Crown Castle Inc (CCI) 2003 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Crown Castle International second quarter earnings call. At this time, all participants are in a listen only mode. Following today's presentation, instructions will be given for the question-and-answer sessions. If anyone needs assistance at any time, press the star followed by the zero on your push button phone. As a reminder, this conference is being recorded today, Friday, August 1st, 2003. I would now like to turn the conference to Ken Dennard managing partner of DRG&E.

Thank you, Jeff, good morning, everyone. We appreciate your joining us for Crown Castle's call to review the quarterly results. We would also like to welcome our Internet participants listening to the call, as it is being simulcast live across the Internet. Before I turn the call over to management, I do have the usual housekeeping details to run through. You could have received a press release via E-mail and/or fax yesterday afternoon after market, but occasionally, there are technical difficulties experienced with these distributions. So if you didn't receive yours or you would like future releases via E-mail or fox, call our offices at DRG & E, 713-529-6600, and we'll put you on the appropriate list and make sure you get that next time. Additionally, there will be a replay of today's call. You can go to the web cast section of Crown Castle's web site, which is www.crowncastle.com, and it should be available in a couple of hours after today's call.

There is also the telephonic replay available for the next 7 days, and the pass code and access number is in the press release to extract from there. Please note that information reported on this call today speaks only as of today, August 1st, 2003, and therefore, you are advised that time sensitive information may no longer be accurate as of the time of any replay.

As you know, too, this conference call will contain certain forward-looking statements and information that are based on management's current expectations. Such statements are subject to risks, uncertainties and assumptions, information about the potential factors that could affect results are available in the press release from yesterday and in the risk factor sections of the company's filings with the SEC. Should one or more of these risks materialize or should underlying assumes prove incorrect, actual results may vary materially from those expected. In addition, today's call includes discussions of certain non-GAAP financial measures, included adjusted EBITDA and free cash flow. Tables reconciling such measures are available under the investors section of the web site at www.crowncastle.com. Now, without further ado, I would like to turn the call over to John P. Kelly, the Chief Executive Officer.

Thank you, Ken. Good morning, everyone. We appreciate your joining us for a review of the second quarter results here on this Friday morning. With me on the call is W. Ben Moreland, our Chief Financial Officer.

Before he goes through the financial results from the second quarter, I would like to highlight a company of themes we will be discussing this morning. First, we exceeded our recurring revenue and free cash flow expectation force this quarter. In addition, we've raised our 2003 free cash flow expectations by a little over 100% and raised 2004 free cash flow expectations by 30%.

Secondly, we're seeing early indications that our U.S. carrier customers may be increasing their cell site deployment activity through the second half of this year. I'm going to be expanding on this point a little later on the call, but with that, I'll turn the call over to Ben to go through the financial results.

Thanks, John. Good morning, everyone. As I indicated in the press release, we remain committed to growing free cash flow and made significant progress in this area during the second quarter. Our results reflect the successful execution of our operating units around our indicated targets. We generated revenues of $224 million in the second quarter. Tower revenues were up $17.5 million to $189.5 million or 10% up from the second quarter of 2002, above our expectations. Service revenues were $34.7 million, down from $53 million in the second quarter of 2002. Gross profit from site rental and broadcast transmission defined as net revenues less cost of operations, was $115.8 million, up 9.2% from $106 million for the second quarter of 2002. The year over year comparison in the site rental and broadcast transmission gross profit is somewhat challenging as we recorded approximately $3.9 million of out of run rate gross margin in the second quarter of last year, related to our agreement with Hutch 3G in the U.K. On a normalized basis, the margin grew approximately 13.4%. Gross profit from services was 6.1% of total gross profit, before G&A, consistent with our de-emphasis we have placed on services. However, the margins are holding up pretty well.

Free cash flow during the second quarter of 2003 was $73.3 million, compared to a use of cash of $72 million in the same quarter of last year. Free cash flow substantially exceeded our expectations due to better operating results, further permanent working capital reductions, and under spending our capital forecast. Free cash flow is defined as GAAP reported, net cash provided by operating activities, less all capital expenditures. During the quarter, we developed 13 sites in the U.K., all of the sites built in the U.K. were developed under British Telecom, bringing the sites developed to 692 of the BT rooftop sites.

Important to note, we have already -- we already have over two tenants per tower or per site on this portfolio. Capital expenditures during the quarter were $105 million or down $105.5 million, from prior second quarter of approximately $20.7 million in the second quarter of this year. U.S. capital expenditures totaled $7.7 million and capital expenditures in the U.K. and Australia total approximately $13 million. We believe this level of capital expenditures being spent around our existing assets is more than sufficient to drive recurring revenue growth at the current level of 10% per year.

Consolidated maintenance capital expenditures continues to be $40 million per year or 2% of our contracted recurring revenue stream for broadcast related maintenance and 3% for other maintenance. Turning to some of the quarter to quarter changes in the income statement, site rental revenue growth comparing or revenue -- rental revenue growth comparing the second quarter to 2003 to 2002, was up $17.5 million or 10.2% for the consolidated company. That breaks down in the U.S. of 6.9% and the U.K. of 16.7% year over year. That's approximately 98% of our sites were in operation as of April 1st, 2002, total site rental revenue is approximately for same tower sales.

