Crown Castle Inc (CCI) 2006 Q2 法說會逐字稿

Good morning my name is Tracy and I will be your conference operator today. At this time I would like to welcome everyone to the Global Signal Second Quarter Earnings Conference Call. [OPERATOR INSTRUCTIONS] Mr. Klopf, you may begin your conference.

Thank you, Tracy, and good morning everyone. I'd like to welcome you to Global Signal's second quarter earnings conference call. Joining us today are Jerry Elliott, our Chief Executive Officer, and Steve Osgood, our Chief Financial Officer. This call is being recorded and the replay number is 800-642-1687 or international 706-645-9291, access code 3143792.

This call will also be available via webcast on our website, gsignal.com. I would like to point out today that statements today which are not historical facts may be deemed forward-looking statements. Actual results may differ materially from the estimates or expectations expressed in those statements. Certain of the factors that could cause actual results to differ materially from our expectations are detailed in our SEC reports. I direct you to the Safe Harbor section of our earnings release for the full forward-looking statement legend. With that I will turn the call over to Jerry and Steve.

All right thank you, Jeff, and thank you everyone for joining us on the call this morning. This is the first real earnings call for Steve Osgood and me and we've both been on the job now for about three months. In those three months we've learned a lot about Global Signal, our strengths and our opportunities. Our many strengths include our employees who are dedicated to serving our customers and making Global Signal a great place to work and I want to thank them for everything they're doing everyday to grow our business, service our customers and make this a great company.

Another strength is our industry and the quality of our towers as preferable locations for our customers. You all know the continued solid growth of the wireless industry with increasing use of wireless voice, data and content by consumers and businesses. In addition, the AWS spectrum auction that begins tomorrow looks like it could result in one or maybe even two new nationwide wireless networks in addition to significant additional network buildouts by the major wireless carriers, Leap, Metro PCS and several new entrants.

Sprint's announcement today of its 4G rollout will also be another positive factor for us, particularly given our relationship with Sprint. That, of course, is all good news for Global Signal and continues to improve our prospects for future growth and revenue and cash flow. We're in a great position to continue to capitalize on the ever-increasing use of wireless because our towers are in the best locations. Almost 60% of our towers are in the largest 50 cities in the US and 73% of our towers are located in the 100 largest cities.

The tower business is fundamentally a real estate business but with faster growth than traditional real estate, so being in the best locations is one of the keys to success. In terms of my approach to the business, many of you already know me well and know that my sole focus has always been on driving growth and free cash flow. I'm continuing that single-minded obsession here at Global Signal, so you should expect that everything we do will be centered around growing cash flow and increasing our dividend.

With respect to our second quarter results, Steve is going to go through the details in a minute, but let me make a few comments on the highlights. Revenue was 122.5 million, which is a 58% increase from a year ago and is 1.2% higher sequentially from the first quarter of this year. Adjusted funds from operations on a per share basis, which is really the best measure of the operating performance of the business, increased 3.8% sequentially.

Leasing activity remains very strong, and during the second quarter, we executed new leases that are going to produce an all-time record of $9 million of new annual revenue. The new leasing activity during the quarter continues to be driven by the big four wireless carriers who in total accounted for 61% of our new leases, and activity from the regional carriers such as Leap and Metro PCS also continues to grow and accounted for 27% of the new leases signed in Q2.

Our mix of tenants and revenue also continues to improve with telephony and wireless broadband providers accounting for 94% of second quarter new lease revenue. It's important to note that our new leasing revenue from telephony and wireless broadband providers is growing at more than 5% sequentially so as our mix of revenue continues to shift toward these providers and away from the slower growing sources of revenue, our revenue growth should accelerate.

As you've been told by all the other tower companies, we're all starting to experience some side consolidation from Cingular. We are, however, continuing to get strong demand and robust lease-up from Cingular so that net-net our revenue from Cingular continues to grow. Net lease-up activity in the second quarter, which is new tenant leases signed during the quarter minus termination notifications received during the quarter, was a solid $3.9 million of additional annual revenue and it was a 43% sequential increase from Q1. Including escalations, we added $6.4 million of additional annual revenue during the second quarter. This net new revenue growth is going to continue to drive our EBITDA and adjusted FFO which are the metrics we focus on and will continue to increase cash flow.

With respect to acquisitions we are interested in continuing to grow our tower portfolio but valuations are generally too rich for us right now, so we're going to remain patient and disciplined until more rational pricing returns to the market because it will -- it always does. Our program of buying out the land underneath our towers accelerated during the second quarter and we expect it's going to further accelerate during the second half of this year. We're buying land at cash-on-cash yields of about 8.3% so it's a very good return on our capital.

