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

Hello, everybody. Tim Long here at Barclays along with Brendan Lynch and Alyssa Shreves on my team. Thank you for joining us this morning. We have a fireside chat here with Dan Schlanger, EVP and CFO of Crown Castle. So Dan, as you know, has been with the company for 5 years or so and leading finance for the company. So we're happy to have him here. Thank you, Dan.

Maybe we'll just jump right into it here. Obviously, one of the hot topics these days has been C-band rollouts and the kind of the bickering between the FAA and the FCC, which has been going on for years. So maybe if you can talk a little bit about this process, how you're looking at it, what you're seeing from activity, some of the carriers have said it's not that big of a deal, but there's still some skepticism. So how do you view this impacting rollouts? What do you think some of the paths to resolution are here?

Well, first, let me just say thanks for having me, Tim. I'm very happy to be here and appreciate getting the opportunity to talk to everybody. What we think around the rollout of C-band is our customers make very long-term decisions when they purchase spectrum and when they want to deploy spectrum, because they're trying to augment and increase the effectiveness and quality of their network. And those are decisions that are made to retain and attract customers over very long periods. And spectrum, as everybody knows, a very limited resource, which is why our customers, the carriers spend billions of dollars to get access to that spectrum. And short-term delays like we're seeing with what is going on between the FAA and FCC, I don't think really impact that long-term planning horizon for our customers. I think both Verizon and AT&T have said that they will continue to deploy C-band and have it out as soon as they get the authority to do so and the clearance to do so. And that C-band is a really important part of their network plans going forward. That just says to us that one way or the other, the C-band spectrum will be deployed. And what we're seeing now is activity, whether it's C-band or otherwise, that is driving the leasing activity across our tower business to the highest level it's been in our history when we look at 2021 application volumes. And to us, it isn't a specific band of spectrum that we really care about. What we care about is that our customers -- all of the carriers are competing with each other on network quality and that they have spectrum that they can deploy and what we're seeing both with the C-band auction or with T-Mobile's purchase of Sprint and getting access to the 2.5 gigahertz spectrum or the more recent 3.45 gigahertz spectrum auction is that all of our customers in the industry overall is really trying to get access to that limited resources spectrum, so that they can meet the demands that are coming, which don't seem like they're abating in any way. The demands are generated by how much we as consumers use our mobile devices to consume data. And that wireless data demand in the U.S. is still growing at 30-plus percent a year, even when our mobility has been restricted by the pandemic. So it's a very resilient backdrop of demand. And spectrum is one of the ways that the demand can be supplied, and because it is a scarce resource, we just believe that our customers will continue to deploy it at this pace that they can as fast as they can, which is exactly what has driven the outperformance we've seen at Crown Castle in 2021.

Okay. Great. That sounds good. It makes a lot of sense. Clearly, there's a lot of battles going on between these guys, and spectrum is a key asset and coverage as well, particularly as we get into 5G. Just maybe a follow-up more on the near-term implications here. Obviously, you've had really strong leasing activity, site work activity. I think your last full year guidance was before this kind of hit the mainstream as a topic. Do you think there could be enough here to delay some of the near-term build plans or site activity? And maybe if you can just touch on how these -- what's covered by MLAs, what's not, so that maybe it wouldn't even matter if it's built and not live, maybe if you can just touch on the implications.

