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

Okay. Good morning, everybody. Welcome to the Goldman Sachs Communacopia + Technology Conference. My name is Jim Schneider. I'm the telecom analyst here at Goldman Sachs. And it's my pleasure to welcome Crown Castle CFO, Dan Schlanger. Thanks for being here, Dan.

Thanks very much for having me. It's good to see you.

Maybe just starting at the top level with some strategic questions. There's been a lot of change at Crown Castle over the last year. You're in the midst of a strategic review of your fiber and small cell business. Can you maybe give us investors an update if any, on where you stand with that process today.

Yes. I agree with your opening statement. There have been a lot of changes. And I can't give much of an update on a strategic review just because, until we have something to talk about, there's really not much to talk about. What I can tell you is generally what we're thinking through in terms of why we are where we are and what we're ultimately trying to make happen. We have spent the last few decades, putting together a set of assets that we believe are important in the delivery of network and digital infrastructure in the U.S. Obviously, for us, that started with Towers. But we had looked out over time in seeing that there was a tremendous opportunity that we thought was coming in trying to densify the network on behalf of our customers, by building out small cells, which are just shorter towers, but it can be pushed closer together than towers typically can. And in densely populated markets, we thought that the amount of data that was going to be trafficked over the network was going to overwhelm the number of towers that you can build in those markets. And therefore, the small cell opportunity was one to densify in those markets. And we thought it was a very similar business model to Towers. And therefore, we started to buy and build assets that supported our small cell business. That included the connectivity of those small cells to each other and back to the network via fiber optic cable, which led us down a path of -- to what we call fiber solutions, it was known as the enterprise fiber market because you needed to own the fiber optic cable and you pass buildings and enterprises and then it would increase the revenue and returns on the same asset by going in and serving those customers as well as the wireless customers. We still believe that is a very good option going forward and believe that there's an opportunity for us to make a significant return on the investments we've made over time but are undergoing a strategic review to try to figure out if that set of assets is better together or separately. So is it better for us as Crown Castle to own all of those things? Or is it better for us as Crown Castle to own portions of them that might go together and others that don't. And that's exactly where we are. We're trying to figure that out currently. As part of that review, we started with an operating review of the small cell and fiber business. And through that process, identified several changes that we thought would be prudent regardless of whether we maintain the ownership of all the assets or did in our fiber solutions and small cell business. Those changes included increasing the underwriting requirements for new build and therefore, trying to reduce the capital intensity for the same growth that we had done historically. And historically, what we had aimed for, because of the thesis that we had that small cells would be a very good opportunity going forward, was to build out fiber optic cabling throughout the markets, the top 30 markets, basically, that we thought were going to be the quickest to see small cell activity. And we did that both in terms of what we would call anchor build or greenfield build small cell systems or building to locations that have enterprises, buildings, consumers, that were not on our network that were far away from our network, so we had to build new fiber. And the thought process being, new fiber in the markets that we think will support small cells is a good thing to have because ultimately, that fiber will be used for those small cells. As part of the operating review, we determined that we have a sufficient footprint at this point in most of those markets to allow us a period where we can start focusing much more on what we call on-net or near-net opportunities, those that do not require substantial capital and substantial new fiber build to go after. And in so doing, we significantly reduced the amount of capital in our plan for 2024. We had to -- because we stopped -- in our planning process stopped building as much fiber as we thought we would when we gave guidance late last year for 2024. And in conjunction with that had a reduction in force because if you have less work to do, you need less people to do it. So we've got our cost structure in line as well. And therefore, we generally maintained our guidance, even though we took capital down pretty substantially, which when you generally maintain your guidance and keep capital -- take capital down, that means returns go up and that's what we were going for as to show better returns. So the operating review of our fiber and small cell business came out with the idea that we could get similar growth, what we think will return to 3% per year revenue growth on the fiber solutions side of our business and 10% plus on the small cell side of our business but spending substantially less money. And those actions we have taken. So we announced them in June. We have taken them. We are through them. And we are at the point where we are seeing the impact of those changes on our business where we do have less capital, and we're seeing how much opportunity we have on-net, near-net that allows us to continue to grow. We believe the second half of the year in the Fiber Solutions business will be lower than our 3% target because we think the disruption that it causes the sales force to change as much as we changed at one time, we'll likely reduce efficiency and productivity, but we'll be back to a long-term growth rate at some point that's closer to 3% that we've targeted historically. But given all that, we think we're in a very good position to make the decision I started with, which is what should the businesses that we own belong together and which would be better separated and under ownership different than it would be today. And the thought process is, anything is on the table. And we are -- our Board is currently engaged in trying to determine what the best option is going forward for that ownership structure. And like I said, can't really update it until we have something to update.

