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

Great. I think we're going to get started now. Thanks, everyone, for coming to our conference. I'm Batya Levi with the communications team at UBS. And our next speakers are Chris Hillabrant, President and CEO; and Sunit Patel, CFO of Crown Castle. Thank you so much for joining us. Great.

Thanks for having us.

Thank you. You both have a long tenure in the space in infrastructure, wireless, telecom. And maybe, Chris, you could start us off with what brought you to Crown Castle? And how do you think the company is positioned as we go to the next year?

Yes. Well, first of all, let me say Crown is a great company. And so a career that spans over 30 years, first chapter of my career working in the operator space. I work for Verizon predecessor PrimeCo, later years at T-Mobile. I went in the OEM space. I worked with Ericsson, I worked with Samsung. And then over the last 6, 7 years, I've been here in the tower space. And I have to say, both as a former customer and now as CEO of Crown is, to me, Crown is one of those great telecom companies here in the U.S. So when the opportunity came up to come and apply for the job and went over the Board, it was a no-brainer for me. It's a great company with a great future ahead. In terms of our focus areas and looking at where we're headed as a company, as you know, we're in the midst of a fairly major transaction. So the first priority for myself and Sunit and the rest of the team is really how do we execute that sale. The good news is we're well on track with our guidance of having that complete by the end of first half '26. And now that the government is back open, we're seeing good progress there. The second is really around relaunching Crown. It's Crown 2.0, the pure-play U.S.-focused tower company that is best-in-class in the industry. And so a lot of the time and effort that we have as a leadership team is focused in on both defining that and executing it. And then I think third is about trying to figure out how we can drive additional efficiencies out of the organization. And so the good news is having recently come as a CEO of a European tower company, many of the exact same types of projects that I've been focused on in Europe are the exact types of projects that we're doing here at Crown. And the good news is that the team has already started this journey. We're well on our way, even though there's still miles and miles to go.

Sunit is pretty good at that.

Yes.

Maybe one topic that has come up more recently is one of your tenants, DISH and the litigation around that. So can you just remind us the exposure and then why you decided to litigate? And how should we think about the process from here on?

Yes, I'll start out, and then I think Sunit can add some additional details. But -- so DISH representative of approximately 5% of our overall revenues, continues to pay their bills on time, of which we're thankful, has elected to go down a route whereby they're selling their spectrum assets and attempting to perhaps get out of the obligations that they have signed. As contracts go, we feel like we have a great contract with them, and it runs through 2026.

2036.

Sorry, '36. Thank you. Thank you. Through 2036. And it's something where we think is legally defensible. We recently elected to file a lawsuit in order to fully protect our rights. And so as you would have seen from the filing, the argument around a force majeure is something that we and our legal team feels really doesn't hold water. So at the end of the day, we have a good contract. We expect them to pay for that contract. If in the future, there was an opportunity to go and have a negotiated settlement. I've heard that others have talked about this in the space. For us, it would have to be something that made good sense for ourselves and our shareholders. We're not looking to let them out of their obligations, but understand that the market would love the surety of putting this behind us ultimately.

Right. And the question comes up, 5% of your revenues in terms of the organic revenues, like has DISH been growing from '24 to '25? And throughout the contract, is there sort of like a run rate level? Or does it keep going?

Yes. So I mean, as you know, DISH started from 0 just a number of years ago. So they have been growing. But our contract with them is pretty secure in terms of the amounts that they owe us. It's not dependent on their deployment per se. So that's why it's -- from our perspective, it's a fixed payment stream, if you like, or determined payment stream. And like we have this year, when we talk about next year's guidance when we report fourth quarter, we'll talk about how much DISH revenue is there.

Makes sense. Maybe, Chris, your prior experience with some of the other tower operators and now just looking at Crown and the U.S. market, can you talk a little bit about your maybe initial findings on what are some similarities, some differences, opportunities with the U.S. tower portfolio?

You're talking about specifically Europe or my experience earlier in the U.S. at other tower companies?

A little bit of both.

