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

Good afternoon. Welcome to our 11th Annual TD Cowen Communications Infrastructure Summit. I'm joined today by the President and CEO of Uniti, Kenny Gunderman. Kenny, thanks for joining us.

Greg, thanks for having us. It's always a pleasure to be here. It's one of our favorite conferences.

Great. Great to hear. Your stock has been down a little bit since the Windstream closing and then earnings, I think, it was maybe $60 million lighter than a lot of the folks looking at in terms of our models. And obviously, with the Windstream merger, it's a little messy. But maybe help articulate what you think the reasons were for the weakness. We didn't see any block shares and most of the REIT and dividend investors are a small percentage of the float now, but what would you contextualize the weakness to? And what are the catalysts and execution you need to do to make it work?

Yes. So we're very happy to have the transaction closed. That was a huge milestone that we've been working on for 18 months now. So really pleased with that. And the tailwinds behind our business continue to be that two jet engines, right, convergence and fiber-to-the-home plus AI-driven demand in our commercial fiber business. And those themes are stronger today, frankly, than when we announced the deal. They've been growing over the past 12, 18 months. And our execution has been good. We put up a solid quarter from a performance point of view is right in line with our expectations. And the growing demand in AI and the themes driving greater penetration opportunities within fiber-to-the-home, we think are better than what we've expected. So with all that said, intrinsically, we think the value of our business is better than it's ever been. And so with respect to the reaction to the quarter and the close, we put it in two categories. I think one is that we did lower guidance, Kinetic is behind plan. And I'm sure we're going to talk a little bit about that today, but Kinetic is a little bit behind plan, but we've got a great strategy and plan in place to get caught back up. And then secondly, this is a big transaction and a lot of technical things happening, right? We're going from a REIT to a C-Corp. We're going from a triple net largely propco type business model now to a true fiber-to-the-home operator. So there's a shift in the shareholder base. There's definitely some technical implications related to the merger consideration, and we expected some volatility. So when we think about what we observe holistically, what we observe about our performance and a relatively smallish reduction in the guide, we think it's probably more technical related. And when we've been out interacting a lot with shareholders for the past 4, 5, 6 days, and we haven't heard anything that rises to the top.

Got it. And maybe we can talk about the fundamentals though and the EBITDA guide down. I think it was 4 major reasons, and it was mostly all Kinetic related really. One is Windstream is off to a slower 2025, if you will, in terms of builds. And subsequent subscriber penetration. I think the second is you expect 2 million fiber-to-the-home passings this year, and there could be some higher costs as you accelerate to that build. The third is maybe pressure on the DSL side, maybe DSL ARPU to be more specific. And the fourth is, I think, the Fiber Forward spend to get that year 2, year 3 penetration, you want to spend that. So there's a lot there to chew on, but can you unpack some of this? And some of this seems more onetime in nature, right, once you do all these initiatives?

Absolutely. I think you captured it correctly, Greg. And the two big drivers of the guide down are really behind on the build and the pressure in the DSL business. The other two that you mentioned, incremental cost on ramping up the build and the -- really, I'd characterize it as ramping up the go-to-market in response. Those are more in response to the fact that we're a little bit behind plan. So when you put those things together, incremental cost this year and not yet the benefit of those costs are what you're seeing. So you're seeing a little bit of a drag in that spend before you start to see the benefit of it. But really, Kinetic over the past 18 months is focused on subsidized builds first as opposed to what we call strategic builds or unsubsidized builds. We're changing that. We're pivoting to unsubsidized builds as immediately essentially. And what that means is you just get to more homes because you're building to more dense homes as opposed to subsidized builds that are less dense. That will get us a lot more homes and a pickup. And secondly, and very importantly, we're onboarding some third-party contractors. And as you know, Greg, historically, Kinetic has built the vast majority of their homes internally, which is good from a cost perspective, but it also gives you a little bit less of margin for error if you run into permitting delays or if you run into weather issues. If we've got third-party contractors, we've got surge resources, and we can move those resources around, especially if you've got good trusted partners, which I think we will have. So that's happening real time. That will give us more predictability on the build and definitely, we think the ability to get caught up on the build by the end of this year. With respect to some of the DSL pressure, that's just competition from fixed wireless predominantly and a little bit of satellite. And I think the wireless carriers continue to focus on fixed wireless as a product right now. And by the way, that helps us in our wholesale fiber business because that's leading to more fiber-to-the-tower upgrades. But I think that's going to change over time. I think eventually, they're going to be more focused on fiber subs as opposed to fixed wireless. And as we're building more fiber and we're transitioning DSL to fiber, that competitive pressure is going to take care of itself because we're going to have.

