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

Great. Good afternoon, and welcome to Day 2 of Cowen's 50th TMT Conference. My name is Greg Williams. I cover the cable, satellite and telco sector here at Cowen. Joined today by Uniti, Ron Mudry, the Chief Revenue Officer; and Bill DiTullio, VP of Finance and Investor Relations. It will be a 30-minute fireside chat. So without further ado, let's get started. Thank you for joining us. Ron and Bill.

Thank you.

Thanks very much.

Okay. the first topic I want to discuss was M&A. You talked about -- and more specifically, you heard the Windstream's breakup in terms of separating the assets at least financially. Could you provide any updates there?

Yes, I'll start on that one. I mean, really no updates. If you've been following us for the last several quarters, we've been saying publicly that we've been evaluating strategic transactions that we can do that not only unlock value, but do it in a tax-efficient manner. And so we've been -- one of the things we've been looking at is potentially separating out the assets. And so given that work that we've done and discussions we've had, we feel highly confident we're able to do that. And we feel that there's a more likely chance that we could do something along those lines, than we cannot. But exactly what the exact structure of that would look like or the exact timing, that's to be determined. Obviously, internally, we have a preferred structure and a rough guideline of when we need to transact on something. But obviously, from -- a lot of different reasons, we don't want to really share that publicly as a lot of different parties that are listening and following it. So we feel highly confident we can do something along those lines and separating the assets, what we're really focused on is potentially separating out the ILEC assets. There is a good cash flow to those assets, but they're not really strategic to what we're doing at Uniti in terms of serving enterprise and wireless customers. And so we think there is a way to unlock value there, but we're still doing that work and still having those discussions.

And when it comes to serving those enterprise and wireless customers, has the public conversation or the saga with Windstream and M&A, has it been a distraction with customers?

I would say no, okay? I mean when there was something in the press, we would basically discuss it directly with our customers, and it seemed like we then moved right on to business as usual, in my opinion. And I think if you take a look at our booking results over the last 4 quarters, that kind of indicates that customers are confident in our strategy and our execution and so forth. Our bookings are up 60% over -- in the last 4 quarters over the prior year. And I think that's very important. And the other thing I would put out there to talk about how customers feel about Uniti. We signed 31 new logos in that same period are first-time customers, basically during that period on the wholesale side. And those are typically larger customers that you've got to negotiate a master service agreement with before you can take the first order. And I think those kind of customers really vet you very closely and so forth. So I think that, again, is a good indicator of the confidence they have in Uniti.

Right. I make sense. And I definitely want to talk about the bookings strength. But before I do, I do want to touch on M&A a little bit further. In M&A, maybe on the flip side, if as an acquisitor, what types of assets or geographies would you be interested into augment the business most? What's on your wish list?

Yes. I think, again, right now, we're focused more on this transformative strategic stuff. But at some point, either we'll be successful on that or we won't. And at that point, we'll turn our attention going back to more of the small tuck-in, bolt-on types of acquisitions, and we'll make sure we clearly communicate that once you get back to focusing on that. But types of assets, Greg, it's really no different on the ones we've been talking about. You see there can be assets that are either going to further densify or expand our existing footprint in the Southeast it fits into our fiber company. We're not necessarily looking for a platform company. We have a good platform company today, but anything that can expand and densify those -- that network, I think it's something we would look at. And then on the leasing side, and Ron, feel free to add on. But we would look additional sale leaseback, up-co, prop-co on a national basis, again, good assets with a good tenant quality, credit quality tenant that we get a good yield on and maybe have access to additional fiber that we could lease up.

Yes, I would just add that, obviously, in or adjacent to our Southeast network makes the most sense. But there's also other geographies where we have a lot of dense dark fiber that we haven't lit yet like the Midwest and really the central time zone is a good indicator of that. Where we have a lot of fiber that could be helpful if we were also to do an M&A transaction up there. And then the other thing is our national long-haul network. We're seeing a lot of growth in demand for dark fiber in our national long-haul network. And I think the assets that we acquired both through Lumen with the acquisition of their divested assets. And then the Windstream settlement have really positioned us to be a new player in that long-haul market. And if you look at the growth event, we have a slide in our IR package that talks about the demand for North American dark fiber is going to go up a CAGR of 10%, $4 billion by 2030. So we think that's another area we want to invest strategically in.

