美國電塔 (AMT) 2003 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the American Tower Corporation fourth quarter earnings conference. At this time all the participant lines are in a listen-only mode. Later there will be an opportunity for questions, instructions will be given at that time.

If you need any assistance for today's call, please press star zero and an operator will assist you off line. A a reminder today's call is being recorded.

I would now like to turn the conference over to the Vice President of Finance Ms. Anne Alter, please go ahead.

Thank you. Good morning, and thank you for joining American Tower's conference call regarding our fourth quarter earnings.

We'll begin with comments from Brad Singer, our Chief Financial Officer; and Jim Taiclet, our Chief Executive Officer. We'd like it remind you that this call will contain forward-looking statements that involve a number of risks and uncertainties. Forward-looking statements include discussions about our quarterly and full-year 2004 outlook. Statements regarding our goals, beliefs, strategies, objectives, plans or current expectations and other statements regarding matters that are not historical fact.

You should be aware that certain factors may affect us in the future and could cause actual results to differ materially from those expressed in these forward-looking statements. Such factors include the risk factors set forth in this morning's press release, and those set forth in our Form 10-Q for the quarter ended September 30, 2003, filed with the SEC and other SEC filings.

We urge you to consider these factors and remind you thank you we undertake no obligation to update the information contained in this call, including forward-looking statements, to reflect subsequently occurring events or circumstances.

Our earnings release, which includes information required by Regulation G, was furnished this morning to the SEC on a Form 8-K and is posted on the website.

Now, I'd like to turn things over to Brad Singer.

Thanks, Anne.

We ended 2003 delivering on our financial goals, strong operating performance, and improving our financial position. During the fourth quarter, our core tower operations continued to incrementally grow revenues and increase operating profit, enabling us to reduce our leverage and access the capital markets to improve our balance sheet and liquidity.

Our fourth quarter total revenues increased 8% to 191.5 million from the same period in 2002. The revenue increase was driven by our high margin tower division revenue growing 10% between the fourth quarter 2003 and the fourth quarter 2002.

Our fourth quarter 2003 adjusted EBITDA increased 17% to almost 105 million, and adjusted EBITDA margins expanded to 55%. Please, note that the fourth quarter 2002 included 4 million of net positive non-recurring items. Adjusting for these one-time items, our adjusted EBITDA increased by 22% on a year-over-year basis in the fourth quarter. We've excluded the 4 million in non-recurring positive items to facilitate following prior-period comparisons in our tower divisions.

Our tower revenue increased 13%, to over 163 million, and our tower operating profit increased 20%, to almost 110 million from the fourth quarter 2002. We continue to demonstrate the substantial operating leverage inherent in the tower model with our tower expenses increasing by just under 1 million, while we increased quarterly revenues by 19 million between the fourth quarter 2003 and 2002.

We improved tower operating margins to over 67%, from under 62%. As we stated on the last earnings call, we expect our tower expenses to remain flat to slightly up on a sequential basis from the third quarter 2003, and deliver essentially flat operating expenses. We continue to maintain our expectations of modest expense growth in 2004.

Our tower division results include the impact of the $34 million tower sale, which reduced our revenues by approximately 700,000, and operating profit close to half a million within the current fourth quarter. As a result of our performance, our tower revenues and operating profits were above the mid point of our outlook.

We have refined our 2004 outlook and provided a quarterly forecast. Our first quarter and full year 2004 tower outlook reflects our fourth quarter revenue run rate, the impact of over 5 million of lost annual revenues related to tower divesters, and slightly lower than anticipated back build revenues. Our guidance also reflects all announced strategic activity, which is expected to have a minimal revenue and cash flow impact during the first half of 2004.

Our 2004 tower guidance maintains our previously forecasted revenue growth of 8-11%. We anticipate tower revenues between 671 and 688 million, and tower operating profit between 456 and 472 million. The mid point of our revenue range is based on the continuation of current new business trends. Our tower operating profit anticipates capturing approximately 90% of the incremental revenue as we continue to successfully control the tower cost structure.

The services division reported revenues of 28.4 million, and operating profit of just below 2 million for the fourth quarter. Our service revenue is at higher end of expectations, but was offset by the higher proportion of our revenues related to low margin projects. Our 2004 services outlook reflects our anticipation of current business trends, with a focus on greater selectivity of third-party projects, and increasing margins from their current levels. We anticipate revenues from 75 to 95 million and operating profit ranging from 7 to 11 million.

