Uniti Group Inc. ($UNIT)

My name is Richard Choe. I cover Communications Infrastructure for JPMorgan. I would like to introduce Kenny Gunderman, President and CEO of Uniti Group. Thank you for joining us today.

Richard, it's a pleasure to be here as always. Thanks for having us.

We were here about a year ago, and you had a lot going on at the time, but I think even more has happened. So can you give us a quick update on what's changed over the past year and kind of where are things today?

Yes. We definitely had a lot going on then. We had announced our merger with Windstream, but it had not yet closed. And so we were still talking about all the benefits of the merger and trying to convince folks of the strategic rationale. And that included our ability to accelerate the fiber build at Kinetic. That included our ability to go after the wholesale fiber opportunity by combining the Windstream Wholesale business with our Uniti Fiber Wholesale business. That included synergies, obviously, corporate and cost savings synergies on-net, off-net synergies, but also very importantly, removing the complexity of the MLA relationship that existed, which we also foreshadowed thought that could also mean cost of capital improvements. And then we also thought the merger would put us in a better position to be leaning into strategic options. So that was the promise. And now that we're a year later and we've closed the merger, and we're 9 months in, I would say that we're delivering on all of those promises. I think the build at Kinetic has been ramped materially. The wholesale opportunity that we talked about, and I even said at the time, I thought that was more exciting to me than the fiber-to-the-home build. That opportunity has blossomed into something that's really terrific. And obviously, a big part of that is the hyperscaler AI theme that's so important right now, but we're really leaning into that. So very excited about that. The synergies achievement, we've really achieved all of our corporate savings, if not a little bit more, and the off-net to on-net savings have been terrific. And our cost of capital has improved. We talk about 600 basis point improvement from where our bonds were yielding previously to where they are now. And so that has absolutely improved. And I think from a strategic point of view, our business is more and more strategic every day. And so I think we've delivered on that. And so all that to say, Richard, I feel great about the progress, a lot more going on. And the key for us right now is just to execute. We've got all the -- we've got the strategy, the plan, the team and the assets, now we just have to execute. And I think we put up a good fourth quarter and finished 2025 strongly, and we've gotten off to a great start this year with a good first quarter, and I feel really good about how the second quarter is building. So...

Yes. And we'll go into each of those topics more. But I will say like when you hear about the plans for merger and the actual delivery, there's a lot of plans, but delivery isn't always as fast or as efficient as possible. But it seems like you've been able to deliver really quickly. Has the integration and the execution gone better than you expected? And kind of what enabled you to be able to kind of deliver on a lot of this? It seems like really quickly.

Yes, I do think -- thank you, and I'm going to take that as a compliment whether it was meant as one or not. But we are definitely delivering on our plan, on our 180-day plan, and we're following through on the execution that we promised at the time of the merger. And the market has moved in our direction as well. And so sometimes, it's just as good to be lucky as good. So we've executed, but also, I think industry themes have been benefiting us. And I think from an integration point of view, we talked about cost savings and a big part of that was bringing off-net traffic onto an owned fiber network and transitioning away from legacy networks onto an owned fiber network. That's probably the most exciting part of the merger so far for me because we're executing on that. We're getting cost savings and the build has gone better than expected. And when we see the throughput of that investment, the early return on that is terrific. That's what's enabling us to pursue the hyperscaler opportunity in the way that we are. And everything we're seeing from a returns perspective in the Kinetic fiber-to-the-home build is better than we expected. So I think that part of the merger and the integration has been terrific. And an important part of pursuing all of that is just a mind shift mentality away from being the old incumbent ILEC to being actually an insurgent share taker. And probably another part of the merger that where we've outperformed is that we were able to recruit and onboard a leadership team, especially at Kinetic that we had drawn up in anticipation, but I think we've really executed well on that as well. And I'll give John Harrobin, a lot of credit for that.

