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

Good afternoon, everyone. I'm Eric Luebchow, senior analyst covering telecom and communications infrastructure at Wells Fargo, and we're very pleased to be joined today by Uniti. We have Greg Ortyl, the President of Wholesale & Strategic Accounts; and Bill DiTullio, the VP of Finance and Investor Relations. So gentlemen, thanks for joining us today.

Eric, thanks for having us here.

So Greg, maybe I'll start with you. Maybe you could get us started by talking a bit about your roles and responsibility at Uniti and kind of key priorities as we sit here today.

Sure. Happy to. Thanks for having us, first of all, Eric. Happy to be here. As you mentioned, I'm President of Wholesale & Strategic Accounts here at Uniti. So my team is a team of about 17 folks, 2 vice presidents, 2 managed groups of quota-bearing headcount who manage all of our wholesale and strategic accounts. So if you think about, first of all, Wholesale, that would include folks like regional fiber providers, [indiscernible], but also the larger wholesale companies such as Verizon or AT&T, Lumen, the cable companies, large MSOs, the regional guys, all the international wholesale providers we sell to. And then obviously, the wireless, the Big 4 as I'll still call them, and then the content and hyperscale segment, cloud folks Mana. I don't know if you've heard of them referred to as Mana. Maybe you came up with that. But -- so all those folks, it's our largest growing segment to date. But our team's focus really is leasing up the assets that we have. We talk about lease-up on an hourly basis on my team. That's the business that we can turn up the quickest. We can turn it up with the least amount of capital, and it represents the highest margin business for us as well. So we have 127,000-plus route miles across the country to sell, so plenty of fiber, plenty of assets to market out to those customers that I mentioned earlier. And then the most exciting aspect of what we're doing today on my team is rolling out a national lit service across those 127,000 route miles. It's going to be a multiple-year process to light that network. And ultimately, we won't light all of it, but we're trying to identify the key routes where we have the most demand for our customers, Ashburn to Atlanta, Atlanta to Dallas are 2 routes in particular that we announced, I think it was last fall, that we'll be deploying late this year. And so we're always talking to our customers, trying to understand where do they see demand? Where do they need high-bandwidth capabilities? What data centers, do they need connectivity to? And so that's an exciting part of what we do is trying to uncover and unlock those key locations that we need to be in to go and sell things like wavelengths and our new private wave channel service, which is a spectrum product that we're marketing now. So yes, that's our gearing.

Great. That's helpful. So maybe, Greg, sticking with you on just demand. Your bookings have accelerated. You've been at north of 1 million of MRR in the past few quarters. Your wholesale bookings, I believe, have doubled in the past year. So maybe you could talk about where you're seeing the most growth across mix of customers and talk about parsing out between your leasing business and your fiber business?

Sure. Yes, happy to. So the -- like I mentioned at the top, the largest -- the fastest-growing segment of our business is the hyperscale cloud content folks. We have some really unique assets when you combine, first of all, the Uniti Fiber network, mostly in the southeastern United States with the Lumen long-haul routes, about 12,000 route miles of long-haul fiber that we acquired a few years back when CenturyLink and Level 3 were combining, and then obviously, the Windstream assets. And so you take all 3 of those assets and combine them together, and when we talk to the hyperscales, Mana and international providers, international cloud providers are interesting. Those assets represent some really unique solutions for them, provide diversity, thriversity, quadversity that those kind of companies are looking for into these key data centers. So that's, far and away, our fastest-growing segment. And I would say that most of that business is focused in what we designate as Uniti Leasing. So all of our Windstream fiber assets, our Lumen fiber assets that we acquired, those sit within our Uniti Leasing business. And so most of what we do on that side of the house is for the content hyperscale segment as well as the international players. There is some activity with regional fiber providers, cable companies, but I would say that the hyperscale segment makes up the vast majority of that revenue. And then on the Uniti Fiber side, again, that's the very, very dense metro and regional fiber from Texas to Georgia and Florida and everywhere in between. Most of the growth that we're seeing in that footprint is with our wireless segment. We've talked a lot publicly about DISH and the key role that we're playing in there, rollout of a new national network. So we're continuing to see a lot of activity out of DISH. They're in the process right now, as you probably know, of putting together their 2023 plan, and we're going to play a huge role in that. And it's right about now that they need to start making decisions about where sites are going, who's going to do the backhaul, where are they going to aggregate the traffic. And we're in a great position to experience a ton of growth here through the latter half of 2022 with DISH in particular. But we've done really well, actually since inception, with all the wireless carriers kind of a key part of our story and our revenue. We've talked publicly about the fact that we're finishing up these several greenfield metro fiber builds in markets like Savannah, Augusta, Georgia, Tampa, Florida, Jacksonville and surrounding areas in Florida. And that just represents great lease-up opportunity once we get those networks live, that as the wireless carriers add density, as they go to densify their network, looking for more cell towers, looking for front-haul that connects small cells, we've got some great assets to be able to do that on.

