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

Hi. Thank you, everyone, for joining. Tim Long here at Barclays. Alyssa Shreves on my team and Brendan Lynch on as well. Happy to have Dan Schlanger from Crown Castle, CFO, with us for this fireside chat. So with that, we're going to jump right into the Q&A session here.

So Dan, thanks for joining us. And obviously, a lot of talk in the industry with you guys announcing the DISH MLA. So can you talk to us a little bit about how was it do you think -- how long did this take to get together? Why do you think it is that Crown is kind of the first of the tower cos involved? And maybe to the extent you can talk about the agreement, including since fiber is announced in there as well, how you see this deal impacting the business over the next few years.

Yes. Thanks, Tim, for having us at the conference. Really excited to be here, and I appreciate the opportunity to talk through the business and answer questions. With regard to the DISH deal, we're really excited about it. It's something that we think is differentiating for us that we are the first and still only tower company to have announced an agreement with DISH. And how long it takes to come together, it takes a while to negotiate these agreements as it always does. But it's important, like I said, that we were the first to announce something, not least of which because DISH, as they describe this transaction, the agreement with us, talk about us being their anchor infrastructure partner on the tower side, which we think is really meaningful. This is a new nationwide network build, the likes of which we haven't seen for at least a decade or more. And to be in a position where we're the anchor of it, makes us feel like we're really well positioned to get more than our fair share of growth going forward. The -- I think the key reasons that DISH was interested in working with us were that we have the scale to support them. We own 48,000 towers in the U.S. And as you saw in our announcement in the press release, this deal is for up to 20,000 towers. And it's difficult to provide 20,000 towers if all you own is 20,000 towers or less. So having that scale in the scope of our operations throughout the U.S. was really helpful. So I think that was the first. The second is, I think that the placement and location of our towers is really important as well, where 70% of our towers are in the top 100 markets in the U.S. And with DISH having a population coverage requirement to deploy their spectrum and their network, they're likely going to go into the most dense areas they can find to make the most out of the money they're spending. And that the fact that we have 70% of our towers in those dense areas, I think, skewed our way favorably. I would also just kind of take one brief step back that I think the fact that towers was the focus of this transaction is just indicative of how important towers are over all the networks, that it is still true and will remain to be true that towers were the most efficient and cost-effective way of deploying spectrum over broad areas of both geography and population. And I think it's important that, that's where DISH started because that's how you build the best network is build it on towers, and it's the most cost efficient, like I said. But having said that, the last thing that I think DISH looked at and something they wanted in both the agreement and in the press release for this transaction, was that we did provide them some fiber transportation services as part of the agreement. And I think our ability to offer a holistic network solution differentiates us from other tower companies, that we are able to talk to our customers around not only where would they want towers but where would they need network solutions, and that broadens the conversation. And it was obviously important enough for DISH to, like I said, include that in this agreement. And when you add those 3 things together, our scope, our urban skew and our ability to offer a holistic solution, we think that's what really led DISH to work with us first. Getting to kind of the terms of that agreement a little bit more, it's a 15-year deal. And like I said, it gives DISH the right to have the option to have rights on up to 20,000 of our towers. And for that, we get minimum contracted payments, which are the majority of what we're going to get paid for these minimum contracted payments. So what that means is that DISH can go on 20 or 20,000 of our sites and still have a minimum contracted payment, which leads us to think that economically, they are incentivized to use as many of those 20,000 as they can because if that minimum payment stays the same over whether they be -- whether on 20 towers or 20,000 towers, the payment per tower goes down substantially, obviously. And I think that just positions us yet again to be an outsized recipient of their work in the initial phase of their deployment.

Great. Great. I don't think this is in any kind of numbers you've talked about, but how do you kind of see the cadence of this MLA playing out as we look out several years?

