Crown Castle Inc (CCI) 2014 Q1 法說會逐字稿

EventID. "Please stand by for realtime transcript. " Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the Crown Castle International Q1 2014 earnings conference call.

(Operator Instructions)

I would like to remind everyone that this conference call is being recorded. I will now turn the presentation over to Son Nguyen, Vice President of Corporate Finance. Please go ahead, Mr. Nguyen.

Thank you, John, and good morning, everyone. Thank you for joining us today as we review our first-quarter 2014 results.

With me on the call this morning are Ben Moreland, Crown Castle's Chief Executive Officer; and Jay Brown, Crown Castle's Chief Financial Officer. To aid the discussion, we have posted supplemental materials in the investor section of our website at crowncastle.com, which we will refer to throughout the call this morning.

The conference call will contain forward-looking statements, which are subject to certain risks, uncertainties and assumptions, and actual results may vary materially from those expected. Information about potential factors which could affect our results is available in the press release and risk factor sections of our Company's SEC filings.

Our statements are made as of today, April 24, 2014, and we assume no obligations to update any forward-looking statements. In addition, today's call includes discussions of certain non-GAAP financial measures. Tables reconciling such non-GAAP financial measures are available in the supplemental information package and slide presentation posted in the investor section of the Company's website at crowncastle.com.

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

Thanks, Son, and good morning, everyone.

We executed another great quarter in Q1 2014, exceeding the high end of our previously issued outlook for site rental revenue, site rental gross margin, adjusted EBITDA, and AFFO. As you can see on slide 3, the strong results from site rental and network services, coupled with our recent financing activities, allow us to increase our outlook for full year 2014.

In addition to achieving great results in Q1, we had a very productive quarter on many other fronts. First, at the beginning of the year we achieved a significant milestone, as we began operating as a REIT, and subsequently paid our first common stock dividend in March.

Further, since the beginning of the year we have refinanced $2.6 billion of debt, extending our average debt maturity, and lowering overall cost of debt. Also during the quarter, we made significant progress integrating the AT&T towers, the integration of which we expect to be substantially complete by the fall of this year.

Turning to slide 4. During the first quarter site rental revenue increased from $615 million to $747 million, representing a year-over-year growth of 21%. On an organic basis, before nonrenewals, and adjusting for the impact of acquisitions, FX, material one-time items, and straight line accounting, site rental revenues increased by $47 million, an increase of approximately 8% compared to the same period a year ago.

Excluded from the organic growth rate is a one time benefit of $5 million from a customer contract termination payment from Revol Wireless during the quarter. The contract related to site leases for Revol, a regional carrier in Ohio that ceased operations earlier this year. Revol previously generated annual site rental revenue of approximately $4 million. Excluding the benefit of this one-time item, we were at the high end of our Q1 outlook for site rental revenues.

Of our approximately 8% organic growth, the cash escalations in our customer contracts contributed approximately 3%, and new leasing activity contributed approximately 5%. This new leasing activity was driven almost entirely by the big four wireless carriers, with 85% of the growth coming from new tenant installations, and the remaining portion from amendments to existing tenants.

As a part of the new leasing activity, we are continuing to see very strong demand for our small cell networks. At the end of the first quarter, we had nearly 12,000 small cell nodes, and over 6,000 miles of fiber. The contribution to site rental revenue from our small cell networks is up approximately 20% year over year. For the quarter, nonrenewal of tenant leases reaching their contractual term end dates, inclusive of Sprint's IDEN decommissioning, was in line with our expectations.

Moving on to slide 5, site rental gross margin increased $81 million to $519 million, up 19% from the first quarter of 2013. Site rental gross margin percentage is lower by approximately 175 basis points year over year, as we closed on the AT&T tower transaction, which had an average tenancy of 1.7 tenants, and, therefore lower margins when compared to our legacy assets with approximately 3 tenants.

However, the organic incremental margins were in excess of 90%, at the high end of our historical average, and reflective of the high operating leverage of the tower business model. In the absence of additional acquisitions, we expect to see site rental gross margins expand as carriers add equipment to our sites.

Adjusted EBITDA increased 20%, driven by the inclusion of the AT&T towers, and increase in site rental gross margin and strong performance of our network services business, and offset to a small degree by increased G&A, which was up about 8% year over year. This increase in G&A includes the effective increased staffing to manage our T-Mobile and AT&T tower transactions, which increased our tower portfolio by nearly 75%, and the significant growth of our small cell networks.

AFFO was $349 million, compared to $263 million from a year ago, an increase of 33%. On a per share basis, AFFO was up 17%, increasing from $0.90 per share to $1.05 per share.

As mentioned in our press release last night, we have updated our AFFO definition to reflect the benefit of prepaid rent from customers over the life of customer contracts, rather than the period in which the prepaid rent was received. We believe the change will enhance the comparability between us and our tower peers as we highlight the significant and growing cash flow our business produces.

Obviously, the change to the AFFO definition does not change our cash flow profile or our investment capacity. Under the previous definition of AFFO, we would have exceeded the midpoint of our Q1 outlook by approximately $25 million.

With respect to how the change in the definition is likely to affect our AFFO results, our AFFO will be lower initially, because of the cash received from prepaid rent in the current period is significantly greater than the amortization of prepaid rent received in prior periods. This is primarily due to the fact that we have increased our portfolio of towers and small cell networks significantly over the last several years. Assuming no additional acquisitions and similar levels of leasing activity, we would expect the amount of prepaid rent and amortization of prepaid rent to converge over time.

Turning to investments and financing activities, as shown on slide 6, since the beginning of the year we refinanced or extended the maturities on $2.6 billion of our debt. In the first quarter of 2014 we extended the maturities on $1.8 billion of our term loan B by two years. Further, earlier this month we closed on an eight-year, $850 million senior notes offering, with a coupon of 4.875%.

Proceeds from the offering will be used to refinance $800 million of existing debt that has a weighted average coupon of approximately 6%. After giving effect to the aforementioned notes offering, our current weighted average cost of debt stands at 4.2%, with a weighted average maturity of six years.

