Q3 2019 Earnings Call
Good day and welcome to the Crown Castle Q3, 2018 earnings call. Today's conference is being recorded at this time I would like to turn the conference over to Ben. Please go ahead Sir.
Great. Thank you for mass and good morning, everyone.
Thank you for joining us today as we review our third quarter 2019 results with me on the call. This morning, our Jay Brown Crown castles, Chief Executive Officer, and Dan Schlanger Crown castles Chief Financial Officer.
They the discussion we posted supplemental materials in the Investor section of our website, a crown castle Dot Com there was referred to throughout the call. This morning.
This conference call will contain forward looking statements, which are subject to certain risks uncertainties and assumptions and actual results may vary materially from those expected.
Information about potential factors, which could affect our results is available in the press release and the risk factor sections of the company's actually see filings.
Our statements were made as of today October 17th 2019, we assume no obligations to update any forward looking statements. In addition, todays call includes discussions or certain non-GAAP financial measures.
Tables reconciling these non-GAAP financial measures are available in the supplemental information package in the Investor section of the company's website at Crown Castle Dot Com. So that let me turn the call over to Jay.
Thanks, Dan and good morning, everyone. We delivered another quarter of strong financial results that reflect the significant demand we're seeing for our shared infrastructure assets.
I believe our strategy an unmatched portfolio 40000 towers 75000 route miles of fiber concentrated in the top U.S. markets has positioned crown castle to generate growth in cash flows and dividends both in the near term and for years to come.
Steady execution against the strategy is resulting in consistent dividend growth.
As we increased our annualized common stock dividend by 7% to $4, an 80 cents per share inline with what we believe our answer so per share growth will be in 2020.
Over the last five years and inclusive of the increase we announced yesterday, we have grown the dividend at a compound annual growth rate of approximately 8%.
While investing heavily in assets that we believe will generate significant growth over the long term.
Dan will discuss the results for the quarter in the full year 2020 outlook in a bit more detail. So I want to focus my comments. This morning on two key points.
First new leasing activity across our business is expected to be higher in 2020 than in 2019, including activity in our tower business remaining at the highest level and more than a decade.
And second I'm excited about the long runway of growth for Crown Castle as Fourg investment remains robust and the deployment of Fiveg is just getting started.
On the first point in 2019, we're seeing a significant acceleration in tower leasing as our customers add capacity to their wireless networks in response to the rapid growth in mobile data traffic.
The current demand environment is largely tied to our customers investing heavily in their fourg networks to keep pace with 30% to 40% annual data demand growth.
As you can see in our outlook for 2020, we expect the elevated level of tower leasing to continue into next year.
As Fiveg becomes a reality and wireless networks expand from connecting everyone to connecting everything.
We believe new use cases will develop that will generate significant long term demand for our infrastructure would towers remaining at the core of the wireless networks.
As I think back on my time at Crown Castle over the last 20 plus years, there have been significant advances in the broader wireless industry.
Like the rapid deployment of technology that has taken us from tracking mobile penetration rates in voice minutes with one she to the current Fourg unlimited data plans that feed a seemingly insatiable demand for data from consumers.
And now the industry is in the beginning stages of what is likely to be the next decade long investment cycle with the deployment of Fiveg.
Which brings with it the promise of a step function change in the role that wireless networks will play in supporting the digital economy going forward.
Well technologies have changed there has been one constant.
The significant and sustained demand for tower assets in the U.S.
This steady growth has been driven by increased data traffic and investment to maintain and improve the wireless user experience.
With continued strong data growth, we believe the carriers will respond to pressure on their networks as they have over the last couple of decades by leasing access to our infrastructure.
In addition, future networks will need to be significantly more dense and current infrastructure can handle which brings me to my second point.
I see a long runway of growth in front of Crown Castle as our customers continue to invest heavily in their fourg networks to keep pace with data demand growth from existing technologies, while the deployment of Fiveg is just getting started.
We were at the very beginning of what the World Economic Forum has deemed the fourth industrial Revolution.
First use water in steam power to mechanized production.
Second used electric power to create mass production, the third used electronics and information technology to automate production.
And the fourth will be the digital revolution that leads to long term gains and efficiencies and productivity and impacts almost every person and every industry.
The fourth industrial Revolution is closely tied to the deployment of Fiveg, which will allow for billions of devices to be connected and communicating in real time.
This level of connectivity is unprecedented and will require a network that is denser and closer to end users than has ever been the case.
We saw this change in network architecture begin with Fourg driving us to expand our shared infrastructure be on towers and build the leading industry small cell business in the U.S.
We believe creating this unique portfolio has increased our opportunity to deliver long term growth and dividends per share by tapping into the same underlying demand trends that make U.S. towers so valuable.
The extension of our strategy utilizes the same playbook, we used with towers by sharing the asset across multiple customers in the case of small cells fiber is the critical shared asset.
We have rapidly scaled our small cell business to where we are today was 70000 small cells on air or under construction and we believe we are still in the very early innings.
According to see T. I, a the number of small cells deployed in the U.S. is expected to increase nearly tenfold from 85000 at the end of last year. The 800000 by 2026 against that backdrop, we see tremendous opportunity to increase the returns on our fiber investments overtime.
Adding new small cell tenants to existing fiber networks as we're doing today.
We also see a path to further improve our small cell returns by sharing the fiber assets across the <unk>, a larger addressable market of customers that require high bandwidth kind of activity, including large enterprises healthcare institutions and government agencies.
When I look at the entire opportunity in front of us I see we are generating a 9% recurring yield on the 37 billion of capital that is invested across our 40000 towers and 75000 route miles the fiber.
With the lease up we have driven over the past two decades. We're now just over two tenants on average per tower.
In a similar vein with an average investment age of just three years, we have less than a small cell one small cell tenant equivalent across our fiber networks, giving us a long runway of growth as we have significant capacity to add more tenants to our assets overtime.
So to wrap up the growth we're seeing in our business reflects the positive underlying fundamentals driving demand for our infrastructure, including the continued growth in mobile data on existing Fourg networks and the early stages of our customers developing fiveg networks.
With our unmatched asset base and expertise operating in the best market in the World for communications infrastructure ownership.