Okay, that's helpful. And you mentioned about the hyperscale demand in the Leasing segment. Wondering, are you seeing those large hyperscalers by dark fiber versus lit? Where do you see a lot of the demand coming from versus your kind of dark versus lit fiber services?

Yes, good question and deserves a couple of minutes here. So today, as we sit here, almost all of our leasing assets are dark. So other than the Florida network that we lit and announced that we lit last year, virtually everything else is dark fiber. So all the success that we're having on the Uniti Leasing side is mostly selling 6-strand, 12-strand, 24-strand type deals to the content carriers, hyperscale folks. Now I mentioned earlier that we do have a multiple-year plan to continue to light that network and connect key data centers across the country, coast-to-coast. And again, Ashburn, Virginia down to Atlanta and Atlanta over to DFW is kind of our next phase rollout. And then we're in discussions with several folks about what's next. What is the next segment that we need to light? We have dark fiber nationwide, connecting markets like Seattle and Portland and the Bay Area, Southern California, Vegas, Phoenix, St. Louis, Denver, Dallas, Houston, Ohio, Detroit, the East Coast. So we can connect a lot of places, but we're trying to really be disciplined about where we light that network, and that's going to be driven purely by customer demand. So we will see that lit traffic increase significantly over the next 5 years. But right now, the vast majority of what we sell on the leasing side is dark.

Got it, got it. That's helpful. I guess related to that, a topic we've touched on with a lot of the other companies has been around supply chain and pricing. Just wondering, have you seen any impacts on your -- in building in markets, whether it's higher labor costs, higher equipment costs, delays in securing labor? And the inevitable inflation question, are you pricing contracts any differently today to reflect the highest inflation we've seen in 40 years? Or how are you thinking about how insulated you are from the current macro environment? And I believe [indiscernible] for Greg.

Yes. I think I can start and then Bill can finish for sure. But on the supply chain issues, I mean, no one is immune to that. Everybody is facing it, even the Mana folks that we talk to, when they buy dark fiber from us, they have the same challenges on trying to get equipment in to light up their routes. So we have seen that but we take that into our delivery intervals. Fortunately, our customers that we work with, again, they're experiencing the same thing. So they have -- they don't like it. We don't like it, but there's a tolerance there to have the right expectations on when we can deliver services. As far as the inflation goes and how does that impact our pricing. On the dark fiber side, these are long-term 20-year -- 10-, 20-year contracts that we're selling. So we absolutely need to be really aware of the ongoing costs that we have to maintain that fiber. And so we are very much focusing on what that -- so when you sell dark fiber typically on a 20-year IRU into feasible right of use, you have a large upfront payment that you're paying based on fiber-mileage and then you have a recurring payment that you make for operations and maintenance, and then that price is based on the route mileage. And so the fiber-mileage price, the upfront fee, if you will, we're not seeing that necessarily build up or down, very stable pricing and has been for quite some time. I think that on some routes, as we get lower on inventory, supply and demand, our prices will go up as we have fewer strands to sell. But our real focus is on the monthly, the ongoing and that operations and maintenance costs because to your point, those costs to maintain and repair and get new materials are absolutely going up. And so we've been diligent about making sure that we're getting not just the right price in the early years but having an escalator built in to make sure we're covered in the outer years as well. So absolutely plays into our pricing strategy. Bill, I don't know if you had anything else on the supply chain issues.

