Crown Castle, Inc. Q3 FY2024 earnings call

• Organizational change in tower business: Cathy Piche to lead tower business, succeeding Mike Kavanagh. - Digitizing tower portfolio using drone technology and enhanced IT infrastructure to visualize marketable space and make faster commercial decisions. - Developing new process for tower field technicians to track and expedite customer service requests. - Revised fiber strategy: Canceled approximately 7,000 small cell nodes in greenfield areas with high deployment costs, leaving a backlog of ~40,000 nodes with over 70% colocation nodes. - Update on strategic review: Evaluating options including divestitures, growth, or partnerships to unlock full value of businesses. - Emphasis on customer service and operational improvements to secure new revenue opportunities in towers.

For the third quarter, consolidated organic revenue growth was 5.2%, with towers contributing 4.3%, small cells 25% (excluding non-recurring net revenues) and fiber solutions 1% (excluding prior period adjustments). For the full year 2024, consolidated organic revenue growth is expected to be approximately 5%, including 4.5% growth in towers, 10% in small cells, and 2% in fiber solutions. In the third quarter, adjusted EBITDA increased 3% compared to the prior year, while AFFO growth is expected at the midpoint of $108 million, excluding impacts from Sprint cancellations and non-cash items.

• Reaffirmed full year 2024 outlook for adjusted EBITDA and AFFO. - Lowered 2024 net income outlook due to $125 million to $150 million asset write-off in fourth quarter related to small cell business. - Expected full year 2024 consolidated organic revenue growth of ~5%, with specific growth rates for towers, small cells, and fiber solutions. - Small cell organic growth of 15% includes $22 million non-recurring revenues from early termination payments, excluding which it's expected to be 10%.

• Risk of small cell node cancellations impacting returns and capital expenditure plans. - Uncertainties related to the strategic review process, including timing and outcome of potential divestitures, growth, or partnerships. - Potential impact of market conditions on carrier capital spending and demand for tower, small cell, and fiber assets.

Q: Thanks for all the detail on the small cell, 7,000 cut for the mostly greenfield stuff. So it sounds like there's no early termination fee for you guys to cancel it, like there would be if a carrier canceled it because the carriers are going to get some savings, too, where it's like they don't have to pay as much upfront capital reimbursement for building the nodes. Is that kind of the right way to think about why the carriers agreed to this reduction?

A: It's somewhat difficult for us to get in the head of the carriers and tell you why they did something. But I believe that we wouldn't have been able to mutually agree to a cancellation if it didn't help them and it didn't help us in a way that we both saw value. We did not pay any early termination fees. I can definitely - I can agree to that and say that, that's true. But what I would take away from this is there's going to - in this case, what we're looking at is in certain areas, the overall cost of getting these nodes built was higher than anybody would have expected, which impacted both our returns, and I would anticipate it impacted their economics as well, which led them to get the conclusion we got to, which was it was better in all of our interest not to continue with these specific nodes. Or they were in places where they've just been taking so long because of the zoning and permitting issues and other issues we were running into that it just didn't make sense to try to pursue these anymore. And I think that, that was the same concept that our customers had as we had. And we just mutually agreed that these were not good things to continue to try do.

Q: Hi. Thanks for taking the question. Just a couple. First, just in terms of small cells. Now you've had a chance to review the portfolio in more detail with the customers. With the remaining greenfields that are left in that backlog, what should be the expected initial return for those small cells? And can you share a little bit more detail on the marginal returns that you get for the colocation nodes? And then just secondly, as you had conversations with these carriers and you walked through some of the optimization of this backlog, as you get a better sense from these customers of when they may want to look at executing another tranche of small cell nodes in terms of their densification needs?

A: On the first point on returns, what we said about the revision to our return threshold is that it's higher than it was. It used to be 6% to 7% and is now higher. And so we're not going to talk about exactly what that is, but you can assume that the greenfield nodes that we have remaining in our backlog meet our new threshold levels of higher than 6% to 7%. And then on colocation returns, generally speaking, we see, on an incremental basis, in the neighborhood of 20% incremental returns on those businesses. And it can be higher than that, but that's a good way to think about it. So those are the types of returns that we're looking at for our backlog. In the conversations with our customers that we've had over the course of the last several months, we are really focused on trying to get through this process and did not get a lot of - it didn't give us any more significant insight into the future potential for bookings. But as Steven has been talking about this whole time, the amount of data demand in the U.S. is growing so fast that we still believe that that the thesis underlying the small cell business makes sense, at some point, densification will be required. At some point, towers are not sufficient for that densification. And the next technology that we'll utilize is small cells, and we believe that over time, those small cells will come to us as a natural provider of a lower-cost solution because we can share those economics among multiple carriers. The difficulty has always been for us in trying to pinpoint the timing of when things like that happen. That's been a difficulty in the tower business of pinpointing when changes in activity levels will happen. I believe that's going to be a difficulty for us in the small cell business. But at some point, we believe that there will be significant demand for small cells over time.