Crown Castle Inc (CCI) 2004 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Crown Castle International first-quarter conference 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 session. If anyone needs assistance at any time during the conference, please press the star followed by the zero on your touchtone phone. And as a reminder, this conference is being recorded today, Thursday, May 6, 2004.

At this time I would now like to turn the conference over to Mr. Jay Brown. Please go ahead, sir.

Good morning, everyone, and thanks for joining us as we review our first-quarter 2004 results. With me on the call this morning are John Kelly, Crown Castle's chief executive officer, and Ben Moreland, Crown Castle's chief financial officer.

This conference call will contain forward-looking statements and information based on management's current expectations. Although the company believes that the expectations reflected in such forward-looking statements are reasonable, it can give no assurances that such expectations will prove to have been correct. Such forward-looking statements are subject to certain risks, uncertainties and assumptions. Information about the potential factors that could affect the company's financial results are available in the press release and in the risk factor sections of the company's filings with the SEC. Should one or more of these or other risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary significantly from those expected. In addition, today's call includes discussion of certain non-GAAP financial measures, including adjusted EBITDA and free cash flow. Tables reconciling such non-GAAP financial measures are available under the investor section of the company's website at www.crowncastle.com.

With that, I'll turn the call over to John. John?

Thank you, Jay, and good morning, everyone. We appreciate you joining us for a review of our first-quarter 2004 results. As I'm sure you've already seen in our release for the quarter, we had a solid first quarter, both operationally and financially. We again exceeded our expectations for cash from operating activities and free cash flow. Notably, we produced positive free cash flow for four straight quarters and improved free cash flow by over $50 million, comparing the first quarter of 2004 to the same quarter last year.

As you listen to Ben's review of the quarter, there are a couple of key takeaways that I'd like to highlight for you. First, we've continued to grow recurring revenue and free cash flow above our expectations and targets. And second, we continue to see signs that U.S. leasing activity and the demand for our tower sites will improve relative to 2003.

With that, I'll turn the call over to Ben to go through the financial results, and then come back after that with a few additional comments.

Thanks, John, and good morning, everyone. As I indicated in the press release, we remain committed to driving recurring free cash flow and made significant progress in this area during the first quarter. Our results reflect the successful execution of our operating units, exceeding our previously disclosed targets. We generated revenues of $248.5 million in the first quarter. Site rental and broadcast transmission revenues were up $34.4 million, to $219.4 million, or 19% from the first quarter of 2003. Service revenues were $29 million.

Gross profit from site rental and broadcast transmission, defined as net revenues less cost of operations, was $136.4 million, up $25 million, or 22%, from $111.6 million in the first quarter of 2003. Free cash flow during the first quarter of 2004 was $7.5 million, significantly above what we had expected. Remember, this is the quarter when we have previously given back significant working capital due to cash interest on our bonds, and we gave back some this quarter, just not as much as we had expected. So for the balance of the year we expect to generate free cash flow of about $150 million. Free cash flow is defined as -- reported net cash from operating activities less all capital expenditures, including, by definition, even discretionary capital expenditures, which are producing very high returns.

During the quarter we developed 26 sites in the U.K. All of these sites were built under our agreement with British Telecom. Capital expenditures during the quarter were down $33.4 million from the prior year's first quarter, to approximately $19.4 million, which is being spent almost exclusively around our existing assets. U.S. capital expenditures totaled $6.4 million, and the U.K. and Australia with the balance of $13 million. This looks to be about the run rate we expect for both maintenance, capex and discretionary spending, and is consistent with our guidance of between $70 and $90 million for 2004. If leasing continues to pace higher, we might spend a little more on site improvements, putting us near the higher end of the range, but as we've said before, these incremental investments come with a tenant and generally average about a one-year payback.

Turning to some of the changes in the income statement, site rental revenue growth, comparing the first quarter 2003 to the first quarter 2004, was 19% growth for the consolidated companies. That's $138 million in annualized run rate growth. U.S. site rental revenue grew 12% year-over-year, or about $51 million annualized. U.K.'s site rental revenue grew 27% year-over-year, or, normalized for currency benefits, 11%, which is over $30 million of annualized growth. Ignoring the benefits of currency fluctuations, we grew consolidated recurring revenue 11%, or about $84 million annualized, certainly at the top end of our own revenue growth expectations.

