American Tower (NYSE:AMT) runs a very simple business model: Buy or lease plots of land in strategically selected spots, build or lease wireless towers on these spots, and then sell long-term contracts to radio stations and wireless networks who want to install base stations or transmitters in these towers.
As simple as this overall model may seem, there are plenty of important wrinkles in its very fabric. Luckily, American Tower's management is not shy about discussing the finer points of its strategy and tactics.
Recently, American Tower CFO Tom Bartlett and CEO Jim Taiclet dove deeper into their operations against the backdrop of a strong third-quarter earnings report. Here are five of the most telling nuggets of wisdom the executives shared in the ensuing analyst call.
American Tower, international growth
Our domestic rental and management revenue growth in the quarter was over 25% with core growth of around 28%. Domestic organic core growth was over 9%, which consisted of just over 3% from escalations and more than 8% from existing site revenue growth less 1.6% from tenant churn.
Our international rental and management segment generated revenue growth of over 30% or about 37% on a core basis during the quarter. Of this core growth, about 18% was organic with the balance driven by the over 8,000 new assets we have acquired or constructed since the beginning of the third quarter of 2013. -- Tom Barlett
In other words, domestic business is good, but it can't hold a candle to the fantastic organic growth seen in overseas markets.
American Tower is very busy acquiring and building fresh tower sites in places like Brazil and Nigeria, but that's not the whole story. Existing towers are also enjoying plenty of new business in international markets, which explains why American Tower wants to build more of them in the first place.
Dê-me um exemplo, por favor
Expanding on the international theme, Jim Taiclet plucked an example from the Brazilian market. American Tower operates 6,800 towers in Brazil, not counting the 6,500 tower sites covered by a $1.2 billion acquisition announced in November:
Mobile data usage in Brazil is expected to grow 10 times over current levels by 2018. To support this type of mobile data expansion, we believe the Brazilian carriers will need to invest significantly in their existing networks. This need is illustrated further by our estimate that there are currently 4,400 subscribers per cell site location in Brazil compared to just 1,500 per cell site location in the United States.
The case of Brazil is representative of the state of wireless networks in many of our international markets, and we anticipate that we will be able to convert high levels of incremental carrier investment to strong core organic growth across our entire international segment.
The thirst for more and faster mobile data is global, including markets where the existing wireless infrastructure is weak or nearly nonexistent today. That's why American Tower is chasing overseas expansion opportunities like a ravenous wolf -- and a big part of why I see massive long-term growth ahead for this company.
American growth drivers
Bartlett also explained the secret sauce behind his company's respectable organic growth in the domestic market:
In the U.S., about two-thirds of the commenced new business activity we saw in the quarter outside of our holistic master lease agreements was in the form of amendments. Similar to the year-ago period, after several quarters of an increasing proportion of new leases we saw very active amendment activity, which reflects additional equipment being placed on towers by our customers in part driven by VoLTE rollouts. As a result of the continuing strong new business trends in the U.S., we are raising our expectations for organic core growth in the U.S. to 9.5% for the full year.
The revised domestic core growth figure isn't shockingly high, as the company expected to "be in the mid 9% range for 2014" three months earlier. But it's good to see a firm explanation of why organic growth is supposed to rise by nearly double-digit percentages in 2014.
VoLTE technology, or Voice over LTE, shifts mobile voice calls over from a dedicated channel to a new format that's based on standard Internet protocols. This way, the calls can be routed over the same 4G LTE connections the high-speed data service uses, both simplifying the whole connectivity model and improving the quality of voice calls.
For all of its benefits, VoLTE calling requires the network to install new hardware in its wireless base station. As this technology refresh moves along, American Tower's customers amend their leases to allow for the new equipment.
This happened before, when wireless operators moved into 3G data networking, and then for 4G LTE upgrades. It'll happen again for 5G network rollouts, 6G upgrades as well, not to mention the next-generation technologies that haven't been imagined yet.
In short, technological progress is the gift that keeps on refreshing and extending American Tower's business relationships.
Long-term leases? Yeah, we've got 'em.
We constructed nearly 200 towers in the quarter and purchased or extended the remaining term on more than 500 ground leases with the extensions averaging about 34 years. As of the end of the quarter 64% of the land under our U.S. towers was either owned or controlled for more than 20 years and we continue to target about 80% for that metric within the next three years. -- Tom Barlett
You want stability? American Tower is dead set on controlling its assets for the very long haul, and then turning around to sell leases on even longer terms.
That's stability for the extremely long run.
Three major market trends
Finally, Taiclet outlined three strong market trends for the wireless sector as a whole, based on his own observations while doing business there in 2014.
First, the number one factor that correlates to our U.S. core organic growth rate is the total amount of data traffic carried on the domestic networks of the major carriers.
The second is that consumers that upgrade from basic functionality to smartphone type handsets in the U.S. or elsewhere use substantially more data per month and that their data usage then increases significantly over time after they upgrade.
Third, within our international served markets, handset upgrades and related data growth are likely to occur at a much more rapid pace than has been the case in the U.S., due in part to significantly cheaper handset pricing.
On the first point, American Tower analyzed its American growth against the backdrop of 27 different metrics and found data traffic volume to be the single best indicator of rising customer spending. In turn, rising smartphone penetration and bandwidth-hungry audio and video applications are the core drivers of this rising data thirst.
That led straight to the second point, where American Tower identified a virtuous cycle that drives data traffic even higher. Impressed by the capabilities of new devices and better 4G networks, consumers get attached to new activities like watching video streams on the go -- thus driving up the demand for even better handsets and stronger networks. And American Tower is there to help the mobile carriers improve their infrastructures to match.
Thirdly, the overseas growth curve acts much like the American one did over the last decade or so -- except that mobile technology has moved on to offer better devices and networks for less money this time around. So the growth curves should point even further skyward in the new batch of growth markets.
It's true that Taiclet, as the CEO of a company with plenty of skin in the wireless growth game, has an obligation to get people excited about the growth drivers on the table. Even so, his conclusions make sense from both technical and economical points of view. I'm buying this line of reasoning -- hook, line, and sinker. And that's another reason American Tower's focus on international growth looks so attractive.