While we use GAAP reported revenue numbers, we'll remind you that from time to time we have revenue not associated with the run rate, which will introduce some volatility into this measure. We're very pleased with our organic consolidated revenue growth. This is right in line with our long-term expectations. Cash and investments at the end of the quarter were approximately $523 million . Senior bank debt at the end of the quarter was $1 billion, approximately 2.6 6 times second quarter annualized EBITDA. Bank debt net of cash is 1.3 times annualized EBITDA. High yield debt totaled $2.2 billion, for total debt at the end of the quarter of $3.2 billion. And the restricted group debt totaled 2.7 billion. We have the ability to access approximately $386 million under our senior credit lines at the end of the quarter, actually up $90 million from the last quarter, bringing our total liquidity to $909 million. Pro forma for the recent cash offering -- recent offering and the tenant 5.8 redemption, that we did last month, and the 12 and three quarters purchases we have $392 million in cash.

Net debt, including the preferred and converts to Q2 annualized EBITDA is 8.6 times. We expect to be near 8 times by the end of this year. We had lowered this by two turns from 10.6 times only four quarters ago. Going forward, we continue to expect to reduce leverage by about one turn per year, ending 2004 at approximately seven times, and 2005 at approximately six times by growing EBITDA 10%-12% per year and investing free cash flow to reduce debt. Interestingly, EBITDA to total interest coverage could exceed two times in 2004 and three times in 2005. Moving to our outlook, which has improved for the balance of 2003 and 2004, we expect site rental and broadcast transmission revenue for the third quarter of between $191 million and $195 million. We expect third quarter 2003 net cash provided by operating activities to be between $25 million and $35 million, which includes the effect of working capital uses including the timing of semi annual interest payments on our bonds. We expect total capital expenditures to be between $22 million and $27 million during the quarter.

We expect the result of this will be free cash flow for the third quarter of between break even and $10 million positive. Implicit in the 2003 and 2004 outlook is the transition of pick interest to full cash pay by August of 2004on our senior discount notes and our 12 and 3/4 pick preferred. As I always point this measure of free cash flow will not lend itself to sequential quarter to quarter comparisons as significant fluctuations in interest due to the timing of semi annual bond payments or changes in working capital do occur, but these are offset when comparing the same quarter to the prior year. We utilize this GAAP measure even though tedious because it reflects the true cash flow of the operations and rewards permanent reductions in working capital.

For the full year 2003, we expect that working capital will be a source of at least $30 million of cash, which we've already achieved. For the full year 2004, we've assumed no further working capital improvement in our outlook. Our current guidance for 2003 projects net cash total net cash provided by operating activities of between $200 million and $220 million. We expect 2003 capital expenditures to be between $120 million and $130 million, including the payments we've already made to BT, with no further payments expected to BT for site acquisitions.

For the full year, we expect free cash flow of between $75 million and $95 million, up significantly from our previous guidance reflecting the operational progress made in the first half of the year. With regard to our outlook, I would note that our guidance implies EBITDA of approximately $100 million to $104 million for the third quarter, and $394 million to $405 million for the full year of 2003, which implies an increase of $9 million on the low end of the range. If the midpoint is achieved for 2003 EBITDA, it would be up over 13% from 2002 or $47 million. More detailed guidance for 2003 and 2004 is contained in our press release. We're not forecasting interest savings beyond what has already been accomplished in our guidance.

In adding a little color to what we've provided in the press release, our long-term view of this business is that we believe that we'll continue to grow on an annual basis, recurring revenue at 8%-10%. That's up $60 million to $75 million per year. EBITDA, 10%-12%, which is$ 40 million-$50 million per year, which is sufficient to drive free cash flow in excess of 20% five-year compound annual growth rate from 2004 and beyond. Free cash flow growth should be well in excess of 20% in the short term. 8%-10% recurring revenue growth is consistent with the leasing activity accomplished in the first half of 2003.

I would point out that increases -- the increases to our revenue outlook for 2003 and 2004 reflect our performance to date and do not reflect an increase in the expected level of leasing activity. I want to illustrate a point around the strength of the recurring cash flow model of this business. If the overall leasing were to increase by 25%, from current levels, it would result in approximately $10 million per year of additional free cash flow on a base of about $117 million which is the midpoint of our 2004 outlook or 8.5% increase. I'm not trying to minimize the importance of leasing. We're optimistic about the future. Further, I'm emphasizing the power of the existing business performing at the current levels to produce large amounts of cash flow, thus de-leveraging and providing attractive refinancing options that should create significant equity value.

Our focus on expected free cash flow growth with conservative assumptions on top line growth is intentional. I believe our reduction in costs during the last year represents a disciplined financial rigor that we've worked hard to develop throughout the organization. While there is still savings that we expect to find in operating costs, G&A, capital expenditures, the most significant savings in the future should be realized on the interest expense line, none of which is reflected in the guidance reflected in our press release.

During the last year, we've made significant progress in reducing interest expense. Our largest cost line on the income at the same time after depreciation. Including the 12-3/4 pick Ford purchases to date, we have eliminated $70 million of annual run rate interest expense. This said, we believe there are a number of additional opportunities available to us to significantly reduce our interest expense and increase free cash flow.