Sure. Like I said, we don't think that these types of short-term delays would have much of an impact on what is very long-term planning from our customers. Now ultimately, it will be up to our customers to make that decision, and they will be in a much better place to answer the question of whether there'll be a significant impact to them in the short term. But as you mentioned, we get paid once we have a site that is up and ready for them to deploy spectrum. And whether they're actually deploying spectrum or not is really on them to figure out. So our MLAs are structured that when they come to us, ask for permission to go on the tower, get that go on the tower, and we have the antennas that are hung and ready to be utilized, that is the point at which our revenue starts. I believe from their public comments, AT&T and Verizon, who are the ones that really won the vast majority of the C-band we're talking about, have said that they want to be ready for C-band when it is available to be deployed. And right now, that's January is what they've agreed as a delay until -- there could be changes in that. But I don't think that those changes will spark a significant change in how our customers are approaching deploying C-band because they want that coverage as quickly as possible. And what we've seen over the history of wireless network upgrades when we've gone from one generation to the next, whether that's 1G to 2G or 3G to 4G, is that our customers were in the midst of those upgrades like we are from 4G to 5G right now, they want to get more spectrum out as quickly as they possibly can, and they do that by going on towers. Towers are the most efficient and effective way to deploy spectrum over a long -- over geographic and population areas. And in the past what we've seen is that they originally initially start by going on towers that are already on, which is what we call an amendment. Because they know what the tower is, they know where it is, they've done the RF engineering, they know what the traffic patterns are, and it's cheaper and faster to go on a tower there already. And they've expanded that then to go to co-locations once those amendments have kind of run out. So they go on all the towers they can that they're on and then they go on towers that they're not on. Those co-locations take a little longer because they have to do the RF engineering. They have to figure out which towers are the right ones. They don't know the traffic patterns nearly as well, and then they go -- so they go from amendments to co-locations. We're seeing the same type of activity now. It's just we have another facet of it that is coming, which is with small cells, is that in the analogy that you can draw from that, towers are more like amendments and small cells are more like co-locations, where it's easier, faster and cheaper to go on towers than it is on small cells. But ultimately, you need small cells to fill in the gaps, much like they have needed co-locations to fill in the gaps historically. And what we're seeing now is exactly that activity where our tower activity is the best we've seen in our history. And we think that will be followed on shortly by a significant increase in small cell activity at some point.

Great. Thank you .

And I wanted to touch on the edge, another topic that's been top of mind for investors recently with American Tower's acquisition of CoreSite, bringing communications infrastructure under one roof. Crown Castle has long counted the benefits of having a holistic solution with towers and small cell and fiber all under the same roof. So I wanted to touch on your partnership with Vapor IO and see how you expect that to continue going forward and what you are looking for before you ramp more aggressively into the edge offering?

We think that there is a potential large opportunity with edge computing going forward. As we think through what is driving the investment in 5G is a new network architecture that allows for significantly higher speeds and significantly lower latencies. So the new use cases can be adopted. In order to get to those significantly higher speeds and lower latencies, we believe that the first thing that will need to be deployed is a very dense network of small cells, because as we talked about with spectrum being the scarcest resource of all in the ecosystem, using that spectrum as many times as you possibly can, what historically has been known as cell splitting, but now will now go into small cells so that the densification of the network matches the densification of the demand. And so we have positioned the company over the last 10 years by investing heavily in small cells and fiber to enable that densification of the network. And we are seeing that coming through now. We know that that will happen ultimately because there -- it is impossible to put enough towers out to meet the demand and density demand going forward. That will, we believe, help with the speed of the network and the latency of the network. As those use cases develop, depending on what they are, we believe also that there is going to be a necessity for computing and storage of data at the edge. So the latency has then dropped even further to enable use cases that we haven't yet seen. But depending on how those use cases go, we don't know exactly where those edge changes are going to end up. So what we did, it was 5 years ago or so, we invested in the company that you mentioned, Vapor IO. It's more than a partnership. We have an equity interest in Vapor. And the reason that we bought into Vapor was so that we could learn about the ecosystem of edge computing and understand how it works, what the customers may want, what the customers are going to use them for, who's going to pay and then what is going to be our place in that ultimate revenue generation opportunity. As of right now, we're not sure what those use cases are in 5G and therefore, I can't really say that edge computing is going to be this or that until we get through a pretty significant proliferation of small cells. But having said all that, we think that edge computing will ultimately be required to enable the types of use cases that everybody is talking about, whether that's augmented reality, virtual reality, autonomous driving, Internet of Things, any of those things will require lots of compute power towards the edge. We believe through our work with Vapor in addition to just wanting to learn from Vapor, we believe they have a very good offering and both of hardware and software that could help on the edge. We've learned a lot from them and believe a lot in their technology. But what we're figuring out now is what is that going to mean for us, and we believe what we've done over the last 10 years in investing in small cells and fiber because whether it was purposeful at the time for this reason or not, we have positioned ourselves as the best place for edge data centers to end up. And that's because we have the locations, tower sites and small cell hubs at the edge of the network, which we define as where the wired network becomes wireless, which are at tower sites and small cell hubs, with connectivity with fiber that we own, so it's a one-stop place to go, so that we can offer a total solution of that what you said, that holistic solution of not only the place, not only having the place to compute and store the data, but also the connectivity, and we understand what the network is going to look like because of our investment in small cells and towers. With all of that, we believe we are significantly better positioned than any other company to get small cell -- sorry, to get edge data centers on our sites so that we can generate incremental revenue. When we've gone through that analysis, which started 5 years ago, as I mentioned, we clearly looked and started thinking about whether owning metro data centers would help in that situation. And we came to the conclusion that no, they wouldn't, because none of that metro data center drives traffic to a specific place. You may need to connect to that metro data center, which we think we can do via a partnership as opposed to ownership, which will give us more flexibility and more choice of actually, ultimately, the customers more choice, which data centers they want to connect to, how they want to do it, but as long as we own the really important pieces of network, fiber, small cell hubs, target sites where we can put these edge data centers. We believe we are best positioned for that. And we don't see the need for those metro data centers to augment our offering.

