Uniti Group Inc. (UNIT) Earnings Call Transcript & Summary

Okay. Great. Good morning. Welcome to the Bank of America Leveraged Finance Conference and to our session with Uniti. I'm Ana Goshko, the credit analyst covering telecom and technology. And we are very pleased to have with us Bill DiTullio, who's the Vice President of Finance and Investor Relations; and Ron Mudry, Senior Vice President and Chief Revenue Officer, President of Uniti Leasing. And I learned just recently that, Ron, you went to the University of Michigan, as did I. So let's just make a rule that we will not talk about football today.

Absolutely.

So a quick note to the audience. You have a tool through which you can submit questions. So feel free to do that throughout the discussion, and we'll be checking with that. And with that, let's get started.

So Bill and Ron, feel free to make any introductory comments. Ron, in particular, I think a few words, it would be interesting to know about your role as Chief Revenue Officer and what that entails.

Sure. So I'm Ron Mudry, and I've been with Uniti about 5 years after they acquired Tower Cloud, and I'm Chief Revenue Officer, which basically means that I work with the sales teams of all the divisions to help support things. I primarily work with the groups that are selling the Uniti Leasing products, which are primarily our national dark fiber products and the fiber that we obtained through the Windstream settlement. I also spend a fair amount of time working with the corporate development group and helping with strategic M&A and OpCo-PropCo transactions like the recent Everstream deal that we announced and really anything else that we need to do to drive customer revenue opportunities.

Okay. Okay. Great. So let's start with the topic of du jour, which is COVID. Has anything changed with regard to the pandemic's impact on Uniti business? I think in the past, you've said that there was rather minimal impact with regard to the sales and installations. And then with regard to, hopefully, a vaccine rollout in the near term, ramping in 2021, what does that mean for your 2021 outlook?

Yes. And before we get to that, I just want to say thank you for having us again this year. We always look forward to coming to this conference. You're right. In terms of COVID, still continue to see minimal impact on our business. When COVID first hit, we talked about we had seen some delays on installs and some bookings. But we're kind of work through that and we're really not seeing much of that going forward. Although there could be some delays in bookings as certain customers' premises continue to be closed, any kind of delays we are seeing, again, which are minimal, being more than offset by the demand that we're seeing, for instance, telemedicine, with e-learning, those are all drivers that are actually helping -- we're actually seeing increased bandwidth needs. And so for our business, that's been a real tailwind there. And so in some cases, in some respects, COVID has actually helped fuel some demand in other parts of our business that we haven't seen before. And so we expect those -- those trends were coming as we thought it will move to more video conferencing and working from home, but we believe COVID kind of just accelerated that time line. And so that demand we're seeing, directly or indirectly, through other customer sets either take wholesale opportunities through us and other solutions has really been a driver for our business. But overall, really minimal impact. In terms of next year, we haven't given our 2021 guidance yet. But again, we expect, going forward, that COVID will have [indiscernible] on our business.

Okay. Great. Okay. So then switching to fiber. So just to kind of set the stage here. What is the fiber run rate adjusted EBITDA and adjusted EBITDA margin when you exclude the noncore business, which is the construction business? And what is your target adjusted EBITDA margin for the fiber segment?