Yes. Ultimately, it's going to be up to DISH how they want to deploy and how quickly they want to deploy. I think the only thing we've been specific about thus far is that there's a limited amount of new leasing activity from DISH incorporated into our 2021 outlook that we gave as part of our third quarter earnings. And that was done before we had announced the DISH agreement. But the activity levels we anticipate from DISH are in line with what we would have expected when we gave that outlook. Because as DISH has talked about, they don't expect to receive the majority of their equipment to put on the towers and to deploy a spectrum until the second half of 2021. Meaning, we won't see a tremendous amount of activity in new revenue until then. So there's a limited amount in 2021 and we would expect it to ramp from there.

Dan, just kind of following up on one of the reasons you guys provided a unique opportunity for DISH in looking at your fiber business, how should we kind of think about your small cell and fiber business as we move into next year and going forward? How should we think about the growth there?

Sure. Like I said before, we believe the ability to offer a holistic set of solutions to our customers is a differentiating factor for us in the market. Our peers are focused more on towers, and many of the companies that would be focused on fiber or small cells don't have towers. So we think that we have a unique value proposition to our customer set, who is increasingly looking to try to deploy a network across all infrastructure, not just across towers or small cells whenever they can. They try to -- they're thinking about it as a total network deployment. And that gives us a lot of confidence in the long-term trajectory of our small cell business. And to 2021 and talking through what -- with your question, we believe that the growth in 2021 in our small cell business will look a lot like the growth in 2020, where we believe we'll add around 10,000 nodes and grow the revenue in the mid-teens percentages year-over-year. We think that will continue going into 2021 on the small cell side of our business. And that's largely because we have those bookings in hand and understand what our deployment schedules are and believe that we will meet those targets again. On the fiber side, where we're talking about fiber solutions or enterprise fiber, during 2020, we've been fortunate enough that, that business has not been impacted significantly by COVID, either positively or negatively. So we continue to anticipate that in 2020, that business will grow in the neighborhood of 3% at the revenue line. And then going into 2021, that we maintain that growth percentage at around 3%. And that's net growth. So that's after any churn on that business. And what we've seen in 2020 has been on the fiber solutions business that there hasn't really been a significant change either in our bookings or our churn levels. Those have remained very close to what we would have anticipated before COVID. The only thing that has really impacted us has been an elongation of the time -- from the time we understand that there could be some demand for a customer to when we sign a contract and put it on air. That time has elongated because it's harder to be in front of people and that is making the sales cycle a bit longer, which has made it a little harder for us to meet some of our bookings targets. And it hasn't been a significant impact, but it has been something that has been noticeable for us and just a reality of the world we live in at this point, is that you just can't sit face-to-face with your customers. And as most salespeople know, that is a very effective way of developing the relationships necessary to make those sales occur.

And then just quickly following up on the small cell, fiber business, kind of with the network densification happening across all carriers and this move to 5G, what should we look for in terms of when the business will see an inflection point? Are there anything we should -- will the backlog grow to a certain point? How should we kind of think about the business in terms of 5G?

Yes. We believe very strongly that the backlog will grow. That will be -- obviously, it is dictated by the pace at which our customers want to order small cells from us. And we believe that going into 2021, we're in the very early stages of real investment in 5G. And what we like to see as an infrastructure provider and what has been so important for us as a tower provider is to see that our customers have spectrum that is available for them to deploy. And then we can see that across all 3 and what will be 4 of our customers -- or it's now 4 of our customers with DISH. They all have spectrum that is available to be deployed and they are seriously contemplating adding more from the C-Band auction that just started. So we see that kind of the first criteria of what an increasing activity level would look like -- could look like is that their supply -- or there is a supply of spectrum that is sitting with our customers that they can deploy relatively quickly. The second thing you need on it, is the other side of that, is demand where we have seen that grow consistently in the U.S., where wireless data is growing at 30% to 40% per year. And over the last 10 years, wireless data demand is 96x what it was, 10 years ago. That's a huge amount of end user demand that is requiring that spectrum to be employed. And the last piece that we like to see is devices out there that accommodate the new technology. So the fact that Apple and Samsung had put out 5G phones really does push our -- the ultimate -- the end user to want the 5G experience, which puts our customers, the carriers to spend to deploy that spectrum that's there. When that combination of events happen, that's usually been a very good thing for infrastructure providers. It's been good for us as a tower company in the past. And we think it bodes really well for the small cell business going forward, because in order to deliver those benefits that have been promised in the 5G world, the density of the network needs to increase substantially. That we've already split the cells many times in order to get closer and closer together on towers. But ultimately, that amount of demand in dense urban areas cannot be accommodated only with towers. They can't get close enough together. There's a requirement to move on to small cells. So it is not a -- and if small cells will be required, it's when. And one of the things that's always been difficult in our business is predicting that when. So you had mentioned an inflection point of when we think we might be able to see incremental demand on the small cell side. And it's really hard for us to predict the when part because our customers have so many different priorities with regard to their capital. And it is a matter of how they prioritize what uses of capital are going to win out in any given period. And then whether that is ultimately the network, whether that's going to be towers or small cells, and the -- for us to try to pinpoint that has always been difficult. But what I can say is that even though it's hard to -- in any given year to say, yes, that will happen or no it won't, that over the next 5 to 10 years, it is clear that we are going to have a tremendous amount more of small cells in the future for all the reasons I was talking about earlier. They were required to deliver the density necessity -- density necessary to provide 5G experience. And so 5, 10 years from now, there's going to be a tremendous amount more of small cells in the U.S. than there are today. And we are really excited that we're well positioned to take advantage of that growth.

