Started. I wanna welcome back Dan Schlanger, the Chief Financial Officer of Crown Castle. Appreciate you spending time with us.
Yeah, thanks for having us. It's great to be back here.
I think maybe I'll kick off with a macro question. You know, presidential elections, movements in interest rates, and any other kind of macro topics, in your seat as CFO, how do you think about that in the context of your balance sheet and possible impacts on capital allocation?
I think to start with, one of the best things about the core of our business, tower business, I don't think from a capital allocation standpoint, many of those things impact us at all. It's a business that has a tremendous amount of underlying positive growth trends, most of which revolve around the fact that we just continue to use our phones more. So as data demand in the U.S. goes up, the demand for equipment on towers goes up, and that is very rarely impacted by capital markets, presidential elections, macroeconomic trends. We use our phones more. And it's one of the great things about the tower business, is that if you can own a tower where there's demand around it, then there will be more demand around it, and therefore more demand for it.
So I think it's just another proof point of how good the business model is, that we don't really spend a lot of time thinking about what is gonna happen in a presidential election. Why? Because we ultimately get to, it's not gonna really impact us. On the interest rate side, of course, interest rates impact our cost of capital like they do any other business. And what I have found in my seat as CFO has been one of the more frustrating parts about our business is, the impact of interest rates is higher than the impact of our operating performance on our stock price.
So you look at our stock, at what we do and how we operate, and what cash flow we make, and that seems to have very little impact on how our business is valued. And the value ultimately comes, that it's tied a lot more to the interest rate environment. And that's frustrating to us, because we make good decisions and think that we're doing the right things in allocating capital, and our stock can be severely impacted by interest rate moves, and there's not very much we can do about that. And so it impacts our cost of capital in the moment. So the way we handle that is think about a long-term cost of our capital, not a short-term cost of our capital. So we think about long-term cost of equity and long-term cost of debt when we're making capital allocation decisions.
So short-term fluctuations in debt markets, interest rate environments, stock markets, don't significantly impact how we think about capital allocation. But obviously, we need to be sensitive to our ability to invest and make a return over our cost of capital, when our cost of capital is cheap. I don't know what's going on necessarily with the mic. We're good? So we are sensitive when our cost of capital changes, and we do make adjustments, but we have to think that those cost of capital changes are extended. They're not for specific moments in time.
So as a general answer to your question is, I don't think that the election or the current interest rate environment or what we're looking like from a stock price is really the impact that we have.
So maybe bring a microphone up, a hand mic.
I need to hold it.
Yeah.
But it's about as close to my mouth as I can get.
So-
I'm good.
Okay.
I'm all done.
No, no, no. Good, good, good way, good way to hit on a lot of the early topics.
It will be done now.
Yeah. I mean, you've slimmed down the CapEx profile. So maybe recap since the past year, there's been some operational changes, there's been some cost cutting. And maybe summarize briefly what you've accomplished, and then are there any operational priorities going forward before we hit on things like strategy and strategic review?
Yeah. What you're alluding to here, John... Is it? Can I get a mic?
Yeah.
All right. Is that better?
So far.
So far?
Yeah, yeah.
We'll see what we can do. See if that works.
Perfect.
So, what John's alluding to is in June of this year, we made an announcement that we were going to change the way that we operated our fiber segment, which includes our fiber solutions and small cell businesses. So we have the vast majority of our values in our tower business. We have another business that we've been developing in small cells, that we believe over a long term are going to be required in the network architecture going forward, because the amount of data that we generate and demand from the network will overwhelm the number of towers there are or can be built in most dense metropolitan markets in the U.S.
And the only way to satisfy that demand going forward, in our opinion, is via small cells, as an effective way of extending the network sufficiently to deliver us the network and demand or data that we require. And in that small cell business, and it's fed by fiber, so we own fiber as well, we made some changes in June of this year. Those changes were aimed at somewhat what I was talking about earlier, is that the cost of capital around us had changed, and so we wanted to react. But we also had a different way of thinking. And in the past, our view had been to build new assets, even in markets where we had assets, build out to new places.