So fiber always wins over fixed wireless or not always, but predominantly versus fixed wireless against DSL, right?

Fiber is going to win. And I've said it before and continue to think those subs that we're losing to fixed wireless today, I'd rather lose them to fixed wireless because we can get...

You get money on the back end for the wholesale.

Well, not only that, but we go get those subs back because at some point, fiber outruns fixed wireless from a reliability and a latency point of view, and we get those subs back 2 or 3 years down the road. So I think we've got the right strategy and plan in place to mitigate the pressure that we're seeing for the balance of this year. And like I said, nothing has swayed our confidence in the future of the business.

Got it. And you mentioned the third-party builders that you've contracted, and that will take the cost per home pass up from your $650 per home to as high as $950. We talked about that, I think, at NAREIT in June and even our TMT conference in May. So is that happening now then? Is that acceleration in the cost per home pass going up? And can you help us with the curve of that build cost?

Yes, it's happening real time, and I'm glad you remember us talking about that months ago because we foreshadowed that so as not to surprise folks. And look, at $650 per passing, we think that's the best in the industry. And that's because Kinetic has spent so much money over the years building fiber to the node. And so that last mile, so to speak, to the home is just less expensive. But because it's so low and because we need those third-party contractors, we're willing to spend a little extra on the build to get that build accelerated. And yes, going to $850 million to $950 million in the coming year, 1.5 years is what you're likely to see. But when you look at it over the life of the build, we're still going to be in that $750 million to $850 million range. And I think that's best in the industry. And ultimately, we feel we have a lot of confidence in our ability to build within those ranges given a lot of our build is still going to be internal and these third-party contractors that we're onboarding, we're locking in rates for a period of time. So predictability there. We'll still have what I think is industry-leading build cost, which gives us the ability to get to more homes economically, right? And when you're building with confidence and at a low cost, you're able to...

Make some projects on the fringe doable.

Absolutely. Absolutely.

Your top line guidance was pretty good, but you had a lot of TDM in there, right, the expected revenue from the legacy TDM services. When should we expect the TDM costs to largely be out of the business?

Yes. So as you know, Greg, we don't like to have legacy services in our story. We've always managed out of those at Uniti, just so there's a clear look at fiber revenue growth, top line and EBITDA. And right now, out of the gate with our merger, we don't have that, right? We've got some legacy services, but we're going to manage out of those aggressively. And so there's really two areas where there's TDM today in the Windstream business. One is that managed services or what we're calling Uniti Solutions. And to your point, we'll be fully out of that, virtually out of it by the end of this year and a little bit may tail into '26, but it will be so small, you won't notice. The other place where there's some TDM is in the Windstream wholesale business. So this is long-haul transport, TDM, roughly $100 million of that. That will weigh on top line a little bit over the next couple of 3 years. We're going to probably be fully out of that by 2028. So that -- we'll manage out of that. But like I said in the earnings last week, number one, those legacy services don't impair our brand in any way, right? It's not like we've got these laggard services that are weighing down the Uniti brand or even the Kinetic brand. Number two, they will -- they're already an immaterial part of the business, especially from an enterprise value perspective from my point of view. And as we accelerate fiber and that we manage out of the legacy services, they'll become even more immaterial in a very short period of time. And thirdly, and very importantly, in the meantime, we're generating good cash flow off of them. So 40%, 45% plus cash flow generation from an EBITDA minus CapEx perspective. So it's helping -- essentially helping finance the bill.

Harvest the cash and use it for fiber builds.

Exactly.

Got it. I wanted to talk about your penetration curves and that fiber forward initiative I alluded to. On your second quarter call, you said terminal penetration of 40% could actually prove conservative, which is encouraging to hear. However, when we look at the pen curves today, it tells a little bit of a different story. You look at the 2022 cohorts in the slide deck you provided. Year 1 looks good. And then years 2 and 3, you're just a little over 30%. And I guess this fiber forward initiative should help that. Can you just provide more context of what the fiber forward initiative does and means and the cost that goes into that?

