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

Good afternoon for the vast majority of you. Welcome to our fireside chat with Crown Castle. With us from the company is Dan Schlanger, Chief Financial Officer. Welcome, Dan, and appreciate you participating in our conference yet again this year.

Jon, thanks for having me. We really enjoy being here with great set of investors and looking forward to the conversation.

So, good, I'll rifle through a bunch of topics. For those of you patched in through the Internet, there may be opportunities to ask questions through the Q&A portal, and we'll get to those time permitting.

But maybe just to kick off, Dan, if you could maybe kind of refresh us on the current state of the mobile carrier landscape, the implications for your growth trajectory and kind of how you see things post 2Q heading into 3Q?

Yes. We're excited about where we are and optimistic about the future. In 2021, our guidance is for our tower business to grow at about 6% at the revenue line, which is an industry-leading figure and something we're really excited about. But beyond that, what we're seeing is what we believe is kind of the first foray of our customers into investing in the 5G network at scale. And we believe that could lead to a multiyear, if not decade-long investment cycle given the amount of activity that we think is necessary for the 5G network to deliver on the capabilities that we are all coming to expect of low-latency, high-speed ubiquitous coverage. And as our customers are providing and investing in that growth and that -- those capabilities, we think that our business is uniquely positioned to take advantage of those opportunities. And that's because we've spent the last several years and almost a decade of building a small cell and fiber network that we think will allow us to benefit no matter where the spend happens in the network, which is something that we believe will even out our growth and allow us to, like I said before, take advantage of whatever the opportunities are from the 5G investments that are coming. And when we talk about kind of where we are today and where we were -- our 2021 activity is, part of the reason we're so optimistic is that we're seeing the highest level of application activity that we've seen in the company's history. And that's been reflected in our 2021 guidance. And we think that there's no reason to believe that our new leasing activity on our tower business would be any less going into 2022. So we're, like I said, excited and optimistic about how things are playing out.

So that backlog, how much of that is contemplated in the form of locked in escalators or MLA types of terms versus -- which translate into variable growth that's more commensurate with the activity level on your portfolio? Is there a kind of rough mix to think about?

I think the way we think about growth in any of our businesses is that it starts with new leasing activity, which is new activity on our assets that we have in place. We add to that our escalators that are contracted in our agreements with our customers, and we subtract from that any churn or nonrenewals of any contracts for any assets that we have. And when we're looking at 2021, our new leasing activity for our tower business been $150 million and $160 million. When we look to the churn, I mean the escalator side of that, it's just below 3% of our revenue and is going to escalate. So we'll have about a little under 3% growth from escalators. And the churn for 2021, it's going to be on the lower end of our 1% to 2% long-term churn expectations for our tower business. When you add all those things together, that's how we get to the kind of the 6% growth of revenue in 2021 for our tower business. When we're looking into 2022, like I mentioned just a second ago, we don't see any reason to believe that the new leasing activity portion of that will be any different in -- or even less in 2022 than it is -- has been in 2021, what we expect in 2021. And that's inclusive of everything that you would talk about in terms of what our agreements look like, what our activity looks like, how we're going to monetize. So we feel good about what's coming up and the ability for us to grow our business going into 2022.

If you think about an upside versus a downside versus a base case, thinking about 2022, what are some of the variables? You talked about very strong demand. Could it be equipment constraints, availability of labor? What are some of the things that might lead to some surprise relative to the total discussions that you're having right now?

