Crown Castle International Corp
Q4 2007 Earnings Call
February 7, 2008, 10:30 am ET
Jay Brown - Treasurer
Ben Moreland - Chief Financial Officer
John P. Kelly - President, Chief Executive Officer
Good morning Ladies and Gentleman and welcome to the Crown Castle International Conference Call. During today's presentation all parties will be in a listen-only mode. Following the presentation, the conference will be opened for questions. (Operator Instruction). This conference is being recorded today Thursday, February 7, 2008.
At this time, I would like the turn the conference over Crown Castle Treasurer Jay Brown. Please go ahead Sir.
Jay Brown – Treasurer
Good morning everyone and thank you for joining as we review our fourth quarter and full year 2007 results. With me on the call this morning are John Kelly, Crown Castle's, Chief Executive Officer and Ben Moreland, Crown Castle's Chief Financial Officer.
This conference call will contain certain forward-looking statements and information based on management's current expectation. 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 risk factors that could affect the Company's financial results are available on the press release and in the "Risk Factors" section of the Company's filing with the SEC.
Should one or more other of these or other risks or uncertainties materialize or should underlying assumptions proved incorrect, actual results may vary significantly from those expected. In addition, today's call will include 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 crowncastle.com.
As you all know, on January 12th, 2007 we closed the merger with Global Signal. The reported results for the fourth quarter and full year 2007 include the affect of the merger, which are compared to the pre-merger, historical results of Crown Castle for prior period.
During the call this morning, we will refer to certain pro-forma results for the three months and twelve months ended December 31, 2006, and 2007, which are also included on page 6 of our fourth quarter earnings release that we put out last night. The pro-forma results combine the results of Crown Castle and Global Signal as of the beginning of the periods presented.
With that I'll turn the call over to Ben.
Ben Moreland - Chief Financial Officer
Thanks Jay, and good morning everyone. As you've seen in the press release, we've reported another solid quarter of results and we are pleased to review the highlights of those with you this morning. During the fourth quarter, we generated revenues of 375.2 million, site rental revenue increased 150.9 million to 337.5 million or up approximately 80.8% from the fourth quarter of 2006. Service revenue was 37.6 million.
Pro-forma site rental revenue growth was approximately 8.3% comparing the recorded fourth quarter 2007 results to pro forma fourth quarter 2006 results exclusive of approximately 4.1 million in the quarter, which were expected in our outlook and 8.9 million out of run rate items in fourth quarter of 2007 and fourth quarter of 2006 respectively.
Gross margin from site rental revenue, defined as power revenues less the cost of operations, was 224.8 million, an increase of 94.7 million or up 72.8% from 130.1 million in the fourth quarter of 2006. Pro-forma site rental gross margin increased approximately 10.7% comparing fourth quarter 2007 results to pro-forma fourth quarter 2006 results.
Adjusted EBITDA for the fourth quarter 2007 was 209.2 million, an increase of 92.7 million or up 79.6% from the fourth quarter of 2006. On a pro-forma basis for the full year of 2007, site rental revenues were approximately 1.3 billion up 95.7 million or up 7.9% from pro-forma full year 2006. Pro-forma site rental gross margin were 9.5% for the full year 2007 from 777.5 million for the pro-forma full year 2006 of 851.7 million. Adjusted EBITDA for the full year 2007 was 758.6 million.
Capital expenditures, during the quarter were 108.7 million. Sustaining capital expenditures totaled approximately 8.2 million and revenue generating capital expenditures were approximately 100.5 million and this was comprised of 35 million expenditures for land purchases, 17.9 million related to the addition of new tenants on existing sites, and 47.6 million for the acquisition of 25 towers and the construction of new sites including 53 towers completed in the quarter.
Consistent with our longstanding practice of investing in our towers, in the fourth quarter we purchased 3.2 million shares of common stock for 126.2 million on an average price of $38.97 per share. After the quarter we've purchased 1.1 million shares up through February 6, 2008, for an additional $42 million on an average price of $36.99 per share.
Since January 1, 2003, we've invested over $2.2 billion in purchases of our own securities to reduce fully diluted common shares by 88 million shares. Without this consistent and disciplined approach to purchasing our own shares, our fully diluted common shares today would be approximately 29% higher.
Recurring cash flow, defined as adjusted EBITDA less interest expense, and sustaining capital expenditures was $110.9 million in the quarter, inclusive of approximately 20.4 million of additional interest expense related to the 1.3 billion in borrowings in the fourth quarter of 2006 and full-year 2007 used to reduce actual and potential shares outstanding, by approximately 36.9 million shares, compared to 67.5 million of recurring cash flow in the fourth quarter of 2006.
Recurring cash flow per share was $0.39 per share for the fourth quarter of 2007, again, inclusive of approximately $0.02 per share of dilution from the previously mentioned borrowings used to reduce the potential and actual shares outstanding, compared to $0.34 per share in the fourth quarter of 2006.
As we've previously stated, the additional borrowings to reduce the share count over the past year have had a short-term dilutive effect impact to recurring cash flow per share. We believe the actions we have taken will deliver long-term growth in this measure consistent with our long-term objective of growing recurring cash flow 20% to 25% annually.
Turning to the balance sheet as of the end of 2007, securitized debt totaled 5.3 billion for the quarter and other debt totaled approximately 784 million for total debt at the end of the quarter of 6.1 billion. The other debt was comprised of our corporate credit facility, which was drawn 720 million, and 63.8 million of our 4% convertible notes. We also had 313.8 million of our 6.25 convertible preferred stock outstanding as of December 31, 2007.
Total debt to latest quarter annualized EBITDA as of the end of the year was 7.3 times, and adjusted EBITDA to interest expense as of the end of the year was 2.3 times. At quarter end we have approximately 75 million in cash, excluding restricted cash and currently we have 100 million of availability under our corporate revolving credit facility. During the fourth quarter of 2007, we extended this $250 million revolving credit facility and another 364 days to January 2009 with substantially the same terms and pricing as our previous revolving credit facility.
