U.S. Telecom Sector Overview - Home ...
←
→
Page content transcription
If your browser does not render page correctly, please read the page content below
U.S. Telecom Allyn Arden, CFA, Director
Chris Mooney, CFA, Director
Sector Overview Copyright © 2018 by S&P Global.
All rights reserved.
September 2018U.S. Telecom and Cable Themes for 2018
2018 M&A Outlook
• 2017 proved to be an exciting year for M&A, even though many rumored transactions
never came to fruition.
• We expect M&A to remain active in 2018 because of secular industry pressures, the
need for scale, technology convergence, changes in consumer preferences, ever-
increasing programming expense, and intense competition in both telecom and cable.
Drivers Constraints Outlook
Rising programming expense and Ongoing consolidation among the
High take out multiples for some
Cable increasing competition from OTT. small and mid-sized cable
assets, especially fiber
Need for fiber providers
Mature industry conditions, Regulatory challenges since the Regulatory approval for T-Mobile
Wireless aggressive competition with four DOJ and FCC seem to prefer four and Sprint merger will be
nationwide providers, nationwide providers challenging
Additional consolidation but fewer
Secular industry pressures, need Acquisition opportunities are
deals than previous years. Will
Wireline for scale to preserve margins and diminishing, integration risk, and
depend on credit and equity
stabilize the top line limited market reception
markets
3T-Mobile and Sprint Agree to Merge, Finally
Benefits
– Increased scale to better compete with AT&T and Verizon
– Substantial cost synergies
– Strong spectrum position
– Fewer competitors could stabilize pricing
– Better positioned for 5G deployment
Risks
– Integration challenges could result in higher churn and margin pressure in the near-term
– Operating complexities are significant
– Financial complexities given Sprint’s balance sheet
– Regulatory hurdles could result in management distractions
– Increased leverage and weaker cash flow metrics for T-Mobile
Regulatory Hurdles
– Shift to three nationwide players from four could result in higher pricing for consumers
– Can DOJ justify the approval of a T-Mobile and Sprint combination but have concerns about AT&T
and Warner Media?
– Possible concessions include divesting spectrum or facilitating the creation of an MVNO
45G Wireless
Opportunities Threats/ Risk
5G fixed wireless could be a
Fiber needed for wireless
Cable competitive threat to existing
backhaul
cable broadband service
Fixed: can offer very fast Fixed: Is it as reliable as a wired
broadband speeds that is broadband service? Need for
comparable with existing higher-band spectrum makes it
cable broadband. Cost to better suited for dense urban
deploy is less than building and suburban markets
fiber to the home
Wireless
Mobile: Need for fiber for
Mobile: New revenue stream wireless backhaul and high-band
for wireless carriers, low spectrum could burden balance
latency and fast data speeds sheets. Revenue opportunities
could drive IoT-based could take time to develop
applications
5Overview of the U.S. Telecom and Cable Sector
Overview of U.S. Telecom / Cable Sector
• Wireline companies continue to face secular declines
− Demand for traditional wireline services shrinking; wireless substitution the main culprit
− DSL is losing market share to cable broadband
− Commercial services losing market share to cable and enterprise revenue declining because of migration to IP-based
services. The evolution of SD-WAN could extend revenue declines
• Wireless operators facing mature conditions and greater price-based competition
− Intense competitive pressures with four nationwide carriers and maturing industry conditions
− Post-paid churn is improving because of declining upgrade activity, lack of “must-have” handset devices, and
convergence of network quality.
− Scale and access to capital will be key determinants of business risk
• Cable industry stable near term; longer-term technology risks
− Share gains in video; but overall Pay-TV universe shrinking
− Secular pressure on bundle; increased OTT adoption and skinny bundle experimentation
− Broadband penetration maturing; subscriber growth extended through share gains against DSL, but longer term growth
eventually dependent on data monetization
− Potential longer-term threat from 5G fixed wireless and regulatory uncertainty
7Overview of the U.S. Telecom / Cable Sector
Rating Distribution Outlook Distribution
CCC/CC SD/D A WatchPos NM
0% 1% BBB Positive 0% 0%
9%
9% 7%
Watch Neg
2%
BB
21% Negative
21%
Stable
67%
B
60%
*As of September 11, 2018
8Upgrades and Downgrades, U.S. Telecom & Cable
Upgrades Downgrades
120
108
100 96
80
60
40
40 37
21 21 19
18 16
20 15 15 14 1415
1211 11 11 11 11 10 10 8 10
7 9 8 8 97 86 9 7
4 6 5 3
0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
*As of September 11, 2018
9Rating Trends for the U.S. Telecom / Cable Sector
• Ratings outlook increasingly negative: 21% of ratings have a negative outlook
• In 2018, there have been 17 downgrades and 3 upgrades
• Notable rating actions (2017/2018):
• AT&T rating lowered to ‘BBB’ from ‘BBB+’ following acquisition of Time Warner
• T-Mobile US ‘BB+’ rating placed on CreditWatch negative and Sprint ‘B’ rating placed on
CreditWatch positive on proposed merger in an all-stock transaction.
