Crown Castle International Management Discusses Q3 2010 Results - Earnings Call Transcript

| About: Crown Castle (CCI)

Crown Castle International (NYSE:CCI)

Q3 2010 Earnings Call

October 28, 2010 10:30 a.m. ET


Fiona McDone – VP Finance

Ben Moreland – Chief Executive Officer

Jay Brown – CFO


Rick Santos – Raymond James

David Barden – Banc of America/Merrill Lynch

Jason Armstrong – Goldman Sachs

James Ratcliffe – Barclays Capital

Clay Moran – Benchmark Capital

Gray Powell – Wells Fargo Security

Tim Horan – Oppenheimer

Edward Katz – Morgan Stanley


Good morning, ladies and gentlemen. Thank you for standing by, and welcome to the Crown Castle, Q3 2010 Earnings Conference Call. During today’s presentation, all participants will be on a listen only mode. Following the presentation, the conference will be open for questions.

(Operator Instructions) I would now like to turn the conference over to our host, Fiona McKone, Vice President of Finance. Please go ahead.

Fiona McKone

Thank you. Good morning, everyone, and thank you all for joining us as we review our third quarter 2010 results. With me on the call this morning are Ben Moreland, Crown Castle's Chief Executive Officer, and Jay Brown, Crown Castle's Chief Financial Officer.

To aid the discussion, we have posted supplemental materials in the Investors section of our website at, which we will discuss throughout the call this morning.

This conference call will contain forward-looking statements and information based on management's current expectations. Although the company believes that the expectations reflected in such forward-looking statements are reasonable, it can give no assurances that such expectations will prove to have been correct.

Such forward-looking statements are subject to certain risks, uncertainties, and assumptions. Information about the potential factors that could affect the company's financial results is available in the press release and in the Risk Factor sections of the company's filings with the SEC. Should one or more of these or other risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary significantly from those expected.

Our statements are made as of today, October 28, 2010, and we assume no obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise.

In addition, today's call includes discussions of certain non-GAAP financial measures, including adjusted EBITDA, recurring cash flow and recurring cash flow per share. Tables reconciling such non-GAAP financial measures are available under the Investors section of the company's website at

With that, I'll turn the call over to Jay.

Jay Brown

Thank you Fiona, good morning, everyone. Let me start with a few summary comments as outlined on Slide 3, and then I’ll go through our results and outlook in greater detail.

I’m very pleased with our third quarter results, reflecting continued demand for wireless infrastructure. In the third quarter, we amended a contract with a U.S. customer, to primarily provide space on our towers for that customer’s data deployment, which together with the expected backend loaded nature of the year, resulted in a significant increase in third quarter site-rental revenue compared to the second quarter of 2010. I will discuss this amendment further in a few minutes.

In addition to a great quarter in Site Rental revenue, our services business performed very well. Service revenues were up 37%, and service gross margins were up 64% compared to the same quarter last year; posting the highest quarterly results in recent years, due in part to the increase take rate by our customer.

The strong year-to-date result allows us to meaningfully increase our Site Rental revenue, Site Rental gross margin, adjusted EBITDA, and recurring cash flow outlook for full year of 2010.

In addition, we are pleased to have completed over $6 billion in refinancing during the last six quarters, resulting in no maturities due before March 2014. This allows us to focus on investing the majority of our cash flow and activities, such as share purchases, tower acquisition, new site construction, and land purchases that we believe will increase long-term recurring cash flow per share.

Getting into the details, I’d like to take you through the excellent results for the quarter, the increase in our 2010 outlook, and our full year of 2011 outlook.

Turning to Slide 4; during the third quarter we generated Site Rental revenue of 437 million, up 10% from the third quarter of 2009. The components of the 10% growth in Site Rental revenue from the third quarter of 2009 to third quarter 2010 were as follows. 2% growth in the existing base of business through contracted escalators and renewal of tenant leases, net of any churn and 8% growth attributable to the additional tenant equipment added to our site reflecting new leasing activity.

Site Rental gross margin, defined as Site Rental revenues less the cost of operations, was 321 million up 14% from third quarter of 2009. We continue to maintain a disciplined approach to operating cost resulting in 97% of the growth in Site Rental revenue finding its way to Site Rental gross margin.

Adjusted EBITDA for the third quarter of 2010 was 306 million up 18% from the third quarter of 2009.

It is important to note that these growth rates were achieved almost entirely through organic growth on assets that we owned as of July 1, 2009, as revenue growth from acquisition was negligible.

Turning to Slide 5, recurring cash flow, defind it’s adjusted EBITDA less interest expense, less sustaining capital expenditures, increased 24% to 178 million compared to 144 million in the third quarter of 2009. Recurring cash flow per share also increased 24% to $0.62 compared to $0.50 in the third quarter of 2009.

Before I turn to our outlook, let me make a few more comments about the amendment to the customer lease agreement that I mentioned earlier. As you know, there are significant amount, there is a significant amount of activity in our industry, currently we have several carriers are deploying 4G data network.

In an effort to efficiently and expeditiously deploy the 4G equipment, we agreed with one of our customers to provide them with the ability to add equipment to its existing arrays on our towers, without the need to negotiate pricing on individual amendments at each site. In exchange for this right, we increased the rent on 100% of its existing leases to incorporate a meaningful amendment to every site. In essence, the deal assumes an amendment on every tower on which the customer currently resides.

Further, the contract amendment does not provide rights to any other level on our tower. We are excited about the meaningful increase in rent that this amendment represents, and we will be working very hard to ensure that we achieve the operational efficiencies and speed that both parties intended through this agreement.

Moving to the outlook for the fourth quarter of 2010 as shown on Slide 6, we expect Site Rental revenue of between 442 and 447 million and adjusted EBITDA between 302 and 307 million.

