Crown Castle Inc (CCI) 2003 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Crown Castle International third quarter earnings conference call. At this time all participants are on a listen only mode. Following today's presentation instruction will be given for the question and answer session. If anyone needs assistance at any time during the conference please press star followed by the 0. As a reminder, this conference is being recorded, today, Wednesday October 29, 2003. I would now like to turn the conference over to Mr Steve Gray, Managing Director of DRG&E. Please go ahead, sir.

Thank you. Good morning, everyone. We appreciate you're joining us for the Crown Castle call to review quarterly results. We would also like to welcome our internet participants listening to the call as it is being simulcast live over the internet. Before I turn the call over to management I do have the usual housekeeping details to go 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 during the distributions.

If you did not receive your release, or you would like to receive future releases via fax and/or e-mail, please call our offices at DRG&E. That number is 713-529-6600. We will get one out to you or put you on the appropriate list. Additionally there will be a replay of today's call. You can go to the webcast section of www.crowncastle.com and it should be available there in a couple of hours. There will also be the usual telephonic replay available for the next 7 days, 24 hours a day. The passcode and access number for that is in the press release. Please note that information reported on this call speaks only as of today, October 29, 2003 and therefore you are advised the time sensitive information may no longer be accurate as of the time of any replay.

As you know, this conference call will contain certain forward-looking statement information and statements that are based on management's belief as well as assumptions made by and information currently available to management. Although the company believes that the expectations reflected in such forward-looking statements are reasonable, it can give no assurance that such expectations will prove to have been correct. Such statements are subject to certain risks and uncertainties and assumptions. Information about the potential factors that could affect the company's financial results are available in the press release and in even greater detail in the risk factor section of the company's filings with the SEC.

Should one or more of these risks materialize or should underlying assumptions prove incorrect, actual results may vary materially from those expected. In addition, today's call includes discussions of certain non-GAAP financial measures, including adjusted EBITDA and free cash flow. Tables reconciling such non-GAAP financial measures to comparable GAAP financial measures are available under the investor section of the web site at www.crowncastle.com. Now I'd like to turn the call over to Mr. John Kelly, Crown Castle's President and Chief Executive Officer. John?

Thank you, Steve and good morning, everyone, we appreciate you joining us for a review of our third quarter results. With me on the call today is Ben Moreland, our Chief Financial Officer. And before Ben goes through the financial results from the third quarter, I'd like to share some perspective on our company in this past quarter. As I'm sure you have already seen, we had a great quarter, exceeding each measure of our Q3 outlook.

We exceeded our site rental and broadcast transmission revenue forecast, we exceeded our net cash provided by operating activities forecast, we spent less on capital expenditures than we had forecast and therefore we generated more free cash flow than we had forecasted. In fact, we generated more than two times the high end of our outlook for free cash flow in the third quarter, outlook that we provided to you last quarter. Our operating and financial accomplishments this quarter demonstrate, in my opinion, Crown Castle's growing leadership position in the wireless infrastructure industry. I'm very pleased with our company's results and I'm confident about our future. As we look forward, we are seeing specific indications that point to increased leasing in the U.S.

We believe that our investments in process and systems over the past two years will serve us well as the pace of our customer application activity picks up. I'm going to comment more on this a little later in the call. As we've indicated in the past, we're executing a strategy of operational excellence and disciplined financial management. As you listen to Ben's review of the third quarter financials, recognize that the overarching financial goals we've set for our company are to reduce our cost of capital and minimize near-term calls on our capital. We believe that by achieving these goals we will be better positioned to deliver maximum value to our customers as they continue to expand and develop their networks to better serve their customers. With that, let me now turn the call over to Ben and I will follow up at the end with additional comments.

Thanks, John and good morning, everyone. As I indicated in the press release, we remain committed to driving free cash flow growth and made significant progress in this area during the quarter. Our results reflect a successful execution of our operating units exceeding our previously-disclosed targets. We generated revenues of $235.6 million in the third quarter. Site rental and broadcast transmission revenues were up $32 million to $198 million or 19% growth from the third quarter of 2002 and above our expectations. Service revenues were $37.2 million. Gross profit from site rental and broadcast transmission, defined as net revenues less the cost of operations, were $121.3 million, up $25.6 million or 27% from $95.8 million for the third quarter of 2002.

Gross profit from services was 7% total gross profit before G&A, consistent with the de-emphasis we have placed on services. However, the margins are remaining stable. Free cash flow during the third quarter of 2003 was $22.4 million, compared to a use of $25.6 million for the same quarter last year, an improvement of $48 million year-over-year. Free cash flow substantially exceeded our expectations, due to better operating results, further permanent working capital reductions and spending at the low end of our capital forecast. For the nine months ended September 30, free cash flow was $49 million compared to a negative cash flow of $155 million for the nine months ended September 30, 2002, an improvement year-over-year of over $200 million.

I would point out that free cash flow is defined as GAAP reported net cash from operating activities less all capital expenditures, including by definition, even discretionary capital expenditures, which are producing very high returns. However, while somewhat severe in this deleveraging phase, we believe this is an appropriate measure. During the quarter, we developed 31 sites in the U.K. All of the sites built in the U.K. were developed under our original agreement with British Telecom, bringing the cumulative BT sites developed to 723 in total. Capital expenditures during the quarter were down $16.4 million from prior third quarter to approximately $21.6 million. U.S. capital expenditures totaled just over $5 million and capital expenditures in the U.K. and Australia were just over $16 million.

