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

All right. Good afternoon, everybody. Welcome back. We're delighted to have Dan Schlanger here from Crown Castle. Welcome back, Dan. Appreciate your time today.

Great to be with you. Nice to see you again in person.

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You don't have that memorized yet?

I should. So it's been a long time since October of 2021, when you put out your guidance, but you've signed the T-Mobile master lease agreements, you've had some updated news here. So help us understand the kind of the key drivers for Crown Castle in 2022 and beyond.

Sure. Like typical, our drivers revolve around a couple of things. One is to increase the utilization of assets that we already own, which means on our tower business, we continue to add new equipment, new antennas, new lines in order to allow the -- our customers, the wireless carriers, to improve their network quality. And we get paid more as that happens. So we want to continue to add additional revenue to the existing assets we have. And then we want to add new assets, primarily through our fiber and small cell business that will allow us to build a business like that in the future. And we believe that given the overall dynamics at play in the U.S. with demand growing for -- data demand growing for somewhere between 30% to 40% per year, that the future of wireless networks will require density that is well beyond that which is available through towers only, which is what drove us into the small cell and fiber business. So we want to build assets like that, that give us access to the same dynamics of the business model, which are upfront capital that we spend to share that capital among multiple customers, to lower their total cost of implementation and operation, which is in essence why we're in business. So we want to do that on our existing assets, add more assets and do all of that profitably, while trying to control the costs. And that's generally what we look at in every year that we come in. What is really great about the year of 2022 is that we've started it with very favorable agreements that we signed. As we've talked about, we've added 50,000 new small cells in the last year or so. And we've signed -- to our backlog, sorry. Thank you for the clarification. And we've signed master lease agreements with most of our customers, our large customers on the wireless side, the tower side of the business, which sets us up really well to have good growth and good visibility for going into the future. And when we look from kind of a longer-term perspective of what 2022 looks like, especially on the tower side, the growth that we've seen over the course of the last couple of years has actually been really good. The tower business is a real great business because it just grows over and over again. So the next year, next year, next year, and you add a bunch of good years of growth together and it's a great business. But over the course of the last couple of years, we've seen a pretty significant increase in the new leasing activity that we see going on our towers because of all the activity our customers are going through. And that has led us to increase the leasing -- the core leasing that we have on our towers kind of 30% from '20 to '21, another 20% from '21 to '22, which puts 2022 at about 50% higher than the 5-year running average. And that's a substantial difference in a business like ours. So like I said, I think '22 was set up extremely well for us. And not only that, we are setting ourselves well -- ourselves up well for well beyond that, in addition, through our -- to the investments we're making in fiber and small cell.

Great. And I mean you've reiterated a number of times your long-term AFFO per share growth model and dividend growth model in the 7% to 8% range. But I think we had Verizon last week, talked about 2022 being the peak CapEx year. So we've certainly got some questions about what does that mean for the towers if their CapEx is coming off. I think we'll hear from AT&T on Friday that they're accelerating their CapEx. DISH is clearly in the middle of their build-out program. But what inning do you think we're in on that sort of a macro tower 5G build-out? You think we're still in the early to middle innings for you and for the industry?

I think from a 5G build-out overall, we're very early. There are lots of additional use cases that will require a new network like 5G. And what 5G will bring to all of us as consumers in the industry is a ubiquitous, very high-speed, very low latency network. And that will drive use cases in the future that we're not quite sure what they are yet. But it's -- we're at the early stages. These cycles typically last a decade or so. That's how long about how the 4G cycle had lasted of -- even when we look back to -- started in about 2014-ish, and our customers are still spending on 4G. So these are things that take a long time to play out. And 5G being kind of a new network that will allow a new way of working, we believe it could even be a longer cycle. And so I think we're very early on. But that's not to say that in the cycle that every year is better than the year before. That's not the way our business works. It doesn't grow up into the right all the time of incremental growth. We're consistently growing, but we're not consistently growing faster every year. But we do see that over that period of time of an upgrade, of a generation of the wireless network, that there is a tremendous amount of growth. And like I said, I think we're in the early stages of it right now. And what we've seen from our customers is it's very rare that all of our customers are very active all at the same time. So I think of it kind of -- as kind of a sine wave. Some of them go up at the same time others go down and it kind of evens itself out for us, which is why we're so comfortable in saying over a long period of time, we can grow 7% to 8% per year. That's not to say that we're going to grow 20% 1 year and then 0% to next year and average out. We think we can grow in that 7% to 8%. Or like we've done in the past couple of years, above that, because there's really steady growth in this business. And what is -- what's great about being the owner and operator of those assets is that steady growth allows us to have a long-term view of our investments, which is why we've been so excited about all the investments we're making on the small cell business that we've been making over the last decade or so is that it's now coming to where we can see the fruition of that and that the benefits that we can generate for our shareholders are coming more in the site with the agreements we've signed recently. But all of that just points to -- like I said earlier, it's a great business model, and we think that the underlying reason for it is to lower the overall cost of the network so that we all don't have to pay more. And I think that's good for us, it's good for our customers, it's good for consumers.

