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

All right. Good afternoon, everybody. Thank you for joining us again for our next session in the 2021 Bank of America Telco Media Conference. I'm Dave Barden, Head of U.S. telecom and comm infrastructure research for the bank. And with us now is Uniti Group. And we're very lucky to have the very newly minted official Chief Financial Officer of Uniti, Paul Bullington with us in addition to the very old Head of IR, Bill DiTullio and who we all know. And so thank you, guys, both for joining us. Appreciate you being here.

Thank you, Dave. It's great to be with you.

Yes. Thanks, Dave.

We appreciate you guys being friends of the firm. So look, so I think maybe, Paul, the way to kick things off would just be for the people that haven't had a chance to meet you yet because you've been kind of interim CFO for a little while and now taking over the official job. Can you give us a little bit of where you're coming from and how you're approaching the seat.

Yes, sure. No, thanks, Dave. We scheduled the timing just for you today on the announcement. So you're welcome. Yes. In all seriousness, it's certainly great. I'm very excited to get to step in this role in a formal permanent position. Like you said, I've been in the role from an interim standpoint for the last about 4 months. So I've gotten to warm up to it a bit, but just excited about being in the role now and the opportunity to help to continue to lead Uniti from this seat to achieve its goals and vision and deliver value for investors. So just real quickly on my background, I've been in the business over 20 years and really kind of only been with 1 company in the business for over 20 years. I started with a small group, started a business called Southern Light in Alabama, which was a pure fiber optic play along the Gulf Coast. And so we started that business together, and I was the CFO for that business for the entirety of his existence until it was acquired by Uniti in 2017. So I've been in the business a bit. I've seen a little bit of it all and done a little bit overall when you start a business as an entrepreneur and if you're in the CFO position, you get to wear a lot of hats. So I run sales in the past and done a number of different things as the business has grown. But we have evolved a lot and now I'm really excited to be back in that CFO seat at a different level here at Uniti. And I'm an operator by nature, and so I tend to approach things from that operational standpoint. That's really -- that's the role that I've been doing since 2017 until stepping into this role is really managing more of the operational finance functions at Uniti Fiber business -- at the Uniti Fiber business. And so I think things are going to continue to be the same in a lot of regards. I want to take just a second to thank Mark Wallace and his service to Uniti. I think he set the table very nicely for me to come in. I mean a lot of the the turmoil that we've had in the last few years with our largest customer and their bankruptcy is behind us in the rearview mirror. And now I think we're in a position -- strongest position we've been in really ever to execute on our vision and deliver value. So I'm excited to be able to step in at this period of time and help us drive towards that goal.

Awesome. Thanks, Paul. So I think the way I think about Uniti, I think about it as kind of 3 parts: there's the Windstream relationship, which is kind of the anchor tenant; there's the other kind of financing, M&A pieces that the original CS&L was actually built to do; and then there's the fiber business. And so if I could, I'd like to kind of walk through those different parts. And I guess the first part I want to walk through a little bit is the kind of the non-Windstream sale leaseback, M&A piece of the business. When Mark and I bumped into each other at a conference a few years ago, and I asked him how are deals coming? And he's like, "Look, look at my briefcase, the thicker my brief case, the more I'm working on." And it was like this thick. I mean it was...

Yes, kind of look like the old Fed Chairman like indicator, right? That big of a briefcase.

His back was definitely thrown out by the end of the day. But -- and I ask this question every quarter, and I [indiscernible] with this question all the time, which is there was this idea that, okay, we're going to get done with the Windstream bankruptcy, we're going to reemerge. The lease is a real lease. It's been litigated to death. Our capital structure has never been stronger. Our weighted average cost of capital has never been better. We've got -- so the story went, we had this laundry list of deals we can do at any moment. And as we kind of -- the clock keeps ticking, not much is happening. So what's happening?

Yes. No, that's a good question. And it's a question we get frequently and certainly one that's at top of mind for us as well.

From other people rather than me.

