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

Good morning. Thank you, everyone, for being here. I'm Bora Lee, a communications infrastructure analyst here at RBC Capital Markets. We're very pleased to have Mike Friloux, Uniti's CTO; and Bill DiTullio, VP of Investor Relations and Finance. Welcome to RBC's Global Data Center, Cloud and Broadband Infrastructure conference. [Operator Instructions] So welcome, Bill and Mike, and I guess we'll get started.

Yes. Thanks, Bora, for having us.

So I wanted to first start with Uniti Leasing. Can you speak to the opportunity you have with the fiber you acquired from Windstream and the demand you've been seeing for that fiber? What -- and if you could speak to what customer verticals you're seeing the most interest from.

Yes, sure. So good morning, everybody. Mike Friloux. I'll kick it off here. So Bora, under Leasing, I think the thing that is helpful to understand is with the Windstream transaction, it was a very large expansion for our leasing portfolio, if you will. So our leasable total strand miles went up significantly. So just as a reminder, we gained access to over 31,000 additional route miles, which expanded our total available inventory by roughly 90%. So it was a pretty significant and -- expansion, not just in terms of scope and route miles but also in terms of operational requirements to scale the organization to support the new opportunity set, if that makes sense. So all of that started to ramp up, I would say, third quarter of last year. And we're continuing to make some good progress on that, and I'll give an update on that on a second. From -- so a couple of things that changed internally from an operation standpoint. We have realigned our strategic wholesale accounts team. So that group is being led by Greg Ortyl. He's a seasoned senior veteran in the industry. And we knew right off the bat that in order for us to be effective, that problem solving on a national scale, we needed to have a little more muscle out there in the industry working with our customers because so much of the long-haul routes and these routes that we market under leasing, they require some really good, deep customer engagement on problem-solving, network design, logistics. These are not what I'd call short sales cycle-type opportunities. They're much more involved with the customers. So they tend to be bigger deals, longer-term deals, a little more complexity. So really realigned the sales team to tackle that opportunity. So I think we're up to 12 now, senior sales directors in the leasing organization. We also, in parallel, scaled up the leasing operations team. So all sales support functions perfecting and improving GIS tools, anything having to do with quoting and inventory checks and all the typical things you would think in a presale support cycle. And we continue in the background to drive operational improvements in the leasing organization. From a demand perspective, we've seen demand actually be pretty brisk, right? I mean by about third quarter last year, I think our wholesales pipeline was roughly about $500 million in total contract value. We've been marketing these assets for 8 months and kind of ramping up on them and learning about them and learning how to sell them. And we've built the sales pipeline now to a total of around $1 billion in total contract value. So we've roughly doubled the sales pipeline in a pretty short period while we're ramping up on the assets. So we expect that positive momentum to continue, right? The more we learn, the more we integrate, the more effective we'll be on the sales front. So a big deal and pretty exciting from our perspective. From a vertical standpoint, it really kind of touches all the verticals. So if you think of government, national carriers, international carriers looking for domestic termination or expansion on domestic routes, content providers, hyperscalers, the usual set that you would think would be interested in the assets that we operate. And in particular, I'll say, regional carriers. So some of the characteristics of the Windstream routes are very, call it, regional in nature, middle-mile routes, regional transport routes. And so we've seen a pretty nice pickup. We expected some of that, but it was, I think, better than we had anticipated. So a lot of interest from regional carriers. So overall, I'd say it's going really well. The last thing I'd add is as, I guess, a derivative to our core Leasing business, we're also actively continuing to be engaged in opco/propco opportunities. And the new routes have actually created a new value proposition for us, right, when we're dealing with our clients. So now we have the ability to be more creative on bringing other assets to the table as we're trying to vet and determine opportunities in the sale-leaseback environment. So it's similar to the Everstream deal we announced a few weeks back. And so it's been nice to see the interest pick up on that front as well. And a big part of that is due to the assets that we were able to gain access to. So Bill, I don't know if anything you want to add?

No, Mike. I think you covered it well.

Okay.

You touched on this briefly. Is there any way to quantify what the typical sales cycle is for dark fiber requirements? And just to set a baseline for investors, how long you've actually been marketing the Windstream fiber versus that sales cycle?