Moving on to the outlook for the first quarter of 2008, we expect site rental revenue for the first quarter between 336 and 341 million. We expect site rental gross margins for the first quarter to be between 226 and 231 million. We expect adjusted EBITDA for the first quarter of between 205 and 210 million, and interest expense between 89 and 91 million. We expect sustaining capital expenditures to be between 6 and 8 million. Net recurring cash flow is expected to be between 109 and 114 million for the first quarter.
We expect site rental revenue for the full year 2008 of between 1,377 million and 1,392 million. We expect 2008 site rental gross margin to be between 930 and 940 million. We expect 2008 adjusted EBITDA to be between 850 and 862 million, which is approximately 13% growth in adjusted EBITDA over 2007 and interest expense to be between $355 million and $360 million. We expect 2008 sustaining capital expenditures to be between $21 million and $26 million. And, this outlook translates into expected recurring cash flow for the full year of 2008 between $474 million and $484 million. Based on the current share count the midpoint of our outlook would suggest approximately 24% increase and recurring cash flow per share compared to full year 2007, which is near the high end of our stated targeted growth in recurring cash flow per share.
Our 2008 outlook implies approximately $100 million in annual site rental revenue growth and $100 million of annual adjusted EBITDA growth. Clearly, this means we are managing expenses well as we expect to post 100% incremental margins in 2008.
Over the past few years we've made many significant investment decisions, most notably the purchase of approximately 29% of our fully diluted outstanding shares since 2003, and the acquisition of Global Signal which closed in January of last year.
Due to the solid performance of our core tower business, and the diligence we have demonstrated through refinancing balance sheet and purchasing a substantial amount of our actual and potential shares outstanding. We have positioned ourselves to effectively leverage our core tower business revenue growth into recurring cash flow per share growth. This is best demonstrated in our outlook where this year we expect 8% revenue growth to translate into 24% recurring cash flow growth approximately at 3:1 ratio.
Consistent with our past actions, we expect to continue to use our recurring cash flow, and additional borrowing to make investments based on their anticipated impact on long term recurring cash flow per share. We have not included the impact of these potential investments in our current outlook.
As of the fourth quarter 2007, our debt-to-adjusted EBITDA ratio was 7.3 times, which is down approximately one turn since the closing of the Global Signal transaction. Our interest coverage level defined as adjusted EBITDA divided by total interest expense has increased to 2.3 times, implying that we are now creating borrowing capacity within our targeted leverage ratios.
Given the state of the debt market, I'd like to comment on how we see the current environment impacting our business. First of all, there is no requirement for this company to access additional debt to deliver the 2008 outlook we've laid out. Existing recurring cash flow is more than adequate to fund all our contemplated capital spending around improving existing sites, selected new tower construction, land purchases, and with a substantial sum left over for discretionary investments in tower acquisitions or additional share purchases, which we don't forecast in the outlook.
As you know it is our stated objective to maintain leverage in the 6 to 8 times adjusted EBITDA range in order to maximize the long-term growth and recurring cash flow per share. Accordingly, with the adjusted EBITDA forecast we have, we would expect to borrow approximately $700 million this year and put it to work either through additional share purchases or tower acquisitions.
With the difficulty in the credit market clearly our cost access additional debt has increased. However, this is somewhat mitigated by the drop in the underlying LIBOR and treasury rates. Our approach is going to be to watch the credit market very closely and take advantage of opportunistic times to be in the market as an issuer remembering that the investment of borrowed money in our business is a relative value trade against the price of the assets or the implied yield on the shares we are purchasing.
Given the volatility that we see in the debt and equity markets, it very well may be that we are able to make opportunistic investments this year incurring less short-term dilution than we have in the past, even taking into account higher borrowing costs. Again, this is a function of the cost of the debt and the expected return on the investment.
Fundamentally, we have not changed our approach to share purchases at all. I'd say on balance we see this as a real opportunity to invest in our company's assets at a substantial discount, our view of fair value based on our long-term outlook for the business. While there's no guarantee it's all-in cost of additional debt offerings and what that will be, we believe that we could be an issuer today in the neighborhood of 6.5% to 7%.
Further, we continue to believe that prudent leverage at our current levels enhances our long-term expected equity returns. Certainly the volatility of the credit markets may affect both the timing and the pricing of future borrowings. We took our steps toward this end as we began borrowing into our revolving credit facility to buy shares over the last three months. Again, we are pleased with results for the quarter and look forward to a strong 2008.
What that I'm pleased to turn the call over to John.
John P. Kelly - President, Chief Executive Officer
Thanks Ben. And once again thanks to all of you for joining our call this morning. As Ben just mentioned, we had an excellent fourth quarter and full year 2007, exceeding our outlook that we provided you in October 2007 for site rental gross margin, adjusted EBITA and recurring cash flow.
Before we turn the call over for questions, I'd like to make a few comments about our operating performance in the fourth quarter, give you an update on the Global Signal integration, discuss our expectations for Crown Castle for 2008 in light of the current economic environment and make a few observations about the 700 megahertz auction and our customers.
As I sit here today, and reflect on where we are just 12 months after closing the Global Signal transaction, approximately I'm very pleased with what we have accomplished and how that positions us for the future. I mean specifically we've doubled our tower account and thus our future leasing opportunities. We doubled the tower account while increasing the share count by 40% which is inclusive of the 8% reduction in common shares outstanding we achieved during 2007.
And as Ben mentioned today, we've also restored our leverage ratio to pre-transaction levels putting us back in the position of levering of our growth on adjusted EBITA to make investments that we believe will maximize our long term growth in recurring cash flow per share.