No, it makes sense. And it's funny in the past, I would say the Kinetic and the fiber build to residential would be the more, I guess, opportunistic and kind of leading theme, but it's actually the infrastructure, but we'll get to that part. So we'll start with the [ boring ] business, which is actually a good opportunity. Something you can't control is the weather and -- but yet you're still able to deliver pretty well on the homes build. Can you kind of talk us through how the fiber progression is going for your residential build? And where should it kind of head to as we go through the year?

First of all, I agree with your characterization. I think when we announced the merger, everybody thought it was all about fiber-to-the-home, but we, at the time, said, hey, don't sleep on this wholesale fiber opportunity. And I think that's proven to be very true. But we're also extremely excited about the fiber-to-the-home investment. And I think -- and I'd hate blaming winter storms for a little bit of the slowdown in the first quarter because as I tell the team, hey, you have storms in the winter time, and so we should plan around that. But with that said, when the build at Kinetic prior to the merger was very focused on building subsidized builds. So RDOF and other builds that were maybe capital efficient, but you're building to a lot fewer homes with the same amount of capital and the same amount of time. That build was also focused on more of a patchwork build around the footprint. And part of that was driven by the fact that we did have that unique MLA relationship where there were fully owned states and not fully owned states. So it kind of led to some build decisions that were suboptimized. And then it was a build that was really done 100% internal. So it was -- Windstream had built a large internal build engine. And I say all that, not to criticize prior decisions, but to say that we changed all 3 of those things. And that really puts a spotlight on how quickly of a ramp we made despite making all 3 of those changes, including really deemphasizing subsidized builds. So we're now focusing on building where we have strategic markets and the return is driven by strategic builds and not subsidized by government builds. And that's important for a lot of reasons because those are the markets where we have the greatest risk of overbuilders. So we're really putting a deeper defensive moat around the footprint by focusing on those markets first. And that's also important because we believe in clustering fiber builds. We don't want to have a patchwork of builds around the country. We want to have them clustered in areas where you get go-to-market synergies, you get construction synergies, you get operational synergies. All of those things are more acute when you've got more adjacent markets versus markets that are more dispersed. Secondly, we -- or thirdly, I should say, we absolutely thought it was the right thing to do to onboard third-party contractors to help subsidize the builds. So as opposed to it all being internal, we wanted to have third-party contractors. And we said at the time, and it's proven to be true that the cost of using third-party contractors is a little bit higher. But in a world where we've got a lot of white space, and it's a very strategic footprint, we want to be able to move as quickly as we possibly can to build that. And so our view is that having those third-party contractors is maybe a little bit more expensive, but it's well worth it in terms of our ability to build quicker and to put more of a defensive moat around that space. So when you put all that together, last year, when the merger was -- it just closed in August, but -- so almost 3/4 of the year was under Windstream leadership. The build -- we built around 220,000 homes. This year, we're going to ramp that to more than double it. And so in the first quarter, as you pointed out, we're a little bit behind the plan, but we pointed out that in March and April, we spent -- we built around 45,000 homes each of those months. And so when you annualize those numbers, you start to get to more than 500,000 homes. And so that's really more directionally where we want to be. So we feel great about that ramp.

It seems like there's been more of an alignment with your build and your strategy, and it seems like it's paying off in terms of not only are you building the moat, but you're attacking the right opportunities and that seem to have come through with your kind of net adds and one is increasing the opportunity of customers, but also kind of preventing churn in your existing base. So how is this kind of being attacked with the new management you brought in and at the strategy level of growing that customer base, not just the TAM of the build?