• Frontier downgraded to ‘CCC+’ with a negative outlook because of underperformance and our
view that the capital structure is unsustainable after 2021
• Windstream raised to ‘CCC+’ from ‘SD’ post distressed exchange. The company still faces
refinancing risk in 2020 and 2021
• SBA placed on Watch positive based on our review of SBA’s credit profile relative to its peers
American Tower and Crown Castle
• CenturyLink outlook revised to negative following acquisition of Level 3 because of secular industry
pressures
• DISH downgraded to ‘B’ on subscriber losses and shifting consumer preferences that have resulted
in weaker credit metrics
• Equinix outlook revised to positive from stable because of strong business momentum
• Altice USA outlook revised to positive from stable following separation from its European parent
• Gogo lowered to ‘CCC+’ from ‘B-’ due to potential cash shortfall in the second half of 2019
10U.S. Telecom and Cable Sectors In-Depth
2018 Cable Outlook
• The outlook for cable remains stable based on our view that continued growth in broadband and commercial
services will more than offset video declines over the next two years, as cable's broadband moat provides a very
powerful pricing counterbalance.
• Cord-cutting is a manageable risk in the near-term. Longer-term, if cable operators become more reliant on
broadband as a stand-alone product, the threat of 5G fixed wireless substitution could become magnified,
particularly for cable operators in more densely populated regions where 5G will be deployed.
• Overall, we forecast mid-single-digit percent revenue growth for cable providers in 2018, with relatively stable
margins as the rising cost of programming is offset by growth in higher-margin broadband. For most operators,
commercial services continue to increase at double-digit percentage rates as cable raises its share of the SMB
market.
• There is now a crowded field of vMVPD’s. On top of that, programmers are now offering DTC apps that provider a-
la-carte live streaming options.
• The biggest risk to cable, in our view, is aggressive pricing for a sustained period by one or more vMVPD, perhaps
to gain scale for targeted advertising, which is attractive because of the unicast nature of the consumer
relationship.
• We expect cable video subscriber losses of around 1%-2% over the next couple of years with the overall pay-TV
universe declining around 3%.
Company CCR Outlook Comments
• Bid for Sky plc
Comcast Corp A- CW Neg
• If successful, leverage could rise to about 3.25x from 3x
• Second largest cable provider but integration risk from
Charter Communications BB+ Stable recent acquisitions
• Expect leverage to be 4.0x-4.5x
12Cord-Cutting Is Manageable Risk To Cable
• Savings May Not Be Worth It For Most Consumers
• Giving up a lot in terms of content, number of streams, DVR functionality, etc
• Slim Profit Margins for vMVPDs
• Could lead to introductory prices increasing in the future
• Deep-pocketed owners may keep prices low to gain scale
• Aggressive Pricing Is Biggest Risk But Its Unlikely
• Hulu has most potential to be disruptive given ownership by programmers; However, not incentivized to
cannibalize existing business. Multiple owners could complicate a more aggressive strategy as well.
• SlingTV and DTV Now unlikely to price irrationally because it would hurt profitable DTH biz
• Vue and YouTube face higher programming costs making earning a return challenging
• Headline Risk More Than Financial Risk To Cable, For Now
• Broadband moat provides very powerful pricing counterbalance
• Smaller operators with tighter video margins more susceptible to video sub losses
• If cord-cutting accelerates, cable becomes more susceptible to 5G fixed wireless substitution L-T
• DISH Most Exposed
• No broadband product
• SlingTV provides hedge but will be difficult to compete profitably in a crowded field
13OTT Services Hulu Live TV PlayStation Vue Sling TV DirecTV Now YouTube TV Philo
Parent Company FOXA, DIS, CMCSA,TWX Sony Dish Network AT&T Google Startup
Advertising Yes Yes Yes Yes Yes Yes
$45/month (Access) $40/month (Live a Little)
$25/month (Orange),
$50/month (Core) $55/month (Just Right)
Price (paid subscription) $40 $25/month (Blue) $40/month Option 1: $16/month
$60/month (Elite) $65/month (Go Big)
$40/month (combined)
$80/month (Ultra) $75/ month (Gotta have It)
2 users (6 user profiles) 1 user on Orange, 3 streams (6 user
Concurrent Streams 5 users 3 users 3 streams
Unlimited for extra $15 3 on Blue profiles)
CBS, NBC, ABC, Fox,
Channels from all major
Popular channels available ESPN, Disney, TNT, TBS, CNN. ESPN, USA, TNT, TBS,
Fox, CBS, NBC, ESPN, Disney, networks. Broadcast networks
from most major networks, Broadcast networks in select CNN, NBA TV Regional A+E, AMC, Discovery,
Available Content Turner Networks, Fox RSN’s, in select markets; RSN’s in 2nd
excluding Viacom; DVR markets (Blue); Comcast and Fox sports plus original Scripps, Viacom
Comcast RSN’s, Scripps tier and above; Add HBO for
functionality RSN’s in select markets (Blue) content from YouTube
$5
Red
PlayStation 3 & 4; Sony iOS Devices, Android,
iOS, Android, Apple TV, Xbox iOS, Android, Roku, FireTV, iOS, Android, Roku, FireTV,
Smart TV and Blu-ray, iOS Xbox 1, Chromecast, Roku, iOS devices (no
One, Chromecast (Roku, Fire Chromecast, AirTV, Desktop, Xbox Chromecast, Apple TV,