We completed a major milestone in the growth of our company as I'm pleased to report the integration of Global Signal is substantially complete. The data quality review and lease abstraction are finished and we've completed quality check and entered into our system over 80% of the cb site and tower drawings and expect to be done with the rest very shortly.
At this point as the integration work is rapidly winding down we've eliminated almost all of the temporary staff associated with the integration activities. This accomplishment is a credit ot our integration teams and all our employees have a done a traffic job in 2007, exceeding our operating targets while successfully integrating Global Signal and doubling the size of our business.
Additionally, we have significantly exceeded our original G&A cost energy estimates of $12 million to $15 million annually As reflected in our outlook our annualized G&A expenses are down approximately $34 million from the combined companies run rate from two years ago, which represents greater than 60% of the legacy Global Signal G&A costs.
All-in-all I couldn't be more pleased with how the integration of Global Signal is gone. And it's great to say that we want need to be talking to you about that activity any longer.
On the leasing front we continue to be excited by the leasing opportunities in 2008. Driven by the level of applications and activity of our customers and the increased leasing demand that we are seeing related to the deployment of AWS spectrum. Consistent with how we end the 2007, we are seeing leasing activity across all of our customer segments including the big four wireless carriers and other voice carriers as well as emerging new technologies and government entities.
Our level of new applications and leasing activities ahead of where we were at this point in 2007, which is a continuation of the trend we saw in the fourth quarter. In addition to leasing activity from all customer segments we continue to see the contribution from amendments to existing leases in and around 30% of leasing activity.
As evidence by the recent earnings announcements by our customers the tower industry fundamentals remain strong as continued growth in minutes of use, an increasing demand for data requires a continued investment by wireless carriers in building out and up grading their wireless network to support data intensive applications.
The incremental investment wireless carriers are making in their networks to support data service is supported by customer acceptance of data services and the revenue it is generating. AT&T recently announced that they have just under two million apple i-phones on their network which is been achieved in just over six months. This of course is in addition to smart phones from other manufactures that are already on their network. Buyers of these devices are acquiring them for there ability to transmit and receive data in addition to working as a basic phone for base purposes.
Wireless data is now more than 15% of total average revenue per user for the wireless carriers as a whole, which is more than double where it was two years ago. AT&T announced that their average revenue per user was up approximately 2% comparing fourth quarter 2006 to fourth quarter 2007, which is the sixth consecutive quarter of year-over-year ARPU growth. And in their case, data revenues grew 57.5%.
If we continue these trends, AT&T announced yesterday that they will be expanding their 3G service to 80 additional cities this year launching more than 1500 new cell sites. So where as wireless subscriber penetration is approaching 85% of the US population, I believe the continued growth in voice minutes-of-use from existing subscribes and the increasing importance of data usage will continue to draw demand for our towers.
Furthermore, the strong correlation between network investment and low churn necessitates the carriers to continue upgrading their wireless networks to improve network quality, increase capacity, and add functionality in order to remain competitive.
A trend I have discussed in the past was the continued evolution of telephony services from being wired to being wireless. This has been going on for over 20 years and is continuing with the introduction of hands to wireless functionality. As such, well, much of the US economy is grappling with recession fears, I believe that wireless telecom service will be more insulated from the tightening of credit markets and slower consumer spending than most sectors, because of the nature of the subscription based business model and the consumers view of their wireless device, which more and more is replacing their wireline telephone. Today, greater than 11% of adults in the US subscribe only to a wireless service.
As such, I believe wireless telephony services rapidly emerging as a consumer staple that will be recession resistant. A recent study that came out of the UK done by the London School of Economics found that 85% of the people taken the survey thought that having a mobile phone is vital to maintaining their quality of life. And interestingly most of the 16 to 24 year olds in the study, which is the generation that are most likely to be the drivers in the adoption of wireless data service, would rather give up a number of items including alcohol, chocolates, or coffee than live without their mobile phone for just a month.
As our business mature, the fundamental strength of our cash flow model becomes clear that is approximately 97% of the revenue for our full year 2008 guidance is already contracted for at the beginning of the year. Our business is often compared to a traditional real estate business. However, the key difference is that we experience high organic growth and revenues and cash flow as compared to most real estate business.
The last point, I would like to make regarding my confidence on our leasing prospects or the current results of the 700 megahertz auction currently underway. Bidding is currently just over $19 billion dollars, for achieving prior auctions and the SEC's minimum of $12.9 billion for this auction. This reflects the high demands of these very attractive spectrum licenses.
There are a myriad of perspective uses for this spectrum being considered by the various bidding parties. But some have estimated the buildup requirement associated with deploying a 700 MHz spectrum could result in the build out of 20,000 plus new cell sites, which consequently drives growth for the tower industry beyond 2009.
I believe these trends continue to underscore the value of our infrastructure to the wireless industry, and these trends apply to our Australian business as well as our US business as illustrated by the results from our Australian business. That business has continued to perform very well, as the wireless carriers down under continued to enhance and expand their third generation wireless data networks.
So in summary, we delivered a very strong fourth quarter, have substantially completed the integration of global signal, enjoyed better than expected results and synergies following the global signal merger, and are optimistic about the strong industry fundamental. All that coupled with the efficiency of our capital structure and the actions we have continued to take to reduce our outstanding shares have positioned us for strong recurring cash flow per share growth in 2008, which is always our objective.
With that operator, I would like to turn to the call over to you to organize the question and answer period, please.
Thank you, sir. Ladies and gentleman at this time we will begin the question and answer session. (Operator Instructions). At this time, our first question will come from the line of Jason Armstrong. Please go ahead.
All right thanks. Good morning. A couple of questions, when you talk about the percentage of revenue that's already under contract, I know you talked about this before, you mentioned 97%, can you remind us if you look back a year when you gave '07 guidance what that percentage was? And then second question here, you guys have talked for a while about the tower portfolio and what percentage is in urban market and that percentage being higher than others. Can you add any granularity behind this, you know, as we see incremental cell site activity or amendment activity, can you help us think through towers in these markets versus not in the top 100 markets and what sort of a differential is then just to give us some granularity on its run rate?
