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

My name is Philip Cusick. I follow the com services and infrastructure space here at JPMorgan. Thanks for joining us. I want to welcome Dan Schlanger, CFO of Charter -- excuse me, CFO of Crown Castle.

[indiscernible] Phil.

A little bit more than 5 years there, and I should know that. Dan, thank you for joining us today. How are you?

Thanks for having me, Phil. I'm doing well.

The U.S. seems to be getting more open every week. Can you talk about just an update on carrier activity? And where you see things versus a normal environment?

Yes. Happy to. And again, thanks for having us. Appreciate being part of this conference. It's a good one. The activity levels in the U.S. are good right now. We're seeing really, for the first time, all of our carrier customers starting to spend on a 5G investment at scale. And we've been talking about this moment for a while now, but we're seeing it in action. And that's a good thing for us. It's a good thing for our peers in the tower business, and something we've been looking forward to for a while. When we think about kind of historical context of the activity levels now, when we gave guidance at the end of last year for 2021, we knew that this year was going to be an upswing from last year. So we had more tower growth in '21, and we were expecting more tower growth in '21 than we performed at in '20. And that's really coming true. And '20 was a good year. And so when we look at '21, our organic growth in the tower business is in the neighborhood of 6% per year -- 6% at the revenue line. And that's something that we're really excited about. We think, based on what our peers have given as guidance, that's industry-leading. Don't see a lot of reasons why that industry-leading growth would change. We feel like we're really well positioned. And as we think back over how we have as a tower industry have grown over time, it is not very often where the customer base is all spending generally at the same time. They usually go in waves where one may be high, one may be low. And we're seeing a pickup in activity across the customer base than over what we saw in 2020. And it's something, like I said, we're excited about, and think that it should continue. But always, as you'd like to point out when you and Jay go back and forth, it's hard to call inflection points in this business. It's hard to call them on the way up, it's hard to call on the way down. But it feels like we've reached a point where there's a lot of activity across the industry right now, and we're really making progress to meeting the needs of our customers.

I should have said that there is a system on your screen to ask a question. So if you push that button and ask a question, I'm happy to take those as well. Let's expand that a little bit to small cell, and how has that been impacted as we've come through COVID. There was a time when there were some municipal headwinds. Anything going on there? Or are we back to normal now?

No. We actually didn't see a huge impact from the -- from COVID on small cells. We still are in the range of -- when we're building an anchor that we -- we saw that it takes about 18 to 36 months to build small cells. That really didn't change during COVID. What we have seen -- what we were fearing was that as [ sales and receivables ] moved into a work-from-home environment, they wouldn't be able to move as quickly as they do when they're in the office. But they did a really good job of transferring, much like the rest of us did, and kept us in that kind of 18 to 36 month range. So it really didn't have much of an impact on our business. Where we -- I think where we did see a little bit of an impact from COVID was really on our fiber solutions business, not on the small cell portion of our fiber business, where -- because there's -- that business really is a face-to-face selling type of business. We saw elongated sales cycles to where it just took longer to close deals, and it was harder to unseat incumbents because that really is a personal type of connection that is required. We still -- for Crown Castle, as you can see from my background, still working from home. So we're trying to work through that still. And as obviously, you've heard my dog, so we'll get rid of that soon at Crown. We're going to go back to the office at some point and get our sales folks back meeting with people as well. So we think all of that will come back to normal pretty quickly.

Okay. Now as you said, all the carriers are spending at this point, and we've seen Verizon raise CapEx back in March and AT&T just last week. So talk to me about the pace of acceleration in applications and then booked revenue and build revenue over the next year?