Yes. So just to remind folks, the noncore construction business, so this is a business that was inherited when we [indiscernible] our acquisitions in fiber. And really, this is a -- it's nonrecurring low margin since that really doesn't fit our strategy going forward of pursuing high-margin recurring revenue. And so a couple of quarters ago, we had an announcement that stated that we are winding that business down, and we expect that to be fully wound down by the end of this year. And so it represents about a $13 million annual revenue based on our prior guidance that we gave last quarter and for 2020. So you should expect that $13 million revenue not be recurring going forward. We're just not pursuing those types of projects anymore. And the remaining projects we have on the books should be wrapped up by the end of this year. It's really little EBITDA impact, but I would say it was a little bit of a drag on 2020 EBITDA, but not much impact there. So when you focus on our core recurring business, the margins there today are around 40%. But we expect that those will improve going forward for a couple of reasons. Number one, when you look at those large dark fiber, small cell projects that we've been constructing, and a lot of them have been [indiscernible] already, but the couple that we have left should be completed by the end of this year, those are all very high-margin types of projects. So they're anywhere from 80% around there, plus the margin on those types of projects that we'll continue to add to our overall -- or recurring margin profile. The other thing that I'd mention is when you look at our lease-up, again, we've been executing on that, and we're still kind of in the early innings of ramping that up. But as we continue to ramp that lease-up, that non-wireless lease-up primarily going into next year in 2021, again, we looked at the margin profile of selling to local enterprises wholesale, schools to the federally funded DRA program, health care, government, those types of entities, all those types of opportunities are, call it, between 70%, 90% type margin, so 80% on average. And so our expectation is you just continue to see improvement in our EBITDA margin as our mix of business shifts more towards non-wireless lease-up and also dark fiber small cells. Because if you look at our revenue mix today, the biggest bucket is still lit backhaul. And we are seeing customers wanting to move -- certain customers move from lit to dark fiber. And again, there's a margin improvement when you do that. There's also -- you get a longer term, right? So these small cell, dark fiber projects are anywhere from 10- to 20-year terms versus 5-year terms for lit backhaul. So you actually, through that, you lock in a customer for a longer time, you should see a little bit churn, but you also see margin improvement. And then as we continue to execute on our lease-up on our non-wireless, again, high margin. So going forward, we would expect the lit backhaul piece, depending on the types of wireless wins we win, but that lit backhaul piece, on average, should start to come down as a percentage [ a little bit high ] and then should be replaced by more small cell dark fiber and [ software ].

Okay. That's helpful. So you touched on that you're obviously focusing more on lease-up of existing assets rather than new builds. You've also said that you're going to be more selective with new builds. So what are your criteria for new builds?

Yes. So again, going forward, and we talked about getting the capital intensity, I talk about that and how that's coming down, and that's a function of us wrapping up these large dark fiber small cell builds. And when you're pursuing these -- the lease-up opportunity, you're talking about substantially less capital density there. So that's why we've said, going forward, we expect that capital to be about 30 to -- capital intensity to be in that 30% to 35% range of -- as a percentage of Uniti Fiber's revenue. Now listen, that doesn't mean that we're not going to continue to pursue greenfield builds. We will. But to your point, we're going to be selective about that. We want to go after greenfield builds that are either in market or near market that either continue to densify our existing footprint or expand our existing footprint, but again, have that high-margin profile. And then when we look at these greenfield builds, we're going to look at the lease-up potential, right? And when you look at the markets that we primarily operate in, it's Tier 2, Tier 3 markets. These markets are more rural suburban. And at Uniti Fiber, our focus has been primarily in the Southeast, which is where we have the most [ densely owned ] fiber network. So our strategy in Uniti Fiber is to be an active manager of fiber. And by active, I mean, providing lit services, actively running the network, seeing how fiber to the areas in dark -- in support of dark fiber to the tower and small cell deployments. But we want to take a more regional approach, right? We want to be at a national scale. So I wouldn't expect us to go pursue greenfield builds that are way outside of our current footprint. We want to densify, kind of densify our existing Southeast footprint, expand that. So those are the types of opportunities we look for, ones that are hard to get in, help densify our current footprint, but also have lease-up potential that we can improve that initial yields. And just to remind folks, we don't do anything on spec. So anytime we do a greenfield build, it's with an anchor that's secured. And we target that 5%, 7% initial cash yield per tenant, and we've seen that play out on the builds that we've done. And in fact, it's been around 7%. The slide in our IR materials, I show that. And then when you layer on the lease-up, again, it can take a couple of years, 2 to 3 years, depending on the size in the market, to get that full ramp-up potential. But when you get that full ramp-up potentially, you've taken that -- and our expectation is you'll take that 7% initial cash yield, and as you grow into the low double digits, 10% to 15% cumulative yields. And again, on the leases that we've done to date [ within ] lease-up this year, we've seen a plant where we've been able to double that 7% to a 14% cumulative yield. And again, on the lease-up, we just finished a lot of these projects in 2019 [indiscernible] stuff we've sold to date. Those -- that lease-up is generating incremental yields of 40% and 50% plus and represents about $10 million of annualized revenue, just on what we sold year-to-date. So we feel really good about the opportunity set there, and again, we'll continue to pursue greenfield builds a handful at a time, so we can set the [ builds ] better on the CapEx spend and also drive those incremental [indiscernible].