We believe this level of capital expenditures, which is being spent almost exclusively around our existing assets, more than sufficient to drive the recurring revenue growth consistent with our outlook. Turning to some of the changes in the income statement, slight rental revenue growth, comparing the third quarter 2003 to the third quarter 2002 was 19% for the consolidated company. U.S. grew 8.2% year-over-year and the U.K. grew almost 42% year-over-year and adjusting for currency fluctuations, 36% growth absent the currency fluctuations, so, a small amount of that, only 5%, was due to currency fluctuations, 36% due to organic growth. Since approximately 98% of our sites were in operation on July 1, 2002, total site rental revenue growth is the proxy we use for same tower sale growth.

While we use GAAP reported revenue figures as a proxy for same tower sales growth, we remind you that from time to time we have revenue not associated with the run rate, which will introduce some volatility to this measure. Our percentage tower revenue growth is very strong this quarter and benefited from a couple of significant items. First, Freeview in the U.K. had not yet launched during the third quarter of 2002. This quarter, Freeview contributed approximately $10.5 million to the recurring revenue line. Secondly, approximately $3.4 million of out of revenue run rate was collected in cash in the U.K. primarily from H3G related to the new site commitment agreement we signed with H3G announced earlier this month.

Notwithstanding this 3.4 million out of run rate revenue, we are very pleased with our organic consolidated revenue growth as it is right in line with our long-term expectation. Some of you have asked how to compare the percentage changes in revenue growth among tower companies. I would suggest this is difficult because of the differing bases of the existing revenue bases. From our perspective, the most relevant measure is the nominal dollar change in recurring revenue and the conversion of that revenue growth to free cash flow across your base of common shares. In our core tower business, we saw solid improvement in the year-over-year change in the gross margin in the U.S. and the U.K.

For housekeeping purposes, to assist some of you with your modeling, I will make a couple of comments about some specific line items that were impacted in the quarter. In the U.S., tower gross margins benefited from approximately 700,000, benefited out of run rate reductions in direct tower expenses. And in the U.K., tower gross margins were negatively impacted by approximately $1.2 million of out of run rate expenses. We had some little ins and outs in the quarter, but not significant. Turning to the service business, gross margins in the U.S. were positively impacted by approximately $1.4 million, primarily from the reversal of the bad debt expense, receivables that were, in fact, collected.

In the U.K., gross margins were positively impacted by approximately $1.5 million, primarily as a recovery of costs previously incurred on behalf of the customer. In total, the out of run rate items had approximately $5.8 million of positive impact on EBITDA this quarter. Even when you subtract these positive adjustments, we are very pleased with the progress we've made in improving the margins in both our core of tower business and our ancillary service business and most of these adjustments resulted from cash collections in the quarter. Cash and investments at the end of the quarter were approximately $255 million.

Senior bank debt at the end of the third quarter totaled $980 million, approximately 2.3 times third quarter's annualized EBITDA and bank debt net of cash was 1.7 times annualized EBITDA. High yield debt totaled $2.2 billion, total debt at the end of the quarter of $3.2 billion. In the restricted group, debt totaled $2.7 billion. Pro forma for the Opco facility, repayment of the CCUK credit facility and redemption of the CCUK 9% guaranteed bonds, which will occur this next month, at September 30, we had approximately $1 billion of total liquidity.

This is comprised of $470 million of availability under our senior credit lines, approximately $550 million of cash and cash equivalents. Net debt, including preferred and the convertible notes, in Q3 annualized EBITDA was a ratio of 8.1 times compared to 10.2 times a year ago, a reduction of over 2 turns in the last year. Going forward, we continue to expect to reduce leverage by about 1 turn per year for 2004 and 2005. Targeting to end 2004 at approximately 7 times and 2005 at approximately 6 times by growing EBITDA 10 to 12% per year and investing free cash flow to reduce debt.

Interestingly, EBITDA to total interest coverage could exceed 2 times by year-end 2004 and 3 times by year-end 2005. Moving to our outlook, we expect site rental and broadcast transmission revenue for the fourth quarter of between 200 and $205 million. We expect fourth quarter 2003 net cash provided by operating activities to be between 40 and $50 million, which includes the effect of working capital uses, including the timing effect of the semi annual interest payments on our bonds and the fact that we will pay the accrued interest on the U.K. 9% bonds in the fourth quarter, which was not previously scheduled to be paid until the first quarter of 2004, associated with their early redemption.

We expect total capital expenditures to be between 24 and $28 million during the quarter. And we expect the results of this will be free cash flow for the fourth quarter of between 15 and $25 million. For the full year 2003, we expect to produce 64 to $74 million of free cash flow inclusive of this $13 million unscheduled interest payment on the U.K. bonds. This outlook for the fourth quarter of 2003 implies EBITDAs between 102 and $105 million.

Implicit in the 2004 outlook is the transition of paid in kind interest at full cash pay by 2004 on our senior discount notes. As I always point out, this measure of free cash flow will not always lend itself to sequential quarter-to-quarter comparisons as significant fluctuations in accrued interest, due to the timing of our semi-annual bond interest payments or changes in working capital do occur. These fluctuations are largely offset when comparing quarter-to-quarter, year-over-year and when comparing annual results. We utilized this GAAP measure, even though tedious, because it reflects the true cash flow of the operations of the company and rewards permanent working capital reductions. For the full year 2004, we've increased our free cash flow outlook but we've assumed no change in our working capital outlook.

