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Edited Transcript of AMT earnings conference call or presentation 3-May-19 12:30pm GMT

Q1 2019 American Tower Corp Earnings Call

BOSTON May 7, 2019 (Thomson StreetEvents) -- Edited Transcript of American Tower Corp earnings conference call or presentation Friday, May 3, 2019 at 12:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Igor Khislavsky

American Tower Corporation (REIT) - Senior Director of IR

* James D. Taiclet

American Tower Corporation (REIT) - Chairman, President & CEO

* Thomas A. Bartlett

American Tower Corporation (REIT) - Executive VP & CFO

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Conference Call Participants

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* Batya Levi

UBS Investment Bank, Research Division - Executive Director and Research Analyst

* Brandon Lee Nispel

KeyBanc Capital Markets Inc., Research Division - Research Analyst

* Colby Alexander Synesael

Cowen and Company, LLC, Research Division - MD and Senior Research Analyst

* David William Barden

BofA Merrill Lynch, Research Division - MD

* Matthew Niknam

Deutsche Bank AG, Research Division - Director

* Michael Rollins

Citigroup Inc, Research Division - MD and U.S. Telecoms Analyst

* Philip A. Cusick

JP Morgan Chase & Co, Research Division - MD and Senior Analyst

* Richard Hamilton Prentiss

Raymond James & Associates, Inc., Research Division - Head of Telecommunication Services Equity Research

* Simon William Flannery

Morgan Stanley, Research Division - MD

* Timothy Kelly Horan

Oppenheimer & Co. Inc., Research Division - MD and Senior Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by. Welcome to the American Tower First Quarter 2019 Earnings Call. (Operator Instructions) As a reminder, today's call is being recorded. And your hosting speaker, Igor Khislavsky. Please go ahead.

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Igor Khislavsky, American Tower Corporation (REIT) - Senior Director of IR [2]

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Thanks, Kevin. Good morning, and thank you for joining American Tower's First Quarter 2019 Earnings Conference Call. We posted a presentation, which we will refer to throughout our prepared remarks, under the Investor Relations tab of our website, www.americantower.com.

Our agenda for this morning's call will be as follows. First, I'll provide an overview of our financial results for the quarter. Next, Jim Taiclet, our Chairman, President and CEO, will provide a brief update on our U.S. business. And finally, Tom Bartlett, our Executive Vice President and CFO, will discuss our first quarter results and 2019 outlook in more detail. After these comments, we will open up the call for your questions.

Before I begin, I'll remind you that this call will contain forward-looking statements that involve a number of risks and uncertainties. Examples of these statements include our expectations regarding industry trends as well as our future growth, including our 2019 outlook, capital allocation and future operating performance; the pacing and magnitude of the Indian Carrier consolidation process and its impacts on American Tower; and any other statements regarding matters that are not historical fact. You should be aware that certain factors may affect us in the future and could cause actual results to differ materially from those expressed in these forward-looking statements. Such factors include the risk factors set forth in this morning's earnings press release, those set forth in our Form 10-K for the year ended December 31, 2018, and in other filings we make with the SEC. We urge you to consider these factors and remind you that we undertake no obligation to update the information contained on this call to reflect subsequent events or circumstances.

Now please turn to Slide 4 of our presentation, which highlights our financial results for the first quarter of 2019. As expected, these results as well as our year-over-year growth rates were impacted by Indian Carrier consolidation-driven churn. During the quarter, our property revenue grew 4.4% to $1.8 billion, our adjusted EBITDA grew about 5% to $1.1 billion, and our consolidated AFFO and consolidated AFFO per share increased by 6.7% and 5.4% to $861 million and $1.94 per share, respectively. Finally, net income attributable to American Tower Corporation common stockholders increased by more than 44% to $397 million or $0.89 per diluted common share.

Additionally, like last quarter, many of our comments around first quarter results and our 2019 outlook focus on growth rates normalized for carrier consolidation-driven churn in India. Normalized outlook growth rates also adjust for the non-recurrence of the impacts of the Tata settlement we recorded in the fourth quarter of 2018. We view these normalized results as important indicators of the underlying trends of our business. Reconciliations of these normalized metrics to our GAAP results are included in the back of our earnings presentation, in our press release and in our supplemental package.

And with that, I'll turn the call over to Jim.

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James D. Taiclet, American Tower Corporation (REIT) - Chairman, President & CEO [3]

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Thanks, Igor, and good morning to everyone on the call. My remarks today will focus on the traditional first quarter report theme of our U.S. business, which accounts for the majority of our cash flows.

ATC's U.S. operations continue to generate strong organic tenant billings growth, achieving 8.2% in Q1 2019. Rapidly rising mobile data usage in the range of 30% to 40% per year remains the underlying driver of demand for our U.S. assets. The sheer growth in the volume of mobile data traffic, plus consumers' expectations of ubiquitous, higher-quality coverage, motivates the national wireless carriers to continually invest in their networks to remain competitive. Consequently, we again expect U.S. aggregate mobile CapEx in 2019 to be on the order of $30 billion as carriers preserve network quality and enhance capacity. For ATC, we expect that to translate into significant lease amendment revenue growth on our towers, including for equipment to support the deployment of new and repurposed spectrum bands.

Independent industry research estimates suggest that elevated usage trends will persist as more advanced devices, applications and network technologies are introduced in the United States. One key projection is that by 2023, the average U.S. consumer mobile device is expected to consume nearly 50 gigabytes of data per month, which is nearly 4x current levels. Meanwhile, industry analysts are also forecasting the deployment of more than 0.5 billion active IoT devices in the U.S. within the next 5 years. Taken together, in aggregate, monthly U.S. mobile data usage is therefore predicted to exceed 20 exabytes by 2023, again, about 4x today's levels.

As our tenants seek to optimize their networks in the context of this tremendous usage growth, initial deployments and mobile operator planning for wider implementation of 5G have intensified. As described in their respective public statements, each U.S. wireless carrier is crafting its own individual approach to the rollout of this new technology. Each has outlined initial plans based on specific spectrum assets, coverage goals and a number of other factors. At the same time, there are a few fundamental 5G-related themes that we believe will be broad-based throughout the industry.

