BOSTON OMAHA CORPORATION - Comments on the Q3 2024 results
Quick comments on Boston Omaha's Q3 2024 results
Important disclaimer: this is a personal opinion. I am not a professional advisor or analyst and I may be wrong in both the data and my interpretation or opinion. Do your own due diligence. None of this is investment advice of any kind. I currently own shares of Boston Omaha Corporation.
This is not a company analysis, but rather quick comments on the Q3 2024 results. Therefore, there are many things about BOC that are not commented on here. If you detect any mistake, please let me know. (And excuse me for the language mistakes, spanish guy writing in english here!) Let's go.
In brief, I think that the company continues to evolve in a stable manner and it is very undervalued. In general, they are positive results in my opinion, although with some points that have to be closely monitored over the next few quarters and especially years. I will focus only on the three operating segments.
Link Media has increased sales by 5.6% year-over-year, the same growth YoY as the previous quarter. Quarter-over-quarter growth has been very slight. The negative part is that ground rent spending has increased QoQ, despite the company making a constant effort to decrease it, and in general, expenses this quarter have been higher despite very slight growth (Q2 Gross Margin of 66.1% vs. Q3 Gross Margin of 64.8%. In revenues, $11.4 million in Q2 and $11.5 million in Q3) . However, I don't consider this to be structural (you have to renew lease contracts from time to time and the terms can change, etc.). But in general, YoY the evolution continues to be very good, expenses continue to decrease and Link Media continues to be a reliable source of cash flow for the company. With about $4.5 million in EBITDA this Q and slow but steady growth with low capital requirements, Link keeps meeting the goal of providing a healthy cash flow to the company for its investment in fiber broadband.
Link has received little investment this year. In the quarter, we can see that the mix of digital faces and legacy billboards remains the same that last Q, and the number of structures or faces has not increased either. However, the possibility of investing with a high return in conversion to digital faces remains an attractive option, it is simply that management currently considers broadband to be too attractive an opportunity to allocate significant capital elsewhere. I suppose that the low capex of the quarter will have been focused on improving ground rent spending for the future.
In general, good results from Link, although they do not show as much improvement as they showed in Q2 compared to previous periods. But solid segment and fulfilling its function in the company.
General Indemnity Group: GIG continues its strong growth of recent quarters. Boston Omaha's businesses usually have the common characteristic of taking a long time to mature, and GIG has recently done so. Although it is still a relatively small part of BOC, its participation in the company's revenues and EBITDA is increasing due to its rapid growth. In addition, I consider that it has great potential given the improvements that Adam and the team have been implementing lately and Adam's intention to increase investment in this line of business when possible (remember that the current strong growth is being achieved without practically investing in capital recently). YoY it has grown revenues by 41%, operating income by 150%, and maintains a very good Loss Ratio of 17%, although higher than the previous quarter (I do not consider this to be a problem, since logically the loss ratio of an insurance company fluctuates, but it continues to be maintained at very good levels). With $0.8 million in operating income and $0.9 million in adjusted EBITDA, and considering the current accelerated growth, I believe that GIG is in a position to contribute around $4 million per year or so in the next 12 months. In addition, as this subsidiary grows, the float is increasing, adding the possibility of bigger investment gains from the float. I think GIG often goes unnoticed when talking about BOC - which is understandable due to its smaller size - but I believe that the evolution of the business and its good ratios - low loss ratio, and an expense ratio that the company is trying to lower progressively - can make this subsidiary a really important part of BOC in the future. I strongly recommend reading the annual letters to see how the business has evolved and how management believes it is in a new, more mature phase and ready to grow. By the way, I take this opportunity to recommend the annex that the company released in the 2022 annual letter, where they gathered all the comments they had made about the different parts of BOC in a single document.
In summary: in general, very good prospects and very good results from GIG.