Dan, I did want to follow up on this. I mean, obviously, there's a little bit more investment in the fiber and small cell businesses more immature than a tower business. So returns, margins, whatnot are lower. What -- and you guys have given some pretty good information on maturity of some markets and different mixes of fiber and small cell, which was very helpful. But when you think out as -- is it scale that's needed for this business to start to match or approach economics of towers? Do you think it will fully get there at some point? How do you think about kind of a longer-term view of the business from a profitability return lens?

Yes. So the best way for us that we think about that is thinking about the return that we're getting on the asset as we deploy. So we talk about that in the definition of a yield, whereas the cash flow generated by that asset in the year divided by the net capital that we have invested in the asset. On the tower side, when we were building and buying towers at the beginning of our company's life, in the beginning of the kind of exposure of tower in the U.S., we were doing that somewhere between 2% to 4% yields. And as you add a second tenant to a tower, that gets -- those yields turn into a high single-digit type yield. And then as you add a third tenant, you get into the mid- to high-teens. So when we look at what the small cell business is, it compares favorably to towers that the initial yield for an anchor build is in the 6% to 7% rate. And with the second tenant, we get into the low double digits. And with the third tenant, we get into that say mid- to high-teens. So if you think about how long it takes to do that, we believe on both towers and small cells, we add about a tenant every 10 years. And it has taken us until now to develop the business in the towers. And because it started at that kind of 3% -- in the range of 3% yield position, it's taken up until now to get that into the double digits. As we look out at small cells because we start higher, it does help us that we get into those low double digits after the first tenant. It reduces the risk profile of the business while still allowing us to significantly reduce the cost of operation and implementation for our customers. And that combination is really helpful for us is that we still provide the value and we'll still be able to provide returns to our shareholders in what is in this business, which is a very long-term business, a relatively near term over 10 years. But like I said, after you get to the third tenant, towers and small cells look very similar. So we do believe the small cell business will look a lot like the tower business over time. And it has the same counterparty, same end user and the wireless user, the same general function of having height and projecting -- or having antenna at height projecting a signal. And then long-term contracts with escalators in very little churn. And when you add all that together, we think that they are very similar businesses that we're going to develop very similarly. It's just that we see the growth rate in small cells being greater over the next 10 years, given how small the business is now and what we know the density will ultimately have to be to accommodate 5G in the future. And a lot of that will go on small cells. Some of it will go on towers as well, and I'm not taking anything away from the tower business being a great business, and we'll continue to have tremendous growth over time. We just think in the next several years, it's going to grow more at the small cell. We will grow more at the small cell revenue line than we will at tower growing.

Just kind of switching gears here a bit and kind of looking at M&A, the past few years, your M&A has mostly been focused in the fiber, small cell business. But this year, we've seen a lot of activity in the international markets, especially over in Europe. Is there anything -- you guys have repeatedly mentioned that the U.S. is the best market for you to be in. But is there anything In terms of international opportunities that we should expect or think about for Crown Castle?

