CCI - Crown Castle Inc. (CCI) Morgan Stanley 2023 European Technology Media & Telecom Conference (Transcript)

2023-11-16 14:07:07 ET

Crown Castle Inc. (CCI)

Morgan Stanley 2023 European Technology, Media & Telecom Conference

November 16, 2023 9:45 AM ET

Company Participants

Daniel Schlanger - EVP & CFO

Conference Call Participants

Simon Flannery - Morgan Stanley

Presentation

Simon Flannery

Good morning, everybody. For those of you who don't know me, I'm Simon Flannery, the U.S. telecom and comm infrastructure analyst. It’s my great pleasure to welcome back Dan Schlanger, the Chief Financial Officer at Crown Castle. Welcome, Dan.

Daniel Schlanger

Thanks for having us. It's always great to be here.

Simon Flannery

Thanks for making the trip here. Before we get started, please note that important disclosures can be found on the Morgan Stanley Research website and -- backslash research disclosures.

Question-and-Answer Session

Q - Simon Flannery

So Dan, you had some news recently. You're going to be moving on. So any color you can provide us about what's going on?

Daniel Schlanger

Sure. Again, thanks for having me. It's great to be here. Yes, I'm going to be moving out of my role as of March 31 and moving on from Crown Castle. Part of the reason for that transition time, my boss, Jay, and I decided this is the right transition, partly as a signal to everybody here and investors in general but also internally that I'm fully supportive of the company and its direction. I have no disagreements at all around what the strategy has been or the capital allocation.

And I'm as excited as I have been and probably more so about the future of our small cell business and our tower business than we've seen in a long time, just because it's a great business that is underpinned by very sustainable growth drivers which we'll get into. And then I will make it through March to get through the year-end filings as well.

So feel really good about where the business is, where it's going. There is a search ongoing for my replacement. We'll look at internal and external candidates, and I'm sure Jay will have an update on that. That's more his camp than mine at this point. And I'm excited about moving on for me and trying to figure out what to do from here.

Simon Flannery

Great. Yes. Thank you for that, and thank you for making the trip to Barcelona. We'll miss you next year. And I wish you all the best in the future.

So unlike almost all of the companies here, you've actually provided 2024 guidance. So you don't see -- I have to say I'm not commenting on '24 at this point. So why don't we start there? Can you just take us through the elements of the guidance? And what -- I think what's special about the tower business is your ability to see into the future. So perhaps just share for those who maybe are not as familiar with Crown Castle or with the business, what gives you that confidence?

Daniel Schlanger

Yes. I think one of the -- where I would start is we give guidance for the subsequent year in October in our third quarter earnings release. And the reason we do that is because we do have visibility because of the underlying business model into the next year. So in 2023 in October, we can see very far into 2024 is a great model because the vast majority of the revenues that we have are contracted for long periods of time.

So we have, in the industry terms, MLAs, master lease agreements, but basically set out the relationship between us and our major customers for a long period of time. We have 4 very large customers -- 3 very large customers plus DISH, so AT&T, T-Mobile and Verizon make up the majority of our revenue. DISH is also a large customer at this point. And with each of those customers, we have 10- to 15-year contracts that we signed. We're somewhere in that 10- to 15-year period at this point. So we have about 7 years left on average on those contracts, which gives us a tremendous amount of visibility just in the base level of the business going forward.

And what that allows for is giving guidance in October, but it also puts a lot of focus for most investors on the change in revenue year-over-year as opposed to the total revenue because we very rarely have significant moves. So what investors typically focus on in our business is what we would call organic growth or new leasing activity, which is a component of the organic growth. And organic growth is exactly what you would imagine it to be. It's just how much revenue are we adding to the assets that we already have as opposed to buying new assets and investing in the small cell business that we have.

So when we give guidance, we focus a lot on that revenue growth. And for the tower business, for all of our businesses, the 3 components, there's new leasing activity, built-in escalators that are part of those master lease agreements and churn or non-renewals of certain portions of the contract.

For the tower business, which is about 70% of our revenue, as we look into 2024, we expect that the business will have about $110 million of the new leasing activity, about 1% churn of revenue and about 3% escalators. And when you add all those 3 things together, we get to 4.5% growth that we expect will happen in 2024 over 2023. For context, in 2023, we are expecting around 5.3% growth in the tower business, so a deceleration going into 2024. I'm sure you'll ask about that in a second, so I'll leave it alone to describe why.