In the fourth quarter, our capital expenditures of approximately 16 million slightly exceeded our expectations for the first time in over a year. We incurred higher than anticipated Cap Ex in the quarter, due to approximately 9 million in improvements and redevelopment Cap Ex, and some one-time IT-related corporate expenditures.

Both of these categories had one lower than expectations throughout 2003. We constructed 16 towers, bringing a total of 57 new builds for 2003. We've provided a breakout of Cap Ex spending and supplemental information in our press release.

Our 2004 total capital expenditure level will be slightly above 2003 levels. Our tower segment Cap Ex is anticipated to range between 44 and 58 million, which is the combination of 24 to 33 million of new build Cap Ex, and 20 to 25 million improvement and augmentation Cap Ex. We continue to anticipate building more towers in 2004, between 120 and 160 towers. The increase in new builds is based on our expectations of the available investment opportunities. As we have demonstrated our investment discipline over the past year, we will no not deploy the capital into new tower builds unless they meet our return criteria.

We anticipate approximately 6 to $7 million Cap Ex spending related to corporate and service activities. As a result of our continued strength of our core tower operations, we generated over 20 million of free cash flow in the fourth quarter. Our free cash flow was flat on a sequential basis, as our increase in tower operating profit was offset by increase in cap spending. We define free cash flow as adjusted EBITDA with total interest and Cap Ex.

Over all, our 20 cents per share net loss from continuing operation was at wide end of our range, due to approximately 10 million of noncash impairment charges, related to our DC Broadcast tower and certain non-core tower assets. We also incurred a $1.4 million cash charge related to Steve Dodge's retirement.

From a strategic perspective we closed 34 million of noncore asset sales during the fourth quarter. The towers divested were in low growth noncore locations. We've also agreed to sell another 10.5 million of noncore tower assets during the first quarter of 2004.

Consistent with our strategy, we redeployed a portion of the proceeds from our divestitures into our core tower business with the purchase of 10.6 million of NII holding towers during the quarter. We anticipate closing another 4.4 million of tower assets from NII holdings by the end of the second quarter 2004.

We also purchased, at the end of the fourth quarter, approximately 8.5 million of tower assets from Iusacell as part of a strategic agreement to acquire a total of 31.4 million by the end of the third quarter of 2004. In addition we anticipate closing 4.1 million of domestic tower assets in the first quarter.

Reviewing our strategic activity over the course of 2003, we have successfully completed the divestiture of over 110 million of noncore tower assets, while redeploying 95 million in the purchase of strategically attractive high growth assets.

As we have worked hard on improving our operating performance and our share price of last year, we've also worked hard on strengthening our financial position. Consistent with our financing goals of increasing our financial flexibility and liquidity, while reducing our leverage and interest costs, we executed two securities offerings and repriced a bank facility since our last earnings call.

The offerings consisted of 400 million of 7.25 senior subordinated notes by our operating subsidiary, American Tower, Inc. and 225 million of 7.5% senior notes from the parent. The proceeds from the 7.25 senior subordinating notes we used to repay bank facilities, and the proceeds from the 7.5 senior notes will be utilized to repurchase the 6.25 convertible notes that may be put to us in 2006. The call of the 6.25 convertible notes is expected to be completed February 24.

These two offerings strengthened our financial position by increasing our liquidity to the extension of over 600 million of near-term maturities at historically low fixed rates.

We refinance our 260 million Term Loan B facility with a new Term Loan C facility, at substantially the same terms as a Term Loan B, except that the interest rate spreads were reduced by 125 basis points, saving us over 3 million a year. It is important to note that over the past year, we have effectively refinanced approximately 1.4 billion of near term debt maturities and reduce our exposure to floating interest rates from over 40% of our total debt, to slightly over 20%.

We also repurchased 30 million of 5% convertible notes from our restricted cash, and reduced the borrowing under our revolving loan by 30 million from operating cash during the fourth quarter. As of the end of the fourth quarter, we had 175 million in our restricted cash account, pro forma for our latest offering.

For a summary of our financing activities and proceeds from our restricted cash, see the supplementary schedule in our press release.

We intend to use the majority of our restricted cash to repurchase outstanding debt by the end of the second quarter. Our strong operating performance enabled us to sequentially reduce our leverage. Our net debt to annualized adjusted EBITDA ratio decreased during the fourth quarter from 7.8 to 7.4 times, as of the end of December. Based on the mid point of our outlook, our net debt to annualized adjusted EBITDA is expected to be less than 6 and a half times by the end of 2004.

