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

Thank you. Good morning and welcome to today's conference call to discuss Unity's second quarter 2026 earnings results. My name is Jonathan and I will be your operator for today. Today's call is be recorded and a webcast will be available on the company's investor relations website. Investor.Unity.com, beginning today and will remain available for 365 days. At this time, all participants are in a listen-only mode. Participants on the call will have the opportunity to ask questions following the company's prepared comments. It is now my pleasure to introduce Bill DiTullio. Unity's Senior Vice President of Investor Relations and Treasury. Please begin.

Thanks, Jonathan. Good morning, everyone, and thank you for joining today's conference call to discuss Unity's second quarter of 2026 results. on the call today will be Kenny Gunderman, our CEO, and Paul Bowlington, Unity's CFO. John Harabin, President of Kinetic, will also be joining us this morning during Q&A. Before we get started, I would like to quickly cover our Safe Harbor Statement. Please note that today's remarks may contain forward-looking statements. These statements include, but are not limited to, statements regarding Unity's fiber build strategy, the business's growth potential, our 2026 outlook, and other statements that are not historical facts. Numerous factors could cause actual results to differ materially from those described in the forward-looking statement. For more information on those factors, please see the section titled Safe Harbor Statement in the accompanying presentation in the Risk Factors section in our filings with the United States Securities and Exchange Commission. With that, I would now like to turn the call over to Kenny. Thank you, Bill. Good morning, everyone, and thank you for joining. Unity posted another terrific quarter of results as we continue to execute well on our strategy as the premier insurgent fiber provider. We're consistently growing wholesale, enterprise, and consumer fiber revenue at 10 to 20% with an insurgent share-taker mentality. Our strategy of being first with fiber to metro and wholesale markets, along with a mission-critical and future-proof technology, positions us for many years of predictable execution and value creation for our shareholders. Demand for fiber is continuing to accelerate, and hyperscalers and neoclouds are leading the way. We posted a record quarter of new bookings at Fiber Infrastructure, exceeding our previous record by almost 30%. Demand was strong across virtually all categories, reinforcing the benefit of our robust, diversified customer base, especially at Unity Wholesale. The use of agentic AI is now upon us and growing. As has proven typical with AI adoption, both the timeline and TAM appear ahead of our prior expectations. Near term agentic AI use cases with measurable ROI such as customer service agents, cybersecurity threat hunting and mitigation, and automation of corporate functions are only a precursor to more bandwidth intensive functions like physical robotics, autonomous driving, personal AI agents, scientific research, and many others. Unity is building the infrastructure to enable this growth and benefit our shareholders. This growth started and continues with dark fiber networks in Tier 2 and 3 markets with fiber strand counts of 50 to 100 times previous levels and is now evolving to lit wave packages at the same 50 to 100 times prior levels. These wholesale investments by our hyperscaler NeoCloud customers are a precursor to enabling greater agentic AI usage by our enterprise and residential customers. And we've seen estimates of dramatic multiplier effects on broadband usage as a result. Distribution of inference to the edge requires low latency and high bandwidth connectivity, highlighting the significant benefit of our 5 million future-proofed connected endpoints at Unity, including fiber to the home, on-net buildings, and data centers, towers, and small cells. Fixed wireless, LEO, and even cable remain somewhat competitive today at the edge, but over time, as usage, reliability, and latency become more mission critical, customers large and small will demand fiber at the edge, presenting us an opportunity to win back share from these other technologies. In short, Unity is well positioned strategically. We have the right assets, plan, and team in place going forward. Now we have to execute. Our results indicate we're doing just that. Total fiber revenue grew 10% year over year, and fiber revenue at fiber infrastructure grew 6%, right in line with our expectations and demonstrating the robust demand we're seeing. In addition to the record bookings of fiber infrastructure, we had the strongest quarter ever of net ads at Kinetic and just as importantly, the number of new fiber homes constructed. As we've been foreshadowing for some time, we really hit our stride for the fiber build in the second quarter, and we fully expect that momentum to continue. Our footprint at Kinetic has substantial opportunities to build first and there are increasingly fewer skilled footprints like ours in the country. We're moving in haste to take advantage of this benefit. To that end, as highlighted on slide five, our priorities have not changed for the full year. Building off the momentum in the kinetic build engine, we're now raising our expectations on new fiber homes constructed this year to 475,000 to 525,000. We also continue to lean into this generational opportunity of fiber infrastructure, which I'll comment further on in a moment. At Unity Solutions, we're seeing growing success in cross-selling products into our on-net fiber base at Unity Fiber and Kinetic. Today, we estimate our managed services attachment rate to be only around 6% excluding voice, but we're growing that materially as during the quarter about 16% of new bookings came with a managed services product. We believe selling more products to on-net customers will not only lead to greater sales, but enhanced margins and more loyal customers. 