Crown Castle Inc. (NYSE:CCI) Q4 2023 Earnings Call Transcript

Crown Castle Inc. (NYSE:CCI) Q4 2023 Earnings Call Transcript January 25, 2024

Crown Castle Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good day and welcome to the Crown Castle Fourth Quarter 2023 Earnings Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Kris Hinson, Vice President of Corporate Finance and Treasurer. Please go ahead.

Kris Hinson: Thanks, Scott and good morning, everyone. Thank you for joining us today as we discuss our fourth quarter 2023 results. With me on the call this morning are Tony Melone, Crown Castle’s Interim 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 at crowncastle.com that will be referenced 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 sections of the company’s SEC filings.

Our statements are made as of today, January 25, 2024 and we assume no obligation to update any forward-looking statements. In addition, today’s call includes discussions 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 at crowncastle.com. With that, let me turn the call over to Tony.

Tony Melone: Thanks, Kris and good morning, everyone. Thank you for joining us. Before I begin, I’d like to take a moment to thank Jay Brown for his 25 years of service to Crown Castle, including the past 7 as CEO. We are grateful for his many contributions over those years and wish him well in his retirement. As we work to identify the next CEO, I am also thankful for the Board’s confidence in me to lead the company during this interim period. I am excited to serve in this capacity. I have been associated with Crown Castle for over 25 years, principally as a customer, but also as a joint venture partner in the early days and most recently as a member of Crown Castle’s Board of Directors. Over that time, I have witnessed the Crown Castle team of dedicated talented people grow the company into the nation’s leading provider of shared communications infrastructure.

In my first few weeks in the new role, I have been impressed by the open, candid and thoughtful discussions I have had with teammates throughout the organization. I am enthusiastic and optimistic about our path forward. In the near term, I will be focused on the following priorities. First and foremost, I am committed to ensuring that our organization continues to execute for our customers, positioning us to meet or exceed our financial and operating goals in 2024. Secondly, I want to facilitate a seamless transition to the company’s next CEO. And lastly, I will assist the Board in evaluating the alternatives that may come out of our strategic fiber review and help position the company to maximize shareholder value regardless of the outcome of that review.

My confidence in achieving these priorities is bolstered by having a closely aligned leadership team that is focused on delivering strong operational performance. To that end, I am pleased to announce that Dan Schlanger will continue serving as Crown Castle’s Chief Financial Officer. Dan has been a valuable member of our executive leadership team for the past 7 years. His expertise, leadership and institutional knowledge will be vital as we position the company for success in 2024 and beyond. In addition, Mike Kavanagh, currently, our Chief Commercial Officer, has been appointed Chief Operating Officer for the Tower segment. Chris Levendos will remain in the role of Chief Operating Officer for the Fiber segment. The Tower, Small Cell and Fiber Solutions sales teams currently under Mike will be distributed across these two organizations.

I believe this change in leadership structure provides an enhanced focus on generating the highest returns in each business segment and will best enable us to maximize value across our portfolio. We have also recently taken steps to further strengthen our company’s Board with the addition of three new directors. Jason, Sunit and Brad each bring valuable financial, operational and industry experience. We look forward to benefiting from their unique insights and expertise as we work to leverage our strong foundation and position Crown Castle for the future. At this point, I’d like to share some of my personal insights into how I see Crown Castle positioned. In my 30 plus years of experience in the wireless industry, I have seen the Tower business grow tremendously, particularly during periods of generational upgrades.

During my time at Verizon, the shift from 3G to 4G required more tower densification than initially expected and more than initially deployed. The coverage and capacity from the new 4G technology and corresponding new spectrum that it was deployed on was not sufficient to meet the promised performance levels of that technology. This was especially true at CellEdge [ph] and resulted in further densification over time. I think a similar dynamic is in play with 5G. The remaining densification required to deliver on the promise of 5G performance will drive not only robust tower growth, but also significant demand for small cells. As the largest shared communications infrastructure provider in the U.S., with a unique portfolio of towers, small cells and fiber, I am excited to see how we can take advantage of these industry trends and deliver value to our shareholders.

As a final note, the work of the CEO Search Committee is underway and the Fiber Review Committee is well into its work as it oversees the Board and management’s review of strategic and operational alternatives that maximize value across our enterprise. We will provide updates on each as developments warrant. With that, I will turn the call over to Dan.

Dan Schlanger: Thanks, Tony and good morning everyone. I want to start by saying how glad I am to continue serving as Crown Castle’s CFO. This is a great company and a great industry, and I look forward to helping deliver on our 2024 plans while positioning the company to grow long-term shareholder value. Moving to 2023 results on Page 4. We finished the year in line with our expectations. Full year site rental revenues grew 4%, which included $212 million of core organic growth, excluding the impact of Sprint Cancellations. In the year, tower organic growth was 5%, supported by our decision to pursue holistic long-term agreements with each of our major customers. Tower growth remained resilient despite the industry-wide slowdown in tower activity in the middle of 2023.