Sure Jason, the 97% measure is pretty well a future contracted revenue at the beginning of the year, is pretty well sort of a year-end run rate revenue concept against the forward 12 months. And that would suggest if you are growing organic revenue in the 5% to 6% range plus the escalators, the contracted escalators that you've got built into the business, on half your convention that gets you to about 97% contracted in any given year.
As we sit here today with the forward contracts we see in the application pipeline we expect it to deliver today in actuality its higher than 97% as we sit here in February because obviously we're working on the pipeline today of applications. But that's pretty consistent.
Secondarily, I'd say to your question about the top 100 markets and the position of the portfolio, it's one of the things we're probably most pleased an encouraged about. I mean the position of the company today with 72% of the towers in the top 100 markets, as we sit here and consider the future impact of data services and the upgrades on networks that are required and the amendments that we see, in our mind continues to solidify the value of the assets are largely driven by their location and that's also consistent with our results. We've looked back and we constantly evaluate our tower results by market and by a grouping of top 100. And the two categories we follow that are not in the top 100, the 28% of our sites that are below the top 100 have clearly leased up less than the top 100 sites. And that has been the case since inception of the company. That has really not changed.
And given the uptick we're starting to see in wireless data whether it's laptop card, some Smartphones which are coming at relatively high usage rate. Are you starting to see carrier's come back with amendment activity on existing networks?
I mean as AT&T's announcement would suggest Jason, the first places that they went and deployed their wireless data services were in the major urban markets. They are now following up with some of the secondary markets in their expansion of 80 additional markets this year. When you look at T-Mobile introducing UMTS into their network this year, once again, they have a pretty prescribed plan for how that's otherwise going to be rolled out and you can well imagine that the markets they go to first to the market with a greater population they get a bigger bank for their buck in that particular regard. Emerging technologies once again, you can continue to see a trend that would suggests that it's larger markets that get deployed originally. And so we would imagine that as you look at the continuing deployment of AWS by those that won in that spectrum auction. as well as the ultimate outcome of the 700 megahertz auction that the place for carriers are going to invest first are going to be in the top 100 markets before they going to be thinking about smaller markets other than some regional place and things like that. So where a carrier might only have that kind of exposure, what I am talking about daily or national trends that tend to show that larger urban markets for the first places that are being deployed.
Okay. And just getting back to the comments on the pipeline you have given the comments about what's contracted already and then given positive comments on the pipeline for what it look like. As we look at this quarter, you stripped out of run rate revenues, just sort of get down the core rental revenues, sequentially just put up like 7.7 million in incremental revenue 3Q to 4Q, you are still implying in this guidance range shedding on average about 4 million step up per quarter. So it just seems like these two don't really stood at this point, in fact there is an opportunity to be little bit more aggressive there?
I mean Jason, you made clearly a good point and is somewhat the obvious point when you look at how the fourth quarter rolled out and what we are seeing relative to the first quarter, but that simply continuation of the approach we have taken year-over-year in our view of the upcoming year. By virtue of how the carriers release their capital budgets to their field organizations what we see regularly see is and clearly exhibited in the fourth quarter there is a flurry of activity in trying to ensure that they hit their objectives of deploying X-number of sites by the end of the year.
As they roll into the first quarter that flurry of activity somewhat comes to a rest and they then go through a process of distributing their capital budgets to their field and we begin to get significantly more granular input on where they are going to specifically need site this year.
We looked at the forecast and outlook for 2008 on the basis of the same leasing activity of 2007. Now the point we are making is the fourth quarter ended strong. We are optimistic about things that we see in 2007 and 08 from a leasing perspective, so it could be higher than that, but what we would prefer to do is wait until after we have had a chance to see with specifics around the budgets being released at which point then we can make further comment on our first quarter earnings call about what we see as positives to what we had originally forecasted for the year or whether or not we see any negatives in that particular regard. It just the way the process folds out. And I would remind that maintaining leasing at a 2007 rate is generating 24% growth in the cash flow per share metric. And so could there be upside? You know, we'll certainly let you know more about that as we finish up the first quarter here, and report that back to you. But I appreciate the question.
On other little nuances, I mean there is a lot of little nuances in that number, when you are talking about changes quarter-to-quarter. One example Jason that may be apparent conservatism is we are forecasting Australia exchange rates at 0.83 the rest of the year, that's about a million a quarter, if it stays at the current rate. So a lot of little nuances here that frankly could go our direction particularly around leasing as John just said that we think the 3 to 1 relationship between revenue growth to recurring cash flow per share growth is pretty healthy.
Great, thanks guys.
Thank you. Our next question comes from Rick Prentick. Please go ahead.
Hi, good morning guys.
Hit on a couple of things too. On the first quarter guidance Ben, are there any one timers that are baked into that guidance. Like I think you mentioned your fourth quarter guidance had assumed the 4 million. Are there anything in the first quarter that we should already be thinking about?
Yeah, there's about 3 down and then also you've got the sequential the fall off in services business that you could back into in there, and figure out that in the first quarter, which is our custom, normal seasonality, you know we did over 15 million in margin in the fourth quarter, and we expect to do substantially less than that in the first quarter. But I would say that is roughly, almost double what we did in the first quarter of 2007. So, our outlook for services, I know, we don’t actually provide you guidance, but you can squeeze the number, is about double what we did in the first quarter 2007. So we are very encouraged by the activity, but it will be a natural sequential quarter-to-quarter fall, which is the biggest reason why adjusted EBITDA guidance for the first quarter is basically flat to fourth quarter actual.
