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

Good morning. I'm Spencer Kurn, and I cover U.S. Communications Infrastructure here at New Street Research. I'm extending a big welcome to Dan Schlanger, the Chief Financial Officer of Crown Castle. I'm sure most are familiar with Dan. But as CFO, he's responsible for capital allocation decisions of Crown and positioning them for growth across their assets in towers, small cells and fiber. Just before we get started, I want to mention, if anybody in the audience would like to ask a question, you can put them into the box at the top left of your screen.

So Dan, let's kick off. Start with the big agreement that you entered into with DISH yesterday, whereby DISH will deploy equipment on up to 20,000 of your towers and will receive certain fiber transport services from you. This is the first infrastructure partnership that DISH has announced so it seems like a big deal. What's the significance of this agreement for Crown? And the big question I've been getting over the last 24 hours is, do you think with this agreement, you'll capture an outsized share of DISH's deployment on towers relative to your current market share in the U.S. tower industry?

Yes. Spencer, thanks for having us. I appreciate the invitation and the opportunity to be here. It is a big deal that we signed with DISH, and we're really excited about it. As you said, it's their first infrastructure partner that they've announced, and it goes to a 20,000 tower site, max. And as they've talked about, 15,000 being their first round of deployment, 15,000 sites is their first round of deployment -- obviously, 20,000 has been -- looking at doing. We can't get too much into the details of what we agreed to with DISH. And ultimately, we need to let them talk about how they're going to deploy their network. But we think that we've set ourselves up really well to get a significant portion of how they're going to deploy and that we've put ourselves in a position of being a partner that extends just beyond -- beyond just towers, as you mentioned in your lead into the question, is that it includes fiber transport as well. And we think that was a big deal for them in trying to choose a partner is that it's not just where do you have the right tower when you're building a new network. They have a little bit of choice there. It's what's the solution that somebody can help get you to. And we believe that having a large-scale tower operations focused in the top 100 markets in the U.S. with fiber was a differentiating factor for us and something that really skewed to our direction. That's why we're so excited about it.

Excellent. One of the biggest themes that's emerged so far today is just the growth that people expect to happen in small cells in the U.S. Crown is the largest small cell player in the country. And industry forecasts have called for massive growth in the amount of small cells deployed up from around 200,000 in the country today to something like 1 million over the next 7 to 8 years. Yet we haven't really -- in your business, you haven't really seen an inflection in the number of nodes that you're deploying. We're still hovering around 10,000 a year. Why haven't we seen an acceleration? And are you expecting an increase in the number of nodes that you deploy over fiber over the next few years?

Yes. I think that the major driver of the pace at which we will ultimately deploy small cells is the demand that we see from our customers. And that demand has remained relatively stable over time at the 10,000 small cell per year level. And we think that what will be the driver of going up from there, to the extent that it will be, and we believe there will be, will be more of our customers looking for more small cells in more places. And as 5G becomes more of a reality and the different spectrum bands that will support 5G become increasingly deployed, all the way from low band up through millimeter wave, we think small cells are going to be a really important facet of network deployment going forward. And as we realize that as an industry, that will increase the amount of small cells on air overall. And ultimately, that's what's going to drive our backlog and our ability to produce more than 10,000 in a given year. I think what's interesting is that the time frame for building a small cell really is -- has been pretty consistent at 18 to 36 months, with the majority of that being zoning, permitting and utility work that has to be done. Which means that even if we did have acceleration in the near term, it may take a little while to roll into when we actually put them on the air. I think what that means also is that there's demand that's being generated and pent-up over time that we all know, or we firmly believe that small cells, like I said, are going to be integral in the 5G network. In order to get to 5G, if it takes us 18 to 36 months to build a small cell network, that -- it means that we're probably right now behind a little bit as an industry, which we think bodes well for us because the other thing that we can provide is the ability to go on a system that we already have in place, what we would call colocation, which we think can cut the deployment times in half, which I think will be a huge driver going forward. Our customers, the carriers, are torn many times between speed and cost. And when speed becomes a priority, that shared infrastructure and ability to colocate on existing asset base becomes a driver. And we think that that's something that will happen and could very well increase the amount of small cells that we can deploy in any given year. But having said that, we have given '21 guidance and believe that 2021 deployments of small cells will look very much like 2020 has and continues to at basically the same pace just given the backlog that we have as we booked previously the backlog we have today.

So just to hone in a little bit more on small cells. There's a lot of analysis out there that suggest small cells don't generate compelling returns. And an activist investor recently brought this to the forefront of their campaign. You've been steadfast in your small cell ambitions and have claimed that returns are just as good as those you generate on towers. What do you think investors are missing? Or do you have a different perspective on the returns that you deem worthy?

