American Tower beats expectations in Q1, but still mulling small cell market

cell tower antennas
American Tower is still mulling its strategy for small cells, which contrasts sharply with its rival Crown Castle.

American Tower posted a solid first quarter thanks largely to its expansion in international markets, and analysts generally agree the U.S. tower industry is positioned to rebound in coming months.

But the company still hasn’t decided whether it will join Crown Castle and others in aggressively pursuing the small cell market.

The Boston-based firm posted first-quarter revenue of $1.62 billion, beating Wells Fargo Securities’ estimate of $1.56 billion, and property revenue of $1.59 billion was up 26% year-over-year. International revenue came in at $702 million, up from $416 million during the year-ago period, and domestic revenue increased from $852 million last year to $892 million.

“U.S. strength was in the spotlight this quarter, with organic growth seeing a meaningful re-acceleration (highest since 2Q 2015),” Matthew Niknam of Deutsche Bank wrote in a research note to investors. “At the same time, American Tower’s global scale and diversification should help it sustain peer-high growth levels longer-term, given the underpenetrated nature of smartphones and LTE in key markets like Inkia and Mexico.”

And while American Tower bumped up its guidance for some financial metrics in 2017, Wells Fargo said the company’s forecast may still err on the conservative side given some promising developments in the North American market.

“We believe this outlook could prove conservative as the company does not account for any increased activity from FirstNet and Mexican wholesale network (AT&T), 600 MHz build (T-Mobile, AT&T and others), (and a) new master lease agreement (Verizon),” Jennifer Fritzsche of Wells Fargo wrote in a research note. “The company spent $400 million in Q1 share buybacks, and has $1.1 billion of dry powder remaining for capital allocation in 2017 while maintaining its leverage ratio steady. We remain at ‘outperform’ on American Tower shares, and are increasing our valuation range to $136-$138 vs. $126-$128 prior.”

American Tower is still mulling its strategy for small cells, though, which contrasts sharply with its rival Crown Castle. Crown Castle said earlier this week that its deployments of small cells will double over the next two years as carriers scramble to densify their networks in advance of 5G, and the company plans to install “nearly 25,000 nodes” over the next 18 to 24 months.

American Tower, though, has been more deliberate as the small cell market gets legs. Small cells are widely viewed as crucial to the rollout of 5G services, but American Tower executives said this week that U.S. carriers will continue to depend heavily on their 4G networks for at least the next few years—and traditional macrocells will continue to be the foundation for those networks.

“Since we anticipate that 4G will remain as the cornerstone of suburban and rural networks well into the 2020s, we also expect this type of strong growth can be continued into the future,” American Tower CEO James Taiclet said on the earnings call, according to a Seeking Alpha transcript. “Our confidence is further underpinned by the basic topography and population characteristics of the United States. More than 80% of the U.S. population lives in rural or suburban areas where macro towers remain by far the most economically and technologically efficient communications infrastructure solution. In these types of locations, it’s simply impractical to broadly deploy high-band spectrum, especially on small cell architectures given that spectrum’s short-range propagation radius.”