I'd like to spend a few minutes walking you through these opportunities. Our capital structure affords us flexibility to utilize existing cash for future -- and future refinancing to pay down our highest coupon debt. This is exactly what we intend to do. We are focused on several things could bring run rate, total interest expense to less than $200 million by the fourth quarter of 2004.

First, we intend to eliminate the remaining 12-3/4 pick preferred security by December 15th, 2003, the date this note is callable and also turns cash pay. As you saw in the press released, we have accomplished a significant portion of that purchase to date. The elimination of the remaining balance will result in an additional reduction of 2004, cash interest expense of approximately $22 million, which again is not in our outlook until actually accomplished. The remaining interest expense reductions that we are focused on would result from refinancing our U.K. subsidiary, which today is less than two times leverage, utilizing a portion of excess liquidity and investing portions of free cash flow generation in our high coupon debt.

The next component of our refinancing plan, which is a little further out, but I believe is important to consider, is that the steps I just described are accomplished, we should be in a good position to refinance some of our high yield debt in 2004. As you know, $932 million of our high yield issuances have call dates next summer. While there are many hurdles to cross before we complete these endeavors, we are uniquely positioned as a company to generate free cash flow growth from this step forward. We have taken steps to enhance the value of our equity holders and believe that the value of this powerful business moderate will be fully realized in the future.

With that, I'll turn the call back over to John. Thank you.

Thanks, Ben. I would like to punctuate a few points but I'll be brief to take as many questions as possible. As you've heard us say many times before, our focus at Crown Castle is squarely on growing free cash flow, de-levering our balance sheet and protecting and protecting the value of the common shareholders. I believe the results this quarter again reflect solid execution around those initiatives.

In our business is predicated on a fairly simple long-term assumption, that the general public will want and pay for increasing amounts of wireless usage and functionality on devices of all types. Critical to the delivery of these wireless services are the towers necessary to broadcast the wireless spectrum to end users. This is, as you know, our core business. We own the infrastructure in densely populated areas, areas that are expected to see increasing amounts of wireless usage.

The critical nature of this infrastructure to our customers means that they contract for space on our towers for the long-term. This is true in both of our core businesses, telecom site rental and broadcast transmission. As carriers go through the various waves of deployments, the new leasing activity that we realize in any given quarter will fluctuate, however, the contracted leases continue to pay rent revenue throughout these cycles. In other words, we don't have to resell our tower and broadcast revenue every quarter.

That said, based on some early signs, it appears that we may be entering another period of increasing activity, as our U.S. customers are focusing on deploying more cell sites as they improve quality for current and new wireless services. While our outlook for this year and next remains and is still based on new leasing running at about 75% of 2002's levels, if these early indications hold, we could see some pickup in the second half of this year and into 2004.

Our customers have realized net subscriber gains, seeing stable to increasing average revenue per user, improved balance sheets, and more accommodating capital markets. As such, we're seeing that carriers have a renewed sense of urgency to deploy sites to improve network quality and to facilitate their introduction of new services. We're seeing that in the form of applications for our sites at a level that we have not seen previously. Again, I would point out that while the signs are positive, I would note that too often the highs and lows of leasing activity in any given quarter are extrapolated to false conclusions. I would submit to you that investing in our company is not a matter of trying to time the fluctuations in leasing activity, but rather valuing the free cash flow that this model should consistently produce over long periods of time.

As current levels of leasing are expected to grow top line tower rental revenue by $60 million to $70 million per year, our organization continues to focus on capturing tenant demand and working hard to deploy customers required new sites. We're also doing a good job in managing costs and improving our processes that result in high incremental margins on new revenue, consistent with our targets, increasing our recurring margins, and the successful reduction of working capital which Ben talked of previously. These combined efforts have and should produce year over year EBITDA growth of approximately 10%-12%.

Some of you have recently asked how we plan to continue to de-lever our balance sheet. As Ben mentioned, we continue to have significant financial flexibility and should be able to accomplish our plan through growth in EBITDA, investing our liquidity, and the attractive refinancing alternatives that are available to us. We don't foresee the need to issue equity to accomplish this de-levering plan. Finally, in our last call, we mentioned that Verizon, in connection with our joint venture transactions, would have distributed to them some $15.6 million Crown Castle International shares, and that we would be assisting Verizon in registering those shares this summer. I'm pleased to say that those shares have been registered and have been sold by Verizon to two institutional investors, and we look forward to our continuing relationship with Verizon as our 37% partner in the Crown Castle Atlantic joint venture. With this sale of their shares, any concern regarding overhang these shares may have created has been eliminated. We certainly appreciate the confidence that the two firms that have purchased these firms have demonstrated in acquiring these large blocks.

In summary, the bottom line is that we believe our business can deliver long-term, 20% plus compound annual growth rate on free cash flow with no more than the 8%-10% top line recurring revenue growth. This is, we believe, a compelling investment story. With that, I'll turn the call back over to the operator to organize the question and answers.

Thank you, sir. Ladies and gentlemen, at this time, we will begin the question-and-answer session. If you have a question, please press the star followed by the one on your push button phone. If you would like to decline from the polling process, please press the star followed by the two. You will hear a three-tone prompt acknowledging your selection. Please ask one question and one follow-up question and re-queue for additional questions. If you are using speaker equipment, you will need to lift the handset before pressing the numbers. Our first question comes from Jonathon Atkin. Please state your company name followed by your question.