Platform and Android, Apple TV, Apple TV, Roku, Chromecast, Apple TV,
TV sticks, and Samsung smart One, variety of smart TV’s and Blu- Desktop, handful of smart
Amazon Fire, Roku, Samsung, LG, and Sony or Amazon Fire yet)
TV soon) ray players TV’s
Chromecast Smart TV’s
Estimated users ~450K ~670K ~2.3mn ~1.2M ~300K N/A
50+ channels; deep VOD Access: 45+ channels Orange: 30+ channels Live a Little: 60+ channels 40+ channels with
Library; Cloud DVR; add-on Core: 60 incl RSN’s Blue: 40+ channels Just Right: 85+ channels 70+ channels with cloud DVR and VOD
Amount of content
features including unlimited Elite: 90 plus more RSN’s Combined: 50 channels Go Big: 105+ channels unlimited cloud DVR; library with social
streams and enhanced DVR Ultra: 90+HBO+Showtime 50 hours cloud DVR: $5 Gotta Have It: 125+ media component
Estimated average
Access: $9; $17; $32 Live a Little: $14; $22; $37
monthly cost savings by Orange: $29; $37; $52
Core: $4; $12; $27 Just Right: ($2); $7; $22
cutting cord* $14; $22; $37 Blue: $29; $37; $52 $14; $22; $37 $38; $46; $61
Elite: ($7); $2; $17 Go Big: ($12); ($3); $12
(Low ARPU; Average All: $14; $22; $37
Ultra: ($27); ($18); $(-3) Gotta Have It: ($22); ($13); $2
ARPU; High ARPU)**
Access: $10.55 Live a Little: $.03
Orange: $5.53
Estimated profit per sub Core: $7.38 Just Right: $7.41
$1.79 Blue: $.67 $4.41 $7.70
*** Elite: $11.32 Go Big: $13.97
All: $4.03
Ultra: $20.76 Gotta Have It: $21.43
• Broadcast affiliates only in • Limited savings • Less kids • No sports
• No CBS; No Fox News
select markets • Broadcast nets not • No DVR (coming in ’18) • No Time Warner, • No Disney
• No broadcast nets in Orange
• 2 streams in base available in all markets • NFL football confusing Discovery, Viacom • No broadcast nets
Drawbacks • No ESPN in Blue
• Excludes AMC, Discovery ($10 discount applied) • Only 2 streams • Price • Limited # of
• 1 stream in Orange
and Viacom • No Viacom • Unsustainable price? unsustainable? supporting
• No RSN’s in Orange
devices
* Based on average U.S. cable TV bill of $95; Assumes loss of $25 bundling discount. Assumes $7.50 upcharge for faster internet, assuming 50% of subs upgrade for $15
** Low APRU = $86 (Charter); Average ARPU=$95; High ARPU = $109 (CableVision) 14
*** Based on SNL average content costs for 2018. Does not include advertising revenue or marketing costs. Used weighted average cost for RSN’s. Actual profits may differ.Pay-TV Trends
• Cable video customer trends are improving because of more advanced set
top boxes (i.e. X1), skinny bundles, and bundled offerings.
• Cable increasing share from telco’s, but pay-TV universe shrinking and
programming expenses not abating materially.
• DTV is benefiting from DTV Now customer growth but is losing satellite video
subs
• DISH aided by low-margin SlingTV subscriber adds
• Programming expense per subscriber is still rising about 8%-10% annually,
but some signs of softening
• Programming prices increases leading to greater focus on “skinny bundles”,
tiering disputes
15Pay-TV Subscriber Forecast
• Larger providers are attempting to strengthen the bundle of services offered by investing in improved video
technology that allows for easier search and navigation of content, while offering a wireless mobile service
through MVNO agreements with wireless carriers and not passing along full cost of programming.
• Smaller cable providers tend to have tighter video margins, less investment resources, and a more limited
scale to offer a wireless product
2017A 2018E 2019E 2017A 2018E 2019E
Large Cable Video Satellite Video
Comcast -0.2% -0.5% -1.0% Dish* -8.5% -8.7% -9.0%
Charter -1.7% -1.5% -1.5% DirecTV -0.8% -1.3% -2.0%
Total -0.8% -0.9% -1.2% Total -3.8% -3.9% -4.4%
*Estimated (ex-Sling)
Midsize Cable Video
Cox -3.0% -2.8% Telco Video
Altice USA -3.5% -3.2% -3.0% Verizon Fios -0.5% -0.5% -1.0%
Total -2.9% -3.1% -2.9% AT&T U-Verse -18.3% -17.5% -17.5%
Total -9.2% -8.2% -7.7%
Small Cable Video
Mediacom -1.3% -3.0% -3.0% Total Traditonal Pay-TV -3.0% -3.0% -3.2%
Radiate -5.5% -5.5%
WideOpenWest -8.2% -8.3%
Cable One -11.5% -10.8%
Total -3.0% -3.8% -3.6%
Total Cable Video -1.2% -1.5% -1.7%
Source: S&P Global Ratings, Figures not shown are confidential
16Still Room To Grow HSD….
• 80% wired penetration, which we expect to eventually exceed peak of Pay-TV which reached 88% in 2010 as
broadband becomes increasingly important for homework, employment, and social aspects of life.
• Government support for CAF buildouts and Lifeline consumer subsidies
• New homes growth of about 1.3 million per year through 2020 per S&P economist
Source: S&P Market Intelligence, Figures not shown are confidential
17…But Opportunities To Take Share Shrinking
•… And New Competition Is On the Horizon
• Verizon is targeting to pass 30 million homes to achieve 20%-30% penetration which we expect
will occur in the largest, most densely populated regions (that don’t currently have a Verizon Fios
network).
• Could result in market share erosion, or margin pressure, for cable providers in these markets
• Opportunity for cable to provider fiber backhaul for this dense small-cell network
Exposure to Verizon 5G Fixed Wireless Buildout
Source: S&P Market Intelligence
19Cable’s Strategic Response
• Continue to invest in their networks to provide an important competitive advantage in terms of speed and
reliability.
