So guys, everybody, welcome to round two. Thanks for joining. I'm Dave Barden. I head up telecom and comm infrastructure research for the U.S. and Canada for the bank. I'm really pleased again to have Chris Stansbury back-
Good to be here.
In the octagon to chat about the Lumen business and everything that's been going on. Obviously, it's a pretty crazy morning. There's a lot of new news to talk about, but Chris, I think you guys have maybe some safe harbor and/or videos you want to show us?
Yeah. So the safe harbor is on the website. So I just encourage everybody to read that, and we have a quick video before we get started.
We have a great plan not only to participate but to thrive in the digital economy because of the capability-
Great. That was amazing.
Oh, you did a great job.
Thank you.
Thank you.
Yeah. You look great on camera.
All right. Thanks.
Yeah, I did wear these socks for you.
I appreciate that.
Yeah.
I appreciate that. That made my day last year, so thanks.
Yeah. I saved them.
Yeah.
They're small-
You haven't worn them since last year.
No, no, in a glass box-
All right.
-on, on my mantle. So okay, what are we gonna talk about? So let's start with the mass markets business.
Yeah.
The smallest business at Lumen, but the one most in the news right now.
Yeah.
Verizon just announced that they're gonna buy Frontier for $20 billion, depending on who you are. Let's just say an eight and a half multiple.
Mm-hmm.
It's a 50/50, roughly copper fiber business as they divide it up. So let's just say that 8.5 is kind of a 11 fiber multiple and a six copper multiple or something in that neighborhood. You know, it's the first time we've had a real kind of metric out there that we could use. So in the context of that, tell us about Lumen's mass market business, fully loaded, what is the EBITDA, and how do you divide it up between copper and fiber?
Yeah, so we at Investor Day, you know, last year, we gave visibility into the EBITDA of that business. So it's, you know, it's a little over $1 billion today. And obviously, if you think about the business, you've got a copper business that generates a lot of EBITDA. You've got a tremendous fiber business, the team's doing a great job at driving enablements and penetration, that doesn't generate a lot of EBITDA because we're in heavy investment mode, right? There's a lot of marketing as you go into that, but it also consumes a lot of cash as we continue with the build plan. So a great business, one that's performing well, but one that we have consistently said doesn't fit with the enterprise space.
The investor profile, the return profile is fundamentally different between enterprise and consumer. And in our view, there are companies that do consumer on a much bigger, better scale than we ever could. And on the enterprise side, we're the only ones that are investing in innovation, and there's a tremendous opportunity there because of that. And we have a lead, and over the next couple of years, I think you'll see us separate ourselves from the crowd. So, you know, our next dollar spend is best spent on the enterprise side. And we have consistently said that there will be a moment of consolidation, but we won't be the consolidator of the consumer space. So that's kind of where things sit today.
Things have been heating up, obviously, and the news yesterday, it got hotter. So we'll see-
Mm-hmm.
where it goes from here.
Remind us, how many homes are left in the Lumen mass market footprint?
Yeah, there's millions of homes left. I think the total is about 10 million. In terms of our overall coverage, we've got 4 million enablements on the fiber side today, and-
How many customers on fiber?
A million. So, you know, our penetration rates are at or above industry levels, as you look at the ramp, curve, so the team's doing great work on that. And it's a large asset. I think when you look at the announcement yesterday, I think we would be the next largest in line with some really attractive markets, so...
So if it's $1 billion in EBITDA, and it's 10% fiber and 90% copper, essentially, so if we were gonna go and do the math, so a six multiple on $900 million is about $5.5 billion, and then an 11 multiple on the other 10% is another, you know, kinda $100 million or so, so $600 million-$700 million kind of number that we think you could maybe extract at this-
Yeah, I don't wanna go down the path of doing the math because I think the other way to look at the fiber piece is, I think you've really got to look at it more on an NPV basis, not a multiple basis, because we are in heavy investment mode-
Mm.
Right? To, to drive penetration, which is what we should be doing. It's really the future potential of that business. So I think when you look at it, of kind of homes passed, you end up in a, in a different place on that, so...
So I guess that, that's a good argument. So what you could say is, it took Frontier a long time to get to where they got to-
Yeah
To get the eight and a half multiple. If you reverse that, it would have been a much higher multiple on what they had five years ago?
Correct.
Essentially.
Yeah.
That's what you're saying. Okay. That's worth thinking about. And just to your point, you've-- I think last year you said this, and you say it pretty regular, that, you know, it's not a, it's not an if, it's a when.
Yeah.
Is that happening here and now, because, or is the phone ringing? Are you? 'Cause yesterday, I asked Verizon if they were gonna buy Frontier, and they said, "No comment." And then five hours later, they were buying Frontier.
They stole the headline from you.
I know. Exactly.
Yeah.
So are you selling it today, anyway?
So the reality is, we're not in any kind of a formal process, but yeah, there's interest. And I think that interest has definitely risen over the course of the last year as economic concerns have settled down. You know, it looks like we're you know, quickly approaching rates moving in a different direction, which is beneficial. And when you look at things like Lumos and Metronet, I mean, there's been a lot of activity in the space. So is now the time? I don't know. What I do know is everything that everybody else knows, there's a lot of activity in the space.
Mm-hmm.
That certainly increases the amount of attention.
It's interesting. I think. Maybe I'm wrong, but I feel like the language has changed a little bit because I think there was a time, a year or two ago, where the idea was that investing in the mass market business was a good idea because the more investment you put in there, the more value you would be able to extract eventually when you sold the fiber part.
That's right.
Then you throttled that back from about 1 million homes passed a year, down to about 500,000 homes passed a year.
Mm-hmm.
So that you could make these more important investments in enterprise, which is where you wanted to go.
Yeah.
Now that you're seeing what's happening, that all the interest and activity and value is being subscribed to the fiber-to-the-home side of the equation.
Mm-hmm.
Does that change your mind about how you want to allocate these dollars, at least in the near term?
No. I mean, really, when you look at where we are and, you know, the other news around the $5 billion in deals and another $7 billion of opportunity, that's where our focus needs to be. And so we ended up at the 500,000 homes really for two reasons. As everyone in the space has experienced, the cost to build has gone up. And at the same time that the cost to build was going up, we obviously went through the debt restructuring last year. We pulled forward some coupon as we, you know, pulled forward maturities and whatnot as part of that. And we had a gap, and that's partially how we solved the gap.
Now, the $5 billion in deals on enterprise fully funds any gap that remained, which is significant, and the $7 billion takes us beyond that. So, again, our next best dollar spent is on the enterprise side because we're winning there. We have a right to win there when you look at the underlying infrastructure and the value that sits underneath Lumen, and that's what we need to capitalize on first.
Mm-hmm.
I think 500,000 homes a year is the right pace, and I think you'll see us stick with that for now.
I think when you and I first spoke, you know, we talked about... You said that, you know, the Lumen equity story is really a credit story. And, you know, you've spent most of your tenure addressing the-
Yeah
... The credit side. The TSA was a huge part of it. I think it was either yesterday or the day before, you guys announced an exchange offer.
Yeah.
We'll get to the contract in a second. But, could you talk a little bit about what the exchange offer is all about?
Sure. So we have near-term maturities. We have cash on the balance sheet. We could use that cash to focus on near-term maturities, but there was an opportunity because of some capacity we had at both the Lumen and Level 3 layers to provide secured debt to creditors in an exchange. And what that does is it preserves more of that cash for us to use elsewhere in the structure, where we may be able to capture more discount. So it's really just looking at the most efficient way to use the cash that we have on hand, as well as the capacity that we have. And that's the path we're on right now.
