In releasing its second-quarter financial results, American Tower Corp., the largest U.S. wireless tower company, maintained good favor with analysts who indicated its overall efforts to reduce its risk profile by streamlining debt and being selective about adding assets to its portfolio will add up to long-term benefits for the company.
Interestingly, American Tower cut its full-year 2004 capital expenditure outlook to reflect a reduction in the number of new towers it expects to construct this year.
The company now expects to spend between $44 million and $51 million to build 90 to 110 towers, down from its previous forecast of 120 to 150.
For the second quarter alone, capital expenditures totaled $7.8 million, down from $13.9 million in the year-ago period. The company said it anticipates higher levels of capital expenditures on a sequential basis going forward.
“Our goal is to derive every possible dollar of value from our rich set of tower assets, further increasing our market share of new business and our tower operating margins,” said Jim Taiclet, American Tower’s chairman and chief executive officer, emphasizing the company’s adherence to strict criteria for new builds, namely that they generate substantial returns on investment.
Year-to-date, American Tower has built 26 towers, each of which has accrued more than “15-percent day-one return on investment,” according to Brad Singer, chief financial officer of American Tower.
Analysts agreed that the lowered forecast could be attributed to American Tower’s increasingly strict requirements for tower builds. If outside factors, like Cingular Wireless L.L.C.’s pending purchase of AT&T Wireless Services Inc., played a part at all, it would be short lived, said analyst Seth Potter from Punk, Ziegel & Co.
Taiclet said American Tower is seeing positive trends from carrier customers, including a “substantial level of leasing activity with all major carriers.” Solid lease-up on existing towers can be expected during the second half of the year, Taiclet added, reaffirming American Tower’s previous expectations the wireless industry will add 15,000 cell sites this year, including new leases colocated on existing sites.
Furthermore, American Tower expects carriers to continue to install 15,000 new cell sites per year-spending $20 billion per year to do so-for the “next few years,” Taiclet said.
American Tower, which ended the quarter with 14,700 towers, said it is currently assessing Sprint’s tower portfolio, which is up for sale, but emphasized any acquisitions would be very selective as the company will continue to set high requirements for ROI, as well as seek assurance that any tower it adds to its portfolio is attractive to multiple tenants.
American Tower reported total revenues of $193 million, up 10 percent from $175.3 million recorded in the second quarter 2003. Income from operations nearly quadrupled from a year ago to $19.3 million, while loss from continuing operations came in at $59.9 million, or 27 cents per share.
Net loss was $60.5 million, or 27 cents per share, which the company attributed at least partly to a $31.4 million pre-tax loss on the retirement of long-term obligations from refinancing an existing senior secured credit facility with a new $1.1 billion senior secured credit facility and the repurchase of debt.
Adjusted EBITDA, defined as income from operations before depreciation, amortization and accretion and impairments, increased 15 percent from last year to $110.2 million. Net cash from operating activities reached $73.7 million, and free cash flow totaled $34.4 million, American Tower’s highest level yet.
“Our core leasing business delivered another quarter of consistent performance with revenues increasing 10 percent and operating profit increasing 14 percent from 2003,” said Taiclet. “We are confident in our ability to deliver sustained revenue growth as wireless carriers strive to improve the competitiveness of their networks.”
Further demonstrating its focus on maintaining a predictable financial model, American Tower said it is exploring strategic alternatives for its construction services group, including selling some or all of its construction services capabilities. Singer pinpointed a “continuing difficult operating environment and breakeven operating revenues,” for the divestiture. The group, part of American Tower’s network development services segment, recorded a $14,000 operating loss on revenues of $21.2 million during the quarter.
Such a move would not be uncommon in the tower industry, where companies have been selling non-core services-related businesses for years. American Tower’s network development services group will continue to provide site acquisition, zoning and permitting, and structural analysis, and any necessary construction services would be outsourced.
“We view this as a positive development as we believe this business contributes too much earnings volatility to an otherwise highly predictable business model,” Raymond James & Associates said in a research note of the potential sale.