Buying the land also, of course, gives us total control of our site and eliminates a significant expense for us and the 23.2 million of land acquisitions we completed during the second quarter is going to eliminate almost $2 million of rental expense every year going forward. One comment on capital expenditures, we're starting a couple of major information technology projects that are going to occur over the next 12 to 18 months, and we'll be spending in total over that period several million dollars.

These projects are going to greatly improve our data systems, efficiency and processes, all in order to provide better and faster service to our customers. But while we're making these improvements you should expect a couple of million dollars of additional CapEx each quarter for the next several quarters.

Before I turn the call over to Steve, I just want to emphasize that the total return our stock provides to our stockholders is the current dividend yield of 4.6% and the growth of the business make our stock look very attractive, and going forward, we're going to focused exclusively on driving cash flow and increasing our dividend. Also please remember that our dividend is a tax free return of capital. When you compare our dividend yield and growth prospects to much slower growing companies like REITs or compare our yield to companies who have flat or even declining free cash flow our stock looks very attractive to me. Steve?

Thank you, Jerry. I'm going to start with the highlights for the second quarter 2006 financially and then go into more detail with respect to the results. For the second quarter of 2006 Global Signal had adjusted EBITDA of $57.6 million, an increase of 42.9% over the second quarter of 2005's adjusted EBITDA of $40.3 million. That's $0.82 per diluted share for Q2 2006. Adjusted FFO in the second quarter 2006 came in at $34.2 million, an increase of 41.6% over the same quarter of 2005's adjusted FFO of $24.1 million. That's $0.48 per diluted share for Q2 2006.

For the second quarter, we had a net loss of $17 million which is $0.24 per share. The largest components, as has been discussed in previous quarters, include non-cash items such as depreciation, amortization and accretion with respect to the Sprint sites. Now let me review the quarter in more detail.

As Jerry mentioned, revenue in the quarter came in at $122.5 million. That's up $44.9 million or 58% over the second quarter of last year. Our Sprint site contributed $63.3 million to the quarter's revenue which is 52% of total revenue. If you look at our mix of revenue for the first quarter -- I'm sorry, for the second quarter, 79.7% of our revenue in the quarter came from telephony tenants. As stated in previous calls we expect this mix to increase as we focus on signing more telephony leases as a percentage of our total lease-up.

Our gross margins during the quarter or tower cash flow, as we refer to it, came in at $65.6 million. It's about 1.4 times the tower cash flow we had in last year's second quarter. If you look at our tower cash flow margins as a percentage, you'll see that they're down from the periods prior to the Sprint acquisition. It's primarily due to the Sprint sites which have lower tenants per tower and higher ground rents based on their urban and suburban locations, and also the effect that pre-Sprint we owned a larger proportion of our towers, the land under our towers.

We would expect those margins to increase as we add more tenants to the Sprint sites. The Sprint sites contributed $24.7 million or 38% of our tower cash flow in the quarter. However, on a quarter over quarter sequential basis tower cash flow declined in Q2 2006 to $65.6 million from $67.6 million in Q1 2006. This decrease of $2 million was despite an increase in revenues of $1.5 million in the second quarter. This reflects the fact that Q2 2006 had $56.9 million in direct site expenses versus $53.4 million in Q1 '06 or an increase of $3.5 million.

As part of Global Signal's remediation efforts of our material weaknesses as described in our 2005 10-K, we discovered that straight line ground rent expense had not been recorded on certain amendments to ground rent leases. This resulted in an additional charge to ground rent expense of $2.2 million in the second quarter. In addition, we also discovered as part of this process that the revenue share payment required under certain of our ground leases had been under-accrued by approximately $400,000. If you were to make adjustments for these two items alone to our tower cash flow on a sequential basis, our tower cash flow would have increased by $800,000 or 1% over the first quarter 2006.

We also incurred an increase of approximately $1 million in structural analysis and site management expenses. SG&A for the second quarter of 2006 was $16.8 million. This compares to $9.4 million for the second quarter 2005. The increase of SG&A for Q2 2006 over the second quarter 2005 was $7.4 million. This difference is primarily due to non-cash stock compensation, increased personnel and other costs tied to the Sprint acquisition itself, higher costs involving IT professional fees due to our efforts to comply with Sarbanes-Oxley and remediate our material weaknesses.

It should be noted that SG&A excluding non-cash stock comp declined in Q2 2006 to 9.8% of revenues from 10.9% in Q2 2005. On a quarter-over-quarter sequential basis SG&A expense increased in the second quarter 2006 to $16.8 million from 11.1 million in Q1 of '06. This increase of 5.7 million is primarily caused by non-cash comp expense in Q2 2006 of $4.9 million. In addition we incurred additional professional fees of $500,000 and recruiting fees for the new management team of $400,000.

