Crown Castle Inc (CCI) — Q1 2017 Earnings Call Transcript

Thank you, everyone, for joining us today as we review our first quarter 2017 results. With me on the call this morning are Jay Brown, Crown Castle's Chief Executive Officer; and Dan Schlanger, Crown Castle's Chief Financial Officer. To aid the discussion, we have posted supplemental materials in the Investors section of our website, which we will refer to throughout the call this morning. This conference call will contain forward-looking statements, which are subject to certain risks, uncertainties, and assumptions. And actual results may vary materially from those expected. Information about potential factors which could affect our results is available in the press release and the Risk Factors section of the company's SEC filings. Our statements are made as today, April 25, 2017, and we assume no obligations to update any forward-looking statements. In addition, today's call includes discussion of certain non-GAAP financial measures. Tables reconciling these non-GAAP financial measures are available in the Supplemental Information Package in the Investors section of the company's website. With that, I'll turn the call over to Jay.

Thanks, Son, and thank you, everyone, for joining us this morning on the call. As you saw from our earnings release yesterday, we kicked off 2017 with a great first quarter as we exceeded the high end of our guidance across the board and raised our full year outlook for 2017. This quarter's strong performance is attributable to our continued focus on execution and disciplined capital allocation. This morning, I'd like to highlight several positive data points supporting our strategy of increasing our long-term dividend per share by leasing our towers and fiber and allocating our capital to assets with expected high returns. Over the last several years, we've seen a fairly consistent and healthy leasing environment across our portfolio of 40,000 towers. Exiting the first quarter, we are seeing early signs of increasing activity as the pace of new leases and amendments of existing leases on our towers is above the level at this same time last year. Recent developments like the award of the FirstNet contract and the completion of the 600 megahertz spectrum auction give us confidence that there continues to be an extended runway of growth for towers. Turning to small cells, we are seeing a significant increase in activity from our carrier customers as they utilize small cells to augment and further densify their macro networks and deploy spectrum closer to their customers. Our small cell pipeline currently stands at record levels with contracts to deliver nearly 25,000 nodes over the next 18 to 24 months, which, when completed, will nearly double our existing small cell nodes on-air. Our contracted pipeline is a testament to our customers' confidence in our ability to assist in the deployment of their wireless networks and speaks volumes about the quality of our metro fiber footprint and our industry-leading real estate, network engineering, and node construction capabilities. To execute on this growing pipeline and position us for the next leg of growth in small cells, we are making additional investments to further scale our organization to be in position to deliver approximately 10,000 small cell nodes per year. In addition, we have made several acquisitions to support our small cell strategy, including Sunesys, FiberNet, and our proposed acquisition of Wilcon. Wilcon excites us because it will give us additional fiber assets in our most active and fastest-growing market for small cells. Our attractive dense metro fiber footprint of over 29,000 route miles pro forma for the Wilcon acquisition is located in the top U.S. markets where we believe there will be sustained small cell demand. As a result, we are seeing significant opportunities to drive meaningful return on our fiber assets.

Thanks, Jay, and good morning, everyone. As Jay mentioned, we got off to a great start in 2017, exceeding the high end of our prior guidance for site rental revenues and adjusted EBITDA. Driven by strong results from the first quarter, we are increasing our full year 2017 outlook for site rental revenues and adjusted EBITDA. Turning to first quarter results, site rental revenues grew approximately 7% or $58 million, including about 4% growth derived from organic contributions of site rental revenues. The growth from organic contribution consists of approximately 8% growth from new leasing activity net of about 4% from tenant non-renewals. We closed on our $1.5 billion acquisition of FiberNet and invested an additional $262 million in capital expenditures, including $225 million of revenue-generating capital expenditures across towers and small cells. We expect our full year 2017 outlook to reflect an increase in tower leasing activity and expected network service gross margin. Given the long cycle time required to bring nodes on-air, the anticipated revenue benefits associated with our record small cell pipeline are expected to come in the second half of 2018 and beyond. Importantly, we believe we will generate yields of approximately 10% on the build-out of this pipeline. Our current full year outlook does not include the expected contribution from Wilcon.