These revenue results approximate same-tower sales, as over 99% of our sites were in operation for the preceding 12 months. While we use GAAP-reported revenue figures to -- for same-tower sales growth, we'll remind you that from time to time we have revenue not associated with the run rate, which will introduce some volatility to this measure.

For housekeeping purposes and to assist some of you with your modeling exercises, I'll make a couple of comments about some specific one-time items we had this quarter. Total out-of-run-rate adjustments of approximated $4 million positively impact the adjusted EBITDA this quarter, and were all in the U.S. This includes the positive impact of approximately $3 million in tower revenue, out-of-run-rate tower revenue, and the positive impact of approximately $1 million from the seasonality of our direct tower expenses, which will catch up later in the year. Even when you subtract these positive adjustments, we exceeded our expectations for the first quarter by being ahead of plan on tower revenue and under on operating costs.

Needless to say, we're very pleased with our organic consolidated revenue growth, as it exceeds our long-term expectations. We believe the most important measure of our performance is the nominal dollar growth in recurring revenue and the conversion of that revenue growth into recurring free cash flow across our base of shares, i.e., per share. Currency neutral for the last 12 months, we have grown recurring revenue $84 million, and about $70 million of that has made its way to the gross margin line, which is about an 84% incremental margin.

Turning to the balance sheet, senior bank debt at the end of the first quarter totaled $1.5 billion, approximately 3.2 times first quarter's annualized adjusted EBITDA. Bank debt net of cash is 2.8 times annualized adjusted EBITDA. High-yield debt totaled $1.7 million, for total debt at the end of the quarter of $3.2 billion. At March 31, we had approximately $574 million in total liquidity. This is comprised of $403 million of availability under senior credit line, and $171 million of cash and cash equivalents. In the first quarter, we repaid $15 million under our Crown Atlantic facility, and further, 88% of our debt in preferred stock maturities are at 2010 or beyond.

Net debt, including the preferred stock but excluding the 4% convertible notes, which are substantially in the money, the Q1 annualized adjusted EBITDA ratio was 7.1 times, compared to 9 times a year ago, a reduction of 1.9 turns. Going forward, we expect to continue to reduce leverage by about one turn per year for 2004 and 2005, targeting to end the year 2004 with net debt in preferred well below seven times adjusted EBITDA, and well below six times by the year-end 2005. We expect to accomplish this by growing adjusted EBITDA 10% to 12% per year, and investing free cash flow to reduce debt. Interestingly, adjusted EBITDA to total interest expense now approximates two times total interest expense, and could exceed three times by 2005.

Moving to our outlook, we expect site rental and broadcast revenue, transmission revenue, for the second quarter of between $218 and $222 million. We expect second-quarter 2004 net cash provided by operating activities to be between $75 and $85 million. We expect total capital expenditures to be between $22 and $27 million for the quarter, and we expect the results of this will be free cash flow for the second quarter of between $48 and $58 million. As I typically point out, our measure of free cash flow will not always lend itself to sequential quarter-to-quarter comparisons, as they are significant fluctuations in accrued interest due to the timing of our semiannual bond payments or changes in working capital, but these fluctuations are largely offset when comparing the current quarter to the same quarter in the prior year, or when comparing annual results. We utilize this GAAP measure, even though tedious, because it reflects the true cash flow of the operations and rewards permanent working capital reductions.

On April 15 we raised our guidance for the full-year 2004, as a result of the increased demand we have seen for the first part of 2004. Our current guidance for 2004 projects total net cash divided by operating activities of between $240 and $250 million, and assumes a 1.75 U.K. pound exchange rate and .70 on the Australian dollar. We expect 2004 capital expenditures to be between $70 and $90 million. And for the full-year 2004 we expect free cash flow of between $150 and $160 million, up from our previous guidance which, at the midpoint, is 71 cents per share, again using our definition of free cash flow. We are not forecasting interest savings beyond our current outlook, beyond what was already accomplished in 2003.

Our continued focus on free cash flow growth, with conservative assumptions on top-line growth, is intentional. Recall that last year we generated $141 million of free cash flow, of which $74 million was from working capital improvements and $67 million was recurring. The 2004 midpoint of our free cash flow outlook suggests growth of about $90 million in recurring free cash flow to $155 million, which assumes no further working capital improvements. So, in other words, it looks to us like virtually all of the revenue growth we're achieving will find its way to the free cash flow line this year. Our outlook implies adjusted EBITDA of between $112 and $115 million for the second quarter, and $465 to $475 million for the full-year 2004. Our adjusted EBITDA expectations reflect the volatility and seasonal effects of our services business, which this quarter was about 3% of total gross margin.