• Most cable operators are upgrading their hybrid fiber coax (HFC) plant to DOCSIS 3.1 through upgraded
electronics that will allow for 1 GB speeds at little incremental expense over the next 1-2 years.
• Longer-term, cable could achieve 10 GB symmetrical speeds through Full Duplex DOCSIS in select
markets which would likely offer superior speeds compared with a wireless connection. While there is
currently little use for speeds that fast, the home of the future might require it include ultra-high-definition
TVs, virtual reality, real-time gaming, and smart capability.
• Outside of network investments, cable operators are employing different strategies based on financial
resources, size of their footprint, and the competitive landscape they face.
• The largest operators such as Comcast, Charter, and Altice USA are all attempting to strengthen the
bundle of services they offer by investing in improved video technology that allows for easier search and
content navigation while offering a wireless mobile service through mobile virtual network operator
(MVNO) agreements with wireless carriers. We believe this is prudent because if cable operators rely
more on broadband as a stand-alone product, the threat of 5G fixed-wireless substitution could become
magnified, particularly for cable operators in more densely populated regions.
• Smaller cable providers tend to have tighter video margins, less investment resources, and a more
limited scale to offer a wireless product. We believe overbuilders such as WoW and Radiate are more
exposed to Verizon's fixed-wireless buildout than more rural providers such as Midcontinent, Mediacom,
Block, and Cable One.
20Forecasted Broadband Revenue Growth
• To the extent that cable providers cannot increase broadband revenue, due to
either customer losses or lower ARPU, we could tighten rating triggers on case-
by-case basis. This is unlikely over the next 2-3 years.
• Longer-term, a more competitive landscape could result in downward rating
pressure if providers do not adjust financial policies, if necessary.
212018 Wireless Outlook
• We have a negative outlook for the U.S. wireless industry due to mature industry conditions and the
presence of four nationwide carriers.
• Wireless competition has abated somewhat as the industry awaits the outcome of the proposed Sprint and
T-Mobile merger.
• We still expect service revenue for the sector to decline in the low-single digit percent area in 2018 based
on very limited subscriber growth and lower ARPU. However, we believe that almost all the service
revenue growth with come from T-Mobile while service revenue for the other carriers declines around 3%-
5%
• We expect aggregate FCF to decline by about 5%-7% driven by relatively flat EBITDA and higher capital
expenditures
• Longer-term opportunitiesCCR
Company include the deployment
Outlook of 5G networks, including fixed wireless technology,
Comments
IoT, and continued growth in mobile data and video
• Acquisition of Time Warner increases leverage to 3.5x
AT&T Inc. BBB Stable • We revised our downgrade threshold to 3.25x from 3.5x, the same
as Verizon
• We revised the upgrade threshold to 2.5x from 2.75x and downgrade
threshold to 3.25x from 3.5x following review of telecom, cable, and
Verizon Communications BBB+ Stable
media sectors. The revision also reflects our view that VZ is heavily
concentrated in the super-competitive and mature wireless industry
• Agreement to merge with T-Mobile in an all-stock transaction
• We estimate pro forma 2019E debt/ EBITDA in the mid-to-high-4x
Sprint Corp. B CW Pos area, excluding the benefits of lease accounting and negative FOCF
for one to two years post-closing.
• Very challenging regulatory hurdles
T-Mobile US Inc. BB+ CW Neg • See above
22U.S. Wireless Spectrum License Holdings
200
180
160
140
120
100
80
60
40
20
0
Verizon AT&T T-Mobile Sprint DISH
600 MHz 700 MHz 850 MHz SMR PCS AWS WCS BRS EBS AWS-3
• T-Mobile’s spectrum position is not far behind that of Verizon, following the Broadcast Incentive
Auction
• Low-band spectrum is highly desirable for coverage purposes and requires fewer cell sites
• Mid-band and high-band spectrum are becoming increasingly more important for data intensive
applications since they enable greater throughput.
• A combined Sprint and T-Mobile would have a much stronger spectrum position to compete with AT&T
and Verizon and deploy 5G wireless.
• Is mmWave spectrum suitable for 5G?
*Source: Company data, S&P estimates
23U.S. Telco Capex Is Ready For Takeoff
$70,000 20%
18%
$60,000
15%
$50,000
10%
$40,000
US$ mm
6%
$30,000
5%
3%
$20,000
0%
$10,000 -2%
-3%
$0 -5%
2016 2017 2018E 2019E 2020E 2021E
Total Growth
• We expect U.S. wireless capital expenditures to increase over the next few years because of
AT&T’s FirstNet build, Sprint spending to support the deployment of its 2.5 GHz band, and
T-Mobile’s buildout of the 600 MHz spectrum acquired in the Broadcast Incentive Auction
• We expect capital spending for all the carriers will be elevated in 2019 relative to historical
trends as they deploy their 5G networks
*Source: Company data, S&P estimates
24AT&T and Verizon Dominate The Post-Paid Market
Other, 2%
T-Mobile, 15%
Verizon, 42%
Sprint, 12%
AT&T, 29%
*Source: Company data, S&P estimates
25Pre-Paid Market Is More Fragmented
Verizon, 7%
Other, 31%
AT&T, 22%
Sprint, 12%
T-Mobile, 28%
*Source: Company data, S&P estimates
262018 Wireline Outlook
• We expect revenues to decline in the mid-single digit percent area or more due to the loss of voice access
lines to wireless substitution and broadband customers to cable
• Additional consolidation is likely to occur as service providers try to preserve margins and stabilize the top
line but there are fewer opportunities
• Recent downgrades of Windstream and Frontier highlight the some of the challenges that wireline
companies face as well as refinancing risk. We also revised CenturyLink’s outlook to negative from stable
• New cloud-based technologies such as SD-WAN could pose a new threat to the industry since they are
more flexible, open, and less expensive than traditional WAN technologies.