Yeah, it's Jonathon Atkin with RBC Capital Markets. My question is, in your revised guidance it looks like you've narrowed the range considerably on both the top and bottom lines.

What's your confidence level that you will hit the midpoint of the new range that you set forth for 2003, and then the follow-up, just want to get a sense of your recurring tower and broadcast revenues, or let's just say tower revenues, what's the mix coming from new co-locations and how do you see the mix changing for each of the U.S. and U.K.?

John, it's Ben. Thank you for the question. I think our narrowing of the range is a reflection in the progression through the year. So we're getting obviously narrowing the range on site rental revenue and it's a function of just looking, you know, all the way into the -- we're into the third quarter obviously and into the fourth quarter. As we would think about augmentations versus pure new co-locations, it's running about 80/20 now, generally in the U.S. and the U.K. So that's about kind of where we are.

That's actually come up -- it had previously been more like 70/30 or 60/40 in the year so it's actually come up later this year. So we think that's a good sign on a comparative basis, more new, complete installations. In terms of our outlook for next year, John made comment on that. We will see it tailing off over time.

Yeah, I think, John, that what we're currently seeing, that 80% new co-locations versus 20% augmentations is more of what we'll see on the on the near term basis the next quarters going forward, as opposed to what Ben mentioned was more augmentations previously. As the carriers are deploying new sites as opposed to simply overlaying on existing sites. So we think that that 80/20 is going to be a number that we should be seeing in future quarters.

And then, just the one follow-up, the portion of your broadcast on tower revenues that were recurring versus nonrecurring this quarter.

It's really all recurring.

Thank you.

Thank you. Our next question comes from Ricahrd Prentiss. Please state your company name.

First question I've got for you guys, Ben, you mentioned that you've got several efforts underway to get interest expense down -- I think you said run rate fourth quarter under $200 million. Where do you think the '05 leverage could go if you were to do that, given that you said you thought it would be 6X? I believe it's below the 6X if you are successful in these efforts?

That contemplates, basically, you get below six times. At the end of '05, you get about six times, and beyond that, we're frankly not that focused on it. We think we've got the opportunity to extend maturities and push out amortization and do a lot of things that, you know, provide even more financial flexibility over the next 24 months. And I mentioned the coverage ratios. I'm not sure we've talked about that before, but it looks to me like you very quickly get over two times coverage next year and then toward the latter part of '05, you start getting to three or better on total interest coverage. And those become credit statistics that are quite unique to this industry, and I think we'll -- we've all in the industry got work to do to educate creditors and rating agencies as to what is the right spread. Credit spread for companies like ours with this level of recurring contracted revenue, and the levels of leverage that we're headed for.

And does the U.K. debt have to be paid off first before you can do the refinancing or could you do the refinancing? I notice you had a pretty significant pay down in the U.S. U.K. facility this Pat quarter.

The U.K. entity is ring fenced, so the current situation is that as they generate free cash flow, there is really no other use other than just to pay down the bank line. It is on a path to be fully retired by next spring. We certainly don't intend to do that.

So that'll be as I mentioned in my remarks, that'll be our first objective, would be more than likely some form of refinancing of the U.K., which would more than likely encompass repayment and completely refinancing all of that debt in the U.K.

Okay. And one other quick question, rents. John, can you talk quickly to what trends you've seen in the rental side, pricing?

From a pricing perspective, Rick, I would continue to characterize it as stable. We are not seeing any material changes up or down from a rental pricing perspective. It has continued to run stable with what we've seen for the last -- as I'm looking at my sheet here, the last three quarters.

Okay. Great. Thanks, guys, good luck.

Thanks.

Thank you. Our next question comes from James Ballan, please state your company name followed by your question.

Hi, James Ballan from Bear, Stearns. One is the CAPEX number. It's considerably less than I was expecting, looking out at your guidance, the numbers seem to indicate that it's pretty much -- that the numbers seem to indicate that it's just your maintenance CAPEX and upgrade CAPEX.

Are you planning on building considerably fewer towers or is your numbers on the maintenance an upgrade side lower than what my expectations are? The other question I had is, if you could just give us an update on what's going on in the U.K. in terms of both the 2G and 3G build out there. Are you seeing UMTS accelerate or is it still kind of going at a slower level?

Jim, I'll take the first part that have on the CAPEX. We're continuing to execute exactly around what we've talked about for some quarters around our allocation of capital. Certainly we're going to continue to spend required capital on maintaining our infrastructure and broadcast networks and towers.

Beyond that, we're very focused on spending the required capital for, as you say, augmentation or as we say, essentially to invest in existing sites that drive additional recurring revenue. And those opportunities come at very high incremental returns, typically in the sort of 40%-80% range. But once that -- those opportunities are exhausted, then we really are not pursuing significant de novo spend or new project spending to date in any significant way as we're focused on generating free cash flow and find opportunities, you know, to invest on our own balance sheet to be he very compelling. We think leveraging the existing assets is the highest and best use -- highest use the company can undertake.

The reason it continues to come down a little bit is we get better at it as we go along. John, you might pick up the other --

Can I ask one last thing on the cap ex? Have you changed the number of GT exchange sites that you are planning on building out here?

