American Tower Corporation (REIT)

Ladies and gentlemen, thank you for standing by. Welcome to the American Tower Third Quarter 2022 Earnings Conference Call. As a reminder, today's conference call is being recorded. Following the prepared remarks, we will open the call for questions. If you would like to ask a question, please press 1, then 0. I would now like to turn the call over to your host, Adam Smith, Senior Vice President of Investor Relations. Please go ahead, sir.

Good morning and thank you for joining American Towers third quarter 2022 earnings conference call. We have posted a presentation, which we will refer to throughout our prepared remarks under the investor relations tab of our website, www.americantower.com. On this morning's call, Tom Bartlett, our president and CEO, will discuss current technology trends and how we are positioned to benefit from continued wireless technology evolution. And then Rod Smith, our Executive Vice President, CFO, and Treasurer, will discuss our Q3 2022 results and revise full-year outlook. After these comments, we will open up the call for your questions. Before we begin, I'll remind you that our comments will contain forward-looking statements that involve a number of risks and uncertainties. Examples of these statements include our expectations regarding future growth, including our 2022 outlook, capital allocation, and future operating performance. our collections expectations associated with Vodafone Idea in India, the Stone Peak transaction and the expected value in future investment activities of our U.S. data center business, our expectations regarding the impact of COVID-19, 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 31st, 2021, as updated in our upcoming Form 10-Q for the nine months ended September 30th, 2022, 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. With that, I'll turn the call over to Tom.

Thanks, Adam. Good morning, everyone. As is typical for our third quarter call, my comments today will center on the key technology trends we're seeing across the wireless landscape and how our distributed tower portfolio is positioned to benefit from next-generation network deployment and generate sustained resilient growth despite ongoing macroeconomic volatilities. Additionally, I'll provide an update on the CoreSight portfolio of assets, our latest view on the evolution of the mobile edge, and the progress we're making in advancing our edge strategy, which aims to leverage our distributed tower and land assets in combination with our interconnected data center portfolio to drive incremental value as network technology evolves. Since the start of 2019, 5G spectrum auctions, mainly in the mid-band, have collectively driven over $155 billion in purchase price proceeds across our served market. These acquisitions of large swaths of new spectrum have kicked off what we believe will be at least a decade-long period of network investment, aimed at delivering on the promises of 5G's faster and lower latency applications. We anticipate this will result in $5 billion of incremental annual customer capex spend in the United States, on average, as compared to the levels we saw throughout the 4G cycle. Additionally, in the U.S., the visibility we gained through the comprehensive MLAs we put in place with AT&T, T-Mobile, DISH, and most recently Verizon, supports our expectation that these investments will drive a near-term acceleration of in organic new business growth and a sustained level of elevated tower activity over a multi-year period. As we saw during the rollout of 4G, we expect this investment cycle to play out in two broad phases, the first being a coverage phase, through which carriers prioritize upgrading their existing footprint to maximize the percentage of the population having 5G access and begin to benefit from the cost efficiencies associated with their network technology upgrades. Over the last year, we've seen carriers leveraging our presence in nationwide scale to efficiently and aggressively upgrade equipment on our sites, both here in the United States and in several markets across our international footprint, to meet those 5G build-out objectives. In the second phase, as consumers adopt advanced 5G-enabled mobile devices and applications, carriers will invest in additional capacity through network densification to facilitate increased mobile data consumption and optimized customer experience. We saw this second phase play out after 4G was launched in the United States around 2010. By coupling the provision of higher bandwidth speed and improved network capabilities with the proliferation of advanced, smart, connected devices with improved user interfaces, 4G unleashed innovative applications such as video streaming, mobile gaming, as well as industry-redefining applications, such as mobile-enabled ride-sharing and transportation. The introduction of these new data-intensive applications contributed to an annual consumption growth rate of nearly 50% from 2013 to 2018, requiring carriers to meaningfully invest in the densification of their network. Similarly, we expect our customers' 5G networks Anticipating delivery times of 5 to 10 times lower latency and increased download speed up to 100 times to further unlock new capabilities, facilitate consumer and enterprise innovation, enable use cases that will necessitate further proliferation of connected devices, and drive higher network throughput. Consider emerging augmented and virtual reality technology as an example. Video streaming exploded primarily because of the advancements achieved through 4G, driving extended destination investment in order to provide users with adequate network quality. Currently, video streaming bandwidth