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

I think any time that our customers, the carriers open up network capacity for consumers and other users to utilize, it's good for our business because what they're doing is adding equipment to push more spectrum across the network. And as long as there's more equipment being added to our sites, that's good for the business. The last time that happened was the transition from 3G to 4G, and there was a tremendous amount of activity on towers that led to significant growth in our business that has continued through today, where we're still seeing that activity, still seeing that growth, and something that we think will continue for a period of time as well in the future is the continued spending on 4G. As we move into 5G, it's going to create a network that is both lower latency and higher speed, which will allow for different use cases, but also to allow for a significant increase in the number of connections that can happen to the network, meaning that you wouldn't have to kick off an individual who's paying $40 or $50 a month to connect to the network in order to connect a sensor that would be much less valuable. You can have both of those things happening at once at very low latency, at very high speeds. And as we move, therefore, from connecting people to connecting things, including those types of sensors, we believe it will open up a myriad of monetization opportunities for our customers to where they can put in that type of network, increase the capacity of it, change the architecture of it and the underlying drivers of it so that we get that capacity. And that will lead them to be able to generate more returns on their capital, which in turn will allow them to spend more on their networks. And we believe they will have that opportunity, and that will occur and that will allow or put them in a position of utilizing both towers and small cells over time. Because these -- the 5G architecture will require significant more density than towers will allow, we believe that small cells will be a huge beneficiary of the move into 5G. Towers will still remain the most effective and most efficient way -- most cost-effective and cost -- and most efficient way to deploy spectrum over large swaths of both population and geographic area. But when you get into 5G, you need to be more dense so that, that low latency can happen and the high speed can happen and all those sensors and things can be connected in dense urban areas. It requires more density than towers could accommodate, which is where small cells come in. And we are the largest third-party provider of small cells, we own 80,000 miles of fiber in the top markets in the U.S. and we have a back -- a total pipeline or -- under development [indiscernible] 70,000 small cells. It's a large business that continues to grow like we're talking -- we said earlier at 15% per year. And we think that there's a lot of runway for that because 5G will drive the density required or -- that necessitates small cells. And therefore, colocation on assets we already have as well as us having the opportunity to build new assets in those top markets, which is why we're so excited about the strategy that we've pursued over the last several years.

Great. And I think that small cell positioning is one of the biggest differences between you and your peers who've generally focused more on emerging market macro sites as their sort of expansion vector. Can you help us understand that the lease-up, the colocation that you're seeing and the returns, and I know you've started to provide some better disclosure around that. So thank you for that. But what can you kind of point to, to help investors get comfortable that this really does have some of the attractive return characteristics that you've been projecting?

Yes. I think what you talked about is a lot of what we've done. We have broken out, in our second quarter earnings presentation, 5 markets that we will continue to track on a yearly basis to show the progression of number of nodes, density of nodes, amount of enterprise fiber revenue and ultimately, the returns in those markets. And you'll see the progression over time, and you'll see whether colocation is occurring. And if it is, whether it's driving returns. But until then, what we can show is that in 2021 in our outlook, as I was mentioning previously, we're showing a lower amount of CapEx for a similar amount of revenue growth, which means the capital intensity is coming down, and that's because of more colocation. So we have proof points, both in those markets, those 5 markets we talked about. You can see -- so for instance, in Orlando, there's a significant colocation and a significant return. And then overall, you can see our business reducing capital intensity and driving the same growth, that all of these are proof points that colocation is happening and that it drives the types of returns we've been talking about. And we just continue to think -- or we think that we will continue to add that type of disclosure and have that disclosure. And as the returns and the metrics actually come out, it will support our -- what we've said all along. And what we said all along is based on our history. It's not like we're just guessing that this is going to happen. It's based on what we've actually seen happen across the different deployments of small cells across the U.S. So we feel really good about the future for small cells. We think that for all the reasons I was just discussing, there's a tremendous revenue opportunity, a tremendous activity level that is going to be directed towards small cells. And that that's going to generate significant returns for us as we continue to have the right assets, the right fiber assets in the right markets and have the relationships with the right customers to be able to colocate and utilize those assets over and over. And by doing that, what we're able to do is we reduce the cost for our customers, both implementation and operation of their network, much like we have with towers. The reason that we're in existence is because we are able to share that infrastructure among multiple customers, which lowers the cost for any one user. And that's just like any other shared infrastructure model. And as we continue to focus on driving that value, driving our cost structure down so we can drive more value to our customers, so they use us more and more, we think we'll be able to accelerate our small cell business. So we're really focused, both in the near and long term, on efficiencies in our business, driving those efficiencies as much as we can, getting our cost structure as lean as it can be, while still positioning ourselves for the future. And that's both on the capital and operating expense side. So we're really looking at how do we drive the right amount of value for our customers by being the most efficient.