Our current guidance for 2004 projects total net cash provided by operating activities of between 195 and $225 million. We expect 2004 capital expenditures to be between 70 and $90 million, essentially the current run rate. For the full year of 2004, we expect free cash flow of between 120 and $140 million, up from our previous guidance. We are not forecasting interest savings beyond what is already accomplished, except for the redemption of the 12 3/4 preferred bonds, which will be on December 15. Our focus on 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 are still savings that we will find in operating costs, G&A and 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 provided in our press release. This quarter, we continued to make significant progress operationally and on the steps we are taking to deleverage the balance sheet, reduce interest expense, extend maturities and improve our financial flexibility. The completion of our new bank facility in October is the most recent example of these efforts.

This new financing, which included $700 million of new institutional term loan B matures now in September of 2010 and should reduce net interest expense by approximately $20 million annually once the net proceeds are fully invested. Further, by rolling the U.K. into our restricted group, we have simplified our capital structure and positioned the company well to take advantage of call dates on our senior notes, which start next summer. As mentioned in the press release, we have issued the notice of redemption on the remaining $47 million of 12 3/4 preferred, which will be called on December 15 and have adjusted our free cash flow outlook accordingly.

As we sit here today, contractual principle amortization is just $38 million in 2004 and $135 million in 2005, the bulk of that 135 being in Crown Atlantic, which we may choose to refinance. Only the Crown Atlantic facility and our remaining term loan A totaling $407 million, mature before 2010. As you may have noticed in our third quarter results, our net loss widened to about $100 million as the debt repurchases have gotten more expensive and generate current period losses as we pay premiums on early retirement of the securities. We'd expect this to continue over the coming quarters as we continue to improve our balance sheet.

Investing our liquidity and ultimately refinancing proceeds in our debt securities, even at these prices, are significantly positive net present value transactions for the company. What a difference a year makes when our financial results were impacted favorably last year when we were able to retire debt and preferred securities at a nearly $80 million discount to par. Obviously these results in the net loss line mask the operational improvements in interest expense reductions we've made during the last year. One further comment, we are uniquely positioned to redeem our debt securities at attractive prices because of their near-term call dates.

The growth in free cash flow and the deleveraging of the balance sheet are aligned with the call dates, thus giving us the ability to refinance this balance sheet without having to pay uneconomic prices for our securities at a time when long-term interest rates are very attractive. As I indicated in our call last quarter, we have the ability to call over $900 million of senior notes next summer. In summary, we plan to keep doing what we have been doing, executing our business plan, reducing leverage and interest expense by investing our excess liquidity, resulting in growing, recurring free cash flow for our shareholders. We have a great opportunity to continue this progress with our recent financings and very much appreciate the support of those institutions that have participated.

We remain on track to reduce our total interest expense run rate to $200 million or less by the end of 2004. This would imply approximately $30 million of additional run rate savings not in our current outlook, are yet to come from investing our excess liquidity in the coming months. With that, I'd be happy to turn the call back over to John.

Thanks, Ben. I'd like to make a few additional points and then turn it over to questions and we'd like to take as many questions as we can. As I mentioned up front, I'm confident about our future. As I reflect on the last year, this confidence is based on the fact that this management team and actually our whole company has proven its ability to operate and manage our business through what was a very difficult telecom and capital market scenario and we did this without diluting our equity holders. During the last year, we have dramatically reduced our level of capital expenditures and with our most recent announcement of our revised agreement with BT, we've eliminated all non-discretionary capital expenditures except maintenance capital expenditures, which, as we've indicated previously, runs at approximately $40 million per year.

We've added $115 million of annual long-term recurring revenues since the third quarter of 2002, including the new contracts we signed in the U.K. related to Freeview for the provision of digital terrestrial television services. And after another quarter of exceeding our free cash flow expectations, we're on pace to generate more than $64 million in free cash flow for 2003 when in 2002 we consumed $68 million. Finally, as Ben explained, we are investing our liquidity and cash flow to delever the balance sheet and reduce our interest expense and I think Ben and his team have done an excellent job in these areas. I'm very proud of the whole team at Crown Castle and believe that you will continue to see us execute in the core tower business and improve the financial profile of our company.

Against the backdrop of these structural improvements, the ones that we've made in our company, the demand side of our business continues to give me greater confidence as potential new site leases in our U.S. business are increasing and there continues to be strong demand in our U.K. business from both 2 G and 3 G installations. The optimism I have in the U.S. stems from the increased number of applications that are being submitted to our U.S. operations as carriers plan for improvement in their networks, particularly in the top markets where the vast majority of our towers are located.

Our focus over the last two years on increasing speed and accuracy in the delivery of sites that meet our customer needs, has resulted in us working with our customers at an earlier stage in their network planning. Our customers have told us that they're very interested in rapidly improving specific geographies. The tools we have developed allow us to work with our customers to quickly identify available towers and specific search areas and then all the asset information necessary for our customers to rapidly apply for the sites they're interested in. These tools can save our customers time and money by accelerating the process of their new site deployment.

It is through the close interactions our organization is having with our customers that I've gained more comfort in our customers' commitment to improving their networks in 2004. In the broadcast business in the U.K., we continue to see and work on new opportunities. Two current opportunities that we're working on are the deployment of the expansion to the digital/audio broadcast network that we deployed for the BBC. The capital for which is already in our outlook for this expansion. The second opportunity we're working on is the Freeview service we deployed just about one year ago today continues to outpace all expectations. As the number of Freeview viewers continues to increase, there is strong demand from content providers for the remaining television channel that we have not yet leased.