So, when we talk about the mass markets business and the enterprise business as being divisible, I think that that makes a lot of sense to people.
Mm-hmm.
There seems to be this belief that somewhere inside the Lumen enterprise business is this super secret, highly, bankruptcy-remote Level 3 business, and that its financials are available, therefore, we can examine them. But it doesn't seem to me that Level 3 is, in fact, divisible. It can be accounted for differently.
Mm-hmm.
You can imagine that it could be, in theory, separated, but that can't actually happen, right?
Yeah. If you think about what Lumen is and Lumen Enterprise, let's talk about that piece specifically, right? It's a series of consolidations, and so that, you know, that obviously feeds into-
Mm-hmm
The billion-dollar cost savings opportunity that we see because we still run four discrete networks.
Mm-hmm.
There's as you would well know, there's Level 3, there's CenturyLink, there's tw telecom, there's Global Crossing. And for a large enterprise customer, they have deep knowledge of that, and we refer to those as colors, those networks as colors. So literally, you get on the phone with a customer, and they're saying, "I need to buy this much green and this much blue and, you know, this much red," and they're trying to weave all that together. And so from that standpoint, you're right, because you know, while a lot of that's in Level 3, there's pieces of it around the system. We don't manage the business, and I have no problem saying this out loud and repeatedly. We do not manage the business as a Level 3 business, a Lumen business, and a Qwest business.
We manage it as Lumen... and, and we do that with the customer in mind and improving the customer experience and making the consumption of networking more seamless. That's where our focus is. So to be really candid, and I've been very open about this, my goal would be, over time, that we don't have three different debt entities. We have one-
Mm-hmm.
Because we run it as one business, and there's not a lot of benefit. I fully understand why creditors are asking the questions, but there's not a lot of benefit to us in dealing with you know, squabbles between different debt entities.
Mm.
It just makes no sense.
Creditor on creditor violence?
Yeah, I think that was referred to last week. Yeah. So it's, you know, I think we need to move beyond that. I think we have largely moved beyond that, but as we go forward and continue to focus on the capital structure, that's a goal of mine, personally, is to get to a more simplified structure.
I wanna get to the business. This is just something I've, you know, questioned is, you say that, but the whole premise of the TSA was that somehow there was a group of people that believed that because the word Level 3 was associated with their bonds, it somehow had this magical pixie dust of security that none of the other bonds had. And yet, if it ever came push to shove, you'd never be able to realize that.
It would be hard to split things up, to your point, but there's a deep truth in that belief, and the deep truth was realized with the $5 billion in deals, right?
Mm.
Andrea Genschaw, our Chief Accounting Officer, is with us today, and
Everyone brings their Chief Accounting Officer with them to meet me.
And-
I don't know what that deal is.
Because you ask questions I can't answer. No. There was a front page of Barron's, June of 1999 . It was James Crowe, the CEO of Level 3 at the time, talking about his vision for this conduit network.
Mm-hmm.
And so 25 years ago, almost to the day, as to when these deals were closed, and the moment is now with AI. It's real, it's lasting, and a lot of that conduit, because of advances in fiber technology, which continues to move forward, and we're taking advantage of that with Corning. There was conduit capacity.
Mm.
And so when you look at the race on the hyperscale and cloud provider side to train these AI models, the real element of scarcity is time, because nobody wants to be left behind in the training of their AI models, because whoever wins that race is who large enterprise, which is gonna be Phase II , leans on.
Mm
To push new data through those learning algorithms to run their businesses. And so time is what matters. And that conduit, that empty conduit, and the ability to put high-speed fiber through it very quickly and build out those networks, is of enormous value.
Mm-hmm.
You know, that value is largely a Level 3 asset, to go back to your question.
Mm-hmm.
So there is truth to-
Yeah
... To where the creditors sit on that.
So all right, let's talk about the $5 billion contract announcement. So, my understanding, you didn't say this to me, but I heard that you said it to someone else, was that? That's actually kind of 10 contracts.
It was over 10, yes.
Over 10. And so these contracts that you announced, this $5 billion, the day before your result, I'm guessing that it was maybe nine-plus small contracts that you didn't have to press release, but then one big one that you felt you had to, the day before you came out with your results?
No. So there were a few large contracts in there.
Mm.
And then there was a number of smaller contracts. There was only one customer that wanted to do a press release with us. A lot of companies don't want to do press releases.
But there were no company names in that press release.
No. In our 8-K.
Oh.
That's correct, but there was a separate press release in terms of our arrangement with Microsoft, and that was something that both companies wanted to do.
Yeah.
Nobody else wanted to do that, which is fine. A lot of companies wanna keep things more quiet. The reason that we filed the 8-K before earnings, it was twofold. The first is because the numbers were so significant, and because we were. You know, it was gonna materially impact the model, we wanted to make sure that the investment community had the information they needed to properly model this, because it's complicated. That was job one. The second reason is that Kate was actually supposed to be on MSNBC Closing Bell the night before earnings.
Mm-hmm.
The Nikkei had its moment.
Mm-hmm.
And so she got pushed a couple of days, but we had to clear the path for her to talk about this, for that.
Mm.
Those two reasons were the reasons why the 8-K was filed before earnings.
So big picture, are these contracts all roughly similar in structure?
In structure, yes.
Okay, and so if we look at the Microsoft relationship as emblematic-
Mm-hmm
... of this structure, so we... One question, when we did all the math, and I think we're in the right place, you said 10% of the revenue was kind of the maintenance part, and-
Mm-hmm
... 90% was the kind of the construction part, and we did the math, and we kinda came out with, like, roughly $800 million of cash related to the construction part. You said in the release it would be 3-4 years. Does the $800 million that's yours, let's just say that's the right number, is that something that you get ratably over the four years, or do you get paid your profit margin after everything's been completed?
No, it's actually one of those projects that if you're sitting in, you know, Finance 101, it's the best possible math because there is no outflow of cash before there's right, an inflow of cash. So we're not funding the working capital for this, and so contract to contract, it may vary a little bit, but we're getting cash in installments, and those installments are in advance of the CapEx that needs to be spent to do the build. So you actually can't calculate an IRR on it because there is no outflow before an inflow.
What I will say, and this is really important about the five billion, and I would say over half of the seven billion opportunity, is that we're doing really a couple of things as it relates to that 90% piece, that construction piece. The first is there's existing conduit in the ground that was bought and paid for decades ago. And that is conduit, in this case, that Level 3 largely owns and continues to own. It's effectively leased to the customer over, you know, a roughly 20-year period. And so we're monetizing that empty tube, that conduit, with very little investment. You got to go in and clean it out, so you can blow fiber through it. So that's the first part.
The second part is that, yes, there's fiber that needs to be placed in those tubes, and there's construction around that. There's hundreds of huts along the way to repower the signal. There may be some compute there, so there's a lot of construction complexity around getting cement pads, and huts, and air conditioning, and generators.
You can't leverage anything that you've already put for the fiber that's already there?
We can, but the reality is these builds are so significant, we need to build more.
Okay.
We're getting, we're getting paid to do that. We're getting compensated to do that. That construction piece has a return associated with it. The return on the conduit is infinite because-
Mm-hmm
... You know, it's already paid for. So when you look at the underlying economics, the EBITDA margin that eventually gets reported as things amortize in is extremely high. The cash contribution margin, as we said, is, you know, after that CapEx, around our EBITDA margin today, so around 30%. But over time, you will see our EBITDA margin improve because of these deals and also because of our move to more digital consumption and networking, which is what the market really wants, and I don't want that point to get lost. Why did Lumen win these deals? Lumen won these deals because no other company has the intra or intercity web of conduit that we have.