Yes. Still want to answer the question, which is we think the U.S. is the best market in the world for wireless infrastructure ownership. So we are focused on the U.S. purposefully, both because we think it is the best, and we believe that it generates the lowest risk-adjusted return that we do not take -- some of the risks that you take is going into international markets, whether that's foreign currency risk or underlying business performance risk or sovereign risk. So we can generate really great returns and not take those risks, and that's better for us. We've been very purposeful about trying to deliver that risk-adjusted return. Having said that, we would look at international expansion into markets that are in developed countries. We would not, in emerging markets for all the risk reasons I just talked about. But in developed countries, we would look at them, and just as we see those portfolios coming up, when we look at the growth potential in those portfolios and compare that to what the pricing is for those assets, we can't make the returns work. And we see a lot of companies going into those markets and paying what we think is too much to get to lower returns and higher risk than we can get in our U.S. business, yet the multiples are very similar. So in the current environment, we do not see any expansion in the international markets. I wouldn't rule it out over time if things changed a bit. But we want to focus on where we can generate, like I said, the highest risk-adjusted return. We clearly think we have those opportunities in the U.S., particularly given our differentiated position in the small cell business.

Dan, I wanted to touch on the C-Band auction. I think it's starting this week. So how much of an opportunity do you see there? Is this the type of thing where tenants have already been having discussions on it? And what would you likely normally see as a kind of a lead time for new spectrum like this hitting kind of the financials of Crown?

Yes, it's really hard for us to answer that question because as you just mentioned, the auction started yesterday. So we don't know who's going to win and whoever wins is going to have their own deployment schedule, and we can't predict that very well. I would say that in a broader point, we are generally agnostic to the spectrum band. What we want to see, like I mentioned earlier, is just a lot of spectrum that our customers hold that needs to be deployed. And this auction will add to that trove of spectrum that is sitting on our customers' balance sheets and not yet generating a return. And that means they're going to have to spend money, put antennas up on towers in order to deploy the spectrum, and that's exactly what we're looking for. So we're really excited about the C-Band auction that it will help us. But we're excited to do any spectrum as auctioned. And as we sit today, there's plenty of laying fallow within our customer base, which means that the C-Band just helps us even more. But we got a lot of room to grow here regardless of which band is going to be deployed and win. And so when we think about the timing of all of the spend that happens in our market, as we -- like we said going into 2021, we're really excited that our tower business is going to grow at 6% per year or 6% in 2021 over 2020. And in 2020, we expect that growth to be 5%. So we have seen an accelerating growth trend in our tower business. And like I mentioned before, that's before we really see a tremendous amount of incremental spend going to 5G. So we think we are well positioned for what looks like it could be a decade-long investment cycle by our customers to invest in a new generation of wireless technology.

Great. Great. I think we're running close to the end here. I did want to ask one last one. Do you see any potential changes with the change in administration whether it be relative to taxes or regulatory regime or anything more or less favorable towards the communication industry or any impact on tower, small cell, fiber?

Yes. It's hard to tell obviously what's going to happen until that -- until we see a little bit more about what the priorities are of this new administration. I would say that as a tower and small cell provider, we don't think there's a significant change because what we're doing is allowing access to wireless communications. And that's something that, regardless of party affiliation, everybody wants more of in the U.S. particularly in underserved populations. And we're able to do that both with towers and small cells. And as long as we continue to focus on being the absolute lowest cost option for deploying that spectrum, and for giving people connectivity, that then it will ultimately result in having consumers pay less over time because we're lowering the cost of implementation of operations. As long as we can keep that as our core focus, we believe that regardless of the administration, it really won't matter very much. It will all be very supportive from what we're trying to do.

Right. Okay, the dog likes that, too. Okay, Dan. Thank you very much for your time. Thank you, everybody, for joining. Have a great day, and we will speak to you again soon.

Thanks very much. It was great talking to you. Appreciate it.