Okay. So maybe start off with the differences between the European market and the U.S. market. I think it comes as no surprise to say the European telco operator market is very fragmented. Lots of very small operators and even the very large operators have recently been looking at selling off portions of their portfolio to raise additional capital to private equity. So it's a very dynamic marketplace. In some of the markets in Western Europe, it's hypercompetitive with tower companies having overbuilt other tower companies and operators seeking to leverage and to get the lowest possible price from their OpEx. The other thing is that while this is truly a scale business, and I think the U.S. tower cos have really coalesced kind of the big 3.5 or big 4 here in the U.S., it remains very fragmented in Europe. And therefore, the need to ultimately drive scale economics in terms of how those businesses are run, supply chain, operational processes, tools, organizational structure are all still far earlier having just recently exited from being operator-owned assets in the European market. Now if you contrast that to the American market, one that is mature, has very large players, has some very small players that are kind of playing in the new tower build arena. Here, in general, I'd say we're further along the continuum in terms of the maturity of our processes, the tools. But even still, it's representing a great opportunity for us. And again, one of the focuses that I have as a new CEO of really going with a fine-tooth comb over the organization, looking at how we do business with our customers to find ways to offer better value. And part of that includes going out to meet with our customers, hearing from them on what their unmet needs are and what role Crown can play in helping them to meet those needs. One thing that has been consistent so far in the meetings that I've had is they're incredibly excited to have a former operator now running a tower company that understands their business and is willing to help shape a product -- series of product offerings that best meets their needs in the future.

In terms of maybe as you look at a public tower company and the types of contracts you have with the incumbent wireless operators or potential new tenants and contrasting that to some of the private tower companies, are there distinctive sort of are there distinctions that matter for the carrier that choose you versus some of the other smaller ones?

I would say the smaller and having worked previously at Tillman, having worked for a smaller tower operator is they have seized probably the lion's share of new tower development. But the types of contracts that you see and that I've seen both operating in that space and seeing others in that space tend to be a different type of model. It's a all-you-can-eat versus, say, an amendment-specific type site license on a site-by-site basis. The financial modeling that has gone into place because they don't have the scrutiny of the public markets, I think, is far more questionable in terms of whether these things make sense from the long term. And what's more is, if you look at the history, particularly over the last 10 years is that there's been a phenomenon whereby the smaller tower operators are typically building the towers and then in many cases, then turning around selling them out to the big 3 or others. And so there is some form of market rationalization where they come back in and our average is part of a larger portfolio. But I'm not thrilled with the economics. And in the case of Crown, our intent is to have a very disciplined approach to that CapEx investment to make sure that the deals that we do make sense, that they're accretive and not dilutive to our business.

Right. I think Verizon has mentioned this that they would like to diversify their tower portfolio and potentially give new business to some of the smaller private names. In that, is the opportunity for that next level of carrier activity going away from the public tower companies to the others?

I don't think so. I think that the quality of Crown's portfolio and quite frankly, for many of the established tower operators is really good, consistent. They're located in the urban and suburban areas where most of the capacity growth and the demand for investing in incremental in-building coverage will differentiate one operator versus the other. And so I think we're excited to see the leasing activity that we've had. It's been very steady. And we have great partnerships with our customers. That said, this is a marketplace which allows for growth outside of the big 3.5 with a lot of other companies that will fulfill other niches like maybe Verizon is looking to do here.

Right. Okay. And let's talk a little bit about the U.S. carrier activity and demand, maybe sort of like taking a view near term and a little bit of midterm. We are -- investors are concerned that with more spectrum held by the carriers, they're going to take a pause. First, maybe before that, where are we in terms of the 5G deployment? Do you expect some pause? And let's talk about if we will see an inflection.