And we have capacity, and by the way, you can build new intracity, really hard to build intercity, okay? So that's, that's something that's unparalleled. The second thing is we can deploy with speed, and I've gotten a lot of feedback in my, you know, two and a bit years of being at Lumen on how Lumen performs, and the one thing that is always a positive, and there's, there hasn't been a lot of positives, right, as we're in the middle of a turnaround, is our ability to deploy networks at speed and in a cost-efficient way. And then the third thing is, the digital services that are coming are real.
So if you think about a world of AI and data explosion, the need to flexibly consume networking, and when I say networking, I don't just mean the connectivity piece. I mean, edge compute. I mean, security. Things that we have that we're continuing to enable, those are enormously valuable because companies don't know where data workloads are gonna be. What they need in that very distributed and ubiquitous environment is the ability to access data in a very latency-free way in an instant, and so that's what NaaS unlocks and everything else. So as companies are building their own networks side by side to our network, they have access to those tools. They also have access to tap into our network and expand their reach.
So, there's a reason that we were the only ones at the table. The decision that customers were making is: do they try to build it themselves, or do they have Lumen do it?
Mm-hmm.
And that's why we're winning these deals, and that's why we have a right to win, and that's why there's more.
So I guess two more questions on the construction part of it, which is, are the places where you're going to be doing this exist, like these training data centers? Because-
Yeah. So, in the $5 billion, and I would say more than half of the $7 billion opportunity list, it's existing routes. There may be some small exceptions where, because of a data center cluster, we've got to do a run of, you know, pick a number, 20 mi, 50 mi-
Mm-hmm
... To connect that. That's easy, and something we can do efficiently. We can pick that up. There are, in the $7 billion list of opportunities, some potential new routes that would be highly valuable. So think of it as a triangle, where we can get from A to B today, but we have to go through C first, and if there was a direct line, it would be faster, lower latency. We're looking at those opportunities. Obviously, that would have a different economic profile associated with it, and we would then have a discrete decision to make that, while the trench is open, do we lay some additional conduit because we see future demand in kind of Phase II and Phase III of AI development?
And that'll be something that, you know, we'll evaluate and decide what to do, but we're deep in those conversations right now.
If a lot of this is on routes that exist, why is it taking three to four years to do?
It takes a long time to go across the country and truly build out that web. So, again, you've got. We haven't disclosed the fiber count that we've been able to work with Corning on, that maximizes the real estate inside of that, those tubes. It's phenomenal, the kind of capacity we can create. I mean, it gives us, frankly, the opportunity to rip and replace if in time we need to do that and dramatically increase capacity. But when you think about going across the country, I mean, there's guys in the middle of a cornfield in Nebraska splicing, right?
Mm-hmm.
Again, these huts, we're talking in the four to five hundred range just for one contract. So it's a massive undertaking. It just takes time. But I would also say that the two to three-year timeframe is actually fast when you think about-
Two to three or three to four?
It depends. Well, you'll see services start to light up earlier. So as soon as we get you know connectivity between points, things will get lit.
Mm.
And it'll get lit along the way. And our relationship with Blue Planet that was announced a couple of weeks ago, that's important because it actually gives us a daily dashboard where we will see how the network builds are going by contract, what the costs are.
Mm-hmm.
Yes, so it is between two to four. It depends on the complexity, but the bulk of it will be in that three-year window.
All right, so then more to the financing side of it, or the financials. What is your liability if construction costs go way above expectations? If you hit a lot of rock or something burns down, like, what is your-
Yeah.
What is your exposure here?
So again, keep in mind, it's existing conduit. So if you think about it, I mean, the whole thing-
It's not exclusively, but there's those runs.
I mean, the reality is the vast majority of this is existing conduit.
Okay.
So I don't wanna say that's not hard 'cause the ops team would be waiting for me with pitchforks when I got back. But that is hard. I would say the bigger complexity is really around these hut builds. And so just to show the level of insight and why these contracts are chunky, and they take time. You know, call it 400 or 500 sites where these things had to go. We went through with the customers site by site and identified: Do we have land? How much power is there? You know, et cetera. And what we got to is... I can't remember the exact number, but say somewhere between 30 and 40 sites, we don't have land.
And so those were agreed to and carved out because we're gonna have to solve it somehow. We're either gonna have to buy more land, we're gonna have to go up, whatever it is. Costs will be higher, and the contracts are structured such that, you know, the customer will bear the cost of that, and we will work with them to come up with the most efficient solution. So I cannot emphasize the amount of time and insight that went into this. So one safety measure is the big thing, getting conduit in the ground. It's there already. The huts, we've spent a lot of time on it. These are huge contracts for our suppliers that are gonna keep them in business for years, so we're getting the best suppliers. We have protections with them so that we're protected.
And then in the contract itself, there are CPI escalators as well. So it's what we do. It's what we've done, obviously on a smaller scale, for many, many years, and we're really good at it, so we're not concerned about that. There are penalties, performance penalties that could exist, but there are also performance bonuses that could exist.
Mm.
We feel that we've struck the right balance on that.
So the $5 billion is maybe Microsoft is an anchor tenant and a couple of other bigger, chunkier pieces to the $5 billion. So let's just say $2 billion for Microsoft and two more unnamed $1 billion guys and then maybe eight or nine, you know, smaller $100 million guys kind of piecing it all together. When you talk about the line of sight to the next $7 billion, how far away is that line of sight?
Yeah.
You know, I think I've heard you say it's more like enterprises and things like that.
Yeah. So the construct of the $7 billion looks a lot like the $5 billion. There is some customer overlap, but there's also a lot of new customers. So again, 10-ish kind of customers. There's a detailed list of opportunities that add up to more than the seven, and we were comfortable with saying the seven. Importantly, since we've thrown that number out there, there's been no fallout on that. And so we're excited and confident in our ability to execute. Because of the chunkiness, here's what I can tell you. Every time I thought we were close, I was wrong, because as we went through the first five, because these are complex agreements, back to your question on cost. But some are closer in.
I don't wanna try to guess that timeframe 'cause I'll be wrong. Some, particularly for, like, new builds, are a little further out, but as we know more, we'll obviously share it. It's to our benefit. We wanna get that in investors' hands as fast as we can, but you know, things are looking good.
Um, so-
Sorry.
Yeah.
Your question on who is it? Again, three phases-
Mm-hmm.
as we see it today. That'll evolve 'cause none of us really know where all this goes. But, when you think about the companies that are either running learning algorithms today, and they're training them, or they kind of support that ecosystem, it's really hyperscalers, cloud providers. That's kind of Phase I. Phase II, which we call inference, is where large enterprise starts once those models are trained.
Mm-hmm.
Large enterprises using those models to run their businesses, and that's where there's a lot of IP and wave-type consumption.
Mm-hmm.
We're making sure we've got the right capacity in the ground. We've obviously added 6 million fiber miles over the last few years. There's another 6 million to come. By the way, that fiber today is supporting 400 gig waves. But as the equipment that powers that fiber comes online, there's a lot of innovation coming. It very quickly goes to 800 Gb, and then 1.6 Tb So that's future-proofed. The last phase, which is further out, probably at least five years, is when AI starts talking to AI, and we think that's explosive again. So we'll, you know, our all of our understanding of that will change as time goes on, but that's kind of how we think about it. But today, it's really largely hyperscaler and cloud provider, big tech companies.