On a quarter-over-quarter sequential basis, adjusted EBITDA decreased in Q2 2006 to $57.6 million from $58.9 million in the first quarter. This decrease of $1.3 million includes the ground lease revenue share accrual item of $400,000, the additional professional fees of $500,000, the recruiting fees for the new management team of 400,000 and an increase of approximately $1 million of structural analysis and site management expense partially offset by our increase of revenue of 1.5 million in the second quarter versus the first quarter.

During the second quarter 2006 Global Signal invested $26.2 million to acquire eight wireless communication sites and to also acquire the real estate under 162 of our existing towers which were subject to ground leases. I would like to point out that it should not be interpreted that we are not actively participating in the acquisition market for towers. We continue to be disciplined in our underwriting standards and are not willing to make acquisitions that would be dilutive in the short or long term.

That does not mean, however, that we're not looking at all the potential transactions that are in the market. We spend the energy and effort to review potential transactions because we view the acquisition process as one that is fluid. We believe that in order to be successful when the current cycle begins to change and pricing becomes more attractive that we need to be in the market reviewing all potential transactions in order to be able to take advantage of that market at that time.

Finally, I would like to address a few additional items regarding our capital structure. At the end of the second quarter 2006 the company had $1.84 billion of long-term debt or 7.3 times adjusted EBITDA. Our debt service coverage ratio for the quarter was 2.3 times. And with that, I think, Operator, we can open it up for questions.

[OPERATOR INSTRUCTIONS] Your first question comes from Ric Prentiss with Raymond James.

Good morning, Ric.

This question is for [inaudible - technical difficulty], you mentioned earlier that you focus on free cash flow, cash flow per share and we agree with that. I appreciate all the details on all those non-cash items. What's going to be the best way in the future to kind of make sure we're modeling it correctly [inaudible - technical difficulty] at true cash flows and being able to pull it out of the income statements? Is there a way to break out the non-cash revenue items, non-cash expense items for us easily?

Well Rick I would say that you would need to do the same thing that we do to actually manage the business, which is why we provide in the press release the adjusted EBITDA as well as the adjusted AFFO numbers because really a number of the adjustments that flow through there try to really provide some transparency to get down to actually a cash number.

Okay. And do you feel that you're spending [inaudible - technical difficulty] on the key systems any more of the accounting details maybe coming up as far as non-cash items that we need to isolate?

You broke up a little bit but to make sure I understand the question you were asking whether we might -- whether we're expecting to have anymore of these type of adjustments as we had in the second quarter?

Exactly.

I would tell you that we're still in the process of the remediation process. I don't know of any but it's still a little bit too early to say that we're solving the all-clear. I mean it's a process. We had material weaknesses. I'm not surprised due to the fact that we had those material weaknesses that we have come up with some items such as we had in Q2. I don't -- and again I don't know of any additional ones but I wouldn't say that that wouldn't be a possibility.

Sure. Okay well that's good as we just kind of watch the process. On another note, the demand side, you have Sprint announcing kind of a 4G plan on what to do with their 2.5 Giga frequency. How are your [inaudible - technical difficulty] lease agreements set up with Sprint as far as if they put additional equipment in on the sell side of 2.5 Gigahertz do you get extra revenue that's on the same [inaudible - technical difficulty] or how is it Sprint looks to roll out a large network it sounds like?

Hey Rick it's Jerry. Yes, as they put on additional equipment both on the towers as well as on the ground going forward that is going to drive additional revenue. The MLA has some specifics about pricing in some cases and others it's going to be a market-by-market approach, tower-by-tower approach going forward. But we do expect significant benefits from their 4G roll out that they're going to be announcing today.

We've been spending time with the Sprint folks and it's an exciting development for us as they continue to enhance the network going forward. The other thing I just wanted to come back to your first question on visibility on sort of the cash area by the business. As Steve said AFFO certainly is we think the best measure to look at and we're trying to take out all the noise when there are cash expenses that are one-timers and we had a number of those in the second quarter.

This time it does, of course, affect FFO but probably most importantly every time we take a look at the dividend, we're trying to look at what do we think the real cash generating prospects of the business are going forward. So that's really our strongest and most visible endorsement of what we think the cash flow generating capacity of the business is on a long-term basis as opposed to a lot of noise that might happen in any given quarter like we've had this quarter.

Okay. Yes, well good luck with it.

Thank you.