Looking back we will have successfully cut our leverage ratio almost in half over the past three years, if we can meet our 2004 performance goals.

As of the end of 2003 we had total liquidity of 554 million, comprised of 106 million in unrestricted cash and 170 million in restricted cash, and the ability to draw on the full 269 million of remaining availability of our revolving line. Our reduced leverage, extended maturities, and relatively low levels of debt at the secured level provides us with significant flexibility to now pursue a more aggressive course of interest expense reduction over the next several years. We will have the ability to opportunistically refinance higher-cost pieces of our debt structure, such as the nine and three eighths senior notes and the 12.25 subordinated notes, as they reach their respective call dates in early 2005 and 2006.

These two potential refinancing opportunities may result in annual interest savings in excess of 50 million, based on today's market environment.

With great pleasure, I hand things over to Jim Taiclet, American Tower's CEO and new Chairman. We will provide an operational update and will be silent with regard to the A-rod trade.

Thanks, Brad.

2003 was a landmark year for our company, as we delivered the first full year of positive free cash flow. Our performance clearly validated the power of the tower business model. As a result of the sharp focus on operational execution, we added $75 million of tower revenue in 2003, while actually reducing tower operating expense by $4 million, and corporate SG&A by over $3 million from the prior year.

All these factors contributed to a robust 25% in EBITDA from 2002 to 2003. We fully intend to continue the strategic direction that enabled our 2003 performance into 2004 and beyond. The first element of our strategy is to maintain focus on our core rental and management business.

Tower leasing is again anticipated to be 98% of our operating profit in 2004. Our continuing operations only include targeted services that enhance our ability to drive speed and quality for collocations on our towers. These services, such as securing building permits and zoning approvals, installing antennas and lines on our towers, benefit our customers. All other business lines have been, or are in the process of being, divested or exited.

The second element of our strategy is to continuously increase the return on our invested capital. We do this in three ways. Generating same tower revenue growth, controlling operating costs, and selling low growth and nonstrategic towers, while building or acquiring high return tower assets.

Regarding revenue growth, our entire organizational structure, management selection process, and incentive system has been developed with a primary goal of adding new tenants on to our existing towers.

On cost side, we've completed a consolidation of our original 20 operating territories to 7, eliminated two levels of organizational structure, and combined five separate back-office operations into one.

As for improving the quality of our asset base, the 16 towers that we built in the fourth quarter had an initial return well in excess of 10%.

The third element of our strategy is to continue deleveraging the balance sheet as Brad described. Our goal is to accelerate the virtuous cycle of reducing debt, and improving our credit quality, thus lowering interest expense over time and expanding free cash flow.

While we feel good about our strategic direction, we are not complacent, and we're not yet satisfied. In 2004, we will aggressively work to improve our sales to collections process, increasing speed and accuracy for our customers, while reducing internal rework. Our objective is to have the most customer-friendly leasing process in the industry, providing carriers with faster time to market, and resulting in expanded revenue growth opportunities for American Tower.

We're also actively exploring a distributed antenna system concept with our customers. This would provide them signal access in high value areas, which are currently unavailable to them due to substantial zoning barriers. Distributed systems use shared low-impact antennas mounted on light poles, buildings, et cetera, that are connected with a fiber back to a cluster of carrier base stations. Just like they do with a tower, carriers would lease a shared portion of the distributed system, which we would own, so these systems are a logical extension of our current core leasing business.

While we're still only in the exploratory stage of discussions with customers on this topic, we perceive it as a potential additional long-term opportunity for growth that's right in line with our current core business.

Finally, we will continue to explore strategic transactions that can offer the right combination of price, synergies, and strategic benefits to further accelerate our free cash flow, strengthen our balance sheet, and reward our investors. The benchmark we use in evaluating strategic transactions is whether we believe a given transaction opportunity would lead to a higher share price a couple years down the road, while not undoing the progress we made in deleveraging our balance sheet.

In 2004, we expect to be pursuing our goals and strategies in a favorable lease-up environment. We are guiding 2004 levels of new leasing business to be at the same level or potentially a higher level than in 2003.

There are plenty of early signs to support these levels of activity. First, many of the big six carriers have already indicated that their plans for Cap Ex and/or self-sight deployments are similar to or higher than last year. Their plans are driven by continued subscriber and minutes of use growth, competitive dynamics, and the introduction of advanced high speed data services. Subscriber and minutes of use growth should be sustained through the combination of a solidly improving economy, and the increasing desirability of mobile telephony, with growing attraction of family plans and other initiatives targeting the youth market. This will expand the number of potential wireless users in the United States.