2026 is an important inflection year for Unity and the terrific industry tailwinds we just discussed are fueling that pivot. We previously committed to some key milestones as highlighted on slide 6 and we're demonstrating progress towards our goals. Convergence offerings and new initiatives from Big Cable are having an expected impact on ARPU across the industry and we've seen some near-term pressure. However, we expect ARPU to stabilize industry-wide and at Kinetic, especially given the favorable competitive dynamics in our markets and the upsell opportunities that exist in our base. The current industry dynamics suggest it has never been more important to build fiber first or early and that's exactly what we're doing now at an accelerated pace. Slide 7 shows that we're well on our way to 3.5 million homes passed with fiber and 1.25 million fiber subs and we're closer to 90% of our revenue coming from our core business. We remain focused on operational excellence, customer obsession, and together with executing on our strategy of building fiber into unique locations, progress on our key KPIs will remain up and to the right. Driving lower churn is critically important to driving higher customer lifetime value, and we are very pleased with our plan and progress there as highlighted on slide 8. Our fiber churn at Kinetic this quarter is the best second quarter churn we've ever seen. We believe that with the various actions we've taken to date, plus future planned actions, will bring kinetic fiber churn down to industry-leading levels. Managing churn effectively is a team effort and we've actually made it a company-wide metric for our incentive compensation plan as a result. Turning to fiber infrastructure on slide 9, having a previously built robust fiber network in Tier 2 and 3 markets is presenting us an opportunity to capture meaningful share of the generational demand as evidenced by a record quarter of new bookings. Importantly, over 50% of the new bookings this quarter were WAVES or LIT capacity as opposed to DAR Fiber, reinforcing the pivot from the build cycle to more lease up and inference. As we've previously pointed out, we expect approximately $1.5 billion of revenue in the next few years as we build profitably to enable AI learning. However, the truly exciting opportunity for Unity is the approximately $500 million of recurring revenue that will sit on top of those new builds, and we're starting to realize that recurring revenue now. We've also said that we expect that broadband usage to come from a diversified base of customers, and during the quarter, we demonstrated a healthy mix of demand across our key customer segments, including about 20% from neoclouds, 18% from superscalers, 10% from hyperscalers, and 6% from fiber optic. the home providers. A special thank you to Mike Freeloo, Greg Ortel, and the terrific sales leaders at Unity Wholesale and our world-class network and service delivery teams under the leadership of Eric Daniels and Kathy De La Garza following through for our customers. With that said, our funnel of opportunities is even more exciting, so we expect continued positive momentum. As a reminder, while quarterly bookings in wholesale will always be lumpy given the nature of the customer base, the general trend over the next few years should be up and to the right. Slide 10 illustrates we're building our fiber network profitably and strategically. Although we're building some attractive new greenfield routes for hyperscalers, close to 80% of our hyperscaler business actually includes selling all or at least partial existing infrastructure, leveraging heavily the previously built network. Make no mistake, this is a big advantage for Unity from a cost and time to deploy perspective, as evidenced by our blended anchor lease up cash yields of 37%, the highest we've ever seen. Turning to slide 11, during the quarter we sold more waves than ever and as a result, waves were the single biggest product contributing to our record bookings. As a reminder, we're not enabling WAVES capability all across the country. We're focusing on routes that are unique to Unity that give us a competitive advantage. Our pre-existing routes are enhanced by the unique build cycle that we're currently undertaking for the hyperscalers as we strategically expand our connectivity among unique markets. Highlights in the quarter were a 20 terabit wave package connecting a NeoCloud from a data center in a Tier 2 market back to a large metro. and an 18 terabit wave packet sold to a superscaler out of another major data center in a Tier 2 market. To put this in perspective, that's 96 400 gig waves sold as lease up in one quarter to just two customers over fiber recently built into new data centers. There's more to come, as our current waste funnel represents approximately 1.3 petabytes of traffic, and the vast majority of this funnel consists of relatively new customers. As we see it today, the demand appears staggering. With that, I'll turn the call to Paul.