Yes, yes. No, you're the #1 asker of that question, but other people have thought about it, too. No. I mean, look, inorganic growth is an imperative for our business. We've said from the very beginning that we want to diversify as quickly away as we can from the Windstream concentration. And that's not because we think the Windstream revenues are unstable. I think we've proven just the opposite. Like you said, it's been litigated to debt. But it's just good business. Anybody in a concentrated business would want to do the same. And we've got that imperative. So inorganic growth is imperative for the business, and it's very important to us. Yet at the same time, we don't want to put a timer on it. We've got to stay disciplined in that marketplace. And we're having very -- we're very active in that piece. We're having a number of conversations but we're going to -- we're not going to put an artificial deadline on us to do deals and get outside of our discipline. So I think it's something that's very important to the business. I hope that you'll be seeing stuff from us very soon along those lines. But we're going to continue to be disciplined about it and go about it in that way and not try to do a deal for the sake of a deal. We want the deals that we do to be highly accretive to the business and to drive our vision forward. It's not that we've been totally inactive. We just closed the Everstream deal in the second quarter, which was a really nice deal for the company, kind of an opco/propco style, those kinds of deals that we like to do, just value-creative in its own right. So it hasn't -- it's not that we've been inactive, and I certainly don't want to give the impression that it's not important for us. It is very important for us, and we're going to continue to pursue that with everything we've got.

I think that one of the questions that emerges is not the lack of an appetite on your part nor the lack of an improved bid capability on your part as a function of kind of weathered the Windstream situation, but rather that the ask has moved in light of how much money has been slushing around the market, infrastructure funds. We've been seeing Apollo getting into the wireline business and Brookfield getting into Cincinnati Bell. And there's just a lot of people that weren't here when Uniti was conceived to do things that Uniti was conceived to do, is that the chief challenge right now? Is kind of -- we're just in a cycle where sometimes home prices are high and sometimes home prices are low, and it's better to buy low, sell high type of thing or. Is that relevant to the situation? Or is there some other things going on?

Yes. No, I think it's definitely relevant. I'd be disingenuous if I said that valuation and the amount of dollars in the marketplace that are chasing good deals is not a factor in the equation. It certainly is. And we're big believers in fiber infrastructure as a long-term asset and a long-term creator of value. I mean these are long-term assets with stable cash flows that have lives that are 30-, 40-, 50-plus years. So we think they're a good investment, too. But high multiples aren't a new thing. I mean, it's been something we've been talking about in the business for 3, 4 or 5 years. And I think we've shown the ability to execute on deals and on good value-accretive deals at reasonable multiples even in that marketplace. So yes, I mean, it does take us out of the picture on some deals that we don't want to chase, deals that are highly competitive, we may not chase all of those. We're more focused on what Kenny talks about as our proprietary funnel and some of those deals that may not be quite as recognizable in the market. But we're also looking at transformative deals, and I think that there are opportunities there as well. So I think that is a factor, Dave, but I think we've shown the ability to execute even against a market where the demand was high and the multiples were high. And so I think there's no reason to think that we can't do that again.

And so Ken brought something up in the last conference call. I think he put out a slide and Bill probably created it, and it kind of said, well, if we assume this fiber multiple this is the implied yield for our Windstream business and that sort of thing. And I flipped it around and I was saying, look, if you've got this Windstream income and it trades at a triple net lease yield of 7% or 8%, you can get the fiber business for free inside of Uniti. When you talk about -- when you use the word transformative transactions, do you exclusively mean external inorganic transformative transactions? Or do you potentially mean transforming the way Uniti tries to extract value from itself in terms of having 2 businesses under 1 roof, the sale-leaseback business inclusive of Windstream and the fiber business?