Yes, that makes a lot of sense. And I see a lot of upside as edge use cases develop for the infrastructure you already have in place. Maybe you could talk a little bit about the risk of establishing a market position early before the use cases really develop versus trying to gain market share and establish yourself for the long term really before there's a clear use case.

As I mentioned, I actually think we have established the market position already. The market position established by the assets we already have, the tower sites, small cell hubs and small cells and fiber. We've invested in that, not because of edge data centers, but because there was a really good business reason to invest in that, that followed our strategy. Our strategy and our business model is to provide shared infrastructure to lower the cost of implementation and operation for our customers. We focus on wireless infrastructure. And small cells were a natural next step for us beyond towers, which led us down the path of investing in fiber, to allow for those small cells and provide us co-location economics on the fiber that we own. All of those assets are already in place. Now we're going to continue to build a lot of them because we think that they are not in place with enough scale. But we have all those assets in place in the top 30 markets in the U.S., which is where we think the small cells will ultimately go, and therefore where we think the edge computing needs to ultimately go. And we are -- we don't need to make a decision on whether we place a bunch of edge data centers all over the country yet, because I don't think that having them right now is going to be a differentiator. Having said that though, through our partnership and ownership of Vapor IO, we have deployed edge data centers across the country, because they are trying to make a business of it. And we know where that business is. We know where those pilots are. We understand the traffic that's going through them. We understand the customer base that's going through them. So we are both positioning our company internally with fiber, small cells, towers to be in the best position with edge data centers, but we're also positioning ourselves through Vapor to have some pilots already out in the market so that we can have a first mover advantage if we believe that, that is something that is going to be necessary. And even if it works out, the first mover advantage is helpful, we already have that too.

Dan, maybe if we start digging into small cells a little bit here, it's been -- I feel like it's been a little bit of a roller-coaster this year. You had a nice win with Verizon, 15,000 small cells earlier in the year. And then we had a little bit of delays on rollouts on the broader portfolio. Can you talk a little bit about this whole kind of tower for small cell second and what that means to timing of this ramp? We are believers that over time, small cells are going to be very important for edge compute on 5G, but maybe update us kind of on your timing to that business scaling. And then second part of that, that Verizon win is a pretty big one. Can you talk about potential with some of the other larger carriers and how you kind of feel about the build versus buy dynamic for them?