Let me spend a minute at walking you through the sequential growth in Site Rental revenue and adjusted EBITDA in the third quarter 2010 to our outlook for the fourth quarter of 2010.

Site Rental gross margin in the fourth quarter is negatively impacted by Site Rental operating expenses being higher by approximately 4 million than the third quarter. This includes repairs and maintenance activities which we previously expected to complete in the third quarter of this year.

Also, we are forecasting services margin to be lower by approximately 3 million from the third quarter of this year. This portion of our business is the most difficult to predict, but I would note that we’ve been exceeding our expectations for the services group all year.

Further, commencement with the increase and operating expenses related to repairs and maintenance. We expect sustaining capital expenditures to be approximately 2 million higher in the fourth quarter than the previous two quarters of 2010.

Our revised full year 2010 outlook as shown on Slide 7 suggests Site Rental revenue growth of over 10% and recurring cash flow growth of 21%, respectfully. Substantially all of the anticipated growth is expected to come from the assets that we owned at the beginning of 2009, as we’ve made no significant tower acquisitions in the last year.

The growth and Site Rental revenue from 2009 to 2010, is comprised of the following. A little less than 4% of the growth is from the existing base of business that was in place at the beginning of the year through contracted escalators and the renewal of tenant leases, net of any churn. And a little less than 7% growth attributable to the additional tenant equipment added to our site, reflecting the significant leasing activity we have experienced since the beginning of 2010.

For the full year 2011, we expect Site Rental revenue growth of approximately 130 million or 8%. This outlook for revenue growth assumes approximately 2% growth in the existing base of business and the remaining 6% from expected additional tenant equipment to be added to our site. Additionally, our 2011 outlook for Site Rental revenue has only a minimal benefit from leasing activity that is depended on customers securing future funding.

The 2011 outlook, suggest Site Rental revenue incremental margins to be approximately 90%, and we have assumed in our outlook, as is our normal practice, a significantly lower expected service margin contribution than our current run rate suggest.

Our 2011 outlook for service margin is approximately 14 million lower than our expectations for full year of 2010.

We have assumed in our outlook that our direct tower operating expenses will grow by approximately 3%. However, as you’ve seen in recent years, we have achieved incremental margin higher than the normal assumed 90% by holding these cost tighter, which provides some potential upside to our 2011 outlook.

Furthermore, we expect the midpoint of interest expense in 2011 to be 504 million, an increase of approximately 14 million over 2010 from midpoint to midpoint. As cash interest expense is expected to be approximately flat year-over-year, the increase in 2011 interest expense is predominately driven by the amortizing of our interest rate flow.

The refinancing of the 2006 tower revenue note that we completed in August will result in our amortizing the liability related to the 2006 note forward, starting swap over a five-year period. Year-over-year we project that interest expense related to this particular swap will be 18 to $19 million higher.

The increase in interest expense related to our interest rate swap is expected to be partially offset by the lower cash interest due to our debt purchases during 2010, and our successful refinancing of the 2006 note, which lowered the weighted average coupon on the note from 5.7% to 4.5%.

Finally, our outlook does not include the benefit from expected future investments around our core business such as share purchases, tower acquisitions, new site construction, and land purchases.

Turning to the balance sheet, the table on Slide 8 reflects our current debt balances and maturity. And on Slide 9, we’ve shown total debt the last quarter annualized adjusted EBITDA as of September 30, 2010 at 5.5 times.

Adjusted EBITDA at a cash interest expense as of September 30, 2010 was approximately 3 times. Both our adjusted EBITDA leverage ratio and cash interest expense coverage ratio were comfortable within their respective debt covenant requirements.

Moving on to investments and liquidity, in August 2010, we issued 1.55 billion of note to refinance 1.33 billion of our 2006 tower revenue notes. The notes were refinanced at a weighted-average interest rate of 4.5% and a weighted-average expected maturity of 8.7 years.

During the last six quarters we’ve refinanced over $6 billion of debt security with an approximate laddering of maturities, and we now have no maturity for March 2014. This gives us tremendous flexibility as we focus on investing activities that we expect will enhance long-term recurring cash flow per share, which we believe is the best long-term measure of shareholders value creation.

As you saw in the press release, the significant investment that we made in the third quarter with closing the NewPath acquisition, as is our practice. We evaluate purchasing our own stock against other alternatives in the market. Also, during the third quarter there were a number of opportunities in the M&A market that we were reviewing; and at the right price, we would be prepared to acquire.

As shown on Slide 10, during the third quarter of 2010, we spent 57 million on capital expenditures including 26 million on capital expenditures as we continued spending on our land lease purchase program.

Since the beginning of 2010, we have extended over 900 land leases and purchased land beneath over 330 of our towers. We had significant success with this program over the last several years. In fact, today 34% of our Site Rental gross margin is generated from towers on land that we own.

Also as of today, we own or control for more than 20 years the land beneath towers representing approximately 70% of our gross margin. Further, the average term remaining on our ground leases is approximately 31 years. Having completed over 9,000 transactions, we believe this activity has resulted in the most secure land position in the industry, based on land ownership and final ground lease expiration.

We continue to believe this is an important long-term effort that provides a long-term benefit as it protects our margins and controls our largest operating expense.

After the third quarter, we spent 5.8 million to purchase our common shares at an average price of 42.42 per share. Since January 2003, we’ve spent $2.4 billion buying back 92.5 million shares, or potential shares at an average price of just over $25. Without these purchases, our current share count would be nearly a third higher.

Lastly I would note that during the third quarter and through October 26, 2010, we spent $52 million of cash, settled approximately $303 million of the notional 1.55 billion interest rate swap, due to be settled by February 2011.

