SBA Communications Corporation (SBAC) Earnings Call Transcript & Summary

All right. Hi, my name is Phil Cusick. I follow the communication services and infrastructure space as well as media here at JPMorgan. Thanks for joining us. I'm pleased to welcome Jeff Stoops, President and CEO of SBA Communications since 2002, 20 years this year. Congratulations.

Thanks. Happy to be here.

Thanks for spending time with us today. I appreciate it.

Starting from a very high level, as you look at all the markets where you operate around the world, can you compare sort of your view of the next 3 to 5 years of activity versus the last 3 to 5 years of activity? How do you think about that comparison?

Yes. I think the comparison is fairly distinct. I mean, if you -- I'm sorry. If you think about in the U.S. when the last kind of the peak of the 4G was, it was 2014 to early 2015. And if you count this year as year 1 of your 5 years going forward, I'm just very confident that there's no doubt that in terms of absolute terms, the next 5 years are going to be more robust than the last 5. And that extends to the international markets, too, who continue to be pursuing the same path as the U.S., but always behind by some number of years depending on the market. So the next 5, counting this year as 1, are going to be more in the aggregate than the last 5.

And how do you reconcile that with 2 of our carriers talking about this year being their peak CapEx year?

Well, I think when our customer -- and first of all, I'm sure whatever our customers are saying is right. But over time, I've observed that when they talk about peak years, that is a single peak, but there's a tremendous amount of work. And peak oftentimes, in their minds, means when are we going to achieve basic coverage that allows us to put the maps out there that say we have 5G. But history has shown us that that's really just part of the start of the process of fill-ins and densification. And I think we have one of our customers who, I believe, is on record of saying they really haven't even done a lot yet around the mid-band spectrum deployments and are just getting started. And then you've got DISH who, I believe, will go through a series of cycles all geared around their regulatory requirements that -- I mean, we really feel good going into -- certainly going into '23. And no reason to think that 2024 and years after won't be very good as well.

Now you started the year at a level of activity that's similar to where you were last year.

Right.

And you've guided to a pretty significant acceleration here. Is there any variability in that acceleration? Or is that fully contracted and it is just ready to go?

It's essentially fully contracted. I mean there's going to be maybe a little variability around the edges, but not much. Not much.

Okay. And so that, what is it, $65 million in the U.S.?

$65 million in the U.S. business this year. And a lot of that we know and it's contracted, and it's the DISH work and some of the other carriers that have really been more active than others. I mean, the beauty of our business is when you do sign up the papers, you kind of know when the revenue is going to start.

And as I think about that exit run rate of, give or take, $20 million in the fourth quarter. You're not going to guide for next year here, although you're welcome to. But is there anything in there that is sort of a one-timer, or that isn't sort of durable as you continue forward?

No, I think we will exit the year and carry into 2023 at a high level of revenue. Now what happens throughout 2023 will largely be dictated by what happens in the second half of this year. There is a lot of work to be done and a lot of backlog and a lot of discussions, which imply it's going to be steadily strong through. I mean, the one thing you won't have that you've had a little bit more so this year because of really not getting going until the second half of last year is you had a greater ramp up in this year's additions, which you alluded to, because based on what we've done so far, we're going to -- we've guided to $20 million for the last quarter. I don't know that 2023 will have that same level of steepness on the curve, but it's -- we're expecting a very good year based on where everything is.

Okay. And you mentioned DISH. We were talking to Rod from American Tower earlier, and he explained that his DISH contract is basically a series of steps. Not necessarily regardless of what DISH does with activity, but it's pretty well contracted. And so we hear things like, oh, DISH is speeding up, they're slowing down. Does it matter for you in hitting those revenue numbers?

It will. I mean, we're in very good shape for the $65 million this year. It will clearly matter as we give out guidance for 2023 as to what our assessment is of DISH and all of our customers. But in our case, the contract is basically one that commences revenue at the earlier of a date certain or commencement of construction on the site, so there is a little bit of variability in that. But I mean, what we do to guard on the conservative side is we generally use the latest date for guidance purposes, which is the by a date certain, revenue needs to commence. So DISH's activity will largely -- from this point forward, will largely drive what we think about DISH for 2023.

Okay. And again, that -- the sort of date-certain revenue numbers, are those revenue numbers set for the next few years or longer?

No, they're based on activity.

They are based on activity. Okay.

They're based on activity. Yes. But there -- because there's the longer lead time, at least for the $65 million that we've guided to this year, we believe that's pretty well set and subject to very little variability.