Yes. I mean, first, the way you started that question, I just wanted to circle back to, which is, we haven't seen any analysis that would show small cell returns are not very good. All of our internal analysis and all of the results that we've seen to date have shown extremely good returns on small cells. As defined, just to give context, our first anchor build, where we build a small cell system from scratch in a greenfield area, we get 6% to 7% returns on that. And that doesn't clear our cost of capital because it can't, and we're a shared infrastructure provider, we have to provide some value, which is lowering the cost and time to market. And if we charge more than our cost of capital, I don't think we would necessarily lower the cost. We really have seen this play out over a long period of time where we get 6% to 7% to start with. And then when we put a second tenant on, we get to kind of low double-digit returns, 10% to 12%, which we do believe clears our cost of capital. So only with 2 tenants, which we would define in the neighborhood of 4 to 6 nodes per mile, that's going to make us money as the infrastructure developer. Those are great returns. And when we compare them to towers, it gets to a clearing of our cost of capital faster than what we saw with towers because we started at a lower base with towers. So now we are doing so in towers, and we're making significant returns over and above our cost of capital. But it's taken a while to get there. And we still believe tower is the best business ever. So we think it will continue to be. And we're trying to prove out to the market that small cells have the same underlying drivers, the demand drivers, the same underlying contract structures and the same underlying carrier customer base. And that the returns, when we get to the third tenant, are very similar between towers and small cells. And those are things that we've seen. We've given disclosures by market to show that we actually have markets that click off all of those different metrics I just went through, first tenant, second tenant and third tenant, of where the returns are. So the hardest part of your question, the one that we struggle with the most is, what are investors seeing that we're not or vice versa? We've been pretty clear about how we view the future being small cell driven in many cases for 5G. And that -- as that tenancy goes up, we will generate good returns. We think we've shown those. And yet we still don't get the value that we think should be attributed to that business, which looks a lot like towers and is growing in mid-double digits, mid-teens. And that's a pretty substantial growth for a business like ours. So we're excited about the small cell. We feel really good about it. We see nothing that would lead us against our viewpoint of small cells generating significant value over the long-term for our shareholders. And as we pointed out in our second quarter earnings call, the upside we see in small cells is significantly higher than what the downside may be and the likelihood of that upside is significantly higher than the likelihood of the downside. So we feel really comfortable with where we are in our investment in small cells. And we think that, basically, what we're looking for is incremental proof points to show whether the volume is going to be there or the returns are going to be there or both. And I think now what would be helpful is if we saw some additional volumes, just say that there's really significant progress being made in terms of the acceleration we're talking about earlier. So I think that's going to be the next proof point that we're going to want to show, and hopefully, we can make progress on that.

Excellent. Yes. And for what it's worth, your small cell strategy has already received a lot of praise from others in the industry today. This is a 5G conference. One of the themes that's been coming out is that, there's a new architecture that's emerging with 5G. And it's not just putting equipment on towers anymore. It's breaking things out into aggregation points, connecting things with fiber, edge data centers. And your small cell strategy really plays into that. But how are you positioning Crown Castle to benefit from the new architecture that's coming out off of 5G?

I think you just said it well, Spencer. We have within our portfolio a unique combination of tower small cells fiber that can be matched by any other provider. And as we're going to move more and more into 5G, and we believe that 2021 will be kind of the first real move into 5G in earnest, and then it will be a very long investment cycle to get us into true 5G architecture, that having the ability to offer towers, small cells and fiber together is a unique value proposition. As you pointed out, we do not believe that towers will be the only way that 5G is deployed. It was part of our investment thesis when we started investing in small cells 10 years ago that the density of the network would require something different than towers and that the only thing that would work in that case would be, in essence, smaller towers closer together, which are now called small cells. And we saw that coming and started making small investments, and then increased our investments as we saw the investment thesis playing out and proving out the returns, ultimately culminating to where we have today, which is 80,000 route miles of fiber, 70,000 small cells on air or under development and 40,000 towers. That's an unmatched portfolio that plays directly in all the things you're talking about. For 5G to really work, where we have a ubiquitous, low latency, high-speed network, it's going to take a significantly denser network architecture filled with fiber, small cells, and like you put it out, edge data centers, to control all that traffic and ensure that people get the service they're expecting, and that we're able to come up with the new use cases that 5G, we think, will ultimately enable. And the -- those use cases, I think that we would sum them up with being instead of connecting people, which is what all of the other Gs have done within the wireless industry, we're now going to be connecting things. And that's a huge difference because you're going to go from 300 million, 350 million people to billions and billions of things. And you need that network to be dense to be able to handle all of that. And we think that there's nothing that compares to what we can provide. And going back to the first question you asked, the DISH agreement was kind of the first proof point that having that combination of solutions that we can provide helps us in winning business in the market.

Excellent. So one of the things you touched on earlier and that investors are looking for in terms of higher -- seeing higher returns on small cells is the mix of nodes that are colocated versus new builds. And colocation comes with much higher margins and returns. So you guided to a higher mix of colo this year. Can you talk about what's driving that? And is this the start of a longer trend of adding more incremental nodes on existing fiber strands rather than having to build new fiber to accommodate more small cells?