Look, it's a good question. To be fair, we're probably in the middle of that 5G deployment cycle. If you think in terms of most of these technology waves are roughly a decade long, give or take, that the first wave of getting low-band 5G out and mid-band 5G out for capacity has occurred in many cases. But the fact of the matter is, as an example, the DISH sale of additional spectrum to AT&T, and there's a rumor that eventually, in addition to SpaceX, maybe Verizon is a player here. In general, for the industry, when more spectrum is deployed, it means that more radios are being placed out on towers, more antennas are being placed out on towers. And again, depending on the MLA with the individual operator, in general, this is a good tailwind for the industry overall in innovation. I think the second piece of this beyond additional spectrum deployment, if you look at data growth in the industry as a whole, one of the really eye-opening stats that I read was, I think, CTIA, which is the Operator Industry Association, was something like 30% compound growth per year. In fact, just last year, it was over 32 trillion gigabytes of data growth, the all-time record in last year and on top of 30% the prior 2 years. It doesn't appear as if data demand is in any way starting to flatten out or to be lowered, which, again, is a tailwind as carriers seek to deploy that capacity to stay ahead of capacity constraints as they look at new technologies like fixed wireless as a new way to monetize that spectrum. It's a general good augur for the industry as a whole that continued demand will be in place.

The -- I guess in the past, the thought was that any time the carriers touch the tower to deploy new spectrum, it will be good for towers. And now there is maybe potentially if it's adjacent spectrum, you can just use the software upgrade and the carrier doesn't have to pay something incremental. With these holistic MLAs, maybe more of the flexibility went towards the carriers. What are your...

So the OEMs like Nokia, like Samsung, like Ericsson, they're developing radio kit, which has the ability to expand through software, the ability to activate additional spectrum, which is true. That's -- there's no dispute in that. But the reality is the more spectrum is put into play and the additional capacity as people discover, hey, before I didn't have coverage in doors, now I do or suddenly, I couldn't really download applications. Now I can do that and all-you-can-eat customer as all the -- as most of the operators' customers are in the U.S. is then it changes behaviors. And to me, a good example to give you a parallel here is imagine if you have a morning commute every day, driving you from, say, New Jersey into New York. And every day, there's a known coverage gap, you know you're going to drop a call in a place. What do you do? You hang up the phone every single day when you get to that spot and you say, hold on, I'll call you back in a second. And so to the network operator that is looking at how that site performs, they're like, I don't see a problem. I don't have a drop call problem because the user is actively self-selecting and ending the call. But then as soon as you fix it, then suddenly people realize, oh, I can actually place a call here. I'm starting to use it. It changes the behavior of the users. And as more spectrum is put into play, the customer experience goes from like okay to suddenly a great experience where I can download a movie or download an application. It really does change behaviors and ultimately will drive the data demand curve that we've talked about, which again, is the benefit for the industry as a whole.

And then the carriers need to keep that going, right? So as there is more usage on the network, I guess that's going to require another level of activity on the tower.

Yes. Again, and I'll let Sunit chime in here. I mean, I think the bottom line is there's an expectation. Each of the big 3 operators has a claim on we have the best network. You turn on the Sunday morning NFL game and you see an ad from one of the carriers talking about how great their network is. The bad news is when you're on the operator side, running an operations team is that if you start to fall behind in your capacity deployment, it is incredibly difficult to catch back up. And I know this because I've had this happen to me a couple of times where capital has been scarce and you tighten down the screws and you stop investing in the network. And if at the end of the day, in a very competitive mature network for customers in the U.S., people suddenly stop spending in that capacity, it could be a very high-risk strategy in that the majority of new acquisitions are oftentimes churn from your competitor. So it becomes a very interesting dynamic, I think, in terms of the risk of not investing to keep up with capacity. But Sunit, do you have a thought there?

Yes. I mean -- and I spent most of my time on the operator side, both wireline and wireless. And I think the simple thing is that as data demand keeps growing, you have a choice to address it and deal with it. The vectors are a little different for wireless operators. So it's network speed, network quality and network reach. And so ultimately, that's an important part of the economic proposition for all of us as buyers of the service. There's what you're paying per month, there's handset subsidy and then there's network. And ultimately, the network is the foundation. One competitor in this case, like T-Mobile has made a lot of strides in the last few years deploying mid-band spectrum and some of the others are not trying to catch up. It's a good thing for us. I mean the other thing also is there's been massive growth in data demand in the middle of the network on the fiber side with AI and data centers. There's huge amounts of data being thrown around. As that translates into various applications, whether it's on your phone for AI or robots or drones or all kinds of IoT things, cars, et cetera, that should continue to fuel mobile data demand growth. And we're core part of facilitating that. So we're excited about what all of this means over the next number of years.