And then on the small cell side, so the tower business is about 70% of our business. That's the core driver of our value and our value proposition. The second business we're in is a small cell business, which is an extension of towers. As the network gets built out, we, as consumers demand more of that network. At some point, it is insufficient for a tower to supply all of the demand around it. You can't add another tower close enough for 2 reasons. One, there's interference between the 2 assets from a physical standpoint. The radio waves actually cancel each other out. And two, regulatory impediments get in the way, and there's a restriction against building towers where a tower already exists.

So the fill-in happens through small cells. It is just the name of a smaller tower. Towers are typically 50- to 300-foot structure. Small cells are typically 25 to 30-foot structures. That difference actually holds very little in terms of the business model. The business model remains the same. It's the same general set of customers, same general set of contract terms with 10-year life, same general set of contract terms with fixed pricing that escalates over time.

For our small cell business, we believe that we will grow new leasing activity of about $60 million next year with very limited churn, 1% churn or so and 1.5% escalators, which is about half of that of towers. The reason for that is that the escalators in towers were tied, the 3%, which is tied to the ground rent we would pay for any place where a tower sits where we don't own the land under the tower. That rent typically escalates at 3%. So we pass that along to our customers.

In the small cell business, it's about half because this isn't exactly how it worked, but it worked out. This is not what it is, but it works out this way. That half the business is similar, where there's some escalation costs and half the business is in fiber, which does not have escalators associated with it. So we kind of settled with our customers at about 1.5% escalators on small cells.

The growth in small cells, when you add all of those things together that I mentioned, the $60 million plus 2.5% escalators less 1% churn, is about 14% going into 2024. Again, for context, the growth in 2023, we think, is around -- was going to be around 7%, so an acceleration in our small cell business, while we see a deceleration in our tower business.

And then our fiber business, which is where we provide data access for large businesses on already existing fiber that we've generally built for small cells, we believe that we can get about 3% growth in that business, which is around 12% overall growth with 9% churn. It's a different business model with more competition, so there is more churn than in towers and small cells, which equates to about 3% year-on-year growth going into 2024. That growth in 2023 was a little awkward, but we think we'll end the year of 2023 at about that same level.

So when you add all of that together, we get to about 5% revenue growth, which is where most of the focus is around our guide. We also obviously have to provide bottom line growth for investors so that the cash flow generation of the business -- we believe the cash flow generation of the business is tied very much to that revenue generation, but we have a deceleration that I was talking about earlier in the tower business, which we have a related services business, where we actually help our customers get on towers. We believe that's coming down a little bit, and interest rates are rising, and therefore, interest expense is rising, which mutes some of that top line growth as you get to the bottom line, and that's basically our [guide].

Simon Flannery

Right. Can you just talk a little bit about the Sprint churn and how we should think about that? You had the early termination fees. Those go away this year, and then you have a churn event in '25. So we're kind of going through this sort of transition period. And then I guess, as we exit '25, we kind of return to those long-term growth rates.

Daniel Schlanger

Yes. I think you said it well as a big picture. As Sprint was purchased by T-Mobile, as has been the case throughout the history of our business, when there's been consolidation in our industry or in the mobile operator industry, they take some costs out by consolidating the number of towers that the 2 companies that have consolidated are on.

So if in this case, Sprint and T-Mobile were on a single tower at the same time, they took down the Sprint equipment and left the T-Mobile equipment. Therefore, we have consolidation-related decommissioning that is happening in our business. The majority of that is on the tower side. There's $200 million of decommissioning that we expect to occur at the beginning of 2025, which will take $200 million out of the revenue of towers.

On the small cell side and fiber side, we've already recognized about $45 million of reduction. We have another $25 million to realize between 2024 and 2025. And for that, as you pointed out, in 2023, we got early termination fees of about $165 million to pay us for the remainder of the contract that was in place with T-Mobile when they chose to decommission certain of the sites on the small cell side of our business.

Basically, that's a whole bunch of noise around an underlying business model that's going really well because if you go back to what I talked about earlier, the revenue growth is really what we focus on most because that's the long-term growth of the business. The potential of the business is the revenue growth that we see. And although we have these events due to -- that are related to the T-Mobile and Sprint consolidation, those are generally -- those are generally done by 2025 when that $200 million of tower revenue comes off. And we think from there, we will return to growth rates that are commensurate with growing the revenue at 5% at the top line, which we think, as you fall to the bottom line, will allow us to grow our dividend sustainably in 2026 and beyond.