Yes, I think that's a really good question, Dave, and it's definitely something we're thinking about. I mean I think historically, when we've talked about transformative transactions, I think the first thing on our mind has been larger fiber acquisitions or fiber deals that really help us move the needle on growth and towards that diversification that we're driving towards. But I think we're thinking about all of those things. And I think you're right in thinking about we don't want to limit the way we think about how we might transform the business and unlock that value for shareholders to adjust that sort of traditional acquisition. I think there is an opportunity to look at other ways to unlock that value that we think is underappreciated in the marketplace right now through other way -- through other means. And that could be -- Kenny has mentioned in the past, he's mentioned JVs or other sorts of investments, maybe securitization of the Windstream cash flows. I think there are definitely ways where we could look to transform the business and diversify ourselves away from those -- from the concentration of Windstream revenues outside of the traditional path that we do definitely intend to pursue, which is an acquisition, either straight acquisition or opco/propcos that sort of thing that continue to grow us inorganically and move that diversification deal for us.

No, I had -- actually I heard the securitization idea that's actually much clever, I like that. So let me ask this question. So if valuations are obviously relevant to the conversation about expanding your fiber footprint and that sort of thing. The thing that seems to be in vogue these days is buying copper with the idea of turning it into fiber. And Apollo just bought a significant chunk of assets at 5.5x. Twilio or Ziply brought assets from frontier at roughly 5.5x and those are multiples that are potentially hugely accretive if you have the manpower to make those businesses work. Is this something that's now maybe on the radar screen in a way it wasn't or is it definitely not on our radar screen?

Getting into the fiber-to-the-home business that traditional sort of ILEC business is not really something that's been been thought of as something we would pursue directly. I mean, of course, you never say never. But we haven't really targeted that piece of the business as our direct strategy. But Dave, as you know, it's still very relevant to our overall strategy and the value of our network going forward. Our largest customer and tenant, Windstream, what we've talked about is right square in the middle of that business and has embarked upon a strategy to really invest in that business in the fiber-to-the-home business and overbuilding copper with fiber. And we've committed a substantial amount of capital over the next few years to help them fund doing just that. And when we invest capital in their business and their ability to bring fiber to the home, we're investing in our network because we own that Windstream network that we're talking about. And those -- we're investing in fiber that we own long term and would be in that business in the fiber-to-the-home business for a long period of time. And so while we're not really targeting those types of investments directly. Again, strategies can change, and we may decide to look at it more intently in the near future. But as for now, so that's not a part of our central strategy, but it is very relevant to our overall business and the value of our network when you think about it holistically.

Got it. And I guess one further question on that from the transformation standpoint. To your point, you come from Southern Light. One of the kind of cornerstone assets for the strategy of being in the kind of southeastern geography. Is your appetite confined to that geography because that's where the highest and best synergy and cost and revenue opportunity is? Or is there an opportunity to kind of diversify geographically speaking and go somewhere else?

Yes. I'm glad you asked that question because I think it's central to sort of the pieces of our business and how we look at them. So if you think of our business, another way to cut our business, you talked about one way to cut it in terms of the types of deals we've done in cash flow. But another way to really to cut our business is we've got this deep interconnected dense metro-network focused network in the Southeast. And that is the core network for what we talk about as Uniti Fiber. And this network is in a lot of Tier 2, Tier 3 markets and is -- has fiber that is second to none and leading -- really a leading position in several of the markets that we provide. And so that market and that piece of our business, we can go and we can overlay the full breadth of our fiber product set across and deliver both wholesale and wireless solutions, dark fiber and lit solutions and solutions to enterprise. And so when we think about networks that -- dense metro networks that we operate, I think you'll most likely see us do deals that are in the Southeast or tangential to the southeast and expand that out because we think there's real value and the interconnectiveness of those networks. But then we also have a piece of our business we refer to as leasing -- the leasing business a lot. But that's a real national network in terms of its composition, with long-haul city-to-city fiber, some of that we've gotten through the Sapphire transactions, some of that we've gotten through the Windstream settlement. But we now have a national network that puts us in the top tier of players of national networks for long-haul deals. Most of that is dark fiber, leasing of dark fiber, but we've also recently announced a Spectrum product that we've launched into the marketplace, which is a little bit of a hybrid solution. It's kind of a dimfiber type of solution that goes a step beyond dark fiber and towards lit solutions. So that piece of the business is something we're interested in investing in as well. So what you may see us do and what we're interested in is those types of assets that complement that national network that we have but more on a long-haul basis. So there's really 2 pieces of it. And I would say we're interested in both dense metro fiber that would most likely be tangential or in the middle of our Southeastern dense metro networks. But we're also interested in national fiber footprints that would help us to expand that national fiber footprint that we have for more long-haul flavored fiber, if that makes sense.