I mean, Greg, I think you covered it well. I mean, go along just a couple of things to add. I mean, in certain cases, where we could buy equipment ahead of time, when we had a project come in or locked-in pricing now that have an increase to lease another year, and we've done that where we can. The good news is a lot of large builds that we were doing, one time we had 15-or-so projects undergoing. We completed the majority of those in 2020. So we still pursue new greenfield builds and we still need equipment to service the customer. But it's not the magnitude of when our capital intensity was much higher a couple of years ago. Now that capital intensity has come down. We've really focused on the lease-up which utilizes the existing network. Now there's still things like equipment and other things you need to buy to serve those customers, but when we could buy those things in advance or lock in the pricing today, we've done that. So we're managing higher costs like everybody else. On the labor side, again, the labor has gone up, but we don't really have seen any shortage in the market that we're upgrading in the southeast, primarily in the southeast. And so really there is no labor shortage there yet. So, so far, we're managing it pretty well. To Greg's point, we try to pass along some of those costs, not all of them, but some of those costs on we can. And we'll just continue to manage through it with our customer in mind.

Got it, got it. That's helpful. Trying to ask that question on all the companies just to get the latest update. So I wanted to touch on your wireless segment. You said that was driving a lot of the Uniti Fiber demand. Where are you seeing the most activity? Is it small cell front-haul or front-haul to C-RAN hubs? Is it fiber to the tower? And are you seeing more dark or lit fiber backhaul driving a lot of that demand in your funnel?

Yes. So in our southeast footprint, we have a huge embedded base with all the wireless carriers. Where I would tell you we've seen our most activity is post C-band auctions and all the spectrum and clearing activities that are underway and will be underway for quite some time, but the carriers are going to need to upgrade their bandwidth. And remember, with our southeastern fiber footprint, we're not in a lot of Tier 1s. Our play is more Tier 2, 3 and rural in that southeast footprint. In the Tier 1 markets, most of the large wireless guys have already moved to a dark fiber play or in the process of moving to dark fiber. So in the Tier 2 and 3 markets, we've seen them getting ready for their C-band upgrades by virtue of putting in upgrade orders with us to upgrade their bandwidth, making sure that our infrastructure is ready to support 10-gig at the tower. That's going to be a 2- to 3-year cycle that we'll see upgrades come in to make sure that we have the bandwidth ready and capable as they go through their upgrades of their C-band equipment. On the DISH front, virtually everything that we've seen with DISH has been lit. A few segments of dark here and there but mostly lit capacity. And far and away, they've been our most active customer from a wireless perspective. So any kind of growth that we're seeing on the wireless segment is lit, I would say. On the small cell side, I would agree with most of my peers and the tower guys in saying that we haven't seen as much activity on that front, certainly not the large market-wide, several hundred node type of deployments. But we are seeing very targeted deployments of small cells in high-density areas. We are typically not doing the toll, the site acquisition and the permitting and zoning, but we absolutely are doing the front haul. And so we've seen steady activity out of the top 2 carriers on the front-haul side, bringing dark fiber for their C-RAN connectivity in some of our Tier 2 markets, take Tallahassee, Florida State, take Daytona around the beach areas, Jacksonville around football stadium, et cetera, so just not as much activity as we were seeing, say, 2, 3 years ago.

Sure, sure. Yes. It seems like most of the carriers are doing a coverage build right now with their macro sites and there may be rounds of densification several years ahead, but it may take some time.

Yes, business usual is what we call it, where we'll see a handful of macro sites, 1-gig orders each month out of the top 3 carriers. That's accurate, yes.

Sure. And then as you look at your backlog and your funnel, how do you think about what you would view as like a new anchor build versus more of a co-location on existing fiber type of deal? Obviously, that has a big implication of the kinds you can generate. Are you seeing an increasing percentage of those kind of co-lo deals that have really juicy returns? Or are you still building a lot of new fiber routes for new anchor tenants like a DISH?