Yes. Great question. And first of all, we're extremely excited to be bringing some fresh talent and fresh leadership into the company with experience from Ziply, experience from Frontier. John Harobbin is someone who's going to be leading Kinetic for us going forward. And so bringing some good best practices from really successful copper to fiber conversion stories in the recent past is something that we're excited about. And it's one of the things that gives us the ability to make comments about 40% being conservative because we can see the upside and the opportunity that maybe up to this point, we haven't fully exploited at Kinetic. So that's number one. Number two, we're doing a lot of things right. I mean we grew fiber subs 15% year-over-year this past quarter, and we grew consumer fiber revenue almost 27%. So there is a lot of momentum in that business, but we think we can do better. And I think two issues that we know are there. Number one, the build historically at Kinetic has been much more, I'd say, Swiss cheese in approach, picking those lower -- higher returning markets all over the footprint and also maybe not fully optimized, right, because we were in this opco/propco structure where there was an incentive to focus on Windstream-owned markets entirely as opposed to...

Greenfield expansion.

Greenfield expansion or the states where the Uniti owned the underlying network. And so the build itself was probably not as optimized as it could have been. And so over the past number of months, as we've gotten ready for this pivot, not only pivoting from subsidized builds to strategic builds, we've also refreshed the build plan itself. And this new build plan is much more focused on clustering. It's much more focused on densification of existing markets, which gives you benefits of scale, whether it be from a sales perspective or a marketing perspective, or field tech, service delivery, you name it, you've got economies of scale like we have in Uniti Fiber over the past number of years. And secondly, I think the build itself probably got a little bit ahead of the go-to-market at Kinetic in the past. And so building up the Fiber Fast Start and Fiber Forward is part of what we're doing. And I think that's part of why we're a little bit behind at Kinetic today because that go-to-market was behind the build. And so to your point about penetration, yes, we -- when we build a market, our early penetration is very good because we have a very good DSL product, and we've got a very good base to build off of. But then following through in year 2 and 3 really requires that insurgent go-to-market where you've got boots on the ground, you've got door-to-door, you've got construction, permitting and sales all aligned and coordinated both before the market launch and during. And so ultimately, as we build up that go-to-market, you're going to see better penetration. And so right now, by the end of this year, we're probably going to have 30% to 40% more homes under our Fiber Fast Start program, right? Because we just haven't had the resources in the past couple of years to get there, but we're ramping that up.

It's interesting you mentioned that. So the Swiss cheese model, if you will, to take your term, now that you sort of have a new plan, you can build the scale and you can build faster and then you can coordinate with marketing a lot cleaner. Okay. That's interesting. Can you talk about Kinetic's ARPU? On the second quarter call, you discussed that in the Tier 2 and Tier 3 markets that you're in that your markets -- there's a little bit more pricing power that you can take advantage of. Does it make sense for going after subscriber growth to maybe just keep the prices down? I mean, I think you're at $80 or $90 for 1 gig plans. How does that compare, I guess, to the cable folks in your space? And if you wanted to take trade peak for Q2, if you will?

It's a good question. It's definitely a debatable point and definitely an option. Yes, we -- Kinetic is like Uniti Fiber. We're operating in Tier 2 and Tier 3 markets, so less competition. And to us, that doesn't just necessarily mean fewer competitors. It also means that you're competing against national brands that maybe aren't as focused on these smaller markets as they are in the Tier 1 markets. And that's a real advantage for a regional scale player that has nimble pricing power like we do at Kinetic. So definitely view those markets as less competitive. We definitely view fiber as the superior product. And I think that's increasingly accepted among consumers, right, not just telecom geeks like us in here. I think just average everyday Joe on the street, when they see fiber coming into their neighborhood, it's something that they aspire to have. And so that gives us a little bit more pricing power, those things. And so as a result, yes, our ARPU is comparable to or slightly higher than our cable competitors. So yes, we could play around with P versus Q. I think we may look at that, but really, we think there's still ARPU growth in the business. Number one, 60% to 65% of our fiber subs are not taking full 1 gig speeds, right? There's an upsell opportunity there. Number two, we haven't really rolled out 2 gig more broadly yet. That's an opportunity for us to do that over the next year, 1.5 years. And I think that as we -- especially as we start to get into the inference phase of AI, I think fiber is going to become a more attractive product over time than it is today, and it's already a superior product because people are going to want better latency. They're going to want more broadband. And so all of those things lead us to optimism about ARPU. And thirdly, we have the ability to be more nimble in pricing. We are today relative to our cable competitors, but I think we can be more market-specific in our pricing as we're doing in our door-to-door and our marketing. So those are all opportunities, and we're pretty excited about...