And one of the things that -- it seems like small cells has even more of a barrier to entry in terms of scale. Lots of people can put up 5 or 10 macro towers at a time, but it seems like that's a harder market entry. So can you just talk about the platform that you have and how that is hard to replicate and therefore, gives you a better positioning with your potential customers?

Yes. I actually think you said it well. Building a tower is not all that difficult. It is difficult now, but -- because of some zoning and permitting restrictions on building towers, but the physical act of building a tower, you get a plot of land, you get the people who own the plot of plan to either sell it to you or lease it to you and then you build a structure on it. And as long as that's in the right place, antennas will go on it to deploy the spectrum to deliver wireless service to consumers. And it takes time and it takes effort because there are permitting and zoning restrictions, as I just mentioned. But it's basically a pretty limited negotiation with either landowners or a single homeowners' association, something like that. With small cells, because we're in the right of way, we're bearing fiber in the right of way and it's a distributed network, we pass lots of buildings, lots of companies, lots of small businesses. We pass places of worship. We pass people's homes. Everybody who we pass has some input into whether they want that permit to be granted or not. And so the local governments, municipalities, listen to that input and then come up with how -- whether to give us the permit or to allow us to be zoned to do it or not. And that's the majority of the negotiation that we go through is how do we get approval to get these things built. And because it is a much larger scale from a geographic standpoint, 1 tower is 1 tower, a small cell system can be 500 small cells over a wide area. We have to talk to all of those constituents and make sure that they're comfortable. And our stance has been to try to work as well as we can to make the small cells as innocuous as possible and blend it into the cityscape as much as possible, so that we can get that approval. And it takes a long time. It takes discussions with municipalities. It takes discussions with all of those different constituents that we pass. And the scale of it is hard to do because we're not building 10 or 20 anymore. Like I said, we're building 500 at a time. So you have had some pretty good expertise like the expertise and capabilities we've developed over the last 10 years of building small cells. And to do that in multiple markets at the same time, which is how our customers are pushing us to deliver for them, it takes a scale that's national that was never true of the tower business. You could have a very localized tower company. That's not true of small cells, it needs to be a national business. And as we have kind of a first-mover advantage, both in terms of the assets we have in the top markets in the U.S. and the capabilities we've developed across the nation, we believe we've positioned ourselves extremely favorably competitively to get a disproportionate share of small cells going forward. And given what we were talking about earlier that we think small cells are going to be a big part of the 5G network architecture in the future, it just looks like a very good setup for us as we execute on our strategy.

Right. And how -- a question coming in. How easy is it to colocate on a small cell. You have different types of street architecture. What's your typical ability? Or just go 50 meters down the street? And are you able to invest in ones that are easier to colocate or it just depend on the market?