And I want to talk about the sale-leaseback opportunity. I figure with rising rates, recessionary pressures, potential inflation, with the pipeline of sale leasebacks in that funnel actually increase. Because the way I look at it is operators that are struggling and the access to capital would get more challenged, they could turn to you. And plus, they can pay you a fixed fee, and that would be good for an inflationary environment.

Yes. So I pitched a lot of sale leasebacks, right?

Yes.

And with the low yield cost of debt and lenders having a wide appetite for high leverage, it's been a challenge. That's been some of the pushback that we've had on the sale leaseback opportunity. So as those things are changing, obviously, that's going to make the sale leaseback and more a better opportunity for operators. And I think more importantly, if we can combine strategically where we have available dark fiber assets that we can combine with the sale-leaseback financing, that can really be a differentiator as well. And I think that will be an opportunity in this upcoming environment.

Right? So sales like plus some dark fiber. What kind of customers are you pitching into? What's this typical kind of customer that is attracted to this?

Something that's growing that needs capital. I would say it's traditionally more the medium-sized companies, regional carriers and so forth that are looking to later growth table.

Cable or...

More telecom fiber operators.

Got it.

Traditional fiber commercial operators. Now on fiber-to-the-home operators, we're seeing good middle mile opportunities to support their initiatives.

Got it. And as promised, we'll talk about booking strength here. Armed with the Windstream acquired assets and Uniti continue to put some solid momentum, a near million MRR bookings for the last few quarters. Maybe help us understand the demand, maybe we'll start with customers. 5G momentum seems to be going strong. Will the strength continue? Or is it too much incremental builds and you're looking for more lease-ups. Help us with the 5G momentum and your mix of wireless customers because you've always tried to go towards enterprising and wholesale but not so much the 5-year view on purpose, but maybe you can help us with that.

Yes. I'll start with talking about more of the band we're seeing on the Uniti Fiber side, and then I'll let Ron speak on Uniti Leasing. But yes, Greg, on Uniti Fiber, I mean, if you recall, over the last couple of years, we had built out these large wireless networks. A lot of the acquisitions we did back in 2016, 2017 to create that fiber platform company in the Southeast. All those companies had large projects undergoing. And even then after we did those acquisitions, we still had builds undergoing. And that was a lot for the eventual rollout of 5G and just to further densify those networks in the Southeast. And so we've made our -- we've built out those networks, and we completed the majority of those build-outs by the end of 2020. And now really the focus turns to leasing up those networks, right? And so part of that is leasing up with second, third additional tenants, wireless side, again, 5G, small cells, we're seeing good demand there. But if you were to look at the mix of bookings over the last several quarters, majority of those bookings in most quarters has come from non-wireless customers. So enterprise, health care, government, schools through the federally funded E-Rate program. And so really, that's been our strategy and the Uniti fiber side is leasing up our networks, leveraging the existing plant with non-wireless opportunities. And so when we did those anchor builds, we targeted 5%, 7% plus anchor yields. And so we got about 7% of those major wireless projects. And through that lease-up over the last 4 or 5 years, we've doubled that yield to a communal yield of about 16% because the stuff that we're leasing up that's coming on with 20%, 30% plus incremental yields. And so even when you layer on -- when we did the Uniti Leasing, now you're up to like 20%, 21%. So we've tripled the initial anchor yield over the last 5 years just to release up alone. And then I'll let Ron talk more about the initiatives that we're doing at Uniti Leasing.