In addition to providing a more efficient technology to help support the existing pace of aggregate data demand growth, we expect 5G to usher in a variety of new products and services for both consumers and business. These will include numerous IoT functions and a host of other low-latency, high-bandwidth applications. And when it comes to 5G, we firmly believe that a substantial portion of that network investment will be oriented towards macro towers, utilizing sub-6 gigahertz spectrum to serve the needs of the 85% of the U.S. population that's living outside of urban areas. This is likely to include spectrum assets like 600 megahertz, 2.5 gigahertz, CBRS and the C band, among others. All these bands, largely deployed on macro tower assets, will likely be utilized to achieve the capacity and the broad coverage needed to serve the topographic and demographic realities of the United States population.

Importantly, we view our approximately 40,000-site macro tower portfolio as extremely well positioned to capture a significant portion of this activity during the evolution from 4G to 5G, similar to past network technology cycles. Our franchise real estate assets typically have significant incremental capacity and are located in high-value areas, such as highway corridors and major suburbs.

We contract for space on these assets under lease structures that have enabled us to maximize the revenue and cash flows throughout the mobile technology deployment cycle while at the same time providing significant value to our tenants. We believe that the combination of the highest-quality asset base and the resiliency of our carefully crafted commercial agreements has contributed to the relative outperformance in our organic growth for the U.S. business within our domestic peer group.

Slide 6 of our earnings deck provides a quick overview of our recent U.S. track record. As you can see, U.S. organic tenant billings growth since 2015 has averaged more than 6.5% at American Tower, including another strong year expected now in 2019, at roughly 7%. An important component of this growth has been consistently low churn, averaging under 2% over the same time period, which correlates directly with our lease arrangements and ability to mitigate churn events, including those resulting from carrier consolidation.

We've also made a concerted effort to build and acquire low-capital-intensity assets that show attractive operating leverage. As a result, U.S. capital intensity for ATC has declined over time as revenue has grown and maintenance CapEx has remained broadly consistent on a per-site basis. Consequently, the overall return on invested capital for our U.S. tower assets has risen by nearly 240 basis points since 2015, with sites we've owned since 2010 generating an even higher ROIC, approaching 20%.

Based on the underlying demand trends in the industry, the upcoming rollout of 5G, anticipated deployments of new spectrum and our strong competitive positioning, we expect that our core U.S. business will continue to produce favorable results over a multiyear period looking forward. At the same time, we are proactively looking for ways to further enhance our growth trajectory, augment the value of our existing assets and explore efficiencies through our innovation program. This program includes attracting new tenants in industries beyond our traditional telecom tenants, finding new ways to take advantage of the ground space at the base of our tower sites, along with a number of other opportunities.

We've also made some relatively small investments in international fiber within that innovation framework but continue to view U.S. fiber assets as inherently less attractive due to the expensive availability of competitive fiber supply in the U.S. and the resulting less attractive growth and return characteristics of domestic U.S. fiber.

One area of focus I'll expand on for just a few minutes is the initiative that we are pursuing on edge data. As information generation and processing progressively moves to the network edge, particularly with respect to advanced IoT applications, we expect there to be a greater need for lower latency through distributed storage and compute functionality in close proximity to both wireless and wireline end consumers.

Edge compute offerings may eventually serve autonomous vehicle networks, interactive and immersive media delivery, content caching and any number of other products and services where low latency is a must or data needs to be closer to the consumer with a machine. We've been evaluating this for some time and have an ongoing edge compute trial at several of our tower sites.

In addition, we recently acquired Colo Atl, an interconnection facility in Atlanta, to further explore the latency in distributed transport networks and to get a firsthand look at the early stages of the cloud evolution to the edge that we expect to see accelerate in the future. Colo Atl is exactly the type of asset that is ideally suited for our innovation program. The $70 million-or-so purchase price represents a roughly 15x year 1 adjusted EBITDA multiple, and we expect additional growth as this facility is leased up, driving an attractive return on existing business.

Even more importantly, Colo Atl affords us the opportunity to learn firsthand about the evolution of connectivity for consumers' devices, IoT units and autonomous vehicles to the cloud. This includes direct and interactive knowledge of potential future tenant needs, key trends like cloud gaming, technology developments like hybrid cloud and a host of other aspects that we could not evaluate and prototype with partners without owning an asset like this.

At the same time, I'll emphasize to everyone that projects like Colo Atl do not indicate a shift in strategy or a material pivot in focus for American Tower. On the contrary, our innovation investments are designed primarily to drive additional tenant leasing growth on our tower and in-building systems, whether it be from existing or new customers and adjacent assets that enhance the leasing value and potential of the tower. Importantly, we will apply the same capital allocation discipline that we've used for our tower acquisitions over the years to sizable innovation-related investments that we might explore.

In the U.S. in particular, we believe those existing assets are poised to deliver continued strong performance based on the drivers I referenced earlier. In short, we anticipate more equipment finding its way onto more of our sites as network quality and performance remain essential to our domestic wireless operator tenants.

Moreover, whether there are 3 national wireless players or 4 in the U.S., the number of subscribers will remain consistent, and these subscribers will continue to expand their data usage. Therefore, in either a 4- or 3-carrier market, we would continue to expect 30% to 40% annual mobile data usage growth, roughly $30 billion of industry CapEx annually and further deployment of 4G and 5G equipment on towers. Consequently, we expect to generate continued solid U.S. organic growth and attractive returns over our planning cycle.

With that, I'll turn the call over to Tom to go through our results for the quarter and our 2019 outlook.

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Thomas A. Bartlett, American Tower Corporation (REIT) - Executive VP & CFO [4]

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Thanks, Jim. Good morning, everyone.

