Crown Castle didn’t see any impact on its business in the first quarter from the COVID-19 pandemic, and expects a significant increase in activity in the second half of 2020 as carriers ramp up 5G deployments.
Executives on Thursday’s Q1 earnings call with investment analysts acknowledged there are many unknowns related to the coronavirus, but remained confident in Crown Castle’s long-term growth and left its 2020 outlook unchanged. Similarly, peer American Tower left its 2020 guidance largely intact when it reported Q1 results on Wednesday.
Slowed carrier activity in the fourth quarter continued into Q1 while the fate of T-Mobile and Sprint’s merger was still uncertain, but with the deal now officially closed, activity is anticipated to come back strong later this year.
It’s not just T-Mobile though, as Crown Castle CEO Jay Brown speaking on the earnings call said the 5G-related ramp in carrier activity is true across each of the major U.S. operators, both in aggregate and individually.
Dish Network’s plan to enter the wireless space and build a new nationwide network over the next several years adds to what Crown Castle sees as the start of a long-term 5G investment cycle, Brown said, adding that they’re working closely with Dish to see what they can provide.
“With our unmatched base of towers, small cells, and fiber we believe we’re in a very favorable position to assist Dish as they build out their network,” Brown said. Dish is still in preparation phases though and any impact on financial results wouldn’t be seen until 2021 and beyond.
The ramp for Crown Castle later this year from 5G deployments, as well as from continued network enhancements to keep up with 30-40% annual increases in data usage, isn't expected to be slowed down by COVID, with Brown pointing to public comments from AT&T, T-Mobile and Verizon in recent weeks reaffirming commitments to 5G rollouts,
Crown Castle’s chief executive compared the activity levels expected in the second half 2020 to look like the first half of 2019, a time when all four carriers were making significant network enhancements, and leasing activity was the highest it had been in more than a decade.
In response to questions from analysts about any changes in carrier behavior since the COVID-19 outbreak, Brown said Crown Castle’s long term visibility into what kind of 5G investments carriers are going to make is better today than it was six to nine months ago, adding that nothing in the last six weeks has changed that view.
“We can see it across the industry, the plans are becoming more real, more specific,” Brown said. “We’re starting to see exactly where they’re targeting the sites and how they’re thinking of deploying 5G network in terms of what equipment needs to be added, how much of it needs to be added.”
In terms of recurring revenue from site rentals, that will continue to grow throughout the course of 2020, Brown said, but the ramp up in the back half of the year will be most pronounced in the company’s services business.
In a note to investors Wednesday ahead of the earnings call, MoffettNathanson analyst Nick Del Deo wrote that Crown Castle’s unchanged 2020 guidance implies a sharp uptick in EBITDA that works out to 7.6% EBITDA growth from Q2 to Q4 in 2020 versus the same periods last year, which “while certainly not impossible to achieve…adds some risk to the outlook.”
Specifically, he noted, the risk appeared to relate mostly to network services.
“Guidance suggests roughly $150M in network services margin for the full year, or about $45M over each of the next three quarters, vs. $14M in Q1 and an average of $45M in the ‘pre-T-Mobile slowdown’ quarters,” wrote Del Deo. “Again, that’s not crazy given the work T-Mobile needs to perform on its network, but if Q2 is also slow it implies a great deal of activity in the second half. Network services revenue is also exposed to the potential for COVID-19 slippage.”
Small cell business not seeing (increased) delays
In addition to its tower sites, Crown Castle also has a fiber and small cell business and interestingly, the company saw no impact in Q1 and very minimal impact in April, in terms of construction-related delays.
So far, the company says crews have been able to work and install infrastructure without interruption.
Crown Castle ended the quarter with about 45,000 small cells on air and expects to deploy approximately 10,000 this year, similar to its 2019 figure. It currently has more than 25,000 nodes in its small cell construction pipeline and continues to deal with ongoing deployment challenges with already overburdened municipalities, according to Brown. Those challenges were present though long before the COVID-19 crisis, and had already elongated deployment timelines to up to 36 months.
The demand for small cells is still strong, executives reiterated, and the company’s aim is to offer a lower cost alternative to carriers building or owning the small cells themselves.
MoffettNathanson’s Del Deo indicated impacts from COVID-19 might make leasing more attractive as carriers look to reduce costs, writing that “a recession that stresses carrier balance sheets could help swing the small cell pendulum away from DIY and back toward leasing.”
While Brown in his prepared remarks cautioned that it’s possible Crown Castle could see some new challenges in terms of getting construction crews to sites or exacerbated issues with zoning and permitting, he indicated the comments were made more out of recognition of widespread disruption from COVID-19 and keeping an open mind that the company might not be able to completely foresee all possible impacts.
Here are some of Crown Castle’s Q1 financial highlights:
- 5.5% growth in site rental revenues to $1.31 billion, including $71 million from organic contribution.
- Organic rental revenue growth was 5.8%.
- Services revenues were $111 million, while services costs came in at $99 million.
- Adjusted EBIDTA and AFFO each grew by 1% to $814 million and $593 million, respectively.
- Fiber rental revenues were $443 million.
- Capex for the quarter was $447 million.
- Paid common stock dividends of about $513 million in aggregate, or $1.20 per common share, an increase of 7% compared to the same period a year prior.
At the mid-point of its 2020 guidance, Crown Castle anticipates site rental revenue growth of 5%, Adjusted EBIDTA growth of 6% and AFFO growth of 9%. For 2020, Crown Castle is still expecting about $175 million in new leasing activity from towers, $70 million from small cells and about $165 million from fiber.