Good morning. My name is Tracy and I’ll be your conference operator today. At this time, I would like to welcome everyone to the American Tower third quarter 2009 earnings call. All lines have been placed on mute to prevent any background noise. After the speakers remarks, there will be a question-and-answer session. (Operator Instructions)
I’d you now like to turn the call over to your host, Mr. Michael Powell, the Vice President of Investor Relations; please go ahead.
Thanks, Tracy. Good morning everyone and thank you for joining American Tower’s conference call regarding our third quarter 2009 financial results. Please note that we posted a brief presentation to accompany this morning’s call on our website, which is www.americantower.com. If you haven’t done so already you may want to download this presentation as we will refer to it at various times throughout our prepared remarks.
The agenda for this morning’s call will be as follows. I’ll provide an introduction and highlight certain key metrics from our third quarter 2009 financial results. Following this, Tom Bartlett, our Chief Financial Officer, will go over our third quarter results in detail. Finally, Jim Taiclet, our Chairman, President and Chief Executive Officer will then give closing remarks, including his thoughts on current key business trends and of course, after these comments, we will open the call to your questions.
Before I begin, I’d like to remind you that this call will contain forward-looking statements that involve a number of risks and uncertainties. Examples of these statements include statements regarding our 2009 outlook, our stock repurchase program, credit markets and any other statements regarding matters that are not historical facts. You should be aware that certain factors may affect us in the future and could cause results to be materially different than those expressed in these forward-looking statements.
Such factors include the risk factors set forth in this morning’s press release and those set forth in our Form 10-Q for the quarter ended June 30, 2009 and our other filings with the SEC. We urge you to consider these factors and remind you that we undertake no obligation to update the information contained in this call to reflect subsequent events or circumstances. With that, I’ll begin the call with some of the highlights of our results.
Please turn to slide four of the presentation for a summary of our third quarter 2009 results, compared against the third quarter of 2008. You’ll note that we reported total revenues of approximately $444 million, reflecting growth of 8.5% from the year ago period. Our results for the third quarter 2009 include a $6.7 million net one time revenue item within our rental and management segment related to a termination agreement with one of our U.S. broadcast customers.
Tom will provide additional color on our core growth for the business excluding this one time item and the impact of foreign exchange, rate fluctuations and straight line accounting. Our adjusted EBITDA for the quarter was $304 million which is a $9.6 million increase from the prior year period. Our operating income for the quarter increased 16% to approximately $179 million and finally, income from continuing operations was up 11.5% to approximately $68 million or approximately $0.17 on a per share basis.
Now Tom, I’d like to turn things over to you at this time.
Thanks, Michael and good morning everyone. I’m again pleased to report that American Tower continued its track record of consistently delivering strong revenue and adjusted EBITDA growth during the third quarter of 2009.
Please turn to slide five to review some of the highlights. Our core growth rate for tower revenue which excludes the impact of foreign currency exchange rate fluctuations, straight line lease accounting and a $6.7 million one time termination agreement with one of our U.S. broadcast customers was 10.3%, relative to the third quarter of 2008. We continue to generate an industry leading adjusted EBITDA margin of 68.5%.
I’d like to highlight that we have maintained this margin level, while doubling the size of our portfolio in Brazil and launching our India operations. We remained focused and disciplined while evaluating opportunities to selectively deploy our capital. We believe these investments will not only drive a core growth in our portfolio, but also enhance our return on invested capital.
Highlights during the quarter and to-date include the construction of 267 sites across our portfolio, the acquisition of 230 communication sites in Brazil and 74 in the United States, and the purchase of 326 sites in India, which closed just subsequent to the end of the quarter. All told, just under 900 sites added over the last 90 days for about $120 million. In addition, we also redeployed approximately $118 million of our excess cash flow back to shareholders through our share repurchase program.
In fact, we purchased back almost $900 million since the beginning of 2008. In addition, our balance sheet remains in a solid position and the strongest in the industry. Net leverage for the quarter was 3.3 times. The reduction from the second quarter is primarily a result of nearly all of our 3% convertible note holders exercising their option to convert their notes into common stock upon our redemption of the notes. We have nearly $850 million of available liquidity, which included over $225 million of cash and cash equivalents, and nearly $625 million of availability under our revolving credit facility.
Finally, our recent upgrade to investment grade enabled us to raise $600 million of 4 5/8% senior unsecured notes to 2015, which is by far of the lowest cost unsecured notes ever issued by the company. As a result of the strong business performance in the quarter, we are reaffirming our previously established 2009 outlook.