No.

Okay. All right, thanks.

That actually segues into the question you asked about the U.K. and 2G-3G. There continues to be on the BT exchange sites which tend to be very good sites for third generation wireless data deployments, as well as 2G because of where they sit in city centers.

You know, we've seen some solid leasing that has occurred on those particular sites, but overall, what's the situation in the U.K. relative to 3G, its deployment and 2G, you know, certainly Much has continued to be a strong tenant, new tenant of ours, but they have launched -- they are going through the, you know, the fine-tuning of their network relative to both the addition of sites for expanding of geographic coverage but also ensuring that the coverage within the geographies that they have turned up is as solid as their customers would expect. They have been aggressively promoting their service. You know, depending upon who you read, certainly there are always certain issues that will occur with the new technology, but they have been realizing some large gains and new subscribers. That, I think, causes reactions of different sort in the various different competitors to Hutch in the U.K. I don't know that you'll see people talk about specific 3G launch plans. What we see is carriers are focused on delivering new wireless data, more robust wireless data enhanced services. In that regard, they continue to invest in 2-1/2 G networks, but we also believe our investing and focusing on 3 G technology upgrades because of the advantages that UMTS does provide in the delivery of certain data rich services.

So, you know, overall, I think that we are on the early path of 3Gs deployment. We're certainly learning along with all of those engaged in this activity in the U.K., about what is necessary to support this new technology, but we're quite excited about what it portends for the long-term, because the types of services that we're seeing over the U.K. customers provide are more rich than some of the services that we are seeing introduced in the U.S. -- introduced in the U.S. and we believe that those services will in fact translate across the ocean at some point as the U.S. begins to catch up with some of what's going on in Europe.

Okay, terrific. Thanks, gentlemen.

Sure, Jim.

Thank you. Our next question comes from Ethan Schwartz. Please state your company name followed by your question.

CRT Capital. A couple of questions on the U.K. It looks like revenue bass down on a constant currency basis. What exactly was going on in the U.K. that that was attributable too?

Ethan, we had, as I mentioned in my comments, in the second quarter last year, we had an abnormal step function in the revenue where we satisfied certain milestones upon -- and we were able to recognize rental revenue around some Hutch sites and represented an out of run rate step, if you will. That's the risk of these quarter to quarter comparisons, and again, we're trying to hold the line on let's focus on the GAAP reported numbers, and you're going to have to sort of stick with us, because of some of these quarters will be bumpy and this one in particular was.

It was down sequentially, not year over year, constant currency basis.

Yeah, because of the Hutch revenues issue. For example, next quarter, next quarter will roll into the quarter where we didn't have ITV last year, where ITV had gone dark, so you'll see a very large sequential gain quarter over quarter there.

Okay. I mean sequentially up from Q1 to Q2, but be that as it may --

Ethan?

Coming from 3G generally this quarter?

Hang on one second. I just wanted to clarify so that we don't create any questions, I'm not sure exactly what the data sheet is that you are looking at, but we don't show a sequentially decline quarter over quarter -- decline quarter over quarter in the U.K. revenues.

I take this quarter as the 630 revenue, divide it by the exchange rate at the end of the quarter and I do the same thing over the last quarter 331and I've got a slight decline. Be that as it may, it was up a pretty weak increase. Was there something that did or didn't happen in the U.K.?

We're still adding sites.

What was the proportion of revenue from Hutch this quarter and other 3G providers in the U.K.?

We have not gone specific customer to customer detail. We've talked about what our overall exposure in the company is about 4%, sort of on 3G sites. So, you know, it's -- the Hutch activity continues to be pretty robust they have launched and we expect to do a number of additional sites throughout the '04 and the balance of this year and through 04 and beyond that, we'll have to wait and see, but we clearly have a large pipeline through '04.

That was 4% for the whole company?

Right.

Okay. And then what -- again, what was the proportion of revenue for analog broadcast in the U.K.?

We'll go look that up. I mean, it's not a number we track that closely. It's about, $45 million a year, so whatever that is.

I know you've stopped reporting this, but if I just take your U.S. revenue increase sequentially and I, you know, divide it by the broadband equivalent rate and I analyze that and then I take that over the number of towers that you had at the end of the last quarter, I get to what you used to call the net tenant add rate. I think I get to about a .05 which is, you know, similar to what you did last quarter, and which is way below what you were doing about a year ago. Is that right? In other words, is that sort of the right number to use going forward?

No, I don't think so. Tell me again what you do? By the way, back to your question --

Yeah.

Even on a pound basis, we're showing site rental revenues up about 600,000 for the quarter.

That may be because of the exchange rate I was using.

In a constant, just in pounds, we're up exactly what you would expect quarter to quarter.

Okay. What I was doing is simply take the increase in revenue from the U.S. from Q2 versus Q1. I multiply that by 4.

Oh, yeah, okay. Here's the challenge you're going to have doing that. Again, it's a function of we're using GAAP numbers, that's what we're going to stick with, and inside and outside of run rate does still occur, so if you go quarter to quarter, you're not always going to see it. It'll jump around. If you go back year over year, we continue to believe the U.S. business, we've been growing about 7% and that's what we continue to forecast. It hasn't changed significantly in one particular quarter, but there's always going to be timing differences as to when licenses turn on or get delayed. And so on any particular quarter, you may see it move around a little bit.