In addition, we expect faster wire line migration encouraged by wire line to wireless number portability, and that will result in more people pulling the plug on their landline phones and relying solely on wireless service.

There are also important competitive dynamics within the wireless industry that include market share migration towards carries with better perceived network quality or features, the reduced switching barrier with wireless number portability, and the increasing use of quality as a differentiator in the carrier zone marketing. Over all, we estimate domestic new cell site deployment to be at least 13,000 new sites, and may be in excess of 16,000 new sites.

All of these trends are based on voice service, and they give us a lot of confidence that our 2004 tower revenue growth guidance of 8 to 11% is highly achievable. Moreover, the introduction of true high speed data services, led by Verizon's nationwide launch of CDMA EBDO will add another significant and sustainable source of leaseup demand, as data usage increases, the need for additional equipment on existing cell sites and for cell splitting over time.

So as we enter 2004, we're looking forward to delivering another year of solid performance, as outlined in our guidance, and we'll be happy to take your questions now. Thank you.

Ladies and gentlemen, if you would like to ask a question at this point please press the star then one on your touchtone phone. You will hear a tone indicating you have been placed in queue.

If you wish to remove yourself from the queue please press the pound key. And we ask if you are using a speaker phone, please pick up your hand before pressing any numbers. Once again, if you have a question press star one.

First to the line of Ric Prentiss with Raymond James. Please, go ahead.

Good morning, guys.

Hi, Ric.

A couple quick questions for you.

First to go back to your guidance thing. Brad you mentioned current trends when you talked about it and, Jim, you were talking about 13,000 or maybe 16,000 new sites for the industry. Your 8 to 11% guidance, is that built on a range of 13 to 16, is that based on a lower range, or a what exactly is the guidance based on?

Ric, it the based on the amount of new business that we've been writing on average for the last four quarters, so if you believe that in 2003 13 to 14,000 cell sites were built, and we maintain the exact same market share, that's how you would get to that number.

With the Cingular AT&T final resolution it seems, can you talk a little bit about what would happen if they prepay some leases? They talked about a little bit on the analyst call yesterday that they would look to, in some cases, take care of prepaying some leases. What would be involved there for American Tower possibly?

Ric, we had this occur a couple of times in the past with customers that maybe cancelled a project or decided to exit a small territory, and it's a very simple process where we MPV the leaseback. There is an upfront payment made on a very fair discount rate to us, and we help our customer move on.

So it's a financially neutral transaction for us, and if the carrier decides that they need to come off a few sites, we'll work with them to to that, and we'll also capture the full value of the lease up front, so it's a neutral outcome for us.

Final question. Go ahead, Brad.

Ric, if you remember in the fourth quarter of 2002 the favorable one-time item was exactly that. There were 40 leases or so that were bought out in the neighborhood of like $4 million. And that's where -- these things happen occasionally, they don't happen that often, but it is a contractual obligation so it is a discounted formula, and the discount rate is usually the cost of funds somewhere between ours and theirs.

And what lifetime is it based over?

It depends on the contract. Five, seven, or ten years, and what's remaining.

Okay. And a final question for you.

Rental rates. Are you seeing any movement up, down, flat, kind of on what the typical -- if there is anything typical -- but what typical rents are doing for tower leasing?

It's been stable, Ric.

So it continues to be stable.

Yep.

Okay, great. Good luck, guys.

Thank you.

The next question is from the line of Thomas Vincent, with Smith Barney. Please go ahead.

A couple of questions. First of all, on the divestitures, you did 206 nonstrategic towers in the quarter. That, if my memory is correct, is one of the highest numbers you've done, if you look at your historical performance. And also it looks like that could be another 70 to 90 towers coming out in the first quarter based, on the 10.5 million proceeds in the release.

Maybe, Jim, if you could talk about, you know, what really constitutes a nonstrategic tower. How do you determine that? What's some of the economics around that? And I don't know if you could maybe quantify for us how many nonstrategic towers are left that could potentially be divested.

Tom, we do a continuous assessment locally in our seven areas by the general managers of their asset base, so they'll know all the particulars of all of their towers, and when they sense the tower may not have additional growth opportunities, it's -- in and of itself, they'll put that on a list that they'll provide to the corporate team. That group will go back and look at, you know, the other elements of the desirability of keeping that tower or selling, but if the local management doesn't think there's growth there and we can get a good multiple for that tower by selling it, we do it. And so that's a continuous process.