Additionally, small cell growth was 6%, resulting from 8,000 new nodes in 2023. We completed an additional 2,000 nodes in the year that are expected to begin billing in the first quarter of this year. Finally, fiber solutions revenue was flat in the year. The slowdown in tower activity in 2023 had the most pronounced impact in our services business, driving a $100 million decrease in our margin year-over-year. The decline in services contribution along with increased interest expense from the rise in interest rates in 2023 partially offset our revenue growth, resulting in 2% AFFO growth for the year. Turning now to Page 5. Our full year 2024 outlook remains unchanged. Strong underlying growth across our business continues to be supported by increasing data demand and the network densification required to meet it.

We continue to forecast tower activity levels consistent with the back half of 2023 as well as accelerating small cell growth. With 2,000 nodes shifting from 2023 to 2024, we now expect to deliver 16,000 new nodes this year. With respect to Fiber Solutions, we returned to growth of 3% in the first quarter of 2023 and continue to expect 3% organic growth in 2024. However, as discussed in our call last quarter, the following three items are expected to negatively impact our 2024 results. First, the $170 million of Sprint Cancellation payments we received in 2023 will not recur in 2024. Second, we anticipate a combined $250 million reduction in non-cash items, specifically to our straight line adjustments and amortization of prepaid rent. And lastly, we expect $55 million in lower contribution from services gross margin.

Due to these impacts, our 2024 outlook shows year-over-year declines in site rental revenues of $160 million or 2%, adjusted EBITDA of $250 million or 6%, and AFFO of $270 million or 8%. Normalized for the impact of the items I just mentioned, site rental revenues, adjusted EBITDA and AFFO would show year-over-year growth of 4%, 5% and 3% respectively. Turning to Page 6. Expected organic contribution to full year 2024 site rental billings remains unchanged with consolidated organic growth of 2% or 5% excluding the impact from Sprint Cancellations. The 5% consolidated organic growth consists of 4.5% growth from towers compared to 5% 2023, 13% growth from small cells as we expect 16,000 new nodes in 2024 compared to 6% growth in 8,000 nodes in 2023 and 3% from Fiber Solutions compared to flat in 2023.

Full year 2023 site rental revenues were $21 million above the 2023 outlook at the midpoint, inclusive of approximately $5 million higher than expected non-recurring tower segment revenue in the fourth quarter. Our 2024 outlook for site rental billing remains unchanged and we expect year-over-year core leasing activity to be within the growth ranges in the chart. Moving to Page 7. We expect to deliver $65 million of AFFO growth at the midpoint, excluding the impact of Sprint Cancellations and the non-cash decrease in amortization of prepaid rent. Turning to the balance sheet. In December of 2023, we issued $1.5 billion of long-term fixed rate debt, allowing us to end the year with approximately $6 billion of unutilized capacity on our revolving credit facility, a weighted average debt maturity profile of 8 years and 92% fixed rate debt.

Lastly, our 2024 outlook for discretionary capital remains unchanged at $1.5 billion to $1.6 billion or $1.1 billion to $1.2 billion, net of $430 million of prepaid rent received. To wrap up, strong underlying growth across our business continues to be supported by increasing data demand and the network densification required to meet it. The contracted agreements we have in place provide line of sight into continued underlying growth over a multiyear period. We believe this growth provides a stable foundation for our current dividend and supports our 2024 CapEx plan without issuing equity. Our unparalleled domestic portfolio of tower, small cell and fiber assets, provides a growing number of opportunities to create value for our shareholders.

With that, Scott, I’d like to open the call to questions.

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Q&A Session

Operator: We will now begin the question and answer session. [Operator Instructions] The first question comes from Simon Flannery with Morgan Stanley. Please go ahead.

Simon Flannery: Thank you very much and good morning. Tony, I appreciate the comments on the densification. It would be great to get a sense of what you think the shape of that looks like. I think you’ve assumed that we continue at the levels of the last couple of quarters. Do you think we sort of pick up then over the next 2, 3, 5 years as the traffic continues to grow or is it going to be a little more lumpy than that? And any comment on the current leasing environment we did here, I think Nokia’s CEO earlier this morning, talking about expectations of some green shoots in the second half of this year. So if you are kind of having better, more constructive conversations around plans that would be interesting to know as well?

And then Dan, just one thing for you on the discretionary CapEx, if there was a decision to do something on the fiber side, to what extent is that CapEx committed today versus still being something that could change later on depending on what the committee comes up with? Thanks.