First, I'll say is that we haven't yet given '22 guidance. So we don't have really a base case, upside case or downside case to speak of. We'll do that in a couple of weeks. But the things that could impact us on the near term -- of any time we talk about our business of some of the things you mentioned, whether there could be supply chain issues, equipment shortages or labor shortages. We don't -- we have not yet seen those impact our business in any substantial way. And therefore, don't think that those will have a significant impact on our ability to perform in 2022. But obviously, that's a long time from now, and things could happen that would result in some downward pressure to the extent that we do see supply chain disruptions either on the equipment or labor side. But beyond that, I think the things that could impact us going forward are the level of demand that we're seeing. And when we project out what we think 2022 will look like in a couple of weeks, we do that really early on. We're very early to provide guidance. And sometimes -- a lot of times in that case, we're making some educated estimates of what we think that activity will look like and what demand will look like moving forward. And there's a chance we could have overestimated it. And what we think is a long-term investment cycle is still a long-term investment cycle, but it could be that we started really strong in 2021, and it slows down for a little bit, which -- again, we haven't come out with what we think is going to happen. But we could be wrong about those activity levels and what our customers ultimately end up spending money on. And one of the reasons that we think about it that way is that the biggest limitation on our -- the demand for our business is what our customers' capital plans are, and where they elect to spend that capital. And they have a lot of demands for that capital, whether that be paying off debt or increasing dividends or buying back stock or investing in their network or investing in the core of the network versus the radio access network part of it, where we provide. How much they choose to invest in small cells versus towers. And all those things, we're making what we think are very reasonable estimates about and they can change a little bit. So -- that would be what -- the level of demand that's always the thing that is most difficult for us to predict the timing of, even if we know that, that demand is coming. So like I said, we think we're in the very early stage of this of a long-term investment cycle because our customers have been touting the benefits of 5G. And in order to meet those benefits of 5G, we believe that there's a lot of investment they need to make to upgrade the network and add equipment to deploy more spectrum. And while we believe very strongly that all of that will happen, as has been the case through most of our history of our company, it's always hard for us to predict exactly when those investments will happen because of all of those different competing capital calls that our customers have and what they ultimately end up prioritizing. But what we feel good about is that because our customers are competing with each other on network quality, and their customers, the consumers have come to expect network quality and will ultimately make decisions to move networks if the quality isn't there, that spending on the network itself typically has been a pretty high priority for our customers. And that's why we feel so good and so optimistic about where we sit today is that over a longer period of time, we're very comfortable that there's going to be a tremendous amount of activity and investment in the business. Like I said, we're not concerned at all about 2022. We think on the tower side, we'll have the same, if not more level of activity going into '22. But longer term, we're even more convinced that there's going to be a whole bunch of investment that needs to be made in order to meet the requirements of 5G and the data demand that's coming. And we feel really good about where our assets are positioned to take advantage of that opportunity.

I want to hit on non-tower topics momentarily. But you mentioned on the call, and it's obviously the results that you see on the services side also reflect elevated activity. Anything to kind of unpack around the services line item? And did that settle down into a more normal level? Do we see extended elevated activity commensurate with leasing demand? How do you think about that line item?

Generally speaking, the level of activity we see on our services business is correlated heavily with the level of activity we see in our tower applications because our services business is basically an opportunity for us to get the equipment on air and start charging a lease. So our services business has broken into 2 pieces, what we call preconstruction work and what we call installation or construction work. And the preconstruction is focused on any type of structural analysis we have to do in zoning and permitting or if we have to acquire land to add equipment at the bottom of the tower, all of those types of services happen in what we would call preconstruction. And then construction, as the name would imply, is going and hanging the antenna on the tower and us hiring crews to make that happen. Those are all very much correlated with how much activity is on our towers because it has to be done in order to get the antenna on the tower and us to charge the lease for -- to our customers for accessing the structure of our tower. And we have seen that as the applications in our business have gone up, the services revenue we have seen has gone up. When we talk about the preconstruction versus construction side of our services business, that pre-construction happens first, obviously, and is typically higher margin and the construction happens more towards when the lease is put on air and is generally lower margin. So we do think a mix shift can impact the overall margin of the business. And because we're kind of early on in '21, we're probably more focused on the preconstruction side of things than the construction side, and that may or may not change going into '22, depending on what the activity levels look like going forward.

I want to maybe ring fence off small cells for the moment, talk about fiber businesses. You've also got edge computing through Vapor IO, you're not directly involved there. But some of these adjacent models that you acquired yourselves into or maybe made minority investments in, how do we think about those sorts of business segments? So fiber, non-small cells, edge computing or anything other that's not macro tower or small cell related?