Our total net debt to last quarter annualized adjusted EBITDA is 5.4 times, and adjusted EBITDA to cash interest expense is 4.2 times. We expect to continue to delever through growth and adjusted EBITDA, trending towards approximately 5 times debt to adjusted EBITDA.

During the first quarter, we invested $143 million in capital expenditures. These capital expenditures included $20 million on our land lease purchase program. During the quarter we extended 340 land leases on our site by an average of approximately 26 years. The extension activity impacted consolidated recurring cash ground lease expense by approximately 20 basis points.

Additionally, we purchased land beneath approximately 130 of our towers during the quarter. As of today, we own or control for more than 20 years the land under towers representing 72% of our site rental margin. In fact, today approximately one-third of our site rental gross margin is generated from towers on land that we own. Where we have ground leases, the average term remaining on our ground leases is approximately 30 years.

Our proactive approach to achieving long term control of the ground beneath our sites is core to our business, as we look to protect our assets and control our largest operating expense. We have provided more information regarding our ground interest activity in our supplemental information package that we referenced last night in our press release.

Of the remaining capital expenditures, we invested $11 million on sustaining capital expenditures, and $111 million on revenue-generating capital expenditures. The latter consisting of $75 million on existing sites and $36 million on the construction of new sites, primarily small cell construction activity. We had no meaningful acquisitions of towers in the first quarter.

Further, during the quarter we paid our first quarterly common stock dividend of $0.35 per share, for $117 million in aggregate. Also during the quarter, we purchased $21 million of common shares, at an average price of $74 per share.

Moving onto 2014 outlook, as shown on slide 7, based on our first quarter results, our expectations of continued strong activity from the carriers for the remainder of the year and our recent financing activities, we have increased our full year 2014 outlook for site rental revenues, site rental gross margin, adjusted EBITDA, and AFFO, by $11 million, $9 million, $26 million, and $28 million, respectively, at the midpoint.

As shown on slide 8, the midpoint of our 2014 outlook for site rental revenues implies growth of 19%, or approximately $480 million, compared to full year 2013. On an organic basis, before nonrenewals, our outlook implies revenue growth of approximately 9% year over year at the midpoint.

The 9% is comprised of approximately 5% from new leasing activity, and approximately 4% from escalations on existing customer lease contracts. Compared to the first quarter 2014, our outlook assumes a 15% increase in quarterly new leasing activity for the remainder of the 2014.

Our 2014 outlook for site rental revenues also includes the negative impact of nonrenewals of approximately 2% of site rental revenues. Approximately half of the nonrenewal impact is expected to come from Sprint's decommissioning of their legacy IDEN network, and the remainder is expected to come from typical nonrenewal activity.

Based on Sprint's stated intention to decommission their IDEN network and our contractual terms with Sprint, we believe approximately 3% of our run rate site rental revenues will be impacted by the IDEN network de commissioning. These IDEN leases have effective term end dates spread evenly throughout 2014 and 2015.

With respect to 2014 adjusted EBITDA, our increased outlook implies 16% growth year over year, and reflects the previously mentioned increase in site rental gross margin and higher expected services gross margin contribution. While the increases in staffing costs are a headwind to this growth in the short term, we believe the investment will allow us to maximize and execute on our leading portfolio of assets over the long run.

As presented on slide 9, after adjusting our previously provided full year 2014 outlook for AFFO from January for the updated definition, on an apples-to-apples basis, our new outlook increases AFFO guidance by $28 million at the midpoint. Our increase to AFFO reflects the increase in our outlook for adjusted EBITDA and from interest savings from our recent financing activities offset by an increase in sustaining capital expenditures related to additional office facilities.

On a per share basis, our 2014 outlook implies AFFO growth of 11% before considering the benefit of the investment of our cash flows and after the 1% drag from additional office facility CapEx. For the full year 2014, we believe we will generate $425 million to $525 million in discretionary investment capacity.

I'd like to spend just a minute to describe the sequential impact to the second quarter of 2014 from certain one-time or seasonal items. Our second-quarter growth is impacted by the previously mentioned one-time $5 million benefit from Revol's termination payment in Q1.

Additionally, as is typical when going from the first quarter to the second quarter and warmer weather, repair and maintenance, quarter to quarter, is higher by $3 million. Further, on an AFFO basis, sustaining capital expenditures for the second quarter is expected to be higher by $11 million, which includes the additional office facilities I spoke to a moment ago versus the first quarter 2014.

Moving back to the high level consistent with our full year outlook, the positive industry backdrop which Ben will speak to, really supports our belief that there is a long runway of site rental revenue growth as the wireless operators continue to expand and improve their networks.

Given the high operating leverage of the business, we believe our organic site rental revenue growth can translate into meaningful organic AFFO growth before considering the benefit of investments that we can make from the significant and growing cash flows generated by our business. These investments include acquisitions; the construction of new sites, including small cell networks; land purchases; and the purchase of our own securities that we believe will further enhance long-term AFFO per-share growth.

Our long-standing approach to capital allocation, combined with strong execution, has driven significant growth in AFFO per share, which we believe is a good measure of our ability to pay and grow our dividends over the long term. Importantly, we believe we will be able to produce this growth without increasing the risk profile of our business.

In summary, we are focused on total shareholder returns, comprised of growth in dividends and AFFO per share. As we have said previously, we expect to grow our dividends to common shareholders by at least 15% per year over the next five years, and continue to see significant growth in AFFO per share.

Lastly, before I turn the call over to Ben, I'd like to point out that we have posted to our website, along with our earnings release, a new supplemental information package. The supplemental information package is a part of our goal to continue to enhance our communication and disclosure practices.

Many of the metrics I spoke to today are reconciled or presented in further detail in the supplemental package. We believe the supplemental information package will be a useful tool that will assist investors in understanding and evaluating our business model and overall performance.

With that, I'm pleased to turn the call over to Ben.

Thanks, Jay, and thanks to all of you for joining us on this call on this busy reporting morning. As Jay just walked you through, the first quarter was another great quarter, exceeding the high end of outlook for site rental revenue, site rental gross margin, adjusted EBITDA, and AFFO. Given the level of activity that we are seeing, we are excited about the balance of the year.