So when a wireless carrier came to us and said: "Hey, we would like to build small cells," there's nobody, there's no small cell system there yet, you don't have fiber there yet. We would say: "Yes, we wanna build out," because we think over time, those assets would be extremely valuable and demanded as we demand more out of the network and small cells become more prevalent, that we would make a return as we got more customers on the same asset. So we wanted to build out our asset base to maximize the future opportunity that we could get.
We did the same thing with our fiber solutions business and enterprise business, where if there was a building that was a long way away from our fiber network, we would wanna build to it, because we thought in the right markets, because we thought that those fiber assets would also generate future co-location and good returns over time off of small cells. We made the determination earlier this year to stop that theory and go more towards just sell what we have. Because we have done a lot of that build-out in most of the dense markets in the US, that we have sufficient fiber to attack the vast majority of the opportunity set that we see in the near term, and even medium term, without building more fiber.
So we have focused more on co-location or additional revenue on existing assets, or said differently, on- net, near- net opportunities. By doing so, we significantly reduce the amount of capital that we think it takes to invest in our business, without significantly reducing the growth rate we can get to. So we believe we can cut a few 100 million dollars out of our capital plan, and the growth in our fiber solutions business can return back to 3% or so of revenue, annual revenue growth. And the growth in our small cell business can return to 10% or remain at 10+% over time, as demand is near our assets that we already have. By doing so, we will increase the returns.
Obviously, if you keep revenue growth and lower CapEx, those returns go up, and we think that that's something that is a very positive outcome in a higher interest rate environment, that's positive. Second, we think that our investors wanted us to show higher returns more than growth, and so we think it's a good result for us, and we are seeing very good results already from that decision to where we have seen a significant reduction in capital, and we have not seen a significant reduction in growth, or we don't think we will going forward.
Because what we think we'll do is in our fiber solutions business, we'll have a lower period of growth in the back half of 2024 , and then return back to growth in 2025 as our teams digest all of these changes. There are people impacted by these changes, and so, there's some disruption we expect. But because the small cell business has a lot of contracted revenue already, we think that that growth can remain 10-plus% over time, as I just said. But with that reduction in capital comes a reduction in activity. Capital is, for us, building new assets. That reduction activity required a reduction in force, the number of people working, or else we'd have a bunch of people not doing anything, and that's not good for people not doing anything.
It's also not good for our financial results. So we had the unfortunate impact of having to have a significant reduction in force along with these decisions. But we believe we've taken care of that, and we're in very good spot now to show going forward, growth and good returns in our fiber and small cell businesses, which is exactly what I think our investors want.
So on that topic, you’ve announced and alluded to, you know, on your earnings call and since, you know, some of the puts and takes around the strategic review, business seems to be on a predictable growth path for both small cells and fiber solutions, and yet, you may not own those businesses depending on where the review leads. So as you’ve gotten feedback from members of your board, customers, other stakeholders, what’s kind of the thought process and timeline around when you would expect to reach a resolution?
Yeah. So as you pointed out, we are in the midst of a strategic review of our small cell and fiber solutions businesses. The board has articulated that strategic review includes looking at a sale of all or a portion of those businesses, or not selling anything at all, just keeping it all. It is not. There's no foregone conclusion one way or the other, and what we're trying to figure out and how we're going through the process is what we believe the value of those businesses are, what other people could believe the value of those businesses are, and then make the best decision in the interest of our shareholders we possibly can, or the board possibly can.
It is a process that obviously takes time to get through all of those discussions. And the way that I think about it is we will make the best decision we can, and the timing is hard to pin down. But we understand that sooner is better than later, but we are not going to make timing be the driver of our decision making. We are going to make the right decision be the driver of our decision making. But what we are trying to do is obviously we are trying to maximize the value for our shareholders, and the board is trying to maximize value for shareholders. And I think that value will best be served by whatever the outcome is.
Compared to what the board believes we can do with the businesses as they sit today. I think one of the things we know and what we continue to understand and learn is that all the businesses we're in, we're in for good reason. Like I described it earlier, we believe small cells are required for the future of the network. They're connected by fiber, and so owning those assets makes a lot of sense for a business like ours, who's in operation to provide shared infrastructure for the network. But it may be that there are other entities that are better able to take advantage of those market dynamics than we are under one roof, and we need to figure out if that is indeed the case or not.