Thank you, Kenny. Starting on slide 13, I'd like to review the key second quarter highlights for both Kinetic and our fiber infrastructure segment. Results for the quarter were once again strong, and we continue to make significant progress across several fronts. Starting with Kinetic, we expanded our fiber network to pass an additional 141,000 homes with fiber, our highest level of new passings on record, ending the quarter with approximately 2.1 million homes passed with fiber. Kinetic also added 38,000 net new fiber subscribers during the second quarter, ending the quarter with 603,000 total fiber subscribers. As Kenny mentioned earlier, FiberNet ads for the quarter were the highest on record, and total kinetic fiber subscribers grew 25% from the prior year period. Kinetic consumer fiber revenue grew 19% year-over-year during the quarter. This growth is being driven by strong adoption of our fiber-to-the-home product, bolstered by the performance of the various marketing initiatives at Kinetic that target both our newer and more seasoned cohorts. At Fiber Infrastructure, we recorded consolidated bookings MRR of approximately $2.2 million, our highest level on record and an almost 30% increase from the previous record level. These record levels continue to be driven by the robust demand we are seeing for both dark and lit fiber solutions from hyperscaler and neocloud superscaler customers. Slide 14 highlights the sustained momentum we are seeing within kinetic fiber. We achieved fiber penetration of 29% during the quarter, which is up 90 basis points year over year. We also now pass 46% of our kinetic consumer footprint with fiber. Consumer fiber ARPU during the quarter was impacted by a number of factors, including new customer volume, the timing of rate plan adjustments, and customer retention initiatives. For the remainder of the year, we expect consumer fiber ARPU to decrease low single digits year-over-year in the third quarter, but should stabilize in the fourth quarter with an expected increase of low single digits year-over-year. Turning to slide 15, the continued strong improvement in our cohort fiber penetration is being driven by highly targeted marketing, customer experience, and customer retention initiatives being deployed by the Kinetic team. Penetration levels in our year one 2025 cohort are now exceeding year two penetration rates in the prior year cohort, and year three penetration rates in our older cohorts. We expect to maintain or improve this trajectory going forward, and given our current trajectory, we remain confident that our 40% terminal penetration target is very achievable and perhaps conservative. Slide 16 lays out our key targets for Kinetic in 2026. Given the accelerated pace of our fiber build, we are increasing our incremental homes passed with fiber target by 25,000 and now expect to reach 2.33 to 2.38 million homes passed with fiber by the end of this year. This would bring fiber coverage within the kinetic footprint to over 50%, a significant milestone and our goal to reach 3.5 million homes by the end of 2029. We also expect to end the year with between 675,000 and 700,000 fiber subs and realize $635 million to $655 million of consumer fiber revenue in 2026, an increase of roughly 25% to 30% from the prior year. Slide 17 provides a pro forma view of Unity's consolidated results for the second quarter. Consolidated pro forma revenue and adjusted EBITDA were down 5% and 10% year over year respectively during the quarter, primarily driven by the continued declines at Unity Solutions and in legacy copper and TDM services. However, we continue to see strong growth in the strategic parts of our business. Kinetic fiber-based revenue inclusive of consumer, business, and wholesale services grew 12% year-over-year. As we continue to execute on and accelerate our fiber over-build plan, fiber services at Kinetic will deliver consistent, strong growth quarter-over-quarter. Our infrastructure revenue and adjustability of DOG grew 10% and 20% respectively year over year. In addition to the information provided in our earnings materials, we have also included supplemental pro forma financial information on our investor website. Slide 18 demonstrates that the growth in each of our core fiber lines of business has been very strong and we expect that growth to continue given the superior nature of fiber as a service. With this pace of growth, we continue to expect fiber to overtake legacy services as the majority of our revenue by the end of 2026. Please turn to slide 19 and I'll now cover our updated full year 2026 outlook for the combined company. Beginning with Kinetic, we continue to expect revenues and contribution margin to be $2.145 billion and $905 million, respectively, at the midpoint. Given the high number of fiber premises now expected to be constructed in 2026 and the incremental capital expected to be spent later this