Yes. So on the leasing side, first of all, we've had a tremendous year in the past 4 quarters. Our bookings doubled on the wholesale side there. And a lot of that was led by our traditional work with wireless carriers, obviously, strong demand from DISH and the other wireless carriers. But we also had a good shot in the eye with all the new assets that we acquired in the Windstream settlement and bringing them to market and really be able to get traction in the sales funnel there. And that's mostly on the long haul and regional side for dark fiber. And it's really coming from all different segments, okay? We're seeing good demand from hyperscalers that need to high-count fiber to get to unique data centers, cable landing stations and so forth. International carriers, we might talk about that a little bit later in more detail. We're seeing a lot of demand from them and really MSOs, regional carriers, it's across the board. So the other thing that we've done recently is we've just introduced our private wave channel, which is a new product where we announced a large 3.2 gigabit anchor sale. And that's attracted a lot of interest from carriers and this is an opportunity for them to take a certain number of channels across our lit backbone system and be able to get higher capacity through it. So we expect more growth there as well.

And that's a lit service private wave channels. What are the products that you're typically leasing? Is it dark fiber, point-to-point...

On the leasing side, it's mostly dark fiber. And as point-to-point, although they're put together in larger networks and so forth depending upon the customer's particular needs, sometimes there's a metro fiber ring that we'll be doing. And on the lit side, that's really been outside of the private wave channel, really been more back offer wireless carriers and traditional business in the Southeast.

Got it. And you do have escalators sometimes on these dark fiber IRUs. In Windstream, you've got a small like 0.5%. Do you typically have escalators of the other dark fiber IRUs that you sell to customers? And at what level as we think about inflation, can we make it CPI adjusted? How do you think about possibly flexing that?

That's interesting. Yes. We do typically have escalators on the dark fiber contracts. That's pretty traditional. And we actually have some already that are tied to CPI indicator, but most are fixed one in the past because inflation hasn't been that way. We'll have to see how the market goes. But obviously, with the inflationary pressure, you may see more of that in the future.

Got it. And Bill, you mentioned enterprise coming from a couple of verticals, government, health care. What type of services are they typically getting? Is this dark? Or is this lit services? And how would you think about enterprise as we enter a potential recession?

Yes. Good question, Greg. I mean, most of the services we're selling to enterprises are lit solutions. So it could be -- we don't -- we tend to try to drive customers towards higher bandwidth, and we don't really want to sell low-bandwidth products. So we're usually starting at least with 25 meg plus in terms of Internet products that we're selling to our customers. But in most cases, the enterprise customers are taking a lit solution. And we do have other customers. It could be a school or a governmental that wants to either lease fiber from us to create their own WAN network. Or again, we may be providing a combination of both lit and dark solutions. So it varies. But mostly on the non-wireless side, it's primarily some kind of blip solution. In terms of a potential impact from inflation or recession as it relates to enterprise customers, we really haven't seen a slowdown in our markets, again, we primarily operate in Tier 2, Tier 3 markets. So a lot of these markets have been underserved for some time or the offerings that they're getting from their incumbent provider are not as robust as what we can offer at competitive pricing. And so we really haven't seen a slowdown there. In fact, with -- during the whole -- the pandemic, COVID pandemic, we saw new use cases for our services, and that really hasn't slowed down either. So you're seeing more of a telemedicine and virtual. So those are still things that are playing well in those markets. And so we still see strong demand from most of our enterprise customers.

The other thing I'll say is that we've been expanding our enterprise footprint basically rolling out our enterprise services and products across new markets, okay, as we're basically taking the companies that we acquired a few years ago and replicating that across the system. And so that means we're adding salespeople as well, and we are a new provider in certain markets. And so I think that's also going to continue to spur our growth for a while.

Yes, that's a good point, actually. So we're in -- we have enterprise salespeople in about 20 metro markets today, but we have fiber available in over 300 metro markets. So I'm not to suggest that we're going to go out and hit out 100 markets by the end of the year, but we have a lot of runway to further deploy enterprise salespeople there. And we do expect through 2022 to expand into new markets and add to that. But the opportunity set is a large one there.

