SBA Communications Corporation (SBAC) Earnings Call Transcript & Summary

Well, welcome back, and it's a pleasure to welcome to our next afternoon session here at Communacopia, Jeff Stoops, the President and CEO of SBA Communications. Jeff, thanks so much for being here with us this afternoon.

Brett, happy to be here.

All right. Well, let's jump right into it. If we look at the company, you have expanded considerably over the last 2 decades. You now have over 32,000 sites across 14 different countries. However, unlike some of your larger U.S.-based peers, you've continued to say predominantly a U.S. tower operator, over 80% of your site leasing revenue continues to be generated domestically. Why do you continue to overweight your exposure to the U.S. market?

Yes. I think we do it both consciously, but also just as a function of where we see the good opportunities. Historically, that's where we grew up. And then as we expanded internationally, we were careful as to where we went. We wanted to maintain our balance sheet leverage because we thought it was always a key contributor to the creation of shareholder value but as such, we were always careful as to what percentage of our revenues were going to be denominated in other than U.S. dollars. So when you mix all that up, it's sort of all work to preserve a certain higher percentage of U.S. revenue and I think that will continue for quite some time. But having said all that, I think the opportunity set, and I've said this before, I think will continue to be larger outside the U.S. than it will inside the United States.

All right. Well, we're going to come and talk about the international opportunity in a few minutes. I want to stick with the U.S. right now. One of the most significant things that's happened in the U.S. market is 2 of your customers merge, Sprint and T-Mobile. Earlier today, one of your peers, American Tower, announced they had reached a new agreement with T-Mobile to sort of help them work through the integration of those businesses. Do you have any update you can share around your relationship with that carrier? And if you don't, could you maybe just remind us how you think through bringing together 2 different customer contracts and seeking win-wins in that process?

We actually had agreements with both T-Mobile and Sprint, which had life and relevance post-merger, so we're operating under those agreements as we speak. And we've actually amended them since the merger was closed. So we have an operating construct with T-Mobile now that it works, we're busy, and it will continue to serve us as we move forward throughout the rest of this year and into next. There may be a time when it needs further amendment or perhaps even wholesale substitution, but it's not a today type issue. And I think as you saw with American and what you would see, I think, with any tower company, the things that we look for or would look for in those types of arrangements are revenue certainty and tenure. How long of a period over time will there be a commitment from our customers. And I think that was the driver for America.

That deal was a 15-year deal. I don't think you've historically done deals as long as 15 years. Have you evolved your thinking around the importance of tenure relative to other factors?

Yes and no. It's never a one-way street, as you know, for a customer to commit to that long a period of time when they otherwise would have traditional 5 year or even earlier rights of termination, they, of course, would expect something in return. And we've always taken the position that our assets are very good and very -- located in very choice locations where regardless of the contractual length of the term, there are going to be places where our customers are going to choose to want to be. So you don't really want to give up a lot of the things for that to extend a term that the reality is you're going to get that anyway over a source of series of renewals. And that doesn't apply, of course, in every case, but in most of our assets that we have found over time that it has. So we would -- we just have to look at all that and weigh the pros and the cons. But with every benefit that comes for one aspect of a transaction for one of the parties, there is something that goes for the other side. It's the way the world has always worked.

One of the obvious reasons why investors are so focused on this is when we listen to you and some of your peers talk about their outlook from here, part of your view and part of the guidance you've given for the year is you do expect that there's going to be a meaningful ramp in leasing activity in U.S., maybe starting a little later than you had initially guessed with T-Mobile getting started a little bit later than you initially guessed. But the obvious question here is just now that we're further into the quarter and further into the back half of the year, what level of visibility do you have? And do you remain confident that, that updated guidance is still the right outlook?

Well, we're that much further down the road from where we were when we gave our updated outlook, and we still feel very good in terms of everything we said. We've now had another, whatever it's been, 6 weeks, 7 weeks to see how T-Mobile has picked up in their activity, and they have. So we feel like the things that we talked about, and we're looking forward to right at our earnings call, all continue to be exactly as we saw. We think things are -- not only do we see things picking up, we think they will continue to pick up even more with T-Mobile as we exit and -- move through and then exit the year and then even more so as we get into 2021, which I think exactly tracks what they've said themselves in terms of their CapEx spending.