I believe Crown Castle is in a great position to capture these substantial long term opportunities and consistently return capital to shareholders through a high quality dividend that we expect to grow 7% to 8% annually and with that I'll turn the call over to Dan.
Thanks, Jay good morning, everyone.
As Jay mentioned, we delivered another great quarter results that sets us up to finish 2019 on a strong note and provides a solid foundation for 2020.
Our third quarter results were positively impacted by higher services contribution and lower sustaining capital expenditures than we'd expected. So this is just timing related so our full your expectations for both remain unchanged.
During the third quarter. We also continued to improve our financial flexibility by taking advantage of favorable market conditions to proactively lock in attractive long term interest rates and extend the weighted average maturity of our outstanding debt to nearly seven years.
We finished the quarter with leverage five times debt to EBITDA, which is consistent with our investment grade credit profile.
Turning to our full year 2019 in 2020 outlook on slide five of the presentation. There are few items I would like to highlight.
First the 2019 outlook remains unchanged from our prior outlook.
Second the 2020 outlook assumes the proposed merger between T mobile and sprint closes prior to the ended the first quarter 2020, and lastly in 2020 relative to 2019, we expect similar contribution to growth from towers, a consistent number of small cell deployments with approximately 10000 nodes.
Constructed and consistent contribution to growth from fiber solutions.
Also.
Please note the 2020 out outlook reflects the impact of the mandatory conversion preferred stock that we anticipate occurring in August 2020.
The conversion will increase the diluted weighted average common shares outstanding for 2020 by approximately 6 million shares and reduced preferred stock dividends paid approximately $28 million when compared to 2019.
In addition, we increased our annualized common stock dividends by per share by 7% from $4.50 per share in the $4, an 80 cents tracking expected growth in AFFO per share.
Moving to slide six we expect approximately $245 million of growth in site rental revenues from 2019 2020 at the midpoint.
Consisting of $285 million organic contribution to site rental revenues offset by a change in straight line revenues were approximately $40 million.
With these expectations, we anticipate consolidated contribution organic contribution to site rental revenues were approximately 6% in 2020, consisting of 5% organic growth from towers inclusive of 3% contribution from escalators offset by 2% churn.
15% organic growth in our small cell business inclusive of wanting a half percent contribution from escalators offset by 1% churn and 3% organic growth from our fiber solutions inclusive of 9% churns and no contribution from escalators.
It relates to the expected tower churn in 2022% remains at the high end of our long term, 1% to 2% range as the last of the acquired network churn is expected to occur in late 2019, having an impact on 2020 financial results.
Turning to slide seven I'd like to briefly walk through the expected as AFFO growth from 2019 to 2020, approximately $210 million at the midpoint of outlook.
The growth is primarily driven by the organic contribution the site rental revenues growth of approximately $285 million at the mid points, which is partially offset by an approximately 90 million dollar increase in passive cash expenses.
This increase in expenses is a combination of the typical cost escalations in our business, including lease escalations in cost of living adjustments in the direct expenses associated with new leasing activity.
The balance of the changes relates to the expected contribution from network services.
And other items that are primarily related to changes in financing costs.
Support this growth we expect our overall discretionary capital expenditures in 2022 appear to be around $1.7 billion were around $1.3 billion net of capital contributions from our customers.
Based on our expected cash flow growth and the incremental leverage capacity that growth will generate we believe we can finance this level of spending without issuing equity.
In closing we're excited about the positive growth trends driving demand for our tower and fiber assets looking forward. We believe we're in a great position to continue delivering on our annual dividend growth target of 7% to 8% well at the same time, making significant investments in our business that we believe will generate attractive long term returns and support future growth.
Before taking questions I want to address one other item.
As you saw in or 8-K filed yesterday, we received the subpoena from the FCC in September requesting certain documents from 2015 through the present, primarily related to our capitalization and expense policies for tenant upgrades and installations in our services business.
Additionally, we have previously provided information to the FCC relating to certain of our service related vendor transactions, which are not material in amount.
The subpoena requires us to produce certain documents, but it's not a finding that any violation of law has occurred.
We believe our longstanding capitalization and expense policies are appropriate and we will of course cooperate fully with the FCC, including in connection with their review of those policies.
With that Samantha I'd like to open the call to questions.
[noise]. Thank you at this time, if he would like to ask your question. Please signal by pressing star one on your telephone keypad, if you're using this speakerphone. Please make sure. Your mute function is turned out to allow your Cmos reach our quick.
Hi style. Once you asked this question.
For just a moment hello, everyone and opportunity to signal for question.
I will first question will come from Simon Flannery with Morgan Stanley .
Great. Thank you very much.
I appreciate it so just following up on the FCC do you have any sense on timing of when.
You've got to get back to them and when you might hear some more clarity around what exactly there.
They're looking for here and then.
On on the outlook for next year, you talked about this small cell the business being similar to this this year and any more clarity around your ability maybe to revisit an acceleration clear up some of the zoning and other issues to get yeah, but if it's not next year at least in the outer years to pass back.
So that's sort of 15000 type number over time. Thank you.
Sure Good morning, Simon a under on your first question, we don't have any indication of timing. So as Dan mentioned tool will fully cooperate with the request that had been made of us and we'll work through the process as appropriate.
On the second question around small cells.
We do think is that we talked about extensively on the last quarter call, we're seeing a meaningful amount of delays from both municipalities and utilities.
In certain jurisdictions around the country, where we're trying to deploy small cells, which has caused the timeline or expected timeline to extend from what we had previously seen around 18 to 24 months to now a range of about 18 to 36 months.
And we're working that on a number of different fronts in terms of trying to come up with a solve on how do we do that more quickly and works through the process more quickly with municipalities and utilities, but I don't I don't have at this point any update or or more positive perspective, I think we still believe as we sit here today that the team.
Hi months gonna be 18 to 36 months.
And the activity that we're giving for 2020.
On the call. This morning reflects that that timeline of 18 to 36 months than to the extent that we do have some breakthroughs on that front, we'll certainly we'll certainly update here.
Great and Hmm.
Right.