Yes. So everything we're doing with DISH is lease-up. That's the beautiful thing about the DISH deployment is those deals are all lease-up on the backs of the anchor deals that we've done with the other wireless folks 5 years ago, 10 years ago in some cases. So those DISH deals are low CapEx, high margin type business. I'll get back to DISH in a little bit. And then as I mentioned at the top, lease-up is a tremendous focus of ours. I would tell you that in the southeast footprint with Uniti Fiber, where we are looking to potentially expand our markets where we already exist but perhaps we don't sell enterprise in those markets, enterprise has been a tremendous growth area for us over the last few quarters, as you know. And I think there's only upside there for us. We're in a couple of dozen, I believe, enterprise markets in that southeast footprint, but there's a lot of Tier 2, Tier 3 markets where we do not currently offer enterprise services. So those are attractive markets to us, where we might have a rating in a particular market, a Tier 2, Tier 3 market, but we're not as dense as we would like to be. So those are the markets where we'll look for an E-Rate deal, maybe a government deal to help anchor, maybe it's a small cell turnkey type opportunity to deploy, might not come for a couple of years to our previous point, or just macro opportunities, maybe 1 carrier move into it once a new backhaul provider in that market. But an opportunity to get more dense in some of our existing southeast footprints are the areas where we'll spend a little bit more capital, I think, to kind of get more of an anchor presence in that market, so we can bring in the lease-up of the enterprise and wholesale. And then on the UL side, we're coming across some really interesting opportunities with the hyperscale content folks who are looking for that diversity is not enough. They need drivers. They need adversity, they need to be redundant from the side of the road that Global Crossing built 20 years ago or what-have-you. And so there's some unique routes that we have an opportunity to look at as potential anchors for multiple content players. And they all kind of need the same type of routes, the same type of diversity. So there's some interesting conversations we're having with them. And I would say that is, in my 20-plus years in the space, it's very similar. If you look back to where maybe wireless backhaul was say, 10 years ago or 12 years ago, where there's an opportunity to maybe build some unique long-haul routes. Obviously, significantly more CapEx and you need multiple anchor customers. But I would say those are the UL-type opportunities that we would be looking at to potentially go after it and some various specific cases that are unique to the space.

Got it, got it. That's a helpful overview. Bill, I wanted to flip to you. So maybe talk about one of the focuses for investors around transformative M&A, which you've talked about and publicly addressed. Just wondering if there's any update upfront worth mentioning or kind of where we're at in that process of looking at potential M&A acquisitions.

Yes. Eric, really no update there. I mean, we've been talking about for the last several quarters now that we're really focused right now on more transformational strategic M&A, basically M&A that will, in a tax-efficient manner, that can unlock value either in a public or private side of market. And what you've seen is we believe that there's been this conglomerate discount that's being unfairly applied to Uniti in the public markets because we believe the pure fiber part of our business, if you take out the Windstream leases, should be trading at a 15 to 20x multiple, which is comparable to other private multiple market transactions and multiples that you've seen over the last year, couple of years. And so when you look at where we're trading today and what we've been trading over the last couple of months, and you see where we're trading at and you apply that 15, 20x multiple to the fiber business, it implies that the Windstream leases are trading at a 6 to 7x multiple, which is below the peer group, below with the third-party valuations we got with the appraisal works valued those leases at. And so we think those leases should be around the 10x multiple on an EBITDA basis, that's more appropriately. And then if you apply that, that would imply that our stock should be trading around $20-plus. And so we believe that there's -- again, one of the reasons for it, we're trading substantially below that is there's this conglomerate discount that's being applied to Uniti. And so we've done a lot of work over the last several quarters to, if there's way we're going to unlock value either through again, private-public again, private seems to be valuing these assets much higher. And so one of the things that we really focused on is separating assets, specifically separating out the ILEC assets. Although the ILEC assets are very generally very good cash flow for Uniti, they're not strategic to our overall, what we're trying to do here in terms of going after businesses. So the CLEC, we still have strategic value because we have an enterprise, we have a full scale business. But we're not interested in -- Uniti is not interested in pursuing or being a fiber-to-the-home operator. We would consider owning those assets and leasing them back on an exclusive or semi-exclusive basis if we had use for that. But we don't want to run operating residential broadband. But you look at some of the deals that have happened over the last year or so in the fiber-to-the-home space and the interest you're seeing from various parties, private equity funds, infrastructure fund sponsors that are interested in investing in those businesses, some of those businesses have sold for pretty robust multiples. And so that is why, again, we're now evaluating this opportunity. Now what the exact structure is, what the time frame for that, to be determined. Internally, we have a preferred structure, we have a preferred time frame. But for many obvious reasons, we don't want to overcommunicate that or communicate that at this time. One of the reasons we've been so open about M&A or strategic M&A is it's a critical part of our strategy. If you recall and prior to Windstream entering bankruptcy, we always had this target of further diversifying away from Windstream. And that was always predicated on doing transformative M&A. And so it's a big part of our strategy. That's why we want to communicate it, but there's also a lot of other parties listening and a lot of moving parts. So again, we have, internally, a structure in mind, but at this time, we don't. We'll communicate that at the appropriate time. And so right now, that focus is on transformative. At some point, and again, we're not blind to the fact that we have a certain window that we need to do this in, but at a certain point, we would be successful or we won't have done a transaction. And at that point, either we've done or we haven't done it. We'll then turn our attention to pursue, again, those more bolt-on smaller acquisitions that we were doing Windstream kind of was in bankruptcy because again, those will further densify expand our network or additional sale-leaseback or proper opportunities that are value accretive. And so again, we'll communicate that on that strategy when we shift back to that at the appropriate time. But right now, we've put those kind of on the back burner while we focus more on the strategic, more transformational opportunities.