We are negotiating with a number of parties and believe that the revenue associated with leasing this remaining channel could be in our run rate by the end of the first quarter of 2004. Importantly, there is no incremental capital required to add this new channel. In the telecom business in the U.K., one new piece of business I'd like to talk about is the contract we entered into to do the radio planning for Hutch 3 G's Republic of Ireland 3 G network build-out. This type of service contract demonstrates the intimate customer relationships our U.K. business has.

Our team is assisting our customer at the earliest stages of their network planning and this type of experience should give us the ability to better forecast long-term site demand both in the U.K. and ultimately in the U.S. as 3 G networks are deployed, which of course, in the U.S., we have begun to see with Verizon's recent announcement regarding the rollout of their EBDO service in San Diego and Washington, DC. All in all I believe the momentum continues to move in a positive direction for the wireless infrastructure industry and for Crown Castle specifically. I would again point out, however, that investing in our company's not a matter of trying to time the fluctuations and leasing activity, but rather value in the free cash flow annuity that I believe this model should consistently produce over long periods of time. With that I'm pleased to turn the call back over to the operator to line up questions.

Thank you, sir. Ladies and gentlemen, at this time, we will begin the question and answer session. If you have a question, please press star followed by the 1 on your push-button phone. If you would like to decline from the polling process, please press star followed by the 2. You will hear a three-tone prompt acknowledging your selection. Please ask one question and one follow-up and requeue for additional questions. If you are using speaker equipment, you will need to lift the handset before pressing the numbers. One moment, please, for our first question. Our first question comes from Jim Ballan. Please state your company name followed by your question.

Thanks lot, it's Jim Ballan from Bear Stearns. One question, one follow-up. Okay, I guess the big question I had is maybe you can give us a little more specifics on the outlook in the U.S. You know, in 2003, the GSM overlay obviously added to the lease uprates over the course of the year and we're expecting that to be less of a factor for next year. So, in order for lease uprates to maintain the level that they're at, are you expecting something else to replace it? Or how do you expect to maintain the lease uprates into next year? And I follow up with the refinancing of the bonds next year is not in your guidance and it seems to me that you have the cash available and the call dates are all contracted and the call prices are contracted. Are there any roadblocks to getting that refinancings that were not done with? Or any other reason why you would not include it in your guidance? Thanks.

Jim, I will start with the first question concerning lease uprates. And as you do point out, the GSM overlay through the balance of this year was, in fact, a factor with a couple of our carrier customers as they transition from TDMA network to a GSM network. It did add incrementally, we saw volume from those particular carriers, either in new leasing or in amendments to current leasing and certainly it was a factor, but the answer to your question about what's giving me the additional confidence relating to U.S. leasing for next year, what's replacing it, is the actual defined applications that are coming into our organization at this point in time. And let me walk through the process a little bit to help all on the call understand exactly how this occurs. Clearly there are a couple of different steps in the process from a wireless carrier's perspective. First is, there is the identification of those areas where the carrier is interested in improving network quality. That's either new coverage where they have not previously provided coverage before or that is enhancing coverage in a particular area that might have been diminished due to capacity constraints, additional subscribers, additional minutes of use being used. Once those areas are identified, the carrier then looks for solutions to those particular geographic trouble spots and it's in that early stage of the process that we've been involved at this point where we are working with our carrier customers and their search rings to determine if we have facilities that can quickly meet their requirements in that particular area. From that point, an application is, in fact, submitted. And it's those applications that are increasing and the issue relative to leasing in our outlook for the new year is simply the final step is conversion of that application into an actual signed new lease. And at this juncture we have not modified our outlook for leasing into 2004 from what we have previously indicated all through 2003. We continue to hold leasing at a steady state because it's a question still as to the commitment of the carriers to move from applications to actual signed leases and that's something that we are waiting to see, all the indications are positive, but we will continue to update all those here on the call as we see actual movement from the applications to the actual signed leases.

Jim, on your second question, on the future interest savings on the refinancings, it's not in the guidance. Let me go through a little more detail with you on a couple of things. Unlike last quarter, where we were speaking of our perspective refinancing of our U.S. restricted group, we've now accomplished that with this new Opco facility, so, your point is a good one, we do have the cash now in the restricted group from the excess proceeds of that financing and it does become somewhat mechanical as you invest those proceeds in the debt securities over time to achieving the interest savings that we've talked about. We've elected to stick with our policy of only including in the guidance what's actually been accomplished to date or otherwise in the case of the 12 3/4, the revokable notice that we've issued on the redemption. So, we've got that in the forecast. But the investment of some, potentially 3 to $400 million of that liquidity, as we've talked about before, will come over a period of months as we go about a disciplined approach to investing that, likely just in open market purchases and we don't want to put that in there until we actually accomplish the savings. So, I'm happy to suggest to people what that might be. If you just do some simple math it's probably on the order of $30 million or so to the run rate, as I mentioned in my comments. But we haven't got it in the formal guidance until it's actually been delivered. The second thing I would mention, which is certainly not in our guidance, but we've eluded to a number of times, is perhaps the opportunity next year to replace some of the existing notes above and beyond our open market purchases with new issues that could be 2% or so inside of what it cost us on the yield to call. That's prospective, that's our hope and belief, it's certainly not in the guidance, but it's an opportunity. We think having the near-term call dates permits for ourselves and we will just take that as it comes. But anyway, thanks for the question.