Following a strong finish to 2018, we kicked off 2019 with a terrific set of results. Our Q1 U.S. organic tenant billings growth came in at over 8%, new business trends throughout our Latin America and EMEA segments remained solid, the recovery in India continued to progress in line with our expectations, and we constructed over 700 sites globally. We also grew our common stock dividend by 20% over the prior year quarter while continuing to deploy capital to both our core business and to select innovation-oriented investments that Jim just mentioned. With that, let's take a deep dive into our first quarter results and our outlook for the full year.

If you'd please turn to Slide 8. During the quarter, we generated consolidated organic tenant billings growth, normalized for the impacts of Indian Carrier consolidation-driven churn, of over 8%. More than 6% of this was driven by volume growth from gross new business. From a segment perspective, our U.S. region reported property revenue growth for the period of nearly 6%, including a negative impact of 2.3% from lower noncash, straight-line revenue recognition. This reflected our second consecutive quarter of record new business contributions, leading to organic tenant billings growth of 8.2%.

Volume growth from co-locations and amendments contributed over 6%, while pricing escalators contributed just over 3%. This was partially offset by churn of about 1.3%. Our major U.S. wireless carrier customers continued to make significant network investments to keep pace with the growing mobile data usage, and we again saw activity largely weighted towards amendments in the quarter.

Our reported international property revenue growth during the period was about 3%, including a negative impact of 9% due to the Indian Carrier consolidation-driven churn. Underpinning this growth was normalized organic tenant billings growth of over 8%. International new business was supported by significant network spending from tenants across our footprint, especially in key markets like India, Mexico and South Africa. New business revenue from co-locations and amendments drove about 6% of the growth, while escalators contributed nearly 4%. Other run rate items added nearly 1%, with normal due-course churn offsetting the items above by just over 2%.

As expected, the flow-through financial impacts due to the Indian Carrier consolidation churn accelerated in the quarter, and Q1 should meet the high watermark for the year regards this consolidation churn. Consequently, we expect to see sequential improvement in the India churn starting in Q2 and anticipate that overall organic tenant billings growth rates in the market to approach historical rates beginning in 2020. In fact, even in this past quarter, normalized organic tenant billings growth in Asia was over 10%.

And finally, the day 1 revenue associated with the more than 25,000 sites we've added over the course of the last year contributed another 4.2% to our global tenant billings growth. These new assets included our acquisitions of around 20,000 sites from Vodafone and Idea in India as well as the nearly 3,200 newly constructed sites built primarily in our international markets, where average day 1 U.S. dollar-denominated NOI yields were nearly 12%.

New builds continue to be an integral part of our capital deployment program. And we had a strong quarter of activity in Q1 across our international markets, constructing more than double the number of sites we built in Q1 of 2018. In India, we sustained momentum from last quarter and built over 540 sites, while also building nearly 100 sites in both EMEA and Latin America.

Importantly, the day 1 NOI yield on these sites remains extremely attractive, with yields on new builds in India and EMEA in particular generating initial NOI yields in the midteen percent range. This activity is an extension of the historical success we've had building sites across our diverse international portfolio, where carriers continue to make significant investments in network coverage and capacity.

In fact, more than 15% of our total international portfolio is comprised of sites we've constructed, with NOI yields on those sites now in the 20% range. And as I'll touch on later, given the attractive economics of these projects and the strong demand for additional towers, particularly in India and Africa, we expect our construction activity to ramp throughout the year.

Turning to Slide 9. We also generated solid adjusted EBITDA and consolidated AFFO growth during the first quarter, driven by the strong revenue growth and diligent management of operating interest expense and seasonally low maintenance CapEx. Adjusted EBITDA grew by nearly 5%, with our adjusted EBITDA margin increasing to about 61.5%. Normalized adjusted EBITDA growth was over 9%, resulting in normalized adjusted EBITDA margin of nearly 62%.

These results included benefits from recent investments we've made in power and fuel, particularly in our African markets, where we continue to optimize our processes and invest in solutions like lithium-ion batteries and solar power. As a result of these investments, for example, we reduced our generator run hours in Africa by over 15% as compared to Q1 of 2018 and continue to look for ways to further reduce our fuel consumption.

We also drove solid consolidated AFFO and AFFO per share in Q1. Consolidated AFFO grew by nearly 7%, and consolidated AFFO per share grew over 5% to $1.94 per share, while AFFO attributable to common stockholders grew nearly 8% or over 6% per share. On a normalized basis, consolidated AFFO grew by over 11% or nearly 10% per share. This was driven largely by our strong cash-adjusted EBITDA growth as well as prudent maintenance of our balance sheet. In addition, our Q1 results also benefited from the lower seasonally adjusted maintenance CapEx levels, which we expect will revert to a more typical range as we move through the rest of the year.

Turning to Slide 10. Let's now take a look at our expectations for 2019, which are largely consistent with the outlook we previously reviewed with you given we only issued guidance just a short while ago. At this point, we are reiterating our expectations for organic tenant billings growth across all of our geographic segments. Trends continue to be roughly in line with our prior assumptions. We continue to expect normalized international organic tenant billings growth to be about 50 basis points higher than our U.S. organic tenant billings growth of about 7%. These projections include a record year of contributions from co-locations and amendments throughout the business, just as we discussed last quarter. We expect to see a return to positive organic tenant billings growth in our international business by Q4 after flushing out most of the remaining Indian Carrier consolidated churn.

Looking at Slide 11. At this point, we're also maintaining our expectations for 2019 property revenue despite FX headwinds of around $13 million versus our prior outlook. Current assumptions reflect a $10 million increase in U.S. revenue versus our prior outlook, primarily driven by the combination of slightly higher straight-line revenue and acquisitions closed in the quarter. In addition, we expect around $3 million in outperformance internationally, including higher new build assumptions, particularly in EMEA. We view this as an early indication of increasing demand for tower space in the region.

We're also reconfirming our expectations for adjusted EBITDA at the midpoint of our outlook despite approximately $14 million in unfavorable FX translation. This is primarily due to the revenue items I just mentioned as well as some slight outperformance on the operating expense side throughout the business. And lastly, we are reiterating our expectations for consolidated AFFO for the year with the business offsetting about $12 million in unfavorable FX. On a per-share basis, we continue to expect normalized growth of over 9% at the midpoint, reflecting our strong operating leverage.