And have you seen any change in private market multiples? I mean, we've noticed in some of the other verticals we cover, data centers and towers, they've remained very sticky high despite the fact the public market has traded down due to interest rates due to inflation. Do you think just the sheer quantum of private capital out there has maybe created a higher valuation in the private markets that might be sustainable? Or do you think that will change in time?

Yes. No, that's a good question. And I think multiples continue to remain robust and healthy. And I think you've seen some recent transactions where those multiples continue to remain pretty healthy. I mean, if you recall, not long ago, we sold -- we had a U.S. tower business that we sold for 35x cash flow. We had a LatAm tower business. We sold for a very healthy multiple ground lease business. All -- and again, these are good businesses but we were able to get really good value for them. So you've seen us be a very good disciplined both buyer and seller, and so we're looking to, again, continue to be that. And so we have this asset that plays very well into the fiber-to-the-home space. It's not really strategic to what we're doing, although it generates good cash flow. But you've seen some of the other interest from others in this space, multiples remain hot. Again, that's one of the reasons why we're kind of going down that modem. So obviously, the markets -- the capital markets today, I don't think it precludes us from doing anything, but obviously adding an element of making it and more challenging or at least making the process more lengthy. And so again, that's one of the reasons why we haven't come out and put out a definitive time frame on that. But at the same time, we know internally that we can't keep this out there for at some point, we either have to do the transaction -- do a transaction or not. And so really, that's what we're working towards.

Got it. And Greg, do any of the M&A headlines and the possibility of separating the ILEC assets, does that impact your ability at all to sell the key strategic clients or wholesale accounts or do you think it hasn't really had an impact?

Hasn't had an impact at all, to be honest. If and when rumors pop up in the media, we're always very transparent and open with our key customers, especially in nothing to hide. They, again, understand that we're a publicly traded company and along with that, have fiduciary responsibilities. And most of them understand that. The key is we still have tremendous assets that produce really unique solutions that these guys need and that's what rules today. And as far as the [ iLife ] lease, obviously, that's exclusively leased asset to Windstream. So it's not an asset that my team has ever marketed nor a key market at this point. So really kind of a nonissue for us and what we do on a day-to-day basis.

Yes. And Greg, we just have a few minutes left. I wanted to ask about DISH again. You said that they have been very, very strong so far. So do you get the sense that -- I think in the past, you've mentioned a concern that they could front run some of the fiber-to-the-tower and not be in a position to accept service. Do you think that concern has largely abated? And do you think you can largely navigate the build with them to kind of marry your fiber supply with their demand for service?

Yes. I'm glad you asked that, Eric. That has abated. The way I would describe it is they kind of turned the spigot on for accepting sites now. And I think what DISH is trying to do is extremely difficult, as we all know, building a network from scratch, and they're doing a hell of a job with it. And it just so happens that where we are providing cell backhaul to them just was not as far along, if you will, in the deployment process as perhaps some of the other regions throughout the country. But that they've caught up and they are accepting sites now and we couldn't be happier. We've been able to have a couple of big months here on the service delivery side. And we see that continuing here between now and what, 365 plus 9 more days until their deadline hits. So we'll see them continue to be active on the accepting side. And that's really pretty standard when we're delivering backhaul for the wireless carriers. We're generally -- if they're building a new tower, we're generally going to be at the curb waiting for them in most cases. But fortunately, as I said, here in the last, I'd say, 6 to 7 weeks, DISH has been in a much better position where they're room-ready, meaning they have their cabinet or shelter in place, but most importantly, they have power from the local utility. And therefore, we [ something to ] plug our equipment into. So really excited about that here that you'll see reflected in our revenue numbers here in the rest of the year.

Okay, great. I think we're about out of time. So Greg and Bill, really appreciate you joining us today, and we look forward to continuing to follow the story.

Sounds good. Thanks, Eric.

Thanks, Eric. All right.

Thank you, both.