And it's helpful. Then as you kind of determine which piece of business you want to keep and how much of them. What are the most [ important ] factors that weigh into those decisions in terms of your overall calculus? Meaning, is it all about maximizing NPV today, net present value of the assets? Or is it also about kind of preserving kind of time optionality of growth or preserving the maximum potential growth options available to you?

It's a very good question. And it is one that I think every public company struggles with on some level, which is how do you continue to drive quarterly results and position yourself for 5, 10 years of value creation. That's always a difficult balance, is what time frame are you looking at? Our Board is focused on generating what they believe will be the best shareholder value outcome they possibly can. And that includes the balance exactly what you said, of what is going to happen in the near term? What is the present value? What do we think the near-term stock price reaction will be? What is the present value reaction going to be? And the present value obviously has some component of what the future growth is in order to determine what the long-term cash flows are discounted back to today, you got to have some view of what those long-term cash flows are. I think that, that balance is exactly one of the things that Board is looking into right now. And it's easy to say we want to create the most shareholder value we can, and it's hard to pinpoint exactly what creates that because there are lots of people who have different views at that point. One of the inputs into that conversation has been, what do our investors want to see as well. So we ask the question a lot of our investors of what do you think as an investor would be the best outcome. And if there are 5 people in the room, you get at least 3 opinions on that point. And over time, a single investor changes their opinion. And I believe as well they should, or they wouldn't be very long for their job. If they kept their opinion the same, even though the facts change, they wouldn't be able to make money. So not only do you get different opinions among investors, you get different opinions within the same investor. Trying to parse through that is hard because sentiment does change and sentiment does matter. It's not the only thing that drives value, but perception does drive value. So I think our Board is rightfully very engaged, very informed and very thoughtful about what the next step might be, which is why they have left all the options open. They don't want to foreclose any option until we figured out what exactly we want to go do. And I think it's been a very good process for us. I think it's healthy for any company to go through a portfolio review. And I think that it has been healthy for us to go through the operating review, which resulted in what I think are very good changes for our business and go through a strategic review to figure out what the businesses that go together should stay together. Those are healthy things to do, and I'm excited to see where they end up.

Let me articulate one possible opinion, which is kind of the big view I have, which is if you've got tower business domestically that's gradually slowing if by no other reason then just scale of the overall business over time, small cells provide optionality for kind of future growth. So I guess my point is if you were to say, hey, we're going to sell the entire business, how should investors think about the growth rate of the remaining business?

