By Jennifer Fritzsche…
We recently conducted our quarterly channel checks with RF engineers and other network contacts in our Rolodex to get a touch point on the current spending environment in the wireless arena and how it will affect the tower companies. Recall that these contacts’ revenue trends tend to have a 15- to 18-month lead time on the tower companies business, and that more than 90 percent of the annual revenue is booked on the first day of the year. There tend to be few surprises. That said, we always find these checks helpful as they give us a good idea of the pace of spending and who is doing what. Our checks offer a bullish outlook for the tower companies’ near- and longer-term revenue trends.
Big Red: the Consistent Tortoise in the Race
Our checks suggest that VZ [Verizon Wireless] continues to be the steady Eddie of the Big Four. Making the analogy from the children’s fable, The Tortoise and the Hare, one contact compared VZ to the tortoise in the tale and reminded us of the lesson of the fable — slow and steady wins the race! All the RF engineering contacts we spoke with indicated VZ has its hands in everything right now: new builds, further expansion of its LTE network, dark fiber draws to the cell site, AWS spectrum deployment and small cell/DAS deployment. This last comment was most interesting, as we have heard AT&T speak more publicly about its small cell effort, whereas checks would indicate VZ has been just as focused.
AT&T — Slower in Small Cell Effort, Still Very Busy on Network
Our checks suggest that T (AT&T) is slightly behind its original targets in deploying small cells. Recall that in November 2012, as part of its Project VIP effort, AT&T outlined plans to deploy 40,000 small cells in the three-year period from 2013 to 2015. It is our understanding that T wants to deploy multi-modal/multi-technology small cells, which have HSPA/LTE/Wi-Fi capabilities. Our checks suggest that it has taken longer than expected to get this equipment from the OEMs. That said, our channel checks show that AT&T remains very busy on the DAS side of the house. T has its own small cell solutions group. Like VZ, T also remains very aggressive on deploying its recently acquired AWS spectrum assets and doing many in-fill additions to its macro-site network to further increase the density of its network footprint.
Sprint and T-Mobile Going Slowly but Ramp Is Expected in Second Half 2014, 2015
Sprint and TMUS [T-Mobile US] have been a bit slower than expected in terms of spending, according to our checks. In the case of Sprint, while its target for 100 million covered POPs of 2.5-GHz spectrum by year-end has not changed (either publicly with Wall Street or in communication with its engineers), the deployment of the equipment has been slow in coming. It is unclear where the issue is, but our contacts indicated it has been about six months behind the delivery schedule originally suggested by the OEMs at the early part of 2013.
In the case of TMUS, it seems it is finishing up its network modernization now and ramping up its spending on its recently acquired A block 700-MHz spectrum. We note that both of these upcoming initiatives (700 A Block deployment by TMUS and the 2.5-GHz deployment by Sprint) were not reflected in the tower companies’ 2014 guidance in a meaningful way. Although we expect some effect from this spending in the second half of 2014, a more significant contribution to tower companies’ revenue trends may occur in 2015.
So What Is the Bottom Line for Tower Companies?
While S and TMUS could be more active, we believe AT&T and VZ have been more than active enough to keep the tower companies busy! A few of our contacts indicated some concern that we could see a repeat of last year when all the work that needed to be done got compressed into a shorter time frame. In our view, although this could lead to resource constraints (like we saw at the end of 2013), this pent up demand bodes very well for the tower companies’ 2015 and beyond outlook.
We believe the biggest domestic tower theme that seems to be shaping up for 2015 is definitely small cells. One contact we spoke to indicated that with legacy DAS, nodes needed to be spaced every three or so city blocks. With low-power small cells, these may be deployed every few hundred feet — suggesting, on average, four times the density now seen. In our view, this is hugely positive for the tower companies participating in this arena (CCI and AMT especially). To explore this theme further, Wells Fargo will be hosting a Small Cell Symposium (one-day conference) in New York on July 24.
Jennifer Fritzsche is a managing director in the Equity Research Department at Wells Fargo Securities, where she has focused on the Telecommunications Services sector since 1999.