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

Yes. I would say it a little differently than effectively fixed. I think that the cycle of the business is long enough that we understand what's going to happen in the back half of this year. I think that's the same thing you're saying. Fixed sounds like it's contractual. What it is, is that we -- it takes about 6 to 12 months from the time that we get an order from our customer to the time that we put the antenna on a tower and start generating revenues. So if you take the average of about 9 months, we generally know what the business will look like for the year by March. And so by May, we feel pretty good about it, and we still feel pretty good about where we are. A lot of the business we do is entered into in the year prior because if we get an antenna on a tower on July 1 of any given year, that means we only have 6 months of revenue that year and additional 6 months to next year. So that's actually growth year-over-year. So that's the other bucket of growth that we come up with. All of that together is part of the $135-ish million, $140-ish million that we talked about in terms of billings growth for the year or the 5%. So yes, we feel good about where we are. We generally have a pretty good sense for our business by this time.

And where is churn running at this point? You've got the -- there's Sprint churn for the industry, and then there's sort of regular churn for the industry. How do you -- how is Crown set up?

For our tower business, we have one chunk of Sprint churn, which happens in 2025, and it's about $200 million. And we don't have any other real significant Sprint churn on the tower side to speak of. Churn generally in the tower business is 1% to 2% a year, and we're running this year on the low end of that churn.

You and I had a conversation about how activity and churn are tied together. I've never really understood where 2% churn would come from on a regular basis because there's not that many customers who aren't big carriers going away. So what's the relationship there?

Yes. Where churn comes from is when they look at their customers, our customers, the carriers generally look at their network and see where there's overlap or not full utilization of a certain tower. And it's too expensive for them to keep that, and so they pull it down in order -- because the network has evolved in a way that made that one tower obsolete. That's where most of the churn comes from. As they have more and more activity and putting up more and more sites, that may -- that activity in and of itself may cause some of that churn to happen because the more sites they put up, the more the network moves around a little bit, that could unearth a place where a tower is no longer necessary. But having said that, even in relatively high periods of growth the last couple of years, our churn has been on the low end of our 1% to 2% range. So we feel pretty good about where we are on the churn side. It's a great business because if churn is 1% to 2%, which it is, we have 3% escalators built into our contract structure, which means that just every time -- every year that comes up, we're growing more contractually than what our churn is, which puts us into long-term growth without having to spend capital, which is what makes the tower business as good of a business as it is.

I think one thing people worry about with Crown is that the business has been running very strong and yet if it reverts to normal sort of slower rate, one thing people worry about, but churn reverts from the 1% where you've been toward more of a midpoint, 1.5% or 2%, that the net growth sort of compresses. Your point is more that if activity is lower, probably churn is lower as well.

Yes. I think that's true because like I said, you have to have the activity that generates the place where the churn comes from. So if the network is static, there's very little churn that's going to happen in that network. When a different band may be added to a specific tower or a set of towers within that area, it could make one of them obsolete. So yes, I think the activity and the churn are somewhat tied together, although I wouldn't say that correlation is perfect.

Right. And about -- what about services revenue? How is that correlated with activity? And is it different by carrier?

Yes. The activity -- so we have a services business, which, in essence, helps our customers put antennas on towers. So there are 2 parts of our services business, as we would call it. One, we would call preconstruction services, and the other, we call construction services. Preconstruction services consist of land work. So permitting, site acquisition, getting appropriate utilities, that type of thing, zoning those things in addition to construction drawings and making sure that the tower has a sufficient capacity to put more equipment on. In the construction side of our business, it's actually managing general contractors that climb a tower, put the antenna on a tower and get it ready to deploy spectrum so we get paid. So you could put those in sequence is that the preconstruction work has to have first in order for the customer to be ready to go on the site, and then construction work happens later for the customer to actually go on the site. So we see early in the activity periods more preconstruction and later in the activity periods more construction. The preconstruction work is at a higher margin than the construction work, but the construction work generally has higher revenues. So what we have seen over time has been this evolution from higher margin, lower revenue preconstruction work into higher revenue, lower margin construction work, and our gross margins have generally held consistent over the past several years.

And so again, help me with as activity is sort of steady for the next few years, should we anticipate services revenue being relatively steady?

Yes. I think services are very much tied to where the activity ultimately goes because we have to have activity -- no matter how it structured, we have activity that goes to put a new antenna on a tower, somebody has to provide the service. We don't provide 100% of the service to our sites. We try to provide as much as we can as long as it's profitable to us. We think it's a good ancillary business and revenue stream for us.

Do you have the right to do that and sort of right of first refusal on that business? Or you...

It really depends on what the business is. I think what we really have, particularly on the preconstruction side, is superior knowledge about our assets than anybody else could have. And because that side of the business is more about what's on the asset already and what structure you have to put around it to add any antennas and then what permitting and zoning to do, and we already have the structure in place, we generally are better equipped or better positioned to get that business than other competitors. On the construction side, it's a little bit more competitive because it doesn't have the same knowledge necessity -- knowledge-based necessity, which is part of the reason that the gross margin percentages are lower.