Simon Flannery

Right. And I think you also gave color that your AFFO per share should trough in the first half of this year -- of this coming year, which is -- it's good to get that data point. I think some people were surprised given that you still have that second element of Sprint churn to come. So again, perhaps you just provide some visibility around how you're able to forecast that.

Daniel Schlanger

Yes. The reason that we gave the guidance is exactly what you said is we wanted to give people an understanding that in the first part of 2024 or the first half of 2024 will be the low point of our AFFO per share. And we believe that there will be a growth trajectory from there. And just like any business, it's not going to go up into the right every quarter. But over time, we believe that the first half of '24 is the low watermark, and we will grow from there.

And the reason we wanted to give that input was largely for what you brought up is that I think a lot of people were expecting that in 2025, we would have lower growth because of $200 million of Sprint churn. And what we were trying to convey is that like we've seen in other consolidation events in our business, the underlying driver of the growth in what we provide to the market is data demand growth in the U.S., and data demand growth is unabated at around 20% to 30% a year.

And despite consolidation, our customers have to meet that demand growth with additional capacity in the network that is provided through our assets. And even though we have events that, at times, consolidation can reduce our revenue, because that data demand growth continues to put pressure on our customers' networks, they need to continue to invest, which gives us more revenue. And as you compound that, we believe that even with $200 million of reduction in revenue, we will still be able to grow based on the growth we expect out of our tower and small cell business for the most part.

And we would anticipate the acceleration of growth from 4.5% going into 2024 to something higher than that because we believe that through 2027, our tower business will grow at 5% on average, excluding that Sprint share. So ignoring that, we believe we can grow around 5%. Of that 5%, 75% is already contracted.

So we feel really comfortable in that growth target because we have a lot of visibility based on what I was talking about earlier, the agreements we have in place with our customers, to allow us to see through 2027 that 5% is a very achievable number. Obviously, if we're in 2024, growing at 4.5%, at some point in the future, we have to see an acceleration to get to that 5%. That acceleration occurs and allows us to grow our AFFO in 2025 from the trough in 2024 is what we would expect.

Simon Flannery

Great. And I guess one last element of it. You decided to keep the payout stable for this coming year. Can you just talk through the puts and takes there? You have obviously this rising interest costs, you've got the churn, you got -- right, the CapEx is going up as well. So how did you balance? Do we put in a modest increase? Do we keep it -- or keep the payout flat? What was the right thing to do?

Daniel Schlanger

Yes. As you pointed out, we decided that for 2024, we believe the dividend will be consistent with that in 2023 at $6.26 a share per year. And the reason for that is the balance of everything you just said. The cash flow generation of the business is how we size the dividend. So our philosophy there, our capital allocation policy is we utilize the operating cash flow to pay back to investors all the investments they've made historically to get us to this point. So we pay out the operating cash flow of the business.

And then we invest in future assets or any other capital allocation decision. We have future assets, M&A, stock buybacks. We look at those to ensure which one has the most potential to drive value over the long term for our shareholders. And we still believe that investing in our small cell business is the allocation of capital to drive the highest long-term value creation.

Therefore, we want to continue with the CapEx, and we want to continue with the dividend. And balancing those 2 items with operating cash flow having some pressure due to interest expense and increasing investment in our small cell business, we thought that it was most prudent to keep the dividend the same going into 2024 because we still have visibility going forward into growth that makes a lot of sense for us beyond the Sprint churn in 2025. So we think that we have a lot of room to continue the sustainable, substantial growth that we've seen in our dividend historically going past 2025.

And that's the balance we went through and where -- we is a strong word, it's a Board-level decision, but the balance the Board went through was to try to figure out how to make all of those things work. And where they came out was leaving the dividend where it is now, was the most prudent course forward.

Simon Flannery

Great. And you can finance that without issuing equity, I think you said it.

Daniel Schlanger

Yes. Well, that is an important point. And thank you for bringing it up. We believe we can make that happen. Everything I just talked about, investing in the future of the business, paying our dividend and maintaining our business. Without issuing equity in 2024, it will likely lead to our leverage being a bit higher than our target of 5x debt to EBITDA in 2024. We think we can live with that.