Got it. And that's interesting. I want to talk about that and maybe how we think about margins if you're hiking up the sales. But before I do, I want to touch one last thing in terms of bookings. I came back from Connect(X) conference last week and we got the indication that small cell growth is rather muted. We've been waiting awhile for small cells to take off. It doesn't seem like that's affecting you guys. But maybe it's a matter of perspective, you're in Tier 2, Tier 3 cities and seeing strong demand, you're riding those 14 projects in the Southeast. But can you talk about if you're seeing a muted small cell growth here?

Yes, I think it goes back to -- to answer your question, we aren't. And I think it goes back to my earlier comments that we're in Tier 2, Tier 3 markets. And I think to date where you've seen most wireless customers roll out small cells have been mostly in the Tier 1 metro markets. And now they're starting to come more into these Tier 2, Tier 3 markets that we're active, where we're actively building or have built out and we're seeing the activity for that. So a lot of the markets that we're seeing small cell growth, the college towns, these are population centers that continue to grow. And so we really haven't seen a drop-off in demand. I mean, again, we also have a small set. I mean we have about 2,500, 2,600 small cells today, either that are active or in our backlog. So again, we're not a huge player in that market, but it is continuing to grow.

The other thing I would say is that we provide a lot of front haul fiber services for small cells where the carrier is self-performing the turnkey small cell installations. So where others may be reporting a slowdown in the turnkey small cell business, we still see good demand for front haul for small cells. And it just depends on what the customer needs to do. They're densifying, adding new macros, putting additional carriers on the same tower and so forth. And so I think our wireless demand continues to be stable.

Got it. And you guys touched upon DISH, and I want to expound on that a little bit. Kenny Gunderman, CEO recently noted that DISH's initial ramp is being more focused on Tier 1 cities to meet their June '22 deadline this month. So it hasn't really materialized Uniti thus far. So as DISH comes online more meaningfully in Uniti markets, how should we think about the structural ramp-up in bookings activity? What's the scope of business for DISH?

Yes. Look, the relationship with DISH is very strong, okay? And I think Kenny's comments are fair, but I think he's really thinking more about the installation cycle. DISH is focused on turning up those sites in those Tier 1 markets. We received a lot of bookings from DISH, okay, that weren't the priority in the past to turn up, and now they are. The backlog is now flowing into activations, and that will continue. But DISH is now working on the '23 deployment, right? 2023 deployment, that should result in additional bookings in 2022 as we get ready for that.

Got it. And what is that bookings to install duration in that cycle when you think about?

Well, it really varies, okay, because we're focused on our existing markets on and near net sites. So there's not a lot of construction activity and things that we need to do. It's really coordinating more with DISH in terms of when they need the site ready and when they'll be ready for us to have the fiber there, and that's what ties into their coverage commitment.

Okay. So bookings are going strong. But on the flip side, churn, particularly Sprint churn, it's a bit lumpy. And there's Sprint churn which is driving higher anticipated ETL fees. Can you help us understand the amount and cadence of the remaining Sprint churn?

Yes. So what we said there is 2022 will be a peak year for that legacy Sprint churn as part of the TMO acquisition. And so as you mentioned, Greg, you're seeing recurring revenue churn off in 2022, but it's being offset by ETL fees that we're receiving, early termination liability fees for the customer disconnecting that site before the term is up. And so when you look at our 2022 guidance, we're still adjusting for the Everstream transaction, we're still -- we're guiding to about 6% top line growth, 8% adjusted EBITDA growth. And when you look at the core -- the recurring versus nonrecurring, the recurring is essentially flat. I think it's 1% or $1 million year-over-year. So essentially flat, but most of that growth is coming from the nonrecurring. And that's an anomaly this year because of that churn. So -- and going forward, we expect top line growth in the mid-single digits, but it's most likely going to come from core recurring revenue versus nonrecurring. It's just mostly coming from nonrecurring this year because of this churn. But what we said in the past is we expect the total churn, Sprint could be $5 million to $10 million. Again, 2022 being a peak year. But we expect most of that churn to be offset by the ETL fees plus new DISH revenue that will eventually come on. So to Ron's point, the bookings have been strong. Our '22 outlook doesn't really account for any billable revenue from DISH. It's more of a 2023 event. But when all said and done, we think that churn will be offset by those 2 things.

