American Tower Corporation (REIT)

Ladies and gentlemen, thank you for standing by, and welcome to the American Tower third quarter 2019 earnings call. At this time, all participants are in listen-only mode. They will conduct a question-and-answer session. If you wish to ask a question during today's call, please press star, then zero on your touchtone phone. As a reminder, today's call is being recorded. Now I turn the conference over to your host, Igor Kozlovsky. Please go ahead.

Good morning. and thank you for joining American Tower's third quarter 2019 earnings conference call. We've posted a presentation, which we will refer to throughout our prepared remarks, under the investor relations tab of our website, www.americantower.com. Our agenda for this morning's call will be as follows. First, I'll quickly summarize our financial results for the quarter. Next, Jim Tegel, our chairman, president, and CEO, We'll provide an update on some key technology trends in the US, particularly around 5G. And finally, Tom Bartlett, our Executive Vice President and CFO, will discuss our third quarter results and revised 2019 outlook in more detail. After these comments, we will open up the call for your questions. Before I begin, I'll remind you that this call will contain forward-looking statements that involve a number of risks and uncertainties. Examples of these statements include our expectations regarding industry trends as well as our future growth, including our 2019 outlook, capital allocation, pending acquisitions, and future operating performance, the pacing and magnitude of the Indian carrier consolidation process and its impacts on American Tower, and any other statements regarding matters that are not historical facts. You should be aware that certain factors may affect us in the future and could cause actual results to differ materially from those expressed in these forward-looking statements. Such factors include the risk factors set forth in this morning's earnings press release, those set forth in our Form 10-K for the year ended December 31, 2018, and in other filings we make with the SEC. We urge you to consider these factors and remind you that we undertake no obligation to update the information contained in this call to reflect subsequent events or circumstances. Now, please turn to slide four of our presentation, which highlights our financial results for the third quarter of 2019. These results, as well as our year-over-year growth rates, were positively impacted by our new agreement with AT&T in the U.S. and negatively impacted by Indian carrier consolidation-driven churn. During the quarter, our property revenue grew 9.7% to $1.9 billion. Our adjusted EBITDA grew over 12% to $1.2 billion, and our consolidated AFFO and consolidated AFFO per share increased by 8.5% and 8.1% to $891 million and $2, respectively. Finally, net income attributable to American Tower Corporation common stockholders increased by nearly 36% to $499 million, or $1.12 per diluted common share. Additionally, like the last few quarters, many of our comments around third quarter results and our updated 2019 outlook will be focused on growth rates normalized for carrier consolidation driven churn in India and the Tata settlement in Q4 2018. We view these normalized results as important indicators of underlying trends in our business. Reconciliations of these normalized metrics to our GAAP results are included in the back of our earnings presentation, in our press release, and in our supplemental package. And with that, let me turn the call over to Jim.

Thanks, Igor, and good morning to everyone on the call. Consistent with our past practice for third quarter reports, my remarks today will be focused on the evolution of mobile technologies. I'll spend most of my time on the U.S., where we generate roughly two-thirds of our cash flows, and where many exciting and potentially impactful developments, particularly on the 5G front, are beginning to emerge. We continue to believe that the technology cycles driving our business in the U.S. will be largely replicated in our international markets over time, thereby lengthening and strengthening our global growth trajectory. Longstanding trends in U.S. mobile continue unabated. Unlimited data plans, advanced devices, and increasing mobile video consumption consistently result in 30% or more growth in annual mobile data consumption per year. To keep up, our mobile operator customers have added significant additional equipment to existing transmission sites while driving forward with incremental spectrum deployments to support today's 4G networks. These factors have led to a sustained period of robust domestic organic tenants' billings growth for American Tower. And average monthly U.S. smartphone usage now stands at roughly 10 gigabytes per month, nearly doubling in less than three years. And by 2028, 10 years roughly from now, industry estimates suggest that the total U.S. mobile data usage will be around six times 2018 levels. We recently concluded that the need to efficiently manage the network cost challenges that this continued explosion in mobile traffic growth creates will actually be the main driver for the deployment of 5G. Simply put, the cost per gigabyte delivered must continue to decline at roughly the same rate as the growth in aggregate traffic carried across the network. That's needed to sustain our carrier tenants' margins. We've seen this pattern historically with each successive generation of