Would the ability to get to below $200 million run rate interest expense by the end of '04, would that include -- did you need any capital-raising to get to that?

No. We do not. We need the yield curve and the LIBOR to sort of be quiet, but other than that, we just need to invest the proceeds we've already gotten.

Great, thanks a lot, then.

Our next question comes from Jonathan Atkin. Please state your company name followed by your question.

Yes, it's Jon Atkin from RBC Capital Markets. Looking at your guidance for 2004, I wanted to know what the adjusted EBITDA estimate is that we can associate with your forecast for the free cash flow and net income from operating activities? And then my second question relates to the growth in site-basing revenues that you saw during the quarter. How much came from leases with new customers on a tower versus augmentations of existing leases for the U.S. and for the U.K.?

Yeah, John, on the EBITDA implicit, it's not guidance, but the implied range for 2004, what we've said is EBITDA should be up 10 to 12% and we will do plus or minus, looks like about 400 to 402 or 403 for the year. So that sort of puts us at the 440 to 450 range next year. That's our best thinking right now.

Okay.

On the mix question, in the U.S. it remained about 20% augmentations or amendments and about 80% new installations and that's a carryover from the second quarter where we saw that mix change to that level. So, we're seeing more new full deployments, full installations.

And roughly the same percentage is in the U.K., John. And I would also add that the leasing activity that we did in the third quarter, 80% of it in the U.S. was from the big 6 wireless carriers.

Great, thanks very much.

Our next question comes from Rick Prentiss. Please state your company name followed by your question.

It is Rick Prentiss, Raymond James. I'm on the west coast, guys, and the keynote speech I was hosting with the carriers yesterday, seemed to imply, John, that not only are they putting in applications, but they very much want leases up there, my question's kind of twofold. One, given Verizon Wireless's strong results, local number portability coming, T-Mobile said they're going to increase sell sites next year 20 to 25% versus this year. Sprint PCS said the same thing, they're going to increase cell sites by 20 to 25%. Two-part question and then a follow-up. If you're seeing these lease applications, how soon will it be before you put them into your, what I think is conservative EBITDA guidance? And the second part of that question is they said they'd like to see faster speed from the tower companies in general from lease applications to be able to get on the tower because these guys are ready to push the gas pedal and they want you guys to be able to react quicker. Some comments?

Sure, let me just say that clearly what you heard from the carriers, we are, in fact, hearing and seeing, as well. But the one thing that a number of the carriers are still working through is their actual capital expenditure budgets for 2004 and not all of them have announced and/or committed to specific capital expenditure forecasts for the new year. An so in that regard the activity that we are looking at at this point, Rick, continues to be increased from what we've seen in really the last 18 to 24 months. It's significantly greater activity but it is not yet actual signed leases from which we can then forecast when the site will be available, the installation will take place and the revenue will start. And it's really at that point that we think it's best and smartest for to us to start incorporating that into our revenue and EBITDA and cash flow forecast going into the new year. All the signs are positive but at this juncture, we're continuing to leave the outlook as it is because we just want to get a little bit more -- some more of the specifics relating to actual leases being signed. Your point about the speed, I definitely confirm that, as well. It is clearly being proven, quarter-to-quarter, that the best networks are generating significant increases in subscribers. And I think all of our customers are interested in and fully committed to being very good network providers. And as such, we're seeing equal interest from all of the various different big 6 carrier customers because I think that they do genuinely recognize that that is what most of their subscribers are primarily interested in, the best operating networks that they can get. And so they are absolutely committed to doing that and given some of the events in the marketplace at this juncture, including wireless number portability that comes up a little later on in this fall, there is a keen interest on moving quickly as opposed to really any other attribute about co-location. In the -

How fast can you get guys on towers, once they give you a lease application? How soon are you guys going to be able to turn that around to say we're ready for you to strap on the antennas.

I hate to answer the question this way, Rick, but I'm going to have to. It clearly depends upon the tower. What I will tell you is that the improvements we have made in terms of the reliability of what we are able to commit to our carrier customers have been marked in the last two years. We know the assets, we know them in detail, we know the issues that will hang an application up in terms of the site lease actually being turned into a rental-producing activity, which can come in certain communities from continued zoning issues. A backdrop of our industry is that it is still difficult for new facilities to be built, but in some communities, it's difficult to modify existing facilities. And as such that's information that's critically important to our carrier customers so that they have reliability in the forecast that we make as far as getting them up. So, unfortunately it's difficult for me to say, I mean there are some averages we can give, but there will be sites that are going to go beyond the average, Rick and there's going to be sites that we're going to be able to move very quickly, a 60-day kind of a period to get them on that facility once they've signed the lease document to when they're operating. What I can tell you, once again, is that it has improved significantly in our company over the last 18 months and we are absolutely committed to working with our carriers to help them in this request for speed.

That's great. Suffice it to say they wanted me to bring that message to you guys since I'm here out here the west coast with carriers saying speed up the lease applications and they're going to be ready to run fast next year. Good luck, guys.

That's good to hear, thanks.

Our next questions comes from Gregor Dannacher. Please state your company name followed by your question.

Good morning, it's Gregor Dannacher, CIBC World Markets. Quick question on how that whole application process might or might not be changed as it looks like carriers are moving more toward outsourcing agreements with third parties. So, now you've got an additional party in the mix. Is that causing problems or does it help out the process as far as speeding up time to get people on the towers? And is there any impact on potential pricing given that from the way I understand the contracts work with the outsourcers is that they'll get probably higher margins on their business if they're in and out of the market more quickly. And so does that put pressure on pricing to say, hey, we'll take down a number of -- or we'll put up a number of sell sites with you if you give us a price break, et cetera. Is that occurring? And how does that change the dynamics?