Our current application pipeline leads us to expect new leasing activity per quarter for the remainder of the year to be approximately 15% higher, compared to the level we experienced in the first quarter 2014. This level of activity, combined with our excellent first-quarter results, allows us to raise our 2014 outlook for site rental revenue, site rental gross margin, adjusted EBITDA, and AFFO.

As all four major wireless carriers continue to invest in their networks for LTE and capacity enhancement, I am excited about the prospects of sustainable long-term growth over the next several years. This is particularly true, given our position as the leading shared wireless infrastructure provider in the US, with nearly 40,000 towers and 12,000 small cell nodes in operation.

As shown on slide 10, we have a long track record of execution and growth through various cycles, whether it be macroeconomic or industry-specific cycles. Through this period of 14 years, we have delivered strong organic growth, as well as growth through disciplined capital allocation.

As you can see from these results, we are committed to a long-term focus that delivers significant value over time. With our industry-leading portfolio of assets and capabilities in the US, we expect to continue this track record in the most dynamic growth market for wireless. Over the last two years, we have invested approximately $9 billion in acquisitions, executing on our strategic objectives to expand our US portfolio of towers and small cells.

Turning to slide 11, we believe that these recent acquisitions provide us with opportunities to grow shareholder value through execution, similar to the acquisitions we have made in the past. Quite simply, our strategy is to replicate the performance of our legacy assets with our recent acquisitions.

Tower assets that we have owned and operated for more than 10 years currently yield 15% on total invested capital, representing significant shareholder value creation when compared to the initial yields at the time of purchase of approximately 4% to 5%, similar to our recent acquisitions. I believe our strategy will continue to prove successful, given our investment in our people, processes, and assets, which are focused on enabling carriers to meet the demand for wireless services.

We believe our recent acquisitions of small cell networks and towers were well timed, as network investments by carriers continue unabated. As carriers continue to invest in their networks, consumers and businesses have quickly absorbed the capacity added by the carriers.

Consumers and businesses continue to innovate, and develop new applications and devices that will take advantage of the mobile internet. This has led to a reinforcing cycle of investment by the carriers and increased usage by the end consumers.

During 2013, Cisco's annual report on mobile data traffic reported that US mobile data consumption grew 75% over 2012. Cisco projects that between 2013 and 2018, mobile data traffic, even after accounting for wi-fi off-loading, will grow at a compounded annual growth rate of 50%, or an 8-times increase in the next five years.

This growth in usage can be seen in all of our everyday lives. The convenience and accessibility of mobile devices have made smartphones and tablets the dominant channel for internet consumption, and changing the way we live, work, and play. For businesses, the mobile internet is changing the way companies operate, innovate, and compete.

There are mountains of positive statistics and trends about the mobile internet usage, and I'd like to highlight just a few. From an entertainment perspective, a majority of consumers believe mobile devices will replace traditional televisions as the most common way to consume television shows and movies in the next eight years.

A separate survey confirms that this trend is well underway, with smartphone screen time already outpacing TV screen time today. Further, Cisco reports that video already represents 50% of mobile internet traffic, and is projected to continue to grow at a 55% compound annual growth rate over the next five years.

As it relates to health, 95 million Americans are currently using mobile phones as health tools. The mobile health industry, or mHealth, is projected to grow 15 times by 2018, to reach $20 billion of value, as wireless technology has proven to increase efficiency and improve results. Remote patient monitoring is projected to save Americans $36 billion in healthcare costs by 2018.

In terms such as, the internet of things, or the connected life, have been coined to describe the machine-to-machine connectivity that we're already seeing. Today there are approximately 10 billion connected devices, ranging from GPS location devices, to thermostats, to smart meters. This number is projected to increase to 30 billion devices by 2020.

Cisco further projects that mobile data traffic created by these devices will increase 68-fold by 2018, driven by increased penetration of technologies, such as connected cars and smart wearable devices. To meet this growing demand, carriers are investing in their networks. And to effectively build out their networks, carriers need economic incentive, spectrum, and infrastructure, like we provide.

When it comes to economic incentive, we believe the US market, as the largest and fastest growing wireless market in the world, provides a landscape where the ability of the wireless carriers to make profitable investment is most apparent, and barriers to entry remain high. As shown on slide 12, the US market is uniquely attractive, due to its relative size and robustness compared to other markets.

Strong unit economics, with average RPUs greater than $50 a month, combined with high correlation between network investment and low consumer churn, has led carriers to continue to upgrade their networks to improve network quality, increase capacity, and add functionality, in order to remain competitive and grow. As a result, we would expect current network upgrade and densification activity by the four major wireless carriers to continue for quite some time.

On the spectrum front, there is approximately 600 megahertz of spectrum in the hands of carriers and potential entrants, including LightSquared, DISH, and FirstNet. Of this 600 megahertz, approximately 350 megahertz is actually deployed and is currently being used by consumers.

That leaves another approximately 250 megahertz to be deployed, depending upon the market. Some of this spectrum, including Sprint's 2.5, T-Mobile 700 megahertz, and Verizon's AWS, represent near-term to intermediate-term opportunities for Crown Castle. Other spectrum, primarily held by LightSquared, DISH, and FirstNet, represents longer-term opportunities.

Additionally, the FCC has proposed freeing up another approximately 150 megahertz over the next several years. It's possible that over the next decade, the total amount of spectrum deployed could double, a positive for Crown Castle, as additional spectrum has historically led to additional equipment being deployed on our sites.

Before I turn the call over for questions, I think it's instructive to compare the current 4G deployment cycle with the 3G deployment cycle that we're familiar with. 3G was initially deployed in 2002, and continued through 2009 to 2010 time frame, when 4G deployments began.

Based on the 3G cycle, we believe that we are still in the early innings of the 4G investment cycle. Verizon and AT&T initially led the way with 4G, and currently they are focused on network densification, having addressed coverage in the early part of their rollout.

Sprint and T-Mobile are fast on their heels, and soon will finish their initial coverage build-out. If history and Verizon and AT&T's experience holds, we expect that Sprint and T-Mobile will soon be focusing on network densification, and we are already seeing signs of those conversations happening that will be in the 2015 time frame.

