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

All right. Great. Good morning, and welcome to our 7th Annual Cowen Communications Infrastructure Summit. For those that don't know me, my name is Greg Williams. I cover cable, satellite and telco, including Uniti. I'm delighted to be joined today by Kenny Gunderman, the CEO and President of Uniti. Today's format will be a 40-minute fireside chat. So yes, let's get started. Kenny, thank you very much for joining us today.

It's great to be with you, as always, Greg. Sorry, we're not there in person, but it's great to be here virtually. So looking forward to the -- to our discussion.

Great. Likewise. So let's just get started and talk about the deal funnel. In the past, you've mentioned that the deal funnel pipeline is typically 1/3, 1/3, 1/3, right? 1/3 sale leaseback, propco/opco; and 1/3 bolt-ons; and then the last 1/3 to be transformative M&A. So how has that deal funnel evolved in the last few months since the last time we talked?

Not much has changed, so it's still roughly that mix, which is really not by accident. We try to guide it towards that mix. Again, we can control the funnel, right? That's what we want it to be. No change in our strong desire to grow inorganically to reach our diversification targets and a recognition that we need to do that, right? That's a really important part of what we've been trying to accomplish and also no change in our view that we can't set artificial deadlines when it comes to M&A. We have to maintain our discipline. And I've been saying that over time, but more frequently, and I don't want it -- that to be misinterpreted in any way. Nothing has changed in terms of our desire to move quickly and our ability to move quickly, but discipline is important. And I'd also point out to investors, remind investors, we have a good track record on deals. We've been pretty good at executing on reasonable, below-market multiples given the proprietary nature of our funnel. We've also been good at monetizing assets at pretty high multiples, premium multiples, so we're willing to transact across the spectrum where it works for our shareholders. And by the way, we just closed a deal. It isn't like we haven't done anything, we have. And I think sometimes the narrative overcomes the facts, right? We just closed one of the biggest sale leasebacks that we've done with Everstream. It's a terrific deal for Uniti where we're locking in revenue for a long period of time, increasing contract value by over -- about close to $100 million. Just a terrific deal for Uniti and our shareholders. So nothing's changed, really focused on it and digging in hard as well as continuing to operate the business.

Got it. And maybe we can talk about the transformational deals, that's what gets folks excited. You said a few months ago to me that the transformational opportunities were more realistic than ever. But with your valuation, you're at a discount. I mean your stock had a little bit of a run after earnings, which is nice to see, but still at a discount. How do I think about that in terms of timing of M&A? And your equity currency currently where it is with those kind of deals?

Yes. We're certainly still at a discount, and I hope we can talk a little bit about that today, too. But yes, no hiding from that. That makes using equity harder to fund deals. That's always been the case. And you know us, Greg, you've noticed from the beginning, 6 years ago, we've always had a volatile equity currency. And so that's always been a little bit of a challenge for us. But we've managed to execute on deals regardless. We've managed to use equity as currency, direct currency in M&A as opposed to going off and raising it in the market later necessarily. We've managed to execute effectively in -- at doing that as well as raising capital in the debt markets at attractive rates. So despite the volatility and the disconnect, we still managed to execute. And when it comes to larger transactions, no surprise, that disconnect on value actually creates an opportunity because I think, especially with strategics and with infrastructure funds and private equity and others, there's an increasing recognition of that disconnect on value, and it creates interest and creates opportunities that you wouldn't otherwise see. And so for us, when we're looking at opportunities, we're certainly never losing sight of the fact that our equity is undervalued based on what we think it should be valued at intrinsically. And we make sure that gets factored into any valuation discussions that we're having with counterparties. And I don't think it's going to ever be a hindrance to us moving forward on transactions.

And I do want to talk about valuation. Before I do, one last question on deals, and that would be a possible JV for some of the GCI fiber-to-the-home with Windstream. We're in unprecedented times for fiber-to-the-home, more deployments this year than ever and really unprecedented interest, whether it's PEs and infrastructure funds. So really it's not a question of capital teams, but maybe resources or limited time to deploy. And just want to know if there's any updates on that front, if that's still a possibility to JV for some of the Windstream build-outs.