Yes. Towers is a great business. And we love it. I love the Tower business. I think it's a fantastic business to be a part of. It has been a wonderful place for me to have been able to work for a fair number of years now. And as I look at what the reason -- one of the reasons the Tower business is such a good business is, although there are cycles, there are ups and downs, and we're in the middle of one right now, it's not a volatile business. What we typically see is the period of time that is the best time for Towers is one, when a generational upgrade happens in the network, when we go from 3G to 4G or 4G to 5G, we're seeing that now. The first thing that we see when those generational upgrades happen is a big wave of activity that results in a lot of growth for the tower companies. It happened in the very early stages of 4G. It happened in the early stage of 5G from 2020 to 2022. Our growth was 6% to 6.5% a year. And then there's a down dip with that wave being done, which is why our customers are basically focusing on getting that generational upgrade in the hands of us as consumers, so we feel the benefit. And they do that really quickly and then they come down to what is more steady-state growth, steady state investment in the network, which is growth for us. We are in that kind of steady stage growth part of the curve right now, and we're -- our guidance for 2024 is we will grow our business at 4.5% at the revenue line in 2024 for Towers, which is actually higher than what we did in 4G at a similar stage in the maturation cycle. So we've been able to kind of reduce the low end and not cut off the high end because I think 5G just -- it requires more investment because there's more data that has to be moved and more people that are using phones and all of that requires more investment than it did in 4G. And what happens for us is that now the 4.5% growth is in there, we believe that over the course of the next several years through 2027, we will be able to grow mid-single digits, 5-ish percent, excluding the impact of Sprint churn, which I can get into in a second. But excluding the impact of -- in 2025, we have Sprint churn. And excluding that, we think we can grow around 5% through 2027. That's a great business, a business that our size and scope growing at 5%, that has tremendous operating leverage because in that business, one of the other reasons that Towers is such a great business is that with additional revenue comes very little, if any, additional cost. Adding a piece of equipment to a tower that already exists, we don't have incremental costs. The tower exists, we have to maintain it, whether there's stuff up there or not. Put another thing on there, we make more money. It doesn't typically cost capital for us. If it does, most of that capital is reimbursed. So the incremental returns are incredible, and the incremental operating leverage is very good. So I would say that, that mid-single-digit growth is a very good place to be, and we can drive very good bottom line growth through that period on a -- if it were to be a tower business. The other time, it's great to be a tower business is when our customers have spectrum to deploy and they feel competitive pressure on network quality. Right now, our customers have spectrum to deploy. So Verizon, AT&T, T-Mobile and DISH, each has a tremendous amount of spectrum they've acquired over the course of the last several years. And it's been somewhat deployed, not fully at this point. And what we see is -- the question becomes where is the network quality competition coming in? And you can see that impact in the amount of churn in our customers' business. In the last couple of years, that churn has been lower than historically has been the case. We believe that will change as people get new phones, they start to look for other options. So the iPhone coming out is helpful. It always is. And it highlights the competitive nature that our carrier customers have to go through to keep us as customers. If you have a worse network than your friends, you're likely at some point, going to go on your friend's network. It's always frustrating to be walking down the street with somebody and they get service and you don't. And so it starts to creep in and you make a change at some point. That drives better investment from our customers because they want that network quality to improve and it drives good outcomes for Tower business. I believe that we're -- we have a setup like that, that's available to us as a Tower business because the spectrum is out there and our customers are going to compete. The other thing I would mention though is from my understanding of the business and my own personal experiences, there's always a call that Tower growth is going to slow and that Towers is going to be a worse business in the future than it has been in the past. I think that happened in 1999. I think that happened in 2004. I think it happened in 2008. I think it happened in 2012. It just -- and I'm just picking those numbers. And it happened all the way the Tower business has grown up, because we always have a hard time thinking what the next thing is going to be to drive incremental data into the network. And we always think that it's just more of what we're doing today, which is great and is growing the network -- the amount of data being traffic over the network, 20% to 30% a year right now. But we always see, oh, that's going to end. People aren't going to watch any more videos than they are going to watch at some point. And it always discounts, there's something else out there. I don't know what it is. That's not my point. It actually is not our job as an infrastructure provider to know what that demand is. But I firmly believe there will be something that is more than what we do now with our connectivity to information. And I believe that there's always been a discount for the Tower business. It's just -- at some point, it's not going to grow anymore because -- at the very beginning of it, was everybody is going to have a phone and once everybody has a phone, there will be no more growth. Because nobody at the time that everybody had a phone saw that data was going to overwhelm voice as the predominant driver of traffic over the network. Those type of shifts happen. Nobody saw people using their phones to run their lives or watch videos or make videos and upload them. Those were all things that people couldn't have imagined. And I think that, that type of technological progress will continue to happen and drive Tower growth for a long time.

