Why did CCI report a net loss even though revenue grew strongly?

The 2007 net loss of $222.8 million reflected the cost of the Global Signal merger rather than weak operations. Depreciation and amortization nearly doubled to $539.9 million because the acquired towers and their intangible assets were recorded at fair value. Interest expense rose 116% to $350.3 million on the $1.8 billion of assumed mortgage debt and the borrowings used to fund the cash portion of the deal and the share buybacks. A $75.6 million impairment on the FiberTower investment and about $60.7 million of Modeo charges added to the loss. Management points to Adjusted EBITDA, which excludes these non-cash and one-time items, as a better measure of operating performance.

How durable is CCI's revenue?

Site rental revenue is generally recurring. Leases typically run five to ten years, renew at the tenant's option, and include contractual escalators tied to CPI or fixed percentages. The company says the vast majority of its site rental revenue was already contracted in prior years. The main caveats are customer concentration (four carriers provided 68% of revenue), possible lease terminations from carrier consolidation or network sharing, and the risk that tenants downsize or rely on alternative sites. Approximately 12% of towers sit on land whose final expiration is under ten years away, so land-rights renewal is also a factor.

What are the main balance-sheet and refinancing risks?

Total debt was $6.1 billion at year-end 2007, and the company expects to refinance most of it within five years. The tower revenue notes and mortgage loans have anticipated repayment dates between 2009 and 2011, and if they are not repaid in full on time, interest rates step up by at least 5% and principal amortization begins. Management hedged much of the expected refinancing with forward-starting swaps at about 5.2% fixed, but these carry a fair-value liability of about $65 million at year-end 2007. Credit spreads widened during the 2007 credit crisis, which could raise financing costs. About $795 million of debt is floating rate, and a 1-point rate rise would add about $1.7 million of annual interest expense after swaps.

Why is the company buying back stock while carrying so much debt?

Management's stated strategy is to grow long-term value per share, and it views opportunistic repurchases as a way to do so when shares trade at attractive levels. In 2007 it bought 21.0 million shares for about $730 million, funded mainly by term loans and revolver borrowings. The company acknowledges that this increases interest expense and creates a short-term dilutive effect on earnings. The trade-off is that buybacks reduce the share count while the company keeps leverage within a targeted range of six to eight times Adjusted EBITDA. Investors should judge whether the expected returns on buybacks and tower growth outweigh the added financial risk.

What is the growth outlook for the core tower business?

Management expects organic growth from adding tenants to existing towers, which carries high incremental margins because tower operating costs are largely fixed. The Global Signal towers still have room to add tenants, and management says CCUSA has significant presence in 91 of the top 100 U.S. BTAs. Industry drivers cited include growing minutes of use, wireless data revenue up 63% year over year in the first half of 2007, 3G deployments, and spectrum auctions that could bring new entrants. Management expects 2008 operating cash flow to exceed 2007 and capital expenditures to be equal to or slightly above 2007's $300 million. The risks are technology substitution (such as signal combining and femtocells), slower-than-expected adoption of new services, and any slowdown in carrier spending.

CCI 10-K FY2007 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed February 27, 2008. Cited figures are marked; the original filing is the authoritative source.

Crown Castle International (CCI) closed 2007 as the largest independent tower operator in the U.S. by tower count (over 21,800 U.S. towers, roughly 23,800 towers total including Australia, Puerto Rico and Canada).

Site rental drove 93% of 2007 revenue, and the business is built on long-term contracts (typically 5-10 year initial terms with renewal options and contractual escalators), which makes the revenue base highly recurring. The defining event of the year was the January 2007 Global Signal merger, which added 10,749 towers, roughly $4.0 billion^a in purchase price (98.1 million shares plus $550 million in cash) and $1.8 billion of assumed mortgage debt. Net revenues rose 76% to $1.385 billion, while site rental gross margins grew about 74% to roughly $843 million, though the margin percentage in CCUSA compressed to 65% because the Global Signal towers are less mature.

The bottom line for investors is that reported earnings were weak. CCI posted a 2007 net loss of $222.8 million^b, or $(0.87) per share, driven by heavy depreciation and amortization ($539.9 million, up 89%), interest expense of $350.3 million (up 116%), a $75.6 million impairment on its FiberTower stake, and $60.7 million of Modeo write-downs and restructuring. Management emphasized Adjusted EBITDA instead, which rose to about $759 million.

Cash from operations increased to $350.4 million^c. Total debt rose to $6.1 billion, with a weighted-average rate of 5.4%, and the company has said it expects to refinance most of this debt within five years. Management also used roughly $730 million of cash to buy back 21.0 million shares during 2007 and repurchased another 1.1 million shares in January 2008, which is a capital-allocation choice that trades near-term dilution and leverage for per-share growth.

Key risks include customer concentration (Sprint Nextel, AT&T, Verizon Wireless and T-Mobile supplied about 68%^d of revenue), refinancing and credit-spread exposure during the 2007-2008 credit crisis, carrier consolidation that could eliminate duplicate sites, and the land-tenure profile, since about 12% of towers sit on land whose final expiration is under ten years out. Investors should weigh the strong contracted cash-flow base against a balance sheet that has shifted substantially toward debt.