requirements range from a few megabits per second to about 8 megabits per second for HD, and up to 25 megabits per second for 4K, depending upon the resolutions. eventually working to 50 and closer to 100 megabits per second for 8K videos. Depending on compression schemes and the device requirements, looking ahead to the theoretical max specs for potential future applications of mixed reality, we would expect multiple gigabits per second. Again, that is gigabits with a G. Compared to 4G, 5G will offer enhanced resolution, rapid refresh rate, real-time raw bitstreams, low latency, and provide three times more bits per hertz spectrum efficiency in the 5G mid-band. Even when factoring in all these benefits, we believe rapid mobile data consumption growth, along with the shorter propagation characteristics of mid-band spectrum, will necessitate a massive 5G densification phase of network investment, greater than what we realized in 4G. As a result, we expect this future capacity phase to support sustained growth in our tower business. At the same time, we expect the applications driving these densification efforts to present new neutral host infrastructure opportunities aimed at minimizing latency and reducing traffic burdens on middle-mile networks. This is a good segue into a discussion about our CoreSight data center activity and the progress we're making in advancing our edge strategy to support these networks of the future. While the tower business certainly remains healthy, and staggered deployments of network generation rollouts across our geographically diverse footprint provide a solid runway for growth over the next decade, we remain focused on identifying new opportunities for value creation through the platform expansion pillar of our Stand and Deliver strategy. A key element of this pillar is identifying new opportunities that leverage our portfolio of communication assets and our capabilities in managing and redeveloping distributed real estate to provide new multi-tenant neutral host infrastructure models that support the demands of next generation networks and applications. As we previously communicated, the most apparent opportunity at scale that we see over the next decade is that of the mobile edge, which ultimately solidified our decision to acquire CoreSight at the end of 2021. We still believe this acquisition further positions us take advantage of the emerging digital transformation enabled by 5G. Having now owned CoreSight for more than three quarters, we couldn't be happier with the performance we're seeing across the business and the use cases driving leasing activity, which we expect to serve as growth catalysts well into the future. Importantly, we're extremely encouraged by the consistently positive customer feedback on this acquisition. customers continue to view CoreSight as a strong operator and hybrid IT solutions provider with a high-quality ecosystem, which under the American Tower umbrella can now provide more predictable scalability and future incremental value through our combined platform, capabilities, and expertise. So far in 2022, CoreSight has achieved solid new business volumes, a reflection of the strong demand for the company's interconnection, and cloud on-ramp rich ecosystem, where over 80% of revenues are derived by customers with a variety of interconnections to at least five different and independent customers. This strong demand demonstrates the differentiated value proposition and resiliency of these strategically located and well-integrated assets. We are pleased to see strong new business volumes from enterprises, prioritizing digital transformation to the implementation of hybrid IT solutions. leading to migrations from an on-premise data center to co-location data centers in major metrics. We are also encouraged to see accelerating demand from leading digital platforms, seeking to extend compute functionality closer to their users to enable automation, collaboration, and address latency-sensitive applications, an early indicator supporting our edge evolution thesis. Vertical to CoreSight's interconnection-rich ecosystem value proposition, is its Open Cloud Exchange Platform, or OCX. OCX provides CoreSight customers with quick scalability and represents an essential element as we seek to expand the ecosystem to more distributed points of presence as the edge develops. Today, through this automated Layer 2 Ethernet software-defined networking platform, we connect our customer communities within and between our U.S. data centers, and we connect cloud providers to CoreSight's nationwide portfolio. We continue to invest in improving the platform's features and building out the functionality and reach to enable high-performance hybrid architectures more quickly and securely and at a lower total cost of operation than alternative solutions. More recently, we launched Layer 3 enhanced network services, including virtual routing, cloud connect peering to service providers, and cloud-to-cloud connectivity to leading cloud providers. These enhanced functionalities simplify an enterprise's network hardware and management resources at a lower total cost of ownership. Through continued innovation over time, Foresight's vision is to provide customers with single port access to their entire digital supply chain, which we will also expect to be leveraged and extended as the distributed, interconnected edge ecosystem develops over time. While the distinctive characteristics of Foresight's portfolio including its enhanced capabilities afforded through its OCX platform, represent the critical attribute in advancing our edge strategy. We also see tremendous value in CoreSight's development pipeline. CoreSight continues to execute