Given the revolutionary nature of 4G, we have reasons to believe that the 4G LTE deployment cycle will be even longer than the 3G cycle. And in order to meet Cisco's projected 8-times increase in mobile data demand, we believe carriers will continue to invest over a multi-year period.

This multi-year deployment cycle gives us confidence in the long runway of sustained organic revenue growth. Our team has a tremendous track record of execution, giving me a lot of confidence that we'll be able to leverage this unprecedented level of activity. With nearly 40,000 towers and 12,000 small cells in the US, as I've previously mentioned, I believe we are well poised to continue to benefit greatly from these macro trends, as we have in the past.

In the near term, our team is working diligently to integrate the AT&T towers into our portfolio, so that we're able to deliver a Crown Quality customer service experience across these assets as soon as possible. We have made significant strides to that end in the first several months since closing, and while it's early, our operating results are off to a good start across these new assets.

So in wrapping up and moving towards questions, our strategy remains unchanged. We are focused on adding site rental revenue across our portfolio of assets, and investing our capital to maximize our long-term total shareholder return, which we measure as growth in AFFO per share, plus the increasing dividend we anticipate in the years to come.

With that, operator, would you please turn the call over for questions?

(Operator Instructions)

Your first question today will come from Ric Prentiss with Raymond James. Please go ahead.

Thanks. Good morning, guys.

Hey, Ric.

First, thanks for providing the supplemental information and making what was probably not an easy decision, but going to a consistent comparable AFFO definition. We appreciate that.

A couple of questions. First, on the organic growth side, obviously, services business had another big quarter. It was big in 4Q, continued big in 1Q. Help us understand what your thoughts are now, as far as how much that's going to contribute in 2014.

Then, also on the organic side, in the supplemental exhibits you gave, give some nice color on 1Q, on page 13, talking about 8.5% growth and 1.4% churn, or cash organic net growth. Then for the year, that organic growth goes up to 8.8%, but churn jumps to 2.7%.

Help us understand, is that the IDEN stuff, or what's going on there? What should we think as we look into 2015, 2016, what that looks like?

Sure. As you look at the growth for the full year, if you are looking at the outlook, there's a couple of things that are happening. Obviously, we folded in the AT&T results. That was entirely in the first quarter, and that will continue for the balance of the year.

On the cost side, we are staffing up in the first quarter, both in terms of direct expenses that would hit the gross margin -- site rental gross margin line -- and also some of G&A, and then the build-out of the facilities, which would impact AFFO.

Most of that is starting to come in during Q2. There may be a little bit of it that doesn't get all the way in, in Q2 and would impact Q3, but I think most of that will be into Q2. So I think that reconciles how to think about the addition of the AT&T assets.

On the second part of the question, we're expecting organic growth to accelerate over the back half of the year, as I think Ben and I both mentioned in our comments. The leasing that we're assuming in Qs 2, 3, and 4, on average is about 15% higher than what we saw in Q1, and that's coming from all of the items that Ben mentioned around the big four operators.

Most of that is new tenant installations on sites rather than amendments, as we've seen over the last several years. So it's site densification, them adding additional sites.

And we see that in the pipeline today, given that we're sitting here in late April. Se can see most of that already in the pipeline.

Then on the churn side, most of that is IDEN. That started to come into the revenue side in the first quarter, although most of it, really, we only saw one month worth of churn in the first quarter from IDEN, and then we'll see it for the balance of the year.

As we go into the calendar year next year, I think we previously mentioned, we thought during calendar year 2014 we would see about 1% impact to revenues from churn from IDEN, maybe a little over 1%.Then the balance of it, we would expect to see in 2015.

Then any licenses that are canceled in the back half of 2015, obviously, will have a little bit of fall over into 2016. So, probably one-third this year, two-thirds next year, as you are trying to time out when we'll see the impact from IDEN.

Makes sense. Then on external growth, it looks like you had $62 million worth of acquisitions in the quarter. Was that for buying, building towers?

Then, Ben, you've hit pretty hard about how the US is the best market you feel for wireless. What are your thoughts internationally? Is there anything that would be interesting to you, and how you frame that?

Sure. You want to take the first part?

Yes. On the CapEx side, those were all either CapEX, we're adding on existing sites, and then the construction on these sites, the vast majority of which would be in small cells. We didn't have any meaningful tower acquisitions in the first quarter.

Rick, obviously, we're very proud of our track record and our business model around the economics of shareable infrastructure. That clearly translates to many markets around the world, as wireless is a growing business worldwide today, and we see that in our international business in Australia today.

We completely support the notion of shared infrastructure in other countries, and we continue to look. The challenge we've had thus far, and the reason we haven't pulled the trigger on anything of any size, has been the initial upfront price. Relative to the cost of capital in those other markets, we have just not been able to get to a risk-adjusted total return expectation on lease-up that you have to have.

When you impose the currency risk, and inflation, and other things that happen in some of those markets, it comes at a premium. In our opinion, we haven't been able to meet the price or expectations of sellers, and therefore haven't pulled the trigger.

So it's merely a function of price. It has really not a lot to do with -- at a price, the shared model certainly makes sense and works anywhere in the world.

We are extremely bullish, as we talked about, on what we see happening in the US market. We would note that we are in pretty good company, with Verizon's decision to acquire their Vodafone interest.

So we've got a lot on our plate here and the small cell business is going well. As networks densify and add new cell sites to accommodate the capacity, we've got a lot do here.

What is small cell? I think you said it had grown significantly, but what is it out of the total leasing revenue?

It's a little over 5%, almost 6%, and as I mentioned in my comments, it's up about 20% year over year, Rick.

Great. Thanks guys.

Your next question will come from David Barden with Bank of America. Please go ahead.

Hey, guys. Thanks for taking the questions.

So, Jay, at the last couple weeks of last year's fourth quarter, we had about an $18 million contribution from the AT&T portfolio. You ended up guiding to about $400 million embedded in the guidance, $400 million contribution for 2014. Obviously, the annualized run rate of last year's AT&T portfolio growth would have been probably closer to $33 million higher than that.