Give me a minute, we'll come back to you. We'll take another question, do that math for you and come back to you.

Thank you. Our next question comes from John Cusack . Please state your company name.

From Goldman Sachs. Good morning. The leasing activity that your' seeing in the U.S. where it sounds like you are cautiously optimistic, are you seeing that across the board or is it focused on a few carriers?

John, it is -- it's across the board relative to the activity. The increases are more dramatic for a few carriers from others. There have been carriers that have been consistently adding to their networks over the last four quarters, where others had pulled back more dramatically, and what we're seek those carriers that had been pretty silent from the standpoint of new site adds, just overall, are beginning to step up at a pretty significant pace, and catching up, if you will, with the kinds of activity that we had been seeing historically from their competitors. So the volume activity is consistent across the board, but the step-up is associated with a few of the carriers out of the big 6.

Okay. Thank you. And then separately on the network services side, you haven't talked a lot about that, but I'm wondering if you think you can make more progress there on the negative EBITDA performance?

Well, as we talked about for a long time, we focused on the gross margin in that business. It's going to continue to be in the 5%-7% range of total. We're pleased to see in the U.S. we have -- we think we're getting a little better there. We're not putting pressure on our ourselves to grow that business. We're taking business that we think has reasonable margins. The reason you see the negative on the EBITDA line is the allocation of G&A on our company which has been consistent application of the G&A bucket back since pre-IPO days, so rather than mess everybody up in change and comparable numbers we’re just going to continue to show it that way.

It's hard to say exactly how activity levels in our company differ between tower, maintenance and service and the service installation activity. So we've elected to just continue to be consistent. Unfortunately, it does continue to show it being negative. You are losing EBITDA in that business. But again, we manage G&A on a total basis and then we focus on the margin. That's helpful in how you'll look at it.

Yeah, definitely. And so are there steps, though, underway on the cost side there to try and improve the gross margin or is that where it is right now?

John, I mean, as you would imagine, throughout the organization, we have a focus on improving on the cost side, really in all areas, and this is no exception. You know, we work hard to ensure that the -- that we are as efficient as we can possibly be in delivering the services to our customers, and so that we can in fact improve the gross margin.

As Ben indicates, it's a small component of the overall business at this Junction sure. The business can clearly be characterized as predominantly a site business as one oriented to services. But it is a business that we find assists our customers, has always been the case, the kinds of things that we do are directly related to helping our customers co-locate on our towers. As such, though it is not a high margin business, even at the gross margin line, it is a business that is assistive to our customers and therefore, something we feel is important for us to continue. But we will continue to be focused on how can we deliver those services more efficiently, and improve on an incremental basis the gross margins that we generate in that business.

Okay, thanks very much.

If I may, let me quickly go back to a question Ethan asked us, because as you know, as an industry, we don't typically report quarterly broadband equivalent new tenants any longer, this BBE metric, but always, there is the ability for those of you to take the change in revenue and then extrapolate into kind of how we did. I would caution you, again, quarter to quarter, it's going to be a little bit lumpy. If you do this quarter in the U.S., for example, the change was $2.7 million in revenue. If you divide that by 4500, it g gets you to 600 broadband tenants which is just over a 0.2 lease up on a revenue basis. I would admit that's got quarter to quarter stuff in it. It's got some escalations in it. For all of those reasons, we've decided to get way from that metric, but to sort of get the information out there, that's the step function that it looks like it's going quarterly.

Thank you. Your next question comes from Anthony Carmen . Please state your company name, followed by your question.

Deutsche Bank, thanks. First, I was wondering if you could maybe comment on the increased activity that you are starting to see in the leasing side, if that might, in fact, translate into something on the services side, and do you think that some of this increased activity that you are seeing is due to WNP and might that increase some of the projects or work that you may take on the services side in the U.S.?

And then couple of housekeeping questions. First, Ben, I was wondering if you could break out the pro forma cash that I think is 392 or something after the buybacks. If you could break that out between restricted and unrestricted and just wanted to double check. The free cash flow guidance that you have for full-year 2004 looks like it does not contemplate the 12-3/4 preferred being retired, but obviously, I just wanted to check if in fact you are successful, in your endeavor of getting rid of that by December 15th, the first call date, in fact, there would be perhaps another $20 million of upside to the free cash flow number for '04

That's exactly right. As a policy, and let me reiterate it, because for all of us going through these next few quarters, it'll be a little confusing, as we're taking interest expense out of the company. As a policy, we've decided that while we'll put operating forecasts obviously in the guidance, we're not going to put forecasted interest savings until they are actually realized.

So, you are exactly right. That forecasted 105 to 130 in free cash flow, does not include the successful conclusion or completion of taking up the 12-3/4, which if completed on December 15th, would be about $22 million upside in that number going for 2004. To break out the pro forma cash for you quickly, and then I'll let John kind of jump into are we going to grow the service business question, about $190 pro forma is in the unrestricted group, and about $200 million or so is in the restricted group.

Thanks.

Okay.

