Crown Castle International Corp. Goes Big By Going Small

By Anders Bylund Markets Fool.com

Wireless infrastructure operator Crown Castle International (NYSE: CCI) reported fourth-quarter results after the closing bell on Wednesday.

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Crown Castle's fourth-quarter results: The raw numbers

Metric

Q4 2016

Q4 2015

Year-Over-Year Change

Revenue

$1,032 million

$946 million

9.1%

Net income from continuing operations

$125 million

$143 million

(12.4%)

GAAP EPS (diluted)

$0.35

$0.39

(10.3%)

Data source: Crown Castle.

What happened with Crown Castle this quarter?

The fourth quarter mostly fell within Crown Castle's guidance ranges, though site rental revenues and bottom-line profits exceeded the top end of management's expectations.

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  • The bulk of Crown Castle's revenue growth in the fourth quarter came from network services, where sales increased 34% to land at $215 million. The higher-margin site rental operations saw a 4% revenue increase.
  • Adjusted funds from operations, or AFFO, rose 9% year-over-year to $406 million.
  • Crown Castle revamped its balance sheet significantly in the fourth quarter. The company paid down $423 million of net debt, reducing its long-term debts to $12.1 billion. At the same time, a secondary stock offering brought in $1.0 billion of fresh cash, which then was poured into the $1.5 billion buyout of long-haul data network FiberNet.
  • The FiberNet deal added 11,500 miles of fiber routes to Crown Castle's portfolio, primarily in Texas and Florida. The company now has access to roughly 28,500 total miles of long-haul fiber connections, serving some 40,000 cell towers and many thousands of small cells. This acquisition was closed in January and did not contribute to the fourth-quarter results.

Management provided a selection of guidance ranges for the first quarter and full year of 2017, as follows:

  • First-quarter earnings should stop at roughly $0.27 per diluted share, based on net income near $98 million. AFFO profits are expected to increase by approximately 12%. to $442 million or $1.22 per diluted share.
  • For the full year, Crown Castle is targeting GAAP earnings of $1.07 per diluted share, which corresponds to net income of $385 million. AFFO totals should land slightly above $1.8 billion, or $5.03 per share. These guidance midpoints compare to full-year 2016 earnings of $1.04 per share, net income of $357 million, and AFFO profits of $1.61 billion or $4.72 per share.

Crown Castle workers installing small cells atop streetlights around Central Park. Image source: Crown Castle.

What management had to say

In a prepared statement, Crown Castle CEO Jay Brown underscored his raised outlook for 2017 and the fact that dividend payouts saw an 8% boost in the fourth quarter -- ahead of the stated long-term goal to raise dividends by 6-7% annually.

"We believe the expected substantial growth in demand for mobile data over the next several years provides us the opportunity to drive organic growth through higher utilization of our existing assets," Brown said, "while allowing us to deploy capital toward new assets that we expect will enhance long-term growth in our dividends per share."

Looking ahead

Going forward, Crown Castle is leaning heavily on the fiber-supported small cell network. That operation absorbed $130 million of the fourth quarter's capital expenses, leaving just $111 million for traditional tower site improvements. That's an almost perfect inversion from the year-ago situation, where tower sites saw a $137 million capital expense budget versus $102 million for small cells.

All of the major wireless tower operators are preparing for the next wave of major wireless network upgrades, starting with limited test sites for 5G networks in 2017. The real boom should arrive in 2018 and beyond.

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Anders Bylund has no position in any stocks mentioned. The Motley Fool recommends Crown Castle International. The Motley Fool has a disclosure policy.