[OPERATOR INSTRUCTIONS] Your next question comes from Jonathan Atkin with RBC Capital Markets.

Good morning, a couple of questions. On the IT-related CapEx, over what timeframe are you going to incur that and I think you mentioned a couple of million. Was that on an annual basis or all in for the project? And what's driving that? Is that Sarbanes-Oxley or are there operational issues that you had identified with respect to perhaps co-location cycle times or what not that's also the motivator here? And then secondly on churn, can you give us a flavor for what the perhaps the annualized churn rate is right now?

I will take the first question regarding the IT project. The timeframe is that these costs will be expended over the next 12 months through the end of the second quarter of '07 as we currently project it. The all-in cost of the IT project itself is approximately $10 million but with some of the ancillary costs that will be incurred as well tied back into the material weaknesses and remediation I would expect that we'll get up to 11 or 12 million by the end of the day.

The other thing I'd say about the IT work, Jonathan, is that it's two things. One is certainly remediation efforts around Sarbanes-Oxley. But from my perspective more importantly for the long-term operation of the business is significant improvements in customer service, the information our folks have, the data they have, how quickly they can respond to our customers, how helpful they can be with our customers -- to, really provide the best service in the industry is where we're trying to go. So that's where most of the money that Steve talked about is being spent. Certainly some of it's on remediation and compliance, but most of it's directed toward one thing which is customer service.

In terms of churn rates, we do have a little bit higher churn rate than the other three public tower companies primarily because of the mix of tenants as I've talked about. As our mix continues to shift toward telephony and wireless broadband providers, I mentioned that 94% of our new leasing activity in the second quarter was from telephony and wireless broadband providers. That mix will obviously continue to shift. We think revenue is going to accelerate.

Right now our telephony and wireless broadband new lease annual revenue is growing at more than 5% sequentially so we're looking forward to being able to report in the P&L every quarter the fruits of that new solid leasing activity. The churn rate around 2% per year and again that's reflecting a little bit of a different mix from the other folks but continuing to improve over time.

Thank you. And then lastly where do things stand now in terms of ground lease ownership? You talked about the cash-on-cash yields you're getting and saving perhaps 2 million of incremental rental expense each year with your ground lease repurchase program, but what percentage of the ground right now do you own versus rent?

Right now the total ground ownership is only about 14% so we've got a long way to go in terms of opportunities, we think to continue to buy ground underneath the towers which $2 million was how much we'll eliminate as a result of purchases only in the second quarter so that drops straight to not only tower cash flow but to EBITDA and FFO. So it's a good program for us. We're going to continue to pick up the pace. It gives us control over the site going forward and we'll leverage the financial results pretty nicely. But a lot of room to run there.

Thank you.

Your next question comes from Mark DeRussy with Raymond James.

Hi good morning. I was wondering if you could give us any detail about what you spent this quarter on maintenance CapEx and then any sort of CapEx you would characterize as augmentation or I think the term your predecessor used was EBITDA enhancing?

I can help you there, Mark. Our EBITDA enhancing CapEx was right around 4.1 million --

Right.

-- and maintenance CapEx, which we'd be the first to tell you would be a little bit low as far as a run rate, was only approximately a couple hundred thousand dollars as we're doing work during the summer. But more of that will fall into the third quarter when it actually gets completed and built.

Okay. And then what would you suggest to be sort of a run rate then, if you don't mind, for maintenance? Is is kind of 15 million a year-ish?

On the maintenance front I don't know what it was.

No not on the maintenance front. I would tell you it's around $3 million a year on the maintenance side. It's very seasonal.

Okay.

It depends a lot on the weather and billing from vendors which tends to lag but in total if you're looking an annual number around 3 million on maintenance.

Okay. And then you talked about how the tower OpEx was impacted by an adjustment due to the straight line accounting. I'm looking at your adjustment to get to EBITDA and it looks like the net positive impact there was about 4.3 million, which I believe was up sequentially about $1.5 million. I know you guys are kind of still in the process of addressing this but that number has -- it's moved around a lot. I'm wondering if at this point in time you guys are comfortable enough to kind of indicate where you think that's going to settle out, or if not when do you think you'd be able to sort of help us model that going forward?

That number has moved around a lot. Frankly it's been one of the frustrating things for both Steve and I. It looks like that number should be in the low 4s every quarter going forward. We are continuing to scrub. You can tell we've found a number of items in the second quarter that were unpleasant surprises. As Steve said we don't know of anything else today but transitioning this company into a solid operating company is a work in progress, and as we're doing that I'm sure we'll continue to find things. But on a run rate basis, low 4s' I think is about the right number, Mark.