And presumably, the bills you're seeing today are mostly on the existing towers that the carriers have. But even before they go to small cells, over time, one would expect that they would continue to build out their -- that don't go into new towers that they haven't been on before. Are you seeing any evidence of that yet? I guess T-Mobile has talked about 10,000 new sites over time.

Yes. I just want to be clear on new sites. They're existing sites, but we're not building any to speak of. New for them but existing for us. What we would call it is a colocation or an amendment. Colocation would be a new site for the customer even though we already have it. An amendment would be where they already have equipment and they're adding more. And we're a little bit skewed to colocation right now more than we had been historically. Typically, it's about 50-50, the total activity. The revenue we generate is about 50-50 from colocation and amendment of new revenue. And we're seeing a little bit more than that right now, primarily because we have a new network being built by DISH. But we are seeing those. So the way that our customers work is when they go out and want to augment their network, they start with what they already know, which is the towers that are already on. It's less expensive and faster just to amend the current tower, add additional equipment to that tower and then utilize that tower more efficiently. And that takes less time, like I said. And it also -- they understand the network engineering a lot better because the tower exists. They know where the traffic is. They know how it all works out. And they don't have to do a lot of work to make that happen. Once they've run out of those opportunities, they then start colocating on towers they haven't yet been on and densifying their network because they can't just be on the towers that are already on because there's too much demand. And that shift from amendment activity to colocation activity happens over a period of time. And what's interesting is we're seeing that in a bigger picture way with the move from towers into small cells. So in that analogy, towers is more like the amendment where they already know where the towers are, they have a network understanding. They don't have to engineer a lot. They just are going to utilize towers to the extent they can. Towers remain the most cost-effective way to deploy spectrum. So they're going to use as many towers as they can, but once they kind of run out of that ability or to the extent that they can run on that ability effectively, there's still going to be more demand that needs to be served, and that's where small cells come in. And what we're seeing with the last year or so with 50,000 nodes being booked is that even in the midst of Verizon saying this is the peak year for CapEx, they signed 15,000 small cell nodes and saying, they know that after they're done with that tower, they have to be on small cells. And what -- that gives us a lot of confidence that the strategic choice we've made to add a fiber and small cell business to our overall portfolio is a very good one because that -- the next leg of spending will come through that small cell. So if you go back to not only to the customers, one customer spend while another one may not spend as much in that year and that evens out for us, they also have to make decisions between towers and small cells. And maybe one customer is really focused on towers when another is focused on small cells or vice versa. And again, for us, because we have both avenues of growth available to us, we think that, that adds to more stability of that -- of the growth rate for us over a longer period of time, and we can grow that 7% to 8% for the medium and to long term.

One of the things you did in the T-Mobile deal was to push out the churn. So if you can just talk about how that all came together and what was the -- can you -- how should we think about churn between now and was it '25 when you'll have the next big churn event for them?

Yes. What happened was when T-Mobile and Sprint merged, they had announced that they were going to consolidate the network, which we knew was coming. And we had shown in some of the disclosures we had that when T-Mobile and Sprint were colocated on a similar -- on one asset, the revenue coming from Sprint, we had laid that out. We had a big churn event that could have happened in 2023, and then we had disclosed that there was another one in 2028. So what we wanted to do was try -- and it's, obviously, from our perspective, we want to maintain as much of the revenue as possible, so minimize the churn. And to the extent the churn were to happen, we want to push it out as far as possible. That's what we want to do. Obviously, we are negotiating with another party who wants the opposite. They want as little revenue coming to us, which is cost to them, and they want to make it as fast as possible. So the negotiation had a lot to do with that. When is that churn going to happen? How much is it going to be? And what we ultimately agreed to was coming to an agreement that 2025 was going to be a year where most of the churn was going to happen, which pushed out from '23 and then pulled in a little from '28, which seems like a reasonable compromise. But we're also able to minimize that amount of churn overall by allowing that to happen because the timing, fortunately for us, is less important than the overall quantum because this is a very long-term business. So if it's 1 year versus the next year, that doesn't really impact the present value. What impacts it is how much revenue do you have going on for a long period of time. So we wanted to maximize that net present value. And what we came up with was concentrating the churn in 2025 and getting rid of those big events in '23 and '28. We think that was a really good trade for us, and it allows us to continue to grow our business with T-Mobile. And you can still see that we are growing the overall tower business in 2022 at the high end of what the industry -- our tower peers are showing, and we're going to be leading the pack again in tower growth. So it hasn't impacted us [ anything positively ] at this point. We think we made a good deal with T-Mobile. We think that they got something out of it as well or they wouldn't have agreed. And we think the relationship's in a really good spot because we were able to come up with what, to us, felt like a very good compromise and something that allows us to keep the majority of our revenue and the growth that we expect.