Yes. As you know, it takes a little while for us to go from getting an application to turning that into leasing revenue. Generally speaking, that's somewhere between 6 and 12 months. So when we look at what activity levels are in, in any given -- are in any given year, those activity levels typically don't impact the current year all that often. We see a lot of the growth and the reason that we're able to feel so good about giving guidance in October of the year for the following year is because we know a lot of that growth already, particularly in the tower business where a lot of it is just deals that we've signed. So for '21, a lot of deals that we signed in 2020, that didn't go on air until late '20 and then there's a lop over effect where we get growth into '21 by getting 12 months of that deal in place or that contract in place or that tower in place. And then when we have a deal or a contract that signed at the end of 2020, that will go on air in 2021 delivers growth. We know all of those things, generally, when we give guidance. The one we really don't know is how much activity in 2021 will be signed early enough to have an impact on leasing in 2021 because like if that happens, it will just lop over into 2022 at some point. So the majority of our growth, we have really good line of sight into because it just takes a while to get it into leasing. And as we look out at the activity levels now, that's holding true. I mean the activity that we would see for any applications today really wouldn't impact '21 because it would take too long to get them on air. When we -- again, when we look out for 2021, we're feeling really good about the guidance we've given about how much growth is going to be and our ability to meet that growth. One of the things that does happen at times is when all of our customers are starting to work at the same time, and that means all of our peers and competitors are starting to work at the same time, we can run into potential shortages of labor, basically, people who are willing to climb towers and hanging tenants. It's a difficult job and it takes skill. So it's not as if you can just go to anybody and say, "Hey, will you do that tomorrow?" So at times, we can run into some labor shortages. We've not found that yet. Being one of the larger tower providers in the U.S. puts us in a good position with our vendors to get some good treatment on that because we do have really high activity levels. But we're monitoring that all the time, and our supply chain organization is looking all the time to find appropriate and safe vendors that will allow us to meet the demands for our customers. And we'll just keep an eye on it and let anybody know if that changes over time, that labor shortage starts to impact us.

Okay. Can you compare the activity levels today to prior big upgrade phases, including the 4G deployments and the first wave of 5G a couple of years ago?

Yes. It's a little bit difficult to do that because there are just different networks that are being built now. When we were looking at 3G going 4G, we were still talking about some mostly low band spectrum, so low frequencies. And the network that was built was -- 3G going 4G was a very similar network. As we're moving from 4G to 5G, lots of things are changing. We're going much more into mid-band spectrum that has different propagation characteristics as well as utilizing more small cells in addition to towers. So there are a lot of different facets to what's going on. So it's hard to give a one-to-one comparison of what was going on then to what is going on now. What we believe is that because 5G will require ubiquitous coverage that is dense, and that the mid-band spectrum does propagate a little shorter distances than low band spectrum. We're up to a lot less distance, that there will be ultimately a lot of density in the 5G build out. And as we think about what's going to happen first, I really believe what we'll see is going on towers is still the most effective way to provide coverage over large slots of geography and population. So towers, I think, will be the first network architecture that is utilized to deploy 5G and all the spectrum bands that we're talking about being deployed now in the low and mid band spectrum. But at some point, there just aren't enough towers to cover everything that needs to be covered. And small cells will become a significant portion of the network architecture going forward. And what's hard is to say, when does that point get reached and how do our customers make those decisions? That is really their network engineering groups that make those decisions. I don't want to speak for the network of engineering groups to say what's going to happen. But we do believe that it'll end up being much more prevalent that small cells are a big part of the network. And it's just a matter of when that happens. So it's hard to say even what the activity levels will be on towers because if that shift happens tomorrow, then it may look a little different than if that shift happens in a year or 2. But like I said, I think at first, we'll see a lot more activity on towers, which will be good for us. We see that our -- the new leasing activity on towers, the actual dollar amounts right now are really high, which would lead you to believe that the activity levels from a historical perspective are very high as well, which is actually -- that is the case. It's just hard to go for a one-on-one comparison, but it is -- we are seeing, right now, activity levels that are high historically.

That makes sense. One of your peers yesterday told us that 5G amendments in this cycle might be a lower price on average than the 3G and 4G amendments of past cycles. Does that make sense to you?

