Crown Castle Inc. (CCI) Earnings Call Transcript & Summary

Okay. I'm told we're live. Welcome back to the 2020 Bank of America Telco and Media Conference. I'm Dave Barden, Head of U.S. Telecom and Comm Infrastructure Services Research. I'm very pleased to have with us today the Executive Vice President and Chief Financial Officer of Crown Castle, Dan Schlanger. Thank you, Dan, for joining us today.

Thanks for having me, Dave. Appreciate it being here.

So the beauty of this being virtual is: One, we don't have to be in L.A., where it's 120 degrees; and two, is that it can be as interactive as anyone wants it to be. So we've got a bunch of participants in the room. If you're watching this on the Webex, there's going to be a little box at the bottom below where Dan and I are sitting, where you can type questions in, and I'll see them and I can kind of feather them into the conversation. So hopefully, people feel comfortable doing that.

So I'm going to do something novel and start off maybe asking a little bit about the fundamental business and then we can kind of get into some other topics. I don't know what that might look like. And I guess the first thing is the story coming into 2020 was that the Towers had this amazing tailwind that Sprint/T-Mobile were merging. Everyone knew they wanted to come out of the box strong. AT&T was kind of pursuing their FirstNet build and Verizon's trying to kind of stay ahead of the pack. And after a relatively softer 2019, where Sprint and T-Mobile really didn't spend that much, the story kind of didn't really play out the way people expected, I think. And the story around the second quarter was, oh, well, T-Mobile didn't really spend as quickly as we expected them to. And I think the second half hinges, and you guys reiterated guidance on the back of this, it kind of hinges on a pretty significant acceleration to kind of get past the hurdle. So I guess the first question is do you feel that's an accurate description? And second, can you kind of update us on the comfort level that the activity is occurring that's going to get you to the guidance that you guys gave in the second quarter?

Sure. I'm happy to talk about it. I think the characterization generally was right. Thinking back to when we gave guidance all the way in October of 2019, it seems like it's really long time ago now, but it's true that we didn't understand -- we didn't know at that time whether Sprint and T-Mobile were going to be able to merge. It was actually a pretty open-ended question that was -- there was not a lot of consensus around. So when we gave guidance, we had to give some understanding, some assumption around what we expected to happen in the Sprint/T-Mobile merger, which at the time, we said we thought we would close at the end of the first quarter, which is what happened. We had anticipated that, that meant that Sprint and T-Mobile or ultimately T-Mobile would spend very quickly thereafter to deploy the spectrum they were purchasing with the Sprint acquisition. And what has happened is, according to what we expected to happen, it has gone a little slower. Again, not speaking to what their plans were, that's really up to them to know and to follow through on, but they've been very good in the past, going very quickly at deploying the integration plans that they had in place. And so we had expected it went very quickly, and it was delayed a little bit. And going into the second half of the year, we do think that, that will pick up. And that was what was the basis for our 2020 outlook when we gave it in the second quarter -- in our second quarter earnings discussion. And as you mentioned, we maintained our guidance for 2020, which meant that the back half of the year was going to be a substantial increase in activity levels over the front half of the year, but back to levels that we saw as part of 2019 and the beginning part of 2019. So not astronomical levels, just more than what the first half of 2020 has been. We still feel like that's the case, that's why we gave that guidance and believe that we can make that guidance happen, albeit we think we'll probably be on the low end for all the reasons you said. It happened slower than what we expected. So we'll be on the low end of our guidance. But we believe it sets us up really well for 2021 because as we come out of 2020, you can see that ramp, what we hope to see is that ramp will continue and that activity level will continue, which will set us up to where the run rate coming out of '20 looks pretty close to what we would have expected when we gave guidance last year, and that moves into '21 with a good trajectory of growth that hopefully takes us above or at the top end of our 7% to 8% long-term AFFO per share growth rate that we've articulated.

The -- would you say that the June, July, August, September to date trajectory gives you increased confidence that you're going to get there? And although you did say at the low end, obviously, but is that where things are tracking?