Yes. No, that's exactly the right question. And so the limiting factor on the build for us has not been the build engine itself. I mean I'm confident that we could build more than what I just talked about. In fact, when John and -- John Harrobin and Manny Sampedro were first onboarded. We said, "hey, go tell us how much you can build in 2026, just max out the build just based on that short ramp period of time." And the number they came back with was close to 600,000 homes. And the reason we're not building that many homes this year is partly because of capital. We want to be responsible about our balance sheet and funding in a responsible manner. And we've got other priorities like hyperscaler opportunities. But importantly, and to your question, we didn't want to build to get so far ahead of the rest of the organization that we didn't follow through on selling and servicing the customer. And I think that's a really important point because if you don't have a good sales organization, if you don't have good distribution, if you don't have a good marketing strategy, if you don't have good and nimble pricing and the ability to be nimble with pricing in the go-to-market, and then you don't have a good customer care organization, then you wind up building, but you're not selling and you have customers that are unhappy and you wind up having elevated churn as a result. And so for us, and one of the things I've been most excited about so far is that we're not only really ramping that build, but things like penetration are outperforming. Fiber churn is better than expected. And we called that out at the time of the merger as being too high. And so it's been a huge focus area. It's a team sport. We've made it a bonus metric and that gets everybody focused on it really quickly. And so I've been really excited about all of that. And it's one of the things that when you look at build cost, the build execution, penetration, churn, follow-through on ARPU, all of those metrics are trending favorable or better than expected. And that's one of the things that we -- that start to give us confidence that our 40% terminal penetration is perhaps conservative because we're starting to see, I'd say, green shoots of opportunity in other areas.

And I think one of the things that people do worry about if you're not building fast enough is that maybe there are some customers you are losing to alternative technologies like fixed wireless and satellite. But in terms of your experience there, it seems like you're not in a super hurry to get there just to get there. And it seems like you have confidence that you can win back customers. What have you seen both in a competitive response from cable providers, but also kind of alternative providers?

Yes. So to be clear, we absolutely have a sense of urgency to get there quickly. We just want to get there in a responsible and economical manner where the rest of the organization is shoulder to shoulder with the build so that we can follow through. And I think that's what we're doing. But yes, the faster, the better because I do think that our footprint is -- it is very strategic because it's white space. It's one of the fewer parts of the country that don't have fiber. And as you all know, there's a rush to get fiber to those -- to that white space. And we want to be the ones that do it and not the overbuilders. And thus far, thankfully, overbuilders have generally stayed away from our footprint. It is harder to build in the more rural areas because there's a smaller pie, and so you have to assume that there's going to be a second fiber provider if you're an overbuilder, you have to figure out how to get backhaul into those markets and there aren't very many backhaul solutions. In fact, we're usually the only one, and we aren't selling to an overbuilder. So it's harder to get in there as an overbuilder and we make it as hard as possible by building as fast as we can. With the competition that we do have, we overlap with big cable in about 50% of our footprint, which is a lot less than most. And so when you think about some of the things that big cable are doing today with the price locks and the MVNOs and the subsidies, we don't feel much of an impact from that thus far. And I I'm cautiously optimistic that we'll continue to be somewhat immune to that. Only about 40% of our base today is taking full speeds available to them. So we have an opportunity to upsell customers, and that gives us some pricing and flexibility with our customers to offset some of the things that cable is doing. And I think we have the ability to be nimble in market and actually adjust on a market-by-market basis. And that gives us a big advantage relative to big cable who are much more of a peanut butter approach in terms of marketing. Probably the most acute competition today is coming from fixed wireless and a little bit on LEO. And that's really happening in the markets that we haven't built fiber yet. And so we -- DSL churn has been elevated as a result. And I think that that's going to probably continue to be true until we build fiber into those markets. And to your point, Richard, when we go back and build fiber in markets where we've lost share, we are winning back share. And so while I don't want to take that as false hope or give us the ability to slow down and take our time because we do want to have that sense of urgency, I do feel like that even though we're losing that share, I do think over the next 2 or 3 years, we're going to have a great opportunity to win a lot of that back. Because in these markets, even the more rural markets, the average consumer values fiber and understands that fiber is faster, it is more reliable. And even when you compare it to a lower cost alternative like a LEO or maybe a fixed wireless, people still put value on that better product.