Company CCR Outlook Comments
• Agreement to purchase Level 3 pushed leverage to the mid-4x area but
acquisition has substantial strategic benefits
CenturyLink Inc, BB Negative
• Secular industry declines have hurt results in the legacy CenturyLink
markets
• Despite modest improvement, results remain largely disappointing
• Capital structure is unsustainable after 2021 and is dependent on
Frontier Communications Corp. CCC+ Negative
favorable market conditions
• We do not believe that Frontier can meaningfully reduce its leverage
• Company could be challenged to refinance its bank loan maturities in
2020 and 2021 on favorable terms and will likely pursue maturity
Windstream CCC+ Developing extensions that could be viewed as distressed
• Despite improving operating and financial results, longer-term business
prospects remain weak
27Operating Trends
Business Services
Revenue from business services is declining due to competition from the cable providers and a
migration to IP-based technologies, which have lower price points, from legacy ATM and Frame
Relay products. Growth in SD-WAN could extend revenue declines
Despite healthy macroeconomic conditions, telecom spending from business customers remains
weak
Incumbent wireline companies have also been hurt by wireless carriers turning down legacy copper
circuits for wireless backhaul although we expect some revenue growth from the deployment of fiber
to the towers over the next few years
Consumer Services
Consumer revenue trends are slightly negative as access line and DSL customer losses are partially
offset by higher ARPU from speed upgrades and modest growth from IP-based broadband.
Carriers continue to upgrade their networks to offer faster broadband speeds to better compete with
cable
The loss of higher margin legacy products and the lack of scale in video are pressuring margins
282018 Data Center Outlook
• Healthy demand for data center solutions is supported by increased IT outsourcing, data growth, and hybrid
solutions including cloud, managed services and colocation. We expect demand will keep pace with supply
over the next few years.
• Substantial capital spending requirements and M&A activity are often funded with new debt in the industry,
limiting potential meaningful improvement in overall credit metrics in 2018. Ratings reflect typically high
leverage and negative FOCF to support expansion activity
• M&A will likely continue given the increasing importance of scale to connect various IT environments and
support the edging out of data, although the large size of recent transactions limits the size of future deals.
Company CCR Outlook Comments
• Leading scale and geographic diversity
• Attractive ecosystem of network operators, enterprises, and
Equinix Inc. BB+ Positive cloud providers
• Prolonged leverage above net leverage target of 3x-4x due to
organic expansion and recent acquisitions
• Limited competition, despite significant market concentration in
Switch Ltd. BB Stable Las Vegas
• Industry leading leverage profile between 2x-3x
• Underperformed under CenturyLink Inc. ownership with limited
Cyxtera DC Holdings Inc. B Stable
track record following carve-out in 2017
Flexential Intermediate • National footprint with operations in less competitive markets
B Negative
Corp. • Elevated leverage following the acquisition of ViaWest in 2017
29Potential Long-Term Risks To Data Centers
Potential Risk Description Potential Mitigant
An oversupply of data center capacity could Nationwide oversupply is unlikely, favoring geographically diverse
Imbalance Of Supply And
lead to pricing pressure data center operators.
Demand
The industry is very capital intensive to To the extent operators can pull back on capital spending, we believe
support growth initiatives, often resulting they would generate good levels of FOCF to support leverage
It Costs Money To Make
in high leverage and negative FOCF reduction
Money
The industry is relatively nascent Larger operators are more likely to serve more resilient large
Limited Track Record During enterprise customers and may have better access to capital markets
Periods Of Economic Stress in an economic downturn
Technology changes quickly and is difficult Software defined network still requires a physical infrastructure;
Technology Evolution Is An to predict improvements in data storage increase power requirements and
Unknown provide additional sellable square footage
Power is the largest cost faced by operators Some operators have started to explore more cost effective and
Rising Power Costs to run and cool facilities and some energy environmentally sustainable renewable energy sources
markets are deregulated
Enterprises may reduce their use of Some workloads will continue to be best suited for colocation; cloud
Cannibalization To The traditional colocation in favor of the cloud providers are leasing space in data centers, encouraging enterprises
Cloud to adopt hybrid cloud architecture and move off premises
Limited scale makes it difficult to connect Larger operators are best positioned to take advantage of favorable
various IT environments, benefit from the industry trends
edging out of data, and serve large
Scale Is Key enterprises
302018 Tower Outlook
