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

Hello. Thank you for joining us, everyone, this afternoon. This is Tim long here at Barclays. I'm joined with Alyssa Shreves on my team. It's our pleasure to have a few members of the management team of Uniti with us this afternoon, Paul Bullington, CFO and Treasurer; and Bill DiTullio from IR and Treasury. So thank you, guys, for joining us today. Happy to have you here and maybe we'll just dig into some questions here.

Paul, maybe to start with you. I mean you've been in this fiber business a long time, a few decades I think. Can you talk about how the value proposition of fiber has changed? We also cover the data centers and the towers and there's always a little bit more confusion on how people should look at the fiber business. So would love your take on the value proposition, how you've seen it evolve and what you're seeing for the future there?

Sure. So first of all, thanks Tim. I appreciate you having us. It's great to be here and great to be with everyone out there. So yes, it has -- I guess we've come a long way since I was a part of a group of a couple of guys that didn't have any telecom experience and had the -- I guess we were just dumb enough to start a telecom company a few days -- a few decades ago and it's been a pretty wild ride. It's been an interesting industry for the last couple of decades for sure. Overall, I think the value proposition for fiber has been remarkably stable over the last couple of decades. I mean if you need high bandwidth, highly reliable services that can scale nearly infinitely, I think fiber is the obvious choice. I think what has changed remarkably is the demand for -- is customer demand for those services over time. So back when we first started building fiber a couple of decades ago and you talk about a Tier 2, Tier 3 market like we focus on in the Southeast, there was only a handful of customers that could justify or had a need for fiber back in those days. You had maybe a few carriers that had a presence in town, you had maybe the hospital system, you had the university system and maybe a couple other kind of specialty players and that was about it. And you fast forward to today and virtually everyone needs those sorts of services and everyone is a candidate for fiber-based services. So I mean even in those early days, I mean the wireless guys really weren't using hardly any fiber except for their massive aggregation sites and people around the industry would tell you that the economics of fiber to the tower wouldn't work. And look where we are today delivering 10G to towers. It's pretty amazing to see how far we've come. And so the proliferation of the cloud, 5G, the Internet of Things; all those things that we read about that are driving bandwidth and driving the need for fiber just contributed to all this. And you get all the way down to the lowest end of the spectrum, even that mom-and-pop retailer out there that knows that if their service is down, they can't process point-of-sale transactions. Even somebody like that is a candidate for fiber and understands the value proposition of fiber reliable sort of 5/9s type of reliability and availability and bandwidth. And then COVID, Tim, has just accelerated a lot of those trends. I recently read a study, I think it was a McKinsey study, where they talked about we had multiple years of progress and digitalization of the economy and only about 8 weeks in 2020. So some of these recent things like COVID have just accelerated remote work and some of the things that are driving the value proposition for fiber forward are interesting.

Okay. Great. It's good backdrop. Maybe can you talk a little bit about kind of -- maybe broadly about the Uniti portfolio? Where do you think the differentiation lies? How does the competitive landscape work with other cable fiber providers?

Yes, sure. So we sold our Uniti Towers business in 2020 so we are very much a fiber-focused business. And competition in the fiber business is a bit like real estate, it's kind of location, location, location, right? So competitive dynamics can be very different from one market to the next. You may have 1 ILEC in 1 market and then in another market adjacent to it maybe a totally different ILEC and the same thing goes even more so for MSOs. So at a market level, it's very different. It's the same way on sort of national network and national routes. If you have a unique route, then the competitive dynamics are very different. But it's -- I'll try to get a little bit more useful rather than just saying it depends and I can talk about it a little bit differently in terms of what we're seeing in the marketplace. So in the enterprise market space, competitive is very dependent on -- so you would typically compete with the ILEC, you typically compete with the MSO in that marketplace and then a couple of maybe independent providers of fiber. And so there's really a competitive advantage we think to having a regional network when you're talking about those sorts of deep services to either wireless providers or wholesale or enterprises. If you can serve a customer's need in multiple markets regionally with one stop, I think that's a competitive advantage and one of the things we think is very strategic about our regional network. When you're talking about our national network so on the leasing side of the business, that very much -- we're competitive against those other national players pretty much in a more straight-up fashion across the board. But even then, like I said, competition can be very different depending on what routes you have. And one of the great things about our business as it currently sits on that side of the business is with the Windstream fibers that we now have access post the settlement in 2020 to -- we got exclusive access to market nationwide really made us a national competitor in that space really overnight. And the ability that we've got to come to market with those fibers plus other fibers we acquired like the fibers we acquired out of the Lumen merger that the DOJ required them to divest of. And then you couple that with the Uniti Fiber footprint across our Southeast, it's pretty powerful. We can deliver network and solutions that wasn't available before and that is really unique in the marketplace. So I think those are a lot of the factors that we deal with from a competitive standpoint.