This past year we made significant progress operationally and on the milestones we set to deleverage the balance sheet, reduce interest expense, extend maturities and extend or improve our financial flexibility. Going forward we expect to continue the progress we've made, and we could see a scenario that has us reducing interest expense by as much as $50 million annually by the end of 2005, through refinancings and paydowns of more expensive debt with our free cash flow. When combined with the $50 million or so of adjusted EBITDA growth we are targeting this year and next, as we've said before, we can see a potential path to $1 per share of free cash flow, again, our definition of free cash flow, for 2005, and considerably higher if discretionary capex is not subtracted. In the end, it is our goal to reduce the cost of debt and equity to the company by continuing this revenue growth on existing assets, reducing leverage and achieving 20%-plus levels of free cash flow growth for an extended period of time with low volatility.

In closing, I would just remind everyone of a point I made during our analyst day presentation in April, and it can be actually found on page 23 of our slides on the website. As a company, we are comprised of three components of value, the existing contractual revenue stream, and remember about 97% of our revenue outlook for 2004 was on the books as of January 1; number two, the rights to grow that revenue stream through co-locations on 15,000 sites in three countries that are in various stages of wireless deployments; and number three, other intellectual property of this company, including the organizational knowledge and expertise we have around digital television and operating radio and TV networks, our nationwide wireless spectrum in the U.S., and a commitment as an organization to extract more value from this network of assets than may be readily apparent. Here's the point, which is shown on that slide 23. If all we were to do is to receive the contractual escalations on our current leases, that is to say we had no further leasing, take the extreme, our free cash flow could be expected to grow at a compound annual growth rate of 13% through 2008. We obviously we believe we can, and are, doing much more than collecting the contractual escalators. This is a very powerful cash flow model.

With that, I'm pleased to turn the call back over to John. John?

Thanks, Ben. I'd like to make a couple of brief comments, and then we'll turn the call over for your questions. I'm very pleased, as you can imagine, with our first-quarter results. I believe the continued achievement of our targets is a direct result of our unwavering focus on our four key initiatives, which I've outlined in the past and would like to review with you again quickly.

First, as I've said before, we will focus on increasing recurring revenue on our existing sites, using our asset management tools to better understand and capture the demand for our sites. This is the highest-returning activity we can engage in, and it's consistent with our customers' needs. To this end, we continue to post industry-leading top-line annualized recurring revenue growth of about $84 million, normalized for the currency impact on our existing base of towers. Driving this growth, as we discussed at our analyst day last month, we are seeing a marked improvement in the leasing environment in the U.S. We're seeing our U.S. customers make a concerted effort to get a higher number of new sites on air during 2004 than in 2003, and so far we've seen a 25% increase in U.S. leasing volumes over last year.

Consistent with our carriers' customers' desire to deploy enhancements to their networks quickly, co-location on existing tower sites is the preferred approach, and clearly that is what's behind the drive on the growth in leasing. I believe the activity we're seeing in the U.S. is just the beginning of the U.S. wireless market's move towards the quality of service and product offering that are enjoyed by consumers in western Europe and parts of Asia. One final point that on the first initiative that I'd like to make is that our internal data and analysis suggests that over the coming years, there will continue to be a need for significant additional U.S. cell sites deployed for voice quality alone, not new enhanced wireless data services, but for voice quality alone to close the gap of service quality that exists between the U.S. and other parts of the world.

The second key initiative that we focus on here at Crown Capital is expanding our recurring margins. As an indication of this focus, and outpacing our expectations, we've grown annualized recurring tower gross margins by $70 million in the last 12 months. That's before the benefit of the weaker dollar. Also important to note is that we've held G&A levels to the same level as last year, while continuing to invest selectively in new business initiatives and properly staffing a decentralized operating team that best meets our customer needs.

The third key initiative here is to invest our capital wisely, to achieve high incremental returns with low risks. During the last four quarters, we've invested about $85 million in capital, and that includes maintenance capex, that $85 million, so this is a conservative way of looking at it. But $85 million total, and that has grown recurring tower gross margin by $70 million, or an 82% yield on capital. All of our operating divisions employ a disciplined approach to capital allocation which has been very successful for us, and you can expect this approach to capital allocation to continue into the future.