Great. And one of the consequences of signing these long-term deals is you're locking in a fixed price escalator over that time period. How do you assess inflation risk? You're obviously hedged with your ground rent in terms of your cost structure. But how do you think of inflation and how that goes into how you sign those deals and the overall impact on value creation?

Generally speaking, we think of stability and predictability as a highly valued asset for us, and we believe our investors as well. And therefore, we have not pushed hard into inflation-based escalators nor has the industry, overall, in the U.S. So we're completely in market with this to target about a 3% escalator within the contract terms, without having a lot of inflationary adjustments up or down. And that's something that we think is core to the value creation of the business because of 2 reasons. One, the churn profile of the business is usually between 1% to 2% of revenue per year. So with the escalator and churn, there's growth. More escalator than churn means there's growth, very little capital, which means that we can grow for a long time without having to spend money, which is unusual in most businesses. So we want that escalator to be there to be certain so that we don't have the potential that, that might turn upside down and you have less growth than escalator. The second reason is what you alluded to is that from an inflationary perspective, we don't see a lot of risk because our cost structure is also subject to basically a 3% escalator. The vast -- the biggest line item cost in our income statement on the tower side is ground rent. So we lease the land underneath our towers, that ground rent comes with 3% escalator. That is very similarly not tied to inflation. So we do not have a lot of cost pressure. So we believe we can grow the gross margin of our business without inflationary escalators. But maintaining that 3% escalator is important to us for the long-term value creation of the business. And we think that within the MLAs we've signed, we've kept that very consistent.

Great. And presumably on the services side, it's sort of a cost plus-type pricing model, is it? So that if you've got labor cost inflation there, you can have some pricing power on those deals?

It's either cost plus or even when it's a fixed revenue side of the business, it's a pretty short cycle. So even if we were to price of business today, get it done in a few months, we can then reprice it the next one with assuming the higher labor costs. So we're not subject to that inflationary labor pressure for very long. But most of it is cost plus, so we have both of those things going on at the same time. So we don't have a lot of margin pressure due to inflation.

Fixed wireless has been a hot topic at the conference so far. And certainly, in the last 6 months, it seems to have gone from sort of dead on arrival to being -- having a moment. And it'd be interesting to just -- you talked about the densification, but it seems like, I think, the amount of traffic that the fixed wireless customers consume should be pretty good for the tower and small cell business. So do you have a sense of how -- if they really do hit Verizon $4 million, $5 million, T-Mobile $7 million, $8 million, what that means for their networks and for your business? Or is that already reflecting some of your backlog?

I think it would be very positive for our business. Whether it's in our backlog or not, it would consume capacity on a tower at a much higher rate, to your point, than we do as individual consumers through our cell phones. And we think that 2 things will happen. One, it will consume a lot at first of a tower capacity. But over time, it is more likely, in our opinion, that fixed wireless access will be served by small cells than towers because it will be hyperlocal, where that -- where the spike in demand will be houses and neighborhoods. And if that were allowed to be served by the tower, a lot of the tower's capacity would be eaten up by that one house or that neighborhood that it would be available in and people took it up. And in order to relieve that pressure on the tower is a lot of what happens with small cells. And you build a small cell, put it really close to where all that demand is, and that tower can go back to serving its entire radius and the small cell can go serve what is that fixed wireless demand. And we believe that over time, that our small cell business will very much benefit from fixed wireless access. And we would love for them to meet and exceed all of their totals for that because what's happening is we're seeing competition both ways. We're seeing competition from the wireless companies in the cable, and we're seeing competition from cable into wireless. And all of that means more customers for our business. And when you're talking about these businesses that are competitive and competing on network quality that the way to make your network the best is to utilize the lowest cost implementation and operation of that network, which is outsourcing it to us because we can share it. And we just think that it just -- this entire -- the dynamic that's going on in the market now is very positive for us because we play a really good part. We can build out that network. We can do it for less money than they can do it for themselves. We can do it with less disruption to the communities in which we're going to provide the network because we dig up streets or put trucks in the middle of the road to build things, you only have to do that once instead of each company doing it themselves. And ultimately, we think we can do it faster because once we have it built, it doesn't take nearly as long -- once we have the network or system built, it doesn't take nearly as long to add another customer to it. When you add all those things together, we think we provide a significant value in the industry and more customers wanting it, more use cases needing a network is just -- it's nothing but good for us.