Right, makes some sense. Okay. Second question is on the pipeline. I think you touched a little bit on, John, the last question there but if you think about your guidance for the pipeline, what was the thought as far as 4G spending from Sprint and Clearwire. If you are saying '08 similar to '07, there probably was not a lot going on from either of those guys. And then a followup question to that, is when you say the application pipeline is going strong, last week when we were in Portland for the Clearwire analyst day, they talked about how they want to go very slow as far as actually turning cell sites on in '08, as far as timing within the year. But they also want to do a lot of prep work – doing zoning, acquisition, planning, for say 30 million pops worth of built versus just the 6 of they are planning on doing right now. How does that sort of work affect you guys? They wanted you to kind of get all the way up through application, but not pay the revenue. How fast could something be turned around, if you will?
Yeah. So Rick, on the question of 4G, kind of WiMAX deployment, I've been consistent with my comments on the third quarter call. You know, we are big believers in the technological elements of WiMAX and certainly the demonstrations that have been taking place. And we don't see any current indications from Sprint that they have taken their foot off the pedal in those initiating markets the first markets that they have indicated to everyone that they were going to turn up. But relative to kind of massive expansion beyond that for 2008, we don't have that in our numbers. And the reason for it as I indicated in our third quarter call, was that as a company clearly they have indicated that they're looking at all aspects of their business, and looking at what steps they should take to optimize returns for their shareholders, as relates the three different initiatives they have, their CDMA network, their iDEN network, and their 4G initiative. So that isn't baked into the 2008 outlook. And as such, we'll be following their announcements in that particular regard as you. But, it would be upside to what we would be seeing for 2008 in our current outlook.
As it relates Clearwire, you bring up a great point relative to the one I was just mentioning when answering Jason's question, and that is we wait to see how the carriers look at their 2008 capital budgets. And in Clearwire's case, one can recognize that there is going to be work that is done around the services side of the activity to get these sites prepared and ready for capital to be deployed at them, aka antennas and base stations installed. But at this juncture, they have indicated that they're going to take a more slower pace in rolling out while they otherwise work through some of their financing objectives that they have for this year. And so, that was something that we also expected as you ended the year 2007 just by virtue of how you could see their activity trending in. So there will be, as they get these sites prepared, some non-recurring services revenue, but depending upon what the capital market environment is and how they progress their financing initiatives, their desire or willingness to deploy sites and put them in billing mode is going to be tampered by those activity.
And so that is big part of why we wait to see how all this roles out in the first quarter. I mean those two things 4G and Clearwire offset by other initiatives by carriers. I mentioned the UMTS rollout by T-Mobile. They are absolutely committed that they have indicated publicly what they have allocated in terms of their capital for this initiative, certainly recognizing the trends that I mentioned before 15.5% of average revenue per user now derived from data, you have to have a data network to be a party to that particular revenue stream. And so they are absolutely committed to that activity and we are very close to them in helping them on rolling that out that as rapidly as possible.
And you see other initiative as I just mentioned on the AT&T new announcement of 1500 new sites. So, there is always puts and takes in a given year and as you we look at the year, we are quite comfortable that the level of 2007 leasing is there and the question is going to be how much more if any, will it be higher than that. And that’s something that will shake out here this quarter.
Sites kind of like, client ready go off and get everything ready and if the capital comes in you could start hitting the ball pretty fast sounds like.
Okay. Final question is back from Ben may be on the M&A environment. You guys bought some towers in the quarter and you bought some land in the quarter. Update us on what kind of multiples you are seeing on both the land business and on the tower business?
Probably not Rick, but I will say it’s competitive out there. But I would say on both fronts, but I would say we are extremely interested in continuing that effort and growing both the M&A effort on the what I would call the small acquisitions, small private deals, as well as the land purchase program. And I would expect to see continuing sort of further investment on both fronts. And its extremely accretive both activities, we look at long-term leasing prospect on everything we buy, just like we evaluate our company when we buy stock, it is exactly the same methodology as we've taken many of you through before. And we evaluate that against the price being competitively bid in the market place.
And I guess the other way that is in the question is given, what we have seen on the pull back in the public tower stocks.
You would like to think it would impact value clearly and you can bet will be pushing that point.
Yeah sometimes it will take the private guys a little bit longer to realize some of the pain that the public guys felt. So they don’t always have a calibrated exactly from a time standpoint, but have you seen some rationalization from private guys realizing that may be multiples should contract a little bit?
A little bit and I think we will see more as it becomes more realization on what the cost of financing is for anyone to ultimately acquire new assets unless they've sort of got a built-in capital you know, funding source like we do through the recurring cash flow or to the extent you are taking out new financing, it is currently more expensive than it was.
Okay. Thanks guys, good luck.
Thank you. Our next question comes from the line of Jonathan Atkins. Please go ahead.
Yeah, I've got three quick questions. One, what surprised you in terms of leasing activity during the fourth quarter that lead to the out performance on the top line. And then if you could talk about your current sales backlog compared to last quarter as well as this time last year? And then finally, the network development business, which as you commented, has been kind of ramping up, what's been kind of the principal driver behind that? Thank you.
On top line revenues, you know I think we are very pleased with how we finished the year. It is never absolutely certain until you sort of get to the end of December, but I would say it is really across the board we are pleased with sort of how we finished up. And not really any big surprises John just went through it. Its puts and takes around markets in different carriers.
If I could just interrupt quickly then, all the trends that lead to the out performance continuing here to date?
Yeah, Jonathan, because I think that you know the surprise was clearly that not withstanding the slower start to the year and we had talked about that being back half year. I think the surprise was that not withstanding the capital markets environment and the carriers did actually come through with their network expansion in the fourth quarter and its lead by new initiative like the T-Mobile, UMTS upgrade initiative. There is also other activity, as I mentioned in the original comment of 30% amendments. You know, something that I think investors don’t typically recognize all the time is that there is other activity that goes on at the site, that isn't necessarily always related to antennas and lines. We are getting a lot of activity from carriers along the Gulf Coast area sites with generator installation, so taking on new site compounds space that is a rental increase.