Turning to slide six, you can see from the chart in the upper left hand side of the page that our top line growth trends remain strong. In fact our core growth versus the year ago period would have been 10.3% on a currency neutral basis and excluding the impacts of straight line lease accounting and the benefit of the one time customer termination agreement I mentioned earlier.
The majority of our core growth has been supported by our legacy communication sites, which continue to produce solid levels of growth. Our organic growth has been strengthened by investments and new communication sites in the U.S. and aboard.
Turning to slide seven, our recent focus has been to expand further within our existing markets, while also pursuing new growth opportunities were our tower leasing expertise can provide carriers with a strong value proposition. Since the beginning of 2008, we have been extremely focused on this endeavor and are proud of our progress to-date.
Our team in Brazil recently completed the acquisition of 230 sites from a regional carrier. These tower sites, along with more than 600 sites that we have built or acquired, have contributed to the successful doubling of our site portfolio since the beginning of 2008. Similarly, in India, our recent acquisition of XCEL Telecom and Transcend Infrastructure has enhanced our scale within our targeted regional telecom circles and provided us with assets that will provide solid foundation to grow.
We also expect that these markets will continue to produce strong growth and in some cases stronger organic growth than our U.S. assets, as wireless industries across the globe mature, more and more subscribers are seeking 3G or faster speeds and as a result, our customers needs for tower space continues to grow. In addition, as spectrum auctions are completed and our customers continue with expansions into new geographies, we will seek to partner with them. These opportunities should provide our investors with a complementary source of growth in the years to come.
If you turn to slide eight, you can see the same positive trends in our core adjusted EBITDA growth, which was 9.2% with an adjusted EBITDA margin of 68.5%. We are pleased to report that even including the first full quarter of our expanded presence in India and Brazil, which partially contributed to the increase in our rental management segment operating expenses and SG&A from the third quarter of 2008, our adjusted EBITDA margin held steady at our industry leading levels.
On slide nine, I’d like to highlight the ways in which we are seeking to add further shareholder value by not only focusing on growing revenues, but also focusing on the costs to support those revenues to drive margin and cash flow expansion. First, our legacy assets continue to produce strong operating leverage as they continue to generate organic revenue, and have only experienced minimal increases in costs compared to the year ago period.
Alternatively, since the beginning of 2008, we have materially increased our international portfolios, which have introduced incremental operating in SG&A costs. These costs support our future growth in these regions. However, we will remain focused on ensuring they are at appropriate levels.
Second, our recent ratings upgrade enabled us to raise $600 million of new senior notes at an annual coupon of 4 5/8% or 250 basis points lower than the notes we’ve refinanced with the proceeds of the offering. As a result, and as an example of how this upgrade will benefit us in the you future, we will save approximately $11 million in cash interest cost per year on this transaction alone, which will contribute to our future sources of cash to reinvest in our core business, new assets or stock repurchase program.
In addition, as we reduce our borrowing costs, our overall cost of capital should decrease. Finally, we’re continuing our work to ensure we are prepared to effectuate the best solution for minimizing our tax burden. Our overall global tax strategy involves managing our tax liabilities in our profitable Latin American operations as well as our tax exposure in the United States.
Moving on to slide 10, you can see the positive trends in our capital expenditure mix over the last year. Our redevelopment CapEx continues to be lower in 2009, compared to the levels we experienced in 2008, and we expect this to continue for the remainder of 2009. Conversely, our discretionary capital expenditures have trended higher and we expect them to remain so for the balance of the year. This is a direct result of our development team’s success in finding high return projects to invest in to grow the business.
During the third quarter, we spent approximately $33 million on new site development, completing the construction of 267 new sites with average day one unlevered returns of approximately 8%, with strong prospects for growth as we add additional tenants to those sites.
In addition, we spent approximately $18 million on land purchases. I would highlight that the company’s total return on invested capital as of the third quarter was approximately 11%, which represents an increase of 140 basis points from the beginning of 2008. The continued improvement in this metric demonstrates our ability to further maximize the return of our existing assets, while selectively seeking new investments to complement our asset base.
Turning to slide 11, we’ve highlighted the trends of both cash provided by operating activities and our recurring free cash flow. Consistent with prior quarters, we continue to use our cash flow from operations to reinvest in our core business and stock repurchase program.
During the third quarter of 2009, we spent $32 million related to investments in our existing sites, and $101 million on new communication sites of which $33 million was for the construction of new communication sites and $68 million was for new acquisitions.