Okay. Maybe could you talk a little bit about synergies and how the fiber business and the leasing business can kind of play off each other and how have you kind of rejiggered the sales force to maybe take advantage of this?

Yes. No, I think you said it right there. I appreciate that question because they really do play off of each other. And our market approach is very much to come to the customers that we deal with in that segment of our business as 1 network, as 1 seamless solution. It's not a oh, that's a leasing solution, you got to talk to people over here. Oh, that's a Uniti Fiber solution, you got to talk to people over here. It's really 1 team, 1 approach, 1 network and that's important for the customer to be able to have that. Kind of like I said previously, it's a unique footprint. It's something that other folks can't offer, other competitors can't offer. So when the Windstream settlement happened and we got access to those thousands of route miles across the country, it really made us a national player overnight in that market. And so whereas prior to that, we were in the conversation with national carriers, international carriers, the big MSOs, the hyperscalers and FANG customers in terms of serving their needs nationally. It was more marginal in terms of our ability to serve their needs because we were very focused in a certain region of the country. But now we've got a national network and so that's a huge opportunity for us and something we're very excited about. So we reorganized ourselves from a sales force perspective to be able to go out and attack that opportunity. So whereas prior to the settlement, we had 1 person focused -- 1 sales rep focused on selling to that group, now we have about a dozen salespeople focused on it and like I said, it's very much an approach of 1 network solution. We have the ability to leverage all of our fiber across the different networks to deliver solutions to customers and customers are responding very well to that. The response to what we're bringing to market as a part of that offering has resonated well and the demand has exceeded our expectations there. We announced last quarter a new deal -- first deal with a new name, kind of a hyperscaler FANG customer. I think that's the type of business that you're going to see a lot more from us going forward because we now have that focused sales force and that national network that we can deploy to deliver solutions to customers.

Okay. Great.

Paul, I just wanted to kind of dive in on your enterprise versus wireless customers. Last quarter I think the fiber segment had its highest level of quarterly enterprise bookings ever. Can you just talk about the strategy in pursuing enterprise? And just kind of on a follow-up on that, is there heightened risk in pursuing enterprise versus the major wireless customers and kind of how are you guys managing that risk?

