SBA Communications provided guidance for 2016 that was lower than investors were expecting, though financial analysts said it was conservative. The analysts think that SBA's guidance indicates that AT&T Mobility (NYSE: T) will step up its U.S. wireless network spending in 2016, but it's unclear by how much, and that there is not a lot of visibility on how Sprint's (NYSE: S) network densification will proceed.
AFFO, or adjusted funds from operations, is a key metric for tower firms and is generally equal to the company's funds from operations (FFO) with adjustments made for recurring capital expenditures used to maintain the quality of the company's assets. SBA expects AFFO of $731 to $775 in 2016, compared to its outlook of $728 to $737 for all of 2015. The company also expects total site leasing revenue of $1.51 billion to $1.53 billion in 2016, compared to its expectation of $1.47 billion to $1.48 billion for 2015. The guidance sent SBA's shares down as much as 7 percent yesterday.
SBA said its initial 2016 outlook includes new tower builds in the U.S. and internationally of 590 to 610 towers. SBA CFO Brendan Cavanagh said on the company's third-quarter earnings conference call that "domestically in 2016, we believe our organic leasing revenue growth will come from continued steady contributions from Verizon and T-Mobile, and increased activity levels with AT&T."
"We have not included any material contributions to our organic growth from Sprint and a reduced services contribution due to present uncertainty with the timing of their future network investments," he added, according to a Seeking Alpha transcript. "Although we do believe we will see some activity from Sprint in 2016."
Meanwhile, SBA CEO Jeffrey Stoops added that "AT&T increased their contribution to our leasing results for the second consecutive quarter, and early indications are that we will see continued increases in leasing levels with AT&T in 2016. Domestic applications are growing, although in terms of signed domestic business year-to-date, we are behind our expectations of a year ago as Brendan mentioned earlier."
AT&T has said it is deploying its 2.3 GHz WCS spectrum for LTE to add capacity in select, urban markets. However, AT&T has focused most of its attention for network spending on Mexico, where it plans to spend $3 billion to cover 100 million people in Mexico with LTE by the end of 2018.
Meanwhile, Sprint has said it plans to add thousands of macro cell sites and tens of thousands of small cells to its network, and ensure that nearly all of its sites support 800 MHZ, 1900 MHz and 2.5 GHz spectrum for LTE. However, other than indicating that most of the early densification work has taken place on the small cell front, Sprint executives this week did not provide much insight into how the densification is proceeding,
"Activity levels with Sprint remained very low," Stoops said. "They publicly discussed increased investment in their network as early as next year and we're excited about the prospects of what that could contribute to our growth. However, as Brendan mentioned earlier, given a lack of clarity around the scope and timing of Sprint's network investment, we've included very little incremental contribution from them in our initial 2016 outlook. We'll obviously continue to monitor their network plans closely."
"The guide assumes consolidated gross organic leasing activity growth of 9% year-over-year, or 7.5% net of churn, and ahead of activity seen in 2015 (8% gross and 7% net, respectively)," Wells Fargo analysts Jennifer Fritzsche, Eric Luebchow and Caleb Stein said in a research note. "While this is lower than we had expected (and clearly lower than the market was looking for!), we would note the guidance appears somewhat conservative."
New Street Research analysts Jonathan Chaplin, Spencer Kurn and Vivek Stalam said in a research note that SBA's "guidance for growth was weaker than expected because management anticipated a stronger acceleration in activity in 2H15 than actually materialized. This was mostly due to AT&T -- growth has picked up since the start of 2015 and should continue to build from here, but has ramped slower than management initially envisioned."
"Importantly, based on management's comments on the call we do not believe the fundamentals of the business have changed," they added. "While 2016 may be a slow year with AT&T dragging, Sprint forming their network plan, and carriers preserving capital for the incentive auction, we believe ramping network activity is a question of when, not if. Carriers will ultimately need to densify their networks and deploy additional spectrum bands over the next several years to meet exponential growth in data demand. We are lowering our forecasts because it appears this growth will occur later than we expected; however, we believe organic growth is poised to accelerate over the next few years."
Jefferies analysts Mike McCormack and Scott Goldman said in their research note that "while we believe management has set a low bar for 2016, carrier behavior in 2016 is a wild card, in our view. We don't expect 2016 to be a banner year for spending."
Importantly, the Jefferies analysts do not expect a significant uptick from AT&T next year in network spending. "AT&T may have reverted to a 'new norm' in some respects with a focus on building out the Mexican assets, and meeting FCC requirements for wireline build out," they said. "We wouldn't expect to see a meaningful increase in AT&T spending until 2017 when the AWS-3 build begins. Nonetheless, we believe Sprint expectations are understated with significant build needed for network quality improvement. We would expect continued steady builds from Verizon and T-Mobile."
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