SBA Communications Corporation (SBAC) Earnings Call Transcript & Summary

Yes. So I think the way we look at it in the U.S. through escalator, I think it's about a 3% top line growth rate. Then lease-up around 3%. And remember, the lease-up is a step function. It's not like 1 year, it's going to be 3 years forever. It could be 1% or 2%, 1 year, 6%, 7%, 8%, another year. I'll give you an example. If you look at the upper C block spectrum, that's probably NPRM, notice for proposed rulemaking and should be issued by the FCC this fall, probably in 12 months by the end of '26, auctions rule will be drafted for the auction of the C block and then it's probably 12 to 18 months of clearing. So you could see the C block coming to market late '28, '29. It's a brand new brand for spectrum. That is going to drive lease-up because it's 100 megahertz, maybe 120. It's going to need new equipment. Everything is going to be new right there, and that's an opportunity for the tower company. So the way we look at it is 3% CPI escalator growth, 3% lease-up and ex-churn about -- ex-Sprint, the churn about 1%. So top line growth rate at around mid-single digits.

Very helpful. And is there anything else just in terms of domestic growth that investors should be mindful of in terms of this current cycle that we're in and trying to think about the acceleration going into the end of the year and what it means for next year?

Well, I mean, as management, we really focus on creating value for shareholders over the long term. So it really means allocated capital in order to create growth and value over the long term. So we don't really think of those like quarter-over-quarter variation because we have a footprint. It's almost impossible to really overlap with some of our -- most of our footprint given the zoning almost urban -- suburban area. And we know that the carriers like the service we provide, the quality, we're very responsive, really help them on the service side. So we have a very good dialogue with the carriers who are trying to support them. And I think it's a good relationship. So I feel that we are really working for the long term to create value for investors and our company. Like those quarter-over-quarter variation, it's almost false precision because you got the application, but the equipment didn't get on the site, so you don't book it in this quarter. That's okay. It's kind of showing the number next quarter.

And so you mentioned the services business and the services business has been ramping this year. Investors tend to look at that, at least from the feedback that we get as one of the leading indicators for leasing because you get the services sometimes before the leasing, but you also have a different algo this year, right, where you're also getting some revenue from third-party sites, which is boosting that figure. So how should investors think about like the strength of the organic services business, what that means for leasing versus like the benefit you're getting from monetizing your business across a larger portfolio?

Yes. So I wouldn't read too much into it. I think Nichole Thomas, who runs that business, is doing a fantastic job, absolutely fantastic job. The team is delivering first rate quality of service to the customers. But it's indexed towards one carrier today and you don't have long-term visibility. So we feel good about the ramp-up for the second half. It's a good sign for the first half of next year, but there's no long-term visibility in this business, and it's a nonrecurring business.

And can you remind our audience in the domestic business what your exposure is to carry your consolidation? We've just talked about EchoStar, but are there other things the T-Mobile integrations like what's left that people should be mindful of, just to think about that.

I think the only thing I could think of is UScellular being acquired by T-mobile. We have about $20 million of revenues from UScellular. There will be some churn. I'm pretty much sure that not all of it will go away over -- and those consolidation usually takes 3 to 5 years before it's all done. So $20 million, not all of it will go away. So I just don't know how much will survive. But I think between Sprint, DISH and UScellular, that's pretty much it at this stage.

And how much is left on Sprint?

We have $50 million this year, $50 million in 2026 and $20 million thereafter. So really, the last big year is '26.

And on the international side, where are you in terms of getting through some of these Latin American headwinds? And how are you feeling about where that business sits?

Yes. So basically, Latin America for us is [ 20% ]. And personally, I'm very bullish on Brazil. It's the largest economy in Latin America. The GDP per capita is 4 or 5x GDP per capita in India. It's a large exporter of corn and soybeans, mineral oil. The Central Bank has done a phenomenal job getting inflation under control. The real has appreciated by over 20% this year. And we are the #2 tower company, 12,000 towers behind American Tower. The industry is going from 4 to 3, which is healthy for the long term. It's painful in the short term. So 4 is being parcel out to Claro, Vivo and TIM and Oi Wireless went into reorg last year. We have another $20 million of annual revenue to Oi Wireless -- that eventually we don't see Oi Wireless surviving. So over the next 2 or 3 years, we'll see that $20 million revenue going away. So those consolidation takes 3 to 5 years. But long term, 5G in Brazil is only like less than 35% deployed. The country is going to need 5G. The fixed line, I think infrastructure is really not what it is in the U.S. So I think fixed wireless access has a huge potential there and I'm bullish for Brazil long term. Listen, I was at Nextel. We had a large operation in Brazil, and it's either red hot or no one wants to touch emerging market. It's totally driven by interest rates in the U.S. The minute interest rates go down in the U.S., everybody is chasing growth and higher return and Brazil is the # 1 place they go because of the size and the macroeconomics of the country. So it's a country of the future. So we feel good about Brazil. It's just we are being very patient there. So what we've done in the short term, I mean, cost of capital is very high. You get 15% in the checking account in Brazil now. So obviously, when we look at new site build, we're looking for a rate of return much greater than this. And our competitors, either the smaller companies have a much higher cost of capital than we do, so they can't afford to build a lot of sites. And I think our #1 competitor is we pull back in the region. So when we build site, we're going to build sites this year. We are teaming up with our carriers and making sure that we get a return commensurate with the cost of capital to operate in that country. But I feel good about Brazil long term.