Can you talk a little bit about realized performance in the AT&T portfolio, and how changes in expectations for the contribution of that portfolio to 2014 have influenced your guidance setting? The last question is, on the 20% growth year over year in the small cell business, could you give us an update on how big that business is now today as a percentage of the total? Thank you.

Sure. On the first question, I would say so far, the AT&T assets are performing very well in terms of the run rate of both revenues and gross margin that we acquired, relative to what we expected in the acquisition. On a cash basis, it's slightly ahead of what we had underwritten and expected to have coming out of the gate.

There's obviously, if you are looking at the GAAP revenue numbers, there's the impacts of straight line, both in terms of site rental revenues and site rental direct expenses related to ground leases. So there's some movement there, but on a cash basis, slightly ahead.

There is some benefit in our uplift of about $11 million in site rental revenue. A portion of that would be related to higher initial run rates out of the AT&T portfolio, as well as the activity that I spoke about earlier of about 15% higher in the second half of the year, and second, third, and fourth quarter of the year compared to the first quarter. So, it's the combination of those two things that's driving the increase in revenue.

On the 20% growth, again, it's about 6% of consolidated revenues today, and it's up about 20% year over year. Ben, I don't know if you want to speak to any of those details on what we're seeing?

We're seeing a very significant uptake in small cell architecture amongst several of the carriers, as they're using it as a way to add capacity in dense markets. When we talk about small cell, as you know, we're in the indoor business and the outdoor business. Certainly, we are doing a number of venues, and those are co-locate able networks, and very pleased with that.

We are also having great success, and a growing building of a pipeline in the outdoor, small cell architecture, where again, serving higher density locations, where macro sites are just unable to handle the traffic. This is an underlay-type of architecture across where there would certainly already be coverage.

And we are seeing a very significant uptake this year in that architecture, and one that I think will ultimately be adopted in a robust way by all four of the major wireless carriers over time.

Thanks, Ben. Jay, if I can just quick follow up? The 20% growth in 6% of the business, so that's obviously giving you a percentage point incremental revenue tailwind. Is that factored into the 8% organic same store sales revenue growth before disconnects in the slide deck?

It is.

Okay. Thank you, guys.

Both on the historical date as well as the look forward.

And the 9% forward.

Yes.

Perfect. Okay. Thank you.

Your next question will come from Jonathan Atkin with RBC. Please go ahead.

I was interested in the nature of the staff increases that you referenced, maybe a little bit more color on both direct expenses and the G&A-type staffing that you're doing.

Secondly, on the DAS, you gave the year-on-year growth rate and scale of the base. Can you talk about whether your incremental investment in DAS, is that going towards more notes, or more fiber mileage, or can you give us a little bit color about what's happening on the infrastructure side?

My last question is on M-to-M spectrum networks, and the press release that came out earlier in the month, and what your expectations are from that partnership, and what they're doing? Thank you.

Okay. On the first question around the direct expenses in G&A, maybe the easiest way to do it, John, is to start from Q1 and then walk you to Q2. Then after Q2, as I mentioned, I think it will mostly be in the run rate.

So moving from Q1 to Q2, there is the warmer weather impacts that we always see, as well as having more towers. That steps up, directs site rental expenses by approximately $3 million from Q1 to Q2.

The second item that's meaningful in site rental operating expenses would be around staffing, and that number moves up about $2 million, roughly, from Q1 to Q2. That's as a result of us hiring folks throughout the first quarter to staff properly for the AT&T transaction, and then by the time we get to the second quarter, it's fully in the run rate. So I wouldn't expect meaningful steps in those expenses in Q3 and Q4.

If you go to the cash G&A line, and this would exclude stock-based comps, because as you look at our G&A line, the G&A line will look almost completely flat year over year. The impact to EBITDA, you need to look at what is happening around cash G&A.

There is probably another $2 million to $3 million step-up that we're seeing inside the quarter from Q1 to Q2. For a similar reason, as to what I was speaking about in direct expenses, where we staffed up during the first quarter, and then we have the full run rate in the second quarter.

Then from there, I would expect we'll see, both in terms of direct site rental expenses and G&A, those numbers to return to something in the neighborhood of about 3% growth on an annual basis from normal cost escalations.

Secondly, John, you asked about the incremental investment and activity we are seeing on the small cell side. Primarily, what we are doing is we are benefiting from the significant fiber plant that we acquired in the NextG acquisition back in 2012.

From that, which we have significant fiber plant in many major cities, we are co-locating across that existing fiber plant, as well as adding additional lateral's to that, extending the capacity of that plant into other locations. And so it gets very blurry.

It's not quite as clear cut as the tower model, where you're adding a tenant on an existing tower, but effectively, you're adding an additional tenant, or node, on existing fiber, and it may come with modifications or extensions of that fiber that we're doing on behalf of that tenant, with an expectation for further tenancy over time. So the term co-location is still alive and well in that business and working very well, but often comes with additional fiber that we're building, again shareable among many.

Then the last point, you were asking, Rick, about the mobile-to-mobile, M-to-M, solutions press release that went out earlier in the month. That was a transaction, a partnership, that we've done with somebody to continue to build out small cells. I think it's relatively small and won't be that impactful to site rental revenues or gross margin adjusted EBITDA in the near term.

There are, as Ben was speaking to in his commentary, there are a number of connected devices. We're going to see the impact of those, or believe we'll see the impact of those, both on our traditional towers, as well as in the small cell space, for a long period of time. This was an early one that they wanted to put out their desire to engage us in a meaningful way, from their perspective, to get their solution rolled out.

I think, Jay, you mentioned in your comments that the vast majority, about 90% of our activity right now, is from the big four carriers. That's skewed a little high lately.

For years, what I would call the other category, has been the equivalent of one or the other big four. There was a big five out there. Of late, that has been light, in that most of the activity has been around the big four carriers.

This M-to-M type announcement highlights that there are always other people with access to spectrum. As I mentioned, longer term thoughts around DISH, LightSquared, and FirstNet, that certainly stand to contribute to our growth over time, but not in the current outlook.