Yes. It's a really good question. And I think what I try to clarify and it is that the colocation we talk about on a small cell system is actually colocating on the fiber that we've built. So as long as we put another small cell node on an existing amount line of fiber, that is colocation because about 80% of the capital goes into the fiber. And it's not the fiber itself, it's actually digging up the street, bearing the fiber and putting the street back together. And 80% of our capital goes into that fiber build process. So as long as we can utilize that fiber over and over and over again, that's what we're colocating on. Now it is obviously better if we can go on a same pole colocation because that reduces our cost of the incremental colocation. But we, when we talk about colocation economics, have a mix of same pole colocation where we actually put another customer on the existing infrastructure -- vertical infrastructure, not only fiber. What we would call next pole over, which is to your point, Simon, going 15 meters down the road, but where we already have fiber, or whether we would call a very small lateral, where we have to build a little tiny node of fiber off the backbone we have. That mix is the colocation we would speak of. And it is not always easy to colocate on the same pole. There are restrictions that cities put up on a size of equipment that can go on any one pole. They typically limit it for the most part to about 2 customers per pole. So we can have 2 nodes on a single pole. But sometimes it's more and sometimes it's less. It really depends on the city. When we talk about our economics though, we talk about the first anchor build being 6% to 7% returns, and that's what we generate off of a greenfield anchor build fiber. When we add a second tenant or a second customer to that system, colocating on the -- again, on the fiber itself, not necessarily on the same pole, that gets us to low double digit, let's call it 10% to 12% returns, where we've cleared on our cost of capital. You add a third tenant or a third customer to that same system, the same fiber system, and we get to mid- to high-teens returns. So we've cleared our cost of capital by a significant amount by the third tenant. When we talk -- like I said, though, those are -- that's a mix. Every time we say that, that's a mix of same pole, next pole over and lateral, small lateral colocation. We try as best we can to force everything into same pole colocation because that is the best return we can get, is the least incremental cost and capital going into it. But those returns I just went through incorporate all of it. And so we feel really comfortable with what our assumptions are and because they're really -- they're based on the history we've seen across all of our small cell [indiscernible] today.

All right. Well, maybe we touched on fiber solutions. You announced Chris Levendos who's coming in as COO. So some leadership changes there. Can you just talk about the business overall, particularly in a COVID environment? And what the kind of the mission is for Chris as he takes over there?

Yes. So Chris has been part of Crown Castle for the last few years, couple of years. His background is firmly in how to build and run fiber businesses for a few companies in his history. And he brings great expertise and very deep knowledge about how to construct, operate and ultimately sell fiber networks. And so we're really excited for him to step into the role with all of that -- bringing all of that experience and expertise to bear. His charge is like all of our charge. We want to maximize the return we get on the asset we have. And that asset is a fiber asset that is utilized not only for small cells and the colocation of small cells, but also to deliver access, data transport to the enterprises, which we call the fiber solutions for enterprise business. And we need whatever we do to add as much revenue as we can with as little cost as possible. And Chris is in charge of trying to figure out how to do that, as we all are. That's our job. In the current environment, We've seen a limited impact from COVID. The biggest market we have for fiber solutions is in the Northeast and the -- some of the biggest impacts to the way business is being done have been felt in the Northeast. And the biggest impact we have seen to our specific fiber solutions business is that it is really elongated the time between having a good dialogue with the customer and closing a deal. So the decision-making process has become much longer. In many parts, in many ways, because of having to meet virtually, a sales process is a very close process and being able to meet in person is really helpful. And we haven't been able to do that nearly as much as we had in the past, which has led to longer cycle times on the sales, which has led to less predictability of when things will happen. It has not impacted our overall growth. The demand is still there. We still think we can grow 3%, both in 2020 and in 2021. It has not impacted our overall churn. It still remains in the high single-digit range per year. It's just made the business a little bit more challenging to get through on a day-to-day basis, both from a sales standpoint and from an operations standpoint where it's just harder to get into buildings to make repairs, it's hard to get into buildings to do installations. And I really commend our teammates who are working out there every day making that happen because it's got to be a difficult situation and they're keeping it up to where we're able to maintain our growth rates very consistent with what we would have expected not with COVID.

Right. Well, a European conference wouldn't be complete without asking you about Europe. So we have seen a remarkable volume of tower and related infrastructure deal activity in the market. And more to come, I think. But Crown has been pretty quiet. So help us think about how you're looking at kind of M&A, international opportunities? And what we should expect going forward?