And that's a good point in terms of as you have conversations with the carriers and next stage of network planning, do you have a sense where -- which company is at what level in terms of requirements just to do some catch-up because of the drop calls or needs to do a bit more amendment, need to start the densification. You don't have to name names but do you think that there is more activity to be had and at different levels when you look at the main 3 providers?

It's all relative because I would have told you, having spent the last 2 years in Europe, as an example, European networks when GSM first rolled out were vastly superior to their American counterparts. I think all 3 operators here in the U.S. have done a really good job of building out good solid networks that have fast data speeds that are reliable. Now can they get better? They always can. Having the experience when you sit right next to a cell site and you're seeing hugely vast speeds of data and the ability to have a call and not have a drop, you have to keep served. The fact that we're here in a subterranean meeting room and the fact that I have good 5G coverage is in of itself wouldn't have been here 10 years ago, right? I mean this is relatively new. And so again, the investments that operators need to do is it's not just one and done. You cover an area and you're fine with that. As your customer base grows and as the capacity needs for those customer bases grow, the sites inevitably shrink and you end up putting new sites in and around it to densify it. So -- the good news is I don't think their job is ever completely done. And in an environment where it's very competitive between these 3 players that have equally spent a lot of money on their networks, I think it fuels a whole new set of expectations every year just because you were great this year, the bar gets risen up every year to go that much better.

Right. Today, we heard from AT&T and T-Mobile CEOs kind of like suggested that we're at peak CapEx for wireless. What do you think that means for tower companies?

Well, I mean, I think -- so there are 2 aspects as it pertains to our business. They were spending a lot of CapEx. So peak or a little decline. The fact is they're still spending billions of dollars a year on network infrastructure. And so for us, whatever they are spending is on the margin positive for us because the -- whether they are replacing older technology radios, antennas are putting in new. Ultimately, if you believe that they're going to keep occupying more spectrum bands and dealing with more and more data throughput, it generally means you need more space on a tower, the ability to occupy more surface area or the ability to put more weight on a tower, all those things are positive for our revenue base. So obviously -- you do see some oscillations here or there. But the fact is even if you believe they're going to spend less than peak, there's still a lot of capital they're spending to keep upgrading their networks.

We always get the question in terms of where are we in terms of amendment versus densification mix. Where are we? And are you seeing a little bit of a pickup in the densification activity?

Please jump in here but I think our demand has been fairly constant, and there hasn't been a huge shift between one and the other. The mix has been relatively similar over time. For us, I think if you think about the organization, amendment revenue is important. And obviously, we have a focus in on that. Finding ways to win new colocations on our existing towers is a huge priority for us. And so when I think about how does our sales team function, what do we do to partner with the operators to help them identify where those areas of weakness are. I gave you that example with drop calls just a few seconds ago, is we want to be very proactive because in reality, whatever it is that they put into the networks, again, that just forms the baseline of what expectations are for the next year going in. And then with the competition in the marketplace, and it seems to be very frothy in terms of the investments in, again, that raises the stakes so more people have accessibility to 5G handsets, that drives the overall data consumption and it starts off the cycle anew. The final piece I would say is I was in Barcelona last year for the Mobile Congress, which is our big annual trade show. And I went into each of the OEMs' spaces. And at least in 2 of the 3, they do have 6G terminals. So even though the standard hasn't been finalized yet, still in work between the operators and the equipment providers is there's already a concept of where 6G might take it. So again, if we're halfway in the development cycle of 5G and 5G deployment and so maybe they reach peak is there's the specter of 6G coming along maybe at the end of the decade or soon into the new decade as fueling the next arms race in terms of capabilities and new business models that are yet to be discovered.