As we’ve shown on Slide 11, our total current remaining swap liability is approximately 438 million; split between February 2011 and November 2011. As shown, we’ve also provided sensitivities of these swaps to change with an interest rate.

As of September 30, 2010, performance for the purchase of our common stock and partial settlement of the February 2011 swap, we have approximately $279 million in cash and cash equivalent and $400 million of availability under our revolving credit facility.

In summary, we had a great quarter. And I’m excited about the growth we expect for the balance of 2010 and continuing into 2011. And I’m pleased that we’re allocate capital in areas related to our core tower business to enhance long-term growth rates and recurring cash flow per share.

And with that, I’ll turn the call over to Ben.

Ben Moreland

Thanks, Jay, and thank you to all of you for joining us this morning. As Jay just mentioned, we had a strong third quarter, exceeding our outlook for Site Rental revenue, Site Rental gross margin, adjusted EBITDA and recurring cash flow. This is an exciting time to be in our business as wireless broadband is a huge secular trend we believe promises to drive growth for the company for a long time.

On that note, I would like to draw your attention to some of the important trends that continue to drive our business.

Adoption rates for Smartphones and more recently tablet devices such as the iPad, continue to accelerate driving wireless data traffic and increased tower demand from carriers striving to maintain a suitable level of network quality and reliability.

Research firm IDC said it expects the Smartphone market to grow 55% this year, a greater increase than its previous prediction. The new estimate is some 10 percentage points higher than IDC had previously estimated due to the introduction of several new Smartphones, including the IPhone 4, RIM’s new BlackBerry Torch, HTC EVO, and more phones running on Google’s Android platform.

To that end, Apple announced iPhone sales in the U.S. of 5.2 million units in the third quarter, up 63% from just the second quarter of this year. Similarly, devices running Google’s Android mobile operating system now accounts for 25% of North American mobile web consumption, and 33% of the Smartphone market share, nearly a 30 percentage point increase versus only a year ago.

While these trends are compelling, it is important to note that data adoption is still in the early stages with only about 40% of wireless subscribers having a data-centric device, representing considerable upside still to come.

As has been well documented, all of these new devices consume enormous amounts of network capacities. In fact, a recent FCC report indicates wireless data consumption is up 450% just since the beginning of 2009.

Looking ahead, industry analysts generally share the view that mobile network data traffic will continue this significant upward trend. As Smartphone’s, laptops, and other devices become increasingly and a relative consumer mobile experiences, mobile data demand is expected to grow from 2009 levels by a factor of 5, by 2011, more than 20 times by 2013, and an astounding 35 times by 2014.

Mobile traffic demand is driven by data usage patterns of each device type and the quantity of devices in use. To give you some context, BlackBerry devices are consuming twice the amount of data as the typical feature phone. The iPhone users typically consuming five times the amount of data as the BlackBerry user, and air cards and laptops consume five times more data than even the iPhone, or 56 times more data than a feature phone.

For example, the average monthly user, a usage per subscriber on Clearwire, which many consumers use as a substitute for wireless broadband, is already 7 gigabytes or 280 times the amount used by a regular cell phone in a given month.

Continued growth of this device segment is likely to contribute significantly to the growth in mobile data traffic. I saw a recent statistic and just to frame this you by historical measures, as we all used to think about subscriber minutes of use, U.S. subscribers are using just over 800 minutes of use per month in your historical measure of voice time. Thus, the phone, if you think about it, is dormant in this historical measurement, 98% of the time.

By contrast, with integrated devices, internet applications are constantly running in the background. Thus, each device creates 24/7 demand on the network.

In the U.S. the FCC has projected the need for continued significant wireless network expansion between now and 2014, to even have a shot at keeping up with consumer demand. This underlines our thesis that our growth prospects in the U.S. are significant and the growth drivers for our business are likely to be long-term.

Currently, we are in the early stages of these high-speed data network deployments. The wireless carriers are busy building out their 4G networks and we remain very excited to be partnering with them as we move to the next generation of wireless.

We believe that our 2010 outlook, and our 2011 outlook is consistent with the wireless carriers recent comments on their expectations for the short term and reflects the launch and pre-launch activities surrounding these 4G build outs into 2011.

Just to give you some specifics, Verizon has said it expects to launch LTE this year in the total of 38 cities and more than 60 airports including Seattle, Denver, and Boston, covering 110 million pops. The carrier is expected to expand that figure to 200 million pops by 2012 and to more than 285 million in 2013. Similarly, AT&T will launch commercial LTE service by mid-2011, and will cover between 70 and 75 million pops by the end of next year.

T-Mobile has also been ruling out HSPA Plus with plans that cover 185 million pops in 100 major markets by the end of 2010 this year. And further, Clearwire plans to continue their coverage plan of 120 million pops by the end of 2010 and has a goal of reaching 200 million pops by the end of next year. Clearly a lot of activity with the current customer base.

Many of you have heard and we’ve spoken at conferences about Life Square, and Life Square has been very active as the new entrant in the market with plans to launch its wholesale LTE network in as many as 9 markets in 2011, and that could expand to as many as 20 markets by 2012.

The company which has accessed almost 60 megahertz of spectrum, has said its network will consist of around 40,000 cell sites covering 92% of the U.S. population by 2015. This is a very significant development for our company and the industry.

These new 4G deployments, which are responsive to the mobile internet demand we’re all witnessing and driving, along with the ongoing activity from incumbent carriers add confidence to our long-term growth prospects.

Our recent amendment to a customer lease agreement that Jay discussed earlier, demonstrates the value of our sites for 4G services and our ability to monetize the space on our towers. In order to maximize our opportunity, it’s important that we are recognized by our customers as a firm that is willing to roll up our sleeves with them and help them address the formable network challenges they face.