Lastly, our fourth key initiative is to capture new revenue operation -- new revenue opportunities around our existing assets. You've heard me talk about this as well. Our most tangible example of this has been our launch of Freeview in the United Kingdom in October of 2002, which we've discussed previously. With approximately three million viewers today, Freeview continues to be the most successful launch of digital terrestrial television globally. And I'm happy to announce that, in April, we've entered into an agreement to lease another preview channel with a new content provider. And importantly, this new agreement includes the benefit of a component of revenue share in addition to the fixed transmission fee that we enjoy in these long-term recurring contracts.

In the U.S., consistent with our fourth key initiative, we continue to work on creating value from our nationwide Spectrum license, and you can expect to hear more specifics on this in future quarters. In all, I believe you're seeing, and we are seeing, the results of acquiring and building the right assets in the right markets and having employees who are making good, smart decisions to serve our customers and create shareholder value. Looking ahead, we plan on keeping -- we plan to keep doing what we have been doing. We're going to keep executing our business plan, reducing leverage and interest expense by investing our excess liquidity, resulting in growing free cash flow per share for our shareholders.

And with that, what I'd like to do is turn the call back over to the operator, who will then organize your questions. Operator?

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 pushbutton phone. If you would like to decline from the polling process, 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, 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 the first question. Our first question comes from Mr. David Small. Please state your company name, followed by your question.

Hi. Goldman Sachs. Good morning. Just on the SG&A side of it, it looks like in the quarter you were -- you sequentially, SG&A declined a little bit. Just to help us think about for the rest of the year, how we should think about your SG&A as a percentage of sales, or just as an absolute number?

Yeah, David. It's Ben. Remember, the first quarter, just because of some of the odd payroll periods, part of it is going to decline, about $1.7 million every odd quarter, first and third. But as an overall trend, and as we looked back into 2003, and if you look in the K, look at total G&A and corporate development, you add that together, it's right at about $100 million, and it looks to us like we're going to come in pacing just right at or possibly even a little bit below that for the full-year 2004. So running flat, like John mentioned.

And then just in terms of your guidance, you had said that 97 -- using your guidance now, 97% of the revenue was on the books as of January 1. If you took that analogy out to today, how much of that revenue in your guidance is on the books?

I see where you're headed. I think you may be headed in to try to annualize the quarter and then get into our guidance, and that's a great way to look at it. The only thing I would point out, there's like two things I would point out. Number one is the $3 million of nonrecurring in the U.S., so you need to back that out of that process as you annualize first quarter. Number two, you know we got some currency benefit in the first quarter in the U.K. The exchange rate in the first quarter was 184. So if you step down to our guidance of 175, then you'll see that, you know, our guidance would then step down, based on just the deterioration in our expectations on the currency for the balance of the year. So I would, I'd caution you a little bit about that, but maybe the easiest way to do it is to take the annualized, you know, minus three, and then add the three back, and then just sort of take it, you know, sort of a nine-month convention of adding the revenue across. And you'll get pretty close to our revenue guidance. You know, it depends on when the additional leasing comes in for the balance of the year as to, you know, how we will do. If we're pacing at about 25% up in the U.S., you know, that's in the vicinity of 500 leases for the year. You can figure out what that is, depending upon when they come in. So it's not a huge impact, but obviously it's recurring and goes forward from there.

Okay, great. Thank you.

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

Hi. It's Jim Ballan from Bear Stearns. I'll ask my two questions up front. One is, I wanted to ask a little bit about the BT exchange sites. Could you just remind us how many you have left to do, what your commitment is, and how many you may do, what the timing of that is? You know, what's driving how many you do and maybe what the cost per BT exchange site is? And then my other question is, could you tell us, for the new Freeview channel, what the quarterly revenue is going to be from that and when you expect that revenue stream to start?

Yeah. Jim, let me take the first part of that on the BT exchange site. Let me just remind everyone, we are -- we're now taking down BT sites under our new agreement with them, which was amended the latter part of last year, where we can access these rooftop sites going forward for no incremental or no additional capital or access fee payment or no purchase price going forward. And in exchange for that, we're receiving 40% of the revenue share and paying 60% to BT, again with no net capital investment on it for paying for the site. And that was the renegotiated transaction last year. So the point is, and it's something to remember, as we access these sites going forward and taking down, putting tenants on the site, you'll see the margin deteriorate -- the margin deteriorate in the U.K.. But that's actually a wonderful thing. There's very little, if any, net capital going in now into that business, and so the overall blended margin would then be diluted somewhat going forward. But, again, the 40% revenue share, without a purchase price associated with it, is very powerful, and we have about 4,000 sites we can access going forward. And we will do that, you know, as tenant demands warrant.

