Tower companies feel varying degrees of U.S. 5G slowdown

Is the slowdown in 5G U.S. carrier deployments as bad as it looked when Crown Castle reported slower Q2 activity a week and a half ago?

All three tower companies cited a slowdown in U.S. carrier activity in the second quarter of 2023, to varying degrees. Crown Castle, which reported Q2 results on July 20, raised fears early in the earnings cycle, saying Q2 activity declined more than 50%.

Last week, American Tower also said activity levels slowed in Q2 and reduced its expectations for service revenue in 2023 by about $40 million.

Yesterday, SBA Communications President and CEO Jeffrey Stoops said SBA saw the same slowdown in activity that others have discussed. But SBA also had a fairly big chunk of good news to offset that: a new five-year master lease agreement (MLA) with AT&T.

It’s the first MLA that SBA has signed in quite some time and represents a $6 million increase to expected domestic leasing activity in 2023, noted MoffettNathanson analyst Nick Del Deo in a report for investors.

SBA management said the companies had been negotiating the deal for well over a year.

For Q2 2023, SBA recorded net income of $202 million. Site leasing revenue was $626.1 million, representing a 7.9% growth over the prior year period. SBA increased its full year 2023 outlook for site leasing revenue, tower cash flow, adjusted EBITDA and adjusted funds from operations (AFFO).

“We posted good financial results for the second quarter, exceeding estimates and our own expectations,” Stoops said in a statement. “Customer activity varied by region, with U.S. customers a little less active in the aggregate with their wireless networks than we expected, and international customers a little more active in the aggregate than we expected.”

Normal surge & fallback

Like some of his peers, Stoops emphasized that the variations in U.S. 5G builds are part of the normal cycle of carrier network investment that occurs with each new generation – a large initial burst of activity followed by many years of coverage completion and capacity building.

Stoops also acknowledged that the rural nature of SBA’s portfolio may be an advantage, as operators start their deployments in “NFL cities” and then expand into the more suburban and rural areas. Analysts have noted that Crown Castle is over-indexed to denser urban markets, which might explain why it’s seeing a greater slowdown.

Indeed, during T-Mobile’s Q2 conference call last week, T-Mobile President of Technology Ulf Ewaldsson said it takes about three times the effort to reach the next 100 million population target as it does with the previous 100 or 200 million. For example, T-Mobile reached 200 million POPs covered with its mid-band spectrum two years ago; it’s now at 285 million and heading toward 300 million by the end of this year.

“It gets harder and harder with the POPs as you grow through, every 100 million POPs takes about three times the efforts in terms of upgrading and building new towers to be able to deliver the same POP growth,” Ewaldsson said, according to earnings call transcript.

To further emphasize the positive, Stoops pointed to the work that Dish Network has yet to complete to reach its 2025 targets; it’s taking a pause since reaching its June 2023 coverage mandate. T-Mobile hasn’t even gotten around to its C-band and 3.45 GHz deployments, and some folks are still waiting on dual-band equipment. “So there’s all kinds of things to look forward to as we move through the year and into next,” he said.

Asked if they’re seeing anything from cable, Stoops said a “little bit” but not enough to give anyone the impression that it’s going to move the needle.

TD Cowen analysts said it might take until February 2024’s guidance to get a clearer picture on the carrier slowdown. SBA’s MLA with AT&T “is somewhat masking the broader carrier slowdown and thus a lower run-rate from 4Q23 as we think about 2024.” Similar to the commentary from other tower companies, SBA management remains optimistic about the longer-term picture, based on the 3G/4G cycle precedent and continued wireless data demand growth.  

MoffettNathanson’s Del Deo noted some other nuances. SBA had guided to decelerating leasing activity over the course of 2023 ever since sharing its 2022 outlook in February. It also had guided to a nearly 30% decline in services revenue in 2023 vs. 2022. “Did SBA already anticipate and incorporate a slowdown that was more sudden than Crown Castle and American Tower had expected, or was this a surprise across the industry?,” he wrote.

“We’ll never know for sure, but SBA may have been a bit more conservative in its prior outlooks than its peers were,” he said.