Do you have any good visibility into the infrastructure bill or the act, the opportunity there? Because it seems like to go to unserved areas, fiber may not be feasible. So again, fixed wireless may be appropriate. And I'm not sure if you're talking to people who are potentially looking at business cases around there, but could that be something important over the medium term?

I don't think we will directly access any of the money from the infrastructure bill. What I do think, though, is that we will secondarily access it. Our customers will get access to that money to allow them to build in areas they otherwise would not build, and then they will use us to make that build the most efficient as they possibly can. That's what I believe we'll -- that's the way we will have access to the infrastructure...

There might be some new customers?

Yes. And then on top of it, which is a good point, there are already new customers that have come to us saying, "Hey, we want access to that money. This is the type of network we want to build to provide access for broadband to these underserved communities. Can you help us?" Because they have no capacity to build for themselves. And especially when you're talking about fiber and small cells, we are clearly the market leader, and therefore, we get that call more than any other company will -- would. And we're seeing more of that recently than we had historically. It's a good -- potential next step for us is to have additional customers in that area.

Great. So we talked about the small cell backlog a couple of times. As we move forward into '23 and '24, you've said that you expect that to reaccelerate. I think there's been concern in the past about [ there would be permitting, the zoning ]. How do we get comfortable that you can kind of accelerate the build-out to, I don't know, ultimately double your and triple your current pacing?

To add numbers to that, in 2021, we built about 5,000 nodes. Our expectation is to build another 5,000 nodes in 2022. In 2023, our expectation is to build 10,000 plus, which is the doubling you spoke of. The confidence we have is that a lot of those nodes are already in process. They weren't necessarily the ones that we signed recently, the 50,000 between Verizon and T-Mobile that we signed recently. There's ones that have been in process for a long time. There are others that are colocation that don't take as long as new builds do. And we have a pretty good sense from project management of when nodes will go on air. So we feel pretty good about it, about meeting those targets. But that doesn't say that we figured out some way to short-circuit the zoning and permitting. It still takes 18 to 36 months to build a small cell from scratch. Most of that time is to get a municipality to tell us, yes, you can do that. That's the majority of the time. We have not found a silver bullet to work through that in 3 months and everything's fine. So that 10,000 plus is partly just rolling through backlog we already had in process and colocations that we may sign because those take much shorter. So where we can add -- like I was talking about at the very beginning, where we can add more revenue and more equipment to the assets we already own. It takes less time and we can make that happen by 2023, and we're very confident in that. What I think is good, though, is that even though it -- the 18 to 36 months is way too long, and it's a long time to get something built, and it's a long time for -- to force our customers to plan, it does force our customers to plan. And it was part of what we were talking about earlier is that even in the midst of the most tower activity that Verizon, say, they'll see or what we've seen in a long time as I was talking about the new leasing activity increasing, being 50% more than the last 5 years. During that period, we had 2 customers, Verizon and T-Mobile come to us and say, "Hey, we really need small cells." And they were looking out because they knew they needed to look out somewhere between 18 and 36 months because it takes that long to build a small cell. So they knew that at some point, if they were going to move from towers to small cells, they needed to get it done. And that gives a little bit more impetus than if it were a month process. And because we are good at this and because we have an experience and track record that we can point to, to give confidence to our customers that we can get things done, we believe we are the first call when they're looking out 18 to 36 months saying, "Hey, we would like to figure out what we can do going forward." And we believe that we've performed well enough to continue to be their preferred provider of small cells when they outsource. And that's -- we -- again, we believe that the outsourcing will continue to accelerate over time. So even though 18 to 36 months is too long and it's hard, on some level, it's a competitive advantage for us.

Sure. And it's just harder for others. And are you still winning the lion's share of 50% of the RFPs out there?