The other point I'd make about it is it makes it very attractive and doable to do a single-tenant site, and so while we're all about co-location and working hard to co-locate multiple parties on each site, it's viable with just one sharer on the site, given that -- our 40% revenue share. Now to the capital end, what we do spend is capital associated with some of the improvements on the rooftop sites. But that is made up -- the carriers basically pays that in the form of their installation fee that comes through our service revenues, so on a net basis it's really no net out-of-pocket, if you will, and then you get the 40% revenue share going forward. And so the point, and I appreciate the question -- the point is you'll see the margins deteriorate over time, but that's actually a very good transaction and a very good agreement we have there. Your next question was on the Freeview specifics.

Yeah, and Jim, I would imagine part of what you're looking at is whether or not that is or is not in our guidance, and I will tell you it is in our guidance.

Okay.

As I mentioned in my prepared comments, we entered into that agreement in April. You should expect to start seeing that revenue flowing through to the income statement in the third and fourth quarters. That particular channel is coming in at a rate that was similar to prior channels, and is already incorporated into the guidance for the year.

Okay. Great. Thanks a lot, guys.

Thank you. Our negotiation question comes from Mr. David Coleman. Please state your company name, followed by your question.

It's Dave Coleman from RBC Capital Markets. You may have addressed this, but could you update us on where things stand with regard to renegotiating the bank facility? And second question is, in first quarter -- if you could talk about carriers that may have attributed to unexpected pickup in 2004 leasing activity? Thanks.

Okay, Dave, I'll hit the first one. As I mentioned at our analyst day, we have an expectation, no guarantees, but an expectation that come fall, October time frame, when one of the prepayment penalties rolls off of our bank deal that we did last year, we'll be in a position to renegotiate the terms of that transaction and likely reduce the credit spread significantly. I would note others have done it in our industry. We will be more than likely in the range of two and one-half times, maybe even less, on that bank deal, and so we would fully expect to be in a position to renegotiate that. And the B loan today is 350 over LIBOR. So one way to think about it -- we haven't initiated those conversations yet and it would be a little premature today.

But while we're on that topic, I'll highlight for everyone, because I think it may be on your mind, it was when we were in Pittsburgh. There's a LIBOR exposure in the company, it's about $14 million per 100 basis points. Or, said another way, we have a $1.4 billion of LIBOR index to debt that's floating, so a 100-basis-point move on LIBOR is $14 million, obviously. We continue to look at the notion of swapping some of that out fixed. We find the swap rates to be very steep, you know, over 300 basis points for the term of the debt, and don't expect to see that, frankly, in the LIBOR move, but would acknowledge, you know, we're prepared to undertake some of that.

I guess I would suggest two things to you. Number one, we think we've got at least a 100-basis-point move on the credit spread coming, which would then dampen the movement in LIBOR. And number two, just the absolute level of deleveraging that we're experiencing, I think brings that overall risk profile down and so it's something that we are -- we remain very comfortable with, but I just wanted to point out to everyone. Secondly, John?

And then, Dave, on the issue of customer demand, I will say that we're actually seeing it from all customers. There really isn't a single carrier that has stepped out in front of all the rest. This is a trend that we're seeing across all of our customers, additional activity this year versus what we saw last year. The only notable exception to that would be AT&T, as I think they look at rationalizing what they will do in '04 given the pending transaction with Cingular. And even they continue to add to their network in a number of areas around the country. So they are not going silent in terms of improving network and example pending capital. So it really, it isn't the specific company, specific carrier customer. It's across the board, and it's different companies in different parts of our geography. And certainly you can expect that the more densely populated areas are the places that people are focusing on first. But we're seeing a pickup from all of the carriers versus what we saw in 2003.

Great. Thank you.

Thank you. Our negotiation question comes from Rick Prentiss. Please state your company name, followed by your question.

Yes, good morning. It's Rick Prentiss, Raymond James. Good morning, guys.

Good morning.