We don't have a list today of these types of towers, because we continuously go through our asset base and figure out locally, and then bring it up the ladder, if you will, which towers we would prefer to market. We clustered a set of towers, mid last year, marketed those and those deals came to fruition late in the year, and that's why you saw the numbers you did in the fourth quarter; but it was a continuous culling of the sites and a couple of deals that were able to be put together that were fairly significant, and those were the result of the numbers you saw.

Okay. Now, in terms of acquisitions in 2004, should we be thinking that you're only going to make acquisitions of new towers if you're able to divest other nonstrategic towers, or would you actually go out and buy towers without having money or proceeds from other divestments?

Well, we always try to balance acquisitions with divestitures, so that theme is right, Tom. We were going to only have modest expectations for acquisitions in '04 as Brad described, and so we don't need to do divestitures to build the cash to do the acquisitions, but we'll continue on our theme of, you know, trying to match those up.

It is not necessary, but we'll work towards it.

Okay. And last question, Brad, for you.

In terms of the guidance, it looked like you narrowed the range for both revenues and profitability across the board. And the high end of the range came down a little bit, but it seems to me that the reason why the high end came down was because of the divestitures and the revenues that you're going lose in 2004.

Is that the right thinking, or did anything change relative to the guidance you gave on the previous conference call?

The guidance came down at the high end of the range for two reasons. One was the divestitures, but those will be made up mostly by acquisitions towards the end of the year, once you get through the full year. The reason why it also got tweaked down a little bit is, since this was a run rate business and we were not at the high end of our fourth quarter 2003, it's hard for us to achieve the high end of our 2004 range, because it builds off and everything is compounding. So that's why you have a tightening, and that's why we couldn't hit the low end and you have to raise the low end up also, because everything is based off where you actually came in for that fourth quarter.

Great,. That's very helpful.

The next question is from the line of Jim Ballan with Bear Stearns. Please, go ahead.

Thanks a lot. Jim, could you talk a little bit about the implications for American Tower of the carriers' continued migration towards 3G, and maybe you could talk about it in terms of the CDMA guys, and also the GSM guys, CDMA going to EBDO, and the GSM guys going to Edge, and ultimately to UMTS.

Sure. I'll start with CDMA.

I have had a chance to visit some CDMA/EBDO cell sites, and the way they're put together with Verizon at the moment is where Verizon's got 1.9 frequencies, they're going to be using those for data, and the cellular frequencies for voice; and so you get in a situation, Jim, where if that overlay is going to occur in a mixed market where both frequencies are available, you need to look at how much voice capacity is on the tower.

If it's already maxed out with 12 antennas and lines on a platform, you may see Verizon add an additional platform to use the 1.9 for data. If the current cell site configuration is only 9 and 9, antennas and lines for voice, they may put an antenna on each sector for data, and until that volume increases they'll be fine with one platform.

But in either case, there's going to be either additional equipment, or there's going to be an additional platform to do an EDO overlay on a CDMA network as Verizon has designed it.

If they're adding just the new antennas, they're going from 9 to 12 in the single array, would you think that that would that be priced similarly to the way the GSM overlay was, the TDMA to GSM overlay was set up?

Yes, in the manner of that additional equipment on the cell site does contractually have an incremental payment. And our augmentations, Brad's put out a number for you guys, sort of the average is 5 to 600 a month for augmentation, and the average cell site rated you know at moment is between 1500 and 1700. So --

-- right.

-- that gives you an order of magnitude there of the possibilities.

GSM overlay, you know, the one that you have already seen gets you to sort of 2 and a half G. A 3G overlay is going to be even more dramatic than that.

There'll be a need again for ultimately additional equipment and/or, again depending on the capacity that's already being used, more cell sites, and you've also got a cell splitting issue on both CDMA and GSM, Jim, where you start getting high volumes of traffic through, you're going to have to split cells for capacity, first of all, and again when people are drawing down high data rate pipes off of cell sites, you end up with GSM with this shrinking cell site radius issue that then requires you to add additional cell sites to fill in.

So there's a real sort of snowballing trend as data gets both broadly covered across the United States, and more deeply used and utilized by customers. They have got both the capacity and a coverage issue with cell site radii going down. And as a rule of thumb we're thinking today, and this isn't in our business planning because our business planning as you've heard from us before, is based on voice; but ultimately there is a 2X potential for cell site requirements in the U.S. as full data networks get deployed with large numbers of users. That is the rule of thumb target that we use.