I'll just add. If you think back a few years, we [ have a ] much stronger foundation of existing networks that we can now do lease-up and [ agile ] and infill and as opposed to having to go after more greenfield build. So I think leveraging our existing base. And then just kind of following up on your COVID questions. Even if the vaccine comes out, which we all hope it does soon, I don't think we're going to go back to the old ways of working. I think work from home is going to be something for the future. And obviously getting bandwidth out to Tier 2, Tier 3 markets in rural areas is a key priority. And now those fit right into Uniti's playbook because that's where we're strong. We've got a lot of existing fiber. And then, while a lot of these services are to boost bandwidth at the residential side, where we don't serve those. We're not interested in serving residential customers directly. The networks have got to be retooled with more middle mile bandwidth and backbone and so forth, which fits right into Uniti's footprint of the top Tier 2, Tier 3 and rural [indiscernible] to be strong [indiscernible].

Okay. So based on the lease-up potential and the new build, what's an expected annual revenue growth rate for the fiber segment?

Yes. So again, we haven't given really guidance for 2021 so I want to be careful how I answer that. But I would say is when you look at our core recurring growth rate for this year for 2020 and based on our prior guidance, I think it implies we're somewhere in the low mid-single digits, right, low single digits. And I think our expectation, again, as we continue to execute on that lease-up, driving that non-wireless and if we're successful in doing so, again, it can take some time, a few years, but I think once we get to that full run rate, obviously, we expect that there will be that core organic where recurring growth can increase. Now what it can get to is really going to depend on how successful we are in the lease-up and how many greenfield builds we continue to pursue and if we can lease those up. But anyway, I think the trajectory, without getting too specific, I think the trajectory will continue to [indiscernible] and I think add into the higher single digits. But it will take some time to do that as we continue to ramp up our lease-up to the next strategy.

Okay. And then I think the company recently made some changes to its sales force, I think you said, to realign to better target customers. What were those changes? And have you seen any impact from those yet?

Sure. So I'll take that one. So we consolidated our Uniti Leasing and Uniti Fiber wholesale carrier sales groups into a new group called the Strategic Accounts group. And that's led by Greg Ortyl, who's the President of Strategic Accounts, [ he reports to ] me. Greg is a long-time industry veteran. He's got deep relationships with many key customers and a lot of experience running these large big ticket sales forces. And so this allows us to have 1 face to the customer representing all our products in all of our geographies rather than having 2 different groups talking to the same customer about something. It also allowed us to realign our sales support functions in our -- and to integrate our sales processes, which have allowed us to gain some efficiencies as we're looking to execute more effectively. Especially now that we're expanding our products and our offerings within the 31,000-odd miles of fiber that we obtained in the Windstream settlement recently, and that's obviously a game changer in terms of what we can bring to market nationwide now. We want to make sure we have the sales force focused on that. And we also still continue to maintain and grow our enterprise sales force, sales teams under Joe McCourt, and the regional wholesale team that's focused primarily on local opportunities in the Southeast. We want to make sure we're looking at those core Uniti fiber Southeast opportunities differently than the national ones. But I know the Strategic Accounts group is focused on all segments, really, cloud, content, the wireless carriers, international carriers that need large capacity, dark fiber and [ service as well ].

Okay. And then you just mentioned the -- obviously, the settlement with Windstream and the assets that you took as a result of that. So I realize it's still early days, but is there any indication of success in leasing those assets? And overall, I mean, is there any advantage to you owning those and sell in capacity on these assets versus Windstream? Like, what are you doing that they haven't been doing in order to kind of generate the sales on those?