Yes. Good question, and I definitely agree. We're in unprecedented times in the industry with respect to interest in fiber-to-the-home, which I think is terrific. And happy to talk about some of the reasons why, but let's just take it as fact that, that's true. JVs are still an option for us. And I think you touched on this, Greg, but not because we need the liquidity to help fund our obligations. In fact, we've never been in a stronger position from a liquidity point of view and a balance sheet point of view. But really as a way of highlighting the value disconnect that exists in our business. So we've talked about monetizing parts of that program or even parts of the leases to lock in a value arbitrage that exists between where that -- where those leases trade publicly or where we think they trade publicly versus where we think we could monetize. So that's sort of the angle we look at the JV as opposed to actually meeting the liquidity to fund the program. I would say the interest is certainly out there. I mean there -- back to my earlier point about the types of conversations that we're having, the transformational-type conversations, the unique conversations, proprietary conversations, we're certainly having those.

Got it. And we'll talk about valuation. You did lay out a pretty nice case on the earnings print. You had a slide that showed your Windstream cash flows and vis-à-vis other methodologies evaluation. And I've said similar things about Uniti and the company doesn't really fit neatly in a box. So what do you believe gets you to that rightful valuation? I think you sort of answered some of it here. Like a JV can maybe show folks that arbitrage, that disconnect. How do you unleash that value, you think, in your opinion?

Yes. I'm not sure if I started talking about this -- that framework first or you did, but I do give you credit for it because I think you sort of recognized some of this, too. But during our history, we've never had a period of peace and tranquility with Windstream. There's been one crisis after another, from their dividend cut to ratings downgrades to Aurelius to the bankruptcy. And so I think the whirlwind around that has created a -- just a misdirection for investors related to the value of that -- of those cash flows versus what really is happening, the facts. And the facts are we've got a really super senior lease. It's a priority payment, and it's never once been disrupted. And so as a result, the valuation, there's just a disconnect there. So we felt, based on that, we're now sort of in a period of tranquility, if you will. We thought now is the time for us to really start talking about this disconnect. And so I think laying out that framework was important. As I said on the earnings call, and I'll say today, I'm sure people aren't going to agree with all of our assumptions, but I do think the framework itself is hard to argue with. And even if you make assumptions within those ranges and these stress tests, it still shows that we're really highly undervalued. And I think that's, to me, indisputable. But to your point, Greg, how do you realize that value? Well, first of all, I think we have to talk about the framework. We have to give people a way to think about it. Secondly, we have to continue to execute on our business. If we -- if these are truly high priority payments and truly safe cash flows, let's continue to prove that. And I think we're going to do that. But thirdly, are there ways to lock in that value as opposed to just being theoretical? And I go back to your question on JVs. Sure, maybe we monetize a portion of the lease or so forth to lock in that value disconnect if we think the market is valuing it at 13%, 14%, 15%, and we think we could monetize it at 7%, 8%, 9%. Well, there you go. That's a way to demonstrate to the market that there's a disconnect. So there's those types of opportunities to do that. Again, not because we need liquidity or want liquidity from those types of things. But those could be ways to actually realize the value for our shareholders.

And with the valuation at these levels, I mean, are you fielding inbound interest on Uniti itself being taken out? And what's your philosophy about that? And -- or do you feel like you're so undervalued it would take a lot at this point for something like that to happen?

