CCI - Crown Castle Inc. (CCI) Goldman Sachs Communacopia & Technology Conference Call Transcript
2023-09-06 17:27:10 ET
Crown Castle, Inc. (CCI)
Goldman Sachs Communacopia & Technology Conference Call
September 06, 2023, 14:30 ET
Company Participants
Jay Brown - President, CEO & Director
Conference Call Participants
Joseph Gaebler - Goldman Sachs Group
Presentation
Joseph Gaebler
All right. Welcome, everyone. It's so great to welcome back to the Communacopia & Technology Conference, Jay Brown, the President and CEO of Crown Castle.
Jay, thanks for being back here with us.
Jay Brown
Good to be here. Thanks for the invite.
Joseph Gaebler
You're always welcome. All right. I'll start high level here. So I think most people in this room know, but just for the sake of sharing some statistics, you are the -- Crown Castle is one of the largest telecom infrastructure providers in the U.S., if not the largest. You have over 40,000 towers; you have 120,000 small cells on air or under contract to go on air; and about 85,000 route miles of fiber.
Question-and-Answer Session
Q - Joseph Gaebler
So the question against that at facts -- a set of facts is, what is Crown Castle's vision for the future wireless networks? And how does that align with your decision to own assets across so many parts of the infrastructure stack?
Jay Brown
Sure. Well, thanks for the commercial. That's a good way to start. If you look at the way the wireless operators are looking at their network, I think our assets align with that. While it's 2 different segments inside of our business, our carrier customers do not think about towers and small cells and fiber as different businesses. Those are a blurred line in terms of they think about how to provide coverage, wireless capacity to -- ultimately to the consumer and to their customers.
And that activity requires a combination of fiber, small cells and towers. So I think it's helpful both in the near term as it has been over the last several years. It gives us greater insight into how they think about their network, what's needed, both in the near term and the long term. And I think as time goes by, and there are greater uses with 5G, particularly on the industrial side, I think we will -- that the combination of the assets will put us closer to our customers and give us greater insight, therefore, give us a better opportunity to sell them product and access to the infrastructure in ways that if we were just towers or if we were just small cells or just fiber, would be more limited.
So I think it positions us well with where their networks are heading. And I think it opens up a good opportunity for us to have a different conversation with them than what others could have if they were just a single product.
Joseph Gaebler
But not data centers. Some of your peers have made bigger investments in data centers. Why do you approach that differently?
Jay Brown
Yes. We have historically looked at our business through the eyes of what's necessary to further wireless telecommunications. And data centers, there's not necessarily, as we see it, revenue synergies there. It's not that we have a view that it's not a good business. It's just that we don't see revenue synergies there in the same way that we see it with the other products that we've offered.
We do, in a sense, because of our points of presence on the fiber side, we do have a version of data centers that are the result of some of the interconnections that we have with our fiber. But in terms of thinking about it in large box, data centers have not seen the revenue synergies that have justified the investment there. But it's not a view that it's not a good business. It's just as we think about the strategic lens of what's important to us around what will the future of wireless networks look like. It's not a critical component for us to operate or own that.
Joseph Gaebler
Right. Let's talk about your tower leasing business. You expect organic growth in your tower business of about 5% this year, although with your second quarter results, you did actually trim your outlook for leasing activity in 2023. And you attribute this to a slowdown that you were starting to see emerge in the second quarter.
I think a lot of investors had expected that inevitably, we would see some deceleration as we sort of came out of the tail end of the front end of the 5G cycle. How would you characterize what the domestic leasing environment is right now? What's driving it if we're sort of through that front end?
Jay Brown
Sure. One of the things that was different about 5G as compared to the other upgrade cycles that we had been through with 2G, 3G, 4G is that there was a staggering of the activity levels at the carriers in each of the previous generations, where a carrier may go and then another carrier and then another carrier. And with 5G, we saw all 3 of the big operators simultaneously deploying and having a surge of activity associated with the additional spectrum that they received and the desire to launch 5G technology stacked right on top of each other.
So the peak of the activity, the peak of the spend, the peak of the deployment, the peak of that initial coverage that they were trying to accomplish were really stacked right on top of each other. So it made the peak look much larger than any inflection point that we had seen historically in the business.