And just a curiosity, I mean, are there those sorts of assets laying around? I mean, I don't read about those things, many of those assets being out there to be had.

No. We've been able to pick up some assets through -- from -- through the Sapphire deal and a couple of other deals where we've been able to pick up pieces of that. Some of that might be the fallout from other combinations coming together where we've been able to come in and do a deal to pick up some of those assets. So no, I mean, there's not a 100 long -- national long-haul providers that we would go and acquire. So it would be more like piecemeal that we would add to those pieces. So it's definitely something that we've been able to, in an opportunistic way, pick up some of those fiber networks as we've moved along, and we're going to continue to look for those assets as well. So I think from a geographic standpoint, we're interested in both.

Okay. So shifting gears to kind of the fiber side of the business, just a little bit more dynamic, more organic inside of Uniti. I've been asking this question to everybody just to try to get a sense. But a year ago, when you guys were here, it was -- we were in the middle of the pandemic coming out of the second quarter, the worst part of it. We are really describing how bad things work. And now I'm trying to get a sense as to how close to normal are we yet here right now in the third quarter of 2021? And thus far, I get the sense that we're not all the way back. Decision-making remains slow. There's increased activity in general, but obviously, you're in a more attacker position, you're more in secondary, tertiary markets. So you might have a different perspective on kind of what your business looks like relative to what it might have looked like had COVID not come [indiscernible]?

Yes. We talked about this a bit previously. And I think I can't say -- I'm not going to sit up here and say that COVID didn't affect our business, I think affected every business that's out there for sure. But by and large part, we remain pretty insulated from it. On the wholesale side, which is 90% of our business, we're under a lot of long-term contracts, stable mission-critical revenue for the providers of these services. And in a lot of respects, with COVID, we're in great demand and shifting demand, geographically shifting demand from maybe the central business district out to neighborhoods and that sort of thing that continue to drive activity in that business. So that piece of the business remain fairly insulated. I'm sure with uncertainty in the market that some decisions were delayed. But we continue to perform, I think, very well through that period. And then with our enterprise business, which makes up the other 10% of our business. It's been growing at a pretty good clip, so the 10% to 15% year-over-year clip. And so while I think there was definitely an effect on that part of our business. We saw customers that were out of the office and unwilling to meet or we couldn't get into their locations to install fiber because they weren't letting people from the outside of the company come in because of COVID restrictions or maybe just delaying decisions because people weren't in the offices or what -- didn't know what the future necessary look like. While there was definitely some of that, we continue to grow at a high pace. So if that wasn't there, I think we would have grown at a faster pace on the enterprise side. But it was kind of masked a bit because we grew pretty well through that period, but it definitely affected us. I get the feeling that things are -- I don't want to say they're back to normal because I know certainly, in the community that I live in and places across the country, we have some restrictions that come back in. And that has to have an effect on business. But I think this time around feels a little different for me. I don't know how other people are experiencing it, but it feels a little different. I think businesses are -- seem to be more willing to work through this as sort of adjusted to this mode of operation. And we're not seeing the reluctance to have conversations or to put off conversations that we were through the first wave, if you want to call it that. So it's definitely affected our business. I'm sure it will continue to have an impact on our business like others, but we've been pretty resilient through it, and I think we would expect to continue to be resilient. And our second quarter bookings were, I think, the highlight of our earnings release for the second quarter is really strong bookings. So -- and during that period, we were seeing very strong activity with our customers, and that activity has continued to be high.

So booking activity is at least as good in 3Q to date as it was last quarter.