On the fiber side of our business, what we've seen is that we expect it to grow at about 3% at the revenue line this year in 2021 according to our guidance. We think that's a reasonable case for the longer term what that business can grow. We haven't seen a tremendous amount of impact from COVID, either positively or negatively or impact from work from anywhere, positively or negatively in that business. So we think it's been a pretty steady around 3%. And of course, it's not going to be 3% every year. It will be a little up or a little down, but around 3% is a good estimate of where that business is going to grow over time. And we believe some of that, what I would say is relative stability in our growth in that business compared to other fiber businesses stems from our focus on larger enterprises, government agencies, school systems, hospital systems, things that have -- entities that have much longer-term planning horizons and are seeing a tremendous increase in the amount of data demand that they are trying to provide for their employees and customers. And so we see that it's a little bit more consistent, a little bit more stable with a little bit less churn than some of the areas of the fiber business historically have been. So when we look forward, we think that, that 3% is in the ballpark of what we would expect it to continue to grow. We're in that business because we own the fiber asset and want to put small cells to work. We believe the upside comes from the small cells we want to put to work. So we're not going to build or buy fiber in areas that we don't ultimately think that small cells will be. But where we do build and buy that fiber, we want to maximize our return on it by getting that revenue -- as much revenue as we can from that fiber solutions business to add returns to a similar asset base that we've already spent money on. And that combination of revenue streams and return profiles, we believe adds to the long-term value for our business. On the edge data center side, as you pointed out, we're very interested in the edge data centers. We believe that as 5G networks become more defined and the use cases that are enabled by those 5G networks become more mainstream, that edge data centers will be an important part of the network architecture as more computing and storage of data needs to happen closer to the consumer in order to the low latency and high speed requirements of 5G networks. We believe we are extremely well positioned to provide space for those edge data centers because we have real estate that is at the edge of the network at the base of our towers that is already secured and powered. And we have at least equally, if not more importantly, fiber that connects those places that we own and can provide because in order for edge data centers to really provide the type of low latency that is necessary in a 5G network, they need to all be connected by fiber. So we believe that we have a unique position to offer a solution that has what a data center may need in fiber connectivity, space, power, security at the edge of the network. What we're doing now, and you mentioned in our -- with our investment in Vapor IO, which is a minority investment we have separate from our business. But as a company that is focused on edge data centers and providing both the hardware and software for how to run them, we are learning from that investment what the use cases are, what the topography is going to look like, how they're going to be deployed. And then ultimately, what our business model will turn into from what we believe is a very good opportunity to provide that edge data center network. But we think that's years away from being a significant revenue driver for our business because we think that the 5G network has to be a little bit more defined before we know where that computing and storage needs to sit in order to enable use cases that we think are coming.

I want to pivot over to small cells in some of the time that we have remaining. Mainly on the supply or delivery side, I think you've talked about expectations being moderated to 5,000 a year due to issues related to zoning and permitting. And how is that going? What is it within your power organizationally or from a process standpoint to make the permitting process or maybe speed to delivery run at a more rapid pace?

Now we took down our anticipated small cell node delivery target from about 10,000 in 2021, down to about 5,000 in 2021 as a result of 2 factors. The first being what you mentioned, zoning and permitting. The second being our customers shifting their focus and their capital away from small cells towards towers as they deploy 5G and as they deploy the spectrum that they have required over the course of the last several years. And more of that impact is because of the focus of our customers that it is the permitting and zoning issues that we're seeing. But taking them in the order that kind of what you asked is, on the zoning and permitting side, we are seeing an elongation of the timing, mostly because we have gone through some of the jurisdictions that are more favorable to allowing small cells. And we've reached the jurisdictions that are less inclined to allow small cells. And when we encounter that type of resistance, it's hard to get through it. And because we're working within more of those municipalities, we've seen a delay in some of the small cells that we thought we're going to be able to put on-air. I don't think we've seen a significant change in the overall permitting and zoning environment. It's just we've kind of shifted into more difficult jurisdictions. What we're doing is -- go ahead, sorry, Jon.

So as to estimate, talk about what we're doing, and then I'll have a follow-up.

Yes. So what we're doing is we're relying on our years of history that are -- that have provided us more capabilities and more understanding of how to deal with municipalities than any other company has that's building small cells at scale from an outsourced perspective. And -- we believe it's a competitive advantage of ours actually that we've been able to deal with municipalities very well over the course of the last decade or so, we've been trying to build small cells. And even though we're running up against municipalities that are not as favorably inclined towards allowing small cells in their communities. We have a lot of experience going through that and believe we will be one of the -- we will be able to resolve those issues faster than almost any other company. So although it is taking us longer than what we would have expected, we believe it is still shorter than what any other alternative would be. And that's one of the competitive advantages we think we've built in this business. It's just based on our long history. We can work through these issues more quickly and with more of a positive outcome and relationship with the municipality than most companies were able to get.

So you can -- it sounds like you're optimistic that over time through learning curve relationships and whatnot, you can recover to the pace that you used to be able to deliver at. Does it go much higher than that 10,000 or is it impossible to say? I guess the question I'm kind of grappling with is that I think it's intuitive that demand -- carrier demand for small cells will accelerate, your backlog will grow, but it's all about backlog conversion that converts to small cell recurring revenues. And that's really more about delivery. So what can we look forward to over the next several years on that side of the equation?