Well on the backlog, we did or has it as we talked about that's up to 70000, a small cells in the backlog. So we put about 2500 on roughly during the third quarter and a and then we took on on some new orders. So the the total the total pipeline.
Unconstructed small cell nodes.
From 65000 to 75000 from second to third quarter of of this year.
Right.
Thank you.
Yeah, just to be clear that number 70000 of the ones that are on air underdeveloped minutes is around 40000 on air and 30000 under development, which as Jay mentioned you can see that we added to both of those numbers in the quarter.
So we had some bookings in the quarter that I think are indicative of what Jay was talking about earlier, which looking at the big picture of all this it does feel like and we're we're a little frustrated about a two that it's taking longer to put these on air than we would've anticipated at this point, but we're really in the early innings of this whole rollout of small cells and really.
I haven't gotten into Fiveg. So what we're looking at is is how can we make this business sustainable in scale. It because we believe the activity levels are there and we'll continue to grow.
And we think we're making progress on that front, but as Jay mentioned dirt, they're gonna be some some hurdles we need to get over and we're working really hard to get over them.
Thanks, a lot.
Thank you I Wouldnt question will come from Philip Cusick Jpmorgan.
Hi, This is Richard for Phil I'm wondering if you get an update on your current thoughts around incremental opportunities around data centers, a towers or nodes and along with that alternative connectivity solutions such as directly connecting crown.
Well sure to other networks of bypassing meet me room. Thank you.
Yeah, I think at this point the strategy that weve undertaking as the core of our focus. So we're focused on the components of the network related to towers, and and fiber, particularly around small cells, we think that the.
Yes majority of the opportunity is going to lie and those two areas as though as the world goes through what I, what I talked about in terms of the.
The fourth industrial Revolution.
We have as you know we've made some investments around edge data centers.
In in vapor and we're continuing to watch that space, we think theres opportunity not only to create a potentially oh, a lease up business by utilizing the space at the very edge of the network, which we would have as a result of our investments in small cells and towers.
But it also gives us the perspective on kind of where the world is going so at this point I I really don't see dana's data centers, playing a significant role in our and our long term long term strategy, we think the opportunity for us really realize a around towers and ended the use of fiber for for small cells and then utilize.
Using that same asset for as I mentioned in my comments offer other customers like hospitals and universities and other users that need to high bandwidth fiber.
Great. Thank you.
Thank you. Our next question will come from David Barden with Bank of America.
Hey, guys. Thanks, a lot for taking the questions [noise].
I've got a few but I guess the first one would be on the sprint T mobile.
Merger assumption could you kind of talk us through how you landed on choosing to assume it closed in the first quarter.
And just kind of what does it contribute to the guide.
Incrementally as if it didn't happen at quarter or happened at all thanks.
Sure I'm, you know I think the.
We needed to make an assumption obviously as we went through the guidance portion is based on the approvals of the of the D.O.J. and the FCC of the transaction. We believe the industry is operating under the assumption that the the deal is going to close in the first quarter of of next year.
As we think about the business and as we sit down to do the outlook each year.
Tober for the following year.
I think I think it's important to keep in context, how our business operates and how it works.
We oftentimes talk about how few inflection points, we have in the business and the reason for that is because how because of the amount of visibility that we gain into the business. We think about the 2020 outlook and talk specifically about kind of the leasing component of that it's a combination of three components as.
We sit down and try to figure out what we're going to do for the year. One it would be the leases that have commenced during 2019, a that are contributing to our results in calendar year 2019, but didn't contribute to the full year of 2019. So as we go over into 2020, we get a full 12 month.
Its contribution from all of those leases that were signed its commenced during calendar year 2019 that adds to growth on the second component would be leases that we signed during 2019, but they won't actually turned on until 2020. So those leases are committed there are signs we know when they're going on air rough.
Italy.
And that would be the second component of our about how we lay out the outlook and then the third component and the smallest component of the contribution to growth in any given year is the leases that will sign in the next calendar year end the year that we're giving guidance too.
And some component of those leases that are signed next year those will commence in the second half in all likelihood towards the second half of next year, that's a relatively small component of the guidance. So.
One of the things that we used to say and we haven't talked about in the long time, but still true in any given year. When we get to this point of thinking about the next year of our guide around site rental revenue growth.
A very significant percentage of the 6% growth. The Dan was speaking about in his comments, we already have visibility too and in many cases more.
More than half of that is probably already signed by customers or is already producing revenue NR NR statements today, and we'll get the benefit of full full year of it next year. So that's on the site rental side and then on the services side as we start to think about it there's two components of the services business, there's the installation compound.
We're project managing the work for carriers and that benefits from all of the leases that have been signed in this year that will get installed next year and then some component of what gets done in 2020 that we don't have visibility to yet but leases that we think side and then the last component would be around preconstruction work that we do.
Two or or or what we often called site development services and that is pre work. That's done. So we would be doing this site development services today for leases that are going to go on in 2020, and then we'll do some some work in 2020 for Preconceive Preconstruction work the construction work won't even be done until two.
Thousand 21, so when we look at all of those those elements. It gives us a tremendous amount of visibility into the business.
Which is why we guide in October of every year for the next calendar year, because significant portions of it are known today, So and I know you asked specifically about how we think about sprint T mobile.
If you followed us for a long time see you know we don't like to talk about specific customers and don't want to do that on the call.
But that's how we've built up our outlook in any given year and we did that consistently for 2020 as to what we've done in prior years, and then to put a finer point on it we thought for sure someone would ask US what did we do with the sprint T mobile merger and so the assumption that we made was that it goes on in the first and the first quarter.
Her but I think the explanation more broadly in how we think about the outlook in what drives that outlook.
Should help folks understand kind of the visibility that we have towards that outlook and then to the extent, there's a development broader in the space that changes forces us to need to change the assumption that we've we've made here, we're happy to come back and and give you that that update to our outlook when it when it occurs or when a certain development.
Necessitates us revisiting our assumption just had one point and clarity that David or is that as Jay mentioned, the three components that can add to new leasing activity in the subsequent year that giving guidance for.
And that last one he talked about.
Leases that we would sign in the year and put on in the year that would impact the financial statements and 20.