Well, I don't want to comment specifically on 3Q or 4Q, but I would say generally, activity continues to be high and bookings continue to be strong.

Okay. Great. So it's good to hear that bookings are strong but the actual growth of the business hasn't been great. There have been projects that have been delayed, there has been -- contracts have expired, things have gotten repriced. The -- what should investors expect the fiber business at Uniti to be able to grow at?

Bill, do you want to take that one?

Sure. Yes, I'll start there, Dave. Thanks. So if you look at our outlook that we're providing you look at Uniti Fiber and you adjust for a couple of things. One is we've been winding down this noncore construction business, right? We've been talking about that for several quarters, and we primarily owned that down by the end of last year. That was one impact, right? Again, it added some top line growth, but we're talking about a business that is very low margins and really didn't contribute much to adjusted EBITDA. And so it really doesn't fit together with our core strategy of driving high-margin recurring revenue. So that's one impact to Uniti Fiber's revenue and adjusted EBITDA. The second is with the Everstream transaction, we sold part of our Northeast operations. And so as part of that, certain contracts and customers went from being customers of Uniti to customers of Everstream, so there was an impact there. So if you adjust for those -- mainly for those 2 things, our 2021 outlook at Uniti Fiber implies 6% top line growth -- revenue growth and about 10% adjusted EBITDA growth, which I think compares pretty favorably to other fiber companies. And so I think going forward, the group can be impacted by several things. One is the mix of bookings, right? So if we get some large wireless wins, obviously, that's going to -- those are kind of home runs that are going to add a lot to MRR and the high margin. But there's also the singles and the doubles that we're focusing on in terms of lease up at enterprise. And so again, those are all high-margin opportunities as well. But going forward, generally speaking, I think to think about top line growth in that mid single-digit range is probably the correct way to look at it. And then obviously, this should continue to be margin improvement as everything that we're going after, albeit greenfield builds and the lease up at Uniti Fiber, it's all high-margin opportunities. So the -- our margins at Uniti Fiber should continue to improve going forward as well. The last thing I'll say is, specifically to both Uniti Fiber and Uniti Leasing, we're still in the very early stages of leasing up those assets, right? So a lot of those builds are Uniti Fiber. We didn't complete those builds until phenomenally until the end of last year. And so if you look at the cadence of the bookings and the installs that are coming online there in terms of lease up and incremental yields that we're generating off of those assets, we're talking about incremental yields of 30%, 40%, 50% plus. We have been able to take our initial anchor yield of, say, 7% and almost triple over the last 4 or 5 years, and that continues to grow every quarter as we continue to add on additional lease up. And then you just look at Uniti Leasing, right, the asset that provided the most available fiber that we have to lease to other parties as part of the Windstream settlement, and we're just approaching the 1-year anniversary of getting that fiber. And within that 1 year, we've been very successful. We've doubled our sales pipeline there in terms of total contract value from $500 million to about $1 billion. And we've had -- we had strong bookings activity there. In the second quarter, we expect those trends to continue as well just like in fiber. But again, we're still early stages of leasing up those assets, and we have a very big pipeline that we can draw upon to execute there in terms of adding incremental lease-up. So the growth is coming. And even in 2021, when you look at the non-Windstream second part of the business, that revenue grew 27% and adjusted EBITDA grew 17%. That's what our outlook implies, expected to grow. So again, I'm not saying that's going to be what's going to grow every year, but there is a lot of runway to grow that meaningfully over the next several years and also fiber too as we just begin our runway in terms of lease up there, and we will continue to pursue additional greenfield opportunities as well to add to the portfolio.

Okay. Good. And so I guess then the question is the growth opportunity where it's coming from and how it's changing, I think that -- 1 question, obviously, there's -- a lot of it revolves around the wireless business and the belief that a lot of this is being driven by the need for the wireless carriers to build out their denser macro networks, they're denser small cell networks. Obviously, you signed a partnership with DISH. So could you kind of describe like where is the growth coming from? Is it primarily the wireless business? And is it primarily new spectrum deployments? Or is it something else?

