How is SBA Communications generating its revenue, and which segment matters most?

Site leasing is the core business. In 2004 it produced $144.0 million, or 62.2% of total revenues, and 94.1% of gross profit contribution. Site development, including consulting and construction, produced $87.5 million, or 37.8% of revenues, but contributed much less gross profit. The company says it is allocating substantially all capital resources to site leasing.

Is the company profitable, and can it cover its debt obligations?

No. The filing reports a 2004 net loss of $147.3 million and says earnings were insufficient to cover fixed charges by $143.3 million. Management estimates 2005 cash interest and principal of about $46.0 million, compared with $93.2 million of operating cash flow before net cash interest in 2004. The filing also warns that the company may need to refinance, restructure, sell assets, or in an adverse case file for bankruptcy protection.

What changed in the financial statements this year?

The company restated 2003 and 2002 results to change its accounting for certain ground leases underlying its towers, adding rent and depreciation expense. The restatement reduced retained earnings by $45.5 million at December 31, 2003, and had no effect on cash flows. Management also concluded that internal controls were not effective, and Ernst & Young issued an adverse opinion on internal control over financial reporting.

What are the main risks to investors from customer concentration?

A small number of customers provide much of the revenue. Cingular (including AT&T Wireless) and Sprint PCS represented 22.7% and 15.7% of 2004 total revenues. The filing notes that Cingular and AT&T together were tenants on 355 towers with about $16 million of contractual revenue, and that Sprint PCS and Nextel together were tenants on 349 towers, also about $16 million, with the Sprint-Nextel merger expected in the second half of 2005. Non-renewal of duplicate leases could cost up to 50% of that revenue.

What growth plans does the company describe for 2005?

The company intends to build 50 to 75 new towers in 2005, either under build-to-suit arrangements or on locations it chooses, and to consummate a limited number of tower acquisitions. It expects 2005 capital expenditures of $10.0 million to $15.0 million for the build program and $12.0 million to $13.0 million for acquisitions in the first quarter. It also expects cash interest requirements for 2005 to be significantly lower than in 2004 after its refinancing activities.

SBAC 10-K FY2004 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed March 16, 2005. Cited figures are marked; the original filing is the authoritative source.

SBA Communications Corporation, a Boca Raton, Florida-based owner and operator of wireless communications towers in the Eastern third of the United States, reported in its Form 10-K for fiscal 2004 that it owned 3,060 towers in continuing operations with 7,257 tenants.

Revenue rose to $231.5 million^a in 2004 from $192.1 million in 2003, driven by site leasing revenue of $144.0 million (62.2% of revenue, with 94.1% of gross profit contribution) and site development revenue of $87.5 million. The company is structured around site leasing, which the filing describes as its primary focus, while site development is a smaller, more volatile business concentrated in the Northeast and Southeast after the exit from Western services. The company remains financially stressed.

It posted a net loss of $147.3 million^b in 2004 and a shareholders' deficit of $88.7 million, with total indebtedness of $925.8 million. Earnings were insufficient to cover fixed charges by $143.3 million, and the filing notes that the company would need about $46.0 million of operating cash flow to cover 2005 cash interest and principal, versus $93.2 million generated in 2004 before net cash interest. Cash rose to $69.6 million at year end, helped by $244.8 million in net proceeds from new 8 1/2% senior notes, used to retire most of the 10 1/4% senior notes.

Operating cash flow was $14.2 million^c as reported. Investors should also note a restatement of 2003 and 2002 results to correct ground lease accounting and depreciation, and management's conclusion that internal control over financial reporting was not effective as of December 31, 2004, due to a material weakness.

Ernst & Young issued an adverse opinion on internal control. The company plans to build 50 to 75 new towers in 2005, with 2005 capital expenditures expected at $10.0 million to $15.0 million^d for construction and $12.0 million to $13.0 million for acquisitions.

02—Key points

Key Highlights

Site leasing revenue grew to $144.0 million in 2004 from $127.8 million, and site leasing generated 94.1% of gross profit contribution.
Total revenues increased 20.5% to $231.5 million, with site development construction revenue up 40.6% to $73.0 million.
Net loss narrowed to $147.3 million from $175.1 million (as restated), and the company recorded a $41.2 million write-off of deferred financing fees and loss on debt extinguishment.
Shareholders' deficit was $88.7 million at December 31, 2004, compared with a $1.6 million deficit a year earlier, and total indebtedness was $925.8 million.
Refinancing included $250.0 million of 8 1/2% senior notes due 2012 and a $400.0 million senior credit facility, with $36.5 million of additional borrowing capacity.
Restatement of 2003 and 2002 financial statements for ground lease accounting, and a material weakness leading management to conclude internal control over financial reporting was not effective.
Tenant concentration is significant: Cingular (including AT&T Wireless) accounted for 22.7% of total revenues and Sprint PCS for 15.7% in 2004.

03—Questions

Frequently Asked Questions

How is SBA Communications generating its revenue, and which segment matters most?
Site leasing is the core business. In 2004 it produced $144.0 million, or 62.2% of total revenues, and 94.1% of gross profit contribution. Site development, including consulting and construction, produced $87.5 million, or 37.8% of revenues, but contributed much less gross profit. The company says it is allocating substantially all capital resources to site leasing.
Is the company profitable, and can it cover its debt obligations?
No. The filing reports a 2004 net loss of $147.3 million and says earnings were insufficient to cover fixed charges by $143.3 million. Management estimates 2005 cash interest and principal of about $46.0 million, compared with $93.2 million of operating cash flow before net cash interest in 2004. The filing also warns that the company may need to refinance, restructure, sell assets, or in an adverse case file for bankruptcy protection.
What changed in the financial statements this year?
The company restated 2003 and 2002 results to change its accounting for certain ground leases underlying its towers, adding rent and depreciation expense. The restatement reduced retained earnings by $45.5 million at December 31, 2003, and had no effect on cash flows. Management also concluded that internal controls were not effective, and Ernst & Young issued an adverse opinion on internal control over financial reporting.
What are the main risks to investors from customer concentration?
A small number of customers provide much of the revenue. Cingular (including AT&T Wireless) and Sprint PCS represented 22.7% and 15.7% of 2004 total revenues. The filing notes that Cingular and AT&T together were tenants on 355 towers with about $16 million of contractual revenue, and that Sprint PCS and Nextel together were tenants on 349 towers, also about $16 million, with the Sprint-Nextel merger expected in the second half of 2005. Non-renewal of duplicate leases could cost up to 50% of that revenue.
What growth plans does the company describe for 2005?
The company intends to build 50 to 75 new towers in 2005, either under build-to-suit arrangements or on locations it chooses, and to consummate a limited number of tower acquisitions. It expects 2005 capital expenditures of $10.0 million to $15.0 million for the build program and $12.0 million to $13.0 million for acquisitions in the first quarter. It also expects cash interest requirements for 2005 to be significantly lower than in 2004 after its refinancing activities.

04—Continue

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