Verizon, T-Mobile lead Q2 network spending, but AT&T and Sprint poised to boost investment

Verizon Wireless (NYSE: VZ) and T-Mobile US (NYSE:TMUS) dominated network spending during the second quarter and boosted tower companies' sales and cell site activity. However, AT&T (NYSE: T) and Sprint (NYSE: S) are poised to increase their spending in the second half of the year and into 2016, according to analysts and tower company executives.

American Tower CFO Tom Bartlett said during the company's second-quarter earnings call that "T-Mobile and Verizon led the way in terms of both new leases and amendments in Q2 and continued to comprise the bulk of our new business pipeline," according to a Seeking Alpha transcript. Similarly, SBA Communications CEO Jeffrey Stoops said "Verizon and T-Mobile represented the majority of our new business in the quarter," according to a Seeking Alpha transcript of his remarks during SBA's earnings call. Those comments echo those of Crown Castle CEO Ben Moreland and are a continuation of trends tower companies saw in the first quarter.

American Tower CEO Jaim Taiclet noted that Verizon has been busy adding capacity using its AWS-1 spectrum to augment is lower-band 700 MHz spectrum, and that the company has been seeing Verizon "co-locating on brand new towers that they hadn't had equipment on in the past with us." Verizon is cell splitting to boost capacity and get sites closer together because of the weaker propagation characteristics of AWS-1 spectrum compared to 700 MHz. Verizon is also starting to refarm its 1900 MHz PCS spectrum, which could increase activity for tower companies.

SBA's Chief Financial Officer Brendan Cavanagh noted that typically when carriers refarm spectrum they swap antennas, which tower companies may or may not charge for, depending on what is being swapped out. However, when new radios heads are added, tower companies get that additional site amendment revenue, he noted.

Taiclet said that T-Mobile has been aggressively deploying its 700 MHz A Block spectrum as part of its goal to boost its LTE footprint to 300 million POPs by year-end (it's currently at 290 million). That's leading to more site amendment activity, he said. Since T-Mobile has been adding customers at a furious pace and is seeing usage in areas where it previously roamed onto other carriers' networks, that gives T-Mobile more of an incentive "to now start building out their own network assets in places where they used to pay their competitors to carry their traffic," Taiclet said.

AT&T has been investing less in its network the last few quarters after increasing spending through mid-2014 to build out its LTE network. "When you have outsized investment, you tend to have, logically, a little bit longer grooming period to get that investment in the network tuned perfectly, see how it performs and then you go into another reinvestment cycle," Taiclet said of AT&T. "We're in the trough of that now, but our holistic agreement keeps their revenues with us pretty steady."

Sprint, meanwhile, is in the final planning stages of its massive network densification project, though Taiclet said that Sprint and American Tower have a holistic agreement in place which keeps revenues from Sprint steady. "That continues and we're looking forward to see if there's upside to that when the new roll-out plan comes out."

Even though Verizon and T-Mobile have been driving network spending, AT&T and Sprint could soon be bringing quite a bit of business to tower companies as they revamp their networks. Sprint, for one, has pledged to add thousands of new macro cell sites and tens of thousands of small cells to its network.

New Street Research analysts Jonathan Chaplin, Spencer Kurn and Vivek Stalam said in a research note that Sprint should drive growth for tower companies in three ways: diminishing impact of old iDEN cell sites, building new macro sites (they assume 3,000 sites annually, starting next year) and amendments on Clearwire's 10,000 legacy sites to make them support Sprint's 800 MHz, 1900 MHz and 2.5 GHz LTE bands.

Evercore ISI analysts Jonathan Schildkraut and Justin Ages said in a research note that Sprint intends to spend $15 billion over three years on the network build-out, "and, importantly, has identified creative ways to access the capital necessary to complete the project."

The Evercore analysts noted that AT&T will host an analyst day on Wednesday to discuss its plans for DirecTV following the close of its deal for the satellite TV operator, and AT&T will likely detail its capital plans. Notably, as a condition of the deal, AT&T has agreed to deploy wireless local loop service to roughly 12.5 million homes, which will require incremental tower-based investment. "This may also signal a broader shift in transitioning more services (particularly in rural markets) from wireline infrastructure to wireless," the Evercore analysts said.

AT&T has also agreed to spend $3 billion in Mexico over the next three years to deploy LTE there. As of the second quarter, the Evercore analysts noted, Mexico represented 7.1 percent of American Tower's site leasing revenues, so there could be upside for American Tower there.

SBA's Stoops said he thinks AT&T has been spending less on its network recently because it has been "managing [its] free cash flow based on a number of initiatives," including the $49 billion DirecTV deal, its $4.4 billion investment in Mexican carriers Iuascell and Nextel Mexico and $18 billion for AWS-3 spectrum. "I would be very surprised if AT&T has changed its long-term views on wanting to always be a network leader and I don't think they have changed that. And I think that would bode well for future investment," he said.

The New Street analysts also expect to see "some revenue from AWS-3 deployments in the back half of next year, which should provide a tailwind for organic growth to accelerate further in 2017." AT&T, Verizon and T-Mobile will all be deploying new gear to support those airwaves.

For more:
- see this Seeking Alpha transcript for American Tower
- see this Seeking Alpha transcript for SBA

Related articles:
Verizon, Sprint, others turn to carrier aggregation, small cells for remainder of 2015 capex
Crown Castle expects 'sustained' long-term network spending by U.S. carriers, T-Mobile and Verizon lead in Q2
Sprint to add 'tens of thousands' of small cells, bring 800 MHz and 2.5 GHz LTE to 'nearly all' macro sites
Report: AT&T angling to get space on América Móvil's Mexican wireless towers
Tower companies see lower Q1 network spending from Verizon, AT&T and T-Mobile - with Sprint as the wild card

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