So the $5 billion deal, again, if my math is roughly right, it's kinda $800 million of profit. You kind of siphon that profit out of the dollars that you get inbound to cover the cost of construction and stuff. So that kind of filters in over a four-year period. Over the course of the next year or two or three, there's another $7 billion of deals. If they're roughly equivalent, that's a billion dollars of cash flow that maybe starts coming in in next year and the year after that. So maybe $200 millio n a year from the first set up, starting next year, and then $250 million a year. I mean, $800 million over the next two, three, four years, another $1 billion over the next three, four, five, six years.
I mean, it sounds great, $12 billion, but the cash dollars after taxes just really aren't that big. You know, you've got $13 billion in revenue, you've got $4 billion in EBITDA, you've got $3 billion in CapEx annually, you've got a $9 billion maturity tower in 2029. These deals don't really do a ton. They're fun to talk about. They make headlines, but they're not changing who you are. Your DNA of this business is not changing because of this.
So I would disagree with you on that. So,
Wait, really?
Yeah. So, let me tell you where I agree. I agree that the legacy business that is in decline and will remain in decline is the legacy business. It generates a lot of cash. There's some things that we can do, and we'll continue to work away on it to improve that rate of decline, but we're not gonna fix it. That's not why we're here, that's not what our focus is. I think what's getting lost in the disagreement, David, is that we're not done. So again, this is Phase I . This is monetizing an asset that is available to us and one that our customers desperately need.
It brings us really valuable cash that literally, over the next number of years, fills the funding gap, so we can continue to invest at the pace we are in the enterprise business, we can continue to invest in consumer, as we said earlier, we can pay the higher coupon because of the TSA, we can fund the pension to the extent that it needs to be funded. It literally takes all of that off the table. What's getting lost is that there's more that comes behind that, so literally, as we're building these networks, and companies are hearing that, you know, we're gonna be, you know, driving through their neighborhood, so to speak, we're getting phone calls saying, "Hey, I wanna connect in. I wanna connect in," so more will come from that.
But importantly, the future of enterprise networking is digital. There's been very little credence given to that. So today, you have a competitive landscape where every other provider out there views this as a commodity, views this as a cash cow, and is not investing in the space. We are the only ones who are investing hundreds of millions, billions, into enterprise networking, such that just like today. I mean, 20 years ago, who would have thought, who would have believed that you could provision, compute, and storage through your laptop, at a very large scale? That is exactly what we are bringing in networking. In a few years, as we consolidate the network and we digitize everything, large enterprise will be able to provision point-to-point connectivity in an instant with no truck rolls, and no one else is bringing that.
On demand?
Well, look at it. People have tried, people have said it, but.
We've talked about it for 20 years.
Yeah, but no one has ever done it. And so that's why this management team is here, and it's coming. You know, if I think about the stories that have been written about Lumen since I've been here, some of them from the investor side, some of them, frankly, from the competitive side, you know, we were apparently gonna die four times, and we haven't. And the reality is, we haven't, and we got the support of our creditors in part because they saw this.
Mm.
They saw the value in this. And it's starting to work. So I would actually say if you were to ask me to summarize in one word, what is Lumen's board and management team viewing the pushback that we get in the market as today? It's flattering. I'm gonna share a quote that we point to regularly, and it's a quote from Gandhi, and it's about radical change. "And when you're driving radical change," he said, "there's four steps.
First, they ignore you, then they laugh at you, then they fight you, and then you win." And we're in the fight stage right now, and we're getting a lot of pushback because people have, for decades, seen legacy telecom move down into the right....and we are challenging every one of those norms, and it's going to happen. So, we're confident in it. We're going to stay focused on execution, and we'll go from there.
So on the path to up and to the right, you lowered your EBITDA guidance for 2024.
Yeah.
And then talked about bringing more downward pressure in 2025.
Yes.
And then it's going to go up into the right in 2026.
Yeah. So look, let's look at the pieces. Job number one, free cash flow, right? Fill the funding gap. Check. Job number two, EBITDA. So we have said consistently that we thought that the pivot point on EBITDA would be 2026 , and that remains true. I think the shape of it is actually better. So what happens is obviously guidance this year came down. Yes, there's a lot of stuff going on in Legacy. We all know that. But we also had more OpEx associated with, you know, firing up the construction factory for these deals. That'll continue into next year, and then next year, because of the cash position, we've made the choice to accelerate some of the OpEx spending that we needed to do to unify the networks into one, and so next year was always going to be down.
It's probably down a little more than what was initially expected because of those two items. In 2026, off of that low point in 2025, we don't start to grow. At this. It's early. I'm not giving guidance, but at this stage, 2026 EBITDA looks a lot like 2024 because of the cost savings we can start to pull in, and the expenses we have next year don't continue forever. So 2026 EBITDA, it's like a V-shaped recovery, and then we start to grow that. Revenue, by the time you balance out the legacy declines, it's a sizable business, but the growth we see in things like IP and Waves and edge compute security, those lines probably cross in 2028. You know, that's sometime in 2028. So we'll give more color on that.
I do think when we give guidance for 2025 in early next year, we'll also give preliminary guidance for 2026.
Mm.
Because we have deep conviction in our ability to execute against this, and we want to give visibility to both.
As you think about that, is it time for another analyst day?
Not yet. I, you know, I think we have to see where some of this stuff sorts out on consumer and whatnot. I do think there could be kind of an in-between step where potentially we do a more of a virtual thing just to update people on the model.
Mm-hmm.
So we're looking at that.
I thought your, the slide and the little presentation you guys gave on IRU and that sort of stuff was helpful in trying to-
Thank you
... understand all this.
Thanks.
So look, that was great. Thank you. I wish I could spend another 40 minutes-
Yeah
... doing this, but thank you for coming. I really appreciate it.
Yeah. No, I really appreciate it, David. Thanks.
Thank you, guys, for coming.
Yeah.
Appreciate it... joining us again. We're super pleased to have Steve Vondran, President and CEO from American Tower, joining us, kind of playing cleanup for our tower guests, at the conference this year. Steve, thanks so much for joining us.
Thanks for inviting me.
Yeah.
Great to be here.
So maybe kick it off to talk about something that's not fiber to the home for the first time today. You know, just as the new CEO, you've been here for about, in the seat for about six months. You've been around American Tower for the longest time. But, you know, kind of at your new perch, you know, could you tell us a little bit about, you know, what you see inside the organization that you want to kind of amplify, things that you want to steer away from? Just kind of the new CEO playbook.
Sure. Well, yeah, I've been part of the leadership team for a number of years, so there's a lot of consistency in terms of how we think about the business. I think one of the things we've been a little more explicit about is some of the actions we've already been taking and kind of the direction we're going with that. So if you look at our kind of near-term priorities, the first focus is on sales and making sure that we're maximizing organic growth across the enterprise and coupling that with a focus on cost controls. So kind of at the midpoint of our guidance, we're expecting to save about $35 million in SG&A this year, year on year, you know, plus not having the inflationary effect that you normally have on it.
And it's not just SG&A that we're looking at. We're looking at kind of all of our expense line items across the globe.
Is that headcount or process?
