Crown Castle International Corp. (CCI) is a second-largest independent operator of wireless communication towers in the United States. It owns 40,000 tower sites in the U.S., more than 1,700 more in Australia, and 200 in Puerto Rico, and its main customers are wireless carriers such as AT&T Inc. (T), Verizon Communications Inc. (VZ), Sprint Corporation (S) and T-Mobile US Inc. (TMUS). The company provides network design, radio frequency engineering and site development services as well. Since the acquisition of Global Signal Inc. in 2007, the company has grown and diversified geographically, and added efficiency and pricing control, allowing Crown Castle to compete with big rivals in the industry.
The firm has primarily two business segments: Site Rental and Network Services. Site Rental segment leases and licenses antenna spaces, mostly to wireless carriers, under long-term contracts. Wireless carriers acquire lease access to Crown Castle’s distributed antenna systems for the transmission of wireless signals, and place their own antennas and equipment in the tower. This segment reported 81.5% of the total revenue in the fourth quarter of 2013. Through the Network Services segment the company provides various services related to antenna installations, network design, site selection, site acquisition and site development. In the fourth quarter of 2013, this segment generated 18.5% of total revenue.
Recently, the company decided to reorganize its structure in order to qualify as a Real Estate Investment Trust (REIT) for tax purposes. Therefore, since Jan. 1, 2014, as a REIT, Crown Castle is able to pay at least 90% of its taxable income to shareholders in the form of dividends every year while driving tax savings and cash flows. Company’s financials for fourth quarter 2013 where above analysts’ estimations, with an extensive tower portfolio, expansion of Small Cell business, aggressive deployment of 4G LTE and VoLTE networks and increased usage of smartphones. Moreover, the fact that Crown Castle has more than 97% of the coming year's revenue projections already under contract, has added serious stability to the company’s mid-term performance.
A Company, an Industry
No one doubts wireless services are advancing and the usage of cell phones and smartphone has reached tremendous levels. In this context, a company like Crown Castle, with its efficient site management of cell towers and equipment, is in the right position to address this opportunity. Moreover, the long-term lease agreements under which the company works make management confident of producing approximately $21 billion of revenues in the next 8 years. A recent increase in leasing activities is expected to achieve 30% growth compared with 2013, and in addition, the successful integration of the AT&T towers is estimated to generate extra revenues for the first quarter of 2014, of nearly $85 million.
Carriers usually choose to renew contracts upon expiration as the costs of moving equipment from one tower to the other requires great deal of effort and high costs. Therefore, Crown Castle sees a steady stream of revenue from these contracts, and its increase is achieved by the expansion of occupancy levels within each existing tower, and of course through annual price hikes of 3-5%. A growth in revenues from both segments, but specially in Network Services segment, -Site Rental segment generated 14% revenue growth, and Network Services segment increased 43% in last fourth-quarter- led the company to raise its Site Rental segment guidance for first quarter and full-year 2014.
The growing usage of smartphones requires upgraded networks, forcing carriers to install new equipment at tower sites. Expansion of 4G LTE and the new Voice over LTE (voLTE) of Verizon Communications Inc. (VZ) is expected to drive data consumption 30%. The growing popularity of high-speed mobile voice, data and video technology is likely to push further up Crown Castle’s top line growth. Likewise, in Australia carriers are initiating network upgrades as well, implying a significant expansion from Crown Castle.
Crown Castle has acquired recently the privately held company NextG Networks Inc., largest provider of outdoor Distributed Antenna Systems (DAS), with more than 7,000 DAS plus another 1,500 nodes in the pipeline, and over 4,600 miles fiber-optic cable’s transmission rights. Through this addition, the company has improved greatly its DAS network across 26 United States metropolitan areas. As NextG has only 1.7 tenants per network on an average and thus underutilizing its capacity, Crown Castle will increase customers with no integration and rearrangement costs. Another company’s big move was the acquisition of 9,700 wireless towers from AT&T Inc. (T) Located in the top 100 markets in the U. S. T-Mobile is likely to maintain its infrastructure in these towers for the next 10 years. On top of all, the recent conversion of business into a REIT has represented long term benefits for the company in terms of tax savings and enhancing shareholders’ wealth.
The smartphone market is increasing, and it currently accounts for more than half of the handsets used in the U.S. making carriers expand its capacity to relieve the burden on their networks. This indeed benefits companies such as Crown Castle. Nevertheless, Crown Castle has a very high customer concentration, as historically more than 80% of revenue has come from top four customers: Sprint (S), AT&T (T), Verizon (VZ) and T-Mobile (TMUS). Therefore, this introduces a dependency towards spending, putting Crown Castle at a vulnerable place. Also, wireless industry consolidation could result in network overlapping, and a resultant limitation of the long-term capital expenditures of carriers. This introduces some risks regarding the company’s performance.
Crown's REIT conversion allows it to pay a dividend which yields enhancing shareholders. Still, the company has high level of debt -the debt-to-capitalization ratio stands at 0.62.-, so the firm's leverage can at times drag down the share price. Nevertheless, Crown Castle continues to refinance its debt and has lowered its weighted average coupon from 6.2% to 4.3%. Analysts are regarding the positive results the company has had in the past quarters, and the stability it is likely to sustain in terms of revenue growth. An increased usage of cell phones and new wireless technology is furthermore esteemed to continue boosting the company’s top line.
Disclosure: Damian Illia holds no position in any of the stocks mentioned.