We are going through the process of trying to figure out whether those businesses make sense the most together under the umbrella of one company, that is predominantly a tower company, or whether they make sense separately, where we can be either all a tower company or all a tower and small cell company, or a portion of some of the capital gets input by somebody else. We're trying to figure out what the best corporate structure is that allows us to maximize value. There's no really easy answer to that question, because I can't tell you, sitting where I am today, what the value of our tower business is in the public markets, and what the value is of the fiber business is in our public markets. We don't know. There's no way to separate them.
We don't separate them enough. You don't separate them. You don't say: "Okay, I'm paying you this much in your stock price. We're, you know, ten of your dollars are here and ten of your dollars are here." Like, that's just not the way the stock market works. So there are a tremendous amount of assumptions that have to go into this type of analysis. And what I can tell you is the board is taking its responsibility extremely seriously, and they're very engaged and very informed of all of the issues. And they will make the decision that they think is in the best interest, even in the lack of clarity, which is always the case in a situation like this.
So while all that is going on, the world continues to operate. There's more mobile traffic, there's AI deployments inside of data centers. And I guess, thinking about, again, capital allocation, there's tower M&A. There is still fiber build, but it's pared back. But as you think about opportunities that aren't directly related to mobile infrastructure around things like edge compute, and so forth, what are your thoughts as to how you could leverage your assets? You made an investment years ago in Vapor IO, and you know, one of your peers has talked about leveraging some of their ground plots as potentially a way to benefit from this. So, give us an update on that.
Yeah, I think artificial intelligence is just, for us, another demand for moving data around. What we see and what I think most industry participants see is that as companies adopt some form of artificial intelligence, they're gonna have to move information from where they are to a centralized location where that intelligence will be applied and back to where they are, or at least call into what the operating models are for those or that artificial intelligence. But it's just more data being moved from one place to another. And we're in the business of moving data, whether that's wirelessly, where we provide towers or small cells to give antenna height, give antennas the height they need to provide the data wirelessly, or wired via fiber, which is the most efficient way to move data around.
We see a tremendous opportunity as data demand increases and the movement of data increases, for us to continue to generate good returns on the assets we own and that we've built. The fact that there's yet another demand for data should be unsurprising to us, 'cause every time people have thought, well, this damn demand for data is gonna go down at some point, we're gonna run out of things to use it for, there's always been something else. And AI being a next something else that people can see and understand is really helpful for us, because I think it gives a more concrete future in mind for why our assets are as valuable as they are.
We are always looking, to your point, John, at infrastructure that would be close to adjacent to the businesses we have today, that we can take advantage of those trends. One way that you mention is we could or we think about taking advantage of those trends is, we have a very large portfolio of distributed real estate across most of the metro markets in the U.S. through our tower business. Our towers all come with a compound of land underneath the tower, that houses equipment that helps run the network. That land typically has space for other things, and if those other things need to be things like we need to store data closer to our customers as a, I don't know, a cloud provider, this might be a very good place to do so because it's secure, it's connected, it has electricity.
It's already connected to a central point of the network, which is where the data is coming in from the wireless side. So there's benefit to being at the bottom of the tower. We would absolutely look to monetize that benefit as we would with any other of our assets, but it doesn't take a specific bet to do so. We actually have the assets, and we have the connectivity, and we have the relationships. So we feel really well positioned for what could be a step change, step function change in the amount of data being demanded due to artificial intelligence. But it's not like we or I care specifically about artificial intelligence. We just care that there's more data being-...
And like I said, there's been a lot of times where there's been a sentiment in the U.S. and across the world, that the amount of data being trafficked will kind of plateau. Because we have a hard time seeing past what we already know, and I think it's really helpful to get people, all of us, including me, to see, no, there's more things, or things will come up. We'll continue to use data to be more efficient as a society, and therefore, we, as Crown Castle, will be called upon to provide the infrastructure to do so, because we are the most efficient way to provide infrastructure. Because we share it among all sorts of different ultimate users, and I think that is why we're in business.