It's a combination of that. There's some headcount in there as well. Some of this is long-planned things. In the U.S., we've implemented some automation technology we've been working on, using some machine learning, and we've been gathering data with high-definition drones on our towers. We've been able to automate some of our processes, and some of it is a reflection of some of our shifts in strategic priority. So if you think about how quickly we've grown over the past decade, we had a lot of acquisitions. We're buying and integrating portfolios, and we were building a lot of sites, particularly in our emerging markets, and as we've shifted some of our CapEx away from those initiatives, we're not buying and building as much as we were.
So there's just some kind of low-hanging fruit in terms of being able to right-size the organization there. And then some of it is just, you know, kind of some long-planned efficiencies that you get from being a global operator and, you know, centralizing a few things, harmonizing some things, using some automation. But so you kind of couple the focus on sales with the cost control, and you get some margin expansion, which is something that we're very focused on. And then looking at our internal CapEx program and making sure that we're supplementing the growth that we get organically with the right types of inorganic growth in terms of building new sites, investing in CoreSite, investing in new towers, et cetera.
One of the things I think we've been a little more explicit about, especially on our last call, is that we're focused more on developed markets right now. If you... That's not a new thing. If you look at our capital priorities over the past four years, we've invested about $25 billion, and that's really been in Europe with the Telxius transaction, in the U.S. with CoreSite and InSite, and a couple of smaller transactions. We haven't done an emerging market M&A deal in that time period, and we've also reduced our internal CapEx program in the emerging markets. In 2021, the emerging markets represented about 70% of our internal CapEx program. This year, at the midpoint of our guidance, it's about 40%.
So as we've kind of looked at our strategic priorities and what we're trying to do, you know, those are the kind of the first three legs. Focusing on the balance sheet is also something that we've been talking about. Our goal is to get to our target leverage range of five times, and we're aiming to get there by the end of the year. Now, we were below five times a couple quarters this year, but that was underpinned by some one-time beneficial things that happened, particularly collections in India. You'll probably see that pop up a little bit this quarter. And then twelve thirty-one, I don't know if we'll be right on it because there's some timing, India timing things in there, but we'll be very close. If not, we'll get there early next year.
That focus has really been there to give us complete optionality for the future. So we, you know, want to be able to pursue any attractive M&A that comes our way, that fits our strategic priorities or buy our stock back, or, you know, increase the dividend, further delever, you know, or increase the internal CapEx program. So we, you know, just want to have that flexibility. So that balance sheet has been a priority. Then we also have some board refreshment that we're working through. So you may have seen we had Neville Ray as a board member, and we had a couple of board members step down. So there's some governance items as well that we're working on this year.
Yeah, Neville was a good choice. I mean, for the longest time, American Tower was kind of the standard-bearer for the emerging market tower business model. You know, it was born out of the success that you guys had in Mexico and Brazil, and then you kind of looked at India and then took it to Africa, and the premise, as I understood it, was that, you know, emerging markets were kind of basically on a direct line to following the U.S. model, eventually, of just blanketing the market with mobile, and I think that now the pivot, you were the head of the U.S., now you're the head of the whole company, and you're kind of steering away from emerging markets.
What, I mean, we can pinpoint one thing, you know, probably in each market that's been problematic, but, is the thesis that underpinned the whole idea of emerging markets being attractive for towers no longer true? Or is it just taking wildly longer to play out than hoped, or what is really going on?
Sure. So let me just kind of. I'll touch base on that. When we went to the international markets, we had two kind of primary theses going in. The first is that we could export our operational model that we kind of think we've perfected in the U.S. across the globe and get some synergies with the operating in those geographies. When you go outside the U.S., there's some complexity that comes with operating in those geographies, and we thought we could really overcome those challenges because of our experience here, and we also thought that those markets were further behind on the technology curve, so the demand drivers would be there, and you'd see a lot of lease-up on the assets. That was the first premise.
The second premise is that we would be able to use those factors to elongate our growth curve, and that it would actually, you know, make us more profitable and grow faster, longer. And when we've reflected on how the markets have played out, that first premise has held true, absolutely. We've gotten operational synergies. I would argue that we're the best operator in every geography we're in, even better than the carriers themselves in a lot of respects. You know, in Africa, we get higher pricing because we're better at delivering power than they are. On some of our build-to-suit agreements, we get more than captive tower companies get because we're better at building. So I think we've proven those synergies from that perspective. And demand has been great.
You know, in Africa this year, we've had near-record sales quarter after quarter because the demand from the consumer is there. Their mobile data growth is outstripping the U.S. in some areas. And so we see the customers continue to invest. So that's kind of the first premise. The second premise has not proven true for us, particularly in recent years, and that's where the financial risks of operating those markets come in. And so in particular, it's come in two flavors. The first is carrier consolidation, and so we saw that happen in India, and that was one of the major factors in some of our decisions that we made there. That's also an issue today in Latin America.
We're seeing some outsized churn right now from Oi in Brazil in particular, and we've seen some carrier consolidation in Mexico in the past and some other Latin American countries, and we've seen a little bit of that in Africa as well, and then the other component is really in Africa. It's FX has really been the headwind that's reduced the profitability in those markets in U.S. dollars when you translate it back, and now we knew when we were going international, FX was going to be an issue. We built some mechanisms in to correct for that. Everywhere outside the U.S., except for India and France, we have CPI escalators, and so that will offset some of the FX over time, but it's not perfect. It doesn't offset it completely.
We also built in some contractual mechanisms, and we do have some dollar pegging in places like Nigeria for a portion of the rents, and we have some natural hedges in the way we structure our agreements so that the majority of our costs in those countries are passed through, so in Latin America, it's usually land rent is the biggest cost, about 75% of our expense. That's passed through the carriers, so that's local currency both ways. And in Africa, it's power, and that's passed through as well, and that's about 75% of the cost, so there's some natural hedges in there, and so we've done a lot of things to protect ourselves on that, but as we've reflected on the kind of final results and how that's gonna hit our bottom line, the FX has quite frankly outpaced our expectations.
Mm-hmm.
And so the response that we've taken to that has been twofold. The first is we've raised the hurdle rates in the emerging markets, because as we looked back, we said, "You know, if we had higher hurdle rates, we could have overcome more of the FX." And so we've raised the hurdle rates. That'll create fewer investment opportunities. And the second thing we've done is we've said we want to decrease the overall enterprise exposure to emerging markets. So we're focusing more of our CapEx on the developed markets, and, you know, we're not telegraphing more divestitures or anything like that. We just will grow the developed more than we grow the emerging markets, so that percentage will trend down over time.
Mm-hmm.
And pro forma for India, our exposure on an AFFO per share basis to emerging markets will be about 25%, and we expect that to trend down over time as a result of investing more in the developed markets. And so one of the things that we're doing with the emerging markets is we're repatriating that cash and using it to invest in other priorities.
Mm-hmm.
You know, we've got some good, durable cash flows in Latin America and Africa, and it's nice to be able to bring that cash back and invest it in the U.S., Europe, and CoreSite.
So when you say developed markets, obviously we're talking about the U.S. and the SAC, but, you know, Europe has been kind of your go-to. One of your peers was here yesterday. I asked, you know, about, you know, the appetite to invest in developed markets, and they were kind of very cautious that the European model isn't as developed as you might think, that consolidation is an issue still, that the profitability and the regulatory environment is such that it's tougher for the European carriers to make and invest money in their networks. So what makes you comfortable that Europe is such a better opportunity than the South Africas and the Mexicos of the world?