We seek to maintain our position as the best solutions provider in the U.S. by first continuing to deliver industry-leading customer satisfaction, facilitating their desire to quickly deploy on our sites; second, providing deployment services in greater scope with full accountability, enabling speed to market for our customers as you’ve seen with continued expansion of our services business. And lastly, expanding our capability around distributed antenna systems which are part of an evolving architecture to provide coverage and capacity solutions where towers not feasible.

To wrap up, I’d like to reiterate a few points from this morning. We are obviously very pleased with our results, and believe they demonstrate the quality of our assets combined with our ability to execute for our customers. As always, we remain declined and focused on maximizing long-term recurring cash flow per share through opportunistic investment, most recent of which we believe is demonstrated from NewPath networks.

On a macro level, we are incredibly excited about the trends we are seeing in wireless, and our position to capture value from them. We are focused on the U.S. market where the ability of the wireless carriers to make profitable investments is most apparent and barriers entries remain high. We have the best located assets in the industry with significantly more towers in the top 100 markets than any of our peers.

And our customer surveys continue to indicate that Crown Castle enjoys the highest level of customer satisfaction in the industry, something that is very important to us.

So in closing, we had an excellent third quarter, I look forward to finishing the year strong. With that, operator, I’d be pleased to turn the call over for questions.

Question-and-Answer Session


Thank you Sir. Ladies and gentlemen, we will now begin the question and answer session. As reminder, if you have a question, please press the star following by the one on your touch-tone phone. If you’d like to withdraw your question, press the star followed by the two. And if you’re using speaker equipment today, it will be necessary to lift the handset before making your selection.

And our first question comes from the line of Rick Santos with Raymond James. Please go ahead.

Rick Santos – Raymond James

Yes, I was opposed to the Gators and the Longhorns, so it’s nice to see somebody put up good numbers.

Jay Brown

No comment.

Rick Santos – Raymond James

Me either, but I want to talk a little further on the modification here. I appreciate the extra color Jay provided about it, so amendment revenue if you will accelerated onto 100% of their existing leases on the existing arrays. Just want to make sure one, so if they go in other areas of the tower, there would be further amendments, or if the demand that Ben talked to about data causes cell splitting, they need to go to a cell site they’re not on, or a tower they’re not on yet. That would be extra revenue, correct?

Jay Brown

That’s correct Rick. If they go on any other level on the tower, then we would get additional rent for that, or if they were to self-split, and go onto a tower that they’re not currently located on, we would get additional revenue from that. Just like we would in another other situation as we’ve seen historically. This is solely related to the level that they’re on today, and anticipate basically what they’re going to be doing as they do their 4-G deployment.

Rick Santos – Raymond James

Any change to whether this flows into escalator versus amendment revenue? Was there any change to the escalators with this amendment?

Ben Moreland

Yeah, Rick, I think both out of the desire to protect our own ability to negotiate with future terms with carriers, and out of a respect for our carriers, I don’t think we’re going to get into the specifics of the contract negotiation, and how we went about pricing that, but we priced as I mentioned in my comments, we priced it as an amendment to all of their sites. And it was a meaningful amendment, which I think both parties assume they’re going to be making over time.

Rick Santos – Raymond James

I guess kind of the crux of that part of the question was just to understand any effect on straight-line revenue versus cash revenues that we need to consider with this new amendment.

Ben Moreland

Yeah, to help you there, I think I’d point out the three numbers that I mentioned. If you are looking at year-over-year change, Q3 of 2009 to Q3 2010, the benefit that we received from contracted escalators or renewal of leases, which would include extending leases, and picking up the straight line benefit there, that was 2% from Q3 ’09 to Q3 /10.

If you were looking at the full year of 2010 over full year 2009, we picked up a 4% benefit there. And in a normalized year, I would expect that we would probably get somewhere in the neighborhood of about 3% from either contracted escalators or renewal of leases including straight line. And we would have about 1% Churn. That would be a normal year, so a normal year would look something in the neighborhood of about 2%. So for the full year, we may have picked up 100 to maybe 200 basis points in our full year number when comparing ’10 to 2009.

And then I mentioned in the ’11, the outlook that we’re providing, the benefit from escalation and that of Churn is 2%. So it looks much more like what we saw in the third quarter than what we saw from the full year 2010.

Rick Santos – Raymond James

Great, and then on the guidance, speaking of the guidance, the 8%, 2% escalator, 6% new tenants, I think you also mentioned that a minimum benefit from folks needed further, or needing future funding, so I assume Clearwire has got some funding playing out through 2010, maybe a little into ’11. Light Squares has received some funding I guess, $850 million that we saw the other day. So should we assume if there’s new announcements from a Clearwire in the next week, or month, or new announcements from Light Square on further funding, which beyond what they already have, that there could be some upside to that leasing guidance?

Ben Moreland

That’s right, Rick. There could be some upside. And it will depend on when they get that funding, and when they can actually get out, and get those cell sites up on air, and start to pay us lease revenues to the extent that the timing news into the latter half of next year, then obviously it certainly helps the run rate going into 2012. And maybe less of a benefit to the full year results in 2011. We’ll just have to kind of see when the timing of those fundings come about.

Rick Santos – Raymond James

Is it safe to say this year, I’m sorry 2011, is more level-loaded than rear-end loaded then given the way you’re giving the guidance?

Ben Moreland

We are giving a more level-loaded year than what we saw in 2010.

Rick Santos – Raymond James

Great, thanks.

Ben Morland

I would say there’s always in the way that we give outlook a tendency to put more revenue growth in the back half of the year than the front of the year. That’s just traditionally how the carriers end up deploying the capital. The first quarter is generally a little lighter than the balance of the year, but it’s certainly not as significantly back-end loaded as 2010 was.

Rick Santos – Raymond James

Makes sense, thanks.


