American Tower Corporation (NYSE:AMT) Q3 2023 Earnings Call Transcript

American Tower Corporation (NYSE:AMT) Q3 2023 Earnings Call Transcript October 26, 2023

American Tower Corporation misses on earnings expectations. Reported EPS is $1.26 EPS, expectations were $2.35.

Operator: Ladies and gentlemen, thank you for standing by. Welcome to the American Tower Third Quarter 2023 Earnings Conference Call. As a reminder, today’s conference call is being recorded. Following the prepared remarks, we will open the call for questions. [Operator Instructions] I would now like to turn the call over to your host, Adam Smith, Senior Vice President of Investor Relations. Please go ahead, sir.

Adam Smith: Good morning, and thank you for joining American Tower’s third quarter 2023 earnings conference call. We have posted a presentation, which we will refer to throughout our prepared remarks under the Investor Relations tab of our website www.americantower.com. On this morning’s call, Tom Barlett, our President and CEO will discuss current technology trends, and how our distributed portfolio of assets is positioned to benefit from ongoing wireless technology evolution. And then Rod Smith, our Executive Vice President, CFO and Treasurer will discuss our Q3 2023 results and revised full year outlook. We are also joined on the call today by Steve Vondran, our current Executive Vice President and President of our U.S. Tower division, who as announced this morning will assume the role of Global Chief Operating Officer effective November 1, before assuming the role of our President and Chief Executive Officer on February 1, 2024.

After these comments, we will open up the call for your questions. Before we begin, I’ll remind you that our comments will contain forward-looking statements that involve a number of risks and uncertainties. Examples of these statements include our expectations regarding future growth, including our 2023 outlook, capital allocation and future operating performance; our collections expectations associated with Vodafone Idea in India and any other statements regarding matters that are not historical facts. You should be aware that certain factors may affect us in the future and could cause actual results to differ materially from those expressed in these forward-looking statements. Such factors include the risk factors set forth in this morning’s earnings press release, those set forth in our Form 10-K for the year ended December 31, 2022, as updated in our Form 10-Q for the six months ended June 30, 2023, and in other filings we make with the SEC.

We urge you to consider these factors and remind you that we undertake no obligation to update the information contained in this call to reflect subsequent events or circumstances. With that, I’ll turn the call over to Tom.

Tom Bartlett: Thanks, Adam. Good morning, everyone. And my focus for today’s call will be on the technology trends and network investments that drive demand for our leading tower and data center platforms as well as the developments we’re seeing at the edge. While my comments will largely be focused on the 5G evolution and the progress we’re seeing in the United States, we believe similar trends will prevail across our international footprint as they have historically. Beginning with our macro tower business, the fundamental factor that drives demand for our global power portfolio, growth in mobile data consumption continues unabated. This is true both in the United States and across the globe, where mobile network data traffic has almost doubled over the last two years alone to a staggering 126 exabytes per month.

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Q&A Session

Looking out over the next five years, forecasted growth in data traffic per device remains compelling as more spectrum for 5G networks will be deployed at scale. Average monthly data usage per smartphone across our key developed markets like the U.S., Germany and Spain is expected to grow at a healthy compounded annual rate of 18% between 2023 and 2028. And I would note that these estimates have been somewhat conservative historically. So let’s spend a moment on where we are in the 5G investment cycle in the U.S. and where we believe we’re going over the next several years. Just as we saw with the 3G and 4G rollouts, we expect the 5G investment cycle to play out in three phases that represent discrete business cases for the carriers and these three phases will drive two peak periods of spend that are bridged by a temporary phase of more moderate activity.

The first phase is coverage-driven and aimed at upgrading existing infrastructure with new spectrum bands and radio technology, its competition to provide broad nationwide coverage with the new G ramps up. At the same time, carriers are looking to realize the efficiency benefits of their investments in new software, hardware and upgraded user devices. Initial equipment upgrades and new spectrum deployment quickly deliver reduced cost per gigabyte resulting in the ability to maintain margin profiles. Absent this migration, any incremental investments in the prior generation would be expected to result in significantly diminished returns as the additional densification required to sustain increasing network traffic on existing spectrum bands would be cost prohibitive.

As the cadence of initial coverage investments begin to moderate from record spend of over $40 billion in 2022, the first peak of the 5G cycle, we retain a high degree of conviction that there’s a long tail of network investment to come. This belief is predicated on several factors, including our experience with past investment cycles, industry forecast for growth in mobile data consumption that apply a necessity for significant incremental coverage and capacity and the visibility into network needs, we get through our contract structures. Today, Phase 1 of the 5G rollout is winding down and we’re heading into a second phase. We expect Phase 2 to be characterized by carriers beginning to harvest the network efficiency benefits of their initial investments, while moderating spend from the record levels of 2022 to roughly $35 billion in 2023, which is $5 billion in excess of 4G averages, representing the second highest level of annual spend on record.