Yes, sure. So like I mentioned earlier, we've been marketing pretty aggressively for the last 8 months in earnest. We did a little pre-marketing on some very targeted accounts early on where we knew there was going to be some strong interest but really aggressively marketing for 8 months and making incremental improvements on that process monthly. The sales cycle -- and this is what, I think, very typical in long-term fiber IRUs and leasing opportunities. These are typically 15- to 20-plus-year type of agreements. They involve long-term capital allocation decisions by our customers. There's a lot of planning and logistics that our customers themselves have to work through. So even if they identify an opportunity in a route, they need time to plan, to determine, to maneuver based on their own individual requirements on their side of the equation to get the timing right. So generally, these agreements from quote to contract generally -- in close, generally take 9 -- on the short end, typically 9 months and on the long end, typically, say, 18 months. Now there will be some times where things will line up perfectly and you may close deals in less than 9 months, right? If everything goes quickly, you can close a deal in 3 or 4 months. And sometimes, the deals are so complicated that it will also take longer than 18 months. So maybe 2 years or even sometimes longer than 2 years. So I'd say generally 9 to 18 months is pretty much the sweet spot. And when we think about managing our backlog at Uniti Leasing, as we built up the sales pipeline, we're really expecting that close rate to start hitting and ramping up in the second half of the year if you think about it from a timing perspective. So everything is going pretty much on par to what we would expect.

Great. So the GCI program with Windstream, can you talk a little bit about where the builds have been to-date? Remind us of Windstream's ILEC footprint?

Yes. So -- and what I'll start off is a little high level. So first of all, we're very pleased with the progress on the GCI program. We'd like and engage heavily with Windstream management in terms of their investment strategy, their business goals and how they're vetting and allocating capital, really focused on IRR returns in markets. So they're just really looking through all their ILEC territories and their CLEC markets. And they're determining where can they get the best impact on returns and cash flow from an investment standpoint. So we really like it. And we agree with what they're doing. And so that's been really, I think, good from a relationship standpoint. In terms of where they're investing, right now, they're primarily investing in their ILEC territories. And so under the GCI program, we're building basically -- they are building what we call value-accretive long-term fiber assets. And again, this is really Uniti investing in its own network through our tenant, Windstream. So as we make these investments, we're actually improving the utility and competitiveness and marketability of Uniti's own network. We're also helping our tenant achieve its directive and goals in this case. So making really good progress from that standpoint. I'd say since inception, we've invested $127 million. Again, as a reminder, the way the program works, they will present a plan to us annually. We will vet that plan. We'll look at the return models. We'll approve that plan. Windstream will then go out and construct the assets, the new routes. And once they're completed, they'll deliver those assets to us for funding. So we basically then fund the assets as they get delivered to Uniti under the program. So $127 million; roughly 3,370 fiber route miles have been deployed and implemented under the program; and a real strong focus on fiber-to-the-home, fiber-to-the-premise and supporting Windstream's Kinetic 1-gig service offering. So yes, really good progress overall, I would say. For the year, we're expecting total this year, in 2021, of around $200 million. And that expectation is really based on the timing component I mentioned. So there's a build cycle that has to be completed. Some of that build cycle, we have to forecast and estimate when we think those builds will be complete. And then we roll that into our forecast, whereas how we estimate the $200 million spend for '21. But all in all, I would say going really well. We're really pleased with it.

Great. So is there anything that actually needs to be done operationally or CapEx-wise to the miles that they build out under the program to either connect them to the Uniti network or somehow -- or can they be theoretically unattached to the Uniti network? How does that work?

Sure. That's a -- it's a really good question. Really, the short answer is no, but I'll kind of explain to it. So the GCI program is meant, again, for Uniti to invest in Uniti's existing infrastructure in a way that improves it and expands it. And so the investments we're making incrementally, we're either overbuilding the -- we'll call the legacy copper plant that we own today. So it's really replacing copper with fiber. In some cases, we're extending fiber that's already connected to our existing owned fiber network. So it's really by default. As these investments are being made and as they're constructed, the default is they're always contiguous and connected to Uniti's own network. So there's no need to go back and, from a CapEx standpoint, have to deploy any more additional funds to provide that continuity. And there's really nothing operationally required to do it. They're attached as kind of part of the design, if you will.

Perfect. Good to hear. So with all this build-out, what do you think the impact of the GCI builds is on the addressable TAM for the company?