So as the activity has come back down to what we believe is a normalized level of activity that's in and around about 5% growth over a long period of time, we think that compares really well with what we saw during 3G and 4G after the initial surges of those activities and think that will continue for a long, long period of time.
So feel really good about where that incremental growth is going to be across our assets and towers as the carriers continue to deploy 5G spectrum. They're not done deploying 5G. Just through that initial surge and now into a more normalized environment like we've seen in prior generations.
And ultimately, we think that gets us to the point where we're able to get back to the place where we're growing the dividend at 7% to 8% once we get through the next couple of years and through the Sprint churn as T-Mobile rationalizes their network and put us back into a place where we're growing the dividend on a consistent basis.
Joseph Gaebler
You've noted that you do anticipate that the business can grow organically at a 5% CAGR. That's obviously an average rate, not at the exact rate you would expect in any given year. How do you think about the things that matter in terms of what are the conditions that might push you above the 5% at any point in time? What are the conditions that might have you run rating below the 5% at any point in time?
Jay Brown
Yes. Well, on the downside, we've contracted 75% of that 5% growth through 2027. So if you're looking for a floor, take about 75% of that 5%, and that's sort of a floor level from a contracted basis.
On the positive side, if growth in data were to accelerate or continue at levels frankly, that they're at currently in terms of data usage, that could drive an outsized return. And I think the most likely outcome of the positive side would be industrial applications developing.
There's lots of conversation around what's the killer app for 5G. I think it's unlikely that as we look back on the cycle of 5G that there is one thing that people identify as that was the killer application for 5G. I think that's an unlikely outcome.
I think we are more likely to look at this generation of upgrades, 5G, as a platform for innovation that permeates industries, and we see a number of industrial applications. I saw Walmart recently talked about over 12,000 of their packages that have been delivered to homes in the last 3 months were delivered via drones. That requires a very low latency network with very high speeds of data traffic.
Obviously, we're in a city where there are autonomous taxis; again, requires a tremendous amount of network capacity. A driverless car and electric vehicle produces 2.5 to 3 terabytes of data per day inside of the vehicle. That's the equivalent of about 4 years' worth of usage by a single consumer. So the amount of data traffic that's going to happen in 5G as industrial applications are created, I think, is going to be the big tailwind for our industry over a long period of time. I think it's going to drive a lot of usage and a lot of need for towers. And I think we will see even greater demand on the small cell side as a result of some of those applications from an industrial standpoint in 5G that heretofore with prior generations with the latency and the speeds in the network, just were not able to be performed. So I think it's a platform for innovation and the killer apps will be many.
Joseph Gaebler
And who do you see as the tenants in that scenario? Is it just the major carriers building out those 5G networks for large industrial customers? Or do you think there's an opportunity to maybe contract directly with enterprises who may be accessing spectrum through a partnership with someone else?
Jay Brown
I think the vast majority will continue to look like the wireless carriers. They have the great benefit of strong spectrum positions. I think that spectrum will be used in great ways. But there will also be other applications that are developed, whether it's private wireless networks, the use of unlicensed spectrum, the use of spectrum bands for things that are not necessarily nationwide deployments, but more targeted into specific markets. Those will likely be customers of small cells and towers. But the predominance of the growth, I think, will be near to the benefit of the wireless carriers.
Joseph Gaebler
Last question here about sort of the swing factors on the long-term outlook for U.S. tower leasing. How important is it to your long-term business plan that there be a strong, viable fourth facilities-based operator? Obviously, DISH has been trying to position itself as that type of operator, but investors debate that. How important is this to you?
Jay Brown
The first thing I would say about DISH is that they have acted in every way like an operator who's building a nationwide network. So we've built a significant portion of their 15,000 sites that they've deployed. And our experience with them is that they're a very sophisticated operator. They've been very thoughtful about how they've designed the network, both on the tower side but also on the fiber side and been thoughtful about how they design their network, which portends to something over the -- in the future that will be built upon.
And so I think that's encouraging as a stand-alone network that they've really built a very good network with what they've done thus far and set themselves up with a foundation that could be added upon to develop into a nationwide network over time.
The driver for our business over time, if you ignore the logos of the various wireless carriers, is how much data traffic is generated onto those wireless networks. There have been changes over many years to who those logos are, the names of those companies, who owns the spectrum. But what has been fundamentally driving our growth through lots of consolidations and changes has been the growth in data traffic.