Got it. And it seems like people generally talk about -- and when you kind of, I guess, went through the positives of the merger, about a 40% long-term penetration in the markets that you've been in, but do you see upside to that? And as you maybe get to upside, if there is like 50% penetration, how does that impact your margins and kind of the overall success of the company?

I'd love to change our long-term guidance here today, Richard. And -- but I'm not going to. But I'm going to continue to say that we feel like the 40% is increasingly conservative and when you think about that, what goes into that assumption? There's a lot of different things that go into it, including how fast can we build? Can we build on schedule? Can we build on budget? What do the competitors do? Do you invite overbuilders or not? And so you have to make assumptions like that. What are the demographics of the market? What are the demographics of the consumer that we're selling to and on and on and on. And when you look at those factors and compare those to what we thought originally, what was in the original model, I would say that virtually all of our assumptions are proving conservative. Again, whether it's overbuilders, the pace of our build, the cost of our build, et cetera, and so I feel great about that. And obviously, things could change, a competitive dynamic could change, cable could do something else that we don't anticipate or something else. But right now, based on everything we're seeing, those numbers feel conservative. And look, once you've built the network in a market, and we've seen this at Uniti for years, once you make the decision to go into a market, you choose a good market that has very little competition or none, that has good demographics, has good growth potential and you make the decision to go in and spend $10 million, $15 million, $20 million or $100 million to build that market, that's the most risky moment there when you're first building. But once you start to execute on it, every additional customer or what we call lease-up after that initial build is just terrific margin. And I wouldn't call it gravy because it's part of our model, but that's when you really start to drive terrific economics. So to your question about margin enhancement, yes, anything above 40% is additive and additive in a material way to the model.

Yes. And I think something I didn't appreciate as much is that we just looked at it as a build opportunity, but there is a customer service side, there is the marketing side, and it seems like you've brought in the right people to kind of maximize that value? And operationally, is that going better than you had expected? And how -- what are your comments there?

Yes. No, it is, and I appreciate you asking that question. I mean when -- again, when we were contemplating the merger, we said one of the things we have to do, one of the strategic imperatives is new leadership at Kinetic to really shake up that business and bring that insurgent share taker mentality to that business. And it just so happened that Frontier was being acquired by Verizon and it created an opportunity to bring on a lot of those people from Frontier into the business. And they had run the play that we're running, right? They emerged from bankruptcy. They were accelerating their build and they had a really aggressive go-to-market to take share back from cable. So we -- John Harrobin was the leader that we chose to run that business. And part of the rationale there was that he could help us bring on -- get the old band back together, not all of them, but a lot of them from Frontier. So we've onboarded some terrific leaders from Frontier. We've onboarded leaders from Brightspeed and leaders from Ziply and others that have terrific experience actually building fiber-to-the-home and then following through on the go-to-market. So I'd say, first and foremost, we've outperformed on executing on onboarding that team. And I would say the first quarter of this year -- actually, the second quarter of this year will be the first quarter where we have the new leadership team fully in place. So most of them came in December, January and February. So this is the second quarter. It will be the first quarter where they're all fully onboarded. And therefore, we're expecting big things from the team on a go-forward basis.

Got it. Now moving to, I guess, the opportunity that we knew would be big, but it seems to be getting bigger every day, if not every week. In terms of a lot of these data center builds, and I said it to Bill a week ago, it's like if you look at your fiber footprint map and you see where all the new data centers are being built, it's like a great overlay. What do you -- you've talked about the $1.5 billion opportunity, but what are you seeing today? And how are the conversations going in terms of what you see down the pipeline just because it seems like a very long-term big opportunity?