Anthony, I think a great question relative to WMP wireless number portability and whether or not that was is a driver for some of what we're seeing. I think it is. This for a number of the others on the call, of course, is the ability that wireless subscribers will have to take their wireless telephone number with them when they choose to change wireless service providers.

This is a rule-making that should go into effect sometime in the latter part of November. And something that we have commented on over the last couple of years, has been the fact that there is a direct correlation between churn and network quality. Those wireless service providers with higher network quality seem to realize less churn, certainly in those cities where they have a statistically higher network quality, than those who have lesser network quality. And I think that is a component of what you are seeing in some of this new focus on deploying additional sites. I would say that I think it's equally important to note that the wireless service providers in the U.S. are experiencing successes in the launch of new services.

And those new services tend to be more data oriented, and those services require better overall signal strength effectively, better overall coverage, and I think that's another driver. I think that's a very healthy driver, because what they are seeing are early signs of success in driving some additional revenue from their users, as they are delivering more services than just the traditional voice communications call. I think that's clearly a trend that we will continue to see because of what I was indicating we are seeing in Europe, where there is a significantly higher portion of the wireless service provider revenue coming from data services, wireless data services than is the case in the U.S. So I think that that is a second component of what's driving the carriers to continue their deployment in some cases and to step up their network deployments in others.

Now, what's the total net effect on services? You know, what I will tell you is over the last couple of years, we've been spending a lot of time as a company to ensure that as the cycles do in fact turn on an upside, where there is more demand coming as opposed to, you know, a declining demand or a lower steady demand, we've worked very hard to ensure that when the carriers then determine that they do need access to new sites, that we have in our portfolio, we can rapidly turn around and deliver those sites to them. That ensures knowing the asset very well, you know, the tower space, the compound space, zoning issues, and also means being in a position to deliver to them the installation services, zoning services, things of that sort. Clearly our services business is directly linked to what the new leasing activity is, and as new leasing activity increases, because of the nature of our services, you would see the same thing occur on the services side of the equation. And to -- the and to the prior question, you know, we'll continue to be keeping an eye out that insuring that any kind of step-up for demand occurs, we're being very vigilant about ensuring that costs are department in control and that we are maximizing efficiency and delivering those services. With an eye towards, again, helping our customers, but also ensuring that we're doing it profit tab plea.

So you could see some, if the leasing does in fact pick up as some of these early indications would suggest, but I will continue to maintain that services is a relatively small component of this overall company's business. This business is a recurring tower rental revenue business, whether or not it's wireless telecom or broadcast, an the services component is small, and even though it might be a little bigger with new leasing activity in the U.S., it will still be small.

Thanks. Ben, a follow-up question on the cash break out. The 200 or so million at the restricted group, is that inclusive of the cash that is held at the unrestricted investments subsidiary that you have?

No, that's in the unrestricted group.

So that's in the 190. So if you could break out the 190, I would imagine given that you are making big prepayments on the bank debt, there is not a lot of --

Yeah, most all of that cash or a good portion is in that investment core.

Okay, great. Thanks very much.

Sure.

Thank you. Our next question comes from Mark DeRussy.

Raymond James. I have two questions. One, Ben, your receive receivables have been declining over the past couple of quarters and declined dramatically this quarter. I was wondering if you could comment on that. And John, Cingular and Next Wave are on the tape. Cingular will be acquiring spectrum from Next Wave. I'm wondering your thoughts on how the release of a significant amount of spectrum may impact the tower industry?

Mark, thanks for noticing on the receivables. We've got a lot of people that have worked very hard to make that happen. We think we've got a little ways to go yet, but we have made tremendous progress there. It's a matter of reconciling thousands and thousands of records and getting everything trued up properly. There is a handful.

We continue to make terrific performance there and results, and you know, the benefits of that in our company is that, with the exception of the U.K., which has made great progress as well, but that cash for the moment is trapped entity, the progress we've made in the U.S., we've been able to upstream and that cash is available for securities repurchases, and so, while some would argue that's nonrecurring, to us, it's real money, and we're able to put it to work.

Okay. So we're getting down to a -- this is almost a sustainable level, if you will, is what it sounds like.

For the guidance, we didn't forecast anything further. We've all got pet projects.

Maybe one more follow-up for you, Ben. The sequential increase in G&A cost?

Actually, we've got a sort of some small projects going on that we would call strategic that are small investments that are G&A in nature or operating expense in nature. Around some coverage solution activity that would be additional products steps for the company going forward. It's not a huge number. Remember, quarter over quarter, this is a quarter where we had an additional payroll period. So that's about a million. But if you go back to Q4, the comparable quarter, then it's up a million and a half, and that's about the biggest part of that is the -- what I would call the sort of very measured investments in new activities.

Yeah, Mark, and I think that that is important. You know, it goes to your question about Cingular next wave and the spectrum acquisition there. You know, in the end, this business clearly can be characterized as one that provides low cost financing collusion solutions to our customers, but in addition to that, I think we have to recognize that we are providers of coverage solutions to our customers. I think what they look to us for, and clearly over the last year, year and a half, they have themselves reduced some of their teams that are involved in the build out of network. I think they are looking for wart enters that are able to help them expand their coverage for the delivery of new services, and so as Ben mentioned, we have a very measured, but specific activity going forward in work around share distributed antenna systems, which allows for coverage expansion into areas that heretofore have not been able to be covered by our carrier customers.