I don't think we can reiterate or update our guidance right now. But what we can say is that when we give our outlook in about a month, what we'll give is both an update on where we are in '20, but also our first look at what '21 will be. And what we think that allows us is to bridge the gaps you're talking about. Hey, if this is happening in '20, what does that look like in '21? And how does that play out? What is that going to drive in terms of overall growth in our business? And we feel pretty good about that, as we said in our second quarter call. And what's driving that is that the activity levels across the industry are increasing. We're still seeing good demand for wireless data across the U.S. The expectation is that demand will increase significantly over time, and most estimates are in the 30% to 40% per year range. And then we also see the transition into more spending on 5G, as has happened throughout the course of wireless networks, moving from one generation of wireless technology to the next kind of follows a relatively steady pattern of it starts with a lot of discussion around a lot of hype around it saying this is coming. That has been followed at some level by a period of investment that has then followed or at least abutted to and leads into where consumers see the benefit from that incremental generation of technology coming to bear. And where I think we are now in 5G is somewhere in that move from the hype into the investment, and you can hear that in all the commentary from all of our -- from the variety of our customers. We're all talking about 5G, all talking about being the leader, but also talking about how they want to expand 5G nationwide. They want to get more coverage, they want to get more capacity. And all of those things line up really well both for our tower and small cell business and why we have some confidence that '21 looks like a good year. But like I said, I think a lot of that will be addressed in a month when we give our outlook for 2021 full year.

So I'm going to ask a couple more questions on this. One of your competitors, peers went so far at the second quarter as to take T-Mobile completely out of their guidance, quite unexpected relative to what people were anticipating when we came into 2019. And there are reasons why that's going on, the tussle between T-Mobile and your competitor, peer, negotiating over what the next MLA might look like. As a function of that, though, are you anticipating -- or should we anticipate that the Crown Castles of the world might get some sort of asymmetrically large or supernormal amount of business as T-Mobile kind of tries to achieve their deployment goals?

Yes. Again, I don't want to speak directly to the customer very often. Like I said, we did that last year when we gave guidance because it was such a unique circumstance around a merger going on. We had to take a stance one way or the other given when you gave guidance. But we try to think away from talking about customers. And you can see some reasons why that we and our tower peers ended up in T-Mobile's public comments, not overly favorably, about talking about their business. So we want to stay away from that. We have a good relationship with T-Mobile. We want to continue to have that. We want to keep it that way. So not speaking directly to T-Mobile. But overall, again, what we're excited about, what our business is predicated on is we have assets that are very valuable. They are part of the network infrastructure that required -- that is required to deliver the service our customers, the wireless carriers, deliver to their customers, us as consumers. And because of that, we know that those assets have a lot of value. But the only reason they have value is because we are able to provide that asset at a lower cost of operation and implementation than the carrier could do themselves because we share it. So we build once, use many. And as long as we're able to provide that value, as long as we're able to lower their total cost of implementation and operation over time, then we have a really good position to negotiate from because there isn't an option that's cheaper. So when we look at what's going on in the industry right now, there's a lot of deployment of spectrum that is going to be required to meet all the demands over the next 1, 3, 5, 10 years that are going to be developed in the U.S., demand for wireless data. And as new spectrum is being deployed, and there's a lot of new spectrum right now that has been either purchased directly or is part of acquisition or part of already existing, but not yet deployed spectrum bands that our customers have, they want to get that out into delivering data to customers so they can monetize that spectrum. In order to do that, they have to go on our towers and on our small cells. We think that our towers are extremely well positioned. We have a lot of towers in the big metro markets, in the top 100 metro markets in the U.S. We have market -- we have towers outside of those areas. We feel really good about where our towers sit, and we think we're going to get at least our fair share. How we then negotiate how much more than that we would get is really the conversations that we're going to have with our customers, whether that is T-Mobile, Verizon, AT&T or ultimately with DISH. How we do that is going to be a function of where our assets are, what they are looking for in terms of coverage and capacity and how we can meet that. And we're going to have our own negotiations around long-term agreements with those -- with all those customers and figure out what the best way is to serve their needs. But our baseline will always be that we don't want to take anything less economically than we're entitled to as kind of business as usual, which is the agreements we have in place and pricing we have in place. So when we look out, we want to make sure we're maximizing the volume we got -- get from our -- from new applications, new equipment going on our towers without minimizing the economics we get for them. And that's always the balance we're looking for. I think what's really good at this point is it feels like the customer base that we have is all looking to expand their network. And when that happens, that generally proves to be a good time to be invested in communications infrastructure in the U.S. One other part that I would add is that it's been very rare in our history that there has been a simultaneous increase in investment across all of our customer base. So whether that customer base used to be 8 wireless carriers or was 4 for a while and now is 3, it's been very rare that all of them spend at maximum amounts in any given period or all of them stop spending in any given period. There have been different peaks and valleys for each, which when added together gives us a pretty steady trajectory of growth, which is why we're comfortable with our 7% to 8% medium- to long-term growth rate target that we've put out. But it doesn't go 0% 1 year, 15% next year to average out the 7% to 8%. It's basically 7% to 8% over time. So as Jay likes to say, there are not a lot of inflection points in this business because they kind of even each other out. We go kind of steady up into the right. And in a business like ours, that is a long-term investment, high capital and shared infrastructure. Having that stability, we think, matches very well with the type of investor profile that we would want because it does take a long time to make these investments and ultimately make a return, which is what we've seen in the tower business over the last 20 years.