Finally, we deployed $118 million through our stock repurchase program. As shown on the chart in the lower right-hand corner of the page, we’re introducing a new metric for the company, recurring free cash flow and recurring free cash flow per share, which we believe will illustrate our past and future ability to deploy our excess capital into accretive investments to enhance shareholder value.
Since the third quarter of 2008, our recurring free cash flow and recurring free cash flow per fully diluted share have increased 16.3% and 18.6% respectively. Consistent with our capital allocation strategy, we will continue to focus on investing in our existing assets and new communication sites, while remaining committed to our stock repurchase program.
Turning to slide 12, American Tower ended the third quarter having generated approximately $467 million of free cash flow, year-to-date with approximately $850 million of available liquidity and a net leverage ratio of approximately 3.3 times. As I mentioned earlier, our strong business model with a significant backlog of contracted revenue, prudent capital structure and approach to leverage were recognized by both Moody’s & Fitch with a recent upgrade of our unsecured credit rating to investment grade.
There are many benefits that go hand in hand with being an investment grade credit, some of which were a larger bond investor base, greater inclusion in Bond Index Funds and the obvious reduction in our cost of debt. Our recent 4 5/8 senior notes offering, illustrated our ability to achieve this and we’ll continue to opportunistically monitor the capital markets as we seek to ladder and further extend our maturities with lower cost debt four or capital structure.
Finally, on slide 13, we’ve highlighted our 2009 outlook for revenue, adjusted EBITDA and cash provided by operating activities, which we are reaffirming. As of the third quarter of 2009, we generated approximately 75% of our annual outlook midpoint targets including our rental and management segment revenue, adjusted EBITDA and cash from operating activities.
In summary, we continue to believe that the fundamentals of our business are strong and we are actively seeking ways to further redeploy our cash towards high return investments to enhance shareholder value.
Also, depending upon our investment pipeline in market conditions, we remain committed to redeploying our excess cash to investors. We believe that our capital structure complements as well and will be a source of strength for the company and its shareholders going forward.
Before I hand the floor over to Jim, I’d like to point out that we will provide our 2010 outlook during the announcement of fourth quarter results, which is the standard practice for most S&P 500 companies. At that time, our customers’ budgets will be set and we will incorporate any further acquisitions that may close by year end into our run rates. Jim.
Thanks, Tom. Good morning, everyone and thank you for joining us on the call today. As Tom very thoroughly described, American Tower again delivered strong operational and financial results in the third quarter. The meaningful and consistent growth in our revenues, profitability, and cash generation speaks to the sustained demand for tower space in our served markets and to the company’s exceptional execution capabilities.
I’d like to take a moment to commend our people from Seattle to Boston, to Sao Paulo to Kolkata, but it’s a probe work ethic and commitment to customer service that makes these kinds of results possible. As an investor, you should know that everyone at American Tower through our performance management system has specific goals and objectives that contribute to driving company performance as ultimately measured by recurring free cash flow per share.
We believe this metric captures the most important elements of effectively managing a company such as ours. These elements include revenue growth, cost control, interest expense management and redevelopment capital expenditures. This metric also captures the ability of the business to distribute cash beyond funds needed to grow back to investors through share repurchase by the company.
As Tom noted in his presentation, we delivered approximately 18% improvement in recurring free cash flow per share in the third quarter of 2009 over the prior year period. We intend to provide this metric to you on a go forward basis in our future earnings releases too. Another critical benchmark achieved by American Tower during the third quarter of 2009, was the company reaching 11% return on invested capital.
Our improvement in ROIC over the course of the year has been driven by two major factors: The continued solid performance of our existing assets and the efficiency, with which we have been adding new assets. With respect to new assets, we have been building towers and dash systems in a cost effective manner and we’ve also been securing acquisitions as favorable entry prices in each of the U.S., Brazil, and India markets.
Viewed together, we believe that our ongoing report of recurring free cash flow per share growth and return on invested capital will provide a well rounded picture of the effective strategic management of our tower company. Strong growth in recurring cash flow per share and stable or increasing ROIC will indicate an appropriate balance between operating leverage, price discipline in the acquisition of assets and the return of excess cash to shareholders.
We anticipate that both our recurring free cash flow per share and our return on invested capital results will further benefit from lower cost debt financing. The company’s recent elevation by Moody’s & Fitch to an investment grade rating is already contributing positively to this objective. Last month’s highly successful $600 million bond offering is a first step in utilizing our new position in the credit markets to extend the maturities of our debt and finance future growth initiatives with lower cost instruments marketed to a much broader investment base.