year to support our accelerated build plan for 2027, we now expect to deploy approximately $1.27 billion of net capex at the midpoint of our guidance, a $100 million increase from our previous range. At Fiber Infrastructure, we expect revenues and contribution margin to be $1 billion and $575 million, respectively, at the midpoint for full year 2026. The increase from our prior guidance range reflects the strong hyperscale and AI activity we saw in the second quarter. As a reminder, we expect the revenue from large sales type lease dark fiber deals to be lumpy and to come in unevenly during 2026. As such, we have further adjusted our third quarter and fourth quarter guidance to account for the timing of these deals in the second half of the year. While we still expect to see a significant portion of those deals hit later this year, in the fourth quarter, as we previously communicated, there is a possibility that some of those deals could slip into early 2027. Our outlook for net capex at fiber infrastructure this year remains $140 million at the midpoint of our guidance and represents a capital intensity of approximately 14%. Please also note that, as has always been our practice, our net CapEx reporting offsets our gross CapEx by upfront payments received in an IRU arrangement as the cash received will offset a significant portion of the CapEx related to those deals. Turning to Unity Solutions, we expect revenues and contribution margin of $700 million and $320 million at the midpoint. The increase in our contribution margin guidance is due to higher margin strategic services sold during the quarter. As we have mentioned several times before, while Unity Solutions is not core to our go-forward fiber infrastructure strategy, it does generate meaningful, predictable cash flow. While we expect revenue and EBITDA to continue to decline at a mid-teens pace year over year over the next few years, a crucial part of our strategy is to retain the most profitable portion of this business while winding down low-value legacy and TDM services. Altogether, we expect consolidated revenue and adjusted EBITDA of approximately $3.655 billion and $1.475 billion at the midpoint of our 2026 outlook, with consolidated net capex of about $1.525 billion. Finally, I'd like to provide some brief comments on our capital structure. Since announcing our agreement to merge with Windstream, we have successfully executed on a series of planned actions that were systematically implemented to extend our debt maturities, lower our overall cost of debt, establish access to new debt markets, optimize our mix of secured and unsecured debt, and drive meaningful interest expense savings. As slide 20 highlights, partially as a result of these actions, the blended yields on our debt have improved significantly, falling an impressive 600 basis points over the past three years, from around 12.5% in February of 2023 to around 6.5% today on a blended basis. In recent quarters, we have discussed the attractive of the ABS debt market and the likelihood that ABS would play a significant and growing role in our capital structure going forward. To do that in, we recently completed our second ABS transaction at Kinetic that will not only substantially help fund our fiber build for the next year, but also allows us to potentially pay down up to $500 million of secured debt through the asset sale offers that are currently ongoing. As I've said many times previously, we intend to be balanced in our approach to raising ABS funds. financing, and these associated offers to pay down secure debt with ABS proceeds is in keeping with that balanced approach. While ABS will be an important part of our strategy to fund the strategic investments we are making in our business, it's not the only source of capital we have at our disposal. For example, as has been our practice at Unity, we are constantly evaluating our portfolio of assets for optimization. Optimization opportunities could include assets that are underutilized or fallow, assets that are outside of our priority footprint or assets for which we can receive premium valuation multiples. As we mentioned last quarter, we believe there are $500 million to a billion of non-core assets that we could monetize. It's important to also note that the monetization of these assets would have a negligible effect on our adjusted EBITDA as many of them are underutilized today and currently produce minimal to no cash flow for the business. As slide 21 shows, between excess fiber, non-core and non-clustered assets and operations, such as select non-clustered kinetic and non-Southeast fiber infrastructure markets, as well as spectrum and other real estate assets, we believe the opportunity exists to generate material proceeds over the next 12 to 36 months, and we are making progress on several potential transactions. With that, we'd be happy to take your questions. Operator?.