Okay. Great. Thanks a lot, Jim.

You bet.

Our next question is from the line of Alex Rygiel with FDR. Please, go ahead.

Thank you very much. What assumptions have you made regarding the AT&T/Cingular merger to build your '04 guidance.

Well, we built the guidance initially without the merger but we are not changing it based on the conclusions that we are drawing from the merger. I can run through those for you and you can see where you come out.

First of all, the goals that Cingular announced with the acquisition of AT&T Wireless included improving network coverage and quality. They also included serving better the base of customers, which will now amount to 46 million in the combined company today. That's not counting growth over the next year or so, as this deal closes. And they also announced that they were planning to use the opportunity of the merger to offer advanced data services on their TDMA-GSM based network. So all these trends point to robust investment in network quality for the combined company.

It also expected, in its announcement, 75% penetration in the U.S. over the next few years, and that's plenty of growth from the kind of, you know, low 50% penetration of subscribers in the U.S. today.

So what Cingular is announcing is a deal in the context of needing a better network, offering high-speed data, and a high growth atmosphere of, you know, an additional, you know, 20, 25 points worth of customers in the U.S. in the next year. So what that's going to do is require them to focus on their network. As you all know, their newly-completed GSM networks for both Cingular and AT&T still require fill-in sights to achieve the desired call quality that they want, again due to the higher frequency they're using, going from cellular to PCS frequencies, those cell sites shrunk and holes were created. And so while the overlays are essentially done, the fill-in is not, so that's going to have to continue in both networks.

As we heard also, they're going to have to run those networks, certainly over the next year and maybe beyond that, independently as the deal comes together.

Also, these advanced data services are going to require additional cell sites as we just talked about, with Jim's question, and they're going to require more and more density as these services get rolled out, so again there's going to be more pressure on the network of the combined company.

In you look at the package that Cingular and AT&T's management went through, as well as SBC's and BellSouth's, they were looking at about a 10% reduction in combined Cap Ex over time. If you take all the cell sites that the two companies were going to do, in let's say '04, and that totals 2500, let's call it for Cingular and for AT&T wireless maybe another 2500, maybe even more, so of the 5,000 cell sites that these guys are going build, even if they took that whole 10% reduction, we're talking about 4500 cell sites on a base of again 15, 16,000.

So even if there is a scaling back of Cap Ex on the order that was in their presentation and it applied to cell site related expenses, which it probably won't, that's the order of magnitude of issue that you are looking at here.

On the contract side, American Tower's got very solid contractual and business relationships with both the carriers. Our current MLAs, which are in force with AT&T Wireless, have leases of 5 and 7 years in those sites, and with Cingular they're 10 years, and neither of those contracts has a termination right for a strategic transaction on the part of the customer. So we feel those contracts are solid, and we also have very solid business relationships with the management teams at both companies.

Now,if you look at overlap, American Tower has only got about 400 towers where both customers are resident. You've heard a number 350 from us, but we have had some growth with both companies over the last few months, and it's around 400 now. But that's still less than 2% of our total tower revenue. I think all of you've heard us speak about the barriers and hurdles that come about when you think, even think, about taking down a cell site, and one of those hurdles is contractual, but there are also many technical hurdles, too. So even though there are 400 overlap towers, we don't expect a whole lot of them to be bought out as we had talked about earlier, and even if they do get bought out, it's a neutral business proposition for us.

So bottom line here, Alex, is that we expect to do continued robust business with the combined company. It's going to have to improve its network, and we've got real good relationships and contracts with Cingular to do that, and with AT&T Wireless today to do that.

Okay. Do you see any near-term revenue generating opportunities, maybe by offering some type of network audit assistance or something of that nature, with regards to merger.

That's business probably best left to the carriers or their third-party engineering firms. We sold our business, Alex, that did those kind of services, Galaxy Engineering last year in 2003, for the very reason that it's best to have a nontower company giving you that kind of advice probably.

So, we'll look for third parties to do that, but we expect to be seeing a lot of leases from both companies because they've got to keep building their networks in '04 as they move toward the deal.

Great. Thank you.

You bet.

Your next question from the line of Roy Astrachan with Camden Asset Management. Please go ahead.

Hi, guys. I just had one follow-up to the last question. Do you think it is reasonable to assume that in the year that it's going to take to close the AT&T/Cingular merger that they might take a pause from developments while they figure out the long-term plan?