We've done -- we've had periods of time in our history where we have investment like we do now that has outpaced the EBITDA generation of the underlying business, like it's going on now, where our leverage went up and we were able to have confidence in the future of the cash flow generation of the business that allowed us to know that over time, we will bring that leverage back down to where we expected to be in that 5x range, which gives us confidence that in any period, if it's -- if our leverage is a little higher than our target, that's okay. Just like there are periods where our leverage is a little lower than our targets because we know investment is coming. We've done both and believe we will be in a sustainable period going forward as our business continues to grow.

Simon Flannery

So it's been a tumultuous year for big tower companies. We had a, I think, one of your peers used the word abrupt slowdown in carrier CapEx. And unlike prior cycles, it all seem to happen at the same time. But we've seen this movie before. We transition from a period of very heavy activity to one of a more normal run rate.

I guess the question is, it sort of -- does it go down and just stop and then you pause and then start again? Or are we now in -- some of our survey work suggests we are kind of reaching some sort of a new level of activity. And it is not that -- I've heard some talk about green shoots in the middle next year, second half of next year. How would you characterize where we are in that kind of transition right now?

Daniel Schlanger

I think you alluded to it. Any generational upgrade in the wireless network in the U.S. has followed a similar pattern where -- whether it was 1G to 2G or 2G to 3G or 3G to 4G and now 4G to 5G, where our customers, the mobile operators, invest very heavily at the beginning to get the new generational technology into the system enough to generate more demand from their customers and to make sure that kind of the base level experience has now increased with the technological upgrade. That period of a surge is followed by some reduction in activity and then a resumption of a kind of level load of activity for a long period of time.

So the surge usually lasts anywhere from 2 to 3 or years or so. There's a reduction that happens. It's a little short period of time. And then there is a 5- to 10-year period that's kind of a level that is consistent over a long period of time, which is higher than the trough and lower than the surge, somewhere in between.

That's exactly what has happened in 5G. It was -- the period in 5G of the surge was exacerbated from historical periods for 2 reasons. One is just our customers acted at the same time when historically, they had phased approach to things, and I'll explain that in a second. And two is we had a new competitor coming in building out a new nationwide network in DISH.

On the first point, where our customers were acting at the same time, historically, there had always been a leader moving into the new technological upgrade. So in 4G, that was generally seen as Verizon at the time. They're calling it LTE at the time, where they pushed into LTE in kind of early 2012, give or take, to 2013. And as they did so, their network quality got better, and there are other mobile operators in the U.S. followed suit shortly thereafter, but it staggered some of the increase in that surge over a period of time.

So the peak wasn't as high for 4G, and the trough wasn't as low. In 5G, what happened was there was a -- there was more spectrum that was allocated to our carrier customers in 2020 through 2022 than in the history of the wireless business in the U.S. combined. Through Sprint getting access to the 2.5 gigahertz spectrum through -- or T-Mobile getting access to Sprint's 2.5 gigahertz spectrum through the merger or AT&T and Verizon spending on C-band, there was more total capacity and more total spectrum added than at any other time, which I think put a lot of pressure on our customers to try to get a lot of that capacity on to towers so that they could benefit their consumers so they could actually make money out of it. They're sitting on an asset like spectrum and not deploying it. It's just an asset on your balance sheet, not generating in return. And they were so much invested, they couldn't let that happen.

So they all acted at the same time to get that spectrum on towers as quickly as possible. And then DISH was also building out a nationwide network at the same time. So the activity levels at the beginning part of the surge for 5G were very high. And you saw the effects of that on Crown Castle's results with our tower growth being higher than our historical averages, so being over 6% and our dividend growth being 9% to 11% through those periods, which was higher than what we expected as well.

So we took advantage, and we're very pleased with that outcome. But what happened was just like everything was happening all at the same time going up, everything happened on the same time going down where everybody stops spending in about the same time. And so there was a marked contrast between the bigger surge and the lower trough than what we had seen in the previous generational upgrade cycles. And it led to a -- one of our peers saying an abrupt change. I don't think we used the word, but we said it happened fairly quickly.

So it was in kind of middle into this year, middle of 2023 where it happened early in 2022, and it happened and drove a very big change in the level of activity we've seen on the tower side of our business, which is part of the reason that we're going from what I described earlier, of over 5% growth in towers in 2023 to 4.5% growth in towers in 2024 is this slowdown in activity. It all makes sense to us, at least if that happens. But we believe this trough is not where the ultimate settling out will be. We believe the settling out, the period of 5 to 10 years of continuous investment in the upgrade cycle, which happens, we believe, will be higher in total dollar terms than that same cycle in 4G.