Yes. I mean we don't see anybody else announcing any small cells they've built, they've won over the last 13 or 14 months. So I would say our outsourced market share is higher than that right now. But that's not to say it will be forever. This is a good business that people will figure out how to compete very well in, we're just -- we're competing very well right now. And we're doing everything we can to convince our customers that using us is the best alternative that they have. And as long as we can keep convincing them that's the case, that means we're less expensive and we're faster than any other alternative, we think we can continue to win. So what is on our mind all the time is how do we get faster and cheaper.

You talked at the start of that leasing up the existing infrastructure and you've got this backlog. I think from time to time, you give us a -- sort of a snapshot of where the markets are, where they were, where they are. And if we sort of fast-forward a little bit, is a lot of this going to be existing customers putting more nodes on a given mile? Or is it a second customer coming in on that same fiber? Is there a lot of new fiber going to be built? And how do we characterize the backlog in terms of what that means for the lease-up?

It's a combination of the 2. But the majority of the 35,000 nodes that we signed with T-Mobile will be colocated on existing assets, which is a big number. So that gets...

That gets your ROIs to be up?

Yes, that should get our ROI up. But at the same time we do that, we're also building new assets as well. So it's...

Still in the major top 20 or somewhat?

Yes, for the most part, in the top 30 markets in the U.S., although we have expanded that to where some of our customers want to go in other markets. We are willing to build there as long as we see lease-up coming. But we're -- I said this before, if you think about how it started, our goal in any year is to lease up existing assets and build new assets. We want to do both at the same time. As long as we think the opportunity -- once we've built the new asset is that we can lease it up in the future. So that's exactly what's happening right now is we are building new and leasing up, both leasing up in towers, but more importantly, for the stage of the business that we're in, leasing up the small cell systems. And that gives us a tremendous amount of confidence that the future of this business is going to be great because all of the assets that we're building now will then become leased-up assets in the future, which drives the ROI up.

Great. The fiber business seems to be kind of steady, doing its thing. I mean in the past, it had grown a little bit faster. It seems to have leveled out at about 3% or so. Any updates there on the demand side? Or it seems like -- again, demand for fiber is pretty strong out there.

Demand for fiber is strong. There was some disruption because of COVID just in how the market worked, but we didn't see a huge impact one way or the other. We believe we'll grow in that 3% range, which is net of about high single digits churn. So gross revenue growth in the low teens area and 9% churn or so to get us to 3% net. What is different about our business is we have probably less gross growth and less churn than most fiber businesses because we are targeting a very specific niche in the market. We're targeting large, highly specialized customers, who want their own network or a piece of a very robust network. So we're going after financial services and health care and government agencies more than we are trying to go to small and medium businesses or homes because that's more our strength. And because we have the asset base that we're building for small cells, we have the asset base that we can allow for that business, which is a little different. Instead of running one strand of fiber and you put as much on it as possible, we can actually give people dark fiber or significant portions of the lit fiber. And that allows them to run their own networks. And that's just a different business. It's a stickier business that we think demands a little bit higher customer service and a little bit higher engineering capabilities, and that's really the market we're going after, which is why it has been more stable than most.

Great. So you've obviously got a lot of investment opportunities there. From time to time, Crown Castle comes up in newspaper articles about this M&A deal or that M&A deal, just to update us on your priorities. You did a lot of fiber deals a few years ago and you've been fairly quiet since then and stayed within a U.S.-centric focus. What's the latest?

Yes. I think you wrapped it up pretty well there. We're going to be U.S.-focused because we think that is -- the U.S. is best market for wireless infrastructure ownership in the world, the most growth with the lowest risk given that we're a U.S.-based company. We don't see a tremendous amount of M&A. We would look at developed market towers. We do look at developed market towers. But given the returns that we see and the prices being paid, we don't think they compete well for our capital. And we don't see a lot of M&A in the U.S. because we look for very specific fiber characteristics, very -- mostly in metro areas, top 30 markets like you mentioned. Density of that fiber under a lot of the streets already existing and then the high-capacity fiber with lots of strands that we can use for small cells. We still see a lot of that out there, so we think we're going to be able to build more than we're going to buy. And we think that's great because it gives us an opportunity to generate a great return over time. So our capital allocation priorities are invest in the business we have, build the new assets in the small cell business that we think are the right assets to build and then continue to return money to our shareholders through a dividend that is funded by the operating cash flow of the business.

Great. Dan, thank you so much for your time today. [ Really appreciate it. ]

Thanks, Simon. It was good seeing you.

Yes, likewise.