SBA Communications

Moat: 4/5

Understandability: 2/5

Balance Sheet Health: 4/5

SBA Communications is a leading independent owner and operator of wireless communications infrastructure, including towers, rooftops, and other structures that support wireless communication, with a global presence primarily in the U.S., South and Central America, Canada, Brazil and Africa.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

SBA Communications (SBAC) operates a business model centered around mission-critical infrastructure: leasing tower space to wireless service providers. This business model, combined with a few key factors, creates a solid and defensible moat.

Economic Moat Analysis:

SBA’s moat is characterized by several sources, which provide it with a competitive advantage that’s not easily replicable.

  1. Economies of Scale: Tower infrastructure is inherently a business where scale matters. Once a tower is built, adding additional tenants has a minimal marginal cost, meaning profitability increases with the number of lessees. SBA, with its large portfolio of towers, benefits immensely from these economies of scale.
  1. High Switching Costs: Wireless carriers face high costs in switching their equipment to another tower provider, including the time and effort needed for physical relocation, and the hassle and costs associated with contracts, creating customer lock-in for tower providers. This significantly reduces churn and provides SBAC with a stable revenue stream.
  2. Strategic Locations: SBA’s tower assets are not merely numerous, they also tend to be positioned in advantageous locations, critical for the effective distribution of wireless signals. Gaining access to and replicating these locations can be difficult and costly.
  3. Barriers to Entry: Establishing new tower sites requires significant capital expenditure, regulatory approvals, and the ability to effectively market and secure leasing contracts. These factors create major barriers to entry for potential competitors.

Moat Rating: 4 / 5

The combination of economies of scale, high switching costs, strategic locations, and regulatory barriers makes SBAC’s moat very strong. However, its reliance on large carriers and the possibility of changes in technology do impose risk.

Legitimate Risks to the Moat and Business Resilience:

  1. Technological Obsolescence: While cell towers are core infrastructure, technological advancements in mobile network technology (such as widespread use of small cells) could eventually diminish the importance of towers. SBAC can mitigate this risk by investing in newer technology and offering colocation facilities which will allow these new technologies to work in tandem with existing technologies. They also need to continually build new towers for new technologies.
  2. Reliance on Major Carriers: SBA depends heavily on a small number of large telecom carriers for revenue. If one of these major carriers were to experience financial difficulties, change their strategy, or go out of business, it could severely hurt SBA’s revenue stream.
  3. Regulatory Changes: Changes in regulations related to zoning, height restrictions, or land-use could adversely affect the profitability and development of new towers.
  4. Competition: While barriers to entry are significant, competition can still occur through mergers and acquisitions by other large tower providers, which will intensify the need for cost efficiencies.
  5. Interest rate and currency risks The company is exposed to changes in interest rates because of the significant level of debt on its balance sheet. The company is also exposed to foreign currency risks as most of its operations are in foreign markets.

Despite these risks, SBA has some resilience built into the business model:

  1. Long-term contracts: Most lease agreements with telcos and wireless companies tend to be for long periods, thereby giving them guaranteed revenue for many years to come.
  2. Diversification: SBA operates in multiple countries and regions, giving them protection from downturns in any particular market.
  3. Demand for towers: Increased demand for wireless data, a higher focus on 5G and the coming 6G all result in continued demand for new towers and expansion of their existing assets.

Business Explanation:

SBA Communications operates within the wireless communication infrastructure sector. The company’s main revenue source is leasing antenna space on their towers to mobile network operators (MNOs). These are usually multi-year lease agreements which provide a relatively stable revenue stream. The company is a Real Estate Investment Trust (REIT), which implies that they distribute a large portion of their earnings as dividends to shareholders, and therefore they are able to lower their tax liabilities.

Their business can be divided into two main segments: site leasing and site development. Site leasing accounts for the vast majority of their revenue, with a recurring nature as contracts are typically long-term. Site development includes new tower construction and is dependent on future demands from MNOs, in addition to services to upgrade existing infrastructure.