Sure, Gregor, you point out a trend that has continued to occur as our customers, to varying degrees, of outsource components of their site deployment process. There are third party intermediateries that we work with and it is the combination of ourselves and those third parties that are working for our joint customers in that regard, which are the wireless carriers. It does, in fact, introduce a new set of individuals that we tend to work with because within the carrier customer itself, a lot of the people that may have originally been involved in the process of site deployment are no longer with those organizations and so the activity is, in fact, coordinated and managed by these third party intermediateries. We work very closely with all of the big ones in that regard, as well, because in the end it goes to the last point of your question, they are very interested in being as swift as possible, as quick as possible in finding and deploying on new sites. Rick's prior question, we do hear, which is that speed of deployment is very important to our wireless carrier customers. And the way they organize their contracts with these third party intermediateries on a generalized basis is moving quickly, is, in fact, important. It's also important to the third party intermediateries beyond servicing their customer, just from the stand point that it's significantly more efficient from an expense perspective on their own side. So, the better we can be at identifying in those particular search areas that wireless carrier has given to the third party intermediatery, the better that we can be at identifying all those areas where we have facilities that can solve the problem and also knowing, with a high degree of confidence the interval that it will take for that installation to be complete, those are the types of facilities that our carrier customers and their intermediateries are looking for. And all of the investment we've continued to make and we've talked about in prior meetings, has been towards that end. While the application activity was a bit slower, we continued to work on improving our internal process to be able to handle just these kind of situations and I believe, and from the feedback we're receiving from our customers, that we'll never say we have arrived. We continue to believe there are things we can do to improve. We believe that what we are able to offer them today is better than what we were offering them just two years ago.

But is there any impact on the pricing of the actual lease sites that are going up, given that type of dynamic, where the outsourcers want to get out of a market as quickly as possible?

No, I appreciate that clarification question, as well. The underlying pricing that governs the lease on the facility is a negotiated item that we do directly with the wireless carrier through these master lease agreements. So, in effect, what the wireless carrier tells the intermediaries, look, if it is a Crown Castle facility that is going to solve our problem the best and the quickest, we've already got the pricing for that lease negotiated with Crown Castle, so, the intermediatery doesn't get involved in that particular element.

Okay. And my one follow-up is have you seen any takes or -- your visibility into the first quarter, which is normally a seasonally soft quarter? Do you see the same seasonality trends appearing or giving number of portability, do you think first quarter won't be down as much as it has been on a seasonal basis?

The seasonality that impacts the first quarter, Gregor, is directly related to the weather. And the ability to actually turn leases around in terms of installed sites and a lot of it depends upon what mother nature decides to throw at us. I would think that based on what we're seeing as the capital budgets are firmed up at the carriers, this isn't a question of the carriers' desire to then go ahead and see those sites come on the air over some extended period of time, I think as we were just discussing, once the capital budgets are firmed up, the carriers would just as soon see the sites turned on yesterday as they would months from now. The impact is going to be directly related to whether or not weather cooperates. If it does, I think we would see things moving sooner rather than later, just because of the desire of the carriers, but we're going to have to wait and see how the weather shapes up.

Great, thank you.

Our next question comes from Seth Potter, please state your company name followed by your question.

Hi, Punk Ziegle & Co Two questions. First, any comment on the pricing trends in terms of rents is the first question. And the second question is in the U.K. business this quarter, if you account for the currency gains and the H 3 G one-time event, it looks like the U.K. revenues actually went down sequentially. I just want to make sure I'm calculating that correctly. And if so, what's happening in that market there? Thanks.

Seth, let me just hit the first one which is the question of pricing. We don't get into, as you can imagine, any of the specifics but I will tell you that the basic underlying pricing for a full installation has remained stable. It is not declining. It has remained stable with what we have discussed in prior quarters. I think that's probably the most that we're going to want to talk about relative to that particular component. And relative to the question about the U.K. --

Yeah, I can, I mean if you just back out the growth from the, I guess, the one-time payment, Seth, we still did have substantial growth of about 1.8 million pounds, quarter-over-quarter, which obviously is before exchange rate impact. So, on a pound basis, yeah, we're still growing. You know, it's fine. We're very, very comfortable with that. And let me just hit the exchange rate question. I suspect there may be one coming. Maybe some of you have thought about that. We have seen a weakening dollar and an increased exchange rate. For the quarter it was about 1.61 and today it's about 1.69. So, it continues to benefit us, but let me just give you a round figure and from there I think everybody can sort of play with it as they choose. We've got about 200 million pounds of run rate recurring revenue. So, if the exchange rate were to move 5 points and stay there for a year, a full year impact would be $10 million U.S. on the revenue line and given our margins, about half of that in the EBITDA line. So, that gives you some relativity of the benefit and so in any particular quarter might help you or hurt you, but across the company that's doing free cash flow at the ranges we've talked about on this call, really not a very slight impact either way.

And just one follow-up with that, is there an expectation going into the fourth quarter given the one-timer in the U.K. to see revenues there, excluding the currency gains there, to go down sequentially?

Yeah.

Okay.