And what about Africa? How is the business doing there? Are you happy with the investments that you've been making? And where does that go over time in terms of exposure for SBA?

Right. So we have 2 countries in Africa, Tanzania. Tanzania is a fast-growing market for us. A lot of new sites are being built, mostly for coverage. The government is really pushing the carriers to build more sites. And our operations are growing very well. Very pleased with the operation in Tanzania. South Africa has the highest return on invested capital of most of all of our international market because we got in early, we saw tremendous growth. And I think we're the #4, #5 carrier in South Africa. Once again, South Africa is ups and downs, but long term, I think it's a good place to do business.

And then just thinking about the competitive landscape and over time, just like the positioning of towers for your wireless carrier customers, are you seeing any impact or a conversation about how these LEO constellations might affect their interest for rural towers, whether it's in the U.S. or some of your emerging markets?

Well, honestly, it's hard to say for us, LEO is probably a complementary to the fixed wireless network -- to the fixed wireless network just because -- I mean, first of all, the antenna are expensive. So it's never going to be as ubiquitous and is big and needs to be plugged to the grid. So it's never going to be as ubiquitous as a handset. So I think it's a complement in very rural areas in the U.S. So we don't see that as a disruptor. You don't get the capacity, you don't get the cost basis. The cost per bit to deliver a bit over satellite versus terrestrial wireless is probably 100 to 500x. So it's more a complement and not a threat to the wireless networks.

Maybe shifting over to capital allocation for a few more minutes. So you mentioned earlier the potential pivot next year into buybacks. Do you look at that as opportunistic where there might be moments to really leverage the financial flexibility that you have? Or do you see kind of going back to maybe the way I perceive SBA used to manage the balance sheet, which was you had a certain leverage ratio you wanted to be at. And if you weren't there because you had flexibility, whether it's because of growth in the business or there was an M&A, you just bought back stock. So by the end of that quarter, you got to kind of in that range that you wanted to stay within. So it's a very prescriptive way of managing the balance sheet and capital returns. Like where are you in terms of that opportunistic discretionary approach versus more of a programmatic experience?

First of all, I just want to correct, I don't think I said we'll pivot towards share buyback. I just say it's going to be a mix of share buyback, dividend, debt paydown and M&A. It's going to depend on opportunity, the level of our stock. So it's a totally flexible approach on this $700 million of extra capital. And then to me or to us, the leverage is an output. It's not an input. The input is what are your cash interest expenses every year? And what are the opportunities on the M&A side? If there's another Millicom deal at 11x EBITDA, 15-year contract, U.S. dollars, high single-digit growth or 0.2 turns of leverage, I think you'll spend the money and increase the leverage. I think I like the kind of where we are at 6.5x. I mean, if interest rates were to go up and we don't see M&A opportunity, I think we probably pay down debt, right? I want to highlight -- it's like a flexible capital allocation approach, and we want to be flexible and be able to react quickly.

And when you spoke earlier about your outlook for domestic leasing growth, when you combine that with international what's the right expectation for organic AFFO per share growth on an annual basis?

Yes, that's the billion dollar question. I think if you relook at it, you say, okay, the top line growth rate about mid-single digit, probably mid- to high single digit at the EBITDA line. And if you will exclude, I mean, rate impact, I think it's probably high single digit, but then the $1 billion issue is where interest rates are going to go in the future. That's why we need to be nimble and flexible if interest rates stay higher for longer, we need to index towards delevering. If interest rates were to go down, I mean there's no reason not to delever the balance sheet and do M&A or buyback.

When you think of the opportunities in front of SBA, what do you think is the most underappreciated part of your future financial opportunities when you look at how the market values you?

I think, obviously, we are highly dependent on interest rates. You could see the volatility in our stock when interest rates fluctuate. I think you need to realize that -- and I've been in this wireless industry for 35 years, people have underestimated the growth in that industry for the last 30 or 40 years or 35 years. And you started doing voice at $1 a minute and then voice is basically free today, then you do text, then you do data, then you do video, then you're going to do AI, you do fixed wireless access. We thought that the wireless network would basically cannibalize the fixed network eventually. No one use a landline anymore. I think no one expected that when the industry started 25 to 30 years ago. So if you take a long-term view and even 10, 15 years with AI, you don't even know where this is going because I mean, look how much video traffic goes through wireless network with Mark Zuckerberg and his AI glasses, you're going to have even more video flying over those networks. You have no idea what it means on the capacity on these networks. I mean 20 years ago, the carriers at 35 to 40 megahertz of spectrum, and now they have 300 or more. And you see like another 100 and 120 coming from the C block. You're going to see government spectrum. You're going to see blocks of 100 megahertz of spectrum coming to market over the next 10 years and that's just going to drive more traffic. The cost per bit on those wireless network has dropped. It's almost like Intel and their prediction of how many semiconductor you could put on a chip. Same thing has happened in the cost per bit in the wireless industry. It's probably gone by over 1,000x over the last 20 years. And it's going to keep doing the same as more spectrum come to market. And the problem for the operators is that it's very difficult to build new towers in those neighbors. No one wants to see a new tower coming up. We have that infrastructure. It's there. There's capacity on it, and we are there to support them. So I think it's a symbiotic relationship. And if you take a long-term view, I think I feel really good about our business. I mean I always say after the Google Search business, just show me a better business. It's 85% gross margin, 70% EBITDA margins. And the fixed cost to get into that business are so high, it's going to be very, very difficult to come and compete with us.

Marc, thanks so much for your time. Thank you.

Thank you, Mike.