Right. And within that, are you also in conversations maybe with nontraditional potential tenants on the towers? Anything you could sort of like share with us where do you think there is some information about Starlink potentially looking to do an MNO hybrid satellite, terrestrial. Do you think that could be an opportunity? I saw that you announced a private wireless network. Is that a new sort of vector that you could go into?

I think with the fact that the industry is coalescing around 3 major customers in terms of active networks is this is an area of opportunity for us that we need to go out and to get serious about and chase. One of the things I saw in Europe was a whole new series of network uses, things like everything from predicting rainfall in a given area to wildfire, early wildfire prevention and identification. It still feels like we're at the fairly early rounds of where IoT and that -- I mean, there's been a lot of hype, so I even hesitate to bring it up. Other than to say there are other parts of the world where this part of the business is now starting to pick up. So there could be some models of where we might adopt those business opportunities. And we've continued to invest in building the capability of our -- both our product teams and our sales force to look at some of these nontraditional activities as new investment opportunities.

Okay. Maybe putting all of that together and looking at, again, 3-, 5-year outlook in terms of the building blocks to get to your organic growth. How should we think about carrier activity we talked about. I think churn is coming towards the end -- to the low end of it, given your exposure to consolidation and you have a fixed escalator. So is mid-single-digit growth attainable from here on?

Why don't you start on the financial side, and then I'll talk about the outlook.

Yes. I mean I think you summed it up well as you walk through the churn issues, we do have rent escalators, which is, as you know, being in telecom, that's a very good thing with legacy revenue that you're always dealing with in the wireline and wireless space. And as long as you believe that demand growth, mobile data demand growth of mobile data traffic will continue to grow healthily, then it means our clients will occupy more spectrum and we'll need more powerful antennas and radios to deal with more data in more places. So yes, I think your hypothesis of being able to perform at that level seems reasonable from an annual growth -- revenue growth perspective.

In terms of where I started off, which is to say we have a very focused vision of what we need to do in the short term, right, complete the sale of the fiber and small cell business, relaunch Crown 2.0 as the stand-alone best-in-class U.S.-focused tower company, look at the efficiencies that we can derive in the business that will ultimately help us to attack things like SG&A and have a better, faster, more agile business into the future. As we go into the midterm, I think there's -- we are a tower business. I think we would like to build towers in the future, certainly in greater numbers than we have here over the last few years. But again, we're going to take an incredibly disciplined approach towards only taking those deals that make sense and that are accretive and not dilutive to our business. And then I think there's additional things that we will look at that will help to grow the AFFO, things like the underlying tower leases that we have. And we are behind today our key competitors in the U.S. marketplace. So that's an opportunity area for us to take additional cost out of the business. I think these are the midterm objectives. This business will be focused, it will be disciplined, and we will grow to the extent that we can grow. But following a path that's clearly been laid out by the Board and myself of where we're headed as a company.

Right. On the cost side, and we -- Sunit, I know that you definitely focused on how to -- you know how to optimize cost. But one thing that we hear a lot is that you've already done a very good job. So is there more opportunity to be had after the fiber sale is done? And where would that come from?

Yes. I think the short answer is yes. I think the company over the last number of years has been focused a lot on the fiber and the small cell business. So -- and I've been at the company now for 6-plus months. And as I look at the systems platform technology environment for our towers business, corporate systems, see a lot of opportunity to do several things. One, really improve our customer experience in terms of the ability to interact with us digitally and also in terms of our response times, our accuracy, billing accuracy, cycle times, how quickly we can get things done. There's a lot of opportunity within the company to reduce the amount of duplicate effort or civil engineering, keystroke time, task time. There's a lot of opportunity for process improvements so that things are not sitting in queue for too long, inaccurate data, bringing it together, even with a very modest level of AI to significantly improve productivity and efficiency in the company. So I think we think there's a lot that we can execute on over the next 2 or 3 years beyond just the benefits of moving from running 3 businesses to 1 business. So we're quite excited about it.

Do you have a target SG&A as a percent of sales, for example, like I think that one is still a little bit more elevated than your peers. Is that the peer level is your goal? Or...

