CROWN CASTLE INC. quarterly report, Q3 FY2023

Crown Castle Inc. 2023 Q3 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 115,000 small cells on air or under contract, and approximately 85,000 route miles of fiber. Its operating segments are Towers and Fiber. The company operates as a REIT and derives most revenue from recurring, long-term tenant contracts with major wireless carriers and fiber customers.

This unaudited Form 10-Q covers the three and nine months ended September 30, 2023, compared with the corresponding 2022 periods. Approximately 95% of third-quarter revenue was site rental revenue. Approximately three-fourths of nine-month site rental revenue came from T-Mobile, AT&T and Verizon Wireless.

Financial Performance and Key Metrics

Metric	Q3 2023	Q3 2022	9M 2023	9M 2022
Net revenues	$1.667 billion	$1.746 billion	$5.307 billion	$5.222 billion
Site rental revenues	$1.577 billion	$1.568 billion	$4.929 billion	$4.711 billion
Services and other revenues	$90 million	$178 million	$378 million	$511 million
Operating income	$486 million	$602 million	$1.781 billion	$1.813 billion
Net income	$265 million	$419 million	$1.139 billion	$1.261 billion
Adjusted EBITDA	$1.047 billion	$1.077 billion	$3.339 billion	$3.249 billion
Diluted EPS	$0.61	$0.97	$2.63	$2.91

Q3 net revenue declined 5%, primarily because services and other revenue fell 49%, partially offset by 1% site rental revenue growth. Nine-month net revenue increased 2%, led by 5% growth in site rental revenue, while services and other revenue declined 26%.

Q3 net margin was approximately 15.9%, compared with 24.0% in the prior-year quarter. Nine-month net margin was approximately 21.5%, compared with 24.1% in the prior-year period. The declines primarily reflected higher interest expense, restructuring charges, and lower Towers results.

Segment performance: Q3 Towers site rental revenue declined 1% to $1.074 billion and Towers operating profit declined 5% to $839 million. Fiber site rental revenue increased 4% to $503 million and Fiber operating profit increased 4% to $281 million.
Nine-month segment performance: Towers operating profit declined 4% to $2.540 billion, while Fiber operating profit increased 23% to $1.043 billion. Fiber results included significant Sprint cancellation-related payments.
Cash flow: Nine-month operating cash flow was $2.258 billion, up 11% from $2.038 billion. Capital expenditures were $1.067 billion, up from $921 million, and included $961 million of discretionary expenditures and $55 million of sustaining expenditures.
Dividends: The company paid $2.044 billion of common-stock dividends during the first nine months, or $1.565 per share in each quarter. The board declared another $1.565 per-share dividend payable December 29, 2023.
Balance sheet: Cash and cash equivalents were $117 million and total cash, cash equivalents and restricted cash were $289 million at September 30, 2023. Total debt and other obligations were $22.730 billion, compared with $21.729 billion at December 31, 2022.
Debt and liquidity: Undrawn availability under the revolving credit facility was $6.8 billion. The weighted-average debt interest rate was approximately 3.8%, approximately 86% of debt had fixed-rate coupons, and weighted-average maturity was approximately nine years based on anticipated repayment dates.

Material Changes Versus the Prior Comparable Period

Site rental revenue growth was driven by Fiber, including Sprint cancellation payments, tenant additions and demand for small cells and fiber solutions. The nine-month period included $160 million of Sprint cancellation payments and $57 million of accelerated prepaid-rent amortization.
Services and other revenue and Towers services gross margin declined materially because of lower carrier network-enhancement activity and changes in the volume and mix of work.
Interest expense increased 23% in Q3 and 24% for the nine-month period, primarily because of higher variable interest rates and increased debt used to finance discretionary capital expenditures.
The company recorded $72 million of restructuring charges in Q3 and the first nine months, including employee severance, office consolidation costs, accelerated depreciation and share-based compensation.
The company issued $1.0 billion of 5.0% senior notes in January 2023 and $1.35 billion of senior notes in April 2023, using proceeds primarily to repay revolving-credit borrowings. It repaid $750 million of 3.15% senior notes at maturity in July 2023.
Operating assets and deferred site rental receivables increased, while equity declined to $6.669 billion from $7.449 billion at year-end 2022, primarily reflecting dividends exceeding reported net income.

Guidance, Outlook, Risks and Unusual Items

Management expects 2023 and 2024 site rental revenue growth from tenant additions and continued demand for communications infrastructure. However, 2024 reported site rental revenue is expected to be lower than 2023 because Sprint cancellation payments will largely be absent and deferred-revenue amortization will decline.
Discretionary capital expenditures are expected to remain significant in 2023 and 2024, with an anticipated acceleration in small-cell deployments. Sustaining capital expenditures are expected to remain approximately 1% of net revenue.
The restructuring plan targets an approximately 15% employee headcount reduction, discontinuation of installation services as a Towers product offering, and office consolidation. Management expects approximately $35 million of additional charges in Q4 2023, approximately $30 million of savings in 2023 and $105 million of savings in 2024. The 2024 savings are expected to be partially offset by approximately $40 million of lower services and other gross margin.
On October 18, 2023, the company announced plans to relocate approximately 1,000 employee positions by the end of Q3 2024. Related restructuring charges are expected, but their magnitude was not clear in the filing.
Over the next 12 months, expected liquidity uses include approximately $2.6 billion of debt obligations, at least $2.7 billion of dividends, capital expenditures and restructuring costs. Management believes available liquidity sources should be sufficient, although expected uses are projected to exceed operating cash flow.
Interest-rate risk remains material: approximately $3.1 billion, or 14% of debt, was floating rate. A hypothetical 0.25 percentage-point increase in rates would increase annual interest expense by approximately $8 million.
Approximately $39.4 billion of contracted tenant amounts were outstanding as of September 30, 2023, with a weighted-average remaining term of approximately six years excluding tenant renewal options.
Management reported compliance with debt covenants and stated that there were no material changes to the risk factors disclosed in the 2022 Form 10-K. Ordinary-course litigation and contingencies were not expected to have a material adverse effect.

Important Facts for Investors to Verify

Whether Fiber growth and new small-cell deployments offset weaker Towers activity and the planned discontinuation of installation services.
The timing and amount of remaining Sprint cancellation-related revenue and the resulting 2024 revenue comparison.
Actual Q4 2023 restructuring charges and realized cost savings versus management’s estimates.
Debt refinancing needs, particularly commercial paper, the September 2024 senior notes maturity and the anticipated refinancing of Tower Revenue Notes.
The effect of sustained elevated interest rates on interest expense, leverage and dividend coverage.
Whether discretionary capital expenditures generate the expected tenant additions and returns.
The magnitude of restructuring charges associated with relocating approximately 1,000 positions, which the filing states is highly uncertain.
Dividend sustainability relative to operating cash flow, capital expenditures and debt obligations.