So I've got another question there, but I'll come back to that when we kind of pivot a little bit. But -- so let's talk about the 7% to 8% growth that you referenced as kind of the steady state is an AFFO/dividend growth rate, correct?

That's true.

What's interesting is that for a long, long time in the sector, 7% to 8% was actually the steady state revenue growth rate. And now same-store sales organic growth rates have come down. And to the idea that everybody is spending, it's -- maybe it's a lot large numbers, maybe it's the allocation of where spending is going in the network, but it feels like now organic growth rates have kind of fallen in the 4% to 6% range. And I'm wondering if you believe that, that is what people should expect is kind of the new normal that in weaker periods instead of 6% being the same-store sales organic low end of the range, it's now 4%. And in really strong periods instead of 8%, it's now going to be 6%, like in order to kind of contain the enthusiasm around what these numbers will really look like. What would you say about the new normal for same-store sales organic revenue growth in towers?

We have been growing in the neighborhood with our tower business in the 5% to 6% range. And we think that's a reasonable expectation for what it can grow. Like I said, that's pretty rare we see significant inflection points up or down in the business. It could be that if everything did go well, that if all of our customers do spend generally at the same time, and you get a new nationwide build out like we might get with DISH, we expect to get with DISH, well, as they fulfill their coverage requirement, that it could be above those ranges and could be better than that. But what we don't want to do is set an expectation that, that isn't the way it's going to be for a long period of time. The expectation is that we grow steadily over a long period of time. But I think it is true that no business grows forever at 7% to 8%. There have to be things that come in and change or make things that new value gets created. But it's not to say that in any given year we couldn't grow revenue at 7% in 1 year. It's that we don't think that it's likely to sustain that over a long period of time given the size of our business and the amount of capital that our customers ultimately have to spend on their network. We generally are limited more by the customer capital allocation than we are by anything else. But generally speaking, our customers have more demands on their network than they do capital to meet those demands. So if our customers can generate more cash and can generate more returns, I think that would be better for us and ultimately would lead to increased investment in their networks. We've -- that's what we expect, that's what we hope to see, particularly with 5G is that new use cases come up, it leads to new monetization alternatives, new returns for their investors, which will allow for more investment. And we could see different growth rates. Just right now, what we're seeing is based on the demand that we think is out there now, which leads to our 7% to 8% AFFO per share and dividend growth rate target.