Sure. Well, obviously, we just completed the sale and got access to the fiber so it is still early days. But we kind of knew that was coming so we began to talk to customers about the opportunity and we're able to build a sales funnel. But really, I think once the settlement was finalized and customers knew that we had access to the fiber and could bring it to market, those conversations got much more serious, and we've seen that sales funnel growing. It’s cloud, content, wireless carriers, the groups I've just mentioned that are the ones that have the bigger opportunities. I will say that selling dark fiber is a longer sales cycle than lit services because the customer is making a bigger commitment, a long-term commitment, to that route because they have to engineer and install the electronics, they will light the route, migrate traffic and so forth. So it does take a longer time to get these. But then you can also see much larger opportunities. So while we'll see some transactional flow here and there, we do expect some lumpiness in our sales with some larger deals that will happen. If you look back at what we've done over the last couple of years with the long-haul routes that we got from CenturyLink when they were forced to divest those to get the Level 3 transaction approved by the Department of Justice, we've sold over $50 million of upfront fees in the first 2 years after acquiring [indiscernible]. And that's -- those were just long-haul routes, a couple of hundred thousand strand miles versus the Windstream settlement that's got 2.2 million fiber strand miles and has metro, regional and long-haul fiber available. So we're pretty excited about it. We have closed a couple of transactions. I met already with a couple of customers. But obviously, the biggest transaction we just announced was the Everstream deal, [ which have factors ] in it. But that includes an IRU on Wind settlement fiber for about $48.5 million. So it [ ended up ] being a large transaction. In terms of our advantage or do we have a difference versus Windstream. We are the owner of the fiber, and therefore, we can go long term with the customers, 20 years, plus renewals, provided it meets our requalification. There was some uncertainty with some customers, what would happen at the end of Windstream's leases that was shorter than -- but dark fiber customers want to have long-term transactions. 20 years is the typical, and that's because they're making that long-term commitment to their network that I just mentioned. The other thing, I think, that’s something that we've been doing differently to differentiate ourselves is combining the Windstream settlement fiber with other Wind -- other Uniti-owned fiber that we have, whether it be in the Southeast Uniti Fiber or with the CenturyLink routes and in some of the other fibers we obtained in some of the sale leasebacks that we've done. By stitching together the different components of our network, we can create a different solution end-to-end than any one of us could do without having all those pieces. So now having the Windstream fiber settlement in fiber together with the rest of it, we can just a little bit [indiscernible] compared to the [indiscernible]. And then lastly, we do manage the [ NOI ] rights for the fiber, which makes it a little bit easier to gain settlement, product access and things like that to issues such as [indiscernible]. But I think differentiating with the solutions and being able to be flexible a bit more terms [indiscernible].

Okay. So just a broad topic but 5G. What is the opportunity? How much of it are you already kind of benefiting from or realizing? And if it's still early, when does it really ramp for you, do you think?

I'll take that, Bill, to start. So as we've already been seeing strong RFP activity from the wireless carriers for several years as they're gearing up for 5G and that has just continued to come in with additional expansion. We're seeing increases in bandwidth requirements at macro sites. We're still serving the [ glut ]. But a lot of increase in dark fiber and small cells is the carriers look to densify their networks. Obviously, the 5G rollout has started in the Tier 1 markets and then will expand right into the Tier 2 and Tier 3. And we're seeing that now where that activity in advance of these bigger rollouts is happening to build the infrastructure. So we don't see any shortage of opportunities to do that here. Sorry, I had a technical problem there for just a minute. But I think that we'll continue to see that. As I mentioned earlier, there's going to continue to be the trend to drive bandwidth off the Tier 2, Tier 3 markets, and that includes bringing 5G into those markets. We think that we're uniquely positioned, especially because of the low latency and density that the carriers need, there's not really other -- a lot of other alternatives in our core Southeast markets to serve the kind of needs that they have for dark fiber. The other thing I'll mention is, obviously, everyone is aware that DISH is now coming to market, building a new nationwide 5G network. That's going to be a great opportunity, and we look forward to participating in that opportunity. And again, as I mentioned, we've now got a strong foundation of existing networks that we've built out. We are doing other greenfield builds that we can now leverage to support these 5G builds with edge-out and infill construction rather than having to build more [indiscernible]. And we think that's a key differentiator because not only is it better from an economic perspective, but it means faster time to market which is critical for [ everyone ].