That's the smallest piece and that's what we would be talking about if there were a significant change in either the timing or outcome of the T. Mobile sprint merger, it's what we would be signing next year and would go on air next year.
So that's the like you said, it's a smaller portion of what could impact new leasing activity from the towers.
Welcome and thanks for that guys and I guess, maybe a second question would would be just on the small cell lease upside. So you've been talking about kind of 2019 and 2020 kind of look in roughly similar in terms of of no deployments presumably.
And then the leased up in revenue terms is also pretty similar I was wondering why the leasing.
Incremental revenue on the small so business wouldn't be higher because if you're going to deploy the same amount. This year as you did last year, but you've got the opportunity to lease up last year systems for incremental tenants, we should be seeing kind of revenue acceleration in dollar terms rather than flat is is there something I'm missing in that equation.
I don't think you're missing anything and equation, David I think what is happening is the timing of the new nodes going on air and 2020 is backend loaded which results in not having as much contribution to the new leasing activity in the year, but we believe that that will overtime come into play.
Okay got it alright, thanks, guys.
Thank you I when its question will come from Jonathan Cohen with RBC capital markets.
Oh, Thanks, a couple of questions. So as you laid out the confidence of guidance for 2020, and these different buckets, where do and delays play a role is that strictly in the escalator or is there.
Part portion of that in leasing and then related to guidance and David Barden question, I guess just to kind of put a finer point on it you do is it sounds like you do assume some modest amounts of integration related Capex. In 2020 is that is that correct.
On the on the MLS component.
And just I know you know this jonathan but just for the broader and broader audience oftentimes the term MLS it's used to describe agreements that we strike with the customers where they make committed levels of activity to us oftentimes those are over over multiyear multi year periods of time.
We we generally do not assume and have not assumed anything with regards to this outlook.
With regards to new customer agreements.
And our outlook for 2020, so it's business as usual if you will in terms of how we're contracting with customers and the activity.
The activity that we've baked into that outlook I'm not sure I understand your your question. The second one could you could you rephrase it or ask a different way yeah. Yeah. If you if two carriers worse or merge and you know before March of 2020, presumably they would to embark on some integration related capex that might be to elevate.
And then but rather just slip say as one carrier deploys to that siding and the other deploy slow to.
Different spectrum is going to get cross pollinated onto onto the different sets of assets. So so that that could lead to maybe a little bit higher pace of other than that revenues next year. So the question is is that.
It sounds like that's contemplated in your guidance, but to Dan's comments, it's the smallest part of your guidance, It's got a fair characterization.
Yeah, I think obviously as we as we noted we are assuming that the T mobile sprint merger happens in the first quarter.
I think broadly the industry is working and thinking under the under under that assumption.
The the pause that I would have and I think consideration of this that's important is.
In the activity cycle of the deployment of what's coming and obviously when you listen to sprint and T. Mobile talk about the rationale for the merger and you listen more broadly to all the players in the space.
The capital spending is going to start to transition here in the next 18 to 24 months from largely being focused on fourg to fiveg.
And those activities, while they will start in the next 18 to 24 months really an earnest.
This is gonna be a decade long, we believe investment cycle that will go through with the carriers.
And I'm trying to put a really fine point on which quarter that activity actually starts in and what the scale of that activity. It is.
We have proven I think to ourselves over 20 years of trying to do this that it's nearly impossible for us to be that be that precise and so we generally talk about the business think about the business manage the business over kind of year, a year plus cycles and I think as we get into five G. I think what you.
We'll hear US talk a significantly about is that the wireless carriers will go out and touched the sites that they're on already an upgrade that technology towards fiveg.
And commensurate with that some of the comments that I made we I think you'll also see them a increased the density, particularly in the top 30 markets in the U.S., where theres greater density of of users in order to provide fiveg and fiveg is going to require a greater density of the network. We think that will really benefits small cells.
And then the though the last phase of it will be a densification around the macro sites, where you see carriers come back and try to find opportunities to put in.
Additional antennas in line and macro sites that they're they're not on existing so I do think to your point I do think you're right that we'll see in the early stages kind of amendment activity to existing existing leases, but I think that's going to happen over a very very long period of time thinking decade or rather than.
Trying to put a finer point on on a on a quarterly outcome.
And then and then lastly related to new business. The there may be auctions that take place, perhaps and then the C band at some point.
In the first part of next year.
And then as an and then unrelated to that there would be the sort of mandated force network that gets built out.
As part of steel Jays approval the deal so I wondered how much or what are the timelines just sort of contemplates and do we see any that and 2020 around cbm deployments and and then maybe a bad debt as sports network deployment or was that not part of what you're thinking what do you.
Your initial outlook.
I think is we think long term about about the network certainly that we would expect that the FCC will continue to go down the path of trying to make additional spectrum bands available I think they have been really clear and all of the research has shown that despite the significant amount of investment that's going to have.
But around Densifying the networks, there's not enough capacity in the existing spectrum, Dan bands to meet the demand that is going to come both from consumers and industry around the deployment of Fiveg. So I think we will see the C. Band is an example of that I think there are multiple other examples that are being taught.
What about in terms of coming to auction, but I think even beyond what's contemplated today I think we're going to see over the next decade additional spectrum bands freed up and come to market and as those bands get freed up the the absolute best thing that's place to be as an infrastructure provider is when there's a combination of new spectrum being deployed.
Or spectrum that has previously been fallow and that ends up in the hands of a have a provider or whether that logo is known to us today or otherwise and that that provider then has either in incentive as mandated by the FCC to get it <unk> deployed or has a business interest and.
Economic desire to get that spectrum deployed.
And when those two things come together, an opportunity to Ah and capital to invest in the network along with new spectrum bands that goes really well for our industry and has for a long long period of time as we contemplate the guidance that we're giving this morning.
We're not assuming that there are additional spectrum bands that are given in the next in the next 12 months as we think about 2020 back to my earlier point around what contributes to that that would really have to be known today and we would we would already have leases to the extent that it was any of those things that I'm I'm talking about now that would be very small and frankly pretty much in constant.