Thanks for that question, Alyssa. I mean that's right. We reported record enterprise bookings in Q2 and Q3 this year and that business is really running on all cylinders right now and we're excited about the opportunity in the enterprise space. Enterprise sales aren't new to us. I was talking about my history in the business earlier and I think the first enterprise sale that I was a part of -- with the legacy company I was a part of as now part of the Uniti Group -- the Uniti Network was in 2001 and that enterprise customer is still an active customer with Uniti today. So it's not something new. But what's new is we've taken the legacy networks that we've pulled together as a part of the acquisitions we've made over the years and we've basically consolidated those networks in a way where we're delivering the same strategy, the same approach, the same product set across all of those networks to our enterprise customers. And then we focused our leadership and we've expanded our sales team around going after the enterprise opportunity. And the enterprise opportunity for us is it's the lease-up that we talk about so often in the Uniti Fiber business. So we go in with the strategy of an anchor build in a market and we build fiber for that anchor customer who sort of supports our entry into that market or expansion in a market we're already in. And then where the real return comes in is our ability to go and layer our other services to other customers over that network. And there are other wholesale and wireless services that we lease-up and layer over those anchor networks. But enterprise is a big piece of what we anchor -- we layer over those networks as well. And so it's a big piece of our strategy going forward. Even though enterprise only makes up about 10% of our revenue in total, it's a big piece of that lease-up strategy. And the bookings that you're seeing, that traction that we're getting and that success we're having in the market is I think a manifestation of that lease-up strategy and the fact that it's working well. And we go to enterprises with high bandwidth fiber products and services just like we go to our other market. So we're coming into those enterprises with these mission critical services like dark fiber, like wide area network lit solutions, SD-WAN, dedicated Internet access, voice services and then a few managed services over the top of that, which makes a highly valuable proposition for these enterprises that like I said earlier, there are more and more and more of them every day that see a reliable highly scalable network as mission critical for their business. And so we're having a lot of success in doing that. And we're also I think a top tier best-in-class delivery of those services and I think that is manifested in the low churn rates we have. So in our enterprise business, our churn rates are less than 1%. A lot of the industry is higher than that and enterprise is often thought of as a high churn business. For us, it's a very low churn business and I think that's the manifestation of that best-in-class service delivery of an all fiber optic delivery and the highly reliable services that come over there and our ability to serve those customers well. So it's not new and it's something that we're just increasing our ability to do well and you're seeing the results of that. And your follow-up question, Alyssa, is about are we losing something on the wireless side because we're focusing on enterprise. And I would say the quick answer to that is no, not at all. It a both/and strategy and not an either/or strategy. So we're not ramping down our service to the wireless industry, we're not ramping down our sales, we're not ramping down our efforts to go and deliver more and more services to the wireless industry. Those guys are critical to our business and make up a huge portion of our revenue and hugely important to our strategy going forward. This is the enterprise and doing it well is not competitive. I mean it's different. It's a different sales team. It's a different support team that's going after those. It's to some degree different products and services and people that support that. There are some overlaps in a lot of the network and the operations people that take care of the network and run our backbones and that sort of thing are the same sorts of people and we've got to make sure those are staffed well to handle both the wireless demands and the enterprise and other wholesale demands as well. But it's definitely something that we've done both for a long time. We've done both well for a long time and we don't think it takes away from our ability to serve the wireless industry in the least bit. It's complementary.

That's really helpful. And you've spoken just a few minutes ago about all the services you offer and specifically in your fiber segment there, I think there's been a strategy to push from lit services to more dark fiber. How should we expect that dark fiber subsegment to grow taking into consideration that the fiber business is a lumpy business and I think getting dark fiber contracts usually takes a bit longer just due to the nature that they are longer-term leases. Just kind of how should we see that business kind of -- like when should we see it inflect?

Bill, I'm going to let you take the microphone for a minute and talk about that one.

Yes, sounds good. So you're right, we've seen really strong growth within both dark fiber and small cell. Small cell grew over 20% sequentially in third quarter versus second quarter, dark fiber over 10%, right? So seeing really strong growth there. And you're right, we are seeing certain customers -- parts of our customer segments want to move from a lit service to a dark fiber solution, right? And so from our standpoint, we're fine with that because we go from on average a 5-year contract to a 10- to a 20-year contract when we do that. So we naturally organically are reducing churn right then and there if you take out the re-rate risk. But you also create a stickier customer, right, customers tend to stick around for a longer time. So any type of stepdown in kind of MRR on a per connection per circuit basis is going to be more than offset by the additional amount of nodes that we're seeing in these ERPs plus that incremental contract term that we're seeing as well. In terms of growth going forward, I mean we don't specifically talk publicly anyways about segments of what we think the long-term growth will be there although I will say with dark fiber and small cell, we continue to be very engaged with our customers in providing those. We have seen a little bit of a slowdown when it comes to small cells and I think others in the industry have seen that as well. Macro towers continues to be very strong as well. And so I don't want to give an impression that we're seeing any kind of slowdown in wireless growth. By the numbers you can see, it continues to accelerate. I think what's a little bit unique about Uniti as well as our small cell base is still small today and so we are still growing off a smaller base and growing at a very high rate. Now I also don't want to give the impression that we're going to grow small cells 20% plus going forward. But I think when you look at Uniti Fiber's revenues in totality and that's kind of how we think about it over the longer term, I think looking in that low single digits to low to single to mid-digit growth is probably the right way to think about it going over the longer term.