I think what makes sense is whatever our customers need, we charge for it. And if they want to put less equipment up to try to cover something in the short term. So if you think about it one way is it -- if it's true that what I said around small cells is it comes true, that they want to use towers to get everything out but ultimately, they know they're going to have to get to small cells eventually. Maybe they don't want as much equipment on towers upfront, and they want to move to small cells quickly. If they don't want as much equipment, we wouldn't charge as much. I think, yes, is the answer to that. Whether that's the case, it may or may not be the case. What I think is most important there, though, is not that if the dollar amount of that upgrade is higher or lower, it's whether the pricing of the structural capacity of the tower has changed at all, and the answer to that is no. We still price the structural capacity the way we [ try ] price the structural capacity. And so like I said, if they want to use less of that by putting less equipment up, that might be a very good way for them to cover more and not have as much capacity that they will then fill in with more small cells or other tower antenna -- tower-based antennas going forward. But at some point, we need that ubiquitous coverage in 5G that's going to require lots of antennas and lots of density. So we feel like all of this is good for us. All of this is good for our tower business. All of this is ultimately good for our small cell business. But there's not -- there's nothing specific about 5G that would say that the structural capacity needs to be lower, and we need to charge less for it. It just may be how they're deploying their networks.

Okay. That makes sense. I was talking to someone afterward, and they were surprised that the prices would be lower given all the headlines we've heard about the weight and size of multiple-in/multiple-out antennas. But it sounds like maybe in this initial pass, the structural needs are maybe a little lower?

Look, I guess the way I would frame that, as you've said that, is our customers are really good at allocating capital. And they understand how to build networks for as little as possible to cover as much as possible. And they've been doing that for years, decades. And that also includes coming up with technological advancements that allow them to use more spectrum more efficiently. And we encourage that because what we ultimately want is the best network coverage in the U.S. we possibly can get for the lowest price point. I think we all want that as an industry. So they've done that really well over time. And part of that is to make sure that they're not getting too much on any 1 tower or too little. And in this case, they -- I believe that they all are trying to deploy as much spectrum as they can quickly, but not spend any dollar that they don't have to spend. So if that can -- if the best result for them is to put less equipment up now, then that would be less expensive and to allow them to go on more towers for the same dollars. And if that's the choice they make, that's a very good choice that ultimately, though, has to be remedied either through more equipment on the tower or more equipment on small cells. So I don't think that there's anything specific that would say there's less total addressable market. I think there's going to be more total addressable market because the density of the demand is coming and the density of the antennas have to get to -- have to meet that demand. So we see that as a big opportunity. But the first pass may be very efficient for them and should be very efficient for them because they need to get as much out as quickly as possible for as little as they can spend. And that's perfectly fine with us because we'll be there.

Got it. One of the other things that your peer mentioned is that DISH is coming through maybe faster than he anticipated, and there's a good chance of some revenue actually being booked to this year. Any indication you can help us with there?

No, I think what we've said all along since we signed our DISH deal is that we anticipate some revenue at the back half of this year out of DISH. We anticipated that, as we said in our guidance because we anticipated that DISH would go fast, and it would result in some additional revenue towards the back end of the year. The difficulty, as DISH has been very vocal about, is how much equipment they can get to be delivered, to be put on towers and they don't anticipate those -- that equipment, including the antennas to really be ready until the second half of the year, which means it's not going to be a huge amount of leasing activity for us in 2021. And what we have found is really encouraging is that DISH, as we expected, has been true to what they said, is that they're trying to deploy a nationwide 5G network to meet their coverage requirements and that they're doing everything they can to make that happen. And we want to support them however we can, and we think we're in the best position to do that given the agreement we signed with them.

Yes. And speaking of that agreement, your -- you talked about getting more than your share of that DISH business. How much do the small cell and fiber assets play in your ability to capture more of your fair share in this -- whether it's DISH or on the 5G sort of upgrade cycle overall?