• We maintain a favorable outlook for the sector based on leasing demand and lease contract amendment
activity
• Near-term revenue and EBITDA growth is supported by increased network investment from wireless
carriers driven by AT&T’s FirstNet build, Sprint’s deployment of 2.5GHz spectrum, and T-Mobile’s buildout
of 600 MHz spectrum
• Consolidation in the wireless industry, including between T-Mobile US and Sprint in the U.S., could be a
headwind although we believe the risk is largely manageable
Company CCR Outlook Comments
• Weaker performance in Asia due to elevated churn from carrier
consolidation in India will be a drag on results over the near-term
• Lower relative exposure to a T-Mobile / Sprint merger at 2% of total
American Tower Corp. BBB- Stable
revenue
• Recent investments in fiber and light poles in Mexico may signal a
shift in strategy regarding small cells
• Best positioned to benefit from 5G given investments in fiber and
small cells
Crown Castle Inc. BBB- Stable
• Higher relative exposure to a T-Mobile /Sprint merger given domestic
focus at 4% of revenue
• More tolerance for leverage, which has hovered around 8x in recent
years
SBA Communications Corp. BB- CW Pos • CW placement is based on our review of SBA’s business risk relative
to peers and the possibility that we will revise our thresholds for the
rating
31Revenue Impact of T-Mobile/Sprint on Tower Companies
American Tower (US$ mm) Crown Castle (US$ mm) SBA (US$ mm)
Domestic Site 2017 Revenue $3,344 Domestic Site 2017 Revenue $3,669 Domestic Site 2017 Revenue $1,308
2017 Domestic Tower Count 40,240 2017 Domestic Tower Count 40,080 2017 Domestic Tower Count 15,979
2017 Average Domestic Tower Count 40,070 2017 Average Domestic Tower Count 40,040 2017 Average Domestic Tower Count 15,951
Site Overlap (%) 4% Site Overlap (%) 5% Site Overlap (%) 6%
Site Overlap (#) 1,408 Site Overlap (#) 2,004 Site Overlap (#) 879
Annual Revenue/ Site $83,454 Annual Revenue/ Site $91,633 Annual Revenue/ Site $82,026
Potential Revenue Loss $118 Potential Revenue Loss $184 Potential Revenue Loss $72
Remaining Contract Term (Years) 3-4 Remaining Contract Term (Years) 5-7 Remaining Contract Term (Years) 3-6
% Of Total Revenue 2% % Of 2017 Total Revenue 4% % Of 2017 Total Revenue 4%
• In aggregate, we estimate that the total revenue loss for the three tower operators is about 3% of revenue and
this does not incorporate planned small cell deployments
– The companies stated that they would expand their combined small cell portfolio by about 40,000 sites over
the next few years
• We also note that losses would be spread across the remainder of lease terms which average in the 3 to 7 year
range
• This also does not take into account the need for network investment (i.e. new equipment to support customer
growth and increased data traffic) to support the combined customer base
32Comparison: Macro Towers vs Small Cells
• Small cells are more costly to build since Towers Small Cells
deployments generally rely on expensive fiber Customer Wireless Carriers Wireless Carriers
backhaul and typically involve several small
cells, which are subject to the same Construction Cost US$ $275,000 $100,000
regulatory permitting process and fees as a
traditional macro tower Time to Construct 12-24 mo. 18-24 mo.
• Margins on small cells are weaker due to high
10 Years + 5 Year 10 Years + 5 Year
regulatory costs and less lease-up Initial Lease Term
Renewal Terms Renewal Terms
opportunities
Contracted Escalators ~3% ~3%
• We believe that margins on small cells will
increase over time due to FCC’s efforts to
promote American leadership in 5G and Estimated Avg. Gross
~75% ~50%
eliminate some of the federal oversight over Margin (%)
small cells making them easier and cheaper to
deploy Estimated Lease-up 1 Tenant Every 5 to 1 Tenant Every 5
Speed 10 Years Years
• We also believe lease-up opportunities will
Churn Profile 1-2% 1-2%
increase over time of small cells become
more prevalent Capital Capital
Requirements, Requirements,
Regulatory, Zoning Regulatory, Zoning
Barriers to Entry and Permitting and Permitting
Approvals, Backhaul Approvals, Fiber
1. Assumes 2 tenants Backhaul
332018 Fiber Outlook
• We expect revenues to grow at a mid-to-high single digit percent pace due to rising demand for bandwidth
• Demand for bandwidth, especially for wireless backhaul, driven by the usage of bandwidth intensive
applications, such as video over IP, cloud-based applications, mobile devices (tablets and phones)
• While declining prices for IP transit and price-based competition from ISPs remain key themes in the
sector, margins will improve modestly in 2018 due to ongoing industry consolidation with more traffic
being driven on-net
• Robust M&A activity to continue over the near-term given the criticality of fiber to wireless, wireline, and
cable companies
Company CCR Outlook Comments
• Timing of potential REIT conversion is uncertain, although we
anticipate little ratings impact, absent a change in financial policy
Zayo Group, LLC B+ Stable
• Non-core CLEC operations remain a slight drag on results and sale
prospects are uncertain
• Continues to be the low cost provider of internet connectivity
Cogent Communications
B+ Stable • Repeal of net neutrality could lead to lower internet traffic growth or
Group Inc.