Yes. Okay.

Because this is for leases, particularly DISH that were second half of last year and the first quarter this year. So there's a lot of predictability and certainty in those things.

Yes. As we've seen Verizon and T-Mobile and eventually AT&T building out higher frequency spectrum on their mid-band grid, essentially. Anecdotally, we've seen some -- about some variability in network quality, especially at Verizon. I'm curious if you've seen those carriers come back and sort of scramble to fill things in on your cell sites over the last 6 months or year that was unexpected early on?

Well, there has always been varying but generally healthy levels of activity even when you're between technological upgrades, which is why I made the comments I made earlier about people may talk about peak, but there's so much work that still has to be done. In terms -- if you limit your question to mid-band spectrum, I would say no because right now, there is so much to be done to provide basic coverage that it's too -- it's early -- too early, really, to tell yet that you have to come back and do infills. I mean, all that kind of business, which has happened over the last 20 years, 25 years and that accompanies every technological upgrade, that's really yet still to come.

Okay. One of the questions we get about is inflation, I'm sure you've heard this before. I was always amused over the last 12, 13 years that I've been watching this where a carrier comes in, makes a big announcement, hey, we're going to get our tower cost down. And the tower companies are pretty good about lining up and saying, no. As we're now in a period where inflation is going higher, is there any conversation about not changing the escalator rate, but changing sort of the rate card on amendments as we go forward?

Well, nobody's asked to go to a CPI escalator lately.

No, I imagine not.

So those conversations, we really haven't had that. In terms of the rate card, we have 3 -- out of the 4 major customers, we have 3 in the U.S. with agreements. And while we have a rate card approach, which has always differentiated us from the kind of all-you-can-eat approach, the rates escalate.

The rates escalate. So my $400 amendment this year might be $405 next year?

Yes. Yes. And they generally escalate at the similar rate to the overall lease escalators. So the pricing for new, while they are fixed, they still escalate at a rate that generally matches the fixed rate escalators with that customer on their leases.

Okay. And is that...

But that's not perfect, right? It's not a perfect hedge, but it actually works pretty well.

It does. And so if I think about your contract with one of those carriers, you don't necessarily have a holistic agreement with them of like, they're going to spend this, they're going to spend that. But those rate cards are pretty well fixed for, is it a 5 or 10-year period?

No, it would be 3 to 5.

3 to 5. Okay. And last time you've adjusted those, has there been any changes substantially in the rate cards?

Well, they've continued to move up with what I would say is the same escalators that we've generally enjoyed on the U.S. portfolio as a whole.

Okay. Okay. That makes sense. On the churn side, Sprint churn very well sort of projected. Any signs that that's not going to be as big as you'd initially expected?

Right now, it's going to be, based on our current experience, it feels like it's going to be spread out more in terms of timing. What we have yet to see, but there is plenty of opportunities to see, is a greater uptake on either DISH taking those Sprint leases or T-Mobile saying, hey, traffic is up to such a degree that we need this for infill and density purposes. But I think those opportunities are still yet to come. But the one thing that is becoming more apparent is it's going to be a more elongated churn cycle than what we had previously thought. And you see that as an example in our most recent results where our churn number is coming down.

That's interesting.

In this period. Yes.

Yes. So not just the non-Sprint churn, but also the Sprint churn, you're sort of projecting a little bit lower than...

The Sprint churn, yes, primarily. It's more of a timing issue right now that for the variety of things that are real world in telecommunications which is, can you get the equipment off? Can you deploy? Can you really shut down? Do you really want to shut down right now? Those things are being pushed out, so.

In previous cycles where there's been major churn, carriers have paid you to take down the equipment, and you've seen big sort of service revenue checks from them where you didn't necessarily spend any money taking down the equipment. Is that something that's happening in this cycle? Or are they pretty much taken care of everything?

Well, they have the option. They have the option. And so far with respect to the Sprint churn, we've not been asked to take it down ourselves in exchange for a fee.

Okay. And you mentioned DISH taking on leases. I always looked at that as fairly unlikely, right? Why would I -- why would DISH want to take on an old high-cost Sprint lease?

Well, as I said, we haven't seen a lot so far. But in terms of is there more -- are those numbers that we've talked about more biased to the upside than the downside? They're more biased to the doing better because of things like that. But yes, I agree with you. I mean, whether the mounting height and all those things perfectly match up with DISH -- and I don't think they would ever come in and say, well, let me just assume that. They would say, I want that spot, but based on our deal.