If I can follow up, then, the nature of the AT&T integration CapEx, what does that consist of? Then on the fiber footprint that you mentioned, I did ask this several quarters ago. Are there opportunities to monetize that for non-mobile carriers, or even enterprises, given the metro nature of the fiber assets that you have?

Sure. I'll take the first one. You can do the second one, Ben.

On the AT&T CapEx, we would have the normal repair and maintenance CapEx that we would expect to have. That will be on a recurring basis, and we'll start that during calendar year 2014 and would expect that to continue annually.

John, if you're trying to pencil that out for the model, that generally works out to about $700 of CapEx per tower per annum. We have our adjusted for sustaining capital expenditures to include that roughly $700 per asset.

In addition to that, in the calendar year 2014, we're building out some additional office facilities to house the additional employees that I mentioned in my answer to your first question. So there is some CapEx this year. It's going to be in the neighborhood in total of about $17 million.

Obviously, I don't expect that to recur in future years. So that will be a cost we incur in calendar year 2014. Then beyond that, we would just have our normal repair and maintenance CapEx on a per asset basis.

So a little spike this year. On the monetization of the existing fiber plant, obviously, we are working hard every day to add small cell nodes to that fiber. But to your point, we have a small level of fiber to the cell business already monetizing some of that fiber.

We have some other opportunities that I wouldn't call material yet, but are interesting. I think there's a number of ways over time we can monetize the fiber, both we already own and what we may construct over time. But as yet, John, it's probably not material enough to really highlight.

Great. Thank you very much.

Your next question will come from Kevin Smithen with Macquarie. Please go ahead.

Yes. How much capacity do T-Mo and AT&T have under their MLAs? As these companies start to build out, 700 megahertz Leap, and then AWS-3, could you see amendment revenue from these carriers later this year, and especially 2015, or is this restricted by the MLAs?

Kevin, as we've talked about, we're down to about 10% of our activity now is being covered by the so-called MLA contracts that were prepaid, if you will, pre sold. We expect that to continue to fall.

So really, any future activity, a significant portion of that would be new revenue opportunities going forward, without getting real specific by carrier by market. We expect that 10% level to hold and trail off over time.

Is it fair to think of the 700 at T-Mo and the Leap spectrum, and AWS at Verizon, is that more of a 2015 event?

Yes. I would characterize it as more of 2015 event, exactly, given that we are already one-third of the way through the year.

So the implied organic growth acceleration does not include a lot from these new spectrum bands?

That's right. Exactly.

Oh, okay.

Your next question on the line will come from Amir Rozwadowski with Barclays. Please go ahead.

Thank you very much. Would love to touch upon the overall spending environment a bit here. You folks are once again raising your outlook for the year. Thus far, we've seen positive commentary from the carriers that have reported around their spending initiatives, particularly noting densification is fairly important.

Would welcome any additional color on how you think about the densification opportunity, particularly the size of the opportunity relative to the initial coverage upgrades to LT. In other words, when we think about all the equipment needed at the site to optimize LTE traffic, be it fiber, cabling, remote radio heads, multi-band antennas, or whatever the carriers are working with, is this densification opportunity for 4G as large an opportunity as initial network deployments?

Thanks Amir. This is Ben. I'll take a crack at that one.

Densification and the anticipation of additional cell sites after the initial coverage build is our entire business thesis. We have spent $9 billion on buying 17,000 towers and 10,000 DAS nodes in the last two years, based on that exact view. That is now happening and playing out in spades.

As we talked about in our prepared remarks, where in the case of Verizon and AT&T, they are actively moving into that cell site densification activity, adding additional locations where they weren't previously present, going on new towers, as their LTE networks load up and they need to add capacity. That's also what we are seeing on the small cell side.

We fully expect, if history is any guide, that you'll see the same occur out of Sprint and T-Mobile over time, as they complete their initial coverage build on LTE. We're already having initial conversations with them around their build plans for 2015 in anticipation of that happening.

So, our thesis, which again, played out quite well back from 1999 to today, is that you have initial coverage builds, and then you have infill. That's exactly what we're seeing happening in the market today, and what we expect will happen for many years to come, as we lease up these new sites we have acquired with roughly 1.7 tenants per tower.

We have a lot of capacity and a lot of locations that can quickly and efficiently aid these carriers in adding capacity to their networks. That's what we are all about.

If I may, just a follow-up. You folks are fairly uniquely positioned in your focus on the DAS and some of the small cell technologies.

If I think about where we are today in transitioning towards more densification initiatives, have you seen any switch in priorities in terms of spending? In other words, are carriers that you work with, both on the DAS side and on the macro side, reallocating capital, or is it just more spend to everything?

Well, it really is carrier-specific, again, depending upon where they are in their deployment cycle with 4G. But, I would say that we have seen absolutely no evidence of switching, as you use that term. What we've seen is more of everything.

Of those that are now in the densification mode, there is a very heightened sense of urgency to add capacity to deal with all the requirements and demands that we, as consumers, are putting on these networks. As we mentioned, with mobile video; connecting machine to machine; voice-over LTE, which is still coming.

So, there is a lot of future demand that the carriers, honestly, are trying to build in anticipation of, and keep up with our current needs. But I haven't seen any evidence of switching, per se. It's just now we have an architecture that adds capacity very efficiently in high dense areas, and reuses that frequency with very small cells, and reuses that frequency frequently.

That's something that we're continuing to benefit from, and working very hard to optimize. We've got a lot of people working on building out and the co-location on the fiber that we mentioned on the small cell side, and a very robust pipeline there.

Thank you. That's very helpful.

Your next question on the line will come from Phil Cusick with JPMorgan. Please go ahead.

Hey, guys. Thanks. First, if I look at the acceleration, going forward, of activity in the business. It seems like there could be upside to your services business, as well. Is that acceleration something that you can capitalize on in services?

Well, Phil, we've got a pretty good track record to grow in the services business, as you all know. We are also resonant to guide up on services, but I would say that with the addition of 10,000 towers this year, you would naturally expect with the activity, that you ought to be able to replicate last year.