technological evolution, 2 to 3 to 4G, with carriers using tools like more efficient radio technology, advanced network design, incremental spectrum deployments, and additional network density to drive down those operating costs. For 5G, we believe the equation will be similar, but with some new aspects. The technology is expected to enable the broad usage of newly developed techniques such as massive MIMO, dynamic spectrum sharing, and self-optimizing networks, as well as wider spectrum allocations. All these will help enable wireless carriers to efficiently manage the cost of their exploding network demand. The deployment of new spectrum bands for 5G will be tailored to both coverage and capacity, and eventually, As nationwide coverage is achieved, we expect that 5G will pave the way towards a variety of interesting next generation products and services that may offer profitable opportunities, not just for mobile operators, but also across a variety of industries. So from a cost efficiency and practical perspective, 5G is the logical and necessary next step in network evolution. With that said, 4G is still carrying nearly all the usage in the United States today and will continue to be the primary network technology here for years to come. And at the same time, with faster speeds, 5G is already being deployed in limited coverage areas with devices beginning to enter the market now. So for the rest of my comments this morning, I'll focus on three specific areas of that 5G migration. One is spectrum. The second is what 5G networks are likely to look at in the anticipated timeline of that topology. And then thirdly, some of those advanced potential products and services that will be ultimately enabled by 5G technology. So on the first point, we expect 5G to be accompanied by significant deployments of new spectrum assets across the full range of low, mid, and high bands. We've already seen 600 megahertz low band spectrum selectively deployed on our towers. T-Mobile has stated publicly that they expect 600 megahertz to serve as a significant component of their 5G coverage plan across the country. And our portfolio of nearly 41,000 US sites is positioned very well to support that deployment. What may be even more impactful for us over time is the widespread rollout of mid band spectrum. These bands, generally between 2.5 and 6 gigahertz, offer an intriguing blend of low-band coverage benefits and high-band capacity benefits. Both of these are expected to be critical attributes of 5G networks. So spectrum assets in this range include Sprint's 2.5 gigahertz spectrum, the 3.5 gigahertz CBRS band, and the C-band spectrum currently held by satellite operators between 3.7 and 4.2 gigahertz. Importantly, given that propagation characteristics of this spectrum aren't as favorable as low band, we expect that more transmission sites will be necessary to deliver an ubiquitous 5G level signal. In turn, this should lead to incremental amendments and co-locations across our nationwide portfolio, which today has ample capacity to support additional carrier equipment. Additionally, we continue to evaluate the potential of significantly expanding the addressable market for neutral host and private indoor systems by utilizing CBRS spectrum. And ATC was one of the earliest members of the CBRS alliance to help facilitate that process. Finally, there has been considerable discussion around millimeter wave spectrum, small cells and their applicability to 5G. Our view remains that millimeter wave spectrum in small cells will serve pedestrian hotspots and other predominantly fixed location applications in urban and dense urban areas. Less than 1% of our U.S. macro tower sites are located in areas with high enough population density to economically support such outdoor small cell arrays. Consequently, the impact of macro tower sites from 5G millimeter wave spectrum deployments are expected initially to be minimal, both from a risk and an opportunity perspective. But over time, there may be some macro-related uses for 5G at these millimeter wave bands for products such as wireless backhaul, fixed wireless service to homes and enterprise, and other applications. As we've previously discussed, we do not believe that fiber-fed outdoor small cells, in their current form, offers sufficiently attractive economics in the U.S. for us to make material investments in that business. Instead, our aim throughout the 4G to 5G evolution is to maximize the value of our existing macro tower and indoor DAS real estate. We're also seeking to add to this core growth by selectively deploying capital through our innovation program towards complementary technologies and initiatives that offer similarly attractive returns as our tower business. At the same time, we continue to look for ways to expand our tenant base and augment the value of our existing portfolio. In our view, 5G will likely have a number of layers, since any given geographic area will have specific topographic and population characteristics. In rural locations, low band spectrum and perhaps some mid band will likely be the main components. In suburban areas and highway corridors where there are more people and more usage, We believe that mid-band spectrum is likely to be an important component of 5G, with low band coverage also broadly deployed. And finally, in dense urban areas, all three types of spectrum, including high band millimeter wave, are likely to be deployed through a combination of rooftop antennas, indoor