Thank you. Our next question comes from the line of David Barden with Banc of America Merrill Lynch. Please go ahead.

David Barden – Banc of America/Merrill Lynch

Thanks guys for taking the question. I guess the first question I guess Jay is just because of how this quarter got reported. You guys are saying you had a very good quarter, but outside of this one time kind of step-up, it’s really hard to verify whether that in fact did happen for the core business relative to guidance. So could you comment about whether xing out the impact of this event, would you have been below the revenue guidance that you put out last quarter, in the guidance, or above it so we can kind of get some comment about the core business on a growth there? And I guess another kind of question on that topic is just with respect to – well, let me say this, our other, are you in negotiations with other carriers to complete transactions like this, or do you think this is kind of more of a one-time event for a large customer? Thanks.

Jay Brown

Sure, Dave on your first question, we would have been certainly within the range, I think towards the higher end of the range if we had not been able to reach an agreement on the amendment that we discussed so we had a very good quarter. Without this amendment, it would have been at the high end, certainly would not have exceeded anywhere close to assume that we showed the numbers as a result of this modification. And you can see on a number of line items, not just at the site rental line, which I think you were specifically referring to, but with regards to the cost containment both at the site rental operating cost line, we saw that cost line basically flat year-over-year. This is the second straight year that we’ve done that. As I alluded to in my comments, I’m not sure that we can continue to hold cost completely flat. We’re working hard to do that, but we had another great quarter with regards to cost containment. And you can see that same thing on the G&A line.

And then obviously, I spoke to the fact that our services business continues to significantly outperform our expectations. I think we’ve done a very good job on that business both building up a reputation with customers that we can get things on air, and delivered on time as they would expect, and we’ve indicated we could. And the results of that I think is that we’ve seen an increase in the take rates of those services.

So I think you could point to any line item of the items that we give outlook for, and see that we had a really good quarter. And specifically at the revenue line, we would have been somewhere between the midpoint and the high end exit transaction that I said I spoke about.

David Barden – Banc of America/Merrill Lynch

Okay, good.

Ben Moreland

And Dave, with respect to other transactions, I guess what I’d say without commenting specifically on any conversations we may be having, just as we did in this one, we would look at facts and circumstances as they come up. And make our best business judgment on what’s fair economics for the transaction. And so whether or not there are others to come like this, I really couldn’t say today, but we would look at each one separately, and see if we could come up with something that we thought was fair to us obviously that met the customers’ need. I mean the main take-away from this agreement is that we’ve received a contractual commitment from a customer for really all their 4G amendments.

This, as you can tell, bring forward the revenue on 100% of their sites in a meaningful way. And we’ve done this without economic concessions when we compare it to our traditional sort of ala-carte pricing model that we’ve been using for years. So it’s simply a different way to price the activity. And you might ask yourself, I think maybe asking, “Why would other party, or particularly the customer be interested in this.” And I think it really goes to the pace with which our customers are finding the need to address the 4G build outs, and accomplish this in the most expeditious manner creating speed and ease around our sites as they deploy.

So this process, as you can appreciate, streamlined their deployment cycle getting on our site. And has eliminated some complexity around having to document every single site. And so that’s really at the core of what we’ve accomplished here. And then as jay mentioned in his comments, we’re going to be working very hard to make certain that the benefit of the bargain arrives with both parties, that we actually get them on the air quickly.

David Barden – Banc of America/Merrill Lynch

And so the bottom line there is that you’re willing to basically front end load cash that might result in kind of a lower relative growth rate in the future, but at the end of the day, the time value money tradeoff is positive.

Ben Moreland

Yeah, and I think you bring up another point. You’d say, “Well then, is there future growth with this particular customer around amendments?” And I would have to concede no, actually they’ve sort of bought out the shelf for amendments for this particular customer. It’s limited in scope as we’ve described. But with respect to amendments, they have pre-contracted for all of that capacity on that existing array associated with their 4G amendments going forward. So if you take that and park it, then you can certainly assume that for that particular customer on existing arrays, you’re sort of sold out.

David Barden – Banc of America/Merrill Lynch

Great, that’s great color. Thanks guys.


Thank you. Our next question comes from the line of Jason Armstrong with Goldman Sachs. Please go ahead.

Jason Armstrong – Goldman Sachs

Okay, thanks guys, and I echo David’s sentiments. That was a great call that I think that was missing.

Just maybe one final question on the topic from my side. Just Ben when you mentioned that this is done without economic concessions, just how do we think through that? Is the amendment rate the same as it would have been? It’s just front loaded, or is this time, value, and money really is on your side here because you’re getting this all up front as opposed to over multiple years. And there still leaves room for maybe a little bit lower amendment rate, but the time value is still on your side?

And then a second question just on buybacks, we started to see them pick up in the fourth quarter absent larger deal activity. What do you think a reasonable run rate for buybacks is?

Ben Moreland

Sure, on your question on sort of time value money, what I’d suggest to you there is it’s contracted. And so what I would think about there is whereas you previously, we have previously for years priced amendments on a one-off basis, and each one was a discreet transaction. Here you’ve got a contractual commitment over a period of time. It’s not indefinite by the way. I’m not going to get into the specific terms of the contract, but it’s not an indefinite link with time. There is a date to it, but it gives you that contractual certainty of that commitment at a level of pricing if you bring it back to a purse fight basis, that is very comparable to what we’ve seen around our amendment activity over the years. And then again, the main benefit for the customer and for us both is that it provides speed, and ease, and simplicity in the back office to get them on the air quickly, provides them certainty of what they’re going to be paying for this additional capacity they’re going to need on the sites, over this definite period of time and limited in scope as we’ve talked about.

The second question around capital allocation, I’ll let Jay get into just around the initiation of the buybacks.

