SBA Communications Corporation (SBAC) Earnings Call Transcript & Summary

Okay. So let's get started. Cameron McVeigh, the communications infrastructure analyst here at Morgan Stanley. Ben Swinburne, the communications infrastructure, media, telecom, cable analyst and Marc Montagner, the CFO of SBA Communications. Welcome, Marc.

Thank you.

Before we get started, let me read this. For important disclosures, please see the Morgan Stanley research disclosure website. If you have any questions, please reach out to your Morgan Stanley sales representative. And with that, we will get started. So Marc, to start I wanted to get your thoughts on the growth outlook, the broader power industry and what you consider the main growth drivers for the industry today?

Well, I think if you really look at our business specifically in the U.S., you have a colocation authentication or extra coverage and amendment for the existing equipment. So that's really driving the growth on -- in terms of revenue growth. But just step back a little bit, right? The catalyst in this industry, I mean it's an industry for 30 years, key areas by spectrum and they roll out next-generation technology. They get about a 10x increase on the capacity versus the prior generation and an exponential cut in terms of the cost per bit in terms of delivering a cost over the airway if you just cram more bits per. And that's really been the driver for the industry for the past years. I mean, 30 years ago, EBITDA margins for the wires carriers of about 45% on a mature network and is still 45% today, but they were charging $0.25 a minute for voice or $0.10 for SMS $40 for a gig of data, and now it's $55 or $60 all you could eat, traffic is still growing at double digit every year. And the EBITDA margins for the carriers is still 45%, just because they have been able to take down the cost a bit tremendously. So the next catalyst, I think, for our industry. And then when you look at CapEx as a percentage of revenue, they roll out a new technology, they get a 10x increase and they go to harvest mode for a few years. So the carriers goes between paying 15% of revenue on CapEx to 25% when they deploy new technology. 2022, 2023, they were running close to 25%. '24 and '25, they are running below 15% of revenue. So we were at the trough now and they are in the harvest mode. The next catalyst for our industry really is going to be [indiscernible] and the FCC is probing to auction the C block in 2027. And it's probably 18 months clearing period, the manufacturer, Samsung, Ericsson, Nokia or [indiscernible] equipment for 6G, marketing this aggressively. So you could see a rollout of 6G in '29, 2030 time frame, and it's going to be a catalyst for growth again. In 2023 we did $78 million of lease up and lower guidance midpoint 35. So you could receive the delta at the trough, we're still growing, but not growing as rapidly. And at the peak, you could see an increase in the top line growth rate.

Great. So it's a long answer for short question. I'll take it. And I wanted to ask specifically in -- on the earnings call last week, it was -- '26 is characterized as the right at the bottom in terms of domestic growth at 2%. That's below what we've seen in the 2% to 3% lease-up expectation. I guess what gives you confidence that this is truly the trough for the year? And what do you think needs to happen to see growth reaccelerating the shortterm.

Yes. So I think we -- if you look at -- especially in the U.S. we always see 4% to 5% growth, 3% will come from the accelerator on the existing leases and 2% to 3% growth from amendment and colocation and as I said, CapEx as a percentage of revenue right now is really at the trough less 15%. We see the majority of the new revenue is not coming from a [indiscernible] coming from co-location, densification coverage. So it just means that the network is still -- the carriers still have double-digit growth in terms of traffic and the need to meet that demand. So we feel pretty good at 4% to 5% growth rate, probably closer to 5% on a normalized environment, closer to 4% at the trough.

Great. That's helpful. I want to ask about fixed wireless. It now accounts for 50 million subs and more than half of the overall network capacity. How directly are you seeing FWA translate into the leasing activity for the towers? And do you expect this to be a meaningful driver into 2026.

Yes. So I think I've seen research report showing that 50% of traffic on network today comes from fixed wire access. We have hundreds of millions of handsets and 50 million fixed wire access customers. So you could just imagine how much tonnage is going on those customers. So it's definitely driving colocation for densification. For us, we have a passive infrastructure. We lease space to the carriers. We know they have visibility and the equipment for fixed wireless access or connectivity to a device is the same thing, a bit is a bit is a bit on the RAN network. So we don't have that type of visibility. But -- it's clear that fixed wire access is going to drive more colocation.

Got it. Marc, you mentioned the shift to colocation. Is there any difference in how we think about the timing between when those leases are signed and when they actually hit the P&L compare with colo to amendments.

Yes. So the cycle book-to-bill cycle on the [indiscernible] is closer to 3 months on a colocation is closer to 6 to 9 months.

Okay. You guys also mentioned on the earnings call, and we had Verizon yesterday here at the conference in AT&T this morning that you've got a lot of contracted activity with Verizon in 2026. Talk a little bit about the growth outlook there and why you think that MLA is a sort of strategic positive for SBA?