The primary drivers for the sector and SBAC includes:

  • Demand for Wireless Data: The increasing use of smartphones, tablets, and other mobile devices drives a continuous need for bandwidth, requiring more infrastructure to accommodate the higher data volumes.
  • 5G Rollout: 5G network deployments demand more infrastructure, creating a long runway for tower providers to continue investing into the business. This also provides upgrades to existing infrastructure as new technologies are integrated, like mmWave and small cell installations.
  • Network Densification: As the demand for coverage rises, operators seek to densify networks, leading to the construction of new towers in urban and rural areas alike.
  • Macroeconomic Factors: The general macroeconomic environment including inflation, interest rates, and foreign currency can have an effect on the business performance of the company.

Financial Analysis:

The company’s revenue model is driven by long-term contracts, which results in quite predictable revenue streams, the site leasing business comprises the bulk of this revenue. The following is a high-level analysis of the business financials:

  • Revenue: The revenue from site leasing operations has grown consistently over the last few years, reflecting the growing need for wireless infrastructure. Recent expansion and acquisitions have also helped to increase revenues. Revenue from the site development business can vary depending on the pace of growth and deployment of new technologies.

  • As of the three months ended March 31st 2024, total revenue was $649.6 million (5% increase compared to prior year) - Site leasing revenue was $625.8 million (5.4% increase compared to prior year) - Site development revenue was $23.8 million (-3.5% decrease compared to prior year)

  • Margins:
    • SBA has high operating profit margins (over 60%) in the site leasing business due to the low costs of adding new tenants to an existing tower.
    • Gross margins are similarly very high.
  • Profitability: SBA has strong net income due to high revenues and relatively low operating costs of the core business.
  • As of three months ended March 31st 2024, operating profit was $389.7 million, net income was $103.5 million and adjusted EBITDA was $465.5 million.
  • Balance Sheet:
    • SBA has a large amount of debt on its balance sheet. The company also has a history of frequent acquisitions, increasing this debt further.
    • However, the company’s recurring and contracted revenue sources provide an ability to maintain high debt levels.
    • Intangibles are a large portion of assets and include cell tower leases, and the company also has high amounts of goodwill from past mergers and acquisitions.
  • As of March 31st, 2024, debt totaled $12.7 billion, with a working capital of $389 million. Net long term assets were at $13.3 billion. Intangible assets totalled $7.3 billion and goodwill totaled $4.3 billion.
  • Cash Flow: The company shows strong positive cash flow from its operations. A lot of this free cash flow is used to service the debt and expand the business through acquisitions and the building of new towers.

-As of the three months ended March 31st 2024, Net cash from operating activities totaled $540 million and net cash flow used in investing activities totalled $110 million.

Recent Concerns/Controversies/Problems and Management’s Perspective: In the Q1 2024 earnings call, a few key topics were discussed:

  • T-Mobile’s tower consolidation program: T-Mobile has publicly announced consolidation of its towers and has been terminating some leases as the MNO moves equipment from leased locations to their own infrastructure. However, management does not see a large negative impact on their revenues and expects the issue to largely be resolved over the next few quarters.
    • SBAC expects this to lower revenue by $15 million in 2024. However, that is still up 6.2% year over year even with the T-Mobile headwind.
  • Interest Rates: Management acknowledged the increase in interest rates but reiterated that its balance sheet is resilient and that it does not expect to reduce the pace of share repurchases. They are comfortable with their existing debt and interest coverage ratios.
  • Growth in Colocations: New colocations (adding additional tenants to existing towers) continue to be strong, a positive signal for future growth and efficiency improvements.

Management repeatedly cited the strength of their financial position and growth prospects, as well as their focus on maintaining a long-term view and continue investments to maximize value for shareholders.

Understandability Rating: 2 / 5 While the core business model of renting out tower space is relatively easy to understand, assessing a company like SBA is more complex. Understanding the regulatory aspect, the implications of network and technology changes on their long-term business, and their accounting is more complicated, making this business difficult to understand completely.

Balance Sheet Health Rating: 4 / 5 The company has a very high debt load which can pose a risk to the company’s financials and profitability, however, this debt is manageable by their reliable recurring revenue streams. Their cash flows also appear to be more than sufficient for servicing its debt commitments, and they are actively re-purchasing stock to give returns back to shareholders. The company maintains a healthy level of assets, particularly intangible assets (which are relatively illiquid). The financial strength and high interest coverage ratios give it a healthy balance sheet, albeit with high debt, it can cover its debt well and has sufficient credit access when the need arises.