It's something that is not, you know, a big issue in the near term but, we think does in fact have longer term positive implications for the company. That's all important because I think that this issue of Cingular and the Next Wave-Spectrum purchases is a bullish side for the industry in general. It is clearly a sign that from Cingular's perspective, there are growth opportunities that are afforded by having enhanced Spectrum positions as they acquire these Next Wave licenses. That includes both markets where they have limited Spectrum positions today. It allows them to continue to expand their existing voice subscriber bases. It allows them to bring on new services, and I think that's an important component of why it is that they are focused on that particular acquisition of Spectrum.

I think it's a bullish sign of how they feel about this industry on a go-forward basis. You know, certainly if some of the concerns that were being expressed in the marketplace a year ago were in fact what they believed, they wouldn't be out acquiring new Spectrum, because they wouldn't have had a need for new Spectrum. But clearly this would suggest that they realize that they will see return on that investment, and we're quite excited to help them deploy in those markets where they are acquiring the additional Spectrum.

Thank you.

Thank you, your next question comes from Gregor Dannacher. State your company name followed by your question.

Yes, hi. CIBC. Quick question on the distribution of your tower network as far as how many tenants -- I'm trying to understand the number of tenants you have on the towers for the range of your tower important portfolio for the U.S. and the U.K., so that for 10%, 20%, you've got six tenants on 10%-20% of the towers. You've got 10%-20% with one, is this a normal distribution or is there lumpiness versus tenants versus capacity on your towers?

Yeah, Gregor, let me take a crack at that. We've sort of never really done a fuel distribution, but we've got 2.2 tenants per tower in the U.S., coincidentally, about the same in the U.K. There are about 10% of the towers in the U.S. that we would call significant under performers. There is probably 10% or so that are significant over performers, overachievers and in the middle band you've got a lot at the two-tenant range. It's not hugely lumpy. In the U.K., it's probably even more normalized, because you've got sort of the rooftop sites we mentioned which is almost 700 sites that already have two tenants per tower per site. So it's not like there is this huge dispersion across the whole range.

Just looking at it, Gregor, there is roughly 50% of the U.S. towers that are just under two tenants per tower, and then there are 50% of the towers that are roughly -- just shy of around 2-3/4 tenants per towers which is why Ben is saying that the average comes out at 2.2 tenants per tower. So certainly, as Ben mentions, it's not huge in terms of lumpiness. It breaks down roughly 50-50.

Okay, and then just a follow-up to that, how is the capacity on those towers? You know, are you having to spend for the overachievers, is that what you are spending all of your upgrade CAPEX? I would imagine it is because those are the most attractive sites. I wanted to confirm that. Is the new system that you guys were kind of displaying back in March or whenever you guys had that meeting, you know, are you getting more traction from that receptivity from the carriers? How is that going?

Yeah, in terms of the capital spend, we look at it just sort of on an average new install, and it's generally running about 15,000 per new install. Which, again, is a very -- that's in the U.S. That's a very high incremental return on that capital. It's hard to characterize whether it's on an overachiever or underachiever. It depends on what you have to do to the site. In the U.K. it's running higher because a lot of the work we're doing is doing the entirely improvements on the rooftop sites that we've acquired. Seas it's a little bit higher, but still high in incremental returns. And on the infamous South Pointe, I'll let John take that one.

It's been having, I think marked success in the discussion that is we're having with our wireless carriers customers. As they focus on increasing the volume of new sites deployed, clearly what they are looking for are partners that are able to move quickly to accommodate their new needs. And as we explained to you back on April 9th at the analyst day, we have spent quite a bit of time doing two things.

One was the demand profile around each one of those towers. And as I would remind everyone, that profiling would have suggested that on current technology in the U.S., there was still significant demand around our existing towers. The important element of that is when we go in and visit with a wireless carrier customer, we're not talking about all, you know, 10,300 sites in the U.S. or you know, 4,000 sites in the U.K. We're talking about those sites that are of interest to them based on our demand profile analysis.

And we've extended that clearly to help them understand what the unique issues are, if any, at a particular site. As such, what we're able to do is help them turn the process around, much more quickly in terms of identifying of our portfolio , those sites that we agree with help them as they enhance their network coverage, as well as help them understand specifically the timing that it will take for them to be deployed at that particular site.

I think that's very helpful to carriers as they are stepping up the pace at which they are deploying these sites. They are interested in us being more efficient, more effective and that's what we're able to do with these tools that we have provided. I'll tell you what, all of the employees in this company that have worked on that, I think, are seeing the benefits, and I applaud all of them for the continuing focus on these projects that we're doing in all three of our countries, U.K., Australia and U.S., because it's a big help to the carriers.

I think with that -- I think that was all of the time that we have for this morning. I hope as many people as we could were accommodated here on the Q & A. You know, once again, we very much appreciate your interest in our company. We continue to work hard across the entire team for all of the stakeholders, and we look forward to talking to you again on our next earnings call.

Ladies and gentlemen, this concludes the Crown Castle International second quarter earnings call. If you would like to listen to the replay of today's conference, please dial 303-590-3,000 and you'll need to enter the pass code of 544827 followed by the pound sign. Thank you and have a great day.