Carrier-Neutral Network Operators - 4Q19 Market Review: Further Sector Consolidation on Cards Amid Virus Outbreak Spread

Carrier-neutral providers of network infrastructure are often touted as the backbone of telecom and webscale sectors. CNNOs continue to play a pivotal role in the overall growth and development of telecom and webscale markets. CNNOs have grown by 3.7x since 2011 to post US$71.3 billion (B) in revenues in 2019. Since 2011, the sector's data centers under management have more than doubled, to 635 facilities; fiber route miles have almost tripled, and the cell tower count increased over 12x to ~2.5 million. Excluding China, CNNO cell towers grew from just over 200K in 2011 to over 500K at year-end 2019.

The CNNO sector's growth has largely been acquisition-induced in the past, and M&A has burned nearly as much cash as capex in the sector, or even more in two calendar years (2015 and 2017). However, M&A spending has slowed down of late before picking up again in 4Q19, and CNNO revenue growth in the year was relatively flat - YoY revenue growth was just 4.1% in 2019. Growth in the sub-segments have been mixed during the year: the data center sub-segment's growth reached double-digits (10.1%), the bandwidth sub-segment posted modest growth of 4.4% while the tower sub-segment grew by a meagre 1.9%.

Other findings from our full-year and 4Q19 analysis include:

• As has been the trend historically, capital spending among CNNOs picked up pace in the last quarter of the year and remains high as a % of revenues. In 4Q19, CNNO capex of $7.2B was 40% of revenues vs. 36.4% in 3Q19 (and 40.1% in 4Q18). Most CNNO capex is for the purchase of property and related construction costs, with telecom equipment & software taking up a small percentage.

• Large tower companies such as American Tower and Crown Castle route a sizeable portion of their cash flows into building infrastructure. More diversified network infrastructure companies such as Uniti Group are entering into a strategic 'off-take' arrangement under which they will build and sell towers to the wireless infrastructure companies at an agreeable price.

• Some CNNOs are deploying more intelligence in their networks and evolving business models, though, such as Crown Castle, NBN and Zayo.

• CNNOs have low employee costs (or high revenues per employee), but high capital costs. Most CNNOs reap benefits from REIT classification, but they still have huge debt loads. As of December 2019, CNNOs had a total of $167B in debt, and just $12.6B in cash & investments. Gauging their ability to manage this debt and raise new funds for expansion is essential to tracking the sector.

• The number of data centers operated by CNNOs globally is now 635, up from 613 in 2018. Few would be classified as "hyperscale" or "webscale" data centers (based on size or power consumption, for instance), but this asset base is still significant. The CNNO data center segment has been driven by the growth of cloud & mobile computing, IoT, and increased telco & webscale reliance on carrier-neutral players to complement their networks.

• CNNOs' tower count as of December 2019 was roughly 2.5 million, including China Tower. Many telcos have spun off tower assets over the years amid consolidation, leaving most towers now in independent hands. 5G is driving a need for new construction.

• In the bandwidth segment, CNNOs now operate over 552K route miles of fiber, used mainly for wholesale or similar services.

The year 2020 could escalate an already 'stalled growth' atmosphere for the CNNO sector as the rapid outbreak of coronavirus and its spread worldwide is threatening to push the world economy into one of its worst recessions ever witnessed. As the downturn deepens, the sector could witness some more consolidation. A few CNNOs with a proven track record of acquisitions will continue to look for multi-billion dollar asset deals in the next several quarters and even years. The larger CNNOs will push the envelope on their business model as they grow, adding services on top of their infrastructure and building further to the edge of the network. Top-line growth will tick up again with M&A deals, and the continued growth of new build CNNO networks (e.g. NBN).

Table of Contents

• Abstract
• CNNO Segment Overview
• Analysis
• Operating Metrics
• Key Stats thru 4Q19
• Segment Drilldown
• Company Drilldown
• Company Benchmarking
• Raw Data
• Exchange Rates
• About

List of Figures & Charts

Total market:

• Revenues by CNNO type (US$M)
• Revenues single-quarter (US$M)
• CNNO Profitability, annualized (%)
• Capex & M&A spending, single-quarter (US$M)
• Net PP&E by CNNO type (US$M)
• Number of data centers & NRSF per data center (K)
• Bandwidth fiber route miles, Global
• CNNO towers & average tenancy ratio

Below charts by total CNNO market, CNNO sub-segments, and by companies:

• Revenues: annual, single-quarter, and annualized (US$M)
• Profitability (Net Profit; Cash from operations; Free cash flow): annual, single-quarter, and annualized (US$M)
• Spending (M&A; Capex): annual, single-quarter, and annualized (US$M)
• Cash & Short-term Investments: annual and single-quarter (US$M)
• Debt (Total debt; Net debt): annual and single-quarter (US$M)
• Property, Plant & Equipment: annual and single-quarter (US$M)
• Key Ratios: Net margin; Capex/revenues; M&A/revenues; Free cash flow/revenues
• Total employees
• Revenue per employee, annualized (US$K)
• FCF per employee, annualized (US$K)
• Net PP&E per employee, annualized (US$K)

Company benchmarking charts:

• 2011 vs. 2019: company benchmark by KPI (Revenues, Net profit, Cash from operations, Capex, Free cash flow, Cash & short-term investments, Net PP&E, Total debt)
• 2011 vs. 2019: company benchmark by key ratio (Capex/revenues; Net margin; FCF margin)
• Top 5 CNNOs by sub-segment: by KPI (Revenues, Net profit, Cash from operations, Capex, Free cash flow, Cash & short-term investments, Net PP&E, Total debt)
• Top 5 CNNOs by sub-segment by Key ratio: Capex/revenues; Net margin; FCF margin