Looking to Slide 12. I'd like to now briefly discuss our capital allocation plans for the year and the success of our capital allocation program historically. We continue to target our annual common stock dividend growth of at least 20%, subject to the discretion of the Board, and expect to declare roughly $1.7 billion in dividends in 2019.

In addition, we plan to deploy $1 billion towards our CapEx program, with over 80% of that spending being discretionary in nature. This is up $50 million as compared to our prior expectations driven by a 250-site increase in expected new builds for the year. We now expect to construct almost 3,300 sites at the midpoint during 2019, which would represent a new record for American Tower. This speaks to the tremendous long-term opportunity we have in our existing markets to add incremental scale and to help our tenants add coverage and capacity to their networks.

Importantly, and as I mentioned earlier, most of our new builds are concentrated in our Indian and African markets, where initial NOI yields a new site builds were in the midteens in Q1. We're especially pleased by the progress we've made in Nigeria, our largest market in Africa, where we have a strong new build pipeline.

And finally, taking into account the M&A we've completed year-to-date, the first part of the Tata's options being exercised in our India business that were redeemed in Q1 and the second part that we would expect to redeem in late Q2 or early Q3, we have committed roughly $900 million in acquisitions.

Our capital allocation plan for 2019 is firmly aligned with our capital allocation methodology we've used over the last decade to drive attractive long-term returns. This process focuses on constructing and acquiring assets. It has exclusive real estate rights, significant structural capacity, low capital intensity and the potential for sustained long-term growth in free cash flow generation, all at attractive price points.

Since 2009, utilizing this criteria, we've amassed a high-quality portfolio of communications infrastructure assets in the most significant free-market democracies around the globe and expanded our global site count at an average annual rate of over 22%. This has driven a free cash flow CAGR of over 15% over the same period. That growing recurring free cash flow base has enabled us to further expand our portfolio while maintaining a strong balance sheet and simultaneously returning capital to shareholders through our common stock dividend and share repurchase programs.

Turning to Slide 13. A key part of our ability to deploy capital effectively has been an extensive evaluation of different asset classes within the communications infrastructure space, drawing on a large set of historical data. For example, while we have a leading portfolio of macro towers in the United States, we also have one of the largest networks of indoor DAS systems in the United States and a smaller portfolio of outdoor small cells. We evaluate the performance of these assets regularly to help inform our future investments in the U.S. and our international markets, where small cell densification is typically in earlier stages.

As you can see on the slide, the performance of these assets has varied considerably over time, with towers and indoor systems generating margins and returns significantly in excess of outdoor small cells. This divergent performance is in part due to the much higher tenancy ratios we have seen on towers and venue-based DAS systems as opposed to outdoor networks, with towers and indoor DAS at over 2 and non-venue outdoor DAS in the low 1 range. Additionally, the capital intensity of outdoor systems in the U.S. is higher, with incremental CapEx generally required to secure additional tenants. And finally, the cash flows of small cell system tend to be more nonrecurring in nature due to the noncash prepaid amortization revenue associated with upfront capital contributions.

Armed with this historical data, we've optimized our capital allocation decisions over time to ensure that capital is deployed to more attractive projects, centered on inherently more attractive assets. This drove our decision to increase the scale of our macro tower and indoor system portfolio in the U.S. through large transactions with GTP and Verizon, for example, while passing on large U.S. fiber assets that have been available for sale.

Importantly, we expect to utilize this framework within our innovation program as well. Significant innovation investments, just like the investments we make in our core business, must conform to the same rigorous database criteria as well as the governance and decision-making approval process.

Turning to Slide 14. And in summary, 2019 is off to a strong start at American Tower with solid organic trends being realized across our global footprint. Our U.S. business generated organic tenant billings growth of 8% or above for the second consecutive quarter, while new business in EMEA and India continues to build. We've also increased assumptions for new site builds, driven primarily by the elevated demand from our carrier customers in Nigeria, which speaks to the tremendous need for incremental coverage in the emerging markets we serve as the technological migration to 4G continues.

We are able to translate this strong top line growth into solid growth in adjusted EBITDA, consolidated AFFO per share and expect to grow AFFO per share on a normalized basis by over 9% for the full year. Additionally, we remain firmly committed to growing our common stock dividend, subject to the Board discretion, as a key part of our total return formula while maintaining our long-held financial policies and investment-grade credit rating. All in all, we expect 2019 to be another solid year and look forward to updating you all on our continued progress in July.

With that, I'll turn the call over to the operator so we can jump in to some Q&A.

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Questions and Answers

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Operator [1]

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(Operator Instructions) With that being said, we go straight to the first question from Brandon Nispel, KeyBanc Capital Markets.

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Brandon Lee Nispel, KeyBanc Capital Markets Inc., Research Division - Research Analyst [2]

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Great. I have 2 if I could. First, in the U.S. business, another strong quarter of 8%-plus growth. I think some people had thought that, that could never happen given the size of your business. Can you maybe unpack that growth in terms of what percentage of your new leasing activity is coming from the big 4 U.S. carriers? I was hoping that you could also unpack your guidance along the same lines for the year.

Secondly, one of the things that we get questions on and I thought was highlighted really well in the call was the return an investment in the U.S. business. When you think about the different international markets you have and then maybe particularly India, I was hoping you could comment on your longer-term expectations for return on investment and whether or not there are already structural benefits or negatives that may make that -- those markets less attractive from a return on investment standpoint.

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James D. Taiclet, American Tower Corporation (REIT) - Chairman, President & CEO [3]

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So, Brandon, the percent of U.S. business coming from the big 4 carriers in the United States, both for the quarter and our expectation for the year, is going to range 85% to 90%, coming from those 4 companies. So that's similar for both current results and for the guidance for the year.

And then when it comes to India and emerging markets in Asia generally, low- to mid-teen percent ROI is our ultimate goal, our ROIC. So we expect to attain that within the planning period, 10 -- which is 10 years for each investment. So with the Viom investment, a couple -- 3 years old, we expect by the mid-2020s, so we should be able to achieve that kind of level.