Yes. We think we have a highly strategic asset, including Uniti Fiber and our Windstream business. And I've always said that the bar would be high to sell Uniti Fiber, for example, or any part of our business because we're aware of that intrinsic value. And so we're not actively marketing anything. But part of the conviction that we have around the valuation is certainly colored by the conversations that we have with nonpublic investors. I mean I'm in a unique position where I'm talking to strategics and the various funds and public investors. And so part of that conviction comes from what I know and what we hear. And so we're trying to bridge some of those gaps. I think at the end of the day, Greg, at your conference in particular, and people who read your research, no one would question whether there would be interest in Uniti Fiber. I mean that's a high-performing scale fiber platform and the range of valuation is from 15 to 20x that we talked about, those are well documented, and it wouldn't be a surprise to anyone in this conference to hear that we [ field that ] inbound interest. I think the unique part that we want to start talking more about is our Windstream relationship is not just -- the lease is not just a financial instrument. We actually own a network, a hard network that enables -- it's a critical ingredient to enable a fiber-to-the-home business. And so there's value in that, and you mentioned it earlier, there's unprecedented interest in ILECs today, Apollo's acquisition of the Lumen assets and Searchlight's investments in this space with Ziply and Consolidated and this Cincinnati Bell take private. There's interest and investment in ILECs and using those as platforms for fiber-to-the-home in a way that we haven't seen in some time. And we actually own one of the critical ingredients for that. So there's a lot of strategic value in our portfolio of assets, and we really want to start trying to shine a light on that.

Got it. I wanted to switch gears and talk fundamentals following your print last week. Your bookings was the highlight of the print in my opinion. I think it was MRR bookings in the fiber business of $800,000. Help us understand this strength. And how sustainable is $800,000 in bookings? And the sales funnel, is it changing as we reopen the economy? Is the strength coming from that wholesale focus while enterprises are still delayed? Is that the right way of contextualizing it?

Yes and no. I mean -- so yes, I agree with you. That was, for sure, the highlight of the print for us. That's why we went with it. And I'd love to talk about the fundamentals of the business because without that, all the other stuff I just said doesn't matter. Terrific quarter on bookings, and it was largely led by wholesale. That's the bulk of our business. 90-plus percent of our business is wholesale, and that's always going to be the case. But enterprise is important because it gives us that steady baseline progressively growing level of bookings that we can rely upon, right? And we've been progressively growing that amount of bookings each month, each quarter, and we expect that to continue. And as I said it on the call, Enterprise is growing at 10% or 15% a year. And who else has an enterprise business out there that's growing at that pace? And bookings, of course, are a precursor to that. But wholesale is what drove the quarter. And wholesale is lumpy by definition because these are bigger deals, not as predictable. But we have a really terrific funnel of opportunities that are now starting to spit out a regularly -- a regular cadence of good deals that have led to that large quarter of bookings. And will it continue? I think it will. Now I can't say it's going to be $1 million every quarter, $1 million plus 10% every quarter, that's not going to be the case. We're going to have periods of time when it's down and then periods of time when it's up. But I think you're going to continue to see a steady, good progressive growth of bookings over time.

And what are the customers of the verticals, both in enterprise and wholesale? For wholesale, is it the carriers wireline, wireless carriers in 5G? Is it the big web scalers? Media companies?

Yes, a little bit of everything. We really believe in a good, diversified set of bookings and installs. I mean that's the way to drive good economics on a fiber platform, we think. But just the sheer numbers, when you look at them, a lot of it is wireless bookings. A lot of it is the web-centric providers. There's just a lot of interest in the fiber network that we got in our settlement, for example. And so there's just a ton of new activity in the wholesale side of our business. And we expect that to continue. We see a lot of growth. And again, you start with the funnel, right? And that's -- that leads to the bookings. And when you look at the funnel, there's just a tremendous amount of activity in the funnel from -- with the wireless guys and the web-centric guys.

You mentioned DISH is fairly active in your business now, and we learned on our earnings call yesterday that the new AT&T deal would not satisfy the FCC shot clock, which is good news because there was a fear that, well, if they can ride on AT&T and put spectrum on their towers, they wouldn't necessarily need to build a lot of infrastructure. But that doesn't seem to be the case, and it means more business for you guys. What's that activity like? Is that fiber-to-the-tower? Is it still just wireline getting back to AWS cloud on-ramps? What are they doing? If you don't want to talk too specifically, but at least contextualize.