It will be flat to maybe down a little bit, based upon the run rate, based upon the one-time payment there. That's to be expected because we had a first and second quarter sort of out of run rate catch-up there on this Hutch deal. But as I pointed out in my comments, it wasn't an accounting adjustment or anything, this was cash. At the end of the day, that's the thing to do.

Okay.

And clearly as the continued leasing in the U.K., which we have continued to see in the third quarter, comes through, those then leasing converts into new run rate recurring revenue and if you pro forma these, the one-time here, on the Hutch agreement, that then starts to take place and you start seeing, again, the sequential growth.

Let me just reiterate one other comment. The year over year growth in the revenue was 42%, of which 36% of that was organic, and only 5% was contributed by the exchange rate move, third quarter 2002 to third quarter 2003. So, again important to keep the relative contributions. Obviously we enjoy seeing the exchange rate move in our direction for rhe first time in a long time, but it really has a pretty insignificant effect on the overall company.

Okay, thanks a lot.

Sure, Seth.

Our next question comes from Alex Rygiel. Please state your company name followed by your question.

Alex Rygiel, Friedman Billings Ramsey. You've been discussing the increase in applications in the U.S. quite a bit. Can you quantify the increase in application activity on either a sequential basis or a year over year basis? Secondly, can you quantify the time line from application to signed lease? Earlier you mentioned that from signed lease to equipment install could be as quick as 60 days. Can we take a step back and talk about from application to signed lease.

Alex, that's the more difficult question to answer. What we have found over the last 2 years is that particular interval has been difficult to forecast because it really depended upon the carrier, and it depended upon their particular situation in a given calendar year. It's been extended at times because of the desire on a carrier's part to reduce their capital expenditures and then suddenly it can be accelerated as they run into a particular problem in a geographic area. And that clearly is the issue with our ability at this juncture to incorporate the application activity into actual leasing demand. The company continues to grow from an outlook perspective in '04, at what we believe is a solid rate, despite the fact that we are holding leasing steady and the net on it is if, in fact, the capital budgets to firm up, as I talked abut before, and these applications do convert, I think that they will be converting on a fairly rapid basis because of the comments I made previously, and then it's the interval, effectively, to get them actually installed on the tower. If you can remind me on the first part of the question, Alex?

Yes, application activity level either on a sequential basis or year-over-year basis?

Yeah, what we are actually participating in right now and certainly just in a very generalized way, I will give you the answer to that, is the search ring process and we have literally received thousands of requests to work through the search ring process with our carrier customers. That then certainly there is a component of those search rings where we don't have a facility that is going to be able to provide them a solution. At times we will receive search rings for geographies where we don't even have any towers, because it happens to be part of a region that a particular carrier is working on from a network planning perspective. Those come out of the equation, we're then left with a subset of that original pool of rings. Those then turn into the applications and then of course moving on down into site leases. But what I would just simple say is the level of activity, and you can see that relative to an earlier question about the new leases versus augmentations. Sometime earlier we were talking about 40% of our leasing activity was coming from augmentations. That is adding additional antennas or lines to existing facilities. Today, this quarter, and the second quarter, it's been running at around 20% in the U.S., so half of what we were seeing before, and yet leasing activities remain stable. So what you're seeing is more and more of this is new activity from carriers and that's what the application trend continues to suggest to us. And quite frankly I wish I could give you more specifics about how that's going to manifest itself in new leasing going forward, but at this juncture I simply ask that you wait a little while longer as we get greater visibility into the capital budgets for '04 from our carrier customers.

One quick followup question. Can you quantify the revenue impact from leasing the remaining channel in the U.K., on an annual basis?

Alex, at this juncture the problem with talking to that is it effectively kind of gives the parties we're negotiating with a perspective on pricing, as it were, and what I will simply say is that we are looking to maximize the revenue for our shareholders in that last channel and it has become ever more valuable because it is no longer a question of whether Freeview will be successful. Freeview is successful and, as such, I'd rather not foreshadow for you that and ask for your patience on that one as well.

Our next question comes from Ned Zacker. Please state your company name followed by your question.

Thomas Weisel Partners. I will just add that these are terrific numbers, so, well done. On the augmentation versus new installs, you've sort of answered my question, but beyond what is going on currently, do you expect that to return to sort of a 40% versus 60% level? That's question No. 1. Number two is how much of the augmentation that is going on has to do with getting GSM 850 for AT&T and Cingular, if you can answer that question. What might the revenue impact be associated with that? And then lastly, do you think some of the improved activity is surrounded not just around wireless portability, but also the expectation that we may get wireline to wireless portability which would drive minutes even faster.

Hey, Ned, relative to the augmentations as a percentage of activity, I don't believe that we're going see a return to the 40% because the kind of activity that we're seeing through the application process is not improvements to existing sites as much as it is new sites from wireless carriers that have not, in certain particular geographies, done much deployment activity over the last year. So, I think that whereas augmentations will clearly continue, there are still activities that are under way by the GSM overlay carriers as well as those carriers that are deploying EVDO and/or other high-speed wireless data initiatives. I think that there will still be augmentations to existing facilities. I think that the new activity is going to outpace the augmentation activity and that's what's going to keep the percentages roughly about where they are at this juncture.

Okay.

Relative to the question about GSM overlay --

At the 850 level.