Central to our tour guide, but I wouldn't dismiss that in terms of the long term benefit that those things are going to bring to our business. We think those are significant and if as we think about the the upside from the investment that we've made around made around fiber and our longstanding assets that we have on towers. Both of those assets are going to benefit significantly.
As additional spectrum bands are deployed over the long term.
Thank you very much.
Thank you I when its question will come from Michael Rollins with Citigroup.
Hi, good morning.
Just going back to the S T. He inquiry.
He Calumet you used for tenant upgrade and installation.
Similar or the pain has your competitors and you know they've also received similar request.
And then maybe just moving.
Over to the network services.
He's news more broadly.
How would you look at the potential for the gross profit that you're generating from that business to be similar or greater over time to current level and is there a framework.
That you use test sort of measure what that might look like relative to the underlying activity for leasing we didnt financials that you report thanks.
Sure.
On your first question I can't speak to the accounting, if our of our peers or whether or not favors received the received a letter.
On the second question around services gross profit over time.
Historically. This this is basically tracked leasing activity in the tower business or the amount of services that we perform a really small outside of the tower business. So virtually all of the gross profit that we have comes from the tower business.
And as I mentioned in my earlier comments there are two primary things that we do for for the wireless carriers and the surfaces business and I'll do the sequentially not an order of upscale the first thing that would do for carriers would be what we would call site development services those would be things that are pre construction.
There are things like site acquisition application fees and other things that we do prior to actually beginning the construction process for for a new tenants and whether that new tenant is an amendment to an existing lease or a brand new installation on the tower, we will do some of that work for them preconstruction that represent.
Since I think in 2018 that represented about 40% roughly of the total services activity that we had.
The 60%, which would be the second second component of it is the project management of if actually installing their equipment on our sites.
And in that regard, we're providing project management services.
Two tenants as they're wanting to install the equipment or whether it's again amendments or brand new brand new leases.
There have been occasions over overtime, where the growth in our gross profit has been a function of us capturing greater percentages of that of the activity.
In periods, where activity in towers was relatively light. If you go back historically, a lighter than levels today at times people will come into that business and they will bid the the price than the margins really tightly.
And we'll walk away from some of that some of that business because we just don't see margins in it in periods of time, where activity is more robust there are times, when we capture a higher higher percentage of it. So it's generally tracks activity, but not but not perfectly on so if you look at the increase in services gross gross profit over the last.
Several years, you can basically track that too our continued increase in activity around around tower active tower leasing activity and as we've mentioned a couple of times. This morning, a were in 2019, and we think will be again in 2020 terms of tower leasing activity. We're at the highest level, we've seen in more than a decade.
Right and so our services business is obviously tracking with that.
And it seems like in 2019, you may have gotten a little bit of a multiplier on that gross profit growth relative to the.
Gross profit growth network services relative to the news mean, if we measure.
He is the by just saying internal leasing dollars is that.
Fair or is there you know more to unpack to try to to get at the change in activity relative to the change in gross profit.
Yeah. There is a benefit that's why I mean my comments about their this it's not single dimension. We did benefit from 2018 into 19, we've captured a higher percentage of both preconstruction work as well as installation work. So weve grab some market share there during 2019 relative to two.
2018, so it's a combination of the activity and a and a little bit higher market share.
Thanks.
You bet.
Thank you. Our next question will come from Tobey set in stone with Cowen and company.
Great. This is John on for Colby, Thanks for taking the questions within the fiber business can you talk about the bookings trends you witnessed in the third quarter versus maybe the second quarter and do you believe there is some potential that the 3% growth for 2020 could ultimately prove conservative. Thank you.
Yeah, we saw the business continued to perform well into the a third quarter. It obviously came in line with our expectations you saw from the numbers that we gave on a on an incremental basis in 2020, our midpoint of growth a 165 million compared to 150 million in 2019.
Off that larger asset after larger revenue base. The growth is still 3%, which is where we guided I think our outlook for that and a in guidance around it as we've we've said a couple of times. This morning is at 3% we feel good about that we believe we can sustain that over a long long period of time.
And and we're doing everything we can to increase it as I look at the quality of fiber and where it's located and the opportunity there that fiber is running right past or a significant addressable market that I believe our fiber could provide services too and I think as we get better at the business I'm hopeful.
That we will be able to increase it a and C an opportunity.
Our 2020 outlook is a balanced view of what we think the best thing that could happen to us the worst things that could happen to us and trying to weigh a number of different assumptions around it and as we get into 2020, if we figure out a way to do a little better in the business, we'll certainly update you.
Thank you.
Thank you. Our next question will come from Rick Prentiss with Raymond James.
Hi, good morning, guys.
Morning.
A couple of questions like that Jay I think you mentioned that the the.
The change in the straight line adjustment for 2020, it looks like about maybe 40 million.
Improvement there we had been expecting maybe more like 100 million change there.
It looks like T. Mobile now is more like six years versus five years, but how should we think about that changed and also as we look into maybe 20, what are we expecting a bigger change from Straightline adjustment as we go from 20 to 21 and get that positive adjustments as cash is so important to look at.
[noise], So Rick let me take that one Uh huh.
He.
What adds to that straight line as you know is extension of current leases and signing new leases and we believe that the combination of those two activity is will lead to an additional $40 million straight line revenue.
I can't really I don't generally speak to your expectation of $100 million compared to that number but we believe that what we've captured in there is a new leasing activity that we expect in our in our guidance and our outlook and then included in that like I said as the extension of current leases to the extended that happens.
And looking into 2021 way, we're just getting guidance for 2020 now so we can get into that when we start talking about 2021 and how it all may look out.
Right now what we're talking about as as we mentioned at the midpoint of around $40 million for 2000.
Sure in the supplement you do give a little extra detail, but obviously, it's a static picture as far as with the adjustment between book in straight line. So that's kind of where we had gotten the early indication on 2020 and thinking on 20 was that's why I'm just trying to I know you don't get guys on 20, what would you do provide that supplement some extra kind of color.
Yeah. That's supplement as you pointed out is a snapshot in time as of our business.
But look relates to our business as of September Thirtyth 2019, and it will move depending on what happens with the business as we signed new leases doesn't extend new leases. So that's why we give it because we want to get as much details, we can but looking into the future we want to give that as part of our outlook.