02—Key points

Key Highlights

Largest U.S. tower owner: about 21,800 U.S. towers out of roughly 23,800 total, with site rental accounting for 93% of 2007 revenue.
The Global Signal merger (closed January 12, 2007) added 10,749 towers for about $4.0 billion in equity and cash consideration, plus $1.8 billion of assumed mortgage debt. Net revenues rose 76% to $1.385 billion.
Net loss widened to $222.8 million ($0.87 per share) on higher depreciation ($539.9M) and interest expense ($350.3M), plus a $75.6M FiberTower impairment and $60.7M in Modeo write-downs and restructuring charges.
Adjusted EBITDA (a non-GAAP measure management emphasizes) was about $759 million in 2007, and operating cash flow rose to $350.4 million from $275.8 million.
Total debt reached $6.1 billion at a weighted-average rate of 5.4%. Roughly $5.3 billion is securitized, and the company expects to refinance most of its debt within five years.
Capital returned to shareholders through buybacks: 21.0 million shares repurchased for about $730 million in 2007, with a further 1.1 million shares bought in January 2008.
Customer concentration remains high: Sprint Nextel (25%), AT&T (19%), Verizon Wireless (15%) and T-Mobile (9%) together accounted for 68% of consolidated revenue.

03—One dollar

04—Financials

Financial Highlights

10-KFY2007filed February 27, 2008

Revenue$1.39B Net Income-$222.81M-16.1% Net Margin Cash & Equivalents$75.25M Free Cash Flow$350.36M

Financial Statements

Revenue	$1.39B
SG&A Expenses	$142.85M
Operating Expenses	$1.29B
Operating Income	$99.53M
Interest Expense	$350.26M
Net Income	-$222.81M

05—Questions

Frequently Asked Questions

Why did CCI report a net loss even though revenue grew strongly?
The 2007 net loss of $222.8 million reflected the cost of the Global Signal merger rather than weak operations. Depreciation and amortization nearly doubled to $539.9 million because the acquired towers and their intangible assets were recorded at fair value. Interest expense rose 116% to $350.3 million on the $1.8 billion of assumed mortgage debt and the borrowings used to fund the cash portion of the deal and the share buybacks. A $75.6 million impairment on the FiberTower investment and about $60.7 million of Modeo charges added to the loss. Management points to Adjusted EBITDA, which excludes these non-cash and one-time items, as a better measure of operating performance.
How durable is CCI's revenue?
Site rental revenue is generally recurring. Leases typically run five to ten years, renew at the tenant's option, and include contractual escalators tied to CPI or fixed percentages. The company says the vast majority of its site rental revenue was already contracted in prior years. The main caveats are customer concentration (four carriers provided 68% of revenue), possible lease terminations from carrier consolidation or network sharing, and the risk that tenants downsize or rely on alternative sites. Approximately 12% of towers sit on land whose final expiration is under ten years away, so land-rights renewal is also a factor.
What are the main balance-sheet and refinancing risks?
Total debt was $6.1 billion at year-end 2007, and the company expects to refinance most of it within five years. The tower revenue notes and mortgage loans have anticipated repayment dates between 2009 and 2011, and if they are not repaid in full on time, interest rates step up by at least 5% and principal amortization begins. Management hedged much of the expected refinancing with forward-starting swaps at about 5.2% fixed, but these carry a fair-value liability of about $65 million at year-end 2007. Credit spreads widened during the 2007 credit crisis, which could raise financing costs. About $795 million of debt is floating rate, and a 1-point rate rise would add about $1.7 million of annual interest expense after swaps.
Why is the company buying back stock while carrying so much debt?
Management's stated strategy is to grow long-term value per share, and it views opportunistic repurchases as a way to do so when shares trade at attractive levels. In 2007 it bought 21.0 million shares for about $730 million, funded mainly by term loans and revolver borrowings. The company acknowledges that this increases interest expense and creates a short-term dilutive effect on earnings. The trade-off is that buybacks reduce the share count while the company keeps leverage within a targeted range of six to eight times Adjusted EBITDA. Investors should judge whether the expected returns on buybacks and tower growth outweigh the added financial risk.
What is the growth outlook for the core tower business?
Management expects organic growth from adding tenants to existing towers, which carries high incremental margins because tower operating costs are largely fixed. The Global Signal towers still have room to add tenants, and management says CCUSA has significant presence in 91 of the top 100 U.S. BTAs. Industry drivers cited include growing minutes of use, wireless data revenue up 63% year over year in the first half of 2007, 3G deployments, and spectrum auctions that could bring new entrants. Management expects 2008 operating cash flow to exceed 2007 and capital expenditures to be equal to or slightly above 2007's $300 million. The risks are technology substitution (such as signal combining and femtocells), slower-than-expected adoption of new services, and any slowdown in carrier spending.

06—Continue

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