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Thomas A. Bartlett, American Tower Corporation (REIT) - Executive VP & CFO [4]

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And just to add on -- just on the color on the growth, again, we're still, as I mentioned, largely amendment-driven in 2019. And I would expect that to be the same really for the balance of the year. It's probably 80-20 kind of relationship. And as Jim mentioned, on the ROI, I mean if you take a look at the U.S., actually in EMEA and Lat Am, our ROICs in those markets are all north of 10% at this point in time.

Now given the consolidated churn that we've seen in India, the ROIC in that particular region is below 10%, probably in the 6-plus kind of range. So we would -- obviously, given the growth that we've seen in the market -- by the way, in Q1, they -- we had a record level of new co-locations and amendments contributing to the organic growth in that market. So -- and as I mentioned, they're over kind of a 10% on a normalized basis growth. So we would definitely see that kind of expansion in ROIC over the next several years.

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Brandon Lee Nispel, KeyBanc Capital Markets Inc., Research Division - Research Analyst [5]

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And I guess if I could just follow up quick, the 85% to 90% new leasing from Big 4, how does that compare with what you've seen historically?

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Thomas A. Bartlett, American Tower Corporation (REIT) - Executive VP & CFO [6]

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Very consistent with what we've seen historically.

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Operator [7]

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And next question is from the line of Colby Synesael, Cowen and Company.

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Colby Alexander Synesael, Cowen and Company, LLC, Research Division - MD and Senior Research Analyst [8]

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As it relates to your innovation program, and I guess that's where the Colo Atl $70 million investment fits in, I mean, just curious, how big is that program? And what is the expectation or what expectation should we have for additional smaller, I guess what I'll refer to as, just trial-type acquisitions just to learn more about that market?

And then secondly, as it relates to the U.S. organic guidance of around 7% versus the 8-plus percent you just did, that obviously would imply then we should see a notable stepdown as we go through the year. How should we interpret that in terms of what might be driving that slowdown as we go through?

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James D. Taiclet, American Tower Corporation (REIT) - Chairman, President & CEO [9]

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Colby, it's Jim. On the innovation program, we're essentially in the exploratory and prototyping phase with outside customers, including, in some areas, the Big 4 or international markets, that have sort of equivalence overseas in markets, whether it's energy management or it's figuring out what the edge data plan is going to be, is often with our current customers.

And secondly, we're trying to understand and prototype projects with potential customers that might scale in industries other than telecommunications, which will need those kind of assets, the kind of assets that we provide, which are tower sites and indoor DAS systems, predominantly. So that's the realm of the program.

What we expect so far to date on capital expense has been -- and mergers and acquisitions has been about $1 billion total, the bulk of that in fiber-related assets outside the U.S. whose predominant purpose at ATC is to connect fiber to towers in markets and countries where there isn't a robust fiber supply base like there is in the U.S. So for 4G sites and certainly for 5G, every tower is ultimately going to need a fiber-like connection or a fiber connection to it.

And we're making most of our investments to lay the groundwork literally for that to happen in emerging markets. And so we're -- as Tom said, we're only going to make investments in assets and in locations and for applications that we expect to meet our return criteria similar to towers.

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Thomas A. Bartlett, American Tower Corporation (REIT) - Executive VP & CFO [10]

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And, Colby, in regard to your second question, at this point -- time in the year, we're keeping our annual guidance roughly the same. Really, we only issued the guidance, as I mentioned, kind of a short while ago, we continue seeing the same positive trends we expected when we originally rolled out the guidance, as I said, just a couple of months ago.

Coming into the year, you always have more visibility into the first half, so makes sense that you would expect a stronger first half. And as we can progress through the year and in July, to the extent that we see some different trends, hopefully, we will see upside. But we'll see, and we'll update that guidance in July.

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Colby Alexander Synesael, Cowen and Company, LLC, Research Division - MD and Senior Research Analyst [11]

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So nothing specific that you're thinking of that would clearly lead to a stepdown? I guess it sounds like just more conservatism at this point than anything else.

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Thomas A. Bartlett, American Tower Corporation (REIT) - Executive VP & CFO [12]

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Yes, I think that's fair. I mean I think we have strong application pipelines. The U.S. group is -- our U.S. team is excited about these types of activity that you're seeing. And we're coming off a very strong first quarter, and hopefully, we'll see some of those continuing trends going forward.

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James D. Taiclet, American Tower Corporation (REIT) - Chairman, President & CEO [13]

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And there's one mathematical factor in addition to that, which is the comp -- the quarterly comps from year-to-year can vary, right? So in 2018, at ATC, we had relatively lower growth than later in the year. And this year, we're having initially high growth, and we've kept our guidance, as Tom said, for the following quarter. So even the comps mathematically simply give you a little bit of a different answer, if you will, going forward. So again, we'll update everything based on what actually happens over the next couple of months.

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Operator [14]

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And next question is from the line of Simon Flannery, Morgan Stanley.

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Simon William Flannery, Morgan Stanley, Research Division - MD [15]

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Great. I wondered if we could talk a little bit about some of the international markets. Can you drive a little bit more into the individual markets in Latin America and EMEA? What are you seeing? Where is strong? Where is a little bit slower? And also on Europe, there's a lot of portfolios that are potentially being offered by the carriers. How do you think about that market? And is there likely to be any value there to cause you to do more in that area?

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James D. Taiclet, American Tower Corporation (REIT) - Chairman, President & CEO [16]

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Sure, Simon. Some of the strong international markets continue to be Mexico, which is having a 4G campaign, if you will, between the new entrant, Altán, and some of the incumbents that are already there. Brazil has also been strong. All 4 of the wireless operators there are competing and deploying 3G and 4G. In spite of all that, there's some lower escalators based on inflation and also some slightly higher churn in the markets due to some Nextel legacy iDEN sites rolling up, which we expected anyway.