I think if you look at the industry, the industries oligopoly, 3 major carriers, 3 large publicly traded company, a power company. I think the carriers have long-term network needs, they're growing the top line at mid-single-digit clearly don't need to control their cost over the long term for us. We have 3 customers, and we want to lock in a minimum growth rate. So there's healthy dialogue there where I think it makes sense for all of us to agree and try to predictable outcome for the next 10 years. So we signed an agreement with Verizon. We're very pleased with the agreement. It's a 10-year agreement with escalated minimum volume commitment and exchange they have certainty on the pricing. And I think it's going very well, and we're very pleased with the way they are. We are working together. At the end of the day, we want to support our customers. We want to make it easy for them to deploy. T-Mobile was, I think, largest generator of new revenue last year. They had build-out requirement as part of the acquisition of Sprint, they need to meet a 95% coverage of pulp and some densification need. Now they have kind of deployed 5G on over 85% of the SBA towers. So they're pretty much slowing down in 2026. Horizon is picking up the [indiscernible] Verizon is going to generate is going to be our most active customers in 2026 in terms of new revenues.

Sticking with the big 3. I think you guys also said that AT&T would probably be a bit of a first half versus second half story. Maybe just talk a little bit more about what's driving the trend line with that customer in '26 versus '25?

Well, AT&T is, I think, is steady. We have a 5-year agreement with them. We signed that in mid-2023 to structure agreement, helping them really roll out, deploy 5G. Make it easy for them to deploy. So it's basically following the term of the agreement.

Great. I wanted to ask about -- EchoStar has been in the news everyday. Yes. Perhaps could you explain to the audience how we got to the situation where we are today and maybe potential next steps on the legal process and path to recovery?

So we -- I mean DISH was starting a fourth carrier in the U.S. They needed basically towers to deploy their equipment. We signed agreements with them, lease agreement, it's about $56 million of annual revenues. Last year, we did $37 million of lease up, $2 million were with DISH, almost nothing in the second half. And the stopping. So we have basically a $56 million revenue contracted with DISH in 2026. We assume it's going to be 100% churn for 2026. We have short-term contract with DISH. So the to exposure under the term of the leases that we have is slightly above $100 million. The runoff at the end of '27 and '28. So Arturo exposure is about $100 million, and we filed a lawsuit basically in order to protect our legal rights. So there's not much I could comment beyond the fact that we are a lawsuit, and we're going to pursue all legal revenues trying to basically collect as much as we can under the contract.

On the topic of churn, I wanted to ask about Sprint. You mentioned on the last call that the expectation for Sprint churn in '26 has raised a bit. Can you help us think through potential timing of Sprint churn over the next couple of years?

So it's $56 million this year and going forward is going to be less than $20 million over the next few years basically. So it's really minimum exposure going forward.

Okay. Great. And let's switch a bit to the international markets. Brazil represents almost, I think, 15% of your site leasing revenue, 12,000-plus towers but there's some near-term headwinds with the OE consolidation and FX volatility, not to anything you don't already know. What needs to happen for Brazil to transition more to a growth story? What do you think is the realistic time line?

Well, I think Brazil is a very interesting country of [indiscernible] experience in Brazil from multiple companies. And I'm always very bullish in Brazil, 200 million people, large exporter of food commodity, minerals, oil and gas, balance of payment is positive. I think they exported more than like by $4 billion in January alone. The population is [indiscernible] 5G is less than a 50% deploy and the country is now in oligoply you have 3 carriers, Vivo, Claro and TIM. And traffic keeps growing. So I think we're indexed towards oil, which has been basically carved out into the other 3. And the Oi wireline is going out of business. We have $14 million churn from Oi wirelline company is going to disappear basically. And then we have a little bit more churn coming from Oi wireless going forward. But is the peak years in terms of churn in Brazil. The Central Bank has done a phenomenal job in terms of drawing inflation. And the key areas, really very few towers have been built in the last 2 years just because short-term interest rate, we're collecting 15% interest on our checking account in Brazil today. The cost of capital is clearly high teens, 20%. And that's what -- when we look at a new BTS, a new tower that an operator wants to us to build that's kind of a high-teens hurdle rate we look at. So we really have cut down the build in Brazil tremendously. And so have the other carriers in summary, I think it's a much healthy market for the tower company because the wireless operators have to keep deploying in terms of color, in terms of new towers and 5G is less than 5% -- 50% deployed, and the churn is basically what the tailend of the change. So I feel pretty good about Brazil over the next few years.

Got it. I also wanted to ask about the -- some of your African markets, which it seems like they have some of the highest returns on invested capital. Do you expect to expand -- continue to expand your footprint in these markets or deepen some of the existing positions.