Got it. And Ron, you mentioned international carriers before. How big of a portion is that of your business? And what's the opportunity here? Help me contexture us what international carriers are doing in year?

Sure. Yes. So I think there are tremendous opportunity. Right now, today, they're not a large part of our business. They're only about 10% of our sales funnel on the Uniti Leasing side right now. But we have signed a few key deals lately and getting a lot of traction in that space. It seems to me that the international carriers seem to be beginning a cycle of upgrading their North American backbones. And some of them are shifting from lit services to bringing on dark fiber and so forth. And that's created a lot of demand for us. And those are big decisions for them because they're long-term planning cycles, they got to migrate traffic, get colocation, and things like that. So the initial sale takes quite a while. But once you get that MSA in place and you take that first order, then you see a lot of follow-on orders as these carriers are working their way across the country segment by segment to upgrade their North American backbone. As an example, we're in year 3 of a 5-year program with an international carrier that we signed early on to do just what I just said. And we continue to see strong bookings from them over the past few years. And as they complete that, we expect that to continue. And that will happen with other international carriers as well.

Got it. And you both mentioned the decision between anchor builds and lease-ups. They both have their pros and cons. Anchor, you need to grow with your lifeblood, but lease-ups, high margin, better CapEx efficiencies. How does that decision process work? If you have a couple of deals in front of you, is there like a committee deciding on which projects to go after? And is it intentionally veered towards lease-ups, your sales folks get paid more, et cetera? How does it work in terms of decisions to go with either or?

Sure. Yes. Well, look, we've been focused on lease-up as we've said for a while, I would say that lease-up is ingrained in our culture, okay? The salespeople are looking for lease-up opportunities and so forth. But at the same time, we do think that it's important to have a balance of strategic investment and anchor opportunities to expand and then a laser focus on leasing them up after the case. So I think you'll continue to see the focus on both. But obviously, we prefer to do more lease-up, which is capital efficient and higher margin. In terms of how we look at those, we have a few different methods. I mean, within our sales process, where we're betting these opportunities and so forth. Our grant of authority in terms of what needs approval as things require more CapEx and move more towards an anchor type yield, they require a higher approval. But at the same time, you can't take forever, you got to get your quotes back to your customer in a reasonable time. So there's a balance there. And then we do have an investment committee that looks at things for certain larger deals, and they have a very broad perspective across where we're deploying our capital. And I think we want to continue to focus on increasing the lease up, but we will have a healthy balance of still investing in some anchor transactions that will help us to expand the inventory and be able to continue that lease up further down the road.

Right. And maybe that is a segue to my next question, which is capital intensity. You want to get down to 30% range. And like you said, if lease-ups are engrained in your culture, that will help to get there. Can you help us with the time line of when we'd reach the 30% levels?

Yes. So when you look at the -- on a total company-wide basis today, net CapEx is around 30%, it's around 33% and so at fiber to -- we've been talking about the lease up, you've seen the capital intensity steadily come down at Uniti Fiber. So at the height, when we were doing all those build-outs, you're probably talking to capital intensity at just Uniti Fiber alone, 50% plus. Now it's around 40%, a little bit below that. And it will eventually continue to come down. And we think the run rate going forward will be in that mid-30%, 35% range. It's really going to be a function of how many of these greenfield bills that we go after. So as I mentioned before, at the height of it, we had 15 of these projects going on. We're probably not going to get to that kind of point again where we have 15 ongoing projects. We're going to be very diligent about which greenfield builds we go after. We want to make sure that they not only have attractive initial yields but that there's significant lease-up opportunity there. And so we said this before, we could go -- there's not a demand issue. We can go on there and build many different markets. But we want to be very disciplined in the markets we're going after to make sure that they're going to be the highest yielding in terms of returns there. So we'll continue to pursue a handful of those times while really we do need to focus on leasing up the networks to build because we build, we put a lot of -- hundreds of millions of dollars into these networks. And so we have to "sweat those assets" and get good returns out of them. And then really when you look at the incremental returns that you can drive on that lease-up, that's where the really attractive economics are. So it's finding that right balance. But I think when you look at our total CapEx today, on a company-wide basis, which I think is the appropriate way to look at it, we're in that 30%, 35% range today.