Yes. Good question. The -- so from a macro perspective, the GCI program with Windstream is really targeted to 2 sides of their operations: their ILEC under the ILEC lease that we have with them and with the CLEC lease. So right now, the majority of the focus is with Windstream ILEC markets. So all the ILEC markets are exclusively -- those are routes and assets that are exclusively leased to Windstream. So that doesn't necessarily -- from Uniti Leasing or Uniti Fiber selling to customers in the market, that doesn't really expand our TAM, right? That's expanding the TAM of Windstream, expanding the value of our assets. However, under the CLEC lease, we do have the opportunity to co-build investments. And so right now, that has not been what I would consider a priority in the capital allocation decisions for the first year or 2. But we have ongoing discussions with Windstream on addressing win-win scenarios under the CLEC. So under the CLEC lease, we actually had the option to co-build. So we can co-build routes where we basically pay -- cover 50% of the cost. We get basically 50% of the cable. That -- when we find these opportunities, that would increase the TAM, if you will, from a Uniti Leasing perspective. But I would say for the most part, especially in the short term, a lot of that capital is being -- going into the Windstream ILEC territories, and it really isn't beneficial to the TAM. Now on the Uniti Leasing, what I'll say on the Uniti Leasing operations and the Uniti Fiber side, expanding our TAM is really important, right? It's one of our key business objectives. So Uniti Leasing, continually out in the marketplace. I mentioned looking at additional sale-leaseback opco/propco opportunities in the market. Those are opportunities for Uniti Leasing to increase its TAM. And we're also looking at some next-generation transport solutions, 400-gig-plus wave services, dynamic spectrum-type products. And we can allocate spectrum live on the transport system. So we're looking at some innovation on that front to grow TAM. And on Uniti Fiber, it's really kind of 3 points: We have organic growth. Every time we add a new customer, a new lateral onto the network, a new building, that's expanding our total addressable market. So we like that. That's a good natural growth component of a fiber business. Strategically, we'll go out and we'll invest discretionary capital. So in a lot of our metro markets where we have target-rich environments, we will make incremental investment to go ahead and build routes given the history of our success rate. So we're able to analyze these target zones, make decisions more proactively to kind of grow the TAM a little bit more aggressively, if you will, by just being strategic. And the third and final category has been in our playbook for a long time now, which is really looking at anchor opportunities with big wholesale clients, wireless carriers and E-Rate customers, where we can build out a new area, a bolt-on area of the network or expanding existing footprint that we have. So those are really the ways we build TAM at Uniti.

Great. So that's a good segue into switching to Uniti Fiber. I'll start with have you seen changes in the decision cycles as the pandemic has progressed. And where do things stand now? I know in past conference calls, you've mentioned that there's been pretty minimal impact from COVID, but just wondering if there's been a change in customer behavior.

So I'll take that one, Bora. Yes, you're correct. So we've said in the past, there's been minimal impact as it relates to COVID-19, and that still remains the case today. Early on, we did see some customers push out their buying decisions, delay installs because their physical office locations were closed. But we've worked through most of that. And again, as more and more business start to open up, that will ease up as well. But again, you have to remember, all that aside, enterprise is still a small part of our overall business today. As a percentage of consolidated revenue, it's less than 5%. So even though enterprise is small, we continue to have to see really any -- see any negligible delays there, so really no impact. But in fact, because of COVID-19, we've actually seen some acceleration of these virtualization trends. And so we thought these trends were always coming, right? So you see telemedicine, e-learning. Here, we are using a video platform, right, to conduct this conference. And we thought all those trends were coming. But no doubt that COVID actually accelerated these trends. And all of these technologies, what they require in the back end is dense fiber networks to work seamlessly. So we have seen increased demand from other types of customers that we normally hadn't seen from the past. And we think these acceleration, these virtualization trends, they're here to stay and should be a tailwind for us going forward.

Great. So on the Fiber side of the business, you have about $1 billion of revenue under contract. What are some of the demand trends you're seeing as we approach the halfway mark of the year? It goes by fast. And what's the typical sales cycle for fiber requirement within Uniti Fiber specifically?