And both in terms of the consumer as well as the industrial uses that I was speaking about a minute ago, I believe there are very strong tailwinds to continue the growth in wireless data traffic. I don't think the world is going back to a state where everyone wants to be tethered. I think we're actually headed the other direction where the vast majority of what we want to do and will do, both corporately and individually, will be untethered in wireless. And as a result of that, I think you're going to continue to see lots of growth in wireless data traffic, and that will demand the need for the infrastructure that we own, both on the tower side and small cells.
Joseph Gaebler
Well, let's spend a little bit of time talking about your small cells business. You expect to deploy 10,000 small cell nodes this year, although you've noticed that -- you've noted that you expect acceleration in that as we go into '24 and '25 just based on what's in your backlog.
One of the questions we get about this is investors will say, "Well, if I listen to some of the big tower companies, it sounds like the carriers have only touched about 1/2 of their existing cell sites with 5G sites and spectrum." So wouldn't the incremental densification happen on the macro sites for a while, meaning wouldn't it be a while before we saw a real need to densify through small cells?
So I guess the first part of the question is what's actually driving the backlog because you have real demand? And then how do you think about getting to a point where there may be a greater allocation of carrier CapEx budgets towards small cells relative to macros?
Jay Brown
Yes. I think both are true. I think that we will continue to see good growth on the tower side as evidenced by our expectation that we'll continue to grow towers, tower revenue growth in that 5% range for a long period of time.
How they get to -- once they get some amount of geographic coverage with the technologies as they're doing with 5G, how they accomplish the second part of that we believe will be over a much longer time line than the first portion of the build-out.
And that has been true in past generations where there's a big push initially, they get to somewhere in the neighborhood of, as you mentioned, 50% to 70% of coverage and then they spend the better part of a decade covering the other 1/2 to 30% that needs to be covered. So I think we will continue to see, as will our peers in the industry, continue to see good growth on the tower side for a long period of time, probably the better part of a decade as the carriers continue to build out 5G.
What drives the need in small cells is that macro tower sites can't solve all of the need and can't solve all of the constraints that occur inside of the network. So the places in the network where they're not necessarily looking for geographic coverage, but they're looking for capacity in the network, those are the places where small cells are used.
Macro towers remain the most effective and efficient way to deploy spectrum over large geographies. I think we will forever see towers used for that purpose of creating coverage in the network. They're like large overhead lights in a room. But the targeted uses of increasing -- reusing the spectrum, targeting the places where there's capacity constraints in the network, like lamps in the room where they're directing a significant amount of light into a small area, small cells excel at that. Because it offloads traffic off of the macro site, allowing that macro site to have greater coverage and it provides a highly ubiquitous, reliable source of spectrum and capacity to users by using small cells.
So the places where, as they spend less on towers and slow down the rate of deployment on macro sites, yes, I think that will continue. But I think they will also be investing in small cells as they have network constraints start to pop up, mostly in dense urban, suburban areas in the United States.
The vast majority of the activity that we've seen thus far are in kind of NFL cities. Those top 30 cities in the United States make up the vast majority of our investment and the activity that we've seen from carriers on the small cell side. So there's the constraint points which make sense. That's where the people are as data traffic per user grows, that's where you're going to feel the constraint in the network.
Joseph Gaebler
I think in the past, you've noted that Crown Castle wins about 1/2 of the small cell RFPs that are out there. There's really very few scaled operators in this space. So it's essentially carriers ultimately deciding to do things themselves when they're not working with you in places where you can provide that service. Any update on what that win rate looks like?
One of the questions we've been getting is whether some of the wireless carriers who have big fiber initiatives, such as AT&T, are increasingly self-performing on the small cell side.
Jay Brown
Yes. There's 2 things that matter relative to that question. One is I think we are probably winning about 50%. But the 2 things that really matter as we think about that question is where do we want to own the infrastructure. And the places where we want to own small cell fiber infrastructure are in places where we believe there will be future co-location.
Those co-locations tend to occur, as I mentioned before, in the dense urban and suburban areas of the United States. It's where we've invested the vast majority of our capital. And we believe while we're investing with 1 carrier in a particular location, we will see multiple carriers thereafter need small cells in that same location, in that same area, and therefore, will get co-location and increase the returns on investment.