Fair enough. Maybe I could just kind of pick on something you said, which is kind of like people always sort of just extrapolate the next thing in point. So right now, like I think leasing activity is subdued, I think it's fair to say. And I think it's probably the case for the small cell business and fiber business and in general, to some extent, just from a cyclical perspective. So I guess, like -- I mean I could also make the devil's advocate argument like, that could be the worst time to actually dispose the business when growth prospects, if they've bottomed out effectively and can only improve from here, that's exactly when you wouldn't want to sell. Maybe just give us maybe kind of your view on that piece. But in the case that you actually did decide to dispose of the fiber business at least, is there a scenario where you could imagine kind of continuing to build small cells and leasing back fiber from somebody else? And do those returns pencil.

So I'll take those in the order you asked. We, as the Board, has an understanding of what the value of our assets is. And they will make a determination of, is this a good time or not? And what [ isn't ] a good time to do. I can't tell you what that determination is as we sit today. I think part of what you talked about is part of how I framed it earlier of sentiment, also has some impact. So sentiment is based on what the most -- the kind of the general consensus is around growth prospects, return prospects. And I believe that there is some benefit in how much activity there's been around fiber assets in general recently that has probably made people think that they are good assets to own. That over time, the amount of information that is going to be carried over those fiber systems will ultimately increase and that's something that could drive value for the owner of the systems. And we are that owner. And if somebody wants to own it, they would have to give us commensurate value to do so. The second part of the question is part of what we're trying to answer is which businesses go together? One is the idea that you brought up between small cells and fiber solutions. Do they need to be together? I would answer that, first, with, operationally, we can separate them. Right now, we run them as a co-mingled operation because it's the most efficient thing to do. But there's nothing that would stop us. I'll use an example. This isn't true, but I think it makes the point. We have a network operations center. We have one of them that runs both small cells and fiber. We might need 2 of those. But that's doable. Like that's -- there's nothing holding us back from that. So I think we can separate the operational aspects of fiber and small cells, fiber solutions and small cells. And that might mean that one company -- one of those 2 separated entity owns the fiber and leases it back or it might be that we split the fiber and say each owns what they need. Those are all things that we can decide based on what we think is the best option. So I think we can separate them. I think the harder question is, should we? Because just because we can, doesn't mean it's the right thing to do. There was a reason we put those assets together, which was, as I articulated earlier, it's the same underlying core asset of fiber, and we're trying to put as many revenue streams on it as possible in order to get the best return as possible. Whether we should break up those 2 revenue streams and let them be separate is a good question that needs to be answered and that's exactly what we're going through. So yes, we can. Should we? I don't know. How we would do it? We'll figure it out.

Okay. Fair enough. Maybe let's just talk about your U.S. business a little bit. And specifically, there's been some rumors in the market about a few tower portfolios that might be for sale or may not be for sale. Maybe just kind of give us an update on how you're thinking about your strategy for expanding your U.S. Tower footprint? Talk about kind of your view on public versus private valuations in the space. And I guess kind of what are the ways you would seek to ideally kind of expand that footprint?