Okay. Help me think about how fiber and the small cell and tower businesses sort of work together? Is -- towers and small cells, they go hand in hand with the team for the -- to a customer? Does the customer buy your small cells because of your fiber and your towers? Or how do you think about that?

Yes. The first thing I would say is that the towers and small cells are driven by the same underlying business characteristics. So similar customer base of the wireless carriers, similar underlying demand driver, which is wireless demand in the U.S. and similar contract structures. All those small cells have about 1.5% escalators as opposed to 3% on the tower side. And so it's a very similar business, doing this very similar thing, which is just putting a vertical piece of infrastructure in place where an antenna can go at height to be able to deliver wireless signals to your phone. The way our customer buys is really dictated by our customer. There are very many times where we go in with a consolidated offering of towers and small cells and fiber all together to a customer and present that as an offering to our customer to say, in this area, you need network coverage, we can help you no matter what you do and how can we do so. They're -- sometimes our customers are broken out a little bit more where they have a tower team and a small cell team that look at things differently. So it really depends on how our customer wants to buy as opposed to how we want to sell. But generally speaking, it isn't that we get small cells because we have towers. That is not what happens. I would say what happens more is we're able to have a conversation with our customer that's more solution-based than product-based. So instead of a customer coming to us and saying, hey, we need a tower, and we say we either have it or we don't, they can come to us and say, hey, we need this coverage area. And we can say, how do you want to do so, and we can put together a package. And that solution-based selling is, I think we all can agree, is generally more effective than just going to somebody and saying, which tower of ours do you want? So having that deeper relationship and understanding what our customer needs are at a deeper level because we have different levels or different ways to address their network needs, I think, does lead to better relationships and ultimately more revenue for us. But I would not say that you have to be a tower company to be a small cell company nor do you have to be a small cell company to be a tower company. We do believe there are synergies between the 2. And we have noticed and seen how those come to bear because we have negotiated very similarly at times. The one aspect of our business I didn't address in that is fiber. The way the network is structured is that the wireless signal goes from the antenna to your phone and back to the -- back to the antenna. But once it hits the antenna, it turns into some sort of signal that then gets transported by fiber. And in our small cell business, it required -- that small cell requires strands of fiber to the small cell. So we own that -- those strands of fiber because that's actually the shared asset that we're talking about because most of the capital of building small cells is in fiber. So whereas the tower becomes the shared asset and any time you can sell more revenue on that tower, you get better margins, better returns, on the small cell side, it's how much of that fiber run can you sell to get more small cells on it. And therefore, we own the fiber primarily because we have small cell business that requires fiber in order to operate effectively. And therefore, the fiber is part of the small cells. And as we own that fiber, we also want to add as much revenue to that fiber as we can. So we passed buildings. So we passed JPMorgan's offices potentially. And we say, hey, we need to be providing data services, communication services to those offices, those enterprises. And we do so, so that we can increase the revenue and increase the returns on the fiber we've already built for small cells. And that synergy is really important because we want to get as much return as we can. And we want to be able to go to as many places as we can to make as much money as we can and help -- and that has helped by having more revenue and more return from the fiber -- the enterprise side of our fiber business. And all of that works together, and we have also seen that having that fiber has helped us with our tower customers, which was not really the thesis going in, but we knew it could happen. And that was evidenced by the agreement we reached with DISH, the same agreement we were talking about earlier on the tower side. It included fiber as well, which on -- what they were looking for was one contract, one company to go out and say, okay, we want to build out this network of towers. We want them to connect it by fiber, but we don't want to go contract with this company for some towers, this other company for more towers, this company for fiber here, that company for fiber there. So they gave us kind of a big package deal. And that was important to them more than it was to us. We didn't go to them and say, you have to package these. They wanted that fiber -- the agreement overall because they thought it was an important aspect to which company would be able best to serve them as they build out their network.

Help me think about the pace of small cell growth. Last year, I think it was 5,000. And this year, you've talked about 10,000 and, I think, alluded to a faster pace going forward. What should we think about the pace through this year and then exiting into next year?