We've been so focused on T mobile. Is T-Mobile really the principal swing factor here as we think about leasing moving from the current level to something that's higher? I mean we haven't spent a lot of time getting your views on may be other factors that you consider significant to the broader leasing backdrop. And I'm not just talking for the remainder of the year, but really, as you think through what's going to be the early end of the 5G cycle?

Well, in the short term, yes, T-Mobile is. In the longer term, you're going to see next year, we believe, meaningful contributions from both DISH and Verizon. If, in fact, Verizon follows through on what appears to be some very well-telegraphed intentions towards their interest in the C-band auction. Verizon, much like other carriers, have historically I believe knowing that there is a fair amount of investment ahead, particularly on their macro sites, assuming that their intentions are fulfilled around the C-band auction, they're kind of storing up for that. And there's a lot of wisdom to the one truck roll theory, and if you know you're going to be deploying a bunch of C-band spectrum and you're going to try and be efficient around that. So we think there's a lot of pent-up work that's going to be coming with the release of that spectrum, the clearing of that. Obviously, DISH has a nationwide network to build-out. They've been very transparent around their CapEx expenditure timing. So that's going to be a 2021 event to start. So -- and T-Mobile, of course, will be in the early innings still of their build-out and their regulatory requirements to provide nationwide 5G service. So that's a long-winded way of saying, yes, we see other contributors, particularly as we move into 2021.

I was going to ask you a follow-up question there on DISH. DISH has talked a lot about designing a network that has a more advanced architecture than what carriers currently have virtualized entirely from day 1. To what extent does that matter to the relationship or the demand that you might see out of DISH? Does that increase or decrease or have no impact on what you would expect based on their buildout time lines and requirements?

Well, for us, I don't know that it matters that much. I mean you're talking mostly about efficiencies around broadband processors and computing power. But when you really get down to the most basic, our business is places where antennas and radios go. And that's -- you can't -- that's not the part of the network that's being virtualized. You can't virtualize the radios and the antennas, that's -- you got to have that for your transmission ability. And that's what we do. I mean we provide exclusive locations to place antennas and radios and we will continue to do that. And I don't think the virtualization of the computing parts of the network are necessarily going to be very impactful to the rest of what we do.

I also want to ask about your view on the competitive landscape. It's not something we've spent a lot of time talking about. Every once in a while, we see a new upstart tower company, and we ask whether it's change anything. The way we've gotten this question asked is you have 2 major projects out there. You have T-Mobile, which really has more sites than they need. And DISH has literally 0. And so the question we've gotten is, are you finding that those customers might have a greater degree of flexibility as they weigh off location versus cost? And are you seeing any shift in the competitive backdrop because of that? Or at the end of the day, are the emerging operators still such a small part of the market, it doesn't really change the fundamental dynamics of your business model?

Yes. Well, the latter part of your statement is the true part, which it doesn't really change any part of our business in a material way. And when you think about it, first of all, cost concerns is not a new phenomena for our customers. They've always been very responsible and very forthright in their desire to control and reduce costs and that's just something that's always been a part of the relationship. But in terms of speed and optionality, we spent 20 years putting together what we think is the top-quality portfolio in the world. And it relies on exclusive locations that are very hard, if not impossible, to replicate. So the folks, the newcomers, they might be able to go into a handful of states where there's no zoning and offer a tower next door at a crazy price that we may or may not choose to match. But for the most part, that's going to be a very isolated, low number incident that obviously, those handful of states is not going to satisfy T-Mobile's or DISH's nationwide buildout requirements. So we're going to do very well, as we always have, because of the nature of our assets and the fact that we have the assets in the places where our customers have needed and will continue to need and that's been the basis of our relationship for 20 years.

I want to ask you about that, about the quality of your portfolio, and we're not questioning that it's a high-quality portfolio. The way I've been asked this question is most investors think of your tower assets as being predominantly in either rural or suburban areas. So not in the top, whatever, 100 markets you want to pick. And they wonder with 5G networks being built around increasingly higher frequency spectrum, does that make those assets less valuable? Or at a minimum, are you just going to be later in terms of catching a bid for that space as they focus on dense areas first?