Yes. Like I just was mentioning, I don't think having small cells is a huge differentiator in this initial wave. I believe that the most efficient way to deploy spectrum is still on towers, and that's likely where our customers will go. Again, I can't speak for them, so that's probably a better question for our customers. Just it seems to reason that that's the right path. I don't -- so I don't think that our outperformance with DISH is because of small cells in the front end and that are early stages of this deployment. Our outperformance with DISH, our belief that we will get more than our fair share. It's more than our fair share of tower activity because of the way that we structured the master lease agreement with them and how we were the first and where our towers are, which are more concentrated in the top metro markets in the U.S., which is where the population density is, obviously. And therefore, where DISH is focusing most likely to get to their population coverage requirements. And then what I think was important was the ability to offer fiber to DISH differentiated us and allowed us to be the first to sign an agreement with them, to make some of what I've just said true. And the reason I think that they were so keen on that and -- well, first, the evidence they were so keen on that is that they wanted the fiber deal to be incorporated into the tower. And they wanted to discuss it as part of the press release that was put out on the master lease agreement, that it included fiber. So it was obviously important to them. And the reason I believe it's important is because their network architecture requires the towers to be connected by fiber to some hub locations. And they wanted to make sure that a tower provider could help them get the entirety of their network build, not just put towers in place. And that's a big reason why we think it's a competitive advantage to have tower and small cells and fiber together under one roof, is not necessarily that we are going to cross-sell. We're not going to say, if you want a tower, you have to buy a small cell. What we're going to say is going to our customers and have a much more solution-based discussion as opposed to a product-based discussion. So we can go in and offer whatever network needs you have, we can have a solution for it as opposed to how many towers do you want to buy from us today. And we just think that's a better discussion to have with our customers, and I think it helped with DISH. I think they understood the value of having a partner who could think through network solutions as opposed to where are your towers and how are they going to work for us. And when we ultimately got to the agreement that we have with DISH, that differentiation, I think, led us to be in the pull position with them. Both first and if you look at how that -- the wording in that agreement or the press release was, it's the anchor tenant per tower provider, which we think signals that they're going to look to try to go on our towers where they can. But again, they're good allocators of capital. They're going to use the towers that they need. So if they need one that happens to be owned by SBA, then they'll go on the one that's owned by SBA. But what's different about DISH than the established network providers is that they have -- they can start from scratch. They don't have a network. So if AT&T, Verizon or T-Mobile wants to add equipment or add antennas, add spectrum, they know where they have a less productive spot in their network and whatever towers in the middle of that spot is the one they're going to go to, whoever owns it. DISH doesn't have that same dynamic. They can go wherever they want to cover whatever they want. And we believe that they can prioritize differently because of it. And what we tried to do in the agreement was give them every incentive possible to utilize Crown Castle towers as opposed to the competitor towers because we want to be that -- where they anchor to and have the opportunity to grow with them over time as they expand their network. And we believe we accomplished that through the structure of the agreement where we have given them rights on up to 20,000 towers and included a fixed payment for those rights. So any time they go on an additional tower, it lowers that fixed payment on a per tower basis, which is an incentive to go on more Crown Castle towers. So we think we've reached that goal and believe it will play out that we will get our -- more than our fair share of the build-out from DISH.

And just let me understand that, that fixed payment, is that a fixed payment regardless of how many sites they go on? Or is that a fixed payment that sort of gradually comes down as they scale up and take more sites? Just trying to think about the marginal cost to them, more marginal revenue to you of them taking another site.

Yes. There is a fixed payment. And obviously, there's some growth that's built in because they are going to go on, we expect, more towers over time. But there's a fixed payment that it doesn't matter where they go. There is some portion of it that is fixed.

Okay. Let me continue there, and you talked about the importance of the fiber in that agreement. Is fiber and towers and small cells all wrapped into one big agreement under one big pricing structure? Or is each piece sort of priced out separately?