Yes. Like I said earlier, we love the Tower business and would love to expand our footprint in the U.S. The issue that has held us back is price. We have a view of what the growth rate is for those assets that are being sold and have been sold in the U.S. over time. When we look at that growth, we have not seen sufficient amount to justify the prices being paid to generate a return that would attract our capital. I don't unfortunately see that changing tremendously right now. As you pointed out, private market multiples have been above public market multiples in the Tower business for as long as I've been around, which is 8 years, and for as long as anybody I had ever talked to has been around, which is the history of the business, for some reason, private investors have been able to value the long-term growth prospects of the business higher than public market investors have. But that hasn't precluded companies that are our peers from buying U.S.-based towers. There are times when you see an opportunity that you can bring specific value to, that you're -- a public company is able to pay more than private companies are. That has happened, and I believe it will happen over time. But as a general rule, we have not competed well because we have not seen a return at the prices being paid. You can assume that any type of asset that has been rumored or ultimately sold, we've been talked to about, because we're one of the 2 largest tower companies in the U.S., it would be weird not to talk to us. And so we know about them. We just sometimes choose not to pursue them. So the growth is not -- the growth in our business is not predicated on ensuring that we have more towers tomorrow than we do today. The growth is, utilizing the towers we have for more activity than what has been in the past. And that's exactly what happens when the data -- wireless data demand continues to grow in the U.S. Having said all of that, I would love to buy towers in the U.S. It will be great. as long as it's a good return, we'd be all over it. We would buy towers in developed countries across the world. I don't think we would ever go into emerging markets, but developed countries make a lot of sense. But again, the price is being paid in some of these transactions. We understand, we believe what the growth is in those markets for those towers, and we just can't justify the price. And when you're in a situation where you can't justify the price, you have to stay away. There's discipline there to not doing something, even though it looks like growth. Yes.

Yes. Fair. Maybe just kind of talking about the growth strategy for the company or the overall algorithm. I think one of the things that's made it a little harder for investors over the past 18 months or so, is just kind of the T-Mobile-Sprint merger and given how everyone is recognizing churn effects over time in different ways, it made hard -- the comparability has been hard. Maybe just kind of help us understand, I think you already started this, once we get out from under this or excluding that medium to long term, how you think of the kind of the core growth in your business. What's the algorithm for both revenue and sort of EBITDA and AFFO growth?

Sure. When T-Mobile and Sprint merged, T-Mobile underwent a process to determine what kind of synergies they can get out of -- basically, the easiest way to think about it is a site that had both T-Mobile and Sprint on it. They took the Sprint stuff off. That's what they wanted to do. That impacted us in our small cell business where we have recognized churn in our small cell business over the course of the last couple of years based on that activity because a lot of the Sprint sites were cited where our T-Mobile already had sites. That's just the way Sprint did some of their network planning. And we've recognized most of that churn at this point. And then we knew that T-Mobile is going to do the same thing on Tower. So we negotiated with them an outcome that we thought was favorable to us from an NPV standpoint that resulted in less churn, pushed out a little bit from what it could have happened. So that merger happened. And we pushed out the churn until the beginning of 2025. Just from a cash flow perspective, that's a good idea. You get the revenue for as long as possible. And we think we limited the churn that we saw on our assets. But that means in 2025, we expect about $200 million of revenue loss at the beginning of the year as part of that negotiated settlement. And after that, we believe that the churn associated with the Sprint network decommissioning will just be part of what we believe is long-term churn in our Tower business of 1% to 2% of revenue per year. Again, a reason that the tower business is so good is that's very little churn in any business, 1% to 2% of revenue in a year is small. And we believe that, that will encapsulate everything that T-Mobile and Sprint will have to do going forward. We have been on the low end of that churn and believe that there's a lot of reasons that 1% seems good and reasonable and 2% would be high in the year. So somewhere in that range is what I would say churn is. Like I said earlier, somewhere in the 5% range is what I think revenue growth is. So we think that the gross growth -- that's net of churn. So the gross growth is somewhere in the 6% to 6.5% range and then you have 1%, 1.5% churn and you get down to the 5%. Like I said, I think that's a great business because part of that growth is just built-in escalators where we increased the revenue that we have on our assets by about 3% per year. And part of it is the incremental activity that happens in order to expand the network. But if our escalators are 3%, which they are, and we have 1% to 2% churn, we grow more than return and our maintenance capital is less than 1% of revenue. And so we grow our cash flows on the tower business without really doing anything. And that's why it's such a powerful business model, that the perpetuity growth rate even after maintenance capital is positive, even if you don't assume there's revenue that there's activity growth, which there will be, because we continue to use our phones more. That's a really good model and a very good place to be going forward is to have the core of our value, which more than 70% of our value, I believe, is in that tower business. The core of our value is generated out of a business model that's one of the better business models that I've seen in my career. So I think it's just a -- it's a good place to be. It allows us to have the conversations like we're having of figuring out whether these other businesses make sense or not and not having to do it under distress, we're not by any stretch, distressed. So we'll make a good decision. We'll live with that decision on the strategic review, and we will have the tower business as the underpinning of our value going forward. And one of the things that I think is unfortunate about all the change that you alluded to in your first question, at Crown Castle, is so much time and effort and energy is focused on the strategic review and on the fiber and small cell side of our business, I think we have distracted investors away from the core of our business. And that's a shame, because the core of our business is a great business.