Yes. So it's pretty amazing here. We said it's almost June here. So the other year has gone by fast. But again, the demand trends that we're seeing on the non-wireless side, it's what I just said, we've seen the acceleration of virtualization trends. So enterprises, health care, government, all those customers that we serve within our markets, we're seeing demand there for increased fiber solutions, bandwidth solutions to meet their needs to be a telemedicine learning, just connecting offices through video platforms, things like that. On the wireless side, the demand we've been seeing there and the trends we've been seeing there for some time are not only just the existing densification to support 4G technology but also the evolution of 5G, right? So you've seen 5G deployed pretty widely in Tier 1 markets. Just as a reminder, we primarily operate in Tier 2, Tier 3 markets, so these are more suburban rural markets. But we're starting to see the 5G get rolled out more in earnest in those markets. And so a lot of our wireless carriers, right, for some time, we've been -- again, a lot of the projects that we completed. And by the end of 2020, these dark fiber and small cell projects we've been building for some time, a lot of those projects were in to support not only 4G but also the eventual rollout of 5G. And so we're seeing strong RFP activity there for both small cells, dark fiber and even led solutions in some cases. So I think that's been a significant tailwind as well. But then also on the wireless side, as fiber-to-the-home begins to be deployed, fixed wireless, those technologies, again, all require dense fiber network. That opens up the door for us to be -- although we're not in the residential business, opens up the door for us to be providers on a wholesale basis to these customers, that they can use our fiber to support those initiatives. And so we've seen demand trends there as well. And Mike, I don't know if there's anything you wanted to add on to that?

No, I think you hit it. I mean, basically, the demand for fiber-based solutions, we just continue to see it grow across the board. And that last point Bill made, I think, is important with these government programs and pushing fiber-to-the-home end markets, both organically from a business perspective and through government programs. We're just seeing the demand for these solutions continue to, I'd say, even accelerate. And as that demand grows, it just creates more opportunity for us because all those fiber route miles that are being deployed, they require connectivity. And so if you're out building in the rural part of Louisiana or Arkansas, those networks need to talk back to the primary hubs and drains and Internet hubs. And so that creates a lot of demand for us from a fiber perspective as well. And those programs are in the process of being ramped up as well. So...

You actually touched on this on the Uniti Leasing side. But on the Uniti Fiber side, are there additional solution services that you're thinking of actually providing or adding to your suite of services that you can offer?

Yes, I think so. So I think from a services standpoint, what we're trying to do is expand our product portfolio to add more value and more local customer stickiness in providing solutions. So the type of things we're doing in our managed services platform, expanding our SD-WAN product set, managed firewall -- it's a typical type of managed services applications, managed firewall, managed router. We do network management. We do some extensibility of WiFi connectivity, especially for our E-Rate customers. And so one of the things we're doing is we're taking this managed services product set. We're putting it together, bundling it with our broadband solutions in the market. So we've gone through, from an integration growth perspective, pretty rapid phase the last couple of years. And we're now in the process of taking the managed services, bundling them with broadband solutions and then selling those to the existing customer base and then using that as a tool to differentiate ourselves selling on a go-forward basis. So we continue to make really good progress on that front. And the whole trick to managed services is being able to support it operationally and to scale it. And so things are going very well. It's pretty much where our focus is from a Uniti Fiber perspective.

Okay. So Uniti was named as one of DISH's core fiber providers. Can you talk about the revenue opportunity there and if the nature of the opportunity of DISH taking capacity on your existing footprint might it require additional CapEx? And -- sorry, that's a 3-parter. And if it does require CapEx, will that impact Uniti's expectation of 30% to 35% or lower net success-based CapEx intensity?

Yes. I missed the first part of your question, Bora. Was that dealing with DISH?

Yes. So just the nature of the opportunity, the revenue opportunity. Will it require -- might it actually require additional CapEx?

Okay. Sure. So what we can say is that we obviously are working closely with DISH. And I think they've announced that they're awarding us several markets down in the Southeast, where we have strong dense fiber networks in the Southeast. We've negotiated an agreement with them. We're expecting orders to start picking up here in 2021 and 2022. The good news about this is that these are -- what we would deem to be on-net, near-net opportunities for the most part. And so that's been one of our big focus points at fiber is how do we drive more revenue, if you think about it this way, per route mile on our network. And so we have a big initiative within our Uniti Fiber sales and ops organizations on driving near-net, on-net sales. And so we look at the DISH opportunity. And the reason they're picking us as a partner, I believe, is because of the infrastructure we already have. So it only makes sense to -- and given the timing requirements on their side, time to market is a big deal for them as well. So it all kind of folds together. And we really look at it as a really nice lease-up opportunity in our existing markets. So for that reason, we don't believe it's going to bend or really materially change our capital expectations for the year.