So a criteria for how we're thinking about where do we invest or where do we say yes to is related to where do we think there's going to be -- where is there going to be co-location. To the extent that that's not going to occur, we think the likelihood of that is less, then we're going to decline to put our capital in those locations. So we are selecting the places where we think there's the highest probability of good returns and the best use of our capital, driving the highest returns for that use of capital.
Joseph Gaebler
What do you look for to get comfortable with the probability that there will be a need for co-locations?
Jay Brown
We look for some demographic information. So what is the density of population? We look at what is the traffic, what is the existing data traffic there. So what does that portend as it grows? We look at various characteristics around age of population and some other things that indicate to us usage and growth in that.
The carriers are also a great source of helping us do that because we're talking to them about their network and their network constraints, which they're sharing with us so that we can deliver the small cell solutions for them. And we can compare multiple customers giving us that information, which gives us some indication of where there's overlap, it's a good indication that we're going to see co-location ultimately.
The second thing that's important in the discussion and the decision is our carrier customers realize we're not going to build everywhere for them. So they've got to maintain the operating capability to build these themselves. So if a carrier needs coverage in a particular area, it may be for certain reasons that the other 2 carriers are not ultimately going to need small cells there. It could be spectrum positions, could be the customer -- the underlying customer makeup, but they've got to maintain that capability because it's critical to their network.
And so I think as long as there's not another really large-scale company like ourselves in the space, I think you're likely to see the carriers continue to maintain that operating capability. And because if we decline to do it, they're going to need to do it themselves. So I think it's not necessary -- in my view, it's not necessarily a bad thing that the carriers are maintaining or building fiber. I think it points to the fact that small cells are a critical component of the wireless networks and they need to ensure that those are able to be done either by us or by themselves.
Joseph Gaebler
Why do you think you haven't seen another large-scale competitor emerge? It's not that there are literally none, but there is no one else at your scale in the U.S. looking to do this.
Jay Brown
Right. It is incredibly expensive to build the overhead and capability to do this. So unlike towers in the tower business, the carriers make a decision 1 tower at a time. So people have gotten into the tower business and they might own 2 towers, 5 towers, 10 towers, and it can be a very good business. You get the tower in the right location, the carriers come to it.
In small cells, they tend to give orders by the thousands. So in a particular market, we may get 3,000, 4,000 small cell nodes at a time, which means we're going to cross -- while it might be the Southern California market, for instance, that's going to cross 20, 30 municipalities, a bunch of different utilities. So the amount of external affairs, government affairs, overhead that you have to carry in order to perform at that level is -- it requires scale to be successful.
So I think one of the benefits that we have had is because we were in so early and developed the teams, the capabilities and the scale to be able to support it as we've positioned ourselves to capture demand that would be really hard -- it would be really hard to enter the business. You would have to make a significant investment in building a team before you had any orders before I think you could make the case to the carriers that you should get orders.
Joseph Gaebler
So that's why other operators that may happen to have a lot of fiber, whether it's a Lumen or a Zayo or so forth, don't necessarily have a presence in the small cell market because it would be another tier of investment?
Jay Brown
Correct. Correct. The asset is the same, right, which is why we have an enterprise fiber business because the asset is the same. So we can take those customers on to the fiber, the asset's similar and can be reused. But just owning fiber is not enough to be successful in small cell.
Joseph Gaebler
I think historically, about 70% of the small cells that you had constructed have represented anchor builds, about 30%, I think have been co-locations. Just based on what's in the funnel right now, where is that ratio trending? And how do you think about getting to a point where you increasingly are co-locating and therefore, driving higher yields?
Jay Brown
Yes. This -- that's historically true. This year, our co-location rates are 50% plus of co-location and less than that on the anchor build side. And you can see that in our capital. So as the revenue growth is occurring this year, the amount of capital we're actually investing is coming down year-over-year just as a result of us doing co-locations.
So over time, long, long term, we'll get to the place just like the tower business, where we're not building very much new anchor systems, and the activity, the volume that's driving revenue will just be co-location. But from what we're seeing in the development of the business, we're not at a point yet where we're willing to say, okay, let's not build anymore, let's just stop with the assets that we have. We believe this is the time actually to be investing in expanding the portfolio because we're seeing such great returns.