So in 2 markets in Africa, South Africa and Tanzania. I think we've got in early at the right valuation. We have done extremely more earlier. It's the 2 countries with the highest return on invested capital into the double digits. And Tanzania is still growing. The government is really pushing coverage, wires is probably the only physical telecom infrastructure that's working well. Africa was a high-growth market for many years. And kind of slowing down a little bit now. But I think we like our position in Africa. I don't see us expanding into New African market at this stage. I think -- I like where we are right now.

Great. Just on that topic, in terms of portfolio rationalization, it's been a focus recently. How should we think about some of the markets in which you have less scale versus others? Maybe just take us through a dynamic where it would lead you to become more of a skilled player.

Right. So I think when Brendan became CEO, he announced, I think, in his first earning call in February '24, portfolio review. And we look at the 15 markets where we operate and we realize that the markets where we're doing where, where the market, where we're at scale. Some operators to roll out a new technology, they come to you because you know you could add them deploy fast and at scale, also gets you better margins because SG&A are pretty much fixed cost. And you need to be in the market where the economy is healthy. The economy is healthy, corporate or hiring people, they need wireless connectivity. People have jobs, they spend money on their wireless device. You need a healthy economy. And you need to be in an economy where you don't basically invest in front of churn. We've seen like Brazil going from 4 to 3, the U.S. with spring being consolidated way, you need to be in a market with an oligoply and scale is important. So on that basis, we exited the Philippines, we exited Colombia. We sold our operational Argentina and we sold our exploration in Canada. We love the market, but we only had a few hundred towers in a very large country and didn't make any sense. So we sold to a P-firm at an attractive multi. And then we look at the markets where we operate in Central America, we much consolidated to 2 operators, Millicom and Claro very healthy operators investing in the network committed to 5G. 5G was under deployed. And when Millicom decided to sell 7,000 hours, we struck a deal with Millicom. So we -- so 50 new contracts in U.S. dollars with escalator newbuild commitment we're working in an upper single-digit growth rate and low-risk, healthy market, growing very rapidly. So the bulk of the towers we will build in 2026 will be building Central America and we had operations in the regions. So with people in the ground. This is a business with -- we don't need that many more people to operate in new sites.

You touched on 6G a little bit earlier. I wanted to kind of bring 6G and AI together and just hear you discuss how you think those standards are coming together, how AI plays into the opportunity and help us -- I know it's early, but how does how does the 6G opportunity compare to what you've seen in previous generation cycles for the tower business?

Right. So I think it's still early to say. But I think if you think about -- I was listening to the CEO of AMD this morning at 7:00 a.m. who is talking about AI and she or he see demand for AI chip for inference data center closer to the urban center where the applications are going to resign. I think if you want to make real-time decision using AI app, latency is going to be very critical. And for that, you need to be close to the user if the user is going to use a mobile device, you need to be close to the site. People are saying is a small data center inference data center coming to the base of the sites, the wireless sites. I don't know, but a lot of people are talking about it. I think the other thing AI is just going to generate much more I think, traffic on the network, probably more uplink and 6G is going to just mean more new equipment at the site, heavier equipment at the site, and it's going to be positive for the operators and then you look at some other countries now are using wireless sites to help for drone delivery services in terms of securing more precision. I think it could be helpful in and clear where autonomous vehicle or they're going to need some local signal. Today, most of the processing is being done in the car, but is a line change or not or they're going to need more connectivity to the cars. Some countries are using wireless sites for drone detection. It's cheaper and more precise at doing it the way we're doing in the U.S. using radars. Is that going to come to the U.S.? I don't know. But I can see that wires infrastructure that's really difficult to be -- to replicate because it took 35 years to build, you have zoning laws. Now you have power at the site, you have fiber going to the site, you have a generator, you have batteries. It will fully robust site, you're protected. And you could see how it could support a number of new use in applications going forward.

Yes. That's interesting. In addition to AI, another big topic, this week has been direct to sell satellite connectivity. I'm sure you probably are aware, probably starting last August, I think EchoStar was talking about their plans and they introduced the idea of carriers using satellite instead of tower capacity, at least in rural markets. I know this is not a new question you've got, but it would be great to get your updated view on how satellite fits in to the overall. Especially U.S. market you think that impacts your business, if at all?