We've been very cautious in Europe as well. So when we were looking to expand in Europe, we waited and waited and waited. A number of transactions happened, a number of portfolios traded, and for us, the main factor in that were the terms and conditions. And so when we're thinking about how to create long-term value for our shareholders and how to have a good, steady growth path, it's really important for us to have, you know, again, CPI-linked escalators, even in Europe-
Mm-hmm
... to have the ability to monetize amendments with an anchor tenant, to be able to lease up every site. You can't have sites, set aside as golden sites you can't lease. Some of those portfolios had a right for the carriers to buy back the towers. And so we looked at all those terms and conditions and said, "That's just not conducive to our business. That may work for somebody else, it doesn't work for us," so we waited. And so when we did enter Europe in a more major way with Telxius, we were getting terms and conditions that met our needs on that, and that's coming with very low churn, very high demand.
If you look at the new business environment that we're seeing there, we're seeing elevated and increasing new business on that business case.
Mm-hmm.
The carriers are deploying 5G. It's a mix of mid and high band there, so it's a little bit different than the U.S., and we're seeing some regulatory pushes that are actually helpful by the governments, 'cause they're pushing the carriers to cover more rural areas. So that's actually very beneficial for us in the leasing environment there. You do have a new entrant in Germany with 1&1. Entering that as a true carrier on an MVNO. So we think there's some really positive market dynamics that we're seeing there, and we're seeing a little more competition based on network quality than we've seen in the past. So we're very bullish that the demand trends that we're seeing in Europe will continue. And, you know, we're only in three countries there.
Mm-hmm.
So I'm speaking about kind of the countries that we're in. But we'd be open to other opportunities if the dynamics are right.
Mm-hmm.
And so for us, it's contract terms and conditions, it's what's the price of the portfolio, but there's also a leasing environment dynamic that'll be different country by country based on the number of MNOs, how well-capitalized they are, and who we can partner with. You know, we want to partner with the strong-
Mm
... carriers, not with the weaker carriers or the anchors.
I mean, you've, Is that balance sheet contingent? Because I think you guys have been floated as a potential buyer for a number of assets over the last couple of years, and you've kind of said, "No, no, no, no, no. Like, we're focused on deleveraging. Like, don't even think about us being part of that." Is now we're starting to modify that language a little?
I'm pretty sure that were we to be buying everything that's for sale, we'd be out there.
Fair enough.
But we do have M&A teams that look at everything that's out there because M&A teams like to buy stuff. Yeah, we're probably somebody from the team is looking at it. But what we've said very publicly is, you know, our priority is getting to five times leverage to give us that optionality, and there's nothing that we're seeing today on my desk or Rod's desk that's compelling enough to take us off of that-
Mm
... from an M&A perspective, but we are interested in inorganic growth, again, with the right terms and conditions and the right price there. And we're hopeful that there will be opportunities in our developed market footprints to do more of that. In the meantime, we've got a great business in Europe that we're operating, and we're expanding there by build-to-suits. This year, we're expecting to build about 500 sites, which is 100 more than we built last year. We do see some growth there, but we'd love to do, you know, something inorganic if we can find the right opportunities.
So I think that that probably goes without saying for everybody, at the right price.
Right.
You know, you guys, I mean, given that you're close enough maybe to your leverage target, you know, a few months away, kind of getting there, they're showing the rating agencies that when you go up in leverage, like you did with CoreSite, you have the capacity to bring it back down again. So, you know, once you've kind of hit that, I'm sure you're gonna get permission from the rating agencies to lever up if you, if you choose.
We just got an upgrade. I'm not sure if you saw that.
I have not seen anything.
Yes, we just got an upgrade, a BBB flat.
Oh, congratulations!
Thank you.
I want to get to that, balance sheet stuff in a second, but just, you have the highest multiple of the towers. We're gonna talk a little bit about why that is in a second, too. So, we've gotten. You know, your peers have kind of made the argument, I've heard this argument from a lot of people, that private tower valuations are just beyond where the public valuations are. There's just, the bid-ask spread is just far too wide, and that, you know, maybe that's informed by investments and valuations that, linger from an earlier time in lower interest rates. But do you know, do you feel like it's possible that there are kind of inorganic transactions that are within reach, that, you know, that your valuation, your balance sheet, the pliability of the sellers is...
There's a way to bridge that gap?
There's nothing today that we're looking at that we think would be compelling for us.
Mm-hmm.
But that's not to say that there won't be something in the future. And, you know, the multiple is one way to value it, but part of that's what value can you create? If you look at our InSite acquisition, we paid a healthy multiple for that business at the time, but we did that because we knew that we could create more value.
Yeah.
We were able to take their sites and their leases, incorporate them into our comprehensive agreements, and outsize the performance of that business, and so we knew that the effective multiple for us would come down very quickly on that.
Yeah.
And so that's the type of thing that lets us look at a portfolio and decide: Are we gonna be able to monetize something in a way that lets us pay a little bit more?
Yeah. Well, I think, you know, I think people maybe don't understand, like, so a higher, a more, a fuller tower, the monolith, as Jim Taiclet used to say, is worth a lower multiple-
'Cause it won't grow .
'Cause it won't grow as fast.
That's right.
And the opposite is true for, say, you know, captive tower portfolios inside one carrier, where there's a one point one tenancy, one point two tenancy. You pay a much bigger multiple for that.
Exactly.
Yeah.
So again, there's nothing on the plate today, and we're very disciplined. We don't want to overpay for anything.
Mm-hmm.
We're gonna be very clear about, you know, what's our potential to make that portfolio perform over the long term-
Okay
-as well.
So let's come back to the domestic tower business, the majority of the company. There's been three challenges that, as an industry, the towers have been grappling with. One is the material slowdown in carrier activity levels. The other is the lingering effects of Sprint churn, and the last of the big three is the kind of higher for longer impact on rate refinancing and other things. So you guys have kind of, I think, shown that you're best in class on those three things. And starting with the carrier activity levels, you've had the best same-store sales, organic growth rate among the peers. And it seems to be related to your MLAs. Did you anticipate what was happening, and it was all skill, or was it a little luck, too?
Every G, the carriers build in a similar cadence, and you have a peak of investment in the first couple of years, followed by a pullback, then there's a reacceleration, and then it kind of steadies off. So when we look at doing these comprehensive agreements for a period of time, we have a pretty good idea about what activity level is gonna be seen over, you know, a number of years. For us, we're just trying to, in these comprehensive agreements, take that business we're gonna get anyway and smooth it out. Do we know there's gonna be some a peak and a valley at some point? Yes. Do I know it's gonna be as steep as it was and as deep as it was? No.
But for us, it's really about that kind of, that securing the value over the longer term. And those agreements are really operationally efficient for us and the carriers. It makes it a lot easier to conclude a transaction, gets them on the air faster, saves them some money in processing, saves us some money in processing. But the purpose of those isn't to necessarily, you know, save ourselves from a valley. It's more just to smooth it out and give us predictability over time. So I don't think there's anything surprising about what happened. I think that what may have caught us by a little bit of surprise is, in 4G, the carriers kicked off their builds at different times because they got spectrum at different times.
Mm-hmm.
In 5G, they got spectrum at the same time, so we had a steeper peak and a steeper valley, but in terms of our comprehensive agreements, well, one of the purposes is to give us more predictability over time.
You are also the only tower company, really, that from the beginning of the year through now, which is almost the end of the year, has been saying that you saw activity levels improving and, you know, you saw green shoots. And I think that, you know, we've had other tower companies. I remember, I think, Vertical Bridge said something to the effect that, you know, only American Tower is seeing this. Why is only American Tower seeing this?
