Crown Castle Inc. — Q2 2023 Form 10-Q Summary
Business context and reporting period
Crown Castle owns, operates and leases shared U.S. communications infrastructure, including more than 40,000 towers, approximately 120,000 small cells on air or under contract, and approximately 85,000 route miles of fiber. Operations are reported through Towers and Fiber segments. The filing covers the three and six months ended June 30, 2023; financial statements are unaudited.
- Approximately 93% of second-quarter revenue was site rental revenue, generally generated under long-term tenant contracts.
- Approximately three-fourths of six-month site rental revenue came from T-Mobile, AT&T and Verizon Wireless.
- The company operates as a REIT and generally must distribute at least 90% of REIT taxable income to retain REIT status.
Financial performance and key metrics
| Metric | Q2 2023 | Q2 2022 | Change |
|---|---|---|---|
| Site rental revenue | $1.728 billion | $1.567 billion | +10% |
| Services and other revenue | $139 million | $167 million | -17% |
| Total revenue | $1.867 billion | $1.734 billion | +8% |
| Operating income | $667 million | $593 million | +12% |
| Net income | $455 million | $421 million | +8% |
| Diluted EPS | $1.05 | $0.97 | +8% |
| Adjusted EBITDA | $1.188 billion | $1.078 billion | +10% |
Q2 operating margin was approximately 35.7%, compared with 34.2% in the prior-year quarter; net margin was approximately 24.4%, compared with 24.3%. Adjusted EBITDA margin was approximately 63.6%, compared with 62.2%.
| Six-month metric | 2023 | 2022 | Change |
|---|---|---|---|
| Total revenue | $3.640 billion | $3.476 billion | +5% |
| Operating income | $1.295 billion | $1.211 billion | +7% |
| Net income | $874 million | $842 million | +4% |
| Diluted EPS | $2.01 | $1.94 | +4% |
| Adjusted EBITDA | $2.292 billion | $2.173 billion | +5% |
| Cash flow from operations | $1.725 billion | $1.337 billion | +29% |
| Capital expenditures | $720 million | $584 million | +23% |
Segment performance and material changes
- Towers: Q2 site rental revenue was $1.080 billion, broadly flat year over year, while site rental gross margin declined 1% to $837 million. Towers operating profit declined 4% to $839 million. Lower services activity and higher site rental costs, including CPI-linked ground lease costs, pressured results.
- Fiber: Q2 site rental revenue increased 33% to $648 million and site rental gross margin increased 46% to $477 million. Fiber operating profit increased 55% to $438 million, primarily reflecting Sprint cancellation-related payments and related activity.
- Services: Q2 services and other revenue decreased to $139 million from $167 million, and Towers services gross margin declined 44% to $32 million, reflecting lower carrier network-enhancement activity and changes in work mix.
- Operating costs: Q2 selling, general and administrative expense increased 11% to $210 million, driven primarily by employee-related costs, stock-based compensation and information-technology investment. Depreciation, amortization and accretion increased 4% to $445 million.
- Interest expense: Q2 interest expense and amortization of deferred financing costs increased 26% to $208 million, mainly because of higher floating interest rates and increased debt used to fund discretionary capital expenditures.
- Sprint cancellations: Q2 site rental revenue included $106 million of Fiber payments satisfying remaining obligations on canceled Sprint leases. The company also recognized $57 million of accelerated prepaid-rent amortization. For the six months, the corresponding amounts were $154 million and $57 million, respectively. These items are unusual and may not recur at the same level.
Cash flow, debt and liquidity
- Six-month operating cash flow was $1.725 billion. Investing cash outflow was $806 million, including $720 million of capital expenditures and $89 million for acquisitions. Financing cash outflow was $758 million, including $1.364 billion of dividends.
- At June 30, cash and cash equivalents were $276 million; cash, cash equivalents and restricted cash totaled $488 million.
- Total debt and other obligations were $22.418 billion at June 30, including $819 million of current maturities. Total equity was $7.046 billion.
- The company issued $1.0 billion of 5.0% senior notes in January 2023 and $600 million of 4.8% notes due 2028 and $750 million of 5.1% notes due 2033 in April 2023. Proceeds were used primarily to repay revolving-credit borrowings.
- The $750 million of 3.15% senior notes were repaid at maturity in July 2023. After giving effect to that repayment, management reported approximately $22.338 billion of debt and other long-term obligations, $488 million of cash and restricted cash, and $5.612 billion of undrawn revolver availability as of June 30. July 31 revolver availability was reported at $6.3 billion.
- After the July repayment, approximately 88% of debt was fixed-rate, with a weighted-average interest rate of approximately 3.8% and weighted-average maturity of approximately eight years. Floating-rate debt was approximately $2.7 billion; a 25-basis-point rate increase would increase annual interest expense by approximately $7 million.
- Management stated that financial maintenance covenants were satisfied and expected continued compliance. The company targets leverage of approximately five times Adjusted EBITDA, although actual leverage may vary.
Guidance, outlook, risks and unusual items
- Management expects 2023 site rental revenue growth to benefit from tenant additions and Sprint cancellation payments, substantially all of which were received in the first half of 2023. Future comparisons may therefore face a difficult or nonrecurring benefit.
- The company expects discretionary capital expenditures to increase as it accelerates small-cell deployments. Sustaining capital expenditures are expected to remain approximately 1% of full-year net revenue.
- Management expects common-stock dividends over the next 12 months to total at least $6.26 per share, or approximately $2.7 billion in aggregate. Future dividends remain subject to board declaration.
- On July 24, 2023, the company initiated a restructuring plan in response to lower tower activity. The plan includes reducing employee headcount by approximately 15%, discontinuing installation services as a Towers offering while retaining site-development services, and consolidating office space. Estimated restructuring and related charges are approximately $120 million, primarily expected in the third and fourth quarters of 2023.
- Management identified risks from lower tower activity, reduced carrier spending, customer concentration, interest-rate increases, refinancing requirements, capital-intensive small-cell and fiber construction, REIT qualification requirements, and execution of the restructuring plan.
- Tenant contracts represented approximately $38.4 billion of expected future contracted amounts as of June 30, 2023, with a weighted-average remaining term of approximately six years excluding tenant-controlled renewals.
- Management stated that ordinary-course legal proceedings and contingencies were not expected to have a material adverse effect, although outcomes remain uncertain. No material changes to previously disclosed risk factors were reported.
Most important facts for investors to verify
- How much 2023 revenue and Adjusted EBITDA growth is attributable to Sprint cancellation payments and accelerated prepaid-rent amortization, versus recurring leasing activity.
- The pace and returns of discretionary small-cell and fiber capital expenditures, particularly given higher financing costs.
- Progress, timing and total cost of the approximately $120 million restructuring plan and its effect on services revenue and operating expenses.
- Debt refinancing needs, commercial-paper balances, floating-rate exposure and compliance with credit-facility covenants.
- Sustainability of the planned minimum $6.26-per-share dividend in relation to operating cash flow, capital expenditures and debt maturities.
- Customer concentration and carrier spending trends, especially among T-Mobile, AT&T and Verizon Wireless.