Crown Castle International (CCI)

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Cell phone towers (often called cell sites since there are both tower and rooftop sites) 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.

Crown Castle depends on the success of the wireless communications business. The U.S. industry has seen steep growth over the past few years (38% growth from 2004 to 2006),^[2] driven by greater market saturation and higher levels of cell phones per user and per household. As the company's US wireless market matures with a penetration near 75%^[3], domestic growth may slow down, and become increasingly dependent on selling more cell phones per capita and additional services (which take extra bandwidth on towers). The company has announced interests in entering cell phone markets in emerging economies, particularly India, which is one of the fastest growing and largest in the world.

[edit] Company Overview

Crown Castle International leases and maintains wireless infrastructure and over 23,000 towers, which are mostly in the United States and, to a lesser degree, Australia.^[4] The company leases antenna space to wireless service providers, including Verizon Communications (VZ), Sprint Nextel (S), T-Mobile, Alltel, and AT&T (T). The company also derives a limited amount of revenue from servicing antennae and other infrastructure projects for customers that build their own infrastructure, though it has de-emphasized such business in recent years.

[edit] Financial and Tower 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, a key driver of growth in the industry.^[5] 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 from long-term (5-10 year), monthly lease payments, with rental payments increasing 3-5% per year.

^[6]

[edit] Merger with Global Signal, Inc.

The company acquired in early 2007 what was previously the third largest tower operating, Global Signals. The purchase makes the combined company the largest tower company by tower base and anticipated market share. Global Signal's tower base is, on average, less mature than CCI's at 1.8 vs. CCI's 2.5 tenants per tower. If the company can successfully raise this number, CCI stands to enjoy a greater number of more efficient cash-generating towers.

[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 utilization for the company, which in turn drives revenue. Given the attractive per tower economics of new business (most new business flows directly to the bottom line),^[7] the company has enjoyed 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 other avenues of growth.

[edit] International growth

Currently the company has 1,387 towers in Australia as of 2006.^[8] Going forward, the company can seek growth opportunities in this market, though the Australian market is nearly saturated at over 80% penetration. The company may also pursue opportunities in other markets in which it has little or no footprint, perhaps including India, the most rapidly growing cell phone market in developing countries in which competitor American Tower (AMT) is highly interested.

[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 Customers

Around 68.3% of the company's business comes from just 5 customers, including Sprint Nextel (S) (14.8%), Cingular (23.5%), Verizon Communications (VZ) (20.3%) and T-Mobile (8.6%). 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] Threat of Substitution

Disruptive technologies such as VoIP may in the long-run alter how voice and mobile phone services and subscriptions are delivered. These new technologies may avoid the use of towers or other heavy infrastructure, and substitution toward them can take business away from wireless carriers and, ultimately, the company. While currently VoIP is largely replacing land-lines (since it requires internet access and most people use it via a computer), the pace of change in the industry makes it difficult to determine the demand for mobile tower infrastructure in the long-run.

[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 (AMT), SBA Communications (SBAC) and Crown Castle. American Tower is the largest by revenue and market share, but following Crown Castle's 2006 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, though these companies, of course, do not draw revenue from their towers. The leased tower segment comprises around 55,000 of the total 200,000 towers across the country.^[14]

[edit] Footnotes

1. ↑ 2006 CCI Annual Report, "Business," pg 1
2. ↑ AMT 2006 Annual Report, "Strategy," pg 2
3. ↑ 2006 AMT Annual Report, pg 2
4. ↑ 2006 CCI Annual Report, "Business," pg 1
5. ↑ 2006 CCI Annual Report, "Business," pg 1-3
6. ↑ CCI 2004, 2005, 2006 Annual Reports, "Selected Financial Data"
7. ↑ AMT 2006 Annual Report, "Business," pg 2
8. ↑ CCI 2006 Annual Report, pg 32
9. ↑ AMT 2006 Annual Report, "Risk Factors," pg 12-13
10. ↑ CCI 2006 Annual Report, "Risk Factors," pg 15
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