And therefore, we expect to see very good growth going forward, both on our towers and small cell business and think that that's going to be an underlying driver of great value creation for Crown Castle and shareholders over a long period of time because, again, the underlying driver of our business is data demand growth in the U.S. That is continuing. Our customers -- the carriers are going to have to continue to spend on their network, which drives a lot of utilization of our assets.

What we have positioned ourselves for is differentiated though in the U.S. and generally throughout the world. We are the only tower company in the U.S. investing in small cells. And whereas we're seeing a deceleration in the tower growth, we're seeing an acceleration in the small cell growth. And our customers knew that this was coming when they gave us large orders 2 years ago because it takes 18 to 36 months to build a small cell. They needed to give us those orders in the midst of knowing they were going to focus almost solely on towers for a period of time. They knew in the future, they would need densification in the form of small cells, therefore gave us orders. And therefore, we are now delivering on those orders going into 2024.

So in 2023, we believe we'll put 10,000 nodes on air. In 2024, we think that will accelerate to 14,000 nodes on air. And as I talked about, the new leasing activity is going from $30 million or $35 million in 2023 to $60 million in 2024, and growth is going from 7% to 14%. At a time, when our other tower peers are going to experience that deceleration and only that deceleration in the tower business, we are offsetting that deceleration with an acceleration in the small cells. That is exactly why we're in the business. We knew at some point, small cells will be required to meet the demand in the network in the -- on the network in the U.S. from increasing mobile data demand.

As that is occurring, the thesis is proving out. We are accelerating our small cell business. And it gives us a lot of confidence that the thesis we have and the investments we make are going to prove to be right because every incremental data point is more supportive of that thesis and more supportive of that thesis.

So we continue to invest because we see very good growth at very good returns. And it's something that we're excited about and remain excited about. I remain excited about the future of this investment because it's exactly playing out like we would have expected. The time frame may be a little different than what we would have expected 5 or 10 years ago, but that's always hard to predict. The activity is happening. The returns are coming in what we expect, and it's really an attractive place to be and a differentiated place to be, and like I said, I'm excited about it.

Simon Flannery

Great. I think in the past, you said that there's a large portion of the towers that you own and operate are not yet upgraded to mid-band 5G. Is that still the case?

Daniel Schlanger

The data point we gave was about 50% of our towers have been touched with 5G. We're not going to update that on a quarterly basis, but it's around that number, which means there's a lot yet to do on towers, which, again, gives us a lot of confidence that our business is positioned really well. However, our customers need to go to meet the demands on their network. Whether that's towers or small cells, we are available and have assets that they are going to need to meet that demand. And that puts us in a unique position of being able to monetize the activity levels, however they come to be. And it's something that, I think, we have not gotten a lot of credit for, mostly because the small cell business has not been proven.

The tower business, I think, is widely regarded as one of the best business models around for all the reasons I've spoken about. And I don't think that there is a similar conviction yet in the investor base on small cells because there's not been the history what happens in small cells as much as there has been in towers. We've been through lots of upgrade cycles, consolidations, macroeconomic events, and the tower businesses continue to grow and continue to generate good returns, increasing returns over time.

But it's not the case with small cells. It's too new to have done that. And so what we see is a huge opportunity. And I think other people see, yes, there's an opportunity, but we also don't know enough, so there's risk there as well. I just don't think we've gotten a lot of credit for the positioning that we're in that we are going to have more than -- if you look at what I said about our guidance, we have $110 million of new leasing activity on towers and $60 million new leasing activity on small cells. That means more than and half of the tower activity is coming through small cells. That's a huge increase from what we've seen historically.

So we're actually seeing the fruits of this strategy playing out, and I hope that, that will lead to more acceptance of this business model and the acceptance of our strategy because it is happening.

Simon Flannery

Right. Can you remind us of your relationship with DISH? I think you were one of the first to sign a contract with them. So where does that stand today? I think in the past, you said something like 2% of revenues. Is that right?

Daniel Schlanger

Yes. It's in -- yes, we don't quantify it exactly, but it's a relatively small number of revenue. The contract we have with DISH was a 15-year deal that we signed in -- I forget when, so sometime earlier 3 years ago or so, sorry, I think. But the contract was written in a specific way such that we get a minimum fee regardless of how much activity they have, and they have access to up to 20,000 of our towers for a fixed amount of space, a finite amount of space on up to 20,000 towers. But the fee is not tied to the number of towers they are on or the activity in any period. That fee increases on a regular basis. So it is not a fee -- a fixed fee that is constant forever and a fixed fee that increases over time. And the reason that we entered into that relationship with DISH the way we did, which is different than most of our customers' relationships is that we wanted to incentivize DISH to go on our towers.