Tony Melone: Simon thanks for the questions. I appreciate it. Let’s start with the shape and trajectory. It’s hard to speculate, obviously, on the progress that the carriers might make in terms of – a lot depends on their own personal capital allocation decisions. My personal opinion based on history is that it will likely be fairly non-lumpy approach over time. But it’s very hard to speculate exactly how it will play out. In terms of some of the commentary recently, it’s too early for us. We have not seen anything that will cause us to change our view of 2024.

Simon Flannery: Okay, thank you.

Dan Schlanger: And I’ll take the CapEx question, Simon. Thanks. Most of what we have on the small cell side of our business is committed, because we have customer obligations to build the small cells, the 16,000 that we have coming on air that we are building throughout 2024. But we obviously are going to be looking at – through the strategic review anything we can to drive the most value possible, including what our CapEx plans are, so we’ll have that in mind. And if anything does change out of that, we’ll update anybody. But as of right now, we see the same capital going for 2024 than we expected when we gave guidance in October.

Simon Flannery: Great. And could you just clarify that 2K that sort of slipped into 2024? What was the situation there?

Dan Schlanger: Sure. I think we discussed it a lot of the small cell node build that we had for 2023 was going to be back-end loaded, it was. And we built some at the very end of the year that we weren’t able to start billing until the beginning part of 2024. So we are talking about something crossing over a year, so being a month later than we expected or even less than that. It just – when we get into trying to figure out exactly when a node is going to be completed, it’s hard to pick to a day. But we feel like we have made the progress we expected to make during the year in 2023 of delivering for our customers and the fact that the billing didn’t happen just kicks it over into 2024.

Simon Flannery: Great. Thanks, Dan.

Dan Schlanger: Sure.

Operator: Our next question comes from Ric Prentiss with Raymond James. Please go ahead.

Ric Prentiss: Thanks. Good morning, everyone. And Tony, good to talk to you again.

Tony Melone: Thanks, Ric.

Ric Prentiss: A couple of questions. First, Dan, I appreciate the color on the 2,000 nodes for Simon. How should we think about what the disconnected nodes were in ‘23? And then I think there is another disconnected nodes in ‘24, probably around the middle of the year. Can you kind of help us understand, was that like maybe [Technical Difficulty] 2,000 to 3,000 disconnected last year and maybe 3,000 to 4,000 getting disconnected this year from that Sprint and other?

Dan Schlanger: Yes, Ric, as we discussed in 2023, a lot of the Sprint cancellations happened and some of those were on the small cells. We churned about 5,000 small cells in the year, which is if you look at kind of the number of small cells we have on air, we went – started 60,000 beginning of the year, took them down to 55,000 during the year with those 5,000 now, and now we’re up back to 65,000 that we – that are generating revenue for us at this point. I think we had talked about that. There is no more going into 2024 of actual churn, but there is some lop-over impact of having churn at the midpoint of the year that will then have a full year churn impact in 2024, which is what you’re seeing. So we don’t anticipate any significant or any churn really at all in our small cell business in 2024.

Ric Prentiss: Okay. And then I think previously, one of the churn slides had anticipated maybe 25 million of small cell churn split between ‘24 and ‘25, is that still the case?

Dan Schlanger: That is still the case.

Ric Prentiss: Okay. And then one more esoteric question. American Tower has started recognizing some capital expenditures for exercising purchase options from carrier transactions. I think in your 10-K, you all talk about you maybe have $9 billion of purchase options that could come due over the next many years. How should we think about how that flow of money comes in? Is it ratably equal over those different periods, whether it was an AT&T set of towers or a T-Mobile set of towers or any thought of giving us a table at some point about when the $9 billion worth of value would come in? And I think I did see a note that less than $10 million would come in before ‘25. Just want a little more color on that, if I could.

Dan Schlanger: Sure. To try to give a little color as we went into some of the transactions where we purchased towers from our carrier customers, some of those were structured as long-term leases where we had a purchase obligation at the end, which is what you’re referring to the $9 billion obligation that we have. Those are not ratable. They really start to kick in, in the mid-2030s area. And we will consider your comment there of providing more color or more certainty around when they come in, in the future in some sort of table, but we’re not close right now for that to be an obligation that we need to worry about at this point. Sorry, it’s an option at this point. It’s not an obligation. We have the option of doing so or not.

A bad language on my part. But we can provide some of that color as we get closer, but we’re still a long way away from that being a material number for us. And as you pointed out, less than $10 million, it’s just – it isn’t something that in the near-term has much impact. And as it does and as we get closer, whenever that maybe, we can provide more color at that point.