So -- but overall, growth -- gross growth rates, as Tom suggested, in Brazil are really strong. India is really coming back on the new business, the gross new business, if you will, before churn. And we expect that trend to continue, especially with the rights offerings and other capital-raising activities of Idea, Vodafone and Airtel along the way. So when you add it all up, it's about 10%-plus normalized organic growth in our international markets in our forecast this year.

As far as European assets, we're going to look at them through the same lens we've always looked at them through, most likely lower growth than some of our current markets, including the U.S. Also, some industry structure concerns over there that could also inhibit growth in returns. And frankly, there's a new investor class coming into that space and has come into that space that has lower return criteria than us. And until that changes because we're not changing our investment criteria, we may or may not act in a large way in Europe.

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Simon William Flannery, Morgan Stanley, Research Division - MD [17]

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And the industry structure means less than 4 players? Or what's that kind of comment?

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James D. Taiclet, American Tower Corporation (REIT) - Chairman, President & CEO [18]

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Well, there are 3 or 4 mobile operators in all the markets, which -- in Europe, which causes them to be highly competitive. It's tougher for them, too, because the countries are smaller in scale than, say, the U.S. is to invest sort of rapidly historically than the U.S. will invest. So growth rates tend to be a little bit lower. And then there's the standard supply side of towers in Europe, which tend to be shorter, a lot of overlap and often some churn that comes with the infrastructure consolidation that you have to absorb if you are into these businesses. So those are some of the structural issues in Europe that we think retard the growth rate potential a little bit.

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Thomas A. Bartlett, American Tower Corporation (REIT) - Executive VP & CFO [19]

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Just even, Simon, if you even take a look at the press release, just look at it on the segment information, you can see some of the growth we've had in the quarter internationally in co-location and amendments. We had roughly $32 million of new business versus $27 million from last year. So I think they're all strong growth. And it's largely being led by India. I mean the -- Latin America continues to be strong, and EMEA is up a little bit, but India has actually been kind of the driving force in Q1. So just something to look at.

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Operator [20]

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Our next question is from the line of Batya Levi, UBS.

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Batya Levi, UBS Investment Bank, Research Division - Executive Director and Research Analyst [21]

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In the U.S., can you provide maybe a little bit more color on the type of early activity and applications you're seeing related to 4G deployment? And how do you think that changes the 80-20 amendment-new lease mix going forward? Do you think some of that new business is going towards carrier-owned towers or maybe other private companies? And just lastly, can you provide an update on the monthly revenues you get from the amendment today? Has that been increasing over time?

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Thomas A. Bartlett, American Tower Corporation (REIT) - Executive VP & CFO [22]

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Yes. I mean I think your question was on the 5G: What are you actually seeing relative to deployment of 5G activity on the towers? Is that correct?

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Batya Levi, UBS Investment Bank, Research Division - Executive Director and Research Analyst [23]

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That's right. Then amendment, new lease and if you're -- if you think some of that activity is actually going towards their own towers or other private companies?

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Thomas A. Bartlett, American Tower Corporation (REIT) - Executive VP & CFO [24]

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Well, I mean I don't know about that mix. I can tell you that -- I mean, it's a better question for the carriers themselves in terms of the types of things that they are deploying. But I'm sure that they are 4G-enhanced. There are 5G radios that are being deployed as we speak so that when 5G gets turned on, it's really just a kind of a software upgrade. So I'm certain that there are those applications. I don't know what the percentage is relative to how much of that activity is normal to normal kind of 4G activity. But I'm certain that the carriers themselves are deploying that kind of technology.

I mean if you look at T-Mobile, they said -- they had talked about 600 megahertz being rolled out to really support their nationwide 5G capabilities. So you know that those type of radios are being deployed. And relative to amendment activity, as I said, overall, amendments are roughly 80% of the activity that we're seeing from an application and a -- perspective in the United States. And they're probably in the $800 range, $800, $900 range, given the level of equipment that is being put on the site in amending those particular leases.

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Operator [25]

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Next question is from the line of David Barden, Bank of America.

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David William Barden, BofA Merrill Lynch, Research Division - MD [26]

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I guess 2, I guess, to start. First would be SBA went out of their way to call out Dish as the business driver for them. Sounds like they were willing to be flexible to kind of accommodate some of Dish's challenges as they look to kind of get their 2020 deadline fulfilled. So I was wondering if you guys could kind of address that opportunity and what it's contributing to this kind of 8.2% domestic growth rate that we're seeing today?

And then the second is Jio in India has spoken publicly about kind of monetizing its roughly 100,000-tower portfolio. And I could see how that might represent potential risk if it fell into an independent operator's hands or a potential opportunity if it represented a consolidation opportunity for American Tower. So I was wondering if you could talk about the risk/opportunity that Jio represents in their tower portfolio.

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James D. Taiclet, American Tower Corporation (REIT) - Chairman, President & CEO [27]

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As far as specific customers, including Dish, David, we don't comment on our either negotiations contracts or new business flow with any of them. But you can assume that for us Dish is in that 10% to 15% -- within that 10% to 15% nonmajor carrier new business ratio that we've talked about earlier. As far as Jio, yes, there are press reports about the company exploring ways to either refinance or monetize or spin-off tower and fiber assets, we will stay abreast of that -- those developments.

Historically, when independent investors eventually get a hold, if they do, of carrier-owned tower assets, that's good for the tower industry because the contracts tend to be arm's length and more of what I would call sort of industry standard once the outside owners are in control of the assets and not the captive carrier business. So it will be a positive if it comes through. Either way, I don't see it as a risk at all.

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Operator [28]

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And next question is from the line of Ric Prentiss, Raymond James.

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Richard Hamilton Prentiss, Raymond James & Associates, Inc., Research Division - Head of Telecommunication Services Equity Research [29]

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A couple of follow-ups and then one deeper question. First, when you guys talk about 80-20 amendment co-lo, how do you count if an existing customer comes and wants to do more work at that tower, maybe also including a new RAD center? Is that still counting as an amendment?