I mean we have said now for a couple of quarters, we want to be best-in-class. So we think the opportunity is to take out several percentage points as a percent of revenues over the next years.

Yes. The way I would characterize this is if this were a baseball game, we're in the third inning, right? So we've made some progress, and I want to acknowledge that we have a good team and they're focusing on trying to do the right thing. But having had the benefit of being in a small start-up disruptor tower co here in the U.S. and having worked for a large at-scale, very lean tower company in Europe, I'm convinced that this is still the early innings and the game is yet to be fully played. And so we can already see elements of where together as a team that we're going to go off and attack this. It's going to take some time, but I'm optimistic. I see what best-in-class looks like in my head, and we're going to and do our best to reach it. We're committed.

And when you look at -- you gave us a little bit of hint on how to think about '26 beyond post the fiber sale. But to think about substantial AFFO per share growth is not crazy, right?

Yes.

Okay. Maybe a couple of last minutes, just going back to capital allocation priorities. And maybe if you could just remind us where you would like to be post fiber sale. But I do also want to touch on if your appetite for M&A is just contained within the U.S.? Or do you think that there are some opportunities globally as well?

Let me answer the second part, and then I'll hand it to Sunit to reiterate what we've committed to do as a management team. But look, we will always look at the deals that are out there. It would be foolish to be ostrich with our head in the sands and not to look at deals as they come across. But we've got a lot of work to do in the short term. And we have to execute the things that I laid out for you, I think, to earn the right to be serious about any kind of M&A. So the short answer is, no, we're not looking for anything specifically. We're sure as heck not looking for anything in Europe or globally. That is not part of our strategy. So full stop on that. But we'll look at things. And if there's a deal to be done out there, which is a good accretive deal, we would consider it. But given some of the discrepancies between the -- what I'd call -- characterize as a frothy private market compared to the public market, it may not be that any of these things make sense for us here. But we'll look at them by all means and kick the tires.

Right.

Yes. I mean just to underline what Chris said, and I'll come to capital allocation. So we've got plenty to do over the next year. Get the transaction done, streamline our costs, get the initiatives in place to take cost out over the next year. So plenty to do right there. And also, if you were to do anything on the M&A front beyond that time, it would have to be accretive with a reasonable margin of safety to our cash FFO per share. So that in itself sets a high bar. And then thirdly, just in the U.S. In terms of capital allocation, yes, what we've said is with the proceeds of these transactions, it's an $8.5 billion sale. The goal -- our plan is to take $6 billion of that and pay down debt and the rest to a share buyback with. And then I think we've committed -- we are committed to spend 75% to 80% of our AFFO towards dividends. So as we grow that over time, we should be able to grow the dividend stream. The rest 20% to 25% of AFFO, to the extent we have the ability to buy back ground leases at decent rates of return, we'll do that. Obviously, there's limits to how much you can do that in any given year. If there might be any opportunity to build new towers that are attractive rates of return, we'd consider that. We'll certainly make some modest investments in the scheme of our cash flow for technology platform investments. But the balance we use for share buybacks and the other foundational proposition of what investors we think are investing in with us is being investment grade. So making sure we're always investment grade, whether interest rates change or not or whatever happens, staying investment grade is critical to our value proposition to our investors.

Given where the valuations are, could you start to buy back earlier than the deal close?

I think we are set on getting to the transaction, which is not far away anymore. Government is open. We feel good about how everything is going. So yes, I think it's easier to do that as you get proceeds from a transaction. And again, we are focused on being investment grade.

And maybe one more on appetite for M&A once everything is cleared but would you like to keep it as a pure tower company? Or do you see some opportunities in other verticals that are adjacent?

I don't think so. I mean the strategy is very clear. We are a pure-play tower company. And I guess I'd expand that we have some rooftop sites but we're a tower company, first and foremost. Don't expect us to start going back into fiber small cells. or anything other than the most closest of adjacencies in the form of products and services for our customers.

Okay. Sounds good. I think we'll stop it right there. Thank you so much.

Thank you.