Just want to ask you one more question about the domestic business. U.S. government doesn't appear to have any spectrum auctions lined up imminently. Based on the way you're talking with carriers, how is that impacting their plan for investing in the business? I mean, is there a view that they're just going to kind of spread ratably and then kind of that changes when if they get new spectrum as they did with C-band in other words? Or do you think you're going to actually see some accelerated spending to maybe densify networks, do more splitting of cells to sort of go at it that way instead?

Yes, that's a question for them. I can't speak on behalf of our customers about how they're going to go about their network spend. What I can say is, a limited amount of spectrum, which I agree with your statement. The U.S. government doesn't have an auction really planned. There isn't a lot that people are expecting over time, that limited spectrum leads to more densification. There's only 3 ways that network capacity can be increased. You utilize different spectrum, new spectrum, you utilize the spectrum you already have more efficiently or you add the spectrum you already have to more sites. Those are the only 3 ways that it works. New spectrum and more sites are great for our business because that's just more revenue for us, because that new spectrum is more activity -- more antennas on the sites we already own. New sites are either sites that towers that a customer isn't already owned that they go to or it's small cells. And we think that because there's a limited amount of spectrum coming to market, our customers are going to have to utilize the spectrum they have on more sites. The only outcome left. And our customers are very good at capital allocation. So the first move they make is to utilize the sites they already own and add more equipment to them. So those are more sites still or more spectrum in certain cases, but it's the same site. That's the first thing they do because they know the site, they know the propagation characteristics, the networks built the way it's built. So it's cheaper and faster just to go in what we would call an amendment. The addition of equipment to an already existing segment. The second thing they do is then move that same spectrum to a new site, which is typically towers, because towers are still the most efficient way to deliver additional capacity to us as consumers over a broad swath of population and geography. And the last thing we believe they do is go to small cells, which is taking that spectrum and moving it closer together so it can be utilized more and more and more and more. That's more expensive and harder and less known to our customers. So they are less likely to jump into it as quickly. That's exactly what we saw. We saw as more spectrum came to market with the C-band auction and with T-Mobile taking over the Sprint spectrum, that more spectrum led to a significant increase in the tower activity but a decrease in a slowdown in our small cell activity. Understandable, we have now, like I said, reacted by saying, well, just won't build a lot of new small cells. We'll put them where we already exist, where our small cell systems already exist and still generate relatively good growth. We'll grow our small cell business low double digits this year and going forward. That's what we think the near-term growth prospect looks like. That's significantly more than we or our peers are growing our tower businesses. So like you said, I think it does give us an avenue for differentiated growth in the U.S. and the lack of spectrum in my opinion, leads to more small cells faster because they can't go back and do the thing they like to do, which is take the spectrum that has, towers they already have. They have to take the spectrum they have and densify it and that has to end up in small cells, which I think will ultimately be a good thing for us.

Great. I've got a bunch of questions that I would love to get to. Unfortunately, we're just about out our time, but that was a great tour to force of the business. So thanks very much, Dan, for being with us today.

Thanks very much. Appreciate all the time, and good luck for the conference.

Thanks so much.

Thanks.