That's really helpful. And just kind of switching gears. You guys have mentioned Windstream and you have the Windstream GCI program as well and I think to date you've invested over $200 million under the program. Is there a specific area in the network where you guys are choosing to invest or is it kind of broad based? How should we think about those investments?

Yes, it's a good question. So how the GCI program works, right, is Windstream is actually the one that's making the investments or deciding where they want to invest those funds. And so the way the program works, Alyssa, is that they will make the investment. They'll actually spend the CapEx and then they'll submit it to Uniti for review and for us to give them the funds back that they spent. And so we have a very robust process in place in terms of how it has to meet certain criteria to be funded under the GCI program. One of those criteria is it has to be in most cases for fiber or fiber related assets. Secondly, it has to meet certain minimum threshold returns. So as long as the CapEx that Windstream spent meets all that criteria in the GCI program, we'll reimburse them for that. It becomes our asset at that time and then on the 1-year anniversary of us funding that capital investment, it will get added to the lease at an 8% initial yield subject to 0.5 annual escalator. And so to date -- you're correct, we've invested over $200 million in that program and to date, most of that investment has been within the ILEC footprint of Windstream and really that is to support their fiber to the home rollout initiative, right? So as we've talked about growing up fiber, putting more fiber in the ground to get more fiber to the home within their footprint, bringing higher speeds. And so most of the investment that they've utilized on the GCI program today has been within that footprint.

And then I think Uniti has begun investing some of its own capital in fiber and I think largely the focus has been on last mile fiber, including fiber in commercial parks and fiber to the home. And can you talk about some of the strategy there?

Yes. I'll start with fiber to the home since we just talked about it, right? So most of our fiber to the home investment is through the GCI program, it's almost -- it's exclusive to the GCI program. Uniti does not want to be an owner and operator of residential broadband operations. But we talked about through other opco/propco structures, we would own the underlying assets and then lease them up back to third party. In essence, that's what we're doing with the GCI program. We're reimbursing them for funding that fiber to the home and then we're getting an 8% yield on it, a very attractive yield and that 8% yield is actually even higher than what we get on our anchor wireless deals, right? But then you turn to that last mile, which we were just talking about building into commercial parks, and that's part of our lease-up strategy, right? So Paul touched on it before. We built out these wireless anchor networks with an anchor tenant secured and now we're leveraging those networks, right, to add on enterprise customers, healthcare, government, schools. And so when we design these networks -- these major wireless projects, we make sure that we would maximize our lease-up and so part of that is looking okay, where are the business parks. Today, we pass over 250,000 buildings that are either on net or near net to our network. So we have the ability, right, to build out maybe 1/4 of a mile up to 1/2 mile, not a lot of build to tap into these business parks or other large office buildings or schools and campuses and drive up, lease-up that by selling these customers either dark fiber solutions or waves or Internet connection, things like that. So that is really the progress we've been making there in terms of our lease-up.

That's quite helpful. I think around 20% of the legacy copper network has now been overbuilt with fiber. How should we see that percentage moving? As we move into next year and beyond, kind of how should we think about the cadence?

Yes, good question. So really it's all going to be dependent on how much Windstream invests within the GCI program, right, because a lot of that copper overbuild, what they're doing in terms of fiber; they're either replacing copper with fiber or putting in -- replacing older fiber with new fiber. But if you look at the 20% today, right, that's grown from about 14% in the time of the spin. So we made considerable headway in just 5 to 6 years there. But then you fast forward to 2030, right? And then if you assume Windstream invests pretty much the maximum amount of the GCI program, we expect that, that 20% will go double at least to 40% and it may even start to approach 50%. But it's really going to be dependent on how much and how quickly Windstream invests into that fiber to the home and put fiber replacing copper.

That's helpful.

Can you talk a little bit about kind of growing the non-Windstream fiber business? How do you see that moving over the next few years here?