A couple of questions for you. First, the piggyback on that bank facility stuff. Ben, what's the process to approach the rating agencies, as far as maybe waking up to the strong position you guys are in today as opposed to the junk status you have? What do you have to go through to try and move that needle, if you will?

Well, Rick, it's an ongoing process. It's one we expect, frankly, after this call, after these results are public, it's definitely on the agenda for May to spend some time with both agencies and really discuss the credit quality of the company, how it's improved and the recurring nature of the cash flow stream that comes out of this business. I think it's continually underappreciated in a number of markets. The ability to produce recurring cash flow, both at a static level and then also the growth that the industry would suggest is going on. But I really can't speak for the thought process there. I think we have, as we talked about in April at our analyst day, we have some pretty compelling credit statistics improving rapidly, very comparable to other industries similarly situated with long-term contractual revenues across long-lived assets. Already today leverage ratios that are very comparable. So, you know, it's a challenge. It's a challenge for the whole industry, not just this company, and it's one we're going to spend a fair amount of time on. I think there is -- I'm optimistic, I think there's a significant amount of value that comes out of improving credit ratings and credit spread across the whole balance sheet, and as you think about refinancing high yield, because we do have two notes that are callable in '05 and '06, we want to be very precise about when we do that. We want to make sure we get some benefit out of -- the, hopefully, upgrades and improved credit statistics before we go out and launch a new 10-year deal, for example,.

And if you're not able to get the satisfaction from them, are you still keeping in your mirror what Global Signal did with the mortgage securitization?

Yeah, we look at that, and we look at that as a benchmark and note the arbitrage there and the inconsistency there between that rating and that level of leverage and credit quality and ourselves, which are very comparable. So if you look at that credit spread, based on that structure, it's quite an inconsistency that exists today, and our hope and belief is that we can close that gap over some period of time and not necessarily have to execute the same transaction, which I would note is highly complicated and fairly expensive on a fee basis. It's a couple, three, four-year payback just on fees. So to us it seems to be a fairly difficult approach to have to actually go through a transaction like that if you can otherwise make the progress just on your own, and that's what we're going to try for some time and can't imagine, you know -- I obviously can't make any commitments as to how successful we'll be.

Yeah, and then on your capex. Did you split out for us what was the components of maintenance versus nonmaintenance capex?

Yeah, we're -- we would still suggest to you 8 to 10 per quarter is maintenance capex, and we're going through a process to really nail that down for everyone and be more specific later in the year. But we're very comfortable that 8 to 10 per quarter, or sort of 30 to 40 for the year, is a very conservative number. And I appreciate the question. I know why you're asking it because at some point, as we highlight in our definition of free cash flow, some of you may want to back out discretionary spending to try to come to an approximate of earnings, and that's fine. So I'm happy to tell you that today we're comfortable with the $8 to $10 million per quarter level.

And what was the actual within first quarter?

I don't have that handy. I mean it's right in that, it's in that range.

Because I know we've already made that change, I mean that's what we think is the way to do this.

Yeah.

We were one of the first to move to free cash flow and and we wanted to do valuation of free cash flow, so if Jay or somebody could get that to us afterwards, because that's the number we're using.

Okay.

Great. Good luck, guys.

Thank you.

Thank you. Our next question comes from Mr. Alex Rygiel. Please state your company name, followed by your question.

Friedman, Billings and Ramsey. To follow up on an earlier question, at year-end 2004 what could the annual revenue run rate be at Freeview?

44 -- Alex, $44 million.

Perfect. And then to follow up on that, can you generally just comment on Nextel's Spectrum swap proposal and its impact on your business?

Well, Alex, as we discussed a little bit at the analyst day, you know, in essence, I think Nextel does a very good job of leveraging the spectrum position that they have today, and are doing amazing things with it, from a network perspective, in bringing new services to their customers. And certainly it is more complicated by virtue of the spectrum position they have, and the need to share with public safety in parts of the band. You know, the specific issues around their spectrum swap proposal are ones that I will leave to the wireless carriers and the FCC to ultimately determine what is the best way forward. Certainly, I think that, as every one of our customers enjoys additional bandwidth, additional spectrum, they are all excited about bringing out new services to serve their customers that do, in fact, need new spectrum allocations. And so, you know, this is certainly one approach that Nextel is taking. If this approach doesn't work quite the way they think it should, I'm confident that they're looking at other ways of bringing new services out to their customers, just as everyone else is. So, you know, in a roundabout way, I guess I'm saying I don't want to specifically comment on the merits of that proposal one way or the other. I do feel that all of the carriers are going to be focused on enhancing spectrum positions, and that will result in new services coming out, which I think is a benefit to all in the wireless industry.