I see. That makes a lot more sense, right. I want my 1,500, not his 4,000, whatever the numbers are.

Whatever the numbers are.

Right. Something like that. Okay. So -- but let's talk a little bit more about DISH there, because I thought Charlie had a -- I hadn't seen what they were doing as clearly as they put up a couple of weeks ago at their Analyst Day. Sort of 2 antennas, relatively small for the spectrum that they're deploying, and a couple of radios, right? Or maybe it's 2 radios and 1 antenna. And so as you look at that, is that something you see as their sort of permanent solution? Or is this a starting point for you where they come in at a low fixed, and then maybe have a decent amount of variable as they grow that business?

Well, what I believe DISH is doing, and I say this based on the history that we've been in this business and watched every carrier deploy, they do what is necessary at that time. Nobody is building ahead for ultimate uptake capacity, things like that. So there's the first layer. And DISH is even more, I believe, susceptible to that approach because right now, their big goals are hitting the FCC coverage requirements, right? So those are going to be all coverage driven. They're going to go thin, not deep, because that's what they should be doing at this point to satisfy those goals. And then over time, as the product gets deployed and the uptake occurs, they're going to have to fill in and densify. And that recipe has been repeated absolutely every single time with every customer over the years.

Right. Nobody builds for...

Nobody builds for what they need today.

Yes.

What they will ultimately need.

Correct. That makes sense. And I just want to quickly touch on PG&E, where you've had questions on it lately, but not a lot has -- seems to have been off the business case. Has that gone pretty much as you expected?

Well, PG&E is doing great. We're very pleased with that. In terms of the timing, the fact that it was really -- I mean, it was even more than not marketed. It was almost discouraged.

You seem to have come in at their sort of bottom in operations as well.

Yes. And we're very, very happy with that deal and would love to find some others. But as we reflect on what we had hoped would be the beginnings of a trend, what we found is that the PG&E deal was pretty unique, given where they were coming from. So coming out of bankruptcy and they had all kinds of regulatory leeway, and they didn't have tax issues that are the things that are -- I mean, we've had a lot of conversations with a lot of other utility companies. But if you are a thriving, financially sound utility company, you're -- to sell those assets which are within your regulatory rate base, if you get a good price for them, there's a chance that your electricity bills to your consumers will be lower by the regulator. And then you have the tax issue. I mean, most all of those assets have been depreciated close down to 0 or things like that. So the regulatory and the tax issues for sound, ongoing utility companies, I think have been a big impediment to doing deals like PG&E which, because of its unique circumstances, didn't really have those same concerns.

Yes.

But having said all that, we're very happy with PG&E. A lot of the reason we're very happy with PG&E is the location of those assets. I mean, not every utility transmission distribution towers are going to be as attractive as Northern California. But having said that, we continue to hope that there'll be some other opportunities where it all works out.

Yes. Yes, my understanding of utilities is they mostly want a bigger rate base, not a smaller rate base.

Yes.

Yes. Yes. And those locations, have you been able to -- I mean, those are areas where you're not going to be able to zone a tower, right? Have you been able to zone amendments to these, the existing towers? So you've been able to add your equipment back without a lot of trouble. I'm surprised you're not being held up by some of those municipalities.

I mean, there's some general rules out there. I mean, we may be. But I mean because I don't -- I have the answer, it can't be material.

It's not rising to the level you're worried about.

Yes, I would know if it were material. I mean, there might be couple little permits and things like that there that we're unhappy to pay. But, I mean, we do that and you move forward, and it all ends up well. But I don't really think there's been any kind of material issue there. And I mean, California is a pretty environmentally advanced state. They -- clearly, they're not going to prefer or allow additional towers to be built when existing structures can satisfy the needs. I mean the one issue that is still out there but is getting resolved that I thought you were headed down this [ tech ], it's not a municipality issue. I mean, the FAA is -- and this is for the entire industry. The FAA continues to take what some folks believe to be an unreasonable stance on the whole C-band deployment around airports and things like that. So you have to -- every single amendment that involves C-band has to go through the FAA. And there's been some delays there, but they're not trying to hold you up for money.

But that's not a Northern California issue. That's an everywhere -- yes.

That's a U.S. issue, yes.

And how many of your towers are in that airport zone? Is it 10%, 20%, 2%?

No. Probably wouldn't be that many, but it would be probably north of 1,000, 1,000 or 2,000.