Finally, we are striving to exceed our growth aspirations for the business and what continues to be a solid demand environment. In the U.S., we believe that we are positioned to benefit for years to come from consumers’ appetite for wireless data services. Not only do subscribers want access to true mobile broadband, but our customers, the wireless carriers, are seeing data as essential to their future revenue growth and they seem to be prepared to fund the ongoing upgrade of networks that will be required over time.
Almost every U.S. wireless carrier is in the midst of large scale 3G deployments and/or is planning on executing 4G as well. For example, Verizon Wireless reported 29% growth in data revenue in Q3 and it’s in the process of a commercial launch of 4G, planning to cover 100 million pops by year end 2010 and virtually the entire U.S. population by year end 2013. AT&T Mobility reported 34% growth in data revenue in the third quarter, along with $3.2 million new iPhone activations. AT&T is upgrading its 3G network currently and is planning to commercial launch 4G in 2011.
Sprint Nextel’s postpaid CDMA customers in the third quarter have highest average data revenue per user in the industry, at $19 each, approximately 20% higher than in the prior year. Sprint Nextel is deploying its 4G network through the Clearwire venture and Sprint plans to offer 4G mobile broadband in 80 markets by year end 2010.
T-Mobile plans to have 300 million POPs covered through its 3G rollout by the end of this year and is moving forward with HSPA Plus upgrade over the next 12 to 18 months to add speed to that network. In the prepaid segment of the market, both MetroPCS and Leap Wireless have future 4G plans under discussion in their respective organizations.
We’re also optimistic about the prospects for our international business. In Latin America, we believe that there’s still opportunity for carriers to grow their voice services and that more importantly, the region is about to launch into a significant deployment of 3G data services over the next few years.
We’re hopeful that additional spectrum will be made available in early 2010 in both Mexico and Brazil to enable the beginning of the expansion of 3G in those countries. Meanwhile, in India, we still see significant upside for both voice penetration and coverage, with eventual deployment of data services on a national level a bit further down the road.
So in summary, we like the continuity of demand that we anticipate in the U.S. and we expect that the transition into 3G data in Latin America and the substantial opportunity in both voice and data in India will provide a very positive growth environment for our international markets. Our focus now is to finish strong in 2009, lay the groundwork for further organic growth in 2010, seek and close attractive acquisition opportunities in a number of targeted markets and optimize our capital structure to fund our growth and benefit shareholders.
Thanks again for joining us on the call today and now Tom and I will be happy to take your questions.
(Operator Instructions) Your first question comes from David Barden - Banc of America.
David Barden - Bank of America
I guess first, I have to say I’m a little disappointed that you guys chose to defer putting out 2010 guidance. I think the visibility in this business and your ability to differentiate yourselves with laying out a view for a year ahead was one of the things that makes these companies different and underscores that difference. So I’d love a little bit more color around why you chose to do that?
Second, with respect to the one timer, Tom, we heard a lot about the margin being I guess 68.5%, but when you take that out, it’s actually below 67% and seems a little off trend. You seem to suggest that that might be related to margin softness in the international operations. So I’m wondering if you can kind of clarify, how we should be thinking about margins on a go forward basis.
Then with respect to the guidance and the one timer, by reiterating guidance and then noting that you have a $6.7 million one timer in the quarter, are you effectively lowering guidance for the year, if you could clarify that? Thanks.
David, I appreciate your first comment, but as I mentioned, we are going to be issuing guidance in just a few months’ time and that’s when most companies issue guidance. So you cover a lot of big companies, so I’m sure you can appreciate our stance there. With regards to the one timer, we’re also now have a lot of scaling going on with obviously India and the new acquisition and the business there.
So as we continue to scale and continue to improve the profitability there, which is by the way EBITDA positive, I would add. I think you’ll see the kind of trends in gross margin as well as EBITDA that we’ve had in the past, but the increase in OpEx and SG&A quarter-to-quarter sequentially was really as a result of having the full quarter, if you will, of that deal. What was your last question, Dave?
David Barden - Bank of America
The guidance question for 2009?
Our guidance, I mean it’s pretty broad. I mean it’s kind of interesting in terms of the tower companies actually issue guidance. I mean it’s a pretty broad span, if you will, in terms of what the guidance looks like and what the midpoints look like, because of its wideness we’re not changing guidance. We feel very strong about where we are and how we’re going to end the year so we think we’re going to end on a very strong note.
David Barden - Bank of America
Just to me clear Tom, should I subtract $7 million from the guidance or should I add $7 million to the guidance for the one timer?
Dave, just leave guidance alone.
Your next question comes from Jonathan Atkin - RBC capital.