Okay. And then just to follow on to that conceptually. I know you guys were looking at an overhaul of the accounting system. Have you guys sort of have gotten to the point where you've made your selection? I know you're looking at a couple of different vendors there.

Yes we have, we have, and we're just now really getting started on that process. It's going to take 12, 14 months to complete. It's not just the accounting side as I mentioned earlier. There's -- really the vast majority of the work is around improving customer-related information data and systems so that we can provide a lot better, faster service to our customers to increase lease-ups. So yes accounting is important, obviously, but that's only one piece of the overall project here which is really just getting going in the third quarter.

Okay thanks.

Your next comes from Vance Edelson with Morgan Stanley.

Hi, thanks a lot. Could you provide a little color on the land purchase process. Specifically are the land owners generally respective to the idea or do they tend to be tough negotiators? And how many towers are on municipal property such that they're really not for sale -- you're never going to be able to buy the property, but on the other hand there's not much risk of them jacking up the rent? Thanks.

Okay I don't have the specifics of how many are actually on municipal properties but I will tell you that we have actually been recently successful in acquiring the rights underneath our towers on some municipal properties. So you may have read recently that certain states are selling their toll roads. I can tell you that certain municipalities are also selling the ground underneath their towers.

We have basically solicited -- our focus is really on the towers that we own. As a general rule we're not interested in going out and buying the land under other people's towers. So we have selectively solicited all of our existing land owners to see if there might be an interest. We did look at those that we thought from an economic standpoint would be the most attractive to us which would be those that have revenue-sharing provisions in their leases just to be able to have the economics of that going forward.

I would tell that as far as tough negotiators I think it really comes down to the psychology and the mental state of the land owner themselves. Oftentimes they like the fact that they're receiving a monthly check and that they're getting that check every month, and they see no reason for a transaction. And a lot of them have been cold called and just frankly surprised that we have this interest and that's where we've been successful in completing a transaction.

Okay thanks. And just one other question on the -- the towers picked up from Sprint last year just in a 2G, 3G world before we even get to WiMAX could you maybe give an update on the number of tenants per tower and just some color on how those Sprint sites are performing of late. Thanks.

Hey Vance, it's Jerry. Going forward we're really going to talk about Global Signal as Global Signal. We're not going to be talking about this piece or that piece and the various acquisition sets and what they're performing on. Obviously we bought the Sprint towers just about a year ago now. They were for the most part single tenant sites.

So there is a lot of opportunity and potential in terms of continuing to add additional tenants on those sites. It's been very strong lease up from other carriers on those towers. In some cases we're needing to augment the tower, acquire additional land. So it's perhaps going a little bit more slowly than some of our other tower lease-ups. But I can tell you in terms of run rate the growth rate on the Sprint towers is much faster than the legacy portfolio and I think it will continue to be so because they're in terrific locations and we're very optimistic about the prospects for faster growth rates continuing to come out of those particular towers.

Okay thanks a lot.

Your next question comes from Clay Moran with Stanford Group.

Good morning.

Good morning Clay.

I just wanted to get back to Sprint again. Is there any other incentives in your agreement with Sprint so that you might get a greater share of their future deployment? Or is it going to be really location based as it traditionally is?

Hey, Clay, it's Jerry. We're not going to get into the specific terms and conditions of every lease, master lease agreement we've got with the big four carriers. But I think you can be confident that because of the relationship we've got with Sprint, the locations that they're familiar with, comfortable with, know how to do the RF engineering around, we think the prospects there for additional lease up not only from the new 4G announcement frankly continuing rollouts on the EVDO side. We think we're going to continue to drive revenue and an acceleration in revenue.

Okay and then one clarification on the, I guess it was non-cash ground rent, 2.2 million in the quarter. Was that a one-time catch up or is that a recurring type number?

Well it will be recurring. I mean, there is an adjustment going forward. Well, I take that back, there is on the straight lining. But on the actual -- I'm sorry, the rev share piece, that was a one-time catch up and the accruals needed to get caught up for more than a month that had not been booked basically. So that's a one-time shot.

That was the 2.2 million number?

No that was the 400,000. The 2.2 million number runs at about 400,000 a quarter.

So 1.8 of that was catch-up.

Okay thank you.

All right, well thank you very much everybody for joining us this morning. We greatly appreciate your interest. We continue to look forward to accelerating our growth rates and revenue opportunities going forward as well as controlling our expenses, all of which are going to be directed around growing our cash flow and growing our dividend. So we look forward to reporting back to you at the end of the third quarter. Thanks.

Thank you for participating in today's conference call. You may now disconnect.