You know, I'm just not really sure they can pause all that dramatically. I'm sure there will be review of the current plans that both companies have and looking for opportunities to optimize those.

But with the subscriber and minutes growth that are happening with the competitive dynamic in the industry, with the added pressure that will probably be brought on subscribers from both of their -- with both these carriers today to switch because of the fear of a merger or quality going down, I don't understand the risk/reward equation of really slowing down dramatically your build plan, and potentially having churn go up in the middle of the deal. But we'll have to wait and see what the carriers say, but I'm not sure it makes sense for them to do that right now.

The fundamentals of network demand are still there, whether the deal happens or wasn't happening at all.

Do you get impression that they are going to start coordinating deployment?

I'm not sure that they even can right now. There's going to be a regulatory review of this transaction, and the ones that I have been around in my career don't necessarily permit you to collaborate on business activities, such as network planning before the deal has approval, so I'm not a lawyer but I'm not sure that for regulatory standpoint that he can do 100% joint planning right now, at the detail level with cell sites.

Gotcha. Thank you.

Yep.

Next to the line of Sam Martini with Cobalt Capital. Please, go ahead.

Hi, guys. Just a question on Mexico and what you're seeing down there if anything to talk about.

It sounds like Telefonica is launching on a pretty big network build, and it seems like you guys continue to be, at least somewhat excited, either seeing value or excited about the the opportunities down there. Could you talk about what you're seeing both from additional acquisitions as well as from lease-up on towers that you already have?

Sure, in 2003 we had a very strong lease-up year in Mexico. We expect '04 to be about the same rates of new businesses in the U.S. but '03 was a little bit stronger than the U.S. because of Telefonica really coming in. Also, Telcell began collocate on towers not their own for the first time in '03 in Mexico, which is very important for us, so we broke into Telcell as a new customer, and Uniphone is coming out of its restructuring and it's beginning to spend again.

So in '04, while Telefonica may not be spending quite as much as they did in '03, there will be, in our view, a more balanced approach in Mexico, where we'll see lease-up from Uniphone, from Iusacell as it goes through its own process, we're into Telcell now, and we expect them to be a robust customer for us. And Nextel International, as well, along with Telefonica will be building networks to compete. So we see a more balance program in Mexico this year, and we think it will be about the same rate of growth as we will enjoy in the U.S.

In the new tower builds is that primarily domestic? Primarily in the U.S.?

It will be leaning a little bit more towards Mexico I'd say. So, you know, the guidance that we have given you is leaning more towards Mexico, a little bit less towards the U.S. but again every decision that we make to build is an investment decision, and that's what will actually make the call on an actual tower being built.

And you still maintaining the types of hurdle rates on cash-on-cash returns year one that we discussed in the past sort after two tenant minimum needed to -- to justify a new build, or is that -- is that a little bit different in Mexico, given the cheaper cost to put up a tower?

We don't necessarily need two tenants in Mexico, because the initial returns meet the hurdle rate as it is anyway. They're shared ground rents down there that are passed through to the customers. The rates are a little bit better in Mexico, so we are able to build a one tenant tower in Mexico and meet our hurdle rate. And we're still maintaining those kinds of goals in the U.S. as well.

To answer your question, Sam, the absolute rate of return for initial capital deployment has not come down.

Right, but you don't need two tenants necessarily. You can get the same return but still sort of think mid to high teens year one type returns?

Year one is typically some where between 10 and 13%. The mid to high teens is what you would want on a return on assets, hopefully in the first three years you would make it there. It's always double digit day one, and then move your way up.

Right. Thanks so much.

Our next question is from the line of Mark DeRussy with Raymond James. Please go ahead

Good morning. Brad, for about a year or so now, you guys have gone through this methodical process of divesting yourselves of noncore assets, then redeploying them.

Can you give us a sense of where you stand now based on what you have announced in terms of, do you have any dry powder left to spend as a result of divestitures?

If the dry powder just comes from divestitures, we have -- we don't -- we have a modest amount left if you don't count noncore tower assets. In terms of our service businesses, we have one left that we are working through a process that will be not a large number, but that's our scaled fabrication business that we are in the negotiating process right now.

Okay.

And hopefully that will meet you know be successful, you know, in the first or second quarter. We do, consistently as Jim said, look at our noncore tower assets. The ones that do not grow or have very low growth, and whether or not it makes sense that someone else can use those assets better than ourselves, in terms of it fits neatly into their portfolios and we go through a process of reviewing that.