I don't know what they're seeing. I can just tell you what we're seeing. From the beginning of the year, the way to telegraph activity for us is our services guide, and that budget is based not on, you know, me or Rod saying, "Here's what we want you to hit.
Mm-hmm.
It's based on boots on the ground. I wish it was.
Yeah. That'd be fun.
It would. It's the boots on the ground, people working with the carrier teams, and they tell us what they plan to do on our sites.
Mm-hmm.
Now, services is hard to predict because, you know, a couple of years ago, we had to take that guidance up. Last year, we had to take it down. But everything we were hearing from the carriers, so there's a certain level of activity we're gonna do on your sites, and that's, that's what constructed the guide. In Q1, our application volume was up 70% from Q4. Now, Q4 was pretty low, and then we saw another sequential increase in Q2, and that let us reiterate our services guide for the year. Now, it's inherently risky, but the-
How's Q3 going?
I'm not gonna tell you that until Q3, but, what I will say is that what we said at the end of Q2 is that, we expected a steady pace for the rest of the year from Q2.
Flattish from Q2.
So that's what we said at the time.
I think I answered. I asked that question on the call, so.
You did.
Got it.
I'll tell you how it's actually going in a few weeks.
Okay, so we actually had Marc Montagner , the CFO of SBA, come in and say that, you know, he kind of expected that the way that twenty twenty-five would shape up would be kind of quarterly steady improvement, you know, as densification and that sort of thing occurred. And the belief that that would happen, it was a function of a combination of the kind of activity, conversations that they were having, coupled with some of the MLAs that they have. Do you see the year, kind of the progression of that unfolding?
I think it's too early to really, for me to opine on what 2025 is gonna be. A lot of that depends on the carrier budgets.
Mm-hmm.
When I look at the activity that they need to do to complete their 5G build-outs, that suggests activity should be picking up. I think what we said very publicly is that one of our carriers is over 80% deployed with mid-band 5G. One's closer to 60. This as of into Q2, one's closer to 60, and one's less than 50. So if you think about what the carriers need to do to meet the consumer demand on 5G, they need to keep deploying it. So I think that would imply a step-up, and you know, I think if you look at the CapEx this year that the carriers are projecting, it's kind of $34 billion-$36 billion. That's kind of right in line with what we thought the average would be during the 5G cycle.
So I think we'll have to wait and see what their budgets come out as and what their build plans come out as... But I think the encouraging thing is they need to do a lot more work to meet the consumer demand, so you would assume that they're gonna step up the deployments.
I guess two questions is, is whether they step up demand or not, does it really matter for American Tower? Because of the MLAs, you already know what you're gonna earn, right? I mean.
We're only under our comprehensive agreements with two of the top three, plus DISH. So there is some variability with the third carrier. So it does matter a little bit there.
Mm-hmm.
But again, it matters more on timing. We have a really good idea about what we're gonna get over a long period of time. That's what gave us the confidence to come out with a multi-year guide in terms of what our organic billings would be. And so we expect to get that business over a relevant timeframe. But with somebody off the comprehensive, you are more subject to, you know, quarterly or annual variability based on their activity.
Right. So that's AT&T who kind of came off the holistic at the beginning of the year.
We haven't confirmed who that is.
I think you did-
Well...
Just now. But one of the theories was that the reason why, you know, you were seeing services revenue activity that other people weren't, was because, you know, you're getting an outsized share of the AT&T Open RAN initiative that they announced at the beginning of the year. Is that true?
I don't talk about specific customer things because I get into that.
Let's just say the third player.
Um-
There's a player out there that-
What we've said publicly is that our activity on our sites is broad-based.
Okay.
And so, I think that you can read into that what you will, but it's broad-based activity levels across all of our carrier customers.
So the second big challenge for the industry has been, Sprint churn. And, can you tell us about how Sprint churn has and will affect American Tower?
We've had the majority of our Sprint churn behind us. The last tranche of Sprint churn hits in Q4 of this year, and that's about $70 million. So once that's through, we're through with the Sprint churn from our agreement there.
And again, how was it that you decided to kind of-- Why, what made you chew through that faster than everyone else was able to chew through it?
We had. I think we disclosed this at the time. We entered into an agreement with T-Mobile post the merger.
Mm-hmm.
And we took a long-term view of the business and did what we thought was right for the long term, and that meant taking a little bit of churn earlier on.
Mm-hmm
- in exchange for the benefits that we got for the long-term relationship.
The third piece is the kind of balance sheet interest rate exposure. So you know, there's guys who have like, you know, very attractive hedges, but those things are gonna get refinanced at much more expensive rates. There's guys that have bigger towers coming up sooner. It feels like, you know, Rod did a pretty good job of kind of stacking the maturity towers through time. But you did have a lot of variable rate debt that you had to chew through. So kind of give us a snapshot of where we are and now philosophically, as we look at a falling rate environment, assuming that's where we are, what happens next?
Sure. So our sort of previous policy was to have about 20% floating rate debt, and that's kind of the area that we were in previously, and we've been pretty aggressively turning out that debt over the past year or so. And so at the end of Q2, we were still double digits, but kind of low double digits in terms of our floating rate debt. We have said we're gonna use the proceeds from our India sale to pay down debt, so you can expect that to come down a little bit more when we pay that down. And then what we've done is we've published in our supplementals, the debt maturities and the rates that are out there so folks can kind of form their own opinion about the headwinds.
But there will be some refinancing headwinds over time, based on the rates that are coming down. Hopefully, a little bit less now that we got the upgrade, but that is out there for folks to be able to take a look at.
Is there an appetite to float the floating rate exposure back up again if rates are kind of moving down?
Look, I think we'll make that determination as we kinda get there. We'll look at the rate environment, the forward-looking curves, and try to decide what we think is gonna happen. You know, we're not in the business of speculating on rates, so I don't think you'll see us doing anything that's too dramatically different. But we'll kind of look at that and figure out what we think the appropriate exposure is, so.
I think SBA just was saying yesterday that they just did an A-rated ABS deal at like 4.5%, but they think like 10-year paper on a standard basis would be closer to maybe a 5% rate. What do you think American Tower could do on a 10-year piece of paper when we're modeling our refi for your debt stack?
I'll defer that to Rod. You guys will have to get his math skills on that one.
Okay, got it.
I don't wanna predict rates or spreads or...
Totally understood. So another piece of the domestic pie is CoreSite data center business. I guess a couple of questions on that. So, it's obviously been doing really, really well. But it's not really in the AI space, really, is it?
CoreSite's not the right location for large learning models.
Mm-hmm.
Let me distinguish it from kind of a couple different business models out there. A lot of the hype around around AI today is people who are building a single-tenant, purpose-built building for a major large learning model. And so it's almost like a build-to-suit for, you know, single-tenant office. That's not our business, so we're not doing that. So that part of AI doesn't really belong in CoreSite. But that large learning model has to talk to all the end users.
Mm-hmm.
There's a layer of AI called inference.
Mm-hmm.
Where you need massive distribution, and for that, you need an interconnection hub, and that's really what CoreSite is. It's an interconnection hub with data center space attached, and it's the perfect location for that. So we are seeing the inferencing layer, interest in CoreSite. We've written a couple of contracts there, but we have the luxury of being selective about counterparty risk. So we're not just-- There's a lot of startups in AI, and, you know, we're not gonna take a ton of risk there. The other area that AI is benefiting CoreSite, the first thing is just price. Because AI is taking up so much of the capacity in the market, prices across the board have risen. That's allowed us to raise our prices as well and still secure the business that we want to secure.