We build anchor systems today at about a 6% to 7% initial cash yield on invested capital. When we add our second tenant, we get to low double-digit yields on that invested capital. We get to 1/3 where high teens to low 20% range with a third tenant on that base. That's meaningfully higher than what we ever found -- than what we found historically in the tower business.
Towers, we started at a 2% to a 3% initial yield would get to kind of a 6% to 7% with the second tenant and then to a double-digit return once we got to 2.5 to 3 tenants per tower. So we start at a higher yield and the incremental growth is attractive.
So for now, in the markets that we have opportunities, being selective and being thoughtful about where there's going to be co-location, we're continuing to look for opportunities where we can expand the assets, which gives us a view towards longer-term growth and opportunity to continue to increase the dividend.
Joseph Gaebler
You've given a lot of examples in your earnings materials of illustrative markets where you've been able to drive yield. And in some markets, it's still considerably higher than others. What are you finding are the factors that are allowing you to get to those very high yields? How much of it is execution versus just picking the right market to begin with?
Jay Brown
So we've -- 3 years in a row now, we've given the same 5 markets so that you can watch markets develop. We picked a smattering of markets. We picked the market that we were not very successful in, Denver, out of the gate. We made some mistakes. We underestimated how much it was going to cost to build nodes in that market.
And then we also showed a market like Orlando, which was one of the very first markets. It was actually the first market that we made investments in, in 2005 and 2006 as we were starting to test to see whether small cells would ultimately become an integral part of the wireless network. It was really small in terms of its dollar amount of investment, but it was the first place that we went into.
Over time, Orlando has proven to be a great market to be in, and we've gotten into the 20%-plus return area in that Orlando market. And I think, ultimately, while I don't know that we'll ever get the entire country to plus 20% returns, I think the trajectory of returns from where we are today across the entire portfolio of almost -- of about 8%.
And I think over time, we will be able to trend the yields on the assets higher, just like we have done in towers. Towers is now north of 12% yield. And we've been at that for 25 years. The bulk of the capital in the small cell business is about 6 to 7 years in. So we're still early days, and the yield on those assets is tracking well ahead of where we were 6 or 7 years into towers. So I'm hopeful about where the business is going to go.
A couple of the other markets that we put in there, we put L.A., which is our second-largest market, Southern California. You can see the co-location continue to trend there, good returns in that market. Philadelphia, obviously, a top 10 market on the East Coast side. That market has continued to perform well. And then Phoenix is the other market that we put in. That market has continued to perform well and seeing nice co-location.
I think it gives investors a good sense of -- if you look at those 5 markets, again, Denver is not our best, and you can get a sense of across the whole portfolio, not everything looks like Orlando. But at the same time, as we look at significant investments that we made in markets, you can really see why we're so confident that over time, this is going to be a great investment and a good add to the tower business.
In the early days, as we started to invest in towers, I think there was a lot of questions about, is this going to be tower-like in terms of its opportunity? And will it really be necessary? Or is this just sort of a niche product that the carriers won't need? And I think we've overcome that, which is evident both in terms of our returns and the financial results, but also in terms of the way the carriers have talked about it.
As you mentioned earlier, the carriers are continuing to build 1/2 of the nodes themselves and building out fiber to do that. So pleased with where the business has gone and excited about future growth in it.
Joseph Gaebler
Your fiber solutions business still generates the majority of the revenue off of your fiber assets. It's going to be pretty flat this year and the Sprint consolidation is factoring into that, but you are expecting that you'll see growth return to that 3% growth rate you've historically seen over time. What's your outlook for this business? And how macro sensitive is it?
Jay Brown
Yes. It has not proven to be very macro sensitive. As we went through sort of COVID period, we've been in and around that 3% growth. We expect by the end of this year, we'll be back to that as we exit out of the churn challenge that we had related to T-Mobile and Sprint consolidating. I think we'll be back in and around 3% growth.
We're serving large enterprises in that business. So the vast majority of our customers would come from government, education, health care and then really large corporate enterprises. So we -- the more sensitive economic portions of fiber businesses, so to speak, are that's small and medium businesses, which really are not a component of our revenue stream.