Yes, I agree. As you know, Richard, our strategy at Uniti for years has been to build fiber first or early into markets where there is no fiber. And that was well before the Kinetic fiber-to-the-home build. This was going back 15, 20 years, and we used to call ourselves the Zayo of the smaller markets. And the thesis was that you would have a smaller TAM because you're in smaller markets, but you should get a greater percentage of the opportunity because there's fewer people there. And we've executed on that strategy at Uniti and we're now executing on it at Kinetic. But one of the advantages that it gave us was we built network into more remote locations, including a backbone that has given us unique long-haul routes in Tier 2 and Tier 3 long-haul connections. And as I've been saying more and more over the past number of weeks, it's sometimes better to be lucky than good because that happens to be where the hyperscalers want to be because land and power are more accessible than it is in the Tier 1 NFL cities. So we're there. And unlike in the enterprise or consumer space, where the TAM is smaller because you're in these smaller markets, I would say the TAM for us is bigger among the hyperscalers because we are in those corridors where they want to be, and we've got existing infrastructure there that we're building off of, which gives us an advantage from a deployment perspective because we can deploy faster and it gives us an advantage from a cost perspective because you're building off of existing infrastructure. So when you put all those things together, I do think the opportunity for us is it's certainly bigger than what we expected, and it appears to be growing. And we sometimes struggle to put numbers around the TAM as a result because it's a moving target in a good way. But what we have said is that over the next several years, we expect to build about $1.5 billion of revenue through some of these anchor builds that we're building off of our network. And then that would lead to roughly $0.5 billion of recurring revenue and really give us a meaningful share of what we've estimated to be a $75 billion TAM for fiber companies. And so -- but honestly, Richard, if you ask me this question next year, I wouldn't be surprised if those numbers are all bigger for us.

Hopefully, I'll be able to ask that next year. In terms of like the lease-up opportunity, it's one of those things that I think people see the hyperscale opportunity, but lease-up has always been a little bit harder for people to really believe in. But it seems like with the development of AI inference and how much companies are using it, that the lease-up opportunity from enterprises that use the hyperscalers might come faster. Are you having more conversations with enterprises that are willing to not sign deals necessarily now, but are in conversation of, oh, if you build that and that hyperscaler is there, we'd like to build capacity or have capacity there.

We certainly are. In fact, the -- and we recognize that lease-up on fiber networks is a sensitive topic, right? People want to see follow through on that. And that's why every single quarter for the past, I don't know, several years, we've tracked our lease-up -- our anchor economics plus lease-up economics and now we're doing that on hyperscaler deals. And we're showing a blended IRR of 30% on anchor plus lease-up economics for hyperscalers. We also recently made the point that 80% of what we're doing with the hyperscalers is either selling existing infrastructure or selling infrastructure that's attached to existing infrastructure, and that's important because we're not building remote locations that are not strategic to our network. We're building where we are expanding our network in a strategic way. And so we're -- and we're starting to see tangible lease-up results. In fact, this first quarter, we talked about a $70 million hyperscaler deal that got turned up and showed up in revenue and EBITDA, and that was a lease-up deal. That was selling -- overpulling strands on an existing network route that we built about 2 years ago. So this was -- it was an overpull that had CapEx, but it was a lease-up on an existing route. And we also talked about a 20-terabit wave package, which by the way, is crazy. I mean 2 years ago, 3 years ago, our entire backbone was only 1.9 terabits, and now we're selling 20-terabit wave packages. That was also an existing route and it was a Tier 3 market connecting back to a Tier 1 market that was a Kinetic backbone route that was connecting a Kinetic market back to the core. And we sold a wave route to a [ NeoCloud ] that is connecting private data centers to public data centers. And we specifically called those out because they're terrific deals, but also those are good leading indicators of what I think we should expect to see going forward. And that's what we're playing for here. We like these builds, the $1.5 billion of builds over the next number of years. But what's going to really drive value in our business is that recurring revenue that comes from the lease-up. And the 2 deals that I just described, when you add up the recurring revenue, not just the onetime revenue, but the recurring revenue, that's about $5 million of recurring revenue just on those 2 deals in 1 quarter. So I feel like we're well down the path to making great progress there.