We lower the cost of everybody operating their own network because we share that cost among everybody. And I think that's a very valuable business model.
I want to open it up for audience questions, so if there are any, feel free to raise your hand, and I guess in the meantime, your CEO's talked about a holistic MLA coming up for negotiation over the next year. Maybe take us back in time a little bit in terms of your general philosophy around holistic MLAs on your macro sites, and what are the factors that you consider when either entering into new ones or renewing existing ones?
Yeah. So just to be clear, MLAs are the agreements that we have with our customers, whereby the terms and conditions are set out, where we're required to do and what they're required to do, including how much they pay. And there are times when those MLAs are structured such that we get a consistent revenue stream, so we don't get paid for every time they touch the tower or put assets on our tower. We just get paid a consistent revenue stream for a specific amount of space on our tower. Those are some ways that we structure MLAs. We have structured MLAs to where we get paid for amendments by usage.
But generally speaking, we have leaned more into trying to smooth out the revenue as opposed to have it directly tied to activity, because we think it solves what our biggest issues are or our biggest opportunities are, and it solves our customers as well. For us, it gives us clarity of what we think will be a smooth and stable growth pattern, which we think is very important to our investors. For our customers, it gives them a smooth and stable cost structure, which is important to them. And then we don't have to negotiate every time we'd have a single antenna going up on a tower, because we know the terms and conditions. We already understand what the revenue is. They understand what the cost is.
We have favored those types of agreements, like I said, because it gives us more direct visibility into our growth and the stability of that growth. And it's been, I think, a very positive two-way street with our customers. And you can see that as we have implemented a lot of those agreements, that our growth has been relatively stable and relatively robust when compared to previous cycles. So as we have, as an industry, implemented 5G over the course of the last several years, our growth has been, for us, relatively high at 6%+ in the early times, early years of that implementation.
As the implementation comes down, which is just a natural cadence of how our customers implement a new generational upgrade in the network, they spend a lot at first, and then it comes down over time, and it levels out for a period of time. We're in that leveling out period right now, we believe. And our growth this year, we have predicted to be 4.5% on our tower business. If you look at the same kind of period in the 4G increase or a 4G upcycle, or implementation cycle, our growth was lower at times than 4.5%, so we've kind of cut off the bottom end. We haven't really capped the top end, so we think we've done a good job negotiating those agreements and done a good job balancing certainty with growth.
That's why we like them. We are always in conversations with our customers, so you can see from our supplemental materials that we give out every quarter with our earnings. There's no specific customer agreement coming up in the next year. We have tables that will indicate that. We are always in negotiations with our customers. I think what Steven was referring to is, we want to have an open dialogue, and we always do have open dialogue about our with our customers about what they want, what we want, and there are chances to have those renegotiations at various times within the agreement, and some of those chances are coming up. We may or may not reach something with that customer.
To us, it is more about maximizing what we want, and like I said, what we want is stability of growth going forward. And if we can get something out of a negotiation, we will pursue it, and if we can't, we'll just operate under the agreements we already have in place. What?
Can you talk about the, like, for example, the Lumen deal, like the fiber between data centers, has that started to become a big opportunity with AI? I know you just talked about expecting less CapEx on that. Give me a view on that market and if you guys are well positioned or there's some-
So the question was Lumen and fiber between data centers, and maybe to kind of focus in. A lot of that, I think, is related to leveraging existing conduit. So there, there's not new right-of-way CapEx, let's say, that they had to incur. So there are opportunities in your fiber footprint to benefit from these different demand drivers, or does your topology not lend itself so much to data center to data center opportunities?
It's a bit of both.
Mm-hmm.
... We have focused purposefully on the top markets in the U.S., metro markets, because we believe that those would be the markets that are most likely to see small cells the fastest, because that's where the people are. Where people are is where demand is for data. So we have focused on metro markets. A lot of the AI demand is being trafficked back to purpose-built data centers that are not in metro markets, because metro markets are both way too expensive, and crowded.