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James D. Taiclet, American Tower Corporation (REIT) - Chairman, President & CEO [30]

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Generally, Ric, that would be a separate lease, but based on specific customers or circumstances or legacy contract that may be on the tower, it could be different. But generally, a new RAD center equates to a new lease, which would count as a co-location.

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Richard Hamilton Prentiss, Raymond James & Associates, Inc., Research Division - Head of Telecommunication Services Equity Research [31]

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Okay. And second one, some of the other -- or one of the other tower guys mentioned that they had explicitly kind of assumed in their guidance a combination in the U.S. from 4 to 3, at least on their services business. Is there anything baked into your guidance on assumption of any industry change in the U.S.?

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James D. Taiclet, American Tower Corporation (REIT) - Chairman, President & CEO [32]

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We don't have any assumptions either way baked into industry consolidation in the U.S. And given that we're almost halfway through the year and by the time something might close, whatever ramifications could occur from that if it happened would probably be out in 2020 and beyond.

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Richard Hamilton Prentiss, Raymond James & Associates, Inc., Research Division - Head of Telecommunication Services Equity Research [33]

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Makes sense. The deeper question is following up on Simon's question where you said the new investor class is coming in with lower return hurdles. Is that driving also some of your thoughts that building towers might be more able to create value than buying towers as you look at M&A?

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James D. Taiclet, American Tower Corporation (REIT) - Chairman, President & CEO [34]

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Yes. Because those new builds, whether inside or outside the U.S., tend to be historically, for ATC, the highest-return projects we have. It's always been that way because you're meeting a specific need of a specific carrier in a specific geography versus buying a portfolio and sort of paying the acquisition premium for that. So it's historically been the best-return activity we can do, and we'll continue to do so.

And as the batting order, Ric, of our capital allocation processes remain the same, we're going to fund our dividend first; we're going to build towers second; we're going to do M&A third; and if there is excess capital left over, we'll buy back equity. We'll buy back stock. So that batting order remains the same.

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Richard Hamilton Prentiss, Raymond James & Associates, Inc., Research Division - Head of Telecommunication Services Equity Research [35]

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Makes sense. Appreciate the batting order with Rays doing pretty well. Final question wraps into that with the -- does it make sense to sell any portions of your portfolio? Increasing amount of joint ventures that people have lower return hurdles and have cash in their pocket, could we see you guys sell some more stakes in your company to bring in fresh capital to deploy elsewhere?

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James D. Taiclet, American Tower Corporation (REIT) - Chairman, President & CEO [36]

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We're always open to innovative financing and partnership arrangements, Ric. And you've seen us do that in numerous countries, whether they're with carriers or with independent financial partners, like PGGM. In Europe, we're -- actually we're a 51-49 partner with them in both France and Germany. So yes, we're open to it. And we don't have any sort of religious restrictions, whether it's getting into those stakes or getting out of them if we think the economic situation merits that.

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Operator [37]

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Our next question is from the line of Michael Rollins, Citi.

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Michael Rollins, Citigroup Inc, Research Division - MD and U.S. Telecoms Analyst [38]

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Just maybe staying on the strategic front, 2 questions. A few years back, you articulated the importance of being -- I think you were the top 3 competitor in any market that you're in. I was just curious, in some of the key international markets how you would evaluate that today. And is that still important as you look at the path to new markets?

And then going back to the question on partnerships or the comment on partnerships. Are partnerships more important for the adjacent growth opportunities that you've been considering, for example, on the edge data center front or maybe some of the other initiatives where you're trying to edge out into a broader ecosystem?

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James D. Taiclet, American Tower Corporation (REIT) - Chairman, President & CEO [39]

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So we're already either first or second, Mike, in most of our major international markets. And by the way, we're first in the U.S. as an independent tower company and have been for some time. We are first in Brazil. And remember, "independent tower company" is important here because captive carrier assets really, to us, don't perform and aren't managed the same way. But nevertheless, in Brazil, we're #1. In Mexico, we're #1. South Africa, the #1 independent. In India, the #1 independent.

So we've achieved industry leadership as an independent infrastructure provider outside of carrier ownership and control in essentially all the major markets that we care to be in. There's some where we're not, and those were conscious decisions, like at the time in Nigeria where IHS was creating a larger market position than we currently have. We'll be a happy #2 there for a while, it looks like. But generally, in the large major markets, we are the #1 or 2 operator.

As far as partnerships, we're applying our innovation initiative really across the board. As I said, the PGGM partnership on a financial perspective in Europe was something that Tom and I talked about as an innovative way to bring capital in to support our ambitions in Europe. Similarly, if we get into -- yes, and you just pointed out specifically edge data.

I think there's a great opportunity for us to bring the asset base that we bring, which is the 40,000 U.S. towers and the 330 or 340 indoor DAS systems we have in the U.S. to a partner who brings something else. Could it be spectrum? Could it be cloud compute capability? Could it be existing big -- larger data centers? Any of those are possible.

So we've had to actually pivot our thinking to say partnerships can be, in an innovation sense, a much broader context than they are today or they have been historically, I'd say, in our industry, which is partnerships with wireless operators in some fashion. Whether it's a sale leaseback, it's a sublease, et cetera, with the mobile operators, those have always been in our industry. But now we're taking a much wider perspective on partnerships and figuring out, we hope, where the puck is going, who can partner with our assets and bring theirs in a complementary fashion. And that's the perspective we're now taking.

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Operator [40]

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Our next question is from the line of Matthew Niknam, Deutsche Bank.

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Matthew Niknam, Deutsche Bank AG, Research Division - Director [41]

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Just on India, any more color you can share in terms of what's driving the growth activity and then what gives you confidence in the ability of the business to actually return growth to sort of historical levels within the next couple of quarters by 2020?

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James D. Taiclet, American Tower Corporation (REIT) - Chairman, President & CEO [42]

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So the drivers in India organic growth for us, on a gross basis now, are Jio and the other 2 major carriers are actually ramping up as well. As I mentioned, they're going to be having access to proceeds from both rights issues, so equity investments from there and investors and also asset sales that they're all planning or expected to do. So we think that those 3 carriers, along with BSNL in a much more minor way, will continue to drive organic growth in India because the 3 of them are going to need to establish a national 4G network, which, although Jio gets a lot of headlines for doing it first, is, a, not pervasive across the country; and b, not us, with the capacity to handle 1 billion users on 4G.