Jonathan Atkin - RBC capital
With respect to Transcend deal in India, I wonder if you can comment on any particular aspects of those assets that you found appealing and then just more broadly, it seems that India and Brazil is where you’re most likely to make either carrier or third party tower acquisitions. Is that a correct assessment?
With regards to Transcend I don’t mean in some of the things that we have released in terms of the acquisition price and we’ve take $20 million for the towers, so we actually them for about $65,000 per tower. Tenancy is pretty consistent with the existing Towers there either in kind of the 1.3 range, as we go very good I mean, having now the management team in place on ground and having the scale that we’re building there, we’ll be able to add on these kinds of portfolios we think on a pretty regular basis so, we feel pretty good about this particular transaction.
It’s not going to really move the dial if you will in terms of kind of fourth quarter margin or fourth quarter revenue. It is just 325 towers, but again I think it demonstrates the success that our team over there is having and with regards to where we’ll be looking at portfolios, we believe that we’re going to be adding portfolios in all of our markets. Clearly, Brazil and India are kind of low-hanging fruit for us, if you will right now.
We think we’re in a good position to add towers there and we’ve had great success and between those three markets, international markets. I think, we just about over 6,000 towers. So we had great success there over the last couple of years, but we’re very focused on adding towers in the United States as well.
Jonathan Atkin - RBC capital
In Brazil and India, do you find these are competitive bidding situations or not the case?
What we’ve done, Jonathan establish a position I think in both those countries, from a business model perspective, at least the leading tower company in each of those countries and so we do get an opportunity to do some negotiated transactions along the way.
Jonathan Atkin - RBC capital
Then on the outdoor dash assets, I notice this is kind of nitpicking but you eliminated the word dash from your CapEx breakdown, doesn’t look like you’ve expanded that in the recent past and less likely to see new investment in that, in that particular area?
No, we’re still on track, Jonathan it’s a long cycle product. I think for those that understand it, that there are permits, rights of way, licenses, etc., that you need to get and the design and sale process to the carrier is pretty long too. So, we’re investing in it we’ve always said that it’s a niche product that like our indoor dash, it’s a nice round out to our total solution. We’re still investing in it and it’s going to be modest as we’ve always said, we think.
Jonathan Atkin - RBC capital
Finally on the question of 2010, I understand your position about not giving quantitative guidance, but anything you can share qualitatively about the outlook for leasing growth, look like you might be roughly comparable to 2009 or would you expect any meaningful difference?
We expect the leasing environment in 2010 to be at least as strong as it was in 2009, Jonathan and what we’d like to do is just have a more accurate picture of merger acquisition activities that we’re working on that may or may not happen first part of the year. Also, currency we would want to have the most up to date currency to be able to incorporate to the guidance as far as FX rates and those are the reasons along with our customers’ budgets being more available and stable that we’re going to do this in the first quarter like most other companies do.
Your next question comes from Jason Armstrong - Goldman Sachs.
Jason Armstrong - Goldman Sachs
First, on just the key customer risk you had in Mexico around some liquidity fears can you update us there and maybe talk about sort the flow of cash payments, if it that’s started again and then second, just on core growth, you had mentioned 9.5% last quarter, that’s up to 10.3% this quarter. I’m just wondering, can you step us through how much including the XCEL acquisition for a full quarter sort of contributed to that up tick and maybe take us back to a same tower growth type metric, if you can, and how that’s been trending?
With regards to the use of cell, I think they’re making great progress down in Mexico. They are staying current on all of their recent business that we’ve done with them. We did not add any additional bad debt to them in the third quarter, so we feel good about where they are and they are paying in full and we anticipate that going forward. With regards to core growth, I think if you look at our core growth over the last several quarters, I mean it ranges in the 9.5% to kind of 10.5% range.
So I don’t think that there are any surprises, yes there was a little bit of an up tick in this particular quarter, perhaps in the second quarter, for more perhaps full impact of the India operation. India’s represents about 2% of our total revenue. I think in terms of kind of same tower growth, it’s consistent with where we’ve seen it over the last few quarters, so I think as Jim pointed out, we feel very good about getting into the fourth quarter and ending the year.
Your next question comes from Mike McCormack - JP Morgan.
Mike McCormack - JP Morgan
Just a couple things on the demand side, are you guys seeing obviously Sprint doing a lot more on the boost unlimited subs. Any significant change going on the iDEN network now that they’ve got sort of positive net subscriber adds on that network. Secondly, Jim your comment about HSPA Plus and some of the things that T-Mobile is doing there, AT&T is doing is as well. Is there anything significant there for the tower companies or is that more of software upgrade?