Those are things that are going to continue on into the New Year from what they are telling us. And that is really as we look at the pipeline, what’s different in 2008 than was in 2007 was starting the year with activities like the T-Mobile and other AWS expansions those that warn them that could be the leaps and metros in a position where they have much more defined plans about what they are doing than was the case of the start of 2007. And so that activity is otherwise greater today, but consistent with fourth quarter than it was at the beginning of 2007. And the adds to that are going to be things like Rick's question there are going to be things like what does happen to WiMAX, where does Clearwire go with its expansion plans and any other new announcements like the one that just came up from AT&T yesterday. Because AT&T have been winding down a lot of their activity, they were not making any public announcements about what they would or would not do with their expansion of 3G. And just yesterday of course, I think probably influenced by what’s going on with the uptake of the Apple iPhone, they talk about expanding to 80 additional markets.
Those are the things that are going to be outside to our forecast, but again we will see that shake out this quarter because there is a certain lead time that carries after otherwise provider any tower company. And if they don’t have it pretty well locked down by the end of the first quarter, it starts making it a lot more for them to realize that was additions to their network in this calendar year. And so that’s when we think it’s most appropriate to kind of talk about additional upsides to what we have originally forecasted.
On the services piece, let me just comment, Jonathan you asked the question, clearly we are off to a better start on services. I think it’s a function of what’s going on in the market as well as probably we’ve picked up our take rate in terms of the amount of the new installations that the men at work were doing that are engaging Crown to do that work. And you know, it looks just like a much more level-loaded year. As John just mentioned, we started very slow in 2007 and we’re playing catch up on that business really all year, and ultimately got there. But it was with a big ramp in the fourth quarter. I think we have the luxury this year at least in forecasting more of a level-loaded year to sort of to get to the same outcome of 2007 and if it is better than that, well then potentially there is some upside there.
Thanks very much.
Thank you. Your next question will come from line of Mike Rollins. Please go ahead.
Hi, good morning.
Thanks. Good morning.
Just a couple of questions, I guess firstly as you look at the Australian business, it looked like both 4Q to 4Q had some really nice growth. Was any significant part of that currency or was that organic, and is that the type of organic growth that you would expect into 2008. And I guess the second question, I would just throw out there is, if you look at the domestic portfolio and the type of mix that you are seeing, where are you seeing in terms of upside on domestic for 2008. Do you think, it comes more from upgrades, you know, and then talk a little bit about what T-Mobile is doing on a 3G side or do you think it could be more back end loaded in terms of some of the site colocation plans of some of the new entrants and regional guys looking to expand? Thanks.
Let me take the Australian one and unfortunately the 40% plus growth we would love to see in play, that’s all organic, but it wasn’t, and it is small in overall company scheme of things, but still very nice to have. With the weak dollar against really all currencies and about a third of that quarter-to-quarter year-over-year growth, in that comparison about third of that was currency driven. And then the other two-thirds was organic leasing growths, which they had a terrific year. And then a couple of little small acquisitions they did, again not big against the total company, but enough to move those numbers, you know in that order of magnitude. And incidentally we do see other opportunities down there. We may do a few more of those small things in Australia. So very pleased with what we see there.
Yeah, and then Mike on the upside question, I think, the upside is going to come from the kind of announcement you saw from AT&T yesterday, which is that as data rolled out, I think the wireless carriers did things very prudently, which was amend existing sites, add the relevant equipment they needed to upgrade their existing installations to handle 3G data services. Recognizing that at the time, there wasn’t revenue stream really that was there to support that investment. So wait to see what the acceptance of those new services were going to be, what kind of revenue generation was that going to create. And, then look at what it takes to expand the network both within markets that you had already initially launched it around your existing sites. So filling sites as well as continuing to add new installations to other markets. I think that's where you're going to see the upside.
I mean, at this juncture its very nice and clearly we had an opportunity to seek what the plans are in the case of the team overview on TFs upgrade. Clearly they would be following the same basic pattern that the Verizon and AT&T already have in terms of how they have introduced 3G to their network. What still lies ahead is going to be the opportunity for the in fill because of the different characteristics of wireless data services from wireless voice services. And what the network needs to look like in terms of density of sites to ensure that you are producing a robust enough signal to drive the high band with rates that 3G services are demanding. And so, I think that's where you're going to see some of the upside. And I think that what we are seeing on this macro evolutionary trend is tremendous in the adoption of data services and the way in which people are looking at using data services.
I think it was tremendous that you see AT&T and Apple discussing their initiatives around modifying the iPhone software so that it is more of a business friendly device. The secure e-mail services, things of that sort because today it's been predominantly a consumer driven sale as opposed to business driven sale. The efficiency, the productivity improvements by putting more of these smart devices, wireless devices into businesses hands, I think are going to continue to drive revenue growth and ARPU growth for the carriers certainly supporting the investments in wireless data.
So, those are the things that I think are upside and I think it's all consistent with what you would expect, that you want to see where the market is and what kind of revenue its going to generate before you start making both kinds of investment decisions. But I think that's what we're now seeing and I think that's where we are going to start to see the upside to our current kind of outlook for leasing for the year.
Thanks very much.
Thank you. Your next question comes from the line of Brett Feldman. Please go ahead.
Yeah. Thanks for taking the question. Earlier in your prepared comments you were talking about potential borrowing, you may be willing to do this year and you said that your willingness to do that is highly dependent on the cost. I'm also curious how important is the term of a potential loan to you. In other words, most of the securitizations you guys have been given has sort of been 5-year term. Are you still comfortable with 5-year loans even if they are another market like a bank or a bond market or would you actually try (CD) at longer duration loans in future borrowing?