on opportunities to redeploy their cash flow towards high-yielding development projects. Customers require additional scale across our footprint, and consequently, over 20% of our data center development under construction is now pre-leased. We also recently announced the acquisition of a purpose-built data center in southern Florida, MI2, which will be connected to our existing Miami facility, expanding and strengthening our southeastern footprint, where we have also integrated our legacy data centers in Atlanta and Orlando into the CoreSight ecosystem. As we look further out, we expect workloads to become even more distributed and localized. Therefore, we see the importance of an interconnection hub like CoreSight increasing as customers look to future-proof their digital businesses through secure, flexible, and scalable solutions, enabling agile interoperability as businesses shift to more customized hybrid multi-cloud IT environments, and importantly, require an extended-edge computing presence to support evolving low-latency applications. In turn, the mobile edge is emerging as a critical area in the convergence of wireless and wireline networks. Over the past year, as 5G deployments in the U.S. have continued at a rapid pace, we've seen elevated emphasis from select wireless carriers with respect to their edge compute strategies and the forging of partnerships with cloud and enterprise technology platforms to better prepare for the network demands of the future. We see all of this as incremental data points in support of our visions for forthcoming demand at the edge. In our view, much like the adoption of the shared power model, this digital ecosystem over time will be most efficiently provisioned through a distributed neutral host, multi-tenant, interconnected edge infrastructure model, reducing the capital intensity and total cost of ownership among MNOs, cloud, landline, and enterprise players, and critically facilitating a seamless universal customer experience for end users. Our tower portfolio, coupled with our U.S. data center business, represents a distributed portfolio of real estate with accessibility to robustly interconnected core networks and native access to cloud on-ramp. We believe the combination of these platforms will be critical as data processing extends from the core to the end. With that migration, more distributed and localized points of presence, along with transit costs and low latency considerations, will become essential over time. providing American Tower and CoreSight with the potential to win across multiple edge layers. To date, our team has identified over 1,000 sites within our existing U.S. tower portfolio that we see as shovel-ready candidates for mobile edge deployment based on location, parcel footprint, land control, and existing fiber and power access. Over the next several months, we plan to break ground on our first one-megawatt edge facility at an owned tower site. to build upon our understanding of market demand and customer requirements, design a blueprint that can be rolled out at scale as the edge ecosystem develops, and demonstrate the differentiated value proposition that America Tower and CoreSight can offer potential customers. As always, any future development will go through our disciplined approach to evaluating the market opportunity and economic returns of edge deployments at scale, as well as an evaluation of the best way to finance future deployments, which could potentially include strategic partnerships, financial sponsors, or both. In short, the strategic partnerships emerging between the MNOs and cloud service providers, the evolution of latency-driven edge leasing activity within our foresight portfolio, and our interactions with the architects of the low-latency networks of the future have only strengthened our conviction that the edge will represent a meaningful opportunity to drive incremental value to our assets over the long term. Although this architecture will take time to develop, American Tower is positioning itself as a critical future provider and partner for cloud M&O and enterprise customers as wireless and wireline network convergence accelerates over time. In the meantime, we'll seek opportunities to advance our learning, including through the development of an edge application incubator and our participation in various trials in edge industry forums. We are proactively taking the necessary steps understand emerging trends, network requirements, and customer needs, all aimed at strengthening our option to win at the edge over the long term. In closing, demand for wireless connectivity continues to grow across the globe, where despite the dynamic challenges we've all navigated over the past several years, the need for reliable wireless and broadband access has been elevated in importance as a means to advance global economies and the populations they serve. with carriers aggressively deploying their valuable spectrum assets, we will begin to realize the true capabilities of 5G. And with that, we expect to see new innovation that will change the way we live for the next decade and beyond. Our effort to build scale across our global footprint of macro tower assets for over the past two decades, combined with our continuous focus on platform expansion and innovation, has positioned American Tower to support our customers in meeting the continued acceleration in mobile data demand while leading the way in the development of new infrastructure models that will be essential in meeting the needs of applications of the future and drive incremental value on our assets over time. With that, let me turn the call over to Rod to go through our third quarter results and updated full year 2022. Rod?