Okay. Which usually would be really valuable towers.

Yes. And they are and still will be, it's just more of a delay issue than anything else.

Okay. Let's switch gears to Africa, which I think has been really interesting. You've been first tiptoeing into South Africa and sort of broadening that. Just help me with your philosophy on where the company wants to be over time, right? You've had discussions about the Philippines and Latin America, you've been for many years and some markets, which were otherwise not that tasteful. How do you think about the African business and where that sort of goes over time?

Well, in general, the business of towers is fairly similar worldwide. So you develop your skill sets, you develop your other attributes. What is not really attainable as it is in some other businesses is a lot of synergies by going to different countries because you have different carriers. And, I mean, people think of Africa as kind of one unit, but trust me, it's 55 very distinct countries, each having their own rules, regulations and regimes. So when we look at a market, and this may sound trite, but it's really the way we've run the company forever. We look for markets where we can operate well that have the right characteristics and demographics where we can create good shareholder value, and really, that's it. I mean, we'll look at the risk, we'll look at the country risk. We'll look at this and that. But I mean, there is no puzzle that we are trying to complete. It is all about are we going to be able to move into this market and capitalize on all of our strengths and create shareholder value? So I mean, Tanzania was not a logical extension to South Africa because of some strategic reason. It was an opportunity where the experience that we gained in Africa gave us some confidence as to how things might work, and then we decided that we can enter at an entry level of price that we're going to be able to create value for our shareholders. And the exact same analysis with the Philippines.

Do you think that your experience in countries like El Salvador sort of helped you get comfortable in Tanzania where other people may not have been?

I think clearly, any operating experience in an emerging market and the things that you learn over time, and it's not always a bed of roses. So you learn over the years that we've been in there what to do and what to watch out for, clearly makes us more comfortable with operating almost anywhere around the globe.

Okay. And I remember when we -- when you bought Brazil, I think the currency was like 2:1 and now we're at 5:1, and you bought the beginnings into the teeth of a pretty nasty currency sell-off. What there led you to think differently about South Africa and Tanzania and the other markets you've gone into since?

Well, we look at currency stability quite a bit. We look at growth rates and where things are likely to turn out. And I would tell you, Brazil has, from an operational perspective with looking at a constant currency approach, has done fabulously well. It's just -- I mean our multiples, even on a USD basis, have been earned down tremendously. But on a local currency basis, I mean, we're probably mid-single digits of EBITDA to cost. But we've watched and learned over time that currencies can be fickle. And you're a U.S. reporting company, and at the end of the day, what you have has got to be based in U.S. dollars. So we -- currency is a big part of any decision. We looked at Tanzania. It's a very steady currency and with the regime change there that occurred recently, which is much more favorable for foreign investment and U.S. companies, frankly. We were encouraged about that. Philippines has had -- reasonably good. It's not -- there's the U.S., which is obviously never changes. But when you compare the Philippine peso to the U.S., it's very, very steady. And the growth in those markets, we think, outweighs the currency risk. But I will tell you, in every underwriting we do and every decision we make, we depreciate the local currency to some degree over time before we make the decision to enter that market.

Right. I mean, in theory, the relative CPI should sort of balance this out. You just went through a period where in Brazil, CPI just didn't keep up, right?

We did. Now, right now, CPI is greatly exceeding...

Currency depreciation.

The change in the currencies.

Right. So you're doing a little catch up which is helpful. Interesting. And did you finance Africa any differently than you did Latin America?

No. No, everything really is still underwritten off of our capital here that is sourced in the U.S. debt markets plus our FFO earnings. We do have a partner there, we have a -- it's a 70-30 partnership and it's with the guys who used to run American Tower's African business, and we're thrilled to be there with them because they know the market very well. But no, no, it wasn't financed really any differently. We didn't bring in any local currency or local debt, and we didn't really -- other than having a partner, we didn't bring in any outside. And we didn't bring in the partner for the money, we brought in the partner for the relationships and the country expertise.

Right. I just want to follow up quickly on the Philippines. I think there's been reports about you building a lot of towers there. Do you need to do a deal? Or is there a deal to be done to create some critical mass in the meantime?

We would always prefer a deal for the right circumstances. But the fact that we -- we're not the -- that there's been a reported transaction involving Smart with 2 other companies and the rumors don't include us should tell you that we -- it's just not a deal that we thought was the right deal. I mean we approach the Philippines like we do any other market, particularly Latin American where we entered into without a deal. And as long as we see our way clear to getting to 500 to 1,000 towers in some reasonable period of time, we will achieve the scale that we need to create the shareholder value that we want to create.

