Key Takeaways:
1. Revenue recognition restatement is not a major issue and does not impact cash flows.
2. Robust leasing activity. In 2019, they had their highest level of tower leasing activity in more than a decade. However, they did see a slowdown in activity in Q4, which they feel is temporary and a result of uncertainty around the outcome of the pending merger between T-Mobile and Sprint. They expect a return to significant activity in the second half of 2020.
3. Excluding the impact of the restatement, 2020 guidance was maintained.
Thesis intact, highlights on the quarter:
· They beat on site rental revenues (almost 90% of revs) and missed on Services revenue, which was impacted by the restatement.
· 4Q19 site rental revenue was $1,301m, above consensus of $1,263mn.
· The restatement came after consultation with the SEC’s Office of the Chief Accountant. This was spurred by a subpoena over a separate issue (capitalization and expense policies related to tenant installations and upgrades), which seems to have been put to rest. Based on the consultation, CCI came to a separate conclusion related to their revenue recognition practices – that a portion of the transaction price from its installation services should be recognized over the course of the lease. They restated historical financials to reflect this, however, CCI will recognize the same absolute dollar amount of both revenue and gross margin over the course of its customer contracts – it’s just a timing issue.
· The 2020 outlook now implies adj. EBITDA growth of 6% YoY, and AFFO growth of 9% YoY to a midpoint of ~$2.6B or $6.12/share.
· LT tower activity should remain robust. Continued growth in mobile data demand is driving their customers to make significant investments in their existing 4G networks. And they expect their customers to spend the next decade investing in deployment of 5G.
· Could see churn picking up from the TMUS/S merger in 2020. However, management views a T-Mobile/Sprint merger as a long-term positive as Sprint has valuable spectrum holdings which it has not been able to fully deploy due to capital constraints, and the combined entity appears likely to accelerate deployment of 5G as part of its integration. Management believes that investment from the combined T-Mobile/Sprint, will likely more than offset the impacts of T-Mobile decommissioning duplicative sites.
Valuation:
· Strong AFFO growth will drive the valuation.
· Trades at a discount to SBAC and AMT.
· High incremental margins means AFFO growth should outpace site rental revenue growth.
· Low maintenance capex (~2% of revenue) supports high AFFO margins.
· 2020 AFFO ($6.12/share) yield of ~4%. This is an attractive yield given the secular growth potential.
The Thesis on Crown Castle:
1. CCI is well positioned to capitalize on secular mobile data demand growth and small cell/urban opportunity.
2. Strong competitive position. Leading US tower company.
3. Toll booth business – offensive (secular growth) & defensive (4% dividend & contracted cash flows) characteristics.
4. Revenues derived from long term contracts with price escalators and good visibility.
Sarah Kanwal
Equity Analyst, Director
Direct: 617.226.0022
Fax: 617.523.8118
Crestwood Advisors
One Liberty Square, Suite 500
Boston, MA 02109
$CCI.US
[tag CCI]
[category earnings]