So let's kind of have a conversation about some of those moving parts. One moving part could be, as we just saw the conclusion to the CBRS auction, all the kind of major players were there. Interestingly, Cable was there. Is there any sense that CBRS is a macro opportunity? Or is it more of a kind of an indoor DAS opportunity for your services business? Or -- how might we think of CBRS as a part of the puzzle as we look into 2021?

I think CBRS is like all the other spectrum. It's just spectrum. It's just the ability to use air waves. And what we believe is that all of that spectrum will be required to meet the demand that is coming from wireless data in both 4G and 5G environment. And it may be that in the near term, the best and highest use for that CBRS spectrum is to use it indoors. But I'm not sure it's the only use or you wouldn't have seen somebody like DISH take a nationwide view of it and buy licenses across the U.S. That's not necessarily for indoors. I'm not sure you would have seen Cable participate as much if until -- if it were only indoors. So we think that there is an opportunity to put CBRS outdoors, that opportunity is going to be a combination of towers and small cells, but it will require an all-of-the-above type of strategy to deploy spectrum. And CBRS is not unique. There's nothing special there. It's just another band of spectrum that can be used to meet the demands that are coming, and we see a lot of those bands coming. And some are being auctioned anew, where something like C-Band is coming out later in the year. But also spectrum that has already been licensed to the carriers, it needs to be deployed in order to generate returns. And we think that there is a significant amount of that, that needs to take investment and to add equipment to towers and small cells that we think really puts us in a very good position to take advantage of where the markets are going over time and to take advantage of the situation that we're in right now, where our customers are starting to honestly compete and always have on -- or really compete, not honestly, but really compete on network quality. And as -- particularly, the big 3 right now are competing on network quality, that's going to require additional equipment to be deployed so that more spectrum can be deployed, so that more people can have more things going on, on their phones, whatever 5G use case comes along, whether that's fiber-to-the-home or some sort of sensor network or autonomous driving or whatever it may be. And we see that as just a large potential opportunity for us that has given us a lot of confidence and comfort in what our strategy is, which is deploy capital upfront. And like I said before, build once, use many, allow that capital to be utilized by a variety of customers so that everybody pays less, and we make a return. And given all of the spectrum that needs to be deployed, whether that's CBRS, C-Band or 2.5 or anything else that may come millimeter wave, all of those things need to come and move forward to and be deployed for them to make money for our customers. And that's why we're so excited that it's the start of a long-term investment cycle. And whether that long-term investment cycle were to have started in the second quarter of 2020 or the fourth quarter of 2020 or in the first quarter of 2021, is not really impactful to the long-term value of the business. I totally get that it's impactful to an investor who's looking at our investing in Crown Castle or our peer stock today versus a month from now versus 3 months from now. But for the long-term value, what we see is significant value drivers that are going to provide us with lots of ability to grow and continue to generate returns on the capital we've spent and continue to spend capital to generate future returns.

The -- another moving part is -- and this is interest I love to kind of view on this is that there's a story out there, narrative that relative to the C-band auction, which is coming in December, that there are certain carriers that are prepositioning equipment in the network to -- in anticipation of winning C-band spectrum. Is that a phenomenon that you see? Is it a phenomenon that you believe and/or expect?

Yes. I think all of our customers, like we talked about, are looking to try to figure out how to turn spectrum into dollars as quickly as possible, and that's great for us. The better that works, the faster that works, the better off we are. And if our customers are looking out and saying that they are confident enough that they're going to own some spectrum in the future that they're willing to spend some time and effort now to set up for that, that's great. That just means that the time between the purchase of the spectrum and the provision of more antennas on our towers has shortened. We will definitely take that. So we're -- again, it's just another proof point of why we feel so comfortable and confident and excited by what the future is bringing because our customers are looking out, trying to figure out where they're going to gain advantages over their competitors by improving their networks. And I think C-band is another place where that may come to bear.

So do you believe it's happening? Or do you believe it's not happening or you do not know?