American Tower (AMT)

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American Tower leases over 22,000 cell phone towers to wireless service providers, including Verizon Communications (VZ), Sprint Nextel (S) and AT&T (T). It operates over 20,000 wireless towers in the U.S. and has an additional 2,800 in Mexico and Brazil.^[1] With a US market share over 40%, the company is one of the largest wireless tower operators in the country, just behind leader Crown Castle International (CCI).

Cell phone towers derive revenue from multiple tenants who use the infrastructure simultaneously. Because of the regulatory difficulty of building new towers (at least domestically), growth is largely driven by adding tenants to existing towers. This gives the tower companies significant barriers to entry and strong cash flow from incremental business at each tower.

American Tower depends primarily on the success of the U.S. wireless communications business, which has seen 38% growth from 2004 to 2006^[2]. As the US wireless market matures, with a penetration near 75%^[3], the company will likely become more dependent on growth in emerging cell phone markets like India, which is one of the largest and fastest growing in the world.

It is hard to differentiate in the cell tower industry because everyone is doing essentially the same thing. However, American Tower is far more profitable than its competitors. American Tower has decided to sacrifice tower growth for tower profitability by maximizing its tenant per tower ratio and keeping their actual tower growth essentially flat.^[4] This strategy produced an operating margin of 23.54%, in comparison to SBA Communications and Crown Castle who had operating margins of 1.73% and 7.96% respectively.

[edit] Company Overview

American Tower has over 20,000 wireless towers in the U.S. and 2,800 in Mexico and Brazil.^[5] The company leases antenna space to wireless service providers, including Verizon Communications (VZ), Sprint Nextel (S) and AT&T (T). Each tower antenna can derive revenue from multiple tenants who use the infrastructure simultaneously.

[edit] Financial and Operating Metrics

Below are operating and tower statistics relevant to the business. Enjoying the tailwinds of greater cell phone saturation and higher levels of cell phone use in the US, the company has increased its revenue per tower over a larger tower base (largely from its acquisition of SpectraSite in 2005).^[6] Because the marginal costs associated with adding new customers to towers are minimal, the company enjoys greater cash flow, higher returns on investment, and fatter margins from tacking on new wireless carriers and increasing revenue per tower. Furthermore, because barriers to entry in the business are substantial, due to high fixed costs and government regulation, a greater tower base drives further competitive advantage, bargaining power, and margins.

The company derives revenue largely from long-term (5-10 year), flat price lease arrangements, with rental payments increasing 3-5% per year.

^[7]

[edit] Trends and Drivers

[edit] The US cell phone market

Since 2004, cell phone usage in the United States, the company's most important market, has increased 38%. Increased cell phone usage means greater antenna and infrastructure usage for the company, which drives revenue. Given the attractive per tower economics of new business (most new business flows directly to the bottom line),^[8] the company has enjoyed significant growth and improved margins. The United States still lags other developed countries' cell phone saturation, leaving room for growth, but as the market continues to mature quickly, the company must seek growth abroad.

[edit] International growth

Currently the company has significant presence in Mexico, a rapidly growing cell phone market, with 2,800 towers. Going forward, the company can seek growth opportunities in this market, as well as pursue opportunities in other markets in which it has little or no footprint. For instance, the company recently hired a President of Asian Operations to oversee expansion in India and Southeast Asia. India is currently the most rapidly growing cell phone market, and as per capita income in the country increases and cell phone saturation improves, India may represent an attractive, albeit entrepreneurial, endeavor for AMT.

[edit] Consolidation and Infrastructure Sharing of Wireless Carriers

In recent years, companies such as Cingular and AT&T (T) and Sprint and Nextel have merged, evidence of increased consolidation among wireless carriers. This consolidation, as well as arrangements to share networks, has led to increased customer bargaining power and lower demand for total antenna usage. This is largely due to the fact that the companies' existing networks and their new, combined networks overlap or are being rationalized as expansion plans converge.^[9] The continued elimination of these duplications will lower revenue per tower, hurting margins and cash flow generation.

[edit] Concentration of Wireless Customer

Around 64% of the company's business comes from just 5 customers, including Sprint Nextel (S) (21%), Cingular (20%), and Verizon Communications (VZ) (10%). Because the company generally signs long-term, 5-10 year lease contracts with these companies, any unwillingness or inability to pay future obligations or any serious disputes with one of these companies can have a materially adverse affect on the business.^[10]

[edit] Government Regulation

Heavy FCC & Federal Aviation Administration regulation governs the construction and maintenance of existing towers. Each proposed new tower must be approved subject to height and weight requirements, location, environmental impact, and various other factors. Furthermore, each existing tower is inspected and expected to meet stringent standards and maintenance requirements, which may necessitate capital expenditures and fees related to upkeep and compliance. While no laws to date limit the construction of new towers, it has become increasingly hard to build new towers, so each of the major three tower companies enjoy regulatory barriers to entry and scale that cannot easily be duplicated by new entrants.

[edit] Competition and Market Share

After recent consolidation in the industry, domestic competition between wireless infrastructure rental companies has become relatively consolidated among three major players: American Tower, Crown Castle International (CCI), and SBA Communications (SBAC). American Tower is the largest by revenue and market share, but following CCI's 2007 merger with Global Signal, Inc., the company is neck-and-neck in terms of number of towers. Below is a comparison of relevant operating metrics.

All of these companies, however, also compete against wireless carriers who choose to maintain their own networks and build their own infrastructure. Many of the wireless carriers also draw revenue from their towers. For example, AT&T Mobility owns and operates at least 8,500 towers and has established a separate division within the company to manage the tenant leasing business. T-Mobile and Verizon have similar tower leasing divisions. The leased tower segment of the above tower owners comprises around 55,000 of the total 200,000 towers across the country.^[14]

[edit] Footnotes

1. ↑ 2006 AMT Annual Report, "Business," pg 1
2. ↑ AMT 2006 Annual Report, "Strategy," pg 2
3. ↑ 2006 AMT Annual Report, pg 2
4. ↑ [www.morningstar.com Morningstar]
5. ↑ 2006 AMT Annual Report, "Business," pg 1
6. ↑ 2006 AMT Annual Report, "Business," pg 1-3
7. ↑ AMT 2004, 2005, 2006 Annual Reports, "Selected Financial Data"
8. ↑ AMT 2006 Annual Report, "Business," pg 2
9. ↑ AMT 2006 Annual Report, "Risk Factors," pg 12-13
10. ↑ AMT 2006 Annual Report, "Risk Factors," pg 14
11. ↑ Figures compiled from company annual reports
12. ↑ Estimates from American Tower Website, www.americantower.com
13. ↑ Figures exclude effect of merger with Global Signal, Inc.
14. ↑ Estimates compiled from company annual report figures