Brett, the answer is as we're looking at all different sources of borrowing and the place where we would most likely focus our attention would be the institutional sort of term loan market. The bank market would typically be a 7-year maturity and then the securitization ABS market would be remember as the legal final of 30 years with an anticipated refinancing of 5. And I'll quickly concede that we would expect to refinance in 5, but it is a settle distinction may be not so settle in this type of environment that you don't have a default risk in 5 years. You've got a step in interest rates to about 10% and clearly that wouldn't be a pleasant day, but you certainly don't have an absolute maturity.
As we look today, our first sizable anticipated refinancing in the CMBS market is two and a half years away. So, it's just impossible to figure or even think about where that market will be. But clearly even if we had to take it out in institutional market that's consistent with my comments that the 6.5% to 7% range is kind of where we think we'll be a borrower today for new money and that's sort of a very high spreads or LIBOR as you can calculate quickly. But we believe there's availability there and that's what we're being told.
When we think about the related value equation, you know, to us if we can buy our own securities at 20 times current year guidance cash flow, and buy implication on the growth rates we talked about that being sort of mid teens next year. If we can buy our current securities at those levels even with that incremental cost of borrowing, we think that's a fantastic opportunity and that really is the value trade is probably more favorable in this environment than it has been any time in the last 3 years as we've been at $2.2 billion worth of stock. And so, within the level of leverage ratio as we have described, I don't think we're not suggesting we're going to go out and just spread out level of this company and have no flexibility. That is not at all I'm suggesting. But I'm clearly suggesting we're committed to remaining at this level of leverage and taking advantage of this related value situation that's there. Not withstanding the sticker shock and the credit spread that's out there today.
Well, that makes sense. I guess, I was just trying to understanding how and whether it’s a priority for you guys are not about concentration of when you would have things come to or when you would anticipate refinancing?
Again the way, I think you best manage that is by you having a lateral growth built in which we do between 2010, 2011 or so. And then you have a reasonable level of leverage and interest coverage that even in an expensive interest rate environment you could take out. And remember at the level of growth today as we just demonstrated in the last 12 months. We're taking out a turn a year. So even if you were to get concerned about that a year-and-a-half from now you could take this down to where basically all you're looking at having to refinances essentially the AAA trenches. And I have a hard time figuring how that would be a real problem.
I am sure, that makes sense. Totally separate question, I think as long as anybody could remember, you guys have always been in some small business that was not pure tower leasing whether it was Free view or what you're doing at Modeo even the investment you had in five of your tower before was spun out. Right now, you're really not doing anything of those things. I am just wondering are you continuing to look at other revenue opportunities around your assets or you just kind of focussed on core leasing business these days?
I think the opportunities on the core leasing side of the business that are so exciting, as we look forward the next couple of years. But we're not looking elsewhere for revenue generating opportunities. Fundamentally, it is around the core tower of business.
Do you think that you might have some further opportunities then to take certain fixed costs out on your G&A for example? I think that you guys have always operated with a little more fixed cost, because you are looking the revenue opportunities, I am wondering if you had opportunity to revisit that now?
Well, I mean, if you look at 2008 and the $100 million of revenue growth translates into 100 million of EBITDA growth. Basically, I think what you can see is we're holding our costs very flat and we're managing it very tight. And so I wouldn't suggest that there is big, big changes in that particular guard, in terms of taking it down I think that we just need to continue to manage it the way we are, utilizing all the current resources as efficiently as possible so that we can get that kind of incremental margin on new revenue.
I mean to be absolutely fair, just to head off the question. Absolutely, we're going to be the beneficiary this year of run rate, favorable comparisons to last year, because last year we had some expenses through the integration period and bring G&A levels down. Coming out of the Global Signal transaction in Modeo that are obviously not going replace themselves this year. And that’s how you're able to run at these levels per year. I wouldn't suggest that’s sustainable over a multi-year period. But absolutely, I think we're working on a number of initiatives where we're becoming more efficient. And I think you'll find overtime that it we'll be a very high incremental margins over a long period.
Great. Thank you for taking the questions.
Thanks. Your next question comes from the line of David Barden. Please go ahead.
Hey guys good morning. Just on the kind of capital expenditure side for 2008. Obviously it was a big investment 4Q in the land repurchases. I was wondering Ben maybe if you could just scope out what a rough perimeter for capital expenditure for this year is going to be that we can kind of carve out of our expectations for cash on leverage as they might be applied to buyback? Thanks.
Well, David, we do have philosophical disagreement a little bit on that whole methodology of evaluation, because everything below recurring cash flow in our mind is discretionary. And what I'll say about that is what are you seeing, we spent money on is clearly the first we do is augment existing sites around additional revenue opportunities that come with leasing. And that comes with usually less than a year of pay back. So that’s obviously a wonderful return on investment. That could be rolled into a lease contract for the customer, and have them make that investment. So again, it's some what of an accounting treatment of how that gets actually displayed in capital expenditures. Beyond that you got land purchases and you got some tower builds we're working on maybe 150 or so this year, but we are sort of looking at. Those are completely discretionary and we are focussed on where we believe we see real organic leasing opportunity there and high returns on investments sort of mid-teens un-levered type investment returns is what we're targeting there. So, when you sum it up to answer your question, it is in and around $200 million; things that are left over. From my comment, I've alluded to a fairly large sum of unspoken for cash and it's in and around $200 million bucks. But again the 250 or 270 that is being spoken for is again completely discretionary. So we're going to evaluate it as we go.
And just to be clear, the $200 million is the sum of all that, the discretionary activity, which is over and above the maintenance capital expenditure?
Correct. If you look at the 480 of recurring cash flow guidance, if you were to say give or take 250 is kind of core business augmentation, land purchases, new builds et cetera to maybe 280. Well then the rest of it is, it leaves 200 that's fair gain for anything. And that's just round figures and we don't give firm guidance on the numbers because frankly it's discretionary. We could change that materially. But that's how it looks like as you rough it out for the year.