Jay Brown

Yeah, Jason, I mean I think you’re going to see us continue to do what we’ve done over the course of this year as we look at what opportunities are in front of us. We see those opportunities to invest in things like distributed antenna systems, building those systems, or acquisitions in that arena, or tower acquisitions, land purchases. We’re going to balance all of those against our ability to go out and purchase our own stock. I think you’ve heard us articulate that perspective for six or seven years. And we haven’t changed our view. I think you will see us continue to look at the opportunities in the market, and measure those against what we think the opportunity is.

We buy our own towers via share purchases, and think about that on a long term recurring cash flow per share basis. And that’s sort of how we evaluate those.

On the short term, I mentioned in the quarter what we spent capital on, and new paths consumed the majority of the capital that we spent in the third quarter. And then in the fourth quarter, so far we’ve spent some of our cash settling the interest rate swap. So we need to settle those swaps going into 2011, and obviously we’ve got some flexibility around the balance sheet. We’ve got an undrawn revolver, and have a full availability there. And then significant cash flow next year, so it’s going to be a balance against the settling the interest rate swap. We’ll certainly do that over there balance of this year and into next year.

And then beyond that, I think you’ll see us to continue to just evaluate opportunities as they become available. And we’ll be focused on trying to maximize recurring cash flow per share when we choose one activity over another.

Ben Moreland

I would just add to that in the last quarter as you mentioned Jay in your comments, there were more than one significant sized opportunity that we were evaluating. And we don’t have anything to announce today, but at the right price, we would be a buyer for any of the things that we looked at this last quarter. And so they were of significant size that we would have certainly been allocating our cash and potentially some borrowing capacity towards those opportunities. And so, that will happen from time to time, and that’s consistent with what we’ve talked about for a long time.

Jason Armstrong – Goldman Sachs

Great, thanks guys.


Thank you. Our next question comes from the line of James Ratcliff of Barclay’s Capital. Please go ahead.

James Ratcliff – Barclay’s Capital

Good morning guys. Thanks again for the color on the new contract.

Two questions I guess. One, would you expect NewPath to have any meaningful effect on revenue in 2011? And secondly, again looking for 4Q, are you seeing a pickup in M&A activity from potential small sellers, or on the land acquisition side? Those people look to be motivated by potential taxes increases in 2011. Thanks.

Ben Moreland

Sure, James, this is Ben. On NewPath, it’s back and loaded, so by the time you get to the yearend ’11 run rate, I would call it meaningful certainly against the purchase price that we paid. But as we mentioned I think when we announced it, a lot of what we purchased is under construction still. It’s contracted, but in the deployment and development. So really it’s the second half of 2011 before you’ll see it start to kick in, and by yearend run rate, it becomes I’d say reasonably significant relative to the price we paid, but that’s still further out. And more color on that as we go along.

Jay Brown

James, on your second question around M&A activity, I think certainly at the land purchase level, we’re seeing landlords who are watching the current tax regime, and thinking that this year is probably a better year to be a seller than next year. So we’ve seen a ramp in activity, and I wouldn’t be surprised if we don’t spend a bit more capital in the fourth quarter around land purchases than we have in the first couple of quarters of this year, for ¾ of this year. And that may continue into 2011. It’s difficult to tell how much of that is macro economic conditions, and people looking to see assets to raise cash against what the benefit is maybe this year from executing on a transaction, and essentially saving some taxes on that.

On the second part of the question around tower sales, as Ben mentioned, there were a couple, and have been a couple this year of significant size tower acquisitions in the market. We have observed over a long period of time that private tower owners are generally pretty proud of their assets, and expect the multiple oftentimes that exceeds the public multiple, which we’re trading at. And I would go back to the comments that I made to Jason in the last question around how we evaluate purchases, and to the extent that we see assets become available. And we think the growth prospects of those assets against the required price in order to acquire them, if that beats what we think we can do by buying our own towers, absolutely interested in pursuing those kinds of transactions, but to the extent that it becomes just an opportunity to try to add more revenue or add more EBITDA. And we end up paying a price on a gross adjusted basis that exceeds our own towers. We’ll revert back to just buying our shares rather than being acquire our towers.

So I don’t know that I would say that there’s been a pickup of activity, but certainly as all of our multiples have gotten into the higher teams or teams area, there have been more people that set on towers in the private sector who have raised their head, and started to look around, and see if there’s an opportunity to modify.

Ben Moreland

I would say just as you’ve heard us talk about for years, and we continue to hear this from investors as an interesting part of the dialogue, we internally have scribed a very serious opportunity cost analysis to the dollars we would use in an M&A transaction. And that opportunity cost again as Jay mentioned is always measured against our own growth prospects on the sites we currently own. As we’ve delivered growth this year, as we’ve been talking about on this call, very significant organic growth coming from this portfolio that you want to make sure you don’t dilute by otherwise not appropriately sort of appreciating the value we have resident in the current portfolio by going off and doing something else. And that’s always sort of the opportunity cost evaluations that we go through, and it’s pretty rigorous.

James Ratcliff – Barclay’s Capital

Great, thanks.


Thank you. Our next question comes from the line of Clay Moran with Benchmark. Please go ahead.

Clay Moran – Benchmark Capital

Good morning, it’s Clay Moran.

A couple, well, really just one thing. The significant size portfolio as you said you looked at were those in the U.S., and can you confirm that really any acquisitions you’re looking to do is still in the U.S. And I guess also, can you just talk about how important scale is when you look at these acquisitions and compare it to your own stock? Is there some added value for increasing yours scale? Thanks.

Ben Moreland

Sure, Clay. The large transactions that we’ve contemplated sort of in the last few months have been in the U.S. It doesn’t mean we’re not active, and wouldn’t look at other international markets. And as you recall, we are in Australia, and are very optimistic about the long term prospects there, and think we’ll have more to talk about there in the coming months.