Yes. I think it's -- do you want to take that, Bill or?

No, go ahead, Paul. Sorry.

I was just going to say -- yes, thanks, Bill. So 50% roughly of our business is the is the wireless side of the house, right? So definitely, wireless is a huge piece of our business and is going to continue to be. And our wireless business has been very active of late, strong across all of the products that we delivered to our wireless carriers. And so I think we're going to continue to see growth from the wireless business. You mentioned DISH. DISH is a nice piece to that as well. So we don't like to really talk too much about specific customers, but since DISH mentioned us as one of their 4 fiber optic -- preferred fiber providers. I think it's worth just to mention. And so we have been very active with DISH. We've seen some of those orders come in, and we're expecting a continued stream of orders from DISH as we continue to work with them to roll out their network across predominantly our southeastern market over the rest of 2021, 2022. So wireless is going to continue to be strong and continue to be a big part of our growth strategy. But we want to have a very diverse strategy in terms of our growth going forward. It's not just a wireless story. And I think if you look at our Q2 bookings numbers, and Bill, keep me honest on this, but 65% of those bookings that came in were nonwireless. So our business, as we go -- get deeper and deeper into lease-up, we expect to be less dependent on wireless. But wireless, we expect to be a big part of our story well into the future. But again, we're going after other pieces of business, other wireline wholesale, enterprise wholesale, the hyperscalers with our national network that we now have from Windstream and through the Sapphire deal and others. We are now in the conversation with some of these players in a way that we weren't prior. And we were having conversations with them. We had a network that was of interest to them. But now with this national network of over 120,000 route miles, we're in the conversation in a really big way. So we see that growth coming from a number of sources, not just the wireless side.

So Paul, just a follow-up on that. So Jeff Stoops, the CEO of SBA, last quarter was asked by me, how big the DISH build was? Obviously, DISH has been talking about launching a market in Las Vegas in the coming quarter as they kind of showcase. And the question was, is there more to it than that? And his answer was that he saw that the build was very broad, geographically speaking and not concentrated with -- strictly speaking, within the Nevada confines. The mere fact that -- it appears that you're doing business with him in the Southeast, for instance, would suggest that it's kind of a confirming data point that there's something meaningful happening here, despite people's suspicions that maybe Charlie isn't really very serious about undertaking a national wireless build. How would you kind of come down on the side of either seriousness or lack thereof in terms of DISH's commitment to building a real network in the world?

Yes. I mean I think from our vantage point and NRC, we're -- we think they're very serious. I mean we've got a number of active conversations with them. We've got real orders from these guys. And I can't -- and I don't want to speak very specifically about their strategy or to speculate as to exactly what their intent is. But I know their activity with us is strong and is real. I mean they are looking to deploy as quickly as they possibly can, which makes a provider like Uniti attractive to them. They don't have 2 to 3 to 4 years to wait to have a provider come in, in greenfield markets and overbuild. I mean they're looking for real solutions today. So where we've got these embedded markets where we've been doing fiber-to-the-tower since 2005 or prior and have this embedded base of on-net towers across our Southeastern markets. That's very attractive to DISH in terms of their ability to move quickly and deliver services quickly. And we see that as their primary driver for their interest in Uniti and that to me says there's some serious mess in what they're trying to do that they're out here actually trying to do something real and it's not just smoke and mirrors. I certainly don't want to comment too far on their strategy, but we definitely are excited about the opportunity, and it's from our vantage point, it's a real opportunity and will have a meaningful impact on our numbers as we go forward.

Well, we've got 10 seconds left. So you've got a lot you want to get off your chest on the DISH strategy, just go right ahead. But we'll get that next time. I really appreciate you guys being a part of the conference this year. We ran out of time. Obviously, there's a lot more to talk about. But Paul, again, congratulations on the new job. And thank you for being a part of this. And Bill, of course, as always, appreciate it. And good luck, and we'll talk soon.

Thank you, Dave. It's a pleasure being with you. Appreciate it.

Yes. Appreciate it.