Well, there'll be 2 different types of spectrum that gets deployed. And we've seen the millimeter wave spectrum in the dense urban markets, so that's become the small cell and the rooftops, and it's been primarily more small cell than rooftops. And we've seen how that's performed and in some cases, less than desired. But to get truly out into the nonurban corridors, that's really what everyone believes is the -- is really going to be the bread and butter of the C-band and the mid-band spectrum. And some would argue that, that was the entire driving force of the T-Mobile acquisition of Sprint. So we think that, that is going to be fabulous for us because that's going to be -- going to touch every one of our sites. And we've never seen a technology upgrade, 1G to 2G to 2G to 3G. And so that hasn't been done on a nationwide basis. The government has required it to be such for both T-Mobile and DISH. And I don't know why AT&T and Verizon wouldn't do the same. So while timing may be different, and it already has been a little different because the millimeter wave spectrum has been rolled out in some of these urban markets already and that's where you've seen some of the initial deployments of 5G capabilities. But we have no doubt that our time will come for our assets, and we are very well positioned to capture that.

One of the attractive features of your portfolio, as you flagged in the past, is that the vast majority of it was either built by you or built by other tower companies for the purposes of co-location. And so they've always been very efficient to lease-up, your augmentation CapEx has historically been quite low relative to your peers. Does that still hold true as you think about higher frequency bands that might need to be situated differently on your assets?

I think so. I mean we've built most of these towers on average for 4 or 5 broadband as we move to a -- essentially a 3 to 4 broadband world, we should be fine and still, if necessary and some augmentation is required, it can be done relatively cheaply. And we generally, negotiate and allocate the cost of that augmentation. So it has never proven to be an economic headwind to us or a detriment, and I don't expect it will be.

When we were talking about spectrum earlier, and you've referenced the C-band most recently here, we didn't spend much time getting your view on the CBRS auction, which recently concluded. We now know that the biggest bidders were Verizon, not surprising; DISH, maybe a little surprising in cable companies. What's your read on that auction? And to what extent do you think that's going to manifest itself in demand for your assets?

We've already seen some interest in tower space for CBRS from both wireless and cable. So that's encouraging. And I also believe it's going to, of course, manifest itself in a much greater number of in-building uses, where I think it's going to allow for greater wireless networks than the past economics of traditional gas systems previously allowed. And that's something that we're looking at, have added some capabilities to our company so that we can capture some of that business -- more of that business as well going forward.

Okay. If we move on just a little bit here, and I want to talk about churn, not merger-related churn because we touched on that earlier with T-Mobile. You've historically targeted or talked about core churn being in the 1% to 1.5% on an annual basis. And I'm curious, do you think that's still the right outlook, particularly now that we've moved past all the major M&A? Is there any more fine-tuning that your other tenants need to do their network?

That -- the churn numbers really do come from a wide variety of sources. I mean, for example, we had a couple of customers who use different RAD centers to move into 4G and kept their 2G to 3G systems. So we counted the 4G leases when they came on, knowing that 1 day, when the 2G to 3G came off, we'd have to churn that. That's an example. We've had customers who signed up leases to get bulk deals and never installed. And then as time has changed and engineering networks have been retuned at the next renewal cycle, those have been terminated for very good and obvious reasons. And we've had a couple of relocations in those handful of markets I talked about earlier. So it really is a mishmash of things. I would think while 5G is being deployed, I think the right number, as we've, I think, talked about more recently is 1.5% to 2%.

And I just want to ask one more follow-up question on CBRS, sorry for going back to that. But you noted that it was not just the wireless providers that have reached out to you, there's a reasonably wide number of entities that picked up at least some degree of spectrum in this auction, including some nontraditional wireless operators. If you just think about it longer term, do you think that there is potentially a new emerging tenant base for your infrastructure beyond the big 3 facilities-based national carriers other than DISH?

I don't think they're going to be able to do it on a nationwide basis just on some of that CBRS spectrum that has been picked up, but I do think it will be more locally based and regionally based niche providers that -- to the extent we have assets in those particular geographic areas, we should be able to benefit from. But I don't know that there is going to be a fifth nationwide provider that emerges because of the CBRS auction, I would doubt it.

Another way we've been asked about the potential for new tenancy over time is from edge computing. And you've obviously acquired some assets in that emerging sector in order to get a bird's eye view of what could develop there. And so I was hoping you could just quickly remind us what your position is so far in that space. Any initial learnings? And in particular, do you think you have some degree of visibility around an incremental source of demand at the base of your towers over time?