On the boost product, it’s been successful for Sprint Nextel, we’re happy to see that. I think it’s burdening the legacy iDEN network a bit, especially in larger population centers in the country. Sprint Nextel themselves announced that they were going to deploy some additional sites in the iDEN network to take care of those questions and issues.
We expect that to happen in 2010, but it will be, again, modest in the context of what a typical national carrier would do in a typical year. So won’t be the full two thousand twenty hundred site kind of number probably at Sprint, but it will be a lot more meaningful than it was in 2009, which was de minimis.
On the HSPA Plus, that’s a UMTS upgrade that enables sort of an interim speed improvement between 3G and 4G and the way we look at all those speed in broadband expansions, Mike, is that, yes, there are some amendments up front on some sites. Some of those amendments have revenue associated, some don’t, but as those networks begin to be used by subscribers and filled up, then you end up having plenty of value amendments and you’re going to end up with cell splitting along the way as well.
So as more subscribers use more bandwidth due in part to these sorts of upgrades, we think that there’ll be additional length and strength to our demand for tower space out in the future.
Your next question comes from Rick Prentiss - Raymond James.
Rick Prentiss - Raymond James
Couple questions for you, maybe follow-up on David’s question earlier. Tom, on the ‘09 reaffirmation, if we think about, I think you said you’re at 75% of your midpoint through three quarters of the year, obviously face a lot of FX headwind earlier in the year as well. As we look to the last two months of the year, how would you kind of frame it as far as what would it take to hit the low end of your guidance? What would have to happen to hit the mid or high end? Just kind of frame it us as far as with the wildcards out there, for what is a very wide range?
Rick, you want me to get into modeling questions, do you?
Rick Prentiss - Raymond James
Sure and 2011 depreciation and tax rate. What it would take, because it is a wide range and FX has improved significantly over the last couple of months.
Back to David’s question before, when I’m looking at our guidance and our midpoint, I’m not including the revenue associated with this one time event. As we’ve said all along, we’ve had strong activity in the second half of the year, was actually stronger than the first half, the activity, from the first half of the year in terms of signed activity and we think that’s going to provide us a strong basis going into the fourth quarter of 2009 and into 2010.
So I don’t want to get into the modeling issues here with you, Rick, but as I said before, we’re reaffirming our outlook. We feel very good about how we’re going to end the year on a very strong note and this one time event even when we looked at the 10.3%, we backed out the effect of that one time event just to give you kind of the transparency in terms of what the real core growth of the business is. So when I’m looking at midpoints and looking at 75%, I’m not including the effect if you will, of that one particular event.
Rick Prentiss - Raymond James
That’s good to know because it kind of, I think people were worried that you were including that one time in there to can’t be achieving that the guidance?
I specifically backed it out to given you a sense of really what our real core growth is.
Rick Prentiss - Raymond James
Then on the balance sheet side, obviously some very significant movement, finally investment grade does mean investment rates. As you lookout, I think Jim and Tom, you both talked about further laddering, first steps. Can you walk us through, first, how much cash do you need to keep on hand in this business?
As you look at your stock buyback program it dropped back to I think about $1 million in October so far versus a much faster pace. How do you look at managing the cash balance? How do you look at approaching the debt markets as far as changing out some further financings?
When you’ve got the kind of cash flow generation the business provides and you’ve also got a very active kind of M&A initiative going on, more or less around the world, there’s no one number for what sort of the minimum or required cash need is in a given month or quarter. We’re actually managing that dynamically, based on the pipeline of M&A activities that we have and what we think the capital markets are like sort of in that given quarter.
So that cash number’s going to fluctuate and you can see it and you have seen it as you pointed out in the share repurchase activity. So when we think we need to build cash for an M&A set of opportunities, the share repurchase may dip downward as far as the rate. If we’ve got more cash than we need to do what’s in the pipeline, you’ll see us turn the rate back up. So it’s a pretty simple mechanism if you will and it’s all enabled by the fact that the business throws off significant cash flows and that we’ve got lots of opportunities out there that we’re looking at.
Rick Prentiss - Raymond James
On the refinancing aspect?
We obviously don’t have to do any refinancing. We’re at a nice position from that perspective. We’ll continue to take a look at some of those obligations that we have out in the 2012, 2014 time to see what makes sense, but the most significant items that we really wanted to refinance were the ones that we already have, the ones that matured in 2012, which is this last one that we just called which is that $500 million.
So we think we’ve done a lot of work on the balance sheet to continue to kick out the tenors and we’ll continue to monitor, see how we want to handle the 2012 and 2014, but there’s nothing that we have to do right now relative to those maturities.