Yes, we don't like to talk too specifically, but DISH did mention us as one of their key fiber providers. So we've given a little more information there. And I never missed a DISH earnings call. I think I'd love to hear Charlie Ergen speak, and I heard those comments. And that's certainly what we see in practice in the field. They're very active with us. I said on the earnings call that the activity level is higher than what I -- we thought it would be coming into the year, and we see it accelerating. And it's a little bit of both the things you said, so it's traditional backhaul in addition to connecting markets, but predominantly backhaul at this point. And I suspect that will continue to be the case in the near term.

Got it. And then talking about organic growth as a whole. What does $800,000 in MRR bookings translate to organic growth? And the bigger question I have is like with the noise -- admittedly challenges in the fiber space by some others, public and not. Over the past 2 years, we've seen some challenges by a couple of companies. And -- but you guys seem to be almost immune to it. What do you believe the organic growth is for the fiber industry and then for Uniti specifically? What's your targets?

Yes. It's -- that's a great question. And I don't really want to say what I think the industry growth is because I know what others growth's -- what others talk about in terms of their growth. And I think ours is higher, top line growth and certainly cash flow growth. So to your question about what's implied from the $800,000 in bookings, it's roughly 6% to 7% top line. And of course, you've got to make assumptions around churn and other things. But -- and you know, Greg, that we -- based on our guidance for the year, we're growing Uniti Fiber around 6% year-over-year. And when I look out over the next several years, that's -- we're kind of in that ZIP code, kind of 6%, 7%, 8% growth. And look, I think that's a good number. But what I would say is what we really focus on more than top line growth is cash flow growth because I think one of the things that other fiber companies have done in the past is lose sight of the importance of profitable growth. I think I've talked about this before, but in our markets, I don't -- we don't have a top line problem. I mean we could really let loose on capital intensity and lower margins, and we could accelerate top line growth. But we don't want to do that. We want to have good, steady, predictable top line growth, but we want to have outsized margin improvement over time, and we want to keep capital intensity at roughly that 30% level. And we think that's the right place to be because that gives investors a nice, steady growth but very predictable cash flow and also gives us the ability to return capital to shareholders along the way through dividends. And so that -- we're kind of in that zone. That's where we want to be. And there will be periods of time when we turn up capital and periods of time when we may turn it down. But generally, we're kind of in the ZIP code where we want to be.

And you're really talking about lease-ups to get to margin growth and better capital efficiencies. So your focus, it seems like these days, is your sales teams. They're incentivized to sell lease-ups rather than new anchor projects?

Yes, that's right. I mean the lease-ups really drive those margin improvements and they really drive capital intensity down because lease-ups are coming in at 10%, 15%, 20%, 30% cash flow margins, right? And when we talk about lease-up, we're not just talking about enterprise, we're talking about wholesale. We're talking about backhaul. We're talking about small cells in some cases. I mean we have markets where we're selling the second, third, fourth and fifth tenant who may be a small cell customer or may be a backhaul customer. So I think -- and so for us, that's a great business. But we never lose sight of the fact that if you don't have a good, steady cadence of new greenfield builds, then you'll lose the ability to continue selling lease-up on a really -- a growth trajectory that we want. So to your point, sure, we're very focused on lease-up, but we're always going to be focused on greenfield. And I haven't said this publicly, but we're always doing business planning. And we have about -- we have over 100 markets today where we have metro fiber. And we have roughly about 20 markets where we're selling enterprise. And within those 20 markets, our market share on average is well less than 5%. And so when you think about all that, there's a tremendous amount of growth potential not only in those 20 markets, but in the other 70 or 80 or 90 markets where we have metro fiber, where we can go in and sell the second, third, fourth tenant and turn those into enterprise-ready markets. So there's a tremendous amount of capital. There's a tremendous amount of value that's already in the ground. And we've got a terrific runway on lease-up and over continuing to build office network and get growth for a long time into the future.

That's a good segue into a topic of office network and the enterprise verticals. How would you characterize enterprise spending today? Is there a delayed decision-making that you're seeing, that we're seeing personally throughout the space of companies I cover?