Yes. So just to specifically address that, Bora, I mean it doesn't -- so we're not baking any really CapEx into our '21 guidance related to that. And then going forward, it shouldn't -- we don't expect it's going to impact our target of -- targeting capital intensity at Uniti Fiber in that mid-30% range given that we're mostly focused on the on-net, near-net opportunities.

Okay. Great. One quick one on M&A. So are there any additional markets either on the Uniti Fiber or the Uniti Leasing side that you'd be interested in adding over time? And more high-level, any views on domestic M&A?

Yes. So in terms of M&A, really, what you should expect to see us -- again, the timing is going to be really dependent on what types of deals we're working on. I mean just as a reminder, most of our -- 90% of our M&A funnel is proprietary in nature. And the railway, it's really broken down. There's about 1/3 that are, I'll call opco/propco sale-leaseback-type transactions, 1/3 that are mostly bolt-on type of transactions that would densify or expand our Southeast fiber footprint. And then the 1/3 that are transformational. So these are larger deals that we would vet. One of them would significantly diversify both our revenue and cash flows at Uniti. And so we continue to be actively engaged in those discussions with potential partners and evaluate various different types of transactions. So I think from a large transformational type of transaction probably would most likely be in the form of sale leaseback opco/propco type of transaction, although we look at a lot of different things. And so if there was a transaction that, again, either further densified or expanded our Southeast footprint at Uniti Fiber, we would probably take a good look at that. In terms of domestic M&A, I mean, really, that's really what we're focused on. At one point, we did have a Latin American tower portfolio, but we've since divested that. And so really I think anything that we would do on that front would be focused in the U.S. We're not really focused on international assets at this time.

Okay. And well -- and with one last question on the capital side. So how do you think about what portion of the lease-up opportunity to include in your guidance?

So on that, it's really -- we look at what is actionable, what's in the pipeline, what do we think that we can sell within a given year. And so let's start with Uniti Fiber, right? And we put some slides in our investor deck and our earnings decks that kind of highlight this. But we look at the lease-up that we've been executing over the last several quarters. And that lease-up over the past 5 quarters represents about $17 million of annualized revenue, recurring revenue, high-margin recurring revenue. And that's really what we're going after. And so that reflects what we've actually booked. And that's really -- what's going into our guidance is, okay, what can we think we can execute on. And so as Mike talked about earlier, again, on the wireless side, some of these -- in the Leasing side, some of these sales cycles can take some time. They can take several months to a year. On the non-wireless side, on Uniti Fiber, again, we're dealing with enterprises, health care, government. Those tend to have shorter sales cycles, right? and so in most cases, we can sell -- start the negotiations with the customer, sell it and install it within the same calendar year. And within -- again, it could be as low as a few months or 3 to 4 months or so, like that. So it has a much shorter sales cycle. So really, the focus of Uniti Fiber is executing on that lease-up, really driving that nonwireless. Even if you look at the mix of our bookings, that's predominantly what it's been, and we expect that to continue going forward. And so it's really executing on that. And then on Uniti Leasing, what we said on our last earnings call is that our outlook for '21 includes about $5.5 million of annualized revenue from Uniti Leasing lease-up when fully deployed. Although that's a good number, it's not a huge number, but that will kick in if you look at the pipeline that we have, right, $1 billion of total contract value. And given the fact that we've just -- the biggest asset that we've just acquired, the Windstream -- the fiber from Windstream, which increased our leasable capacity by 90%, right, gives us the opportunity to really lease more fiber out there. We're still in the early innings of that. So we expect that to ramp up over time as well. But it really -- what goes into our outlook really reflects what we think is actionable within that year and given the sales cycle times that we talked about.

Got it. Okay. So we'll wrap it there. I believe we're out of time. But thank you both for taking the time and for being part of the conference.

Thank you, Bora.

All right. Thank you, Bora.

Appreciate it.

Take care, guys.