But as we look at -- do we have dry powder we have plenty of availability and plenty of capacity within our capital structure to make high quality investments. If the size of the investment gets large enough, we don't want to increase our leverage from where it is and that's what we're very cognizant of, as we think of use of proceeds from anything that we do.

But thus far your source of funds have been to redeploy assets. Is that correct?

That is, correct.

Okay.

And we have over funded that so to speak to date.

Okay. Okay. And then do you see yourselves, you know, actively doing work for the DO -- EBDO project this year?

Jim?

As the planning gets accomplished for that market by market, Mark.

Um-h'm.

We certainty expect to see some of our sites that are going to require additional equipment or new sites that will come on to our towers. We've been in close contact with our counterparts at Verizon. We're getting the information we need and giving them what they need to decide, you know, where augmentations and sites will occur, and we expect to get our fair share or better of that opportunity as the system rolls out.

Okay. But, if you look at the numbers, it is a fairly large opportunity out there in a fairly short period of time.

Right.

I think you guys have got 5 or 6,000 Verizon towers. Not to say that they're all going to be involved with this project, but it's a big opportunity.

Then I guess to follow up on that, you guys have really not sort of factored that into your guidance either?

No, Mark, we have not. I mean in terms of -- the way our guidance works is based on a bottoms-up budgeting process, and what they've released to the field. So from what their current build plans and what they are thinking of doing is how -- that's what's been incorporate into our guidance.

Okay, thanks.

We will take a follow-up from the line of Alex Rygiel. Please, go ahead.

Thank you very much. Can you talk a little bit more about pricing? I understand it's somewhat difficult to talk about pricing and measure pricing, but can you discuss long-term what could actually get pricing to be positive versus stable?

I guess, Alex, supply and demand.

In the markets where we operate today, there's a fairly stable pricing history over the last number of quarters. And that denotes you've got an equilibrium of sorts there. The way to measure pricing opportunities, up or down, in this industry, I believe, is versus the next best alternative for the carrier. If demand goes up and there are less alternatives than existing towers, because of zoning or other obstacles, then maybe there's an opportunity to increase price.

But we are not anticipating that. We're anticipating stable pricing going forward, and if there's enough activity in the market that really takes us to another level of spending on the -- the carrier base, then maybe we'd see opportunity for price movement, but that's not what we're planning for and not what we are anticipating.

It is a pretty stable situation given comparisons to the next best alternative, which is in some cases building a tower or just not having one at all.

Thank you.

Yep.

Our final question is from the line of Ric Prentiss. Please, go ahead.

I guess a natural extension to that, guys, would be as we've seen consolidation on the wireless front, do you anticipate any consolidation coming into the tower industry? And then a second quick follow-up question on the distributed systems network that you talked about, Jim, give us an idea of how much capital you might be talking about, either on a per location basis or kind of in total what you guys might be trialing around with there?

On a consolidation point, there is no need for American Tower, from a scale perspective, to create a merger or other opportunity like that. We feel our scale is sufficient. There are benefits to improving scale that we recognize, and as as I said earlier, it's got to be the total package of a deal for us, Ric, which is the right price, the right synergies, the ability to manage risk, et cetera. And when and if we come across that opportunity we will seize upon that, but we don't need to do a deal.

I don't think that the Cingular/AT&T merger is compelling us to do anything beyond what I just said. It is an important big customer which we are already well established with from both sides. And the fact that you know the big six may become the big -- the big seven in our case, we count Alltel in that group, may become the big seven to six, doesn't create a compelling situation for us to run out and not stay with the tenants of our own consolidation theory.

So, no need to do it. We're looking and always will be for the right combination of transaction but there is nothing compelling us to do that.

On the distributing antenna systems they are a little tough to price now, because the equipment is new. It is not built to scale yet from the vendors that are supplying it, and there's a fiber component which can vary, Ric, from city to city, and based on what design you need to fulfill the fiber.

It is a pretty significant capital expenditure to put one of these systems in. Covering, sort of, a square mile, if you will, of territory could cost you upwards of a million to a million four, and the process we're going about now is, we're talking to the major carriers about the top 20 venues they might be interested to put something like this in to get their signal into a great neighborhood, into a great shopping area, whatever, and what we'll do is matchmake those 20 across the carriers that are participating in this, and we'll figure out if there's three or four that really make sense.

Okay. Good luck, guys.

Thanks.

And, please, go ahead with any closing comments.

We just want to thank everyone for participating in the call.

And, ladies and gentlemen, that does conclude your conference for today. We do thank you for your participation. And you may now disconnect.