Okay. Okay.

But all things being equal, if you could go in with a great deal and get big in a hurry and have all that also pencil out for shareholder returns, absolutely.

Okay. There's been a thesis very well publicized by a friend of ours who says that this is a digital infrastructure business, towers and data centers and fiber and all these things need to work together. Do you see SBA going in that direction? Or do you want to be more of a sort of pure -- mostly pure tower company over time?

That particular friend never puts any of those businesses in the same entity, which is the answer to your question.

I'm not quite sure how they work together, except for meetings once in a while.

Well, I mean, clearly, there is convergence. But it doesn't mean that in a converged universe, and again, you've known me a long time, you know what our focus is on creating shareholder value. It doesn't necessarily compute and translate that to have all those areas under a single one roof public company with one balance sheet is going to be the best way to create shareholder value. But is there going to be a lot of other stuff, fiber and small? Sure, there's a lot to do out there to make the 5G world as best as it can be. But it doesn't mean it all has to. And the one thing we've proved over the years that often was a criticism back when these new things were first deployed was you got to have everything to be relevant for anything, and that's absolutely not true.

Right. So the data center in Brazil that you've done, and you've done a couple here in the U.S., it seems like these are -- I don't know, I don't like to think that you're going to spend tens of millions of dollars on just a learning experience, but things that feed or create value in the legacy business. Is that fair?

That's what we're pursuing, and it is a bit of an experiment. It's a very controlled experiment with limited dollars, given when you look at what our enterprise value is. And basically, we want to make sure that given how big the opportunity would be if the edge moves to the tower space, that we have to understand and see where the connections are with the data center side of the business. But if the edge does not move to the tower side, this will not be something that you will see us kind of growing every year. And even if it does move to the edge, this is more for us to understand the business. There's still many good arguments why you'd want to partner with -- for example, my good friend who was just sitting in this chair, Charles at Equinix. I mean, all those things, we want to stay open to what our options would be in the event the edge gets to the tower side. But I mean, right now, that very fundamental question remains unanswered. Is the edge going to get to the tower side?

Have you seen any evidence of that since you -- I think, what has it been, 5 years since you bought Chicago? Is that...

No. No, it's only been 3, I think. No. We've had success in locating micro edge facilities at our tower sites, but it's not for the reason that will ultimately make this thing really huge. It's for the fact that we had the land, we had the permitting, we had the zoning. We had the entitlements, and that particular location had worked well for that particular user. What will ultimately bring the edge to the tower side is when the compute power and the latency is directly connected at that point into the wireless network. That's what we're positioning ourselves for, but in a very tempered, very measured way.

Okay. We're running out of time. I wanted to ask you, we have known each other a long time. I think the first time I met you was in Boston in 2008, and we were walking around Boston and you were on your phone sort of secretly telling the company to buy back a boatload of stock as the market was in a tank. And so that was my beginning of your...

I did that right in front of you?

You didn't -- I couldn't hear you, but I kind of guessed what was going on. It was a very secretive conversation around the corner. So -- and at the time, you're running at 7 turns of leverage, and the market was in a tailspin. But -- but you've been doing this a long time. How do you think about succession now? Do you want to continue to run this business for the long term? Are you going to be here in 5 more years or where is that...

Well, I just celebrated my 25th anniversary and 20 years as a public company CEO. I don't think the future will be quite as long as the past.

That's a pretty easy to guess statement.

I'm not giving you much.

All right. Every time somebody asked Jamie, Jamie says, he'll be here 5 years.

We're still having a good time. We're learning, we're creating value. We really haven't changed our approach over the years, and we won't. I mean we have always run the company even back -- way back when, when we were rumored to be a takeover target or this or that. We never put any stock in that because you never know. You never know what might happen. All you really have is yourself. And we've run the company as if we were going to be independent forever. And we continue to do that today. We have a great team. We actually spend a lot of time on succession and we have a lot of plans and procedures in place when those times come. So I think we're very well positioned and that, regardless of who is sitting in the leadership chairs, I think you will see a continued disciplined approach similar to the things that have made us a historical success.

Good. It's a good place to stop. We'll see you in 20 years right here.

20 years. We'll see.

I know I'll be. Thank you, Jeff.

Thank you.

Thanks, everybody.