higher interconnection costs
• Debt financed Interoute deal, while offering some operational benefits,
materially elevates leverage and provides limited cushion for
integration missteps at the current rating level
GTT Communications, Inc. B Negative
• Despite an increase in network ownership (60% pro forma), the
company still leases significant portions of its backbone fiber network
and last mile connections from incumbent providers
34Satellite Sector Discussions
• Industry ramp of high-throughput satellite launches will cause oversupply and pricing pressure
Supply/Demand
• Supply exceeds demand by 3:1 through 2020, with demand driven by the mobility markets
Imbalance
• Company adoption of high-throughput technology is needed to remain competitive
• FCC proposal to free up 100MHz of C-band spectrum for 5G deployment provides a potential
opportunity to further monetize spectrum holdings
C-Band Proposal • NPRM published by the FCC on June 21st identified its various options for the C-band
Intelsat/SES/Eutelsat • Significant uncertainty around the timing and nature of an FCC ruling, the potential revenue
opportunity, and the associated cost to clear the spectrum
• Potential FCC ruling by mid-2019 followed by 18-36 months to clear the spectrum
• M&A among satellite operators is unlikely over the next year due to differing views on valuation
• EchoStar, with $3.3 billion of cash, did not make a formal offer for Inmarsat by the July 6th
deadline – it is now unable to approach the company for 6 months, unless under certain
M&A circumstances
• M&A among satellite service providers is possible over the next year given the fragmented market
and potential for meaningful network synergies
• The market for LEO satellites is relatively nascent
• Iridium will complete its Next constellation in 2018
• OneWeb will launch its first 10 satellites by year-end
• LEO satellites will primarily compliment geostationary (GEO) satellites
Low-Earth Orbit
(LEO) Satellites LEO GEO
• Low latency supports the Internet of Things • Significant capacity and ability to redistribute
• Global coverage provides access to the capacity to high-demand areas supports data
Earth’s poles intensive video and broadband applications
35Market Segment Exposure to Satellite Oversupply
High Traditional Voice/Data • Satellite oversupply and increased fiber alternatives
result in pricing pressure
Mobility • Satellite oversupply could result in lower returns on
investment, despite volume growth
Government • Satellite dependent on government budgets and
lowest price technically acceptable
Media • Satellite remains the most efficient way to distribute
content for point-to-multipoint services and media
companies have long-term contracts that range from
Residential
Broadband
10-15 years
• Satellite focus on residential customers without
terrestrial alternatives and high-throughput
Low satellites enable greater data speeds and usage caps
Company CCR Outlook Traditional Mobility Residential Media Government
Voice/Data Broadband
Intelsat S.A. CCC+ Negative High Low Low Medium Medium
Hughes Satellite Systems Corp. BB Stable N.M. Low High Low Medium
ViaSat Inc. BB- Stable N.M. Low High N.M. High
Iridium Communications Inc. B- Negative High Medium N.M. N.M. Medium
36S&P U.S. Telecom Sector Team
Analyst Title Phone Number Email Address Sector Coverage
Senior
Michael Altberg (212) 438-3950 michael.altberg@spglobal.com
Director
Chris Mooney, CFA Director (212) 438-4240 chris.mooney@spglobal.com
Associate
Rose Askinazi, CFA (212) 438-0354 rose.askinazi@spglobal.com Cable, Satellite, Data Centers
Director
William Savage Associate (212) 438-0259 william.savage@spglobal.com
Allyn Arden, CFA Director (212) 438-7832 allyn.arden@spglobal.com
Wireless, Wireline, Fiber, Cable,
Associate Towers
Ryan Gilmore (212) 438-0602 ryan.gilmore@spglobal.com
Director
37Analyst Title Phone Number Email Address Sector Coverage
Allyn Arden, CFA Director (212) 438-7832 allyn.arden@spglobal.com
Associate Cable, Satellite, Towers,
Ryan Gilmore (212) 438-0602 ryan.gilmore@spglobal.com
Director Wireless, Wireline
William Savage Associate (212) 438-0259 william.savage@spglobal.com
Wireless Wireline/Infrastructure (Continued)
Verizon Communications Inc. BBB+/STABLE/A-2 TVC Albany, Inc. B-/STABLE/--
AT&T Inc. BBB/STABLE/A-2 Onvoy LLC B-/STABLE/--
T-Mobile US Inc. BB+/CW NEG/--
Frontier Communications Corp. CCC+/NEGATIVE/--
Sprint Corp. B/CW POS/--
Wireline/Infrastructure Cable & Satellite
CenturyLink Inc. BB/NEG/-- Cox Enterprises Inc. BBB/STABLE/A-2
AP Teleguam Holdings Inc. B+/STABLE/-- Cable One Inc. BB/STABLE/--
Cogent Communications Group Inc. B+/STABLE/-- MidContinent Communications BB-/STABLE/--
Consolidated Communications Holdings Inc. B+/STABLE/-- GCI LLC B/STABLE/--
Hargray Holdings LLC B+/STABLE/-- WideOpenWest Finance LLC B/STABLE/--
Zayo Group LLC B+/STABLE/--
Cincinnati Bell Inc. B/STABLE/-- Towers
Logix Intermediate Holdings Corp. B/STABLE/-- American Tower Corp. BBB-/STABLE/--
Masergy Holdings Inc. B/STABLE/-- Crown Castle International Corp. BBB-/STABLE/--
MTN Infrastructure TopCo Inc. B/STABLE/-- SBA Communications Corp. BB-/CW POS/--
U.S. TelePacific Holdings Corp. B/STABLE/--
GTT Communications Inc. B/NEGATIVE/-- Miscellaneous
Uniti Group Inc. CCC+/DEV/-- Aerial Parent Inc. B+/STABLE/--
Windstream Holdings Inc. CCC+/DEV/-- West Corp. B/STABLE/--
Fusion Telecommunications Intl Inc. B/NEGATIVE/-- Syniverse Holdings Inc. B/STABLE/--
Premiere Global Services Inc. B/NEGATIVE/--
Sitel Worldwide Corp. B/STABLE/--
IPC Corp. B-/NEGATIVE/--
38Analyst Title Phone Number Email Address Sector Coverage
Chris Mooney, CFA Director (212) 438-4240 chris.mooney@spglobal.com
Associate Cable, Satellite, Infrastructure,
Rose Askinazi, CFA (212) 438-0354 rose.askinazi@spglobal.com
Director Wireless, Wireline
William Savage Associate (212) 438-0259 william.savage@spglobal.com
Cable & Satellite Infrastructure (Continued)