As you back into the guidance, you can figure out that the service activity for this year now is roughly the same as last year, what's implicit in the guidance. Can we do better than that? We'll see as we go through the year.

We are extremely pleased with the take rates and the confidence that our carrier customers are placing in us, and helping to meet these needs, both on augmenting and amending cell sites, as well as brand new installations. We'll see, but it's continuing to go in a very big way.

Great. Second, on the small cell side, is it easier to build small cell infrastructure where Crown has towers, or carriers consider reused back-haul, and you have some zoning and staff?

Or does something else drive the ability to build? Do you need local teams? Or do those teams move around?

We have a lot of local presence. We operate a national business, since we have people in local markets.

While I would say there has been some overlap and some benefit, and I would suggest to you in the future, there will be more benefit and more overlap where we have towers where you can even use some compounds of towers to build lateral's off of tower sites into the small cell architecture, that has not been a real material part of the activity so far. I think it will over time.

What the most determining factor is for us, and what's the most efficient, obviously, is where we already have fiber. So where we already have some of these 6200 miles of fiber that we own in these major cities, that becomes a very compelling proposition for carriers looking to add that architecture in those markets.

Then, obviously, we have to build more, as we are serving additional locations with lateral's off of that spectrum -- I mean off of that fiber. Obviously, the most important part of that is having that embedded fiber base already there, and that's yielding this pipeline we have spoken about.

Probably the other synergy, Phil, I might just mention for you, really on the sales side and sales cycle of this activity. We've talked about for years that when we do our customer surveys, that we have the highest rate of customer service in the industry.

As we've broadened our service opportunity for small cells and demonstrated to the carriers in the early days that we're able to do these successfully, to build them on time, to make them work, we've got a great track record of that. That helps us as the carriers are looking to expand their portfolio. Our track record and our sales effort there has been really helpful.

That, obviously, has benefited greatly from the synergies of how well we've done over a long period of time on the tower side and on the services side. They trust us, and they know we're going to do what we say we're going to do. That has benefited us greatly, since we did the large acquisition two years ago.

Thanks, guys.

Your next question will come from Simon Flannery with Morgan Stanley. Please go ahead.

Thanks a lot. Ben, you talked about first and had a couple of times, seems like the funding is coming into view here with the H block and the AWS auctions. Have you been able to get at more substantive conversations in terms of trying to feel like, is that something that could start contributing in 2015, or is it still 2016, 2017?

Then again, thanks for the supplemental disclosure. If I'm reading it right, you're about 71% of the top 100 markets. How does the growth trajectory look in your top 100 markets versus other markets? Are we still seeing superior growth trajectory there, or is it more even now? Thanks.

No, I would suggest the top 100 markets are probably even accelerating from what you see as the historical. We provided in the supplement now the historical run rates of revenue, both top 100 and otherwise, on those towers, so you can see the spread there.

I would suggest it's accelerating, as the density of those markets as where all this capacity is required, on top of the tower business. I would overlay the small cell business and say, obviously, that's happening, primarily in the top 100 markets, although not completely, but primarily in the top 100 markets. I think that's probably going to accelerate over time.

The FirstNet activity, Simon, I hate to put a timeline on it. You can expect, given our position in the market, that we are very close to FirstNet and what's going on there. They've got the keys to our system, and our profiling our sites and portfolios in various markets, and know how we could assist them, and we're in constant dialogue.

But, I would really not want to put a timeline on exactly when we would think that would turn into revenue. As you know, there's a lot of moving pieces there state by state. Let's hold that one out for now. Obviously, it's a nice opportunity that we think will yield something in the future, but not in current outlook.

Thank you.

Your next question will come from Colby Synesael with Cowen and Company. Please go ahead.

Great. Thanks. I wanted go back to the organic growth, and more specifically, the churn. You reported in supplemental, it was 1.4% in the quarter, and the guide was 2.7% for the year, so, obviously, an expectation for meaningful increase as we go through the year.

When we think about it collectively, and we think of total site rental revenue, do you expect the fourth quarter to be the low point for total site rental revenue based on that rise in churn? Or is it more going to happen in the second or third quarter, and then we start to grow from there? Just trying to get a sense of what's the low point as it relates to site rental revenue as a result of the churn, so we can get a better understanding for the jump-off point might be as we go into 2015.

Then, going through your supplements related to small cell, if I take the 6% of revenue that small cell represents of site rental revenue, and I divide that by the nodes, I get to about $1300 that you're generating per small cell -- excuse me, per node right now. Can you give us an idea, how many customers are averaging on it per node so we can get a better sense of what you're generating on a per customer basis?

Just curious, are you getting escalators for that, call it $1300 per month? Just getting a sense, is that a good number to look at, or is it very wide, so don't read too much into it? Just trying to get a bit of sense of how we should start thinking about modeling out small cell. Thanks.

Sure Colby. On your first question, the churn numbers -- I think it's important to draw a delineation between, as you're thinking about the impact to site rental revenues in the full year of 2014 versus year 2015, if you asked that question. There is, as I mentioned in my comments, an acceleration, by virtue of the fact that the IDEN churn didn't start occurring until March of this year.

As you go through the balance of the year, you'll in essence start to have full quarter impacts from the prior quarter non renewals. Really in the second, third, and fourth quarter, we're expecting a similar level of non renewals, as you go through each of those quarters.

By the back half of the year, the cumulative impact of that is higher, and it will continue to grow all the way through calendar year 2015, which would have the highest cumulative amount of impact. But on a steady state, as you are thinking about sequential change quarter to quarter, the biggest move there is really Q1 to Q2, as we go from one month of impact to a full quarter impact, and then after that, you have full quarter impact. So the sequential change is most impacted from Q1 to Q2.

As we look at the revenue outlook for the balance of the year, given that we're expecting an increase in leasing of 10% at the organic growth line, that number would accelerate over the course of the year. So, your sequential steps in net revenue quarter to quarter are going to be greatest by the time you get to the fourth quarter. Hopefully, that helps you think through your model.

