Cell tower operator Crown Castle International (NYSE:CCI) reported earnings after the closing bell on Wednesday, followed by an earnings call near lunchtime (EDT) the next day. The company exceeded the midpoint of every guidance target and proceeded to raise its full-year profit estimates.

Crown Castle International's second-quarter results: The raw numbers

Metric

Q2 2019

Q2 2018

Change

Net revenue

$1.48 billion

$1.33 billion

11%

Net income attributable to common shareholders

$218 million

$152 million

43%

Adjusted funds from operations (AFFO)

$619 million

$546 million

13%

AFFO per share (diluted)

$1.48

$1.31

13%

Data source: Crown Castle International. 

What happened with Crown Castle International this quarter?

  • Management's guidance for this quarter pointed to site rental revenue near $1.16 billion, net income of approximately $152 million, and AFFO in the neighborhood of $544 million. Crown Castle beat all of these targets, including $1.24 billion of site rental revenue.
  • The number of cell towers under Crown Castle's management held almost perfectly steady at 40,051 sites, just 40 towers above the first-quarter count. The company's fiber network routes lengthened from 70,000 to 75,000 miles over the same period. A year ago, the tower count stood at 40,041 and fiber assets stopped at 60,000 miles.
  • The company reported the highest tower leasing activity in more than a decade and high interest in fiber-based small cell installations. In particular, telecom customers are taking advantage of small cell sites to power their installations of 5G wireless networks.
Silhouette of a heavily equipped cell tower against a colorful sunset.

Image source: Getty Images.

What management had to say

CEO Jay Brown spent a lot of time discussing the small cell market in the earnings call. Small cells represent a cost-effective investment that can serve several customers based on fiber infrastructure that is already in place.

"We are seeing significant demand from multiple customers for the same asset, which results in co-location economics," Brown said. "The small cell co-location on existing fiber accounts for nearly 30% of the incremental cash flows we expect to generate from these projects, but only 10% of the incremental capital investment."

Crown Castle's small cell installations have been slower than ideal due to a large number of planned sites and red tape in the municipalities and utilities that have to approve these projects. The Federal Communications Commission (FCC) has issued an order to expedite these network approvals, but not all authorities are following the new guidelines to the letter.

"One of the great benefits of the FCC order is that it requires the municipalities and the utilities to timely respond and deal with both the permits and the process of applications for installing in the right-of-way," Brown said. "I think the long-term outcome we're hopeful will be that this is somewhat temporary and that, ultimately, you'll see municipalities and utilities fall in line with what the FCC order is. And that will come back to a more normalized timeline around these activities."

CFO Dan Schlanger underscored Crown Castle's unique opportunity to make the most of the small cell market.

"The core to our business is shared infrastructure. And we believe we are in the best position to put that infrastructure in one and share it across as many customers as we can," Schlanger said. "With the focus on small cells, we can reach multiple of the wireless customers, but also with a focus on providing fiber solutions, we can add customers that same fiber infrastructure. And we think we're in the best position of any company to do that."

Looking ahead

The second quarter's surprising tower lease activity resulted in Crown Castle's management raising its full-year estimates.

  • The midpoint of Crown Castle's full-year revenue guidance held steady at $4.96 billion. The net income target for the same period was raised from $821 million to $926 million, which would equal a 38% year-over-year improvement.
  • AFFO per share should now land in the neighborhood of $5.94 per diluted share for the full fiscal year, up from $5.84 in the guidance provided with Crown Castle's first-quarter report and representing an 8% year-over-year boost.