In this next phase, we will begin to see a seeping in of 5G technology across the wireless and enterprise landscape. For example, 5G smartphone penetration has now surpassed the 50% mark in North America, which will ultimately allow for the majority of network traffic to shift over to 5G networks which we would expect to occur in the 2025 time frame. We’re also looking forward to the emergence of more ubiquitous accessibility of stand-alone 5G core networks, which will unlock improved 5G network quality, higher speeds and lower latency and provide a platform for the development of innovative services and consumer applications. Finally, we anticipate that the arrival of end-to-end 5G capabilities will facilitate additional monetization opportunities at the enterprise level through use cases like private networks, network slicing and other IoT services that are beginning to emerge today.

Ultimately, these dynamics will culminate in a third capacity focused phase aimed at significant densification of 5G networks. We continue to believe that 5G will advance and enable the next generation of mass market consumer use cases, particularly once 3GPP-released 17 and 18 are in the market, coupled with 5G cores that provide the true benefits of the end-to-end technology upgrade at scale. That said, meeting industry forecasts for growth in mobile data consumption that will drive the need for substantial network capacity investments seems highly achievable when taking into account the technology we have at our fingertips today. In fact, industry estimates already show that 5G subscribers are consuming 2 times to 3 times more mobile data than the average 4G subscriber.

So let’s take the case of mobile video consumption, which has consistently shown to be a dominant use case across subscriber usage types. As you can see on Slide 6, today the average smartphone subscriber in North America utilizes roughly 21 gigabytes of mobile data per month, and this is expected to grow to about 48 gigabytes by 2028. Of the 21 gigabytes consumed today, the majority or approximately 19 gigabytes are attributed to video streaming, which corresponds to a little over an hour of daily video usage and 360 and 480 pixel videos currently make up around half of that time. So by simply assuming a modest level of incremental usage towards higher resolution streaming such as 8 minutes of 4K Ultra HD, we would see video consumption alone drive usage to the forecasted 48 gigabytes per month or approximately 2.3 times the current rate.

Furthermore, the data already shows that 5G is driving increased usage of higher resolution video formats. A recent report from Ericsson found that since 2021, 5G users report a nearly 50% increase in time spent on enhanced video formats. For example, among that user base, usage of new video formats like 360 degree videos and multi-view streaming have increased by an average of 10 minutes and 15 minutes per day, respectively, while time spent streaming videos and standard resolution has decreased by 23 minutes over the same period. In short, we’ve already seen 5G adoption linked with a shift in behavior towards using more data intensive applications, a trend we firmly believe will continue going forward. And while we remain confident that new low latency, high bandwidth consumer applications will be born as 5G standalone networks are deployed at scale, we see a highly tangible case for densification requirements from where we stand today.

With that, I’ll briefly provide an update on CoreSite in our data center segment before shifting to the progress we’re making at the edge. The case remains that demand in CoreSite’s interconnection centric business is exceeding our initial expectations. Our teams delivered record signed new business in 2022, a record we are targeting to exceed in 2023. We’ve also seen consistent elevated growth in interconnection revenue, mark-to-market pricing increases that exceed our historical averages, low churn and ongoing performance that we believe positions us to deliver compelling results in the segment for many years to come. And much like we see in our tower business, the secular trends that underpin the business model like the migration of workloads from on-prem to hybrid multi-cloud environments and the emergence of AI use cases that will drive more demand in our ecosystem continue on a path toward long-term acceleration.

For example, findings from our recent 2023 state of the data center report showed that 94% of IT leaders noted that native direct connection between co-location data centers, major cloud providers, which CoreSite provides is essential for improved performance, enhanced security, cost savings and hybrid cloud connectivity. Further, 92% of IT leaders are considering moving critical workloads from public cloud to colocation to accelerate revenue growth and support the increasing need for AI and machine learning applications. In this context, we continue to upgrade our offerings and capabilities within the business to support emerging use cases. For example, earlier this month, we launched new capabilities on our OCX, our pioneering software defined networking platform, enabling clients to rapidly create higher bandwidth virtual connections to Google Cloud and AWS Direct Connect and between CoreSite data centers, including 50 gigabit services.

These upgrades reduce the time required for organizations to augment network capacity to support high bandwidth, low latency hybrid applications like AI, machine learning and digital media production. When it comes to current and future AI and machine learning applications, CoreSite’s flexible, purpose-built design data centers position us to host power-intensive GPU services being used for AI and ML use cases. For example, we’re already providing GPU capacity for applications like 3D visualization and rendering and for software development with a niche cloud environment. And for the densest AI applications, our purpose built facilities are designed to accommodate liquid cooling with modest development efforts when required. As we’ve stated previously, in the near term, we continue to believe the majority of today’s generative AI workloads will provide hyperscale opportunities that don’t meet our investment criteria or fit within the CoreSite ecosystem.