SBA Communications leases about 6,000 cell phone towers to major wireless service providers, including Verizon Communications (VZ), Sprint Nextel (S), T-Mobile, Alltel, and AT&T (T). The company trails leading rivals Crown Castle International (CCI) and American Tower (AMT) in terms of market share, with around 11% of total industry revenue in the U.S. SBA has fewer towers and generates less revenue per tower, as it does not enjoy the scale and efficiencies of its rivals.
Cell phone towers derive revenue from multiple tenants who use the infrastructure simultaneously. Because of the regulatory difficulty of building new towers (at least domestically), growth is largely driven by adding tenants to existing towers. This gives the tower companies significant barriers to entry and strong cash flow from incremental business at each tower.
The company's fortunes depend on the success of the wireless communications business. The industry grew 38% growth from 2004 to 2006, driven by greater market saturation and higher levels of cell phones per user and per household. As the US wireless market matures with a penetration near 75%, growth domestically will eventually slow and likely be dependent on higher cell phones per capita as well as incremental subscriber airtime. The company had no international operations as of the end of 2006, giving its competitors a head start in capitalizing on emerging cell phone markets. Furthermore, it is only about 50% exposed to the most quickly growing regions of the US, compared to about 70% for its competitors.
SBA Communications operates nearly 6,000 towers in 48 states, Puerto Rico and the Virgin Islands. The company leases antenna space to wireless service providers, including Verizon Communications (VZ), Sprint Nextel (S), T-Mobile, Alltel, and AT&T (T). These leases are typically long-term, 5-10 year in length, providing for a flat monthly rental payment, with 3-5% increases each year.
Below are operating and tower statistics relevant to the business. Enjoying the tailwinds of greater cell phone saturation and higher levels of cell phone use in the U.S., the company has increased its revenue per tower over a greater tower base, both key drivers of growth in the industry.
Because the marginal costs associated with adding new customers to towers are minimal, the company enjoys greater cash flow, higher returns on investment, and fatter margins from tacking on new wireless carriers and increasing revenue per tower. Furthermore, because barriers to entry in the business are substantial, due to high fixed costs and government regulation, a greater tower base drives further competitive advantage, bargaining power, and margins. The company, though, has not enjoyed the profit levels and margins of major competitors given its smaller size and less efficient tower base. And since the market has consolidated significantly and acquisition potential is limited, the company may have significant difficulty increasing scale and efficiency going forward.
In 2006, the company acquired another large tower company, AAT, which added 1,850 towers to its portfolio. The company expects to experience scale and cost benefits from increased geographic tower footprint and bargaining power. Furthermore, AAT's tower base was, on average, less mature than SBA's as evidenced by the lower overall revenue per tower experienced in 2006. If the company can successfully raise this number, SBA stands to enjoy a greater number of more efficient cash-generating towers.
Since 2004, cell phone usage in the United States--the company's most important market--has increased 38%. Increased cell phone usage means greater antenna and infrastructure utilization for the company, which in turn drives revenue. Given the attractive per tower economics of new business (most new business flows directly to the bottom line), the company has enjoyed growth and improved margins. The United States still lags other developed countries' cell phone saturation, leaving room for growth, but as the market continues to mature quickly, the company must seek other avenues of growth.
Currently the company has virtually no international presence. This contrasts with competitors American Tower (AMT) and Crown Castle International (CCI) who have operations in Mexico and Australia, respectively. American Tower is also pursuing opportunities in India, a rapidly growing wireless market. The company may pursue opportunities in other markets in which it has no footprint, but it currently lags its peers in doing so.
In recent years, companies such as Cingular and AT&T (T) and Sprint and Nextel have merged, evidence of increased consolidation among wireless carriers. This consolidation, as well as arrangements to share networks, has led to increased customer bargaining power and lower demand for total antenna usage. This is largely due to the fact that the companies' existing networks and their new, combined networks overlap or are being rationalized as expansion plans converge. The continued elimination of these duplications will lower revenue per tower, hurting margins and cash flow generation.
Around 63% of the company's business comes from just 3 customers, including Sprint Nextel (S) (26.2%), Cingular (26.7%), and Verizon Communications (VZ) (9.7%). Because the company generally signs long-term, 5-10 year lease contracts with these companies, any unwillingness or inability to pay future obligations or any serious disputes with one of these companies can have a materially adverse affect on the business.
Disruptive technologies such as VoIP may in the long-run alter how voice and mobile phone services and subscriptions are delivered. These new technologies may avoid the use of towers or other heavy infrastructure, and substitution toward them can take business away from wireless carriers and, ultimately, the company. While currently VoIP is largely replacing land-lines (since it requires internet access and most people use it via a computer), the pace of change in the industry makes it difficult to determine the demand for mobile tower infrastructure in the long-run.
Heavy FCC & Federal Aviation Administration regulation governs the construction and maintenance of existing towers. Each proposed new tower must be approved subject to height and weight requirements, location, environmental impact, and various other factors. Furthermore, each existing tower is inspected and expected to meet stringent standards and maintenance requirements, which may necessitate capital expenditures and fees related to upkeep and compliance. While no laws to date limit the construction of new towers, it has become increasingly hard to build new towers, so each of the major three tower companies enjoy regulatory barriers to entry and scale that cannot easily be duplicated by new entrants.
After consolidation in the industry, domestic competition between wireless infrastructure rental companies has become relatively concentrated among three major players: American Tower (AMT), Crown Castle International (CCI), and SBA Communications. American Tower is the largest by revenue and market share, but following CCI's 2006 merger with Global Signal, Inc., the company is neck-and-neck in terms of number of towers.
SBA is lagging both companies along several metrics. Below is a comparison of these relevant operating data.
|Company||Tower Rev. 2006 ($M)||# of Towers||Revenue per Tower||US Market Share (by rental revenue)|
|SBA Communications (SBAC)||$351||5,551||$46,118||11%|
|Crown Castle International (CCI)||$697||12,912||$53,958||29%|
|Global Signal, Inc. (merged with CCI in early 2007)||N/A||10,749||N/A||18%|
|American Tower (AMT)||$1,249||22,000||$58,818||42%|
All of these companies, however, also compete against wireless carriers who choose to maintain their own networks and build their own infrastructure. These companies, of course, do not draw revenue from their towers. The leased tower segment comprises around 55,000 of the total 200,000 towers across the country.