You said it very well, Tim. That 15,000 order from Verizon, we think, was a very big deal. Not only was it the largest order in our history, it was also an order that was given to us by Verizon during a time when they were shifting a lot of their resources towards towers away from small cells. And as I talked about earlier, that's kind of a natural progression for our customers. It makes a lot of sense for them that when you're trying to increase the coverage and capacity of your networks, you first go to the most cost-effective way to do that, which historically was amendments then co-locations and now is towers and small cells. That did not surprise us. The speed with which they made that shift surprised us. But even during that transition, Verizon recognized that they needed to give 15,000 small cells to us to be prepared for when they got C-band deployed or whatever they thought was going to be deployed, and they needed something that was after that in order to get to the coverage and capacity that they think is coming. And even during this period of high tower focus, they still gave us a 15,000 note order. We think that that is a very positive sign for exactly what you said, which is ultimately small cells to be extremely important for our carrier customers' network. And the question that it brings up is the timing of it, because we did reduce the -- our expectation of how many small cells we will put on air both in '21 and '22. And timing has always been hard for us. We've been in the tower business for 25 years. We underperformed in towers in 2020, and we've overperformed towers in 2021. We can't predict within that level of precision when things are going to change. But we do have a very good insight from our history and our relationships and our understanding of wireless networks around the requirements for networks over time, and small cells will be necessary. They are not a preferred mechanism. They are required mechanism to continue the expansion of the networks going forward. The timing of that, like I said, is hard to predict, but we think that within the next 3 to 5 years, we will have a significant increase in the number of small cell numbers that we're deploying. And what's really good about that is part of what we've done with our investments over time is, we've focused on providing the highest risk-adjusted return we possibly can for our shareholders. And one of the ways we thought about doing that was focusing on the U.S. because it's the best market in the world for wireless infrastructure ownership, but also trying to get the assets to put in our possession that would allow us to take advantage of the opportunities that came up regardless of where our customers are spending money. So in 2020, like I mentioned, towers underperformed, small cells outperformed, so we as a company outperformed. In 2021, towers overperformed, small cells underperformed, and we as a company overperformed. As you go to 2022, towers are overperforming, small cells are underperforming, and we expect to be at the high end of our AFFO per share growth rate. That is part of what we were doing when we were investing in these assets, was that we were positioning ourselves so that whatever came up, we would be the beneficiary, and it will allow us to grow in our 7% to 8% targeted range over a long period of time regardless of where that investment happens. And historically, over the last 5 years, we've grown our dividend at 9% a year. So it's been better than what we expected. And that back and forth between small cells and towers or T-Mobile spending versus AT&T or the Verizon spending or AT&T spending in a year, we think that one way or the other, they kind of I think in the sign curves, they may bounce around, but they kind of cancel each other out at some point, and we just grow at 7% to 8% a year. And that's a really great business model given the stability of the cash flows we generate, the underlying data demand that we talked about and what we ultimately pay out in our dividend, you put that all together and it's a great total return for shareholders over a long period of time in various type of business. What we've seen through the history of small cells, though, is it has been a bit lumpier. It is not that we get a consistent level of small cell demand over time. We get big projects, big orders from our customers, more sporadically. But we've gotten orders from all customers. We are in conversations with all of our customers all the time. That includes the Big 3 as well as other companies. And those -- that position we're in, I think we're at the very beginning of the real scaled investment in 5G and therefore, at the very beginning of the real scale investment in small cells, but we fully believe it's coming, and we're excited about the position we have as a company.

Yes, in looking at the competition, I think it's probably largely you guys and self-install or self-managed by the telcos themselves. How do you see that transpiring over time? Do you think over time, the telco customers will look at this and say, "why we should just fully outsource it?" Or what do you think the dynamics are for that build versus buy decision?

I don't think they will ever get to the point where they fully outsource all small cells everywhere. That -- I believe there will be markets that they want to have more control over. I think there'll be markets where we don't see the co-location happening in a short enough time frame to justify us spending money. I think there will be markets where they have fiber that they may want to build their own small cells on their fiber. What I do think, though, is that the offering that we provide is the lowest cost offering that they could possibly have access to. And that's not because we are so much better. It's because we share the economics. It is the reason that we are in existence as a company, is that we build an asset once, and we use it many times, and therefore, we can lower the cost to anybody who's using it, as opposed to building it themselves. And economics, I believe, always wins. Because if one customer chooses to build their own, and it is economically not as efficient as using us, and the other customers all use us, ultimately, the ones using us will have better networks. And as I spoke to before, I believe that the competition is on network quality. And when network quality is driving that level of competition, a better network is what exactly you're going for. So the way to get that is to use an outsourced provider. We believe we are by far the best outsource provider, by far the biggest outsource provider. And like you said, the biggest competition we have is really self-perform, not other third parties. So I don't think we'll get to the point where we are 100% outsourced or that Crown Castle has 100% market share. But I believe Crown Castle will have a very large market share of the outsourcing, and that outsourcing will increase over time because economics drive those outcomes.