Not as a static picture.
Sure.
The question is amortization of prepaid rent.
Looks like that amortization everything well, maybe about 25 million from 2018 to 29.
As we look at your 2020 guidance should we assume a similar increase of maybe 25 million more or less just trying to take away the amortization of prepaid rent contribution is fully employed.
Yeah first Ah that's about right. It's in that neighborhood from 28 in 2019, and we believe that going into 20, it'll be a little higher but not anything that would be material.
Okay, and then lastly, Dan you mentioned on churn on the towers I'd be up with that 2% level and toys, because it kind of wrapping up the acquired network churn lately. He how much dollars are left in there. So we just going to get a sense.
What that is as we get to finish up 19 to 20 dollar basis.
Well, what we've seen now is that we think we've taken almost all of it at this point and it'll just be the flow through from the activity that we've already seen going into the remainder of this year and then into 2020 and its most of the difference between our what would it be normalized of 1% and where we are now at about 2% and therefore as we.
Get into the back end of 2020, we think that that number of incremental churn will come down or will get closer to the lower end of our 1% to 2% long term guidance.
Makes sense, so long term more like 1%, where you're seeing the historical absent any other acquired networks.
I think that's fair, it's within that range and will be on the lower into that range is supposed to higher leverage.
Great that helps.
[laughter].
Thank you. Our next question will come from <unk> don't do with <unk>.
Hey, Thanks for taking my question, Yeah, Dan can you walk us through the mechanics of what gets expensed than what gets capitalized on the services business.
Sure Nick.
We.
Just I wanted to take a step back and just talk about that generally as how we think about capitalization and what we do and I think this is what any company does but it's basically looking at what are the expenditures that add to the long term Vicki.
Value of an asset can generate future revenues on an asset anything that does that we will capitalize to the extent that we are making expenditures.
For instance are more maintenance and in nature, but do not add to the long term revenue generating potential that asset we will expense.
Okay are you capitalizing costs. So so does that mean, you're capitalizing costs incurred for the services business two ppt.
Hi Tech segment.
Nick Nick like I said, we capitalized costs that add to the long term nature of the asset and I think you're going appreciate that given where we are with our discussions right now we don't want to get into a lot more detail here.
Okay understood and maybe switching gears then you know one on the [noise].
On the small cells front.
As we think about the lengthening installation timeframe are there any exit clauses in customer contracts, if you're not able to deliver the small cells in a given time frame I recognize that they may not choose to exercise them because waiting might be a better option. Thanks anything kind of curious if there are there.
I I am sure they have an exit should we not perform appropriately under the contract but these are committed contracts. So to the extent that we're performing appropriately we're not on the hook based on.
Certain barriers like municipalities and utilities that would prove that would make the timeline very very long. So I think as we talk about the can contracted a base of small cells that we that we that we have we don't view those at risk as long as we can get them on air at some point.
Okay got it thanks guys.
But.
Thank you I wouldn't <unk> question will come from the to yet, but I would you be yes.
Hi, Thank you couple of questions I'm, just going back on the guidance given that you're expecting a similar organic growth in Macau.
Next year and this includes a small amount from new leases that could be sign.
The deal closes can you provide more color on what type of activities think actually could slow down.
To make it probably not defense and maybe any thoughts on commercial availability of CBR asked if you're seeing any increased activity from the carriers as they deploy that and that's final question on them discretionary capex. It looks like it's a little bit lower versus 19 can you talk about what's driving that production.
Sure on this on the first point I really don't want to get into specific customer guidance around what we expect in calendar year 2020, we've tried to frame. This in a way that that's helpful and shows the relatively minimal amount of activity that would have.
Listen in 20, and how that would flow through to the guide that weve that we've given so I'm not I'm not sure I can add much much color to that we're certainly assume that during during 2020, we'll see a new macro a new macro leases across the portfolio and across the across the industry.
And those will have some contribution in 2020, but those those leases will frankly have more meaningful contribution to our 2021 results.
On Crs, we are watching that that that activity. There is some of it but it's not material to the results today, we don't expect that it'll be material to our results than in 2020 in the outlook that we're we're providing initially I think most of the Crs activity appears to be focused in building.
So we're seeing some of that in a in the venue opportunities that we have and they and that may contribute their but it's it's really small at this point and not I'm not material driver of a driver of the business.
On the discretionary capital back to the the reduction really is too is related to what we believe will to it will take to put on air all of the assets that we believe will generate a new leasing activity that we have coming in at 2020, and we believe that's just lower in 2020 that it isn't 2019 as you know there was a step up in activity going into 2000.
19 were leveling out a bit and 2020 into what the result of that is a slightly lower capital expenditure profile and what we're seeing a night.
Okay, well one just so.
Can you give us a rough split Oh this fiber on small cells revenue base as we exit there is it's more like 80% fiber 20 small cells.
Yeah, it's closer to 70% fiber, 30% small so going into 2023rd is 80 to one.
Okay.
Hi, Thank you.
Thank you. Our next question will come from Robert Dunn with Guggenheim Securities.
Yep, Thanks for taking my question.
You know the site leasing fourth quarter site leasing revenue implied.
Given year to date progress and <unk> and even at the high end of full year guidance.
It seems like the fourth quarter implication is pretty flat versus third quarter, just a hair higher.
As you know, we think about fourth quarter, usually being seasonally stronger. So can you talk about little bit about the you know timing through the year, there and maybe pulling to that a little bit about.
You know, we <unk>, how you see order activity in the second half the year versus the first half of this year.
[noise], Yeah happy to happy to answer that question, we had a maybe a seasonably strong third quarter, a as we think about as we think about historically the the activity in Q3 was stronger so I would just I would chalk that up to timing, obviously, we're not changing our full year outlook for 2000.
And then 19, we we did expect Q3 to be really strong relative to the to the full year and so to the extent you're noticing a little bit of movement between Q3 in Q4, we believe that to be just just timing.
Thanks, and at what about the pace of new order activity in the second half the year versus the first half the year.