So that spend's going to happen. There'll be, we think, a significant increase in the number of sites and the loading-on sites in India. And as Tom referenced, our most active construction program already is in India to start serving this market. So when you look at, again, the fundamentals in the U.S. we talk about is 30% to 40% data growth, $30 billion of CapEx, in India, you're talking about even faster data growth rates on 3x as many people much earlier in the technology deployment cycle. So once the industry consolidation settles in over the course of 2019 and as we roll into 2020 and beyond, we fully expect between those 3 large carriers and BSNL, that there'll be strong top line organic growth demand in India.

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Thomas A. Bartlett, American Tower Corporation (REIT) - Executive VP & CFO [43]

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And the other thing I'd add, Matt, is that our own internal estimates as well as outside third-party estimates is suggesting that kind of the roughly industry 600,000-tower leases that exist in the market are going to be growing to over 1 million over the next several years. And I think that's just a reflection of all the things that Jim just talked to.

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Matthew Niknam, Deutsche Bank AG, Research Division - Director [44]

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If I could just follow up, I think in the past, you've talked about 3% to 4% sort of normalized longer-term churn in that market. Is that still the case? And when do you sort of anticipate getting to more of a stabilized rate?

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Thomas A. Bartlett, American Tower Corporation (REIT) - Executive VP & CFO [45]

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Actually, we think that probably the normalized rate of churn, which is if you back out what the impact of the India Carrier consolidation churn in Q1 is, probably more in that 1% -- 1% to 2% kind of range. So around half of what you just talked through.

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Matthew Niknam, Deutsche Bank AG, Research Division - Director [46]

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And in terms of timing to get there, that's sort of late 2020?

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Thomas A. Bartlett, American Tower Corporation (REIT) - Executive VP & CFO [47]

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We realized that already in Q1. So we would think that as we're going out into the -- end of this year, we'll flush out all of that India Carrier consolidated churn. So getting back into 2020, we should start to get back to those historical rates of what we realized in terms of growth back in the '16 and 2017 time frames.

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Operator [48]

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Our next question is from the line of Tim Horan, Oppenheimer.

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Timothy Kelly Horan, Oppenheimer & Co. Inc., Research Division - MD and Senior Analyst [49]

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Tom, if you can -- I know you said normalized AFFO grew 11%, but if you normalize for the India churn, was that closer to 15%?

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Thomas A. Bartlett, American Tower Corporation (REIT) - Executive VP & CFO [50]

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No. What I referred to, Tim, the normalization, it's actually backing out that India Carrier consolidated churn.

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Timothy Kelly Horan, Oppenheimer & Co. Inc., Research Division - MD and Senior Analyst [51]

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Great. Indoor, can you talk about what percentage of revenue indoor is in the United States now? And do you think you're kind of growing at market rate?

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James D. Taiclet, American Tower Corporation (REIT) - Chairman, President & CEO [52]

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The indoor DAS assets are about 2% to 3% of our U.S. revenue at this point, and it's been growing about 10% recently. So pretty solid growth in that business, although it's relatively small compared to the major tower asset we have in the U.S.

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Timothy Kelly Horan, Oppenheimer & Co. Inc., Research Division - MD and Senior Analyst [53]

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And then lastly, on India, do you think, with the consolidation being done and maybe more sales of assets, that the pricing structure over there could look more like the U.S. over time? It's a fairly unique market in terms of pricing.

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James D. Taiclet, American Tower Corporation (REIT) - Chairman, President & CEO [54]

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The pricing is going to be in a different category than the U.S. But the long-term structure of contracts will, I think, evolve more closely to what I would call the global tower industry standard, where there's more favorable escalation rates, less favorable reinvestment rates, et cetera, on the sites and the elimination of discounts for second or third tenants along the way. So those sort of contract structural adjustments, I expect to come over time in India, which will actually improve your effective pricing, frankly. But as far as rates of rupees per month per antenna, I can't predict whether they're going to go.

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Operator [55]

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And we do have time for one additional question, and that will be from the line of Philip Cusick, JPMorgan.

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Philip A. Cusick, JP Morgan Chase & Co, Research Division - MD and Senior Analyst [56]

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Just before the bell. Jim, can you talk more about the potential model for you of edge compute at the tower? Any estimate on the potential number or percent of sites over time that, that might generate and sort of relative rent versus a carrier?

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James D. Taiclet, American Tower Corporation (REIT) - Chairman, President & CEO [57]

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Well, there's a lot of uncertainty around all those factors, Phil. And that's why we're broadening our access and involvement with other industries right now. So we're engaged with cloud providers. We're part of the CBRS team that's looking at how to deploy 3.5 spectrum both within and without -- outside of mobile operators. We're involved and engaged, and especially our CTO is, on innovation and technology task forces with other industries, like the automotive industry, for example.

So we are in a learning phase about a lot of these initiatives, including edge compute. But we are taking them in a methodical, serious and resourced way so that we can be ahead of our industry, both in the U.S. and outside because, frankly, we're -- we feel we're the only globally accessible tower company in the world that can reach really all of the highly populated continents with a partner. And some of those partners will be global multinational companies, unlike even the national license holders we have in our tenant base today.

So we will learn and prototype and determine all those factors. We know it's going to be important, and we want to lead the wider industry in figuring out that these tower sites because of their placement and their immediate proximity to the mobile RAN, radio access network, are going to be really important real estate assets that they should learn how to work with. And we want them to work with us.

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Operator [58]

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Back over to speakers for any closing remarks.

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Igor Khislavsky, American Tower Corporation (REIT) - Senior Director of IR [59]

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Great. Thank you, everybody, for joining. Have a great day.

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Operator [60]

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Thank you. Ladies and gentlemen, that does conclude your conference. We do thank you for joining. You may now disconnect.