Yes. Generally speaking, we have different agreements for each of those different products that we have. It is pretty rare that we would wrap them all up into one big agreement. And even within one big agreement, they are different businesses that have different pricing structures. So it's not as if we say, if you pay us $4, you can have 7 towers and 6 small cells. That's really not how we do it. We actually think about them as different ways of attacking a network issue with a solution. So what we would do is whether they're in 1 master lease agreement or 2, if you're talking about towers and small cells, for instance, it's really up to our customer how they want to negotiate that conversation and how they want to ultimately contract. We have not seen that very often to where our customers want a 1 big agreement to cover everything. You can see from our Verizon announcements, we announced a small cell deal before we announced the tower deal. So they did not have them together in 1 agreement. That has been more common how we've seen this play out over time. Going forward, it may change that they want a holistic network solution to be provided by us as the only provider of that, the only company that's capable of providing that on a nationwide basis. But even within that, it would not mix the economics of towers with the economics of small cells. Those are 2 separate things that we want to make sure that we keep separate within our own company.

Okay. That makes sense. And so you talked about the sort of up to 20,000 sites, and there's a fixed payment for towers. And on the fiber side, though, that sounds like a little -- maybe a pretty important part of the deal. How should we think about the pricing there? Have you committed to a certain amount of new build for them? Is it mostly existing build for their backhaul? And what's the pricing structure of that deal?

Yes. Just to be clear, the vast majority of that agreement covers towers, just because it's a much bigger portion of the agreement. The reason it was important is not because necessarily the economic impact of it, but because of the solution impact of it, that we were the only company that could provide with one of the things that we're looking for, which was kind of a one place to go to get towers and fiber. And just because of the size of the businesses, towers overwhelms fiber in that contract. But within that -- within the fiber piece of it, there are separate pricing mechanisms and it does differentiate -- well, let me say that differently. We will sometimes build, sometimes we have fiber. It depends on what happens for a specific tower. But there's nothing that would obligate us to do something that didn't make sense, nor is there anything that obligates them to do anything that doesn't make sense. So if we refuse to do something that they have no other option. So it wasn't as if it's an exclusive, and no matter what happens, that's -- we're there. It's just it's a way of facilitating their fiber build-out to towers.

Got it. Okay. Okay. A couple of things from the line on fiber, just a follow-up. Will the rollout of C-band by carriers drive the unlocking of the fiber ROI story into '22/'23? I guess the question is does 5G and C-band drive more demand for the fiber business than we've been seeing?

I think -- I would take it away from C-band specifically and say that 5G will ultimately require a tremendous amount of fiber to make it work. And that's because that the requirements of 5G and the promise of 5G are to give whatever use case it is, a high-speed ubiquitous low-latency connection. And when we have that, we will allow for different utilization than what we've seen in a 4G environment today. But in order to get there, we need, as an industry, to have a point of presence that's closer to the user -- the end user. And those end users, I think, are going to expand from just consumers like you and me who carry our phones around to industrial use cases that really need that real time, low-latency feedback. And because of that, the density of the network is going to have to increase substantially. And the only way to do that is to have fiber connecting all of those points of presence. And that's why we have been so excited about our fiber and small cell business, is that we see that future coming. And we know that the only way to take advantage of it is to connect small cells via fiber to the -- back to the network. And yes, we think that, that will drive a substantial increase in the utilization of fiber over time because there's no way to meet all of those requirements without having the speed and the low latency that is provided by moving from the radio wave into the digital fiber as quickly as you possibly can and utilizing the spectrum over and over as much as possibly can. So that's where small cells come in, and that's where fiber comes in. So we see a huge uptick, we believe, in the utilization of small cells and fiber because of those requirements.

Okay. Another follow-up on fiber. You mentioned that the sales process in fiber was impacted by COVID at some point. So should we think of you coming out and starting to maybe book better revenue growth on the growth side here? But also the question is, does that mean that your customers could start going other places as they're able to meet with other fiber providers?

Yes. We don't think it's going to impact us all that much. It was just the only time we saw any COVID impact. So the growth of our fiber business in 2020 was around 3%. We expect that the growth in our fiber business in 2021 to be around 3%. And the churn in our fiber business hasn't really changed all that much from around 9% of revenue on a yearly basis. So I think what the question is makes sense. If it was a big impact, it would potentially get to higher gross bookings and potentially higher churn for a period of time. But I think that these things tend to even themselves out. When you see an elongation like that, maybe it impacts for a little bit of time, but then you kind of just settle into what the new normal is, and maybe we would accelerate things for a little bit of time and then you settle into the new normal again. But it really shouldn't impact our business overall all that much.