Got it. And it sounds like a good setup then in '23 and beyond if you focused on lease-ups here with the higher margin, lower CapEx efficiencies again.

Yes.

Are you facing supply chain issues? Any change in the messaging around any bottlenecks or as we consider chip shortages, optronics equipment?

Yes. I mean we're not immune to that like everybody else. I mean obviously, we're seeing prices increase. In terms of actually like our biggest -- where we see increase is on the equipment side, again, we've worked through a lot of the build-out. And so even on the newer projects that we are building out, we try to buy the equipment ahead of time. There's a lead time even know the lead times are also increasing in terms of getting that equipment. So we saw that coming. So cases where we could, we tried to lock in price -- existing pricing we have before prices went up and also by anticipation of deployment. So I think we've done a good job of that and navigating that difficulty. But obviously, we're seeing prices increase. In terms of labor, itself, we don't have a -- we're not seeing a supply issue in terms of being able to secure labor, especially in most of the Southeast markets, we're still seeing available labor there. However, the cost of labor is going up. So where we can, we try to pass along those costs to our customers. Obviously, we're not going to be able to push all that through. But it is going into the modeling and everything that we're doing when we look at these projects to get the appropriate returns, which without adjusting our return thresholds, we're probably just getting more particular in which projects we want to go after. But we are seeing some rising cost pressures, but we're taking steps to kind of mitigate that as much as we can.

Yes. It feels like the labor issue can get worse before it gets better. I mean, you can train a lot of these folks to trench fiber. But with the looming Bitan IIJA money is chasing a finite labor pool. Any concerns there and how you can mitigate that?

Yes. I think on that front, I mean, again, we don't expect -- in terms of RDOF and the infrastructure bill, we may be recipient to that in terms of some of the projects we're after, but it's really not going to be a direct impact for Uniti where we are going to see an impact is indirectly through customers that want to buy services from us. So again, I think the projects that we're looking at, we want to leverage our existing assets as much as we can. So in the markets that we're potentially deploying there, I think we have -- we don't see an issue with getting the appropriate amount of labor that we need. Again, rising costs will go into our modeling and how -- which projects we want to go after. So I don't think it precludes us or we have a great concern about the types of projects we can do with just kind of going to become more particular about which ones we want to go after.

Got it. I wanted to discuss competition. You typically noted that in the Tier 2 and Tier 3 markets, the competition is typically incumbents, cable and telco and they're rather sleepy for lack of a better word. Is that the same today in terms of competition? I would figure what the influx of PE and infrastructure capital, just thrown into the comment for space, there'd be an encroachment of competition. I'm just curious to hear your thoughts.

Yes. Look, I would say that competition is stable, okay? I mean obviously, you have competition that varies from market to market. But I wouldn't say that we've been affected by the large influx of capital that you're saying is bringing in a lot of new operators. I think a lot of those new operators are really last mile providers. And obviously, in particular, fiber-to-the-home, right? It's been a big one. And we're finding that we benefit from that now. We've seen in the last few quarters where a lot of these new entrants that are coming in to build fiber-to-the-home, they need middle-mile services from us, either connect their networks together, their metro networks together or to reach an Internet hub. So we view that as a catalyst for growth, basically.

Got it. And with that, we're about out of time. Ron, Bill, thank you very much.

Okay. Thank you.

Thanks, Greg.