Thank you.

Thank you. Our next question comes from David Marsh. Please state your company name, followed by your question.

Thanks. I'm with Friedman, Billings, Ramsey. Fellows, in the investing section of your free cash flow statement, there was $14 million investment in affiliated entities. Could you tell us what that is pertaining to, and if we should expect more of that type of activity going forward?

Yeah, David. That is a discretionary investment that we made in a company called FiberTower, which we have a 35% interest in. FiberTower is engaged in the backhaul business. This is a business in the U.S. that I would suggest is an addressable market of just approaching $5 billion U.S. in revenue. And, in effect, it is the link that each one of the cell sites, each one of these transmitting sites, requires to connect that particular transmitting site back to the core part of the network, the swerving switching component of the network. And there is a significant need for these backhaul facilities. As new services are deployed, and as additional voice capacity is demanded at a site, the backhaul continues to increase. And the company FiberTower is interested in, and is providing, wireless carrier customers on existing tower facilities an alternative backhaul that is very reliable, highly reliable, and lower cost than what the traditional backhaul alternatives have been to date. And we made this investment in that company as a way to continue to work with our customers to improve the efficiency of their network on the shared basis around our existing assets. But it is a --

We made the investment to maintain our 35% interest, and it was made in conjunction with a round of financing the company was raising that also included outside venture capital coming into the company. So done on a valuation that we were comfortable with.

Right.

Great. And follow-up question is, as free cash flow continues to build over time, would you look at potentially acquiring other tower assets, either domestically or internationally, and what kind of metrics do you think would be attractive for an acquisition?

I think -- go ahead, if you want.

I was just going to say, David, I think, you know, the first and foremost thing that you should, and all should, remember is the four initiatives that I laid out, and we don't talk about acquisition of tower assets domestically or internationally in the organization at this point. You know, I would submit to you that we are very focused on reducing the cost of capital first, and all of the initiatives that we are focused on are designed to do just that. We're not at our goals yet in terms of that particular metric, the reduction in cost of capital, and until we realize that type of goal, it really isn't a subject that we talk a lot about in terms of acquisition of towers, here or internationally. So there really isn't a way to answer the question in terms of what metrics we would look at to do it.

Yeah, I mean, David, really it goes to my -- part of my presentation this morning, which is why do we focus on the cost of capital? I mean, we -- in order to be able to make discretionary investments in any size going forward that compete favorably with buying our own securities, and I mean long-term debt and/or equity, you know, the cost of capital has to ultimately come down. And the way we think about that is, you know, we've got a business that stated goal and experience and practice would indicate ought to grow, as we said, over 20% for a sustained period of time in free cash flow, that's trading at substantial discounts on a forward multiple to that. So it appears to us that it's very -- it'll be very challenging to invest significant sums outside the core business for some time until that is rectified.

I do want to come back to Rick's question real quickly on the maintenance capex. I'm not -- we're not hedging on the answer. The number rolled up to $5 million this quarter in maintenance capex. What I would caution everyone is we are still making certain, doing a little more due diligence around the proper coding, because sometimes it's challenging when you're improving a site, what was maintenance and what was site improvements associated with a new tenant, if you understand. So we're comfortable being a little more conservative saying it's 8 to 10 per quarter. The number actually rolled up to be 5, but I'd put that with a grain of salt for everyone as you look at that for the quarter.

Thanks, guys.

Okay.

Thanks, David.

Thank you. Gentlemen, there are no further questions at this time. Please continue.

All right. Well, that's great. And hopefully a number of you had an opportunity to either come to Pittsburgh for our analyst day on April 15 or join us on the webcast for that, and that we were able to give you enough insight into what's going on in our business that it has made this call very efficient. We appreciate everybody joining us this morning, and we look forward to reviewing our second-quarter results with you a little later in the year. With that, we'll end the call. Thank you.

Ladies and gentlemen, this concludes the Crown Castle International first-quarter conference call. If you would like to listen to a replay of today's conference, please dial 303-590-3000, followed by the pass code 576555. Once again, if you would like to listen to a replay of today's conference call, please dial 303-590-3000, followed by the pass code 576555. You may now disconnect, and thank you for using AT&T Teleconferencing.