and outdoor systems, and other small cell solutions. The net result is likely to be an even more complex radio access network architecture, requiring more density, considerably more compute power, and more intelligent design to deliver a consistent user experience to all of us. These deployments are likely to take a significant amount of time. Past technologies have lasted at least 15 to 20 years from inception to sunset. Given the scope and intricacies involved with 5G, we would, at a minimum, expect a similar timeline. Moreover, in the near term, 4G will continue to serve the vast majority of mobile usage across the country. Currently, industry estimates suggest that 4G will still represent more than 50% of the embedded U.S. device market share even through the year 2025. Consequently, investments by our tenants into augmenting their existing LTE networks are expected to continue well into the 2020s, with incremental 5G-related spending progressively being added to the mix. This view is further reinforced by currently projected timelines of when mid-band spectrum assets will be available to be deployed. While SPRINT's two and a half gigahertz spectrum is ready today, the CBRS option for license spectrum has yet to occur, and the C band is likely years away from being made available for terrestrial use. Consequently, we at ATC anticipate a five to ten year period ahead of us that will be driven by a combination of ever increasing data consumption and a long cycle evolution from 4 to 5G technology. Therefore, we are exploring through our innovation program opportunities to use our assets to support this transitory period, and in turn, to maximize the revenue from our macro tower sites and our in-building systems capabilities. Edge compute solutions at tower sites are one example. As data demand increases on both wired and wireless networks, Our macro tower sites have the potential to act as convergence points for wireless access networks, cloud services, the Internet of Things, and enterprise networks, given the tower's positioning on the edge of today's mobile networks. As 5G-supported applications that require minimal latency develop, there could be a further opportunity for edge compute to play an even more important role, especially in the establishment of autonomous air and ground vehicle management and control systems. autonomous cars and drums. To better understand the potential of this and other industry developments, we're already moving forward with trial edge data centers at several of our U.S. tower sites and also have acquired a mid-size interconnect facility in Atlanta earlier this year. We're using this limited scope architecture to learn as much as possible about potential future business models and to work together with some prospective future tenants as they evolve their approaches to this type of distributed data storage and compute technology. Drone applications are another promising area where we continue to focus efforts within our innovation program as well. We're already using drones internally, which promotes safety and enhances our site monitoring and maintenance functions. Similar to what we anticipate from our mobile operator tenants, we're first using this technology to reduce our unit cost of operations. as well as increase the quality and the cycle time of our site inspections and structural analyses. In the longer term, we continue to believe that our tower sites could play a significant role in a 5G-enabled drone air traffic control system, and we're working towards that goal. Already, UPS, Google, and some others have received regulatory clearance to begin drone deliveries for limited purposes in specific geographic areas, which we see as an indication to us that progress is being made. Then there's augmented and virtual reality, autonomous long-haul trucking, smart factories and buildings, and a myriad of other next-generation applications that are also in the 5G pipeline. Many of these will be deployed by existing mobile operators, industry verticals, or even by the government. Some may ultimately fail to gain traction or scale, while there may be others that we aren't even thinking about today that will be introduced by creative entrepreneurs. Just like the founders of Uber and Lyft did, when a robust 4G platform became available to them. All these developments are important for American Tower, as we expect our towers and indoor DAS assets to play an even more critical role in the 4G and 5G networks of both the near-term and the longer-term future. Given the spectrum bands that will be utilized and the much heavier data throughput of 5G networks, we anticipate that transmission site topologies will be denser and there will be more equipment for tower. Further, we are striving to pursue a well-organized and integrated innovation program that we hope will enable us to expand our tenant base and deliver additional value to our investors from our extensive asset portfolio. Importantly, this is a global expectation over a medium to long time horizon, as we believe our properties outside the U.S. will serve similarly critical roles in technology evolution across our 16 international markets. And our primary conclusion of my remarks today, that 5G will become imperative to mobile operators for reasons of per gigabyte cost management, should apply both in the U.S. and internationally as well. And with that, I'll turn it over to Tom for more detail on the quarter and our revised full year expectations.