Helpful. Thank you very much.
Thank you. Your next question comes from Gray Powell. Please go ahead.
Good morning everybody; just had a few quick questions. First of, can you just talk about what needs to happen for industry demand, longer term, in order for you to maintain free cash flow growth above 20% beyond 2008. And then what do you expect to be the main driver of the growth for the industry over there for two to three years. Do you expect it to be new tenants coming on to existing towers or amendments from existing tenants? Thanks.
It’s a great first question there Gray and I'd love to address it. The wonderful position we find ourselves in today because of the actions we've taken over the last four years in terms of the balance sheet and shrinking the capital structure can get us to the position where at this level of leasing, and I don't mean percentage, I mean dollars, $100 million a year basically of new revenue coming on. Because again the percentage on that static number will fall about 50 basis points a year because you're coming out with bigger number every year unless you are adding assets. But just for the example purposes, that $100 million a year now reinvesting that, as we just talked about with Dave, that $480 million of recurring cash flow growing overtime by roughly call it an 85% to 90% incremental margin, call it $90 million a year, reinvesting that cash flow and the barring capacity that gets created, and our judgment in our long-term planing horizon gives us the confidence to be able to say to you, we expect to be able to grow recurring cash flow per share 20% to 25% for the foreseeable future. And that is exactly how we get there. Its because its not just a one year thing, its because you are constantly reinvesting either in shares or in assets that are ultimately driving organic growth that results in that.
It’s a very important point because we could not invest this year; I'll give you the example. This year as suggested in our guidance, doesn’t presume further investment of that discretionary cash flow or borrowing capacity. And you see 24%. As some would expect, could we outperform that number; could it be 25, 26. We don't know, but we do know if we go in and re-lever and borrow appropriately as we have discussed that 24% goes to about 20.
Now you have to assume what price you are buying the shares and the incremental cost of debt. But it takes it down in the current year a little bit. But it enables you to your question to sustain that growth rate over a very long period of time, assuming that the current level of leasing basically remains. So hopefully that wasn't too confusing. But that's how we think about it.
That makes a lot of sense. And then really, just a followup on a previous comment. Did you guys say that there is going to be $3 million like one-time negative item that hits Q1 site leasing revenue, if that's the case then simple math implies that the mid points of incremental revenue, is actually up in Q1 from what was a pretty strong Q4?
Actually Gray, it is about $2 million and that's the non-recurring items if you will. I mean, there's back billing and there's things in that number. So I wouldn't spend too much time thinking about it. Its sort of normal one-timers of about $2 million and that's already baked in that number.
There's a negative $2 million one-time item in the Q1 guidance?
Okay, thank you. Thank you very much.
Thank you. Our next question comes from the Line of Richard Schuldt. Please go ahead.
Hi, thanks for taking the question. I just wanted to clarify something. In terms of I guess, your current guidance, and I guess you mentioned a few times the AT&T announcement. Is that announcement something that’s going to help you get to your guidance, or is that something that could drive the guidance a little bit higher in the latter half of the year. And then the other thing I kind of wanted to touch on was this whole idea that the wireless industry seems to be very volatile. People are uncertain with a lot of things right now, but all of your comments so far about how the leasing business has gone, and the amendments have gone, doesn't seem to reflect that. Can you give us a little more color or comment on that?
Yeah, Richard, with respect to the AT&T announcement, all other things being equal, it would be upside to what we were forecasting for this year in terms of leasing. The reason why you don't see this based on yesterday's announcement, changing the view is because we have to wait to see whether or not there is any offset to that from other carriers this year, because of alternative priorities that they might have including capital market impacts on some of their plans. But all other things being equal, that doesn't get us to our number that would be upside if nothing else changed. So we'll let you know more about that again on the first quarter call.
And then your comment about not withstanding the volatility our comments seem to be fairly sanguine about the state of our industry, I think is right on point. The reality is, in difficult economic cycles, there are certain products that continue to be consumed by consumers and business alike. Certainly on the consumer side, there are the myriad of different consumer staples, and on the business side there are certain realities to conducting business in good economic times and in bad economic times. And on both sides of that equation, communications are very important. Notwithstanding what somebody feels about their prospects, either on a business level or on a consumer level. There is a need for communication. And given the way wireless is replacing so much of what people had traditionally done on a wire-line platform, our view is that the companies engaged in this from the wireless carrier perspective, are going to continue to prudently allocate capital in good economies and bad economies to the continuing growth of their networks.
I mean in essence Richard, one of the things that we've found, not all carriers followed through on this, but at the last economic downturn, post-9/11 in 2001, there was one carrier that was unbelievably consistent in their routine capital investments in their network. And it has been very beneficial to them as they have clearly been recognized as a leader on the element of network quality. And I think others have witnessed the positive impact that created for them. And so I think people, certainly businesses on the wireless carrier side, are going to strive to continue to ensure that they are meeting the demands of consumers and business alike for these wireless communication services. And I think that's why we are sanguine, because we are seeing that in the activity levels of our customers, and seeing that in terms of what they talk about for this year. And certainly we would expect post the close of the 700 megahertz auction, we'll start hearing more about what people are thinking about there. Again, no one should be looking at that as a 2008 element because the frequencies really don't become available until 2009, when the analog television is shut off. But we'll start getting greater visibility as to what people's plans are, later this year and be able to talk to that on future calls as it then impacts 2009 and beyond.
I think at this juncture, operator, since we've run over our time, we certainly do appreciate everybody's continued interest in the company, and you're being on a call today. Sorry, we have run over a little bit, we wanted to make certain we fit in as many questions as we could. But I'm going to conclude the call at this juncture. And just thank you all and look forward to talking to you about our first quarter results a little later this half of the year.
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