Because that was my next question. If the long-term ARPU growth can be 3%, given you're a little more elevated in some of your plans, but I guess you just point out three reasons. Speed buy-ups because 60% of the base doesn't have the 1 gig plan and then you haven't really rolled out 2 gig and then just be nimble on sort of hyperlocal strategy.

Yes, exactly.

I wanted to talk about ACP risk. In the past, Windstream, when I spoke with them a couple of quarters ago, they had 100,000 former ACP subs in the base and Windstream is still subsidizing them even ACP expired. So is that still the case? And is there a risk here?

That is still the case. There's around 70,000 ACP subs in the base today. I can tell you we're actively looking at that subsidy and don't want to get ahead of our market approach. So more to come on that in the coming weeks. I don't think there's a lot of risk, especially when you do the math. That's not a huge number, but I think there's an opportunity for us to get some pickup.

And it's down to 70,000 now. Okay. I want to go back to the AT&T bundle, those mentioned on the call. You noted seeing churn and subscriber benefits by offering a $20 discounted bundle with AT&T. I guess how many people take the bundle of the gross adds? And is this discounted on your end, the $20 bundle discount? Like how is that sort of breaking out? I'll stop there. I have other question.

Yes, yes. I'll -- so the bundle is small today at Kinetic. So less than 50,000 subscribers take the bundle. But we wanted to start talking about it because we think it's a really valuable -- potentially a really valuable tool for us, and we think it validates the convergence theme that we're hearing about in the industry. So to your point about the subsidy, the discount, we roughly split that 50-50 with AT&T. So that's that. Number two, that 50,000 -- less than 50,000 subs is growing pretty materially. So our attachment rate is somewhere in the 10% to 15% range. And so by the end of next year, we think we'll be either at or above 100,000 subs. So we're really excited about that growth that we're seeing. But more importantly, the churn benefits are -- have been terrific, the 50%. And so as a result, we want to talk about it because it's positive and the themes are good. But at the same time, we think we can start using that bundle more tactically, targeting markets where we might have a little bit more competition. and using it as a way to be a competitive advantage in some of these markets more tactically.

It's interesting, like why not go the full MVNO route that other fiber providers -- or I'm sorry, yes, fiber providers are getting wholesale wireless deals. But it sounds like you're getting the bundled benefits anyway and the churn benefits. Why you get a comprehensive MVNO deal and you just bundle?

I think today, what we're doing works really well for us. I do think over time, Kinetic having its own MVNO or being part of a broader wireless footprint makes a lot of sense. And that's the reason we're talking about these themes and trends a little bit more granularly and openly because we definitely see that as a possibility. Right now, we have a lot of opportunity in just the fiber footprint for the reasons we talked about earlier, right? The go-to-market really can be optimized. And so we don't want to distract too much of that selling motion on fiber with an MVNO, which would be more complicated than the bundle. The bundle today is simple, right? It's very easy to manage, whereas with an MVNO, you've got to have the back office in place and all those things. So right now, for us, I think the bundle is the right thing to do. But over time, there's a lot of value to be had with an MVNO.

Right, right. So that makes sense. Go after that year 2, year 3 penetration and not complicate it with an MVNO structure at this point.

Right.

I want to shift gears and talk about Elliott who owns about 24% of your shares. There's a fear out there they could sell shares in the market. They do have 4 appointed Board seats now. So can you provide insights on the working relationship and the path forward with Elliott to the degree you can?

I definitely can. I'm glad you asked that question because that is definitely a question that we've gotten a lot over the past week or so. We get it periodically, but especially over the past week or so with the deal closing and Elliott disclosing how many shares they're actually going to own. We've been telling people 20%, 25%. So that's not news. But I think when people see it, it's now become a reality. So we've gotten a lot of questions about it. And up to this point, we haven't really answered the question because we don't like to talk about our customers by name, and we certainly don't want to talk on behalf of our shareholders.

And the deal wasn't formalized yet, it is closed.