I got a question on your 20,000 tower agreement with DISH. It seems they're deploying their infrastructure at a very rapid pace. Can you put any data points around how many towers they put equipment on to date and what is baked into your '22 guidance?

Brendan, as you know, we don't talk specifically about customer activity, but I can tell you that in 2021, there's very little in our guidance of new leasing activity from DISH because any activity would have happened late enough in the year that wouldn't have much of an impact, and that there is a reasonable amount of our new leasing activity in 2022 that is attributable to DISH, as they are putting equipment on air. What I will say, though, is that we have been very impressed with DISH and their management team and how quickly they have gotten a wireless organization off the ground. They started basically from a dead stop and at this point, are pushing us really hard every day to be as quick as we can be on preparing our sites and getting our sites ready. And it's a testament to the team they've put together, starting with Dave Mayo around, how well they've done that, how well they transitioned into building a network. And we feel really good because that agreement that you spoke to, we think, positions us as the most likely first choice for them. We think we're seeing that in the market now. And we're working with them very closely, and it's been a very good partnership and something that we look forward to continuing over a long period of time.

Great. [indiscernible], you've also seemed agnostic about your -- about renegotiating your existing MLA with T-Mobile or creating a holistic MLA. The T-Mobile MLA seems a bit different from DISH's. Maybe you can briefly highlight the differences between the contracts and what you see as the pluses and minuses of the different MLA structures?

First of all, I wouldn't say we're agnostic. I would say we are economically driven. We believe that if we can get an MLA that makes sense for us, we would love to do so. And if we can't, the business as usual case is still a good case. It doesn't mean that we don't care. It means that we want to maximize the benefit. As I would imagine, so does T-Mobile. And the question will become is can we find a place where we each maximize that benefit in a way that we get something we want and we can come to an agreement. I think generally speaking, as you've seen with us, we like those agreements, the longer-term agreements because we believe it helps us and our customers, both plan and reduce the friction of any one site going up because you don't have to negotiate anything, you just kind of do it and move on, but also just give us certainty over our revenue growth and conversely give our customers certainty over cost spread. That all makes sense, and that's why we've generally gone down the path of MLAs. But I think it was Jeff Stoops said this a while ago, an MLA versus not or holistic pricing versus a la carte pricing, it's kind of like ice cream. Some people may like chocolate and some people may like vanilla, but everybody likes ice cream. And I think it's the same way with an MLA or a holistic agreement versus an a la carte agreement. It is really good for our business. We are just figuring out a way of monetizing future activity. And we all know how important towers are or network deployments that are required for networks to work. We understand that. Our customers understand that, and we understand we have a very valuable asset that we have to make sure always results in a lower cost to our customers because otherwise, our business model breaks down. So how we determine that, whether that's holistic or a la carte pricing, that's just kind of a mechanism to monetize the asset. So we don't have a preference from how that happens other than we do like the certainty that comes with the MLAs because we believe that the best investor base for us is one that values certain. Because what we're trying to provide, as I mentioned earlier, is the best risk-adjusted return we possibly can and give a dividend yield that is very attractive, plus growth that is very attractive in a business that's growing and very stable. I think that's what we're trying to make that.

Makes sense. Okay, Dan, thank you. Thank you very much for the time. We're bumping up against the end here. Thank you, everybody, for joining and enjoy the rest of the presentations and meetings today. And thanks again, Dan. We look forward to seeing you in person.

Thanks, Tim. Thanks, Brendan. I appreciate it. Hope the rest of your conference goes really well.

Great. Thank you.

Thank you.