American Tower (NYSE:AMT) beat Wall Street's estimates in the second quarter, then raised revenue guidance for the rest of the year. Live and die by the headlines, and that's all you're likely to hear about American Tower's results.
But the numbers rarely tell the whole story. American Tower's management jumped on the horn with industry analysts, ready to dig much deeper into the second quarter. They had a lot to say, but these are five of the most telling quotes from that call.
Spoiler alert: You'll see a lot of "growth" talk here.
Deconstructing American Tower's growth
"We constructed 276 domestic towers in Q2, and in addition purchased or extended the remaining term on almost 600 of our ground leases with the extensions averaging about 30 years.
"Our international rental and management segment generated revenue growth of 29% or nearly 39% on a core basis during the quarter. Of this core growth, about 18% was organic with the balance driven by nearly 8,000 new assets we have acquired since the beginning of Q2 2013."
-- Tom Bartlett, CFO
American Tower owns and operates more than 21,000 broadcast and cell towers in the domestic market, and leases another 7,200 tower sites. That's up from 16,600 company-owned and 6,400 leased towers for the same period in 2013, or a 21% larger American network. The international footprint grew by 19%, led by large acquisitions in Mexico and Brazil.
The company is still hungry for further expansion, especially abroad. Moreover, American Tower is growing its sales faster than it builds and buys new towers. The company is inserting new customers in existing towers, and also has enough negotiating leverage to raise prices when old contracts come up for renewal.
International growth markets
"Internationally, just as in the U.S., consumers want more and more access to both basic and advance mobile services. Smartphone penetration is at about 55% in the United States, but it is just 12% in emerging markets. We are starting to see smartphone adoption rising rapidly in those markets with smartphone penetration rising quickly over 65% versus prior year across emerging markets.
"There are still a just 180 million 4G LTE subscriptions worldwide and over 80% of those are concentrated in only three countries: the U.S., Japan, and South Korea. Consequently, while global mobile data traffic grew 81% last year there remains significant pent-up demand around the world especially in less developed markets."
-- Jim Taiclet, CEO
In other words, the opportunity abroad is incredibly large.
Despite its flag-fluttering name, 59% of American Tower's towers aren't American at all. Put the company's Brazilian, Mexican, and Indian assets together, and you've already passed the size of the American market -- with another nine nations left uncounted.
Taiclet's analysis shows that the smartphone and high-speed networking markets are very immature in most of the world. We're talking billions of potential wireless consumers left untapped, especially when it comes to modern smartphones. American Tower is chasing this enormous market -- but also picking its battles.
Picking the right growth opportunities
"We have got terrific management teams in Latin America, EMEA, and Asia that are involved in pretty much every opportunity that one could think of. And those that pass muster, we'll act on and we have the balance sheet and the financial position to do that. And those that don't meet our investment criteria, we won't act on. There are more of those than the ones we act on."
-- Jim Taiclet, CEO
Right, so American Tower takes a deep look at every potential expansion opportunity. By doing its homework, the company avoids getting stuck with unprofitable or hard-to-develop tower networks.
Quality over quantity.
Robust domestic activity
"Look our actual experience to-date with both Verizon and AT&T and frankly the other major carriers in the U.S. as well, Sprint and T-Mobile, is that we haven't seen a decline in activity. Whether it's commencements, meaning we start a build that includes installation of equipment, whether applications, signing new business, all this is trending very positive for us and that gives us very constant visibility into the next few quarters that our demand for real estate space is going to stay strong."
-- Jim Taiclet, CEO
The American market may be mature, but it's still both growing and dynamic.
It's actually fairly easy to verify these claims. Verizon Communications (NYSE:VZ) and AT&T (NYSE:T) still spend roughly $20 billion a year on network improvements and maintenance. Sprint (NYSE:S) and T-Mobile US (NASDAQ:TMUS) have smaller budgets so they're spending less, but the wireless underdogs are doing what they can to ramp up their capital spending.
All of this works out to solid domestic demand for American Tower's services:
"We remain committed to our capital deployment strategy. Our goal is to simultaneously fund growth, return cash to our stockholders and maintain a strong balance sheet. Year-to-date, we have declared over $261 million in common stock dividend, spent about $466 million on CapEx and have reduced our total debt by more than $500 million."
-- Tom Bartlett, CFO
American Tower still holds a bit more debt than management would like, but a torrential surge in free cash flows will correct that imbalance soon enough.
For the moment, American Tower places more emphasis on rapid growth than on juicy dividends. Over time, this will change as the company runs low on the easy growth plays mentioned earlier. Since American Tower is structured as a real estate investment trust, excess earnings will eventually have to be funneled into big dividend checks.
But for now, it's all about controlling debt balances while building out networks across the globe. Good things come to those who wait a few years.