Rick Prentiss - Raymond James
I’ll just echo that it was pretty impressive rate. It definitely opened a lot of eyes, so job well done on that.
Your next question comes from Simon Flannery - Morgan Stanley.
Simon Flannery - Morgan Stanley
Just to clarify on the broadcast customer, Tom, what sort of size impact is that on Q4, the amount of revenues that they took and any other commentary on other expected churn? Then I think you referenced briefly looking at your options once your NOLs expire. Can you just give us an update on timing and thoughts about status and what you need to do to prep for that?
Relative to the one broadcast customer, it’s minimal in the fourth quarter. So I wouldn’t expect it to have any impact at all really significant impact at fall the fourth quarter.
Just to add Tom, that was a very long term buyout of a broadcast contract, Simon, and that those go for many, many years into the future. So when you take it on a monthly, quarterly basis, it’s not going to affect materially the churn rate of the revenues of the Company.
Relative to the NOL, Simon, as I’ve said before, we’re looking to, given current course and speed, probably utilize the NOLs in a 2012, 2013 kind of timeframe. So we do have some runway, if you will in terms of being able to look at our various options. What we are spending a tremendous amount of time internally now working with a number of different advisors, on what our options are, what our strategies are and what our best path forward is and when we land on what that best path forward is, we will obviously let you know.
Simon Flannery - Morgan Stanley
The growing international presences complicate that, or can you work through that…?
We believe we can work through that on a number of different structures.
Your next question comes from Jonathan Schildkraut - Jefferies.
Jonathan Schildkraut - Jefferies
In your prepared remarks and the presentation, you highlighted the size of the backlog. I was wondering if you could compare that maybe some prior periods to give us a sense of where it stands versus kind of historical activity and I was also wondering if you can give us a sense as to some of the application activity in the quarter and then I’d like to ask one question on India, following that. Thanks.
I can take the first question. Just in terms of the backlog, I believe I go back and take a look about 12 months ago, it’s up about $0.5 billion, so it sizable increase in terms of year-over-year activity.
On the application front, Jonathan, we’re seeing a nice, healthy increase in the second half of the year. Many of you know, how our business process works, which is customers put in applications for sites, either new sites or upgrades. Those can take from 60 to 90 days to get fully completed and converted into a commenced contract which then begins to build revenue and so we have a very positive trend of signings in the second half of this year which gives us some good confidence into what we’re going to see as far as commencements and billings in 2010. So it’s a pretty good picture right now.
Jonathan Schildkraut - Jefferies
In terms of India, just had a couple of questions here, you just finished this recent acquisition and I was wondering just in the sense of how disciplined you’ve been in that market, if there have been M&A opportunities that you guys have passed on or bid on that have gone to other people that just were kind of outside of your required return rates.
Then further along in that market, we’ve read a lot about some tower sharing agreements among some of the larger providers in the Indian market and I’m wondering how you view those from a competitive perspective and whether those are maybe not in circles that you are or whether they are in fact competitive. Thank you.
As in all the markets we’ve participated in over the last seven, eight years I’ve been here, we win some deals and we’ve lost some deals or some of the deals didn’t trade at all like the T-Mobile divestiture in the U.S. that didn’t happen about two years ago. So sure, the answer is we’ve been in situations where others may have out let us even in India, so that has in fact happened, but we stick to our price discipline and we also have the long view that sometimes these things come back around.
So we’re not going to overpay on the first iteration. We may never see it again, b0ut we may see it in a second iteration at a price we like. So, that’s how we approach it we’re going to keep the discipline in India as we have in other places. There is some tower sharing agreements in India. There are also some in other markets that we operate in. They’re a portion of the site leasing traffic, if you will, in a number of markets, but there’s still plenty of room including in India for the kind of business that we conduct and we think we’re going to be very successful there as well.
Your next question comes from Philip Cusick - Macquarie.
Philip Cusick - Macquarie
While recognizing you’re not giving 2010 guidance, I wonder if you can help us think about how you look at both the 4G builds, both from Clearwire and from Verizon as it does amendments through next year. Can you help us get an idea of sort of what you’re expecting over the next 12 months on that?
On the Clearwire front, the application stream that I mentioned earlier is significantly benefited by Clearwire in the back half of 2009 in our company and so we do expect that they’ll have meaningful commencements in 2010. There will be a material new business customer for us for billings next year and when we pull the guidance together in detail and provide it to you all in the first quarter, they’ll be included in that.