So a lot of those new AI-focused data centers are where there are very few people, so the land is cheap, where the power is generally cheap and where it's cool because they don't wanna have to cool. You know, you don't really want to put data centers in Houston because it's already 100 degrees, so you have to cool it down ambient also. So we have not, purposefully not, built out to those areas. We are in a shared infrastructure model. We believe that infrastructure is shared most likely in dense metro markets. Where we see data center-to-data center connectivity for us is in those dense metro markets, where there will be multiple data centers and have been multiple data centers, and we believe more data centers will be built.
Just not the huge ones that were part of the deal with Lumen, that are kind of these aggregation points for AI data. So the way we see it is, our assets are extremely well-positioned to connect metro data center to metro data center because we believe the evolution over time, through AI and otherwise, will be for companies to utilize multiple cloud providers and have their data basically fungible among data centers. And the way you do so is to connect all those data centers with fiber.
Because we have a significant presence in the metro markets, where that fiber already exists in many cases, we don't have to build a lot to connect all those data centers together, and we believe that there will be a tremendous opportunity for revenue growth on our fiber solutions business as we connect those data centers to each other. But we are not interested in building out to the middle, or to a aggregated AI-centric data center that isn't in those metro markets, because we don't see that as shared infrastructure. That's purpose-built infrastructure for that thing. And we believe there's a market for both. Both have a tremendous amount of opportunity. It's just not where we want to participate. We don't see where our competitive advantage would be by doing so.
So, O-RAN and FWA got talked about earlier today. And real quick, I guess, in our last three minutes, O-RAN, good, bad, or neutral for your business as you see it? And then FWA to date, has it had an impact, and then FWA going forward, do you think it might have an impact on your macro towers?
Okay, well, I'm assuming everybody knows what O-RAN is by that, but so it's basically neutral to us. Basically, it's an architecture of the network to where a lot of the electronics get centralized, and the only thing that stays at the tower site is the antenna, and then the translation of the analog signal from the antenna into a digital signal of the fiber that goes back to that centralized electronic system. A lot of those electronics used to sit at the bottom of our towers, where the compound I was talking about earlier, those have moved to a more centralized location, so that would be less revenue for us because there's less of our ground space being utilized. But a lot of the equipment that was there has now been moved up the tower.
That translation from analog to digital has been moved up the tower. Up the tower is more expensive, and so those cancel each other out, and it's basically neutral for us.
FWA.
FWA. Fixed wireless access, for us, it's definitely a positive. Again, what we care about is the increasing utilization of, or the increasing movement of data, and in this case, it's the movement of data wirelessly from a network into somebody's home to provide wireless access in your home. But the last mile, if you wanna call it that, the last bit will be from a antenna into your home, as opposed to the fiber being built into your home. Clearly, as we move from fiber access to wireless access, that increases the demand on the wireless network.
In a home, I don't know, you may know this data better than I would, but a home right now, I think, is an average utilization of 700 GB to 800 GB a month, and phones are 30-ish, so a home is 20-30 times more data than a phone is. And if our customers, T-Mobile, AT&T, and Verizon, are trying to get more homes onto their wireless network, every home is 30 people, basically, on an equivalent basis. That's nothing but good for us. That just means at some point they're gonna need more antennas and more towers, and to the extent that the antennas on towers don't sufficiently supply that demand, they're gonna need small cells.
So it's yet another example of more data being generated, more data being trafficked, that adds to our belief that the assets we have are good assets for the future. And yes, we've seen some demand to date. It's hard to tell exactly. They don't come to us and say, "Hey, here's a fixed wireless antenna." That's not the way our business works. But there are places where antennas or towers that are in more suburban areas are getting activity that there would reason to believe that there is some fixed wireless traffic.
So maybe one last question, kind of hitting on the holistic MLA topic, but as you look at the growth going forward, over the next year, how much of that would you view as kind of contractually locked in, where it's activity insensitive, versus how much of that would be variable?
Yeah, so we've provided a medium-term guidance on our tower business that is in the mid-single digits growth, excluding Sprint churn through 2027, and we believe about three quarters of that is locked in via our agreements in place.
Fantastic. Well, thank you for your time this morning.
Thanks, John. Really appreciate it.