Well the second half of the year leads right into our 2020 outlook. So the the leasing in the bookings that were doing in the second half of this calendar year those flow into leases that are turning on in 2020 to the extent, we don't get them on air at the end of 2019, So I think a good read through for for particularly second half activity of 19.
That is you can you can get a good proxy for that by looking at the outlook for 2020, so when we make comments and 2020 to say that the leasing activity in 20.
Look substantially similar to that of 2019 in terms of change in our reported revenue growth. That's that's really a proxy for what's happened for the second half of 2019, So say all that to say second half of 2019 activity.
Is that at the highest levels, we've seen in a decade, except for the the periods and a second half of 18 through the beginning of 19. So it's been incredibly incredibly strong and really hopeful as we as we go into into 20 and as you remember Robert we increased our new leasing activity expectations earlier this year, increasing double that.
Tivity through through 2019, so we believe that this higher level activity, we're seeing now will continue.
Great Thanks, and on the incremental a small so orders how much of that is a new you know newbuilds versus second tenants. The this the breakout proportionately.
Similar to what we've seen over the last over the last several several quarters. So we're still seeing the predominant amount at the activity is coming from from new new new locations, where we're going to extend fiber off the plant, but we're seeing co locations in the next then that mixes.
Well to the tune of about 30% to 40% of the activity is coming in and co locations and about 60%, 60% to 70% would be would be new extension of the of the fiber networks that we that we haven't had in place.
The activity continues to be focused in the top 30 top 30 markets of the U.S. So there is some marginal activity outside of that.
But certainly this increase that would that we're talking about this morning, Oh, that's coming in the and almost entirely the top 30 markets.
Great. Thank you.
Thank you I wouldn't social come from.
And with Oppenheimer.
Thanks, Dave maybe just asking I'm sorry, guys. Thanks, Dave maybe just asking the question a little differently on sprint T. Mobile dish do you think that merger ends up changing the trajectory revenue at all over the next five years, you know for that doesn't improve it does it you know keep things relatively the same that doesn't hurt I mean, I know, there's a million moving parts and then secondly are you see much industry.
Listen the cable companies, yet or do you think their engineering wireless networks at this point and then lastly.
Our the municipalities and utilities are the improving on on their ability to kind of process. You know only orders here for small cells or you know when do you think that it really comes where we get some good run rate again.
Sure I I think to your question around longer term. The the driver of our business is really data traffic growth, which I referenced a couple of times than my comments and I think regardless of the logos. The number of logos, who owns what spectrum I think the what drives our business in the.
And the investment in the infrastructure goes to what is the data traffic opportunity and.
If if our assumption is right around the the coming of Fiveg and the amount of infrastructure, that's going to be required for that I think our business is going to perform really well regardless of the outcome. There are there may be some short term changes that we're talking about on a quarter to quarter basis, depending on out what the ultimate outcome of the industry's try.
Sure is but the long term trajectory of revenue growth. We believe that that is a very favorable environment and it's why we you know when Dan and I are having these kind of conversations. It's why we spent so much time trying to focus around the dividend and our dividend growth of 7% to 8% inside of that range of 7% to 8%, we're taking into consideration to know.
For a different outcomes, whether its if movements in activity around leasing as well as changes in interest rate environment and other things. We're trying to look out over a really long period of time and so how do we think the business will perform over a long period of time and that drives us to talk about kind of the dividend growth of 7% to 8% and to.
Good question looking at the longer term of kind of what does it look like over the next five five years or so.
You know I would say I think our view around dividend growth of 7% to 8% encapsulates the number of different industry structures deployments of new technologies different spectrum bands and we believe it'll be really favorable [noise].
On the <unk> on your second question around cable companies again, I'm going to beg off on that because I really don't like to talk about specific customers.
I think more generally a as we move towards Fiveg, there's a mix of a lot of customers that are starting to look at the need for infrastructure and how they could own wireless networks in ways that go beyond what we've historically seen a and a and we've seen leasing from players outside of the four big operators in the U.S.
This year and that activity has been up compared to compared to prior year. So we've benefited from some leasing outside of the big for operators I think as we move towards Fiveg, you're likely to see that likely to see that continue then your last question around the municipalities and utilities, we're certainly working really hard to to try to get there.
There have been a number of of governmental entities that have been helpful. On that front. Obviously, the FCC has worked really hard to try to put out some guidance and some rules that.
Are intended to give clarity to the timeline into the amount those rules have been helpful. In a lot of cases, but we also run into utilities and municipalities that just failed to comply with the comply with the orders in the rules of the FCC a number of states have undertaken activities and try to to try to help this activity and so we're up to.
The mid Twentys in terms of number of states that have passed legislation that enables a.
Those are our ability to deploy this with was committed timelines and committed cost structures and there are a number of other states that we're working on at the state level.
In general, though I would say a as we talked about kind of the operating components, how long, it's going to take us to deploy these all of those changes and and an opportunity is there really havent changed our trajectory of how quickly. We think we can deploy these ultimately, though I mean, just going all the way back to kind of where we started in the and the conversation.
And in my prepared remarks.
This business at its most basic level is a significant investment of capital upfront.
Ah to own and asset that can be shared and that sharing occurs over a very long period of time and the timing. While we certainly are working on it and we want to deliver for our customers a small cell node at absolutely quickly as we can ultimately as we think about looking at the business on whether or not it makes sense for us.
The shared asset and what the returns are we're less focused on the exact timing of when we can get the small cell nodes on a much more focused around what's the addressable market and what's the opportunity there and we have found by run the the tower business over a long period of time that the patient steady execution of al.
Adding tenants to that shared asset over a long period of time, it's how you can effectively drive great returns on the investments that we've made and we're really focused on how do we do that cost effectively and thoughtfully and then position ourselves really well with our customers to be the go to provider because we can provide them with a low cost solution that they can count on.
And and that's what we're focused on day in and day out to run the business well.
Thank you.
Thank you I wouldn't <unk> question will come from that's okay with eastern research.
Hey, guys. So a couple of questions, but and Ah on small cells you talked about.
Our new leasing revenue being back end weighted I was wondering if you could provide a little bit of context on the cadence of new leasing activity that you expect in the guide for towers in fiber.
The those are generally flat across the 2020 outlook.