On the second question, as you get into the pricing on a tenant basis with small cells, it's a little different than traditional towers, because the systems are priced based on what needs to occur at the local level in order to accomplish that build-out. These are priced much more on a return basis.

I would say, generally speaking, if you laid out the numbers, you're in the general ballpark of what small cells revenue impact is on a per site basis, maybe a little high, but there are certain systems that are going to be even higher than the number that you mentioned, and other systems that are lower. We're pricing these on a return basis.

As we said, historically, we think the returns on small cells are similar to that of towers, if you price them on a -- take a system that has three tenants on them, or four tenants on them, and the returns on those would look very similar to a tower that would have three to four tenants.

The business is performing very well. The lease-up that we're seeing on the small cells that we've built thus far, they're actually leasing faster than what we've historically seen from tower.

So the returns, or the margins, or however you want to think about yields on those assets, they're achieving yields higher over a shorter period of time than what we've traditionally seen in towers. Which is probably a better way to think about, it rather than trying to price it out on a per-node basis, because we're pricing these based on the invested capital required in order to accomplish them.

Great. That's very helpful. Thanks.

Your next question will come from Tim Horan with Oppenheimer. Please go ahead.

Thanks, Jay. Just two clarifications. Last year you talked about 8% organic growth. Was that net of churn?

Then on Colby's question, do the small cells have escalators embedded in them? Then, Ben, I get asked a question a lot, so I figured I'd ask you. Any current thoughts on potential technological cannibalization?

I know the cable companies sound like they're going to be deploying Wi-Fi hot spots fairly aggressively. There was an article yesterday that -- of a P cell technology that DISH might be trialing. Is that maybe a risk or benefit to you guys? Thanks.

On the first question, the 8% number we were talking about last year, that was on a gross basis before non renewals. We've moved that number from 8% to 9%. That 1% move is all related to new leasing activity. Escalators are remaining the same, as we previously expected.

We do have escalators on the DAS. Thank you for re-asking the question. I'm sorry I missed that in Colby's question.

There are embedded escalators in the DAS contracts. The terms of those leases are very similar to towers, as we noted in the supplement. There's about eight years remaining, on average term on those leases. They look very similar to tower leases, both in terms of term and escalation provisions.

Tim, on the technology question, as I think about technology, what we've seen that's been most impactful so far, aside from spectral efficiencies we've gained in equipment by putting RUs up to power and things like that, has been the emergence of Wi-Fi hot spots.

I don't want to speak for my carrier customer friends, but I suspect in certain places they're somewhat relieved that you're getting wireless, somewhat a relief there through Wi-Fi hot spots. I believe, by some estimates, it's already offloading as much as 50% of the traffic when we're all using Wi-Fi when we can.

It's our expectation that -- as I said in my prepared remarks -- net of that offloading, though, in a mobile environment, where license spectrum and hand-off from one cell to the other is the dominant architecture, we're going to continue to see very significant growth on the license spectrum side. If for no other reason, just because of the capacity requirement that's needed. As we mentioned, with 350 megahertz out there and more to come, that's a whole lot more than you could traditionally do on a Wi-Fi node.

With respect to the P-cell article the other day, from time to time there are valuable new technologies that come up. They don't seem to change the laws of physics.

They do require site installations and some level of back haul connectivity, and so whether it's vertical height, or it's an installation that looks a lot like a small cell. Over time, to the extent that's viable, and I think it's very early days, but to the extent that's viable, I would think that would certainly be something we can benefit from over time.

I think we've got time for one more question.

Thank you. Your last question will come from Batya Levi with UBS. Please go ahead.

Thanks. Just a couple of quick follow-ups. Last quarter you had mentioned that you expect to be at the high end of 25% to 30% revenue increase for new leases. Now you're looking for a 15% sequential increase off of 1Q. Given the prior comments, how should we think about the overall annual growth?

The new installment and amendment mix that you gave -- 85%/15%, how does that compare to last year? Can you also provide some color on average rental revenue for them? Thank you.

Yes. On the first question, if you were to take the 25% to 30% that we said before and then factor in the 15% from Q2 to Q3/Q4, we're probably closer to about 35%, maybe a little bit more than that year-over-year growth in terms of new activity and amendment activity.

Combine that, and think about that in terms of organic revenue growth on the sites. On the amendment activity 85% of the total revenue activity is leasing activity that we're seeing. It's new licenses in 2015. That probably compares last year to somewhere in the neighborhood of about 60% new and 40% amendments.

The year prior to that, it was almost a complete inverse of 2014, where we were seeing between 10% and 20% new licenses, and about 80% almost of the activity was coming from amendments. Most of that speaks to the commentary that Ben gave around the carriers' move from a coverage build-out for 4G to looking at site intensification.

In terms of what we're seeing from both amendments and new leasing pricing, it's up from past years. On a like-for-like basis, if you look at the equipment being added, the pricing's gone up probably 3% to 4% on an annual basis.

When you start to try to compare what's the average amendment or the average lease, you really have do that analysis on a carrier-by-carrier basis and look at what equipment are they actually putting up. Otherwise, the numbers are not necessarily comparable, and we're not prepared to share pricing by carrier. So I think I'll stop there on the explanation.

I was about to stop you. Listen, I appreciate everybody going long with us this morning. I know it was a very busy morning for reporting.

I want to commend the team for putting out this supplemental pack. As you can appreciate, this was a lot of work to determine what we thought was most relevant to you, the investor. There's a lot of good information in here that I would encourage you to spend a little time with.

I think, most importantly, that I think is relevant is it will help all of us more easily toggle between the GAAP reported revenue numbers and the adjusted numbers suggested for straight line and acquisitions. That's a challenging concept. It sounds easy. It's not. I appreciate that.

It's challenging for us, and we do it everyday. So hopefully, some of this disclosure, for example, on page 8, for one, and others, that really gets this into very granular terms, is helpful for your own modeling and to really understand what's going on in the business.

But again, thanks to the team for doing that. Thank you again for listening and staying long with us this morning. We look forward to reporting to you on another very successful quarter next quarter. Thank you.

Ladies and gentlemen, that does conclude our conference call for today. We thank you for your participation. You may now disconnect your lines