Our view of that business is that it adds yield and return to an asset that we're investing in for the purpose of small cells and the growth that we think is there. It is the asset. Fiber makes up 85% of the cost of deployment for small cells, the capital cost of deployment. So you've got to have dense, high-capacity fiber networks.
And in the places and in markets where we have that dense high-capacity fiber, we think it makes sense to offer bespoke solutions on the fiber side to large enterprises that help add to the return.
I think of it kind of -- I think, long term, we'll look at enterprises, similar to the way we do on towers, where sure, 85%, 90% of the revenue comes from the big wireless operators, but there's another 10% to 15% of the revenues that come from others, and they increase the yield on the assets. So we'll take as many co-locations as we possibly can.
Same thing is true on the fiber side. We have a team dedicated to growing the revenues there. Believe there's good growth there. Like the way the funnel is looking and been through a good -- a difficult economic cycle where the business performed in and around what we expected. So feel good about it.
Joseph Gaebler
In July, shortly after your second quarter report, you initiated a restructuring plan around your services business. Where are you in terms of implementing that? How do we think about the cost savings? And are there any other meaningful cost-saving steps you think you could take or need to take going forward?
Jay Brown
Yes. We did 2 things internally that we publicly announced after the earnings call. One is we reduced our staffing internally in our tower group as we came off of that peak and came back down to a normalized level. So we brought staffing back down to that more normalized level of activity.
The second thing we did was there's a portion of our services business, which was basically the general management, the oversight of installing tenants on our towers, that historically, we had argued to ourselves, we thought was strategic and we thought it was helpful to leasing activity. It did not produce a lot of margin, and we knew it was not necessarily covering all of the G&A costs associated with it, but we thought it was helpful in gaining leasing activities.
As we studied that business, we thought it was neither profitable nor strategic and so it just made sense to shut it down. And so we did and the adjustments in the cost structure that we announced in the 8-K are related to both that and the changes in staffing.
Joseph Gaebler
Okay. Your outlook for this year anticipates discretionary CapEx of about $1 billion, a little bit more than you spent last year. How should we think about the capital intensity of the business going forward? And how sensitive is that going to be to what happens with your small cell business?
Jay Brown
It's very sensitive to that. Towers continue to not need a lot of capital investment in order to drive incremental growth. Our split of small cells will be important to that answer of how much is co-location versus how much are anchor builds and then the volume of small cells into the future.
So if our long-term view is correct, that small cells are going to continue to be an integral part of the network for the wireless carriers and that, that need is going to grow as data traffic grows, I can see a future where we see continued growth in the amount of capital that we put into the business, particularly as we have opportunities to invest in assets that we think will continue to add to the growth in the dividend.
So I would answer the question by saying if the returns that we have seen thus far stay intact, and if we can make a diligent review of the capital spend and the opportunities, and it clears that rigorous review, then we're looking to continue to make the investment because the returns are materializing and they're helpful to the business long term. So I'm hopeful we have opportunities to invest more capital.
Joseph Gaebler
In the near to medium term, there will be a little bit of a headwind you have to work through at a consolidated level because of some of the remaining churn that you're going to experience out of T-Mobile. And so you're not going to have a significant amount of AFFO per share growth over that period of time. Your dividend growth will be lower. You've said all of this.
If the small cell demand were to start to ramp within that period of time, how would you think about funding that? How would you think about where your balance sheet needs to be in that cycle?
Jay Brown
Yes. So we're managing the balance sheet at around 5x leverage. We have an ability to pay for the capital needs that we've talked about publicly thus far with that leverage capacity. I think based on the short-term to near-term kind of activity, I think we can continue to fund that using the debt balance sheet -- using debt and staying within our goal of staying investment-grade credit rating. So that's our view in the short to near term.
If demand were to materialize and ultimately, there was a need to issue equity in order to maintain our investment-grade credit rating and pursue investments that were above our ability to just fund with debt, we would be open to do that, again, presuming that the returns of those opportunities are what we have seen to date of well exceeding our cost of capital and highest and best use of capital investment.
Joseph Gaebler
Jay, this has been really great. Thanks so much for being here with us.
Jay Brown
Thanks for having me.
For further details see:
Crown Castle, Inc. (CCI) Goldman Sachs Communacopia & Technology Conference Call Transcript