So if there's a fixed fee and they only go on one tower, it will be a very expensive tower. And if they go on 20,000 towers, it is a price -- a tower that is priced very similar to all of our other towers. So they have an incentive to go on more towers. We wanted to give them that incentive because we wanted them to rely on Crown Castle, first, as we believe that as they build their network, input customers on their network, they're going to have to add equipment, which is going to add to our revenue generation capacity in the future.

It also puts us in a very strong position in terms of the number of towers that DISH equipment is on. We believe we have an outsized number of Crown Castle Towers, which puts us in a much better position with DISH because we're much more important to them than anybody else is. So we are more in partnership with them than any other company is.

And because that fixed fee sits there, we feel really comfortable about the future of the business and the growth of that business. And if it was tied to some level of activity because they have been very vocal about meeting some requirements that have been placed on them by the U.S. government through the Federal Communications Commission, where they have to provide coverage to 70% of the U.S. population in 2023 to maintain the spectrum licenses they have; and by 2025, that number goes to 90% of the locations in the U.S., not just population.

And that, I think, is a -- has led DISH to have a lot of activity going into 2023. They said there will be a lot of activity on in 2025, but they reduced their activity in the middle. We don't feel the effect of that reduction in activity because of this structure we put in place, all of which was part of the reason that we decided to do so. And I think it's been a very good contract for us and a very good outcome for Crown Castle.

Simon Flannery

Great. And what about other tenants? The cable companies are talking about a little bit of edge outs. Do you think they might use some of your small cells or use strand-mount and any others like municipalities, private networks? Any other things that are interesting in terms of incremental demand beyond the major carriers?

Daniel Schlanger

On specifically small cells?

Simon Flannery

Either.

Daniel Schlanger

Yes. On towers, we always have a tremendous amount of activity outside of the big 4 customers we have. You mentioned some of them. They're wireless Internet providers, municipalities, fire departments, police departments, things like that just to provide connectivity. So we have that level of activity always on towers that adds to our revenue generation over time and similar contract structure, similar business models. That, we believe, will continue. All of that demand, we believe, will continue.

And some of it will go into small cells, not all of it. But one of the ones you mentioned, one of the sources of demand you mentioned in your question was the cable companies in the U.S. are starting to compete for wireless customers, just like the wireless customers are starting to compete for cable customers. That's good for us. That convergence of the business means there's more customers for us on both sides.

So as the cable companies compete for wireless customers, if they get enough wireless customer to sign up in a specific area, we believe the economics will favor them having their own infrastructure as opposed to utilizing the network that the network -- the MVNO agreement they have with Verizon. They can lower their costs by owning their own infrastructure. We are the lowest cost provider of that infrastructure. We think that, that would result in good growth for us through the cable companies. And we've seen some of their growth come through on small cells already but very small.

It's just too early to tell whether that's going to be a huge driver or not. But we believe that there is a legitimate possibility that as the cable companies do get customers that they will want to own small cells to have very targeted pockets of their own network at a lower cost to provide. So we're excited about the opportunity. It's just too small yet to have had much of an impact on our business.

Simon Flannery

Great. And looking at small cells more broadly, could you just describe the competitive environment between you and -- I think in the past, you've won more than your fair share perhaps or dominant share of the opportunities out there. How does that look today? We've got, I think, DigitalBridge as a player in this market, but it's a game of scale. So how would you -- looking forward to your competitive position versus others?

Daniel Schlanger

Our largest competitor in building small cells is -- or are customers. So the carriers, the operators building their own small cells is where we see the most competition. And what we have seen over time is that the number of small cells are outsourcing has increased, meaning that they see value in the proposition we bring. The reason they see value really boils down to one or 2 things, and I think it's true basically anything in an infrastructure model. It's either faster or cheaper, in our case, both.

So if we can deliver a small cell that is faster and cheaper, they will use us. If we can, they will use their own self-build. There will be markets that we are not willing to move into that they may want to build. Verizon may want to build in a market that we are not interested in because we don't see co-location happening in that market, and as an infrastructure provider, the only way we make money on an investment we're making is if we get a second tenant to go on that same asset or -- and then a third tenant, much like you can't pay for an apartment building with just one unit rented. You have to actually get some occupancy. Same principle holds true with our small cells.

