more we pay for a tower, the less multiple we are paying for it at the same time.

Okay. And then I guess maybe just a philosophical question for you, Jeff. The industry is very healthy. You guys are performing at a very high level. The list goes on of things that you're doing very well. As you look out to the future, is there anything that you would like to see the Company do better? Or where you can improve upon?

Well, I think our future challenges are really going to be much more incremental. We would like to cut expenses a little bit more, squeeze out a little bit more leasing and revenue growth, buy a few more assets, but in terms of wholesale changes or anything materially different, Mark, no. It's really -- we've got a very good plan and Company and people in place, and we just push everyone to execute a little bit better tomorrow than they did today.

Okay. Thank you.

And thank you. (OPERATOR INSTRUCTIONS) I have a question from Mark DeRussy. Please go ahead.

I'll take this opportunity for sure. Jeff, could you talk about your appetite for doing a large/transformational type of transaction? There's been some discussion about some larger portfolios that could be for sale.

Well, we did one last year, so we, under the right circumstances and on the right terms, we would consider doing one again. We don't really view our strategic position as such that we need to do a big deal, much like we did AAT, it will be driven, if we do something primarily and if not strictly by our expected financial rewards from that transaction going forward. So having said that, we'll certainly look, and if it's something that can make sense for our shareholders in the confines of where we're comfortable from a capital structure perspective, and we think we can materially increase equity free cash flow per share, we'll pursue it.

Okay, and then in the absence of any large transactions, it sounds like you guys are still on target to deliver what I would call superlative free cash growth given your current method of operations.

Yes, we certainly think so.

Thank you.

Thank you, and there are no further questions in queue. Please continue.

Great. Well, thank you, everyone, for joining us this morning, and we look forward to the next time we're together to discuss second quarter results.

Thank you. This conference will be available for replay starting today at 5:00 p.m. and will go until May 22 at midnight. To access the replay system, you can dial the number 1-800-475-6701, and enter the access code 870879. That number again is 1-800-475-6701, and enter the access code of 870879. That does conclude our conference for today. Thank you for your participation and for using the AT&T Executive Teleconference. You may now disconnect.