To level set where we are, we have about 60,000 small cell nodes, which is the unit of measure we utilize, which is one customer deploying one signal through our small cell. We have 60,000 on air and 60,000 that are in our pipeline having been contracted but not yet built. Last year, we put 5,000 small cell nodes on air. In 2023, we anticipate that we'll put 10,000 small cell nodes on air, obviously, a doubling between those 2. And then in 2024 and beyond, we believe we'll put more than that on air and grow our business more because it's based -- that deployment profile is based on basically 2 large contracts that we signed over the last couple of years, one with Verizon for 15,000 small cell nodes and one with T-Mobile for 35,000 small cell nodes. Obviously, that's 50,000 of the 60,000 backlog I just spoke of. So it's -- a majority of what we have or what we're building are for T-Mobile and Verizon. And most of Verizon is anchor built, new small cell systems that are being built. And most of T-Mobile is colocation, which is going -- putting small cells on networks we've already built. So a second tenant -- the same -- equivalent of what putting a second tenant on a tower would do. And as we are building out, the pace is really dictated by how quickly our customers want those small cells to be on air. So we're going from 5,000 to 10,000 because our customers are going faster. There is some requirement for them to move. And we believe that they will need more and more as we go forward. And therefore, we will build more and more in '24 and '25. Obviously, again, we'll give more detail on that when we give guidance in October. But that's the pace that we're looking at. And it's been an acceleration over time because the 60,000 nodes we have on backlog, obviously, are equal to the number of nodes we have built to date. So that's a pretty substantial increase in the pace at which we're deploying small cells. We've been in the business for a decade or so. We put 60,000 on air over that decade. And now we have 60,000 in our backlog over the course of a couple of years that will be built out over the course of several years. But that's a significant uptick in the number of small cells being built by us in the U.S., which we think is reflective of the requirement that our customers see to densify the network like we were talking about earlier because the data demand is coming quickly to them and they need a way to satisfy that demand with new sites. And the only way to do so is through small cells. So the premise of our investment in small cells is coming true, and we're seeing that acceleration over time.

How should we think about the mix this year of overlay versus new sites and then maybe going forward? That's -- I didn't realize that Verizon was mostly new sites and the T-Mobile was mostly overlay. Obviously, the dominant portion is overlay between the 2.

Yes. I think what we've said about this year is that it's a pretty even split between colocation and anchor builds. Going forward, again, we'll give more detail to that. But you can look at the backlog and say, oh, that 50,000, most of the Verizon is anchor build and most of the T-Mobile is colocation. So you can kind of do some rough math around that and see what that generally is in our backlog. What we're excited about that is that colocation does come with significantly less capital intensity. So you would imagine that moving from 5,000 small cells being built in 2022 into 10,000 being built in 2023, that there would be an increase in capital. But for a doubling of the small cell node count, we are increasing capital around 12%, which means we're having a significantly lower capital intensity going into 2023 than we did in 2022 precisely because we have a pretty substantial number of colocation nodes being built in 2023, which is just somewhat of a proof point of one of our thesis -- of our overall thesis in small cells that it follows a very similar pattern as to what towers does, which is you put the first customer on air. That first customer does not pay for your costs and your cost of capital for having to spend the capital. But the second customer can and gets you closer in the tower business, but we believe we can make a return with a second customer in the small cell business. And we're seeing that come true right now with that lower capital intensity coming through our numbers for 2023. And what we believe will happen over time is, we'll continue to have some amount of colocation and some amount of anchor build that will kind of mix with each other. I don't think you'll see a substantial increase in yield all of a sudden because all of it is going to turn to colocation. But at least we're having some reasonable mix between the 2 that we think evens out our returns because on the anchor build side, when we build a new small cell system, it's -- the returns are about 6% to 7% on a gross margin basis or yearly gross margin divided by the capital. And the second tenant, when we add another customer to that same small cell system, we get to low double digits. When we add a third, it gets to mid- to high teens digits returns. Those are really solid returns based against our cost of capital. And what we're seeing is with the move into colocation that we see with a lot of the T-Mobile nodes, we're actually coming up with examples of how that's coming true, and it's showing up. And our yield does tick up a little bit, but then it's brought back down as we build the anchor sites.

Is it fair to think that the anchor mix would go up next year given sort of Verizon's focus on expansion?

Yes, we're going to have to see how it comes out. That's something that we'll give more in October because it's hard to tell. This -- building a small cell takes us and our customers working together to site each of those small cells and then go build them. When that happens versus when that might happen for other customers and how that lays out between colocation and anchor build happens much closer to when we give guidance. It's not as clear right now.

Okay. Let's finish up on the balance sheet and AFFO. You've guided to AFFO per share growth of 7% to 8% over time. But you noted on the earnings call, there would be minimal dividend growth in '24 and '25. Just remind everybody how we should think about AFFO and dividend growth over the next sort of 3 years.

We size our dividend to the cash flow generation of our business and then fund any discretionary capital, including the build of small cells, with external capital, predominantly has been debt capital because our incremental EBITDA provides leverage capacity that then pays for the CapEx. So we take the cash flow of the business and return it in the form of a dividend because of interest rate headwinds and then the Sprint churn. So '24 and '25, '24 of interest rate headwinds and '25 of the Sprint churn. In total, those 2 things add up to $350 million, $370 million of headwinds to our growth. And our dividend is $2.5 billion, $2.7 billion. So our goal is to grow our dividend 7% to 8% a year at $350-ish million, is about 2 years of growth. So that's why we've said the dividend growth will be minimal. Even though the activity underlying our business continues to be at pace that would allow us to grow 7% to 8%, we have 2 discrete events that are taking away from our growth, which leads us to have minimal dividend per share growth over the course of the next couple of years. And then as we get to the backside over the Sprint churn in 2025, the $200 million I mentioned earlier, when we go into 2026 and beyond, we believe that we can return back to the 7% to 8% growth that we had guided to previously.

Makes sense. And a good place to leave it.

Okay.

Dan, thank you.

Thanks, Phil.

Thanks, everybody.