So if we don't see that incremental occupancy through colocation from a different customer, we wouldn't want to build in the market. But other than that, our value proposition is that we can do something faster and cheaper. And the reason we can do so is we're sharing the infrastructure. It doesn't necessarily mean that we can build it cheaper, although we believe we can, given our experience and our history. But even if we can't, we only share a portion of the build cost with each customer as opposed to them bearing the entirety of the build cost if they build it for themselves. It's the same reason that the tower business is in existence, and it's the same reason that other shared infrastructure businesses work. And we believe that we provide a valuable service to our customers by providing them cheaper and faster access to network densification.

In terms of third-party outsourced providers, we believe we are the largest by far. We have 60,000 nodes in our backlog and about 50,000, 55,000 nodes on air. So about 115,000 nodes, either operating or to be built. We don't think anybody is anywhere close. And as you pointed out, the orders we're getting are for 15,000 or 35,000 nodes, not for 1,000 or 2,000 nodes. So having somebody come in and say, hey, we're going to enter this business in one specific market and build you 500 nodes, we don't believe it's actually a very likely outcome at this point because our customers want to build in different markets at the same time across the U.S. And having one counterparty makes it significantly easier and less expensive for them internally to manage.

And so we believe we are creating competitive advantage every day by continuing to get better and better at small cell builds, get more and more ingrained in our customers, have them trust us more and more because we deliver on what they say what we say we're going to do for them and make it harder for third parties to compete with us.

We will always have the competition of the cells' performance. We do not believe that we're going to be the only provider of small cells in the U.S. We believe that there will be plenty of competition going forward. But we think it's going to be hard to compete in certain markets where we already have significant fiber. And we believe that's because the cost will be lower for us to provide the future small cell than anybody else do.

Simon Flannery

Right. So as you noted, you're going to have your second big ramp sequentially into next year with 14,000. Is that trajectory likely to continue? Or should we think about sort of 14,000, 15,000 as sort of the new normal here given what you're hearing from the carriers at the time?

Daniel Schlanger

Yes. It's hard to tell. We believe that, generally speaking, the number of small cell nodes in the U.S. will increase, and therefore, the trajectory will increase. But in any given year, it's hard to tell because the pace at which we deploy depends more on the demand from our customers than it does our ability to supply. We have not run into supply constraints. What we've run into is demand constraint. Our customers only want 14,000 next year.

So I can't really tell you what '25 or '26 are going to look like until we get there. But we have a backlog of 60,000 nodes. And we see mobile data demand increasing. So we would feel comfortable that the growth in that small cell business over time will remain consistent or, hopefully, be better.

Simon Flannery

And things like fixed wireless would be pretty good for you as well.

Daniel Schlanger

Yes, it would be great. As fixed wireless consumes so much more of the data capacity or network capacity in the U.S., we believe it's just another use case that has data demand to that 20% to 30% growth that, we think, will be very beneficial for us over time.

Simon Flannery

Maybe we're running out of time. One last one here. Given that we're in Europe, there's been a lot of European tower M&A. I think you've always had a developed market focus but haven't done a lot of deals in the last several years here. So just perhaps give us a view, I'm sure you see a lot of things. How do you think about the M&A landscape and Crown's part in it?

Daniel Schlanger

Yes. So we are -- developed countries only would be in our option set. We don't think that emerging markets provides a good risk-return relationship. We would be very interested in countries in Western Europe and developed countries in Western Europe. We believe that will be a great business to be in. We just believe that the growth we saw in the revenue of those businesses that have come to market did not justify the prices being paid, so the returns just weren't good enough. And we have significant growth that we think is driving great value for us in the U.S., which we still believe is the best market in the world for wireless services because of the combination of higher average revenue per user, higher investment and more technological advancement, which is good for us.

So we believe that we want to stay focused on the U.S., although Western Europe would be attractive at the right price. We just haven't seen that price. And hopefully, that will change and we can make some inroads. Nothing against it. We're excited to be able to do so.

Simon Flannery

Great. Dan, thank you so much for your time. We appreciate it. I wish you all the best.

Daniel Schlanger

Thank you very much and great to be here. Appreciate it.

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Crown Castle Inc. (CCI) Morgan Stanley 2023 European Technology, Media & Telecom Conference (Transcript)