Boston Omaha Broadband: Now let's move on to BOB. Undoubtedly, it's the most important part of the company right now, and the one that Adam has the highest expectations, focus, and interest in. I admit that when I first looked at the results, I felt a bit unsatisfied, as I was expecting them better. Revenues have decreased slightly QoQ, and while the number of fiber passings and fiber subscribers has increased, I was hoping to see greater growth. The slow or even occasional decline in revenues has a clear explanation: currently, BOB has a mix of fixed wireless subscribers, which is decreasing and that the company has little interest in maintaining because it considers them to be of lower quality than fiber subscribers; and the part of fiber subscribers, which is the one that is growing and that matters most. Due to the fact that fixed wireless subs are currently much more numerous (about 14,000 in fiber, compared to about 31,500 in fixed wireless), their reduction can make it seem like the business is doing poorly if you only look at revenue and don't take into account that it's a conscious movement by the company, which is focusing on a currently smaller part (fiber subscribers) but which will soon be the majority (and of higher quality in terms of cash flow and durability). However, I was a bit more disappointed by the growth in the number of fiber subscribers, fiber passings, and CapEx (slightly less than $6 million, while in Q1 and Q2 BOB capex was roughly $7.8 million in each Q); in general, I expected to see higher numbers in all three. However, I am aware that one cannot judge the evolution of a business based on just one quarter (which, in any case, has not been bad, just less good than I expected). I believe that overall the outlook for the fiber business at BOC is good for the following reasons:
the company is in a position to increase its investment, thanks to the fact that there is increasingly more cash flow coming from the three subsidiaries (plus the cash that will be coming in from selling BOAM assets), and, in addition, BOB has recently obtained a $20 million credit facility, which indicates not only that there is sufficient liquidity, but also that the company does not plan to reduce its investment in capex, but rather increase it. By the way, this credit line is not something improvised, management has always talked about taking moderate debt once the fiber business reaches a certain scale and stability of cash flow. Therefore, this credit facility not only gives us a financial indication, but also an indication of the company's intentions. In fact, if we read the Subsequent events (in the 10Q of this third quarter, p. 37), we can see that they have already borrowed $3.5 million of the credit facility, so they are using this credit line.
This year is being a bit special in terms of expenses and cash flows. Both the departure of Alex Rozek and all the expenses that it involved, as well as the gradual closure of BOAM and the alterations that this can cause, make me to believe that in the short-medium term, once all these expenses and movements have stabilized, cash flows will normalize and therefore the amount of investments in BOB increase significantly.
Although the next point is something that management has insisted on, it is something that is easy to forget and get frustrated with when looking at short-term quarterly numbers: investing in fiber requires a pain in the short term because you have to make a large investment in passings first (I insist, in passings, that is, they are not yet subscribers), then those passings will gradually become subscribers, and those subscribers (whether individuals or communities of neighbors, such as HOAs, or other types) will pay small monthly amounts. In other words, it is an "ugly" business in the short term - good in the long-term, and you have to look at the results from that perspective.
BOB is already generating a significant amount of cash flow. If we annualize the adjusted EBITDA of $1.3 million per quarter and you assume they will be at least the same for the next 3 quarters (the adjustments, by the way, are minimal and are really "non-cash" for the most part), we have about $5 million (and this is too conservative; they are not going to remain the same but to grow significantly, in my opinion). And pay attention to an important issue that often goes unnoticed by those who look at the results superficially: this EBITDA is assuming the losses of Fiber Fast Homes, the greenfield part of the business, which this quarter has made a negative EBITDA of -$1.3 million. Once this part breaks even and starts to contribute positively, plus the growth that the rest of BOB will have, it will cause the EBITDA and cash flow figures to change significantly for the better. By the way, the progress towards the break-even point of FFH is not just a hope: in Q2 2024, the gross margin was -40%, while in this one it has been -21.9%. This, along with management's insistence about "lower burn rate" leads me to think that this part will soon stop subtracting to start contributing.
Therefore, while I would have liked BOB's results to be brighter at first glance, I believe that overall the outlook is notably good, and I think the economic and financial movements that are taking place in the economy point in this direction.
However, this part is the most "dangerous", so to speak, of BOC, since it is the one that is still under construction and is requiring a great effort from the entire company, and therefore a failure in BOB would be a very strong blow at the level of the entire company, not just the subsidiary. Therefore, it is necessary to continue looking at it critically although always into the context of long-term that it requires.
As these are quick comments, I will not comment much on the rest of the investments. Just some words. About BOAM, they continue their process of closing it, selling assets, and returning them to the parent company as well as to the other investors in the funds. This whole process is creating a significant noise in cash flows, but it won't last too long, and it's bringing a non-negligible amount of cash to the company. In the Q3 presentation, they indicate that they have received $8.9 million and $7.7 million To Date from the Build for Rent Fund and the 24th Street Fund, respectively. In Q2 these figures were $5.3 and $6.3 respectively, which indicates that in this Q they have received $3.6 million from BFR, and $1.4 million from the 24th Street Fund.