But in terms of what’s going on in terms of our real activity, it’s continued to focus most of our attention on the U.S. And the reason that the opportunity cost analysis can be pretty pure at this level is because we don’t think there’s a lot of benefit from gaining scale through additional size. We think we are of a significant size. We are meaningful to our customers. They are obviously meaningful to us, but I think we provide a meaningful impact on their ability to deploy and accomplish what they want to accomplish in the U.S. market whether they be an incumbent carrier, or a brand new entrant into the market. And would never suggest that we can accomplish everything that they need to accomplish. They have to rely on some of our peers to do that, and that’s certainly the way the business works. But I think we are certainly at a size where we’re meaningfully important to their deployment needs, and we’re not disadvantaged in any respect.

So if that’s the case, then we can continue to demonstrate that. It becomes a financial analysis, or an opportunity cost analysis around which portfolio we want to acquire whether it be external or internal. And that’s the way we’ll continue to operate.

Clay Morrow – Benchmark

Okay, thanks.


Thank you. Our next question comes from the line of Greg Powell with Wells Fargo Securities. Please go ahead.

Greg Powell – Wells Fargo Securities

Good morning everyone. Thanks for taking the questions. I just had a couple.

So on the outlook, I mean just at a really high level, does your guidance for 2011 imply that leasing demand next year is higher, lower, or the same as 2010?

Ben Moreland

Greg, thanks for the question. On the outlook for ’11, it would be lower than what we’re experiencing in 2010. Obviously, we don’t have as much visibility into the year sitting here in October. So we’re assuming that our new leasing activity in full year ’11 as I mentioned in my prepared comments is about 6% growth. And for the full year of 2010, the new leasing activity was about a 7% growth rate, and a little higher than that obviously in Q3 of this year, so we’re assuming that next year is going to be a little lower than this year. Some of that I would go back to my comments before on how we model tenants that do not have funding for future development, and minimal impact there, we could get some benefit from if we have some favorable funding announcements from some of our customers, and they end up deploying next year. But the baseline is lower for organic revenue growth next year as compared to what we saw in 2010.

Greg Powell – Wells Fargo Securities

Okay, so it sounds like sort of just a typical level of conservatism that you guys normally do at Q3, and then we can revisit things in January when you report Q4.

Ben Moreland

We revisit it every quarter.

Greg Powell – Wells Fargo Securities

Right. Okay, and then the color that you’ve given on this contract amendment has been very helpful. I just want to make sure that I understand it correctly from a timing perspective, and then just the contribution to attachments going forward. So if I look at the upside to your Q3 results versus just kind of taking a point towards the high end of your guidance, I get roughly $12 million of additional revenue related to that contract modification. How should I think about the benefit of that modification to revenue in Q4 and in 2011?

Ben Moreland

Two things there. I think Dave earlier in the call had asked a question about how did we do in the third quarter results related to if we excluded this contract, or excluded this amendment that we were speaking to. And we would have been sort of at the mid to high end if we were to have excluded it.

In terms of the longer term nature of the business here, this is a recurring number. So if you were looking at 2011 revenue, this number would be recurring for fourth quarters in 2011.

Greg Powell – Wells Fargo Securities

Okay, that makes sense. And then just lastly, was the contract amended like at the beginning of the quarter, like middle, or end?

Ben Moreland

We got a full quarter benefit from it.

Greg Powell – Wells Fargo Securities

Okay, great. Thank you very much. It’s very helpful.

Ben Moreland

You bet Greg.


Thank you. Our next question comes from the line of Tim Horan with Oppenheimer. Please go ahead.

Tim Horan – Oppenheimer

Good morning. Thanks guys.

I’m trying to understand maybe when new platforms will start getting built for 4G, and the timing on that, and I guess somewhat related to that from just a pure engineering perspective. Do you think data growth is still accelerating, and how do you think the networks are kind of holding up, and I guess just the whole just engineering behind the new dynamics of kind of being 24/7 edge you kind of alluded to. It seems like 35 full growth you’re looking at in the next five years to your point would be extremely difficult to keep up with. And do you think they’re going to do things differently from an engineering perspective the next three years with 4G than we’ve seen kind of the last three or four years? Maybe just a little bit more color around that. Thanks.

Ben Moreland

Yeah Tim, this is Ben.

Great question, and it’s one I think all of us are sort of scratching our heads over. How do the wireless networks of today with the spectrum limitations that are there today accommodate this demand. And I think probably the reality is that it’s going to be suboptimal for some time as this continued growth explodes.

But at the same time, there are improvements underway, and I would refer you to – there’s a good paper out that the FCC put out last week around their expectations on wireless growth in data, the additional infrastructure that will be required to even begin to, as I mentioned in my comments, even have a shot at covering the demand. And the additional spectrum that they need to make available to the industry. And all those things go together to begin to satisfy this kind of growth.

The other thing I would mention is I think you’re going to see over time, and it’s frankly inevitability is that over time, there’s going to be multiple architectures that satisfy this demand. And so you’ll have macro tower sites as we’ve certainly come to enjoy today that will continue to be very valuable, but you’ll also have alternative architectures that are complimentary in building in high density urban areas, in venues. That will take the form of DAS systems, or things that look like DAS systems. I think that’s going to continue to grow and be a more meaningful part of the deployment solution going forward. I think you’ll see WiFi offloading, which we already use. If you have an iPad, you probably do that. I know I do. And so you’ll have a number of alternatives to a macro network running with spectrum that give us the ability to try to accommodate this untethered demand that we all see wirelessly.