Yes. I don't think that moving from 10,000 to 5,000 small cell nodes in this year is indicative of the pace at which we can provide -- we can perform for small cells for any length of time. It just means in this year, we are only going to provide 5,000. But we have been able to do 10,000 and we don't think there's anything that would stop us from going significantly above that. The zoning and permitting issues you're talking about is what's baked into us believing it between 18 and 36 months for us to build a small cell system. But if we were to get an order tomorrow for 100,000 small cells, we believe that we could put those on-air in some amount of time depending on when the customer wants them, but it wouldn't be that we would constrain that because of zoning and permitting issues. We think we could get those done, because we are as good as we believe anybody can be at doing so. But that's not because we believe that we're going to be able to shorten the zoning and permitting process from where it is today, just something shorter than that in the future. It's still going to take 18 to 36 months. But if we were to get such a large order, we think we can push that through very, very well. And I'm not saying we can do 100,000 in a year. That was not my point. I was just trying to use kind of egregious examples so that nobody thought I was trying to foreshadow getting an order along. But what I do think we can do is work among multiple municipalities at the same time, given our scale and given our breadth, which is not very common for most companies, especially outsourced providers of small cells to be able to do because they just don't have that breadth and scale. And that allows us to be faster and more efficient than our competitors. So I don't -- like I said, I don't think there's a cap or anything close to it at 10,000 small cell nodes per year. If we were to have demand that came in that was more than that, we think we can deliver on that demand.

The mix between buy versus build from a carrier -- or rents versus, say, self-perform from a carrier standpoint, that always fluctuates and anything going on currently in 2021? Or anything to kind of expect going forward around that mix of carrier appetite to -- or preference to build on their own versus lease from third party on small cells?

I think the biggest proof point that we can point to that's happened in 2021 is that we signed the largest small cell deal in our history with Verizon at the beginning of the year for -- to deliver 15,000 small cell nodes, after Verizon had spoken for a long time about their preference to build on their own. So clearly, Verizon has seen some benefit in contracting with us and believe that we can provide some value, and I think that is a shift. That's a shift that I think is very positive for us because it shows that even when having a preference towards self-perform over the course of some recent history that we were able to get Verizon to see the benefit of what we can provide for them and then ultimately sign an agreement to do so that obligates them to 15,000 small cells. And that's, I think, the biggest change we've seen. Other than that, we are seeing activity levels or inquiry levels that are across our customer base and believe that all of our customers are ultimately going to need small cells as part of the network because small cells are going to be required as part of the network. We can't meet as an industry, the demand and density of that demand of what we believe is coming due to increasing wireless data demand and 5G applications with a tower-only network. The physics won't allow for it. So we are convinced that small cells are going to be an important part of the network going forward and that we're extremely well positioned to be a party that benefits from that increase in small cells over time.

We are almost out of time. I think we covered the vast majority, but I was hoping to ask. Anything around cost structure so that, that could be -- so some of your services work you would have with FTEs and then sometimes you're obviously using outside contractors. Anything around that mix or that driver cost, anything around wage inflation to kind of call out as we look forward?

No. The biggest expense that we have in our business is the land lease under our towers. And that has an escalator that's built in. It's approximates to 3% revenue escalator we have in our contracts. That is our biggest expense. The second biggest expense is our interest costs. So -- and we have mostly fixed rate debt, mostly long-term debt, like more than 90% fixed rate debt, very long-term debt. So we don't see those fluctuating a lot with inflation. Where we see some of what you're talking about on the labor side, wage inflation will likely more be associated with building small cell networks and fiber than it will be in operating the businesses we already have. And most of that will go into the capital of building because that's capitalized labor. So we don't see a near-term impact. We don't really see a long-term impact because even that, we think, we can modify how we get our returns to make sure that we are not going to get squeezed with that wage -- labor inflation over time.

And lastly, maybe just filling over 1 or 2 minutes, but augmentation CapEx, it's been at maybe less than usual levels. But as we look to mobile 5G build-outs, whether it's C-band or O-RAN or some of the mid-band deployment that T-Mobile is embarking on. Anything about augmentation CapEx on your existing structures that is worth calling out? Or is that not a factor to really be concerned now?

We would hope that we continue to have some discretionary capital to build new assets because we believe that both new equipment or new tower capacity is good. We believe that new assets on the small cell and fiber will generate really good returns over time. So we feel good about when we get to spend that capital. When we look at the ability to spend capital, we always compare spending the capital versus something that would be like buying back stock in our model and the spending of the capital drives more -- higher dividend per share growth rates over a longer period of time, and that's what we're trying to do. And as long as that's the case, we will continue to want to spend capital to buy new assets, augment our tower assets and move forward to seeing those returns come in the future. And that's really what we do as a business is invest now so that we can have shared infrastructure that benefits our customers, lowers their cost of implementation and operation. And ultimately, in to our benefit because we get multiple tenants on that same asset and generate returns above our cost of capital.

Wonderful. We'll wrap it at that. That was the last word. I appreciate you participating yet again, and thanks again for your time.

Thanks, Jon, for having us. Really appreciate it.