As for the investments in Breezeway and Logic, we can't say much, although they are too small to move the needle. Regarding Crescent Bank and Trust, management indicated a difficult economic environment in the last annual letter. It is valued at $19 million in GAAP value. We can't say much about it. And neither about MyBundle. You can see the GAAP values in the report and in the presentation.
Finally, Sky Harbour's stake. I haven't dug into this company yet, so I won't comment on it. But it must be said that due to the size of the investment, it is one of the main parts of BOC ($90 million in GAAP value and $154 million in market value as of September 30, 2024). I invite readers to learn more about the company on X as there are some accounts that have recently been analyzing it in depth. Remember that BOC currently has a market capitalization of less than $500 million, so it is a really significant investment for the company. From the opinions I have read, it seems that the company is doing really well.
Regarding whether or not BOC is profitable, let's make some very quick comments. The company does generate cash, and at an increasing rate. In fact, in the last 9 months, the company has generated $12.1 million in cash from operating activities. If we subtract the $6.9 million that it had generated in the first 6 months according to the Q2 report, the company has generated 12.1 - 6.9 = $5.2 million in cash from operating activities this quarter. I also believe that this cash flow is far from being the normalized cashflow that the company can generate, both due to extraordinary expenses or expenses close to disappearing (i.e., those related to Alex Rozek, and the losses of BOAM), and because BOB is still earning less than what its assets will currently produce once they mature and when FFH stops the "burning" phase. The fact that the income statement shows losses does not indicate anything negative about the Company, at least in my opinion. It is simply normal and what you'd expect in a holding company with businesses of this nature and with increasing D&A due to heavy investments.
Finally, and although these are quick comments about the company results and not an in-depth analysis, I would like to reflect on Adam Peterson and the company's management in general. Although criticisms about the direction of BOC are frequent (increased by the important changes this year), I believe that if one reads carefully the different communications they have made over the years, one can discover a management that truly fulfills the long-term vision they have for the company (painful investments in the short term that pay off in the long term - the similarities in approach between Link and BOB are clear), a use of debt as they have said they would from the beginning (solid balance sheet and moderate use of debt when the assets of the subsidiaries can support it without problems). We can also see that when they have said that a company is mature and ready, the company's economics really show it. In this sense, I invite you to read the "ready to fly" comment they made about GIG in the 2022 annual letter and how the business has performed since then:
"It has taken seven years, six acquisitions and the persistent daily effort of Dave Herman and his team to finally get GIG airborne. There is still a lot to do and all manner of execution risks, market risks, and increasing competition lay before us, but we now have the platform built that we believe can continue to execute on scaling our profitable insurance business at a much lower expense ratio. For that reason, we can confidently report we believe intrinsic value grew at our insurance subsidiary last year and possibly in a big way". (2022 Annual Letter, p. 6).
So, things don't happen by chance. In my humble opinion, BOC's best asset is not fiber, billboards, or Sky Harbour hangars. Its best asset is called Adam Peterson. I say this without knowing him personally, of course I may be totally wrong and it is my personal opinion. But I am sincere about it.
Given the complexity of BOC, both due to its multiple lines of business and its multiple other investments, and due to the "short-term pain, long-term reward" nature of these investments, I invite anyone interested in BOC to read calmly and slowly what the company has written, and not superficially look at numbers and data in a data aggregator or in a superficial comment on X. Of course, I don't mean to say that one has to like the company or management, or that one has to be necessarily bullish. The company has risks, has made mistakes in the past, and the issue of the management breakup can be a legitimate cause for concern. What I do want to say is that it is a company that requires time, attention, and study over several periods to see its evolution and understand the nature of its businesses. Of course, I could be wrong and it could be me who doesn't really understand them.
Disclosure: I own shares of BOC, and I would like to maintain and increase my position for a long time, or permanently. However, I may change my mind at any time.
In the future I would like to write a deeper and most complete article about Boston Omaha, not just about some financial results.
If you've gotten this far, thank you so much for reading me! It is my first publication in Substack but I'm eager to keep writing, so I'd really appreciate -a lot!- any feedbak, comments or retweet!