Verizon is active on a number of fronts including just building out its normal couple thousand sites your network plan and the 4G that goes with it. Again, some of those 4G amendments on an existing network like Verizon have revenue associated with those and some can be included within the rights that are already on that tower. So we will see some applications and we have for Verizon LTE, many have some revenue that go along with them and that’s happening now, but it’s not necessarily at the game changer level yet.
Again, Phil, as I said earlier, what’s encouraging for us as we view the long term aspect of our business is every carrier that steps up to 4G and we basically talked through almost all of them today over the next two, three, four years is going to need to invest in this network in a material way and that’s going to lengthen our opportunity. So it’s applications in the short term, we think important in the long term with 4G in terms of Verizon and others that have existing networks.
Your next question comes from Gray Powell - Wells Fargo Securities.
Gray Powell - Wells Fargo Securities
I just have a few. I know you touched on this already, but can you just kind of talk about what you’re seeing in terms of booking trends in Q3 versus Q2, possibly quantify some of this increase that you’re seeing in the second half and then what do you expect to see in terms of bookings in Q4?
As I take a look at and as we said, the third quarter signed and actually commenced business has been picking up as we said. I mean I think it’s consistent with how the carriers have actually been talking about their build out plans throughout the year. Q3 was I think a very solid quarter for us in terms of signed and commenced new business and we expect to actually pick that up further into Q4, as Jim was saying, which really reflects some of the new Clearwire activity. So I think we’re ending on a very positive track and I think as I said before, we’re positioned well as we go into 2010.
Gray Powell - Wells Fargo Securities
Then switching subjects, can you just tell us what local currency revenue growth in Mexico and Brazil are tracking towards in 2009 and then with the spectrum option in Mexico coming up, how would you expect that Q1 to impact 2010 trends?
Together, Mexico and Brazil have been growing in 2009, about on pace with the total company on pace with the U.S. growth rate and Mexico being a little lighter than normal and Brazil being a little heavier than normal, just based on the timing of options and new peck trim and new entrants in each of those countries.
So for 2010, again, not having quantitative guidance here quite yet, but kind of a qualitative sense would be together Latin America will be around the same or potentially a shade better if we get a Mexican spectrum option the first part of the year.
Gray Powell - Wells Fargo Securities
Then just last question, redevelopment CapEx moved lower this year after I guess heightened levels of spending in 2008. How should we expect that to trend going forward?
We’re not giving guidance here, but I think you should be thinking of that consistently with how we’ve been spending in the 2009.
We had a project last year in 2008 with one of our Latin American customers where we committed to do some redevelopment specifically to their needs and the lease rates were higher that went along with that. That program’s wrapped up and so as Tom said, redevelopment in the future is going to look a lot more like it did in the back half of this year.
Your final question comes from Michael Rollins- Citi.
Michael Rollins- Citi
Two follow-up questions; firstly, just to go back to guidance, realize there’s already been a number of questions on it, but for ‘09 if you go back to the disclosures in the 2Q press release, you’re estimating an impact from foreign exchange rates of a negative two percentage points at the midpoint of guidance. Can you give us some sense to where that is today based on the way FX rates have moved to date?
Then the second question that I have is just on revenue churn. Can you give a sense of how revenue churn has been moving through your model? Is there anything that you see any kind of activities that you see that could pickup that revenue trend over the next 12 months or things that have happened in the past that you don’t think will happen next year that could actually reduce that rate of revenue churn? Thanks.
I think with regards to the FX, I mean on a sequential basis, there was actually a bit of a pickup with relative to FX, kind of a year-over-year basis. So Michael, I think we’re still pretty consistent with where we were back in the second quarter release. So I don’t think there’s any impact and there’s obviously no impact to kind of the core growth and relative to churn, we still are obviously underneath kind of the 2% level.
What you may see, and again, this is not guidance, but what you may see going forward into 2010 is the delay in some of the broadcast churn that occurred perhaps later in the year, benefiting us, then we had thought just because of the delay in the spectrum itself coming off. So you may see a bit of a pickup on a year-over-year basis relative to the broadcast churn in 2010, but again, not significant but just in response to your questions.
Yes, Mike, if you just get a chance later, refer back to page six on the presentation that’s on the website, the Q3 ‘09 impact of FX was a negative 2.1, so there’s a quarter left and you could make an estimate on what you think it might be in the fourth quarter, but as Tom said, it’s pretty consistent in the third quarter from what we said we thought would happen.
Great, well thank you very much for taking the time to listen to us and we look forward to reporting results for the fourth quarter in a couple months.
Have a great day, everybody. Good-bye.
This concludes today’s American Tower third quarter 2009 earnings call. You may now disconnect.
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