Thanks for taking the question. In the past, you've given us some good color talking about how the early lease-up on small cells is actually in line with what you saw in towers back when towers were an emerging model. The other side of the equation that investors like to focus on a lot is the cost associated with scaling small cells. Is there any story you can tell about how the investment levels you're making in the small cell business may be similar or different to what you were doing, I guess, a while ago as you were building up your tower footprint?

Yeah, Brett, happy to do that. I think the important point to note here is that the all-in returns of small cells are higher than what we originally saw when we were investing in towers. The second component of it is that from a co-location standpoint, we're seeing the lease-up on these small cells occur faster than what we originally saw when we built towers. We're ramping up on the operating side to meet the demand we're seeing.

Great. And just a quick follow-up. I think Dan alluded to this, but it sounds like your anchor tenants are still paying you initial rents that work out to the targeted 6% or 7% yield. Is that correct?

That's correct. And then the co-location activity continues to be where we expected. So on a blended basis, we're seeing good results in our pipeline.

Thanks. Jay, you talked about being encouraged by some of the activity you're seeing on the tower leasing so far this year versus 2016. Can you talk about the overall environment here and have you seen a material change in behavior?

Yes, on the first question around tower leasing in the first quarter, we raised our outlook for tower leasing based on the activity we saw during the first quarter. Our outlook does not include the impact of FirstNet until we have clarity on state options over the next year.

Hey, guys. Thanks for taking the questions. I guess, first one would be, Dan, I think you've mentioned that the bulk of the revenue opportunity for the backlog of small cells, which you said was 25,000, was going to be in the second half of 2018. I guess two questions around that.

Yes. We think the capital required is around $1.2 billion, and we expect a run rate of around $120 million once everything is installed and on air. What’s going to move the needle between now and then is the backlog we will execute on that allows us to grow between now and the end of 2018.

On your second question regarding FirstNet, I don’t want to get into specific negotiations, but I think in terms of timing the plan for build-out will have clarity in the first quarter of 2018.

Thanks. Appreciate the color on the small cell backlog. Can you help us understand kind of the timeframe of the $1.2 billion CapEx?

The timing of the capital spend will likely follow just a little earlier than the timing of revenue. We can't give you an exact number on that. It will roll out over the next 18 months or so.

It's still probably too early to know exactly what that’s going to look like. Historically, the first wave of activity tends to be amendments on existing sites, and additional spectrum bands deployed by carriers will look for existing infrastructure.

Thanks. Can you comment on the growth you've seen on the legacy T-Mobile assets versus legacy AT&T assets?

Across all assets, leasing is generally consistent and performing as expected. We do not see a significant differentiation.

When I look at the guidance update that you provided, you slightly increased your expectations for churn. What's driving that?

We don't have a different expectation for churn for calendar year 2017 than what we did previously. The timing of that churn occurred a little earlier than our previous expectation.

Is the increase in the pipeline doubling of nodes you're talking about able to be met with fiber you own today or does it require more M&A?

The $1.2 billion of capital cost includes what we need to build from a fiber standpoint. We've not assumed any acquisitions to the extent that we don't have existing fiber footprint.

How instrumental was the Wilcon fiber in your ability to close and deliver on those commitments?

We thought it was the fastest way to deploy the nodes we had under contract, but we believe we would have delivered for customers even without it.

On Wilcon, can you talk about the growth profile, and how we should think about that $40 million gross margin contribution going forward?

The growth profile will be driven from the 25,000 contracted nodes, and those assets will benefit greatly from that. The growth rates will be high as we add those nodes.

On churn, can you give us some sense of what type of churn rate there is in the small cell business?

It's way less than 1%.

On last week's announcement, one of your customers wants to build a lot of fiber on its own. How does that change your expectations for leasing fiber in certain markets?

It's indicative that there's going to be a lot of small cells built in the market. The carriers will continue to self-perform.

Back to the 70% anchor build and 30% co-location mix for the pipeline you've discussed, can you talk about how this mix compares historically?

Initially, 100% of our builds would have been brand-new. The percentage of co-location has increased, and as we build the opportunity gets bigger, we're seeing a significant increase in the amount of co-locations.

The $1.2 billion in small cell costs and how we look at the pipeline definitely involves a mix of anchor builds and co-locations.