Spencer there's no there's no significant change from first at the second half.
Okay got it. Thank you and then on Capex I was just wondering if you could put a finer point on where you expect the lower capex to cut to come from whether its towers small cells or fiber in 2020.
It's in the fiber small cells arena Spencer towers is going to be relatively similar and then building the asset out for the five or small cell business is what we're spending a little less money on 20 that we didnt like it.
Got it and then just lastly on small cells have you.
You've historically talked to a win rate of around 50% of the market.
And in the meantime.
It feels like we've seen more more growth from carriers building small cells themselves.
Or or or or cable companies talking about adding CBR asked or life I to their own infrastructure. So I was just wondering if you could.
Okay. That's on your and your perspective of the competitive landscape anything change or are you seeing a better when rates are or.
Table. Thanks.
Yeah, you're correct in that our historical experience has been we've we've won we what we believed to be about 50% if the opportunity that's been available in the market and the small cells that have been deployed we believe we've won about 50% of that activity.
We're certainly not underwriting as we think about the long term returns in the business, we're not underwriting that as well, we believe will be a significant growth in the amount of activity.
I quoted the CIA stat in terms of a tenfold increase and the number of small cell nodes between now and 2026.
We don't assume that we're going to continue to win 50% of the activity.
We will we believe we'll win a very high percentage of the activity that happens in the areas, where we have existing fiber.
And to the extent that there is activity outside of where we have fiber. Today then it will just be an investment decision around whether or not we would like to continue to expand the business and that goes back to kind of my comments a couple of questions go around you know how are we thinking about running the business. We're focused on how do we grow the dividend per share.
Over a long period of time and to the extent that we continue to expand the base and and follow the carriers into markets beyond what we have today that will really be an investment decision around what do we believe the returns are the initial returns plus the opportunity for future for future growth there and.
And to the extent that the the return or the return structure stay similar to what it is today.
Think we'll continue to do that if it changes then a them, we'll evaluate that capital at that at that point, but we're not underwriting and assumption there I'm not sure to your question around self perform it we believe it it is the most likely a if crown if crown castle is not building the small cells. The most likely scenario is that the work.
As being self performed by the carriers.
It again similar to kind of the tower industry in the earlier days, where there were a few providers who are building a bunch of towers, but the curious were also self performing.
There are locations that we choose not to a two to build small cells and build fiber and in those cases oftentimes. The carrier is going to do it themselves. A there are other cases, where we would potentially be interested in doing it but the curious decide that they want to self self perform I think the scale of what's gonna be needed around small cells over the coming decade is you're going.
I have some of all of that and more.
And so I think we'll continue to see the carriers self perform and build a significant number of small cells themselves and I think we'll do really well in the places where we've chosen to build fiber and capture capture lease up opportunities against that fiber to drive our returns.
Great. Thank you.
You bet, then we'll take a given the time and we'll take one more question.
Thank you.
Last question for today's presentation will come from bringing in this though with Keybanc capital markets.
Awesome. Thanks for squeezing me in wanted to follow up on Robert's question on bookings activity specifically on towers. So is the backlog.
Business side, but not commenced up year over year, maybe just provide some color from a year over year in quarter over quarter perspective, and thank you know about follow up question.
Yeah.
Just to clarify brand and you're asking third quarter 2019 over third quarter 2018.
Yes, I don't think England.
Yeah sure.
Yeah, I think from what you can piece together, especially from how we've talked about the new leasing activity being higher in 19 than 18.
And then increasing it during 19 from our original outlook an expectation that it has been building overtime and that isn't that is included into the third quarter. We believe that as James mentioned, a few times that this this activity level in towers, which is the highest we've seen in a decade will continue into 2020. So it is it has been.
In increasing and we think it will continue around this pace.
Got it then on the small cell business you guys called out 1% churn in small cells why is that happening math pretty now in the last couple of years and you just curious why theres any churn in that business at all then on the escalator for the small cell business.
It is one of the half percent started the best that you guys do and does that cover your cost inflation in that business longer term. Thanks.
Sure that the trend of about 1%. It I know this may not be a totally satisfying answer, but they're going to be times. When there are certain knows that it just aren't performing in a way that is appropriate or that somehow we want that our customers don't want one particular point and or one particular location and.
The 1% turned level now I think you can take it to say that it's pretty de Minimis.
And not something that I think is.
Indicative of anything other than just certain times, where nodes get turned off.
With regard to the escalator itself the 1.5% as we've talked about historically, there's been somewhat of a thought process, but it's not in the contract, but I thought process between the escalation on that the node portion and the escalation on the fiber portion where the fiber portion doesn't get an escalator node portion, which is approximately more process.
More of the tower business does get an escalator and as we've kind of worked through that we've gotten to the point, where the escalator is on average about wanting to have percent in the small cell business.
We don't think that that will go up overtime no I don't I don't think it'll get better than that for that dynamic I. Just spoke of is it five are generally doesn't have an escalator associated with it and I'd say, that's a significant portion of the build.
And as far as cost Escalations. It there aren't really many cost escalations within that small cell business. Once we just like in the tower business. Once we have the asset in place it is in place.
And we believe that because of that what really will drive the incremental revenue incremental returns and ultimately the incremental gross margins associated small cell business will be lease up as we add those at higher incremental returns and and margins then the anchor build is at it. So what we'll see we believe is increasing return.
Turns and margins overtime as we lease up the assets and de escalator recover any cost increases that we stand the underlying business.
Great. Thanks for taking the question.
You bet. Thanks, everyone for joining us. This morning, we're obviously a incredibly thrilled with the results in the third quarter I want to give a shout out to our employees, who have done a terrific job delivering for our customers doing during 2019, thus far and we're looking to finish up the your strong and we're obviously really excited about the long term opportune.
Andy that's in front of us as we turn the page from largely focused on Fourg and I think as we get into 2020, they'll start to be even greater conversations around the opportunity in fiveg and what it's going to mean for our business. We think it's gonna be great. Thanks. So thanks for joining us this morning with 40 catching up with you soon bye bye.
Thank you ladies and gentlemen. This concludes today's teleconference. You may now disconnect.