It's funny because like I know the nonrecurring revenue people don't kind of give it the same multiple or view, but you're making good money on that also, it's just the accounting involved. In terms of -- the one thing we do hear is that before you would get a deal, you'd build a route. And now it seems like there are multiple routes being built or the hyperscalers don't want just one route that there's redundant routes. And then also the level of build, the capacity you're building is different. How has this changed over the past few years? And where do you see it kind of going as more of these orders kind of come in?

Yes. It's definitely changed. And we we're constantly challenging ourselves to be innovative and think creatively about doing things differently, better and actually working with our customers to do things differently and innovate. When you're going from a customer that 3 years ago was buying 6 strands or 12 strands or maybe 24, and that was a gusher when you sold 24 strands, and they're now buying 832 -- or sorry, 864, 1,728 and then additional conduits on top of that, that's a very different network to engineer and follow through on and then service after the fact than the smaller networks we were talking about before. So you have to really work well with your customers and design routes that work for us and for them. So that's a big part of it. But the redundancy point is also really important because a lot of these data centers, in the past, customers might want a redundant circuit into a data center, maybe not. But the hyperscalers are actually looking for 4 different redundant circuits into these data centers. And that in and of itself is mind boggling. But when you're in a remote data center and you're the only fiber provider, there's 4 different opportunities. Now we don't always get all 4 of those opportunities. But when you're one of the few fiber providers near there with a backbone, you're almost always in the conversation for all of those. So it's -- in other words, it's not vendor diversity, it's really route diversity that they're looking for. And we're in a unique location -- unique position to service that.

And something that we start -- or we've been hearing more of, but I'm not sure how you're able to manage it is that people are worried about having enough fiber and having enough of the supply chain, whether it's construction or materials. Do you have any concerns that the supply chain is going to be constraining for you over the next few years?

I think it's -- I do have concerns and because we -- that's the kind of thing we're supposed to think about and be focused on. But I don't see us having any issues or at least in the near term. And by the way, that's a high-class problem when there's so much activity going on that fiber is a constraint. But I think that we're one of the few large remaining fiber providers that are building at scale. And when you consider that we're building at Kinetic and we're building at Fiber Infra and you compare that to others. I mean, there's a handful that are building more than we are, but not many. And so that does get us a seat at the adult table as we like to say. And so when it comes to our ability to procure fiber on time and at reasonable cost, we have, I think, the right relationships and the right amount of leverage in order to make that happen. And also, our customers are procuring fiber for themselves, and we benefit from that at times. And we've had customers who have channeled fiber our way, if we've needed it to help them -- to help us build on time for them. So I think at this moment in time, I feel good about our ability to manage through that.

One of the last things I want to hit on is something that you talked about a little bit with the 20-terabit deal. But how does FastWaves going to really kind of accelerate your business over the next few years because you seem really into...

Yes. We spent millions of dollars on that FastWaves marketing brand. I'm kidding. Look, I think the ability to turn up waves in a short period of time is a nice to have, but not a must-have. So what I mean by that -- and FastWaves, just for those of you who don't know, that is our product where we commit to a customer to turn up a wave within 21 days that's our committed SLA. We've been executing on that at around 14 days or maybe a little bit less. And it is important to have that because occasionally, customers do come to you and say, hey, I need this wave, and I need it quickly. And so for us to have that product is important, and it does give us an advantage relative to a lot of companies that don't have that product. With that said, when it comes to these mega wave projects or even 400 gig and certainly 800 gig waves, those are not overnight decisions that customers make. These are usually months in the making, and we have a heads-up weeks, months in advance. And so those are not deals that we win because we have the FastWaves product. We win FastWaves because of the exception, not necessarily the rule on the big wave packages. And ultimately, for us, we don't want to compete on Tier 1 to Tier 1 routes. We want to compete on Tier 2 and Tier 3 routes where we have route diversity and we have route uniqueness that give us the ability to compete on those things as opposed to on price. So that's our wave strategy, and I'm confident that we're going to capture some share.

It feels like it's a differentiation that you're able to deliver for both types. But we're out of time. Thank you.

Thank you, Richard. Thank you all.