Yes, I'll take that one as well. So if you looked at our outlook that we put in our last earnings call and it's been pretty consistent there, we expect that non-Windstream revenue to grow about 27% in '21 versus '20 and adjusted EBITDA to grow about 17%. And really that's coming off again a smaller base and really just this is the first full year, right, that we've had these Windstream assets that we got. As part of the settlement agreement, we got 2.2 million square miles of fiber that we now have the right to lease to other parties. And so really going forward, that's going to be the growing part. We also got a part of the settlement, right, certainly these dark fiber IRU contracts. Today it's about around $24 million of annual revenue. We sold a portion of those when we did the Everstream transaction. But that's another revenue source that wasn't there in full year '20. That's now there in full year '21. And so I don't want to give the impression that again we're going to grow the non-Windstream piece 27% every year going forward. But you look at the sales pipeline on Uniti Leasing, it's over $1 billion, right, and it doubled once we announced that we were getting those 2.2 million strands from Windstream. And so we've had tremendous amount of inbound inquiries and tremendous success in leasing up those assets. In fact when we did the Everstream transaction, we utilized a good portion of those strands as part of that transaction. And so we just announced last quarter we signed on a new hyperscale customer that was taking fiber from us and so again that's utilizing part of that Windstream fiber that we acquired as part of that settlement. So going forward, I think again given the large amount of opportunities that we have in terms of our sales pipeline and again we're still growing it off a smaller base, I would still expect healthy double-digit growth for the foreseeable future in that non-Windstream segment. Although Windstream still represents about 65% of our revenue today and still represents overall large portion of the leasing segment. But that non-leasing set will continue to grow at a very healthy clip here going forward.

Okay. Great. I think we're running out of time. I'll ask one more and you guys can give a shorter answer for this one so you get off the hook a little bit. But obviously there's a ton of M&A activity going on in the broader communication infrastructure space. We're just seeing a lot of activity public, private and you guys have always been active with whether it's M&A or combinations or opco propco. So how do you see fiber overall playing into everything else that's going on and how do you guys fit into it yourselves? There's probably tons of assets that would fit pretty nicely with you as well.

I'll take that one, Tim. I appreciate the question. I'll try to do it justice in short order. So M&A is a very critical piece of our strategy. We are very active in that. It's a strategic imperative for us to continue to grow through M&A and to diversify our revenue stream through M&A. So we're very active in that space. There's a lot of interest in fiber and that's what we're interested in is fiber. We're pursuing M&A deals that would bring fiber assets to the table. We're not focused on other infrastructure assets, data centers or towers. We're very focused on fiber. And we think about those sorts of things in 3 categories. We talk about smaller bolt-on acquisitions, particularly those that have fiber that would be tangential to our Southeastern networks or complementary to those Southeastern networks. We think there are great synergies both on the cost side and on the revenue side in terms of having adjacent networks. So we are very interested in fiber assets that are adjacent to our current footprint. On the leasing side, we're also interested in national more long-haul fiber so -- and we'd be interested in that really across the geographic spectrum here. We're not focused on only the Southeast for that sort of piece. And then we talk about transformational so those would be larger deals that would really move the needle in terms of diversification for us. And there's a lot of interest in fiber today and multiples are high and competition is strong for assets out there. But that's not really new. We've been dealing in a world of high multiples for a while now and Uniti has shown that it can be successful in doing deals in that kind of space. And we're going to look for deals that are accretive to the business. We're going to look for deals where we can get an attractive multiple. And so that requires some more work and for us to put in place are some more proprietary pipeline of acquisition targets. And we're going to continue to work through that. And like I said, we're very active, we're very focused on that. We want to do more deals there, but we're going to make sure that we do deals that are smart and that are accretive to the business and that we don't do things -- we don't set artificial time lines for ourselves to go get things done. We're going to be disciplined in our approach.

Okay. Great. Thank you very much, Paul and Bill, for the time here. Very helpful. Thank you everybody else for joining us. Enjoy the rest of the evening. And thanks, guys. Look forward to seeing you in person soon.

Thanks, Tim and Alyssa. Appreciate you being with us. Thank you.

Thank you. Bye.