Sure. We always keep apprised of international M&A opportunities. And we're always interested in them because they might represent very good transactions for us. It's just we have not seen recently in Europe specifically, the returns that would attract our capital. We think the returns in the U.S. are better and they're better on a risk-adjusted basis for us. They're better absolutely and on risk-adjusted basis. We want to focus on the U.S. because it is the best market in the world for wireless communications infrastructure. And as we talked about in our third quarter call, the U.S. has about 5% of the population of the world. And we're attracting about 20% of the investment for wireless infrastructure. That's just another proof point as to why we believe the U.S. is the best market in the world. And what we've seen in Europe has been prices that are paid that are driving the returns down below what we would be able to generate in the U.S. market, and we don't see why we would go make those choices. If that were to change, and somehow the pricing came down and returns going up, we would absolutely consider going into Europe or other developed markets around the world, but not any emerging markets. That's not something that we have any interest in. But in the developed markets, we would consider it. It just the returns just aren't there to attract the capital away from what we already see as really great opportunities in the U.S.

Great. And I mean you had done a lot of fiber deals in a short period of time. You've built a strong position in the, however you want to call it, the NFL cities. But are you kind of done with domestic M&A? We did see InSite traded here recently, but do you think that you're going to mostly focus on operating the assets you have and maybe some organic build?

Yes. We're clearly focused on organically building our business through building fiber and small cells in the markets that we need to build that we think are really attractive for fiber and small cell. We do not believe, on the fiber side, there is a tremendous amount of large-scale acquisitions we could do or any large-scale acquisitions we can do at this point, which is generally what we said when we completed our most recent large deal in Lightower 3 years ago now, that we did not see a lot of remaining large fiber deals that would meet the criteria that we have for fiber, which are high-capacity, meaning lots of strands of fiber; dense, meaning under a lot of streets already; metro, meaning the top 30 markets in the U.S. If we meet those criteria, they're very interesting to us. If we don't, then those fiber assets aren't that interesting. And at the time, we said, we didn't see a lot of them out there, except for potentially some small tuck-in acquisitions. That's continuing what we see. We don't see a lot of large-scale acquisitions out there, and we don't intend to pursue them because they don't meet our criteria, and those criteria are built around what is necessary to have small cell demand be satisfied by that fiber asset. And without that, we don't see the value. So we don't see a lot of M&A activity in our future. Again, we'd be interested in tower business in the U.S., but we are -- we do remain disciplined on pricing and we want to make sure that we generate good returns from those tower assets as well.

Great. And maybe just to wrap up, Dan, the -- one of the exciting things about DISH is it's a brand-new customer coming in. It's with tens of thousands of towers of demand. Where do you see additional opportunities to bring new customers into the industry like cable to bring new use cases like edge compute? What are the things that have you most excited over the medium term?

Well, you're moving past DISH in a hurry. We just announced it yesterday and we're already looking for the next big thing. No, we're excited about DISH, first of all, and we think it is a great deal for us and that they will build it out. And that is new customer that going to drive incremental demand for our assets. Beyond that, I think you mentioned a few of them. I think that there are cable companies that may be interested in our assets. Other companies may be interested in our assets that they want to build their own enterprise private networks for their own reasons. And we think that 5G helps enable a lot of that because of the architecture and the cost of building 5G networks hopefully coming down. So we think that there's opportunity out there to expand our customer base to -- which would ultimately lead to better colocation economics because that will go to assets we already own most likely and generate really good returns for our shareholders, which we think supports our long-term 7% to 8% growth rate in our AFFO per share, dividend per share that we think is really attractive when you look at the underlying business being as stable and as good as ours is. Delivering 7% to 8% of growth with a 3%, 3.5% dividend yield, we think it's a remarkably good investment opportunity and something that we're excited about that we can continue for a long period of time given all of the investments we're making today and a new business in small cells that we think will generate really good returns over the next 5, 10, 20 years.

Right. Well, Dan, that's a great place to stop. And we really appreciate your time today. Thanks, everybody, for joining us, and have a great evening. And we hope to see you in real life next year. All right. Take care.

Absolutely. Thank you very much.

Okay.