Late Wednesday, Crown Castle revealed the SEC was investigating its capitalization and expense policies for its services unit. Services represent about 10 percent of the company’s gross margin, fairly modest in absolute terms, but much larger than at peers, according to Nick Del Deo of MoffettNathanson.
“On its earnings call [yesterday] morning, the company did not meaningfully expand upon the commentary it provided in its 8-K, and understandably so,” Del Deo said.
“Still, after further reflecting on the disclosures and considering what the company said today, we think the commentary in our earnings note may have misdiagnosed the issue at hand. We can’t say for sure, but several clues suggest that Crown Castle is capitalizing certain services costs to PP&E and depreciating them over time.”
He said that would explain Crown Castle’s substantially higher services gross margin versus other players that perform similar work, as well as its higher non-maintenance capex per tower versus peers. “Unlike independent providers of contracting services (Dycom, MasTec, Quanta), Crown Castle is performing the work on its own infrastructure,” Del Deo said, “creating a plausible opening to justify that the work improves the revenue-generating potential of its assets and some of the costs should be capitalized rather than expensed. However, this is at odds with peer SBA’s policy of expensing all services costs.”
Wells Fargo’s Senior Analyst Jennifer Fritzsche said the results were well ahead of their estimates and Street consensus. Despite the Q3 beat, she said the company reiterated its 2019 guide (vs. increasing it), and offered a 2020 outlook that was somewhat mixed, in her view.
“While CCI spoke to continued elevated leasing levels across its towers, fiber, and small cell assets, actual guide for revenue, EBITDA, and AFFO guidance that was light of our estimates,” Fritzsche said. “The moving target in this guide is the assumed closure of the S/TMUS merger in Q1’20. Importantly CCI indicated it also expects a similar level of activity for BOTH small cells and macro in 2020, although the timeframe to get small cell deployments deployed continues to be lengthy (up to 36 months).”
Fritzsche emphasized this is not an issue with demand but rather the permitting process to get it done.
“We continue to favor CCI of the tower names and believe it is best positioned to benefit from carriers’ 4G densification efforts and gradual shift to 5G investment given the multiple infrastructure services it provides (small cells, fiber, macro),” she said.
CCI expects a similar level of new leasing activity in 2020 as in 2019 (highest levels in +10 years), and Fritzsche believes this is a positive read-through to its towerco peers. But key to this is resolution with S/TMUS, in her view.
“We expect to know merger outcome by the time of AMT and SBAC’s Q4’19 earnings prints,” she said.
October 18, 2019