Sure. So I think satellite is great for coverage, not great for capacity. So I think it's really a complement to the terrestrial wireless network. If you really look at the wireless network in the U.S. covers about 95% of the population, but only 2/3 of land mass. 1/3 of the landmass is not covered by wires networks. So if you have a dual mono handset with the right form factor, dual chip, dual radio, community execution with a satellite and terrestrial network, I think, is basically the killer app. And then if we look at starting. So they bought spectrum from DISH, but also they got the MSS spectrum, which is 40 megahertz of a global ban and knowing Elon he thinks big. So it's probably thinking of a global play, not just the U.S. So I think it's going to be a great complement to the wires network. As you look in terms of capacity, you probably need 10 satellites to have the capacity of 1 base station. We probably have 150 to 200 sites in the U.S. alone. So you can put 1 million satellite in orbit or replicate that it's just not cost effective. And it's interesting because I've been having that question from investors for 6 months and today, at the World Mobile Congress in Barcelona, I think one of the SVP for starting basically confirm and now we won't have the capacity. It's a good complement to the terrestrial wireless network, but it's not something that is going to cannibalize it. It's more of a complement can never get the capacity and the scale.

Marc, it seems like the private tower market valuations are much higher than the public valuation and it seems like the disconnect has limited some of the M&A activity recently. If the gap persists, how should we think about capital allocation priorities buybacks, acquisitions and debt reduction.

Yes. So there's a disconnect because it's just a scarcity of large tower portfolio for sale in the U.S. and two, there are multiple large productory infrastructure franchising those opportunities, sorry. They could basically fund the acquisition in the ABS market, putting 12 tons of leverage at attractive rates. And the way they got committee is probably saying I could buy this for 35, 40 times today. And market it to another PE for in 5 or 7 years at 25 to 30x and justify a multiple and that mass has worked for the last 35 years. So I'm not saying the math is wrong. It's just something that's worked really well for the last 35 years, just make it very difficult for us to compete. So if you look at our capital allocation strategy and also public numbers, it's about $1.9 billion of EBITDA , $525 million for the dividend, about $490 million for cash interest expense, $70 million of cash taxes. And then you have another $225 million, maybe $250 million for gross CapEx and maintenance CapEx. That leaves you about $650 million of extra cash to allocate. And then this is as a management team and our Board, this is how who could create value by being disciplined on how we allocate that capital. So in 2024, we spent $250 million M&A, $200 million buyback, and we paid our debt in a rising interest rate environment. Last year, we did a $1 billion deal with Millicom accretive at 11x EBITDA. And we bought $0.5 billion of stock at an average price of $200. Going forward, I think buyback is at this level, makes sense. And we don't see -- I don't see ourselves buying a large portfolio in the U.S. given the valuation, and I don't see us entering new emerging markets. So I think we're probably going to index towards buyback.

Great. I wanted to -- we have a couple of minutes left. I want to see if there's any audience Q&A. You guys can think about it. Marc, the tower industry has faced a persistent valuation multiple compression recently, SBAC trading at a mid-teens to AFFO versus a 10-year average below 20s. What do you believe the market may be missing or what catalysts might drive some more multiple expansion?

Well, I think, as I said, CapEx is a percentage of revenue for our customers oscillate between 15% and 25%. We at the trough, '25, '26, we're running below 50%, although historical low but the traffic keeps growing at double-digit, fixed-wise access is using 50% of the capacity. The industry is going to add another 10 million sub this year. The $15 million that they have were already using half of the capacity, you're adding another 10, just imagine the demand on the network. So I think CapEx as a percentage of revenue is going to grow 6 years around the corner, AI, I think phone detection, autonomous vehicle. So many, I think, applications. The world is going wireless, wires growth is never going to go away. And I feel really good about our industry. And then you look at the tower industry, it's really difficult to think how you could replicate that infrastructure, recently visited a tower down close to headquarters that was built in the '90s. The Crete lab base probably is, round slab of concrete, the size of this room, going 60 feet into the ground, you have those steel rolls going 40 feet down and you have a 200 feet tolerant half of it with tons and tons of equipment, generators, fuel tanks, batteries for the operators, fiber coming in. [indiscernible] in a very dense environment where the zoning law would never let you basically replicate that infrastructure. So look at the geography where you live in California, Connecticut, Resisted County, the coast of Florida, Long Island it's almost impossible to build there. And if you're wise operators, you need to bring more and more traffic to this community. So the only way to do it is cheaper to just pay your tower operator to put another piece of equipment on the tower than trying to find a way to build new towers. So I think that infrastructure has been there for 35 years is going to be the 35 years from now in an industry that's growing traffic at double digit. So I feel pretty good about our industry going forward. I feel pretty good about the barriers to entry and the exclusivity that it provides just to factor given the zoning laws and the cost to replicate that industry. So I think people always look at it. Again, you're only growing at 5%, only growing at 4%, but that's a trough and it's very stable. It's contractual, and I feel pretty good about our prospects going forward.

Great. It seems like a good place to end. Marc, thank you so much.

Thank you. Thanks for having me.