Crown Castle International Corp. — 2017 Q3 Form 10-Q Summary
Business context and reporting period
Unaudited results cover the three and nine months ended September 30, 2017, compared with the same periods in 2016. Crown Castle owns, operates and leases shared wireless infrastructure in the United States and Puerto Rico, primarily approximately 40,000 towers and fiber supporting small-cell networks. The company operates as a U.S. federal income tax REIT and reports Towers and Small Cells segments.
At September 30, 2017, the company had 406.3 million common shares outstanding. Following the November 1, 2017 closing of the Lightower acquisition, the company had more than 60,000 route miles of fiber, including the acquired Lightower network.
Key financial metrics
| Metric | Q3 2017 | Q3 2016 | Change |
|---|---|---|---|
| Net revenues | $1.063 billion | $992.0 million | +7% |
| Site rental revenue | $892.8 million | $812.0 million | +10% |
| Operating income | $260.6 million | $244.3 million | +7% |
| Operating margin | 24.5% | 24.6% | Slightly lower |
| Net income attributable to common stockholders | $85.3 million | $87.4 million | -2% |
| Diluted EPS | $0.21 | $0.26 | Down |
| Adjusted EBITDA | $604.8 million | $564.1 million | +7% |
| Common dividend declared per share | $0.95 | $0.885 | +7% |
| Metric | Nine months 2017 | Nine months 2016 | Change |
|---|---|---|---|
| Net revenues | $3.118 billion | $2.889 billion | +8% |
| Operating income | $775.6 million | $687.2 million | +13% |
| Net income attributable to common stockholders | $316.5 million | $199.3 million | +59% |
| Diluted EPS | $0.84 | $0.59 | +42% |
| Adjusted EBITDA | $1.775 billion | $1.653 billion | +7% |
| Net cash provided by operating activities | $1.417 billion | $1.305 billion | +9% |
Q3 site rental revenue represented 84% of consolidated revenue. Towers site rental revenue increased 2% to $724.8 million, while Small Cells site rental revenue increased 64% to $168.0 million. Small Cells growth reflected the FiberNet and Wilcon acquisitions and newly constructed small cells. Q3 Towers operating profit rose 1% to $552.4 million, while Small Cells operating profit rose 76% to $93.4 million.
For the nine months, capital expenditures were $851.5 million, including $791.8 million of discretionary capital expenditures. Cash used in investing activities was $2.971 billion, principally reflecting $2.113 billion of business acquisitions and capital expenditures.
Balance sheet, debt and liquidity
- September 30 cash and cash equivalents were $6.719 billion, including financing proceeds held for the Lightower transaction. Management’s liquidity presentation after giving effect to the Lightower closing showed $199.1 million of cash and $2.835 billion of undrawn revolver availability.
- Total debt and other obligations were $15.204 billion at September 30, 2017, compared with $12.171 billion at December 31, 2016. Non-current debt was $15.090 billion.
- Debt included approximately $3.1 billion of floating-rate debt and approximately $12.9 billion of fixed-rate debt after giving effect to Lightower. A 0.125 percentage-point increase in rates was estimated to increase annual interest expense by approximately $4 million.
- The revolver commitment was increased to $3.5 billion and maturity extended to August 2022. Management stated that the company was in compliance with financial maintenance covenants.
- Liquidity sources were expected to cover the next 12 months of debt principal payments, common dividends, preferred dividends and capital expenditures. Expected common dividends were at least $1.7 billion, and expected preferred dividends were approximately $113 million.
Material changes versus the prior comparable period
- Revenue growth was led by Small Cells, with nine-month Small Cells site rental revenue up 54% and Small Cells operating profit up 68%.
- Q3 network services and other gross margin declined 10% overall, primarily because Towers network services gross margin declined 11%; this business is variable and not generally supported by long-term contracts.
- Interest expense increased 19% in Q3 and 12% for the nine months, reflecting higher outstanding debt associated with acquisitions and financing activities.
- Net income attributable to common stockholders declined in Q3 despite higher operating income because of higher interest, depreciation and amortization, general and administrative expenses, and preferred dividends. The nine-month comparison benefited from substantially lower losses on retirement of debt than in 2016.
- Shares outstanding increased materially following the May and July common stock offerings. The company also issued $1.65 billion of 6.875% mandatory convertible preferred stock, which is expected to convert into common stock in 2020 unless converted earlier.
- FiberNet closed in January 2017 for approximately $1.5 billion and Wilcon closed in June 2017 for approximately $600 million. Lightower closed on November 1, 2017 for approximately $7.1 billion; purchase accounting and pro forma financial information were not available when the 10-Q was filed.
Guidance, outlook, commentary and risks
- Management expected continued demand for towers and small cells as carriers expand network capacity, improve coverage and deploy new technologies.
- Management expected the FiberNet, Wilcon and Lightower acquisitions collectively to contribute $885 million to $905 million of site rental revenue during 2018.
- 2017 and 2018 capital expenditures were expected to exceed 2016 levels, driven particularly by construction of new small-cell networks. Sustaining capital expenditures were expected to be approximately 2% of net revenues.
- The quarterly common dividend was increased after quarter-end from $0.95 to $1.05 per share. Management expected common dividends over the following 12 months to total at least $4.20 per share, subject to board approval.
- Management cited anticipated non-renewals associated with customers decommissioning the former Leap Wireless, MetroPCS and Clearwire networks, partially offsetting tenant additions and contractual escalators.
- Key risks include integration and execution risks related to Lightower, the ability to realize expected acquisition benefits, higher leverage and interest-rate exposure, customer concentration, network decommissioning and non-renewals, variable network-services activity, and the need to pay preferred dividends to maintain the ability to pay common dividends and preserve REIT status.
- The company expects the new lease accounting standard, effective January 1, 2019, to have a material balance-sheet impact through recognition of right-of-use assets and lease liabilities. It did not expect the revenue recognition standard effective January 1, 2018 to have a material impact.
Important facts for investors to verify
- Reconcile the reported September 30 cash balance with the substantially lower post-Lightower liquidity balance and confirm the final acquisition financing and purchase accounting.
- Review pro forma leverage, fixed-versus-floating debt, covenant headroom and interest expense after the Lightower closing.
- Assess whether expected 2018 acquisition revenue contributions and small-cell growth justify increased capital expenditures and integration costs.
- Monitor tower lease non-renewals related to Acquired Network decommissioning and customer concentration, with approximately 84% of site rental revenue from four major wireless carriers.
- Evaluate dividend sustainability after common and preferred dividend obligations, acquisition financing needs and higher interest expense.
- Confirm the effect of mandatory convertible preferred stock on future share count, EPS dilution and common dividend restrictions.