But if you look at this FCC study, it’s a pretty concise report. It’s one of the best I’ve seen recently that tries to at least frame some of these variables and put some numbers around some of these things that are no doubt of very big challenger for our customers today to try to deal with all of this demand. And it’s going to take as it has already over the last ten years, it’s going to take efforts from a lot of different fronts and a number of solutions. Things like spectral efficiency is in this report and continued improvements there. Additional spectrum certainly is contemplated over time, not in the short period, but in the long period. Cell splitting, smaller cells, additional cell sites being deployed, all of those things are going to be part and parcel of this sort of work to accommodate this demand. And I don’t think there’s any one silver bullet. I think it’s going to take all of us in the industry, ourselves, our customers, our peers, working very hard to try to accommodate this in an efficient way, one that ultimately can remain profitable for the carrier and obviously for us.

Tim Horan – Oppenheimer

But more specifically on the 4G build outs, when do you think the amendments won’t be enough to really handle all the traffic. Is it three years from now, a year from now, you'll start to see them putting new cell sites with separate platforms with a lot more antennas in place?

Ben Moreland

Yeah, I guess I would say to that, you never know because we don’t know what the demand is going to look like over the next couple of years for the consumer, which is ultimately going to be the driver of how many cell sites are needed, and what does that architecture look like.

But if history has taught us anything in the industry, you go through two or three years of activity where the carriers will go out and touch all of the sites that they’re already on. It’s obviously faster to do it that way because it requires less site act work. They already have existing base stations and equipment there, so it’s relatively cheap to do that. And typically, that’s where the focus goes for a couple of years. And then once they get through that process, as they acquire new spectrum, I think all of the carriers have in the case of 4G, they’ve acquired additional spectrum in order to roll this out. Then they go back, and they look for sites that they need to go back, and instill where they just put that new spectrum band specifically on. And we’ve seen that now through two or three cycles as they go from one generation to the next generation.

So if I were guessing at this point, and again, a lot of this depends on what is the activity from the consumer, we’re probably two to three years at least away before you would start to see the carriers take on brand new cell sites for deploying this data activity. Now that’s not to say that the carriers won’t take on brand new leasing. And we’ve seen recently going into the third quarter, and into the fourth quarter, and we think we’ll see this next year that we’ll actually see a higher percentage from brand new tenants going on towers as opposed to amendments, which has been very heavy for the first ¾ of this year, and was heavy at the end of last year.

We’re starting to see a trend back towards brand new tenant leases. Most of those though are probably related best we can tell on areas where they have holes in their network, and they’re trying to do things like self-split. And then still the resulting hole in the network rather than necessarily specifically related to this just data traffic.

So a lot of that is conjecture, and we’ll just try to kind of have to see how the consumer starts to take up the device, and use the data, and then we’ll be ready to help our customers if they need it.

Tim Horan – Oppenheimer

Thanks guys.


Thank you. Our next question comes from the line of Edward Katz with Morgan Stanley. Please go ahead.

Edward Katz – Morgan Stanley

Hey, guys, its Edward Katz for Simon Flannery. I was just wondering if you could update us on what you're hearing surrounding the timing impacts from the operating lease re-classification, proposed by FSAB. And I think at PCIA there was some talk of working with [inaudible] to deal with some of the changes specifically on the lessor side, so, any views there would be appreciative. Thanks.

Ben Moreland

Sure, Edward, that’s a riveting topic to end the call on.

Edward Katz – Morgan Stanley

Trying to run everybody off the call.

Ben Moreland

So there’s been a lot of discussion around how to account for operating leases over the last couple of years, and the fantasy has taken us up both in terms of how to account for a lessor, which would obviously be our revenue side, as well as how to account for leases under a lessee transaction, which would be all of our ground leases. I would say that all of the literature right now is in discussion form, and nothing has been settled.

At the end of whatever they end up deciding I think we’ll be able to report metrics that look similar to what they do today. In other words, be able to give you color around what’s changing in the business, and what the leasing activity is, and what the results of that is in terms of cash flow being produced by the business. So I don’t think it will have any meaningful impact there. We don’t have any covenants in any of our debt agreements that would tie us down, or give us a problem if the literature came out one way versus another. So I think this is just going to be something that we’ll see develop.

In terms of timing, I think most believe that this is probably at least a 2013, and more likely to be 2014, or beyond before this new literature would be implemented. So in all likelihood, we’re talking several years before it would actually be implemented, and then at that point, we would just have to take a look at how we report, and how we account for those leases to comply with the new standard if there is one. And then I think you would probably also see us, depending on how it goes, you’d see us add some supplemental disclosure in order to help everyone to get back to being able to calculate that covenant. Or alternatively if you’re trying to figure out the underlying performance of the leasing business, we should be able to report that.

So much more to come there probably in the coming days, and maybe we’ll have something more firm by the time we get into next year.

Edward Katz – Morgan Stanley

Could we expect to see something in the Q's or K's kind of going forward, either this quarter or early 2011 on that?

Ben Moreland

I think the, and again, this is all preliminary so you don’t know exactly when they’re going to come out with the standard, but there’s some discussion heading into the back half of this year, so it’s a possibility by the time we get to the filing of our K in the January or February timeframe, that there may be some color around this topic. If there is, we would either include it there, or we would certainly disclose it in our press releases. But again, this is not a change that’s going to affect 2010 or 2011 results. We’re probably talking many years out before it would actually be implemented.

Edward Katz – Morgan Stanley

Okay, great, thanks so much.

Ben Moreland

All right, well, again, I want to thank everyone for joining us on the call today. We look forward to finishing the year strong, and reporting those results to you. So we will reconnect probably toward the end of January. Thanks again.


Ladies and gentlemen, this does conclude the Crown Castle Q3 2010 earnings conference call. If you’d like to listen to a replay of today’s conference, please dial 1-800-406-7325, or 1-303-590-3030, and enter the access code of 43.

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