Yeah, at the 850 level, clearly depending upon which of the two carriers we're talking about, their approach to how they handled the GSM overlay was different and in some of the cases that resulted in a lot of augmentation as they added antennas and lines to existing facilities. In other cases, that wasn't so much the case, but what we are, if fact seeing at this point is that by virtue of the fact that there were engineering compromises that had to be made relative to how you handle both GSM and TDMA on the same facility, the carriers that otherwise handled the rollout in such a way that they tried to use as much of the existing facilities that they could are beginning to go back in right now and fine tune their engineering by adding new sites. We're seeing that show up in our numbers at this point in time. So, the overarching perspective on that is both of those companies will continue to be participating in some of the augmentation, but there's also a lot more new activity taking place as GSM and TDMA really are operating in their own right, independently and they're fine tuning their networks to ensure that both customer bases, those using TDMA and those using GSM, are getting the highest quality of service.

Okay. And then wireline to wireless number portability? Is anybody talking about that?

I think it's an excellent point, Ned, and clearly the FCC continues to talk about it, all of our carrier customers continue to talk about it. We support it. We think it makes a lot of sense. Certainly one of the largest out there, Verizon, has announced that they will, in fact, port their landline, wireline numbers to their wireless division and I think that that is important because as we discussed at a conference here a few weeks ago, the number of Americans that are cutting the cord and moving to wireless as their only telecommunications device is increasing and we think it is important from a consumer perspective that they be given the right to keep their telephone number whether or not it was originally wireline or wireless. That will, in fact, drive additional minutes of use because today the statistics show that when someone has cut the cord they use more wireless minutes of use than if they still have a land line phone. On average, 600 minutes of use per month if they have cut the cord versus some 420 minutes of use per month on average for wireless consumers generically. And as I've pointed out previously, that 600, interestingly enough, compares to 1200 minutes of use per month that is typical of a land line telephone number. So as there is greater migration of wireline to wireless, and people have cut the cords, I think it does drive minutes of use and those minutes of use clearly demand high quality networks, that's what the customers continue to suggest and so I think that that's good generically for our wireless carrier customers as well as for the wireless infrastructure industry.

Thanks very much.

Our final question comes from Michael Weisberg, please state your company name followed your question.

Yes, ING Investment Management. A couple of things, if I could. Number one, I don't know if you can quantify this or not, but in switching pictures, in sending a picture on a cell phone, could you give us a sense of how much bandwidth that takes up relative to a voice call? Or another kind of data call? Is that something you know about?

Yeah, Michael, what it does is it depends upon the carrier, it depends upon the technology that they've actually deployed. What it does do is it takes up capacity from what otherwise would have been a voice call but it's difficult to suggest that it is a one for one degradation in the capacity on the network because a lot of carriers will, in fact, handle that picture with their data aspects of their network, which tends to be already carved out from the voice aspect of their network because it's a more efficient approach as opposed to handling it all in a circuit-switch basis, the carriers try to handle those types of calls in a more data friendly way. But, your point, I think, is a good and valid one and without getting into kind of specific engineering and statistics about what it does or does not take away, as you do continue to add devices that are using more and more data minutes, that does take away from capacity on the voice side and that's clearly what our carrier customers are continually managing. They manage that both through looking for new spectrum, they manage it through technology and they manage it through adding additional sites. And it's a combination of those three things that will continue to provide their customers the highest quality of data as well as voice and not find themselves comprising the two. So, I think the trend that you're discussing is very valid. But the actual statistics are difficult because it's a carrier-based.

Great. If I can follow up to a prior question. When you talk about the transition from 40% augmentation to 20%, two things, does that reflect carriers moving to new geographic areas where they were roaming in the past? And second, what does that mean in terms of revenues to you? Do you get more revenues from a new site? And I also thought, thinking back, aren't there more start-up costs involved for you with a new sell-site installation rather than an augmentation?

Michael, thank you for the question. A new installation is roughly three times more valuable than an augmentation and it's simply based on the activity that occurs at a site. There are more antennas that are installed in a new installation than is done in an augmentation, where the carrier is adding some more antennas and/or some more lines or ground space to an existing installation. As such, you can imagine, the new installation is, in fact, worth more. Relative to the question of start-up costs on our part, it really is commiserate with the level of activity. So, clearly there's more activity in a new installation, so, in and of itself, there can be, but not necessarily. There can be costs associated with an augmentation, as well. The first part of your question, though, I think was very interesting. As the minutes of use have continued to increase to what is now on average, as I mentioned, some 420 across all of the wireless industry, what happens is the consumer finds more and more places within the network where the phone doesn't work. And because they are relying on it to an ever greater degree, they expect the phone to work in 100% of the geography that they are using the phone in. And therefore it's not so much that this new activity is coming from expansion into more rural areas where a carrier might have previously been roaming, it's really filling in the network, continuing to fill in the network to reinforce coverage in really every area of a particular geography that the customer is using it. I will tell you, in fact, that the predominant applications that we're receiving as a company tend not to be for rural markets, they tend to be for the top markets where all the people live and clearly where the highest percentage of a carrier subscribers come from. That's where they're trying to reinforce the quality and that's what they're focused on improving. I think with that last question what I'd like to do is just simply thank all of you for joining us this morning and we appreciate your continued interest in the company. We look forward to finishing 2003, according to what we have indicated to you here in our outlook and reporting on the full year, first part of next. With that, we wish you all a good day and we will talk to you on the next call.

Thank you, sir. Ladies and gentlemen, this concludes today's Crown Castle International third quarter earnings conference. If you would like to listen to a replay of today's conference, please dial 303-590-3000, followed by access number 555073. Once again, if you would like to listen to a replay of today's conference, please dial 303-590-3000 followed by access number 555073. We thank you for participating, you may now disconnect.