The second piece of it that, frankly, six months ago, I didn't anticipate this, is you have enterprises that are in hybrid cloud deployments, which is kind of our core. That's our bread and butter customer, and they're interested in doing large learning models, but they don't want to put their data in these public models.
Mm-hmm.
So they're interested in creating their own LLM as part of their-
Mm-hmm.
-hybrid cloud deployment. So we're seeing interest in actually putting kind of GPU pods as part of those enterprise systems in CoreSite, and that's new, so there's not a lot of that yet. But as that becomes more ubiquitous, that could be a big driver for us as well. But at the end of the day, you know, CoreSite is, its core business is this hybrid cloud deployment by enterprises that needs this interconnection ecosystem. That's the customer we want to be there because they need to be in the environment. They're willing to pay a premium price. Churn's very low, and, you know, we're not as subject to the ups and downs in the market with those customers. And that's. There's a very long tail of that business. That'll be the primary driver of business in CoreSite long after I'm gone on this.
Mm-hmm.
So, we feel very confident about that part of the business, but AI is helping us, and there are some use cases that are appropriate to be in there.
I was skeptical of this, you know, maybe I'm still a little skeptical when American Tower bought CoreSite. Not that I didn't think that the data center business was a good one, but that, you know, I think Tom kind of bent himself into a pretzel trying to explain how towers and data centers fit together and, you know, that was gonna really be a good idea, and where we landed on that was this idea that because you had all the big players who would be creating the applications of the future, that you would have an inside track on learning where the edge would want to live, and if the edge happened to live, maybe where the towers were, there would be a new opportunity for you, and you'd be the first one to spot it.
What was interesting to me was Sampath, the CEO of Verizon Consumer, yesterday said that he was optimistic that, you know, AI is kind of creating the platform from which a lot of applications will be born, and many of those will need an edge compute component. Do you have, you know, putting those two things together, have you at this stage any new learnings about where the edge might live and what the opportunity might be for American Tower there?
Yes. Look, I'm more confident than ever that the edge is gonna happen. The timing is uncertain with it. I do want to distinguish. It's not just a data center that you need with a tower, it's the interconnection hub. Because, you know, you can drop an edge facility anywhere and tie it back with a piece of fiber. The key is that fiber has to land in a data center that's interconnected to other people and other environments and cloud on-ramps and things like that. The cost of connecting to those other people is what's gonna make the edge either economic or uneconomic. So us buying CoreSite was really to control that interconnection hub, and that's the key thing that will help promote edge for us in the future.
And we'll control that hub, whether it's going on a tower site or not.
Mm-hmm.
Quite frankly. So that was the real thesis behind that, is controlling the interconnection hub. So what we've done so far is we have some proofs of concepts with different partners. One's a little bit more public because IBM's a part of it, blogged about it, and that's a niche product with an automotive application where, you know, automotive companies producing cars. The software in the car is obsolete when it comes off the line. They store them in this huge facility, and the update mechanism is through a wireless chip.
Mm-hmm.
There's not enough bandwidth there. So in that, the proof of concept is with IBM and Enterprise and a carrier to do an edge facility, to do local breakout and update all the cars.
Mm.
That's a niche market, and the learnings from that are you have to figure out what the technological challenges are to making that happen. And local breakout's not something that the wireless carriers have been doing a lot of, and so working with them to figure out the complexities there is helpful in figuring out what the ultimate edge looks like. We have another proof of concept, and not as liberty you're talking about, but it's an AI application in an enterprise environment where they need low latency and an operational simplicity, and that's got its own set of challenges. So doing these proofs of concepts with these major company players has been very helpful for us in figuring out where we do play in that ecosystem.
I'm confident that the convergence that the wireless carriers are talking about is gonna happen, and I think we're in a primary position to be their partner with that when it does.
So kind of where the towers meet the data centers, and I've kind of taken some tours. One of the things, if we're gonna have edge compute or essentially data centers at the tower, we might need more land. We might need more power backup systems. That all requires investment. Those sorts of things probably happen relatively slowly. Are you kind of prepared to make that bet in terms of trying to negotiate expanded footprints at your towers and burying diesel, you know, getting permits to do that in your backyard?
We have a lot of sites that are already capable, and so one of the activities that we've done is to assess our current portfolio, and we've identified kind of over a thousand properties that have enough land, there's fiber presence, and there's enough power availability there to do it. So we don't have to make a lot of investments for kind of the proof of concept phase-
Mm-hmm.
-and what we're doing there. and so for now, it's really about working with these partners, and then we'll figure out, you know, what makes sense going forward.
For the other 39,000 sites?
Well, well, I mean, part of the proof of concept is figuring out the economics-
Yeah
... and making sure this works. You know, you used the term bet. We're not gonna make bets on this. We don't have to make bets. There are. We have the scale and the leverage to work with these partners to do these small proofs of concepts to figure out what the economics are gonna be. And frankly, if I can't earn better returns on the edge than I can earn in CoreSite , I'd rather invest in CoreSite and then let someone else invest in the edge, and we'll monetize it through our land and our interconnect and-
Mm-hmm.
-those types of things. But I do think the economics are gonna work out. I think it's gonna be a multi-tenant facility. It's gonna have the same types of characteristics, but we're not there yet.
Mm-hmm.
We're still trying to prove it out. One of the things that we just broke ground on a small edge facility in Raleigh, and it's another sandbox to play in, and it's on a tower site. That's one where we're learning the learnings. What does it cost? What does it take to bring in the extra power? What does it take to bring in the density for an edge use application?
Mm-hmm.
That'll give us a lot better view of, you know, how much CapEx is it gonna require? You know, how fast do you get tenants in the building? What returns do you get? And then we'll decide, is that, is that where we wanna invest, or is that where we wanna partner with somebody else?
Interesting. So then again, so kind of wrapping it up, we get to our target five times leverage round numbers at the end of the year. It's kind of interesting, a lot of companies getting to their leverage targets at the end of 2024 after kind of different acquisitions, spectrum and data center companies or whatever. You know, Verizon, obviously, this morning has decided to choose to use its leverage to buy a new company. It sounds like you're open to that. But if we kinda cardinal rank at this stage, you know, acquisitions, data center investments, edge experiments, domestic, you know, or sorry, developed market acquisitions, dividend payments, stock repurchase, in order, which ones are we gonna do?
I don't know yet.
Ugh!
I'll tell you why. What's been really important for us to do is create optionality.
Mm.
As we look at our portfolio, there's no strategic imperative out there today for us to do something. We, we've reached appropriate scale where we need to, and even markets where we're subscale today, we've modified our operations to run those out of regional hubs in a way that they're efficient enough.
Mm.
There's no kind of compelling reason to do something strategically right now in the portfolio. What that does is it gives us the optionality, once we hit that five times, to look at every incremental dollar of capital and say: What's gonna create the most long-term shareholder return? Whether it's a buyback, an M&A transaction, internal CapEx program, further delevering or raising the dividend. Rod and I are both very math-based people, and we're gonna run that calculation for every dollar that comes up, and it's gonna depend on, you know, what is the opportunity that's out there? What is the interest rate environment? What's our stock trading at? There's so many variables in there, I just can't tell you what's gonna be the best use.
But whatever it is, it's gonna be all focused on that long-term value creation for the shareholder.
Spoken like a true CEO. Steve, thank you so much-
All right.
For coming. Appreciate it.
Thanks.
Cheers.