Okay. Okay. On the Sprint side, there's been a little -- some different ways that people talk about. And obviously, your contracts with Sprint are a lot longer than some of your peers. What you've outlined is it seems to be sort of a direct overlap. And I'm curious about any sort of early conversations you've had about turning off sites or anything like that, that you could help us with? Whether those direct overlap sites are going to come down on time? Or whether other sites might be exposed?

Yes. What we've tried to do is give all the information we have, not necessarily give a forecast for when or what we expect from the churn. So in our most recent supplemental earnings materials, we broke out -- we always break out nonrenewals by year by customer for the next 5 years and then kind of thereafter. And what we broke out this time was to show how much of the nonrenewal within T-Mobile is Sprint contracts, and that broke out further between Sprint contracts that are co-located dual residency with T-Mobile on the same tower and those Sprint contracts that are just single residency on the tower where T-Mobile doesn't also have antennas. And you can see from that, that we have the biggest churn event that we see in the next 5 years is in 2023. And that's a potential for what might happen. That just shows what is up for renewal in that year, not what we expect to churn in that year. But that number is a little over $100 million of dual residency Sprint sites and a little over $100 million of single residency Sprint sites. And like I said, it's not a forecast. It's just trying to give everybody information because I would say that what we're doing now is talking to T-Mobile and having conversations around what they want, what we want and how can we come to an agreement or not that would help us both reach whatever goals we have. So for us, of course, we want as few sites to churn as possible. We want as much revenue as we can get. We want to grow with them to help them meet their network needs. For them, I think it has been very clear that they're focused on network synergies, and so they want a lot of -- they want to churn probably as much as they can that makes sense within their network. And then they want us to have -- I would imagine, they want to be able to grow on our towers as they continue to expand their network. And we can work all of that together into a new agreement that works for both of us that is mutually acceptable. We'd be happy to do that. But that agreement would have to come with it some benefit to us over what would just be the normal course of whatever may happen going forward. And the reason that we're -- we feel good about where we are is that we still have a couple of years to work through that. And it will be, I think in our best interest, to allow some of that time to go by, while we continue to talk because the farther away they get from the merger, the less important synergies are. So if we were having this conversation 15 years from now, they wouldn't be talking about synergies from a deal in 2020. And the more antennas they need to add to deploy the network to lead network quality in the competition they have with the other carriers because that's the competition that's out there. So we feel like we're in a good spot that we can help them, we can continue to meet their needs and we can continue to negotiate with them, but there's no pressure for it because we still have a couple of years. And that was all done on purpose to allow us that conversation, and we feel really good about the relationship with T-Mobile, and we'll continue to work with them to hopefully find the common ground. But if not, that's okay, too.

Okay. Last one on overall, and we're about out of time anyway. But you've guided that CapEx would be drastically down in '21 versus '19 as fiber acquisition builds and small cell build subsides. Those small cell builds are very, very long duration contracts and take a long time to get up and running. Is this a new level that's pretty fair? Because I don't see you signing big new fiber deals. The pace of new small cells seems to be pretty steady. Is this a level that we can assume is probably pretty good for a while?

I think, yes, as long as you think that the 10,000 nodes per year deployment is a reasonable level to believe in as well. So if we keep building around 10,000 nodes per year, this will be a very similar level. If, for some reason, which we hope will happen, there is a tremendous amount of demand over and above 10,000, we need to build more than 10,000, then obviously our CapEx would go up. And we'll get into it, to what that looks like in '22 when we give guidance in October. But it really -- it's a matter of where the demand is for small cells. And like I said, we would hope for that demand to increase and therefore, our capital to increase. But if we stay around that 10,000 small cell nodes per year, we should be in this range of capital, yes.

Okay. Okay. That's a good place to stop. Thanks, Dan, for joining us. Thanks, everybody, on the line. And Dan, have a great day.

Thanks, Phil.

See you soon.