Charter Communications Inc. BB+/STABLE/-- Internap Network Services Corp. B/STABLE/--
Mediacom Communications Corp. BB/POSITIVE/-- Flexential Intermediate Corp. B/NEGATIVE/--
Block Communications Inc. BB-/STABLE/-- Ensono L.P. B-/POSITIVE/--
Cogeco Communications (USA) Inc. BB-/STABLE/-- Cequel Data Centers L.P. B-/STABLE/--
Altice USA, Inc. B+/POSITIVE/-- DataBridge Parent Inc. B-/STABLE/--
DISH Network Corp. B/NEGATIVE/-- Gogo Inc. CCC+/NEGATIVE/--
Radiate Holdco LLC B/STABLE/-- Iridium Communications Inc. B-/NEGATIVE/--
Liberty Cablevision of Puerto Rico LLC B/NEGATIVE/-- Intelsat S.A. CCC+/Negative/--
Infrastructure Miscellaneous
Equinix Inc. BB+/POSITIVE/-- Amdocs Ltd. BBB/STABLE/--
Hughes Satellite Systems Corp. BB/STABLE/-- CSG Systems International Inc. BB+/STABLE/--
Switch Ltd. BB/STABLE/-- Telephone and Data Systems Inc. BB/STABLE/--
ViaSat Inc. BB-/STABLE/-- TNS Inc. B+/NEGATIVE/--
Rackspace Hosting Inc. B+/STABLE/-- Global Tel*Link Corp. B/STABLE/--
Orbcomm Inc. B/POSITIVE/-- Securus Holdings Inc. B/NEGATIVE/--
Cologix Holdings Inc. B/STABLE/-- iQor Holdings Inc. B/NEGATIVE/--
Cyxtera DC Holdings Inc. B/STABLE/--
Global Eagle Entertainment Inc. B-/NEGATIVE/--
39Copyright © 2018 by Standard & Poor’s Financial Services LLC. All rights reserved.
No content (including ratings, credit-related analyses and data, valuations, model, software or other application or output therefrom) or any part thereof (Content) may be modified, reverse engineered,
reproduced or distributed in any form by any means, or stored in a database or retrieval system, without the prior written permission of Standard & Poor’s Financial Services LLC or its affiliates (collectively, S&P).
The Content shall not be used for any unlawful or unauthorized purposes. S&P and any third-party providers, as well as their directors, officers, shareholders, employees or agents (collectively S&P Parties) do not
guarantee the accuracy, completeness, timeliness or availability of the Content. S&P Parties are not responsible for any errors or omissions (negligent or otherwise), regardless of the cause, for the results
obtained from the use of the Content, or for the security or maintenance of any data input by the user. The Content is provided on an “as is” basis. S&P PARTIES DISCLAIM ANY AND ALL EXPRESS OR IMPLIED
WARRANTIES, INCLUDING, BUT NOT LIMITED TO, ANY WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE, FREEDOM FROM BUGS, SOFTWARE ERRORS OR DEFECTS, THAT THE
CONTENT’S FUNCTIONING WILL BE UNINTERRUPTED OR THAT THE CONTENT WILL OPERATE WITH ANY SOFTWARE OR HARDWARE CONFIGURATION. In no event shall S&P Parties be liable to any party for any
direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses, legal fees, or losses (including, without limitation, lost income or lost profits and opportunity
costs or losses caused by negligence) in connection with any use of the Content even if advised of the possibility of such damages.
Credit-related and other analyses, including ratings, and statements in the Content are statements of opinion as of the date they are expressed and not statements of fact. S&P’s opinions, analyses and rating
acknowledgment decisions (described below) are not recommendations to purchase, hold, or sell any securities or to make any investment decisions, and do not address the suitability of any security. S&P
assumes no obligation to update the Content following publication in any form or format. The Content should not be relied on and is not a substitute for the skill, judgment and experience of the user, its
management, employees, advisors and/or clients when making investment and other business decisions. S&P does not act as a fiduciary or an investment advisor except where registered as such. While S&P has
obtained information from sources it believes to be reliable, S&P does not perform an audit and undertakes no duty of due diligence or independent verification of any information it receives.
To the extent that regulatory authorities allow a rating agency to acknowledge in one jurisdiction a rating issued in another jurisdiction for certain regulatory purposes, S&P reserves the right to assign, withdraw
or suspend such acknowledgement at any time and in its sole discretion. S&P Parties disclaim any duty whatsoever arising out of the assignment, withdrawal or suspension of an acknowledgment as well as any
liability for any damage alleged to have been suffered on account thereof.
S&P keeps certain activities of its business units separate from each other in order to preserve the independence and objectivity of their respective activities. As a result, certain business units of S&P may have
information that is not available to other S&P business units. S&P has established policies and procedures to maintain the confidentiality of certain non-public information received in connection with each
analytical process.
S&P may receive compensation for its ratings and certain analyses, normally from issuers or underwriters of securities or from obligors. S&P reserves the right to disseminate its opinions and analyses. S&P's
public ratings and analyses are made available on its Web sites, www.standardandpoors.com (free of charge), and www.ratingsdirect.com and www.globalcreditportal.com (subscription), and may be distributed
through other means, including via S&P publications and third-party redistributors. Additional information about our ratings fees is available at www.standardandpoors.com/usratingsfees.
Australia
Standard & Poor's (Australia) Pty. Ltd. holds Australian financial services license number 337565 under the Corporations Act 2001. Standard & Poor’s credit ratings and related research are not intended for and
must not be distributed to any person in Australia other than a wholesale client (as defined in Chapter 7 of the Corporations Act).
STANDARD & POOR’S, S&P and RATINGSDIRECT are registered trademarks of Standard & Poor’s Financial Services LLC.
40You can also read