Certainly. And ladies and gentlemen, if you do have a question at this time, please press star 1-1 on your telephone. If your question has been answered and you'd like to remove yourself from the queue, simply press star 1-1 again. Our first question comes from the line of Gregory Williams from TD Cowan. Your question, please.

Great. Thanks for taking my questions. Sounds like business is booming on the fiber-infra side, so my questions are more on the kinetic side, actually. One is just on the consideration Consumer Fiber ARPU, as you guys noted, it was down 2.6%. And you gave us some guidance for the third quarter and fourth quarter saying that you had new customers, timing of rate plan adjustments and retention. Can you just help provide more color to the ARPU trajectory? We're seeing ARPU pressures everywhere, whether it's cable repricing, wireless and now Starlink in the mix. How do you think about the ARPU curve sort of longer term? As you think about maybe two or 3% growth from previous messaging. Second question is on Kinetic CapEx. You did raise it by a hundred million and you did raise the fiber home deployment by 25,000. So it implies cost per home pass might be going up or is this just because you're front end loading some of the costs or warehousing equipment or is it actually indeed cost for home pass going up from rising equipment costs thanks.

Yes, Greg, this is John. I'll take that and I'll start with the second one. And on the equipment costs, You know, we've seen all those stories that you've seen. We believe that there's going to be a slight increase in our cost of fiber in the outer years, 27 and beyond. And as a result, I think when you look at the range that we've guided to in terms of cost per passing, we're going to come in at the upper end of that range. So I would plan for that, and that's what we are planning for as well. We're not going to be impacted by the CPE memory charge issues for a variety of reasons, including our long term contracts and volume and the fact that we can balance different skews in order to hit the targeted CPE cost number that we are that we plan for. So I think we're good on the CPE side and an uptick a little bit in the fiber material side, beginning in, I'd say mid 2027 and beyond. relative to the ARPU trends. As Paul said, we expect a slight decrease year over year next quarter and then return to positive in the fourth quarter. And on an annual basis, our forecasts still show to and beyond. And all the reasons Paul mentioned are, entirely accurate when he talks about cost of retention. That is in response to the competitive promotions that Cable started with and the Telcos matched on. And we've seen that, you know, we're fortunate in a sense that we only compete with cable and less than big cable and less than 60% of our fiber territory. So it means that and that compares to like mid 80s to low 90s versus other areas. peers in our category. So we're not as impacted, but make no mistake, 60% is still a number and we are in a growth business. And like Kenny said, we're not going to chase unprofitable growth, but we're not going to see the market either. So we're being really smart about it. We've got, We call them regional, but they're not geographic. They're more like tiers of pricing and cohorts. that we adjust based on our performance, the strength of that market, and the competitors pricing. We track it and monitor it, and we adjust that to be rational yet maintain our growth. As you can see, we haven't necessarily been slowed down by growth on the top line or churn improvements either. So I think we'll see it play out. We said churn would come in where it did at an improved guidance last quarter, and we expect that to improve. And like Paul said, we're going to return back to that 2 to 3 percent growth beginning in fourth quarter.

Greg, let me just add a couple of things to what John said to reemphasize on the CAPEX, make sure we're clear there. You can't really take the increase in capital that we're guiding to and apply it directly to just those 25,000 additional homes we're guiding to. As mentioned in my comments, a lot of that CapEx is a pull forward of CapEx to accelerate 2027 growth. So those households that we're investing in at the end of 2026 will be households that are passings, I think, in 2027. So as we've talked about before, these bills tend to be more front loaded from a CapEx standpoint. and with design and permitting and then construction starts on homes to be passed in future periods. We're confident in our ability to hit the cost to pass range that we've put out prior, even though, as John said, there might be forces that are driving us a little bit more towards the higher end of that range, but that range still holds.

That's helpful. Thank you. Thank you. And our next question comes from the line of Richard Choi from JP Morgan. Your question, please.

Hi, sorry about that. I wanted to ask about the demand funnel or pipeline you see from the three different categories you called out, neocloud, superscalers, and hyperscalers. Is there any differentiation? and what type of projects they're looking at or you're potentially doing for them.

Good morning, Richard. This is Kenny. I think you trailed off a little bit at the end there, but I think I got the gist of your question, which is the distribution of our funnel across the key customer segments and the types of products. I'm paraphrasing a little bit. Look, fundamentally, the funnel is very, very strong across all of those customer segments. And I think our distribution of bookings in the quarter is actually a pretty good representation of the funnel. And, of course, it ebbs and flows because any time you've got a funnel, funnel that just grows and grows, that means you're not selling enough. So we need the funnel to grow, but then retract and grow again. But fundamentally, each of those segments are strong. As we've been saying now for really two years, and we're really just parroting what the hyperscalers and neoclouds have been saying, there is a constraint on compute supply in the industry and therefore the infrastructure to enable that compute. That is a constraint. It has been a consistent message. It's been a consistent message among that customer segment that they need to invest to stay ahead of the demand, and they're consistently surprised by the amount of demand that's chewing up the capacity. And so they're having – they're struggling to stay ahead of it. And of course, we're at the tip of the spear of that, and we see the same amount of demand across all of those segments. I think the hyperscalers are much more in the vein of building new fiber, whether it's greenfield or interconnecting routes or over-pulling routes and more in the vein of dark fiber as a product. think about them as more of enabling building the learning models. And really that's a large percentage of the billion and a half of revenue that we've talked about over the next several years as being the build cycle. So they're generally the anchor customers in that build cycle. And we've talked about the the emergence of the neoclouds and the superscalers and other names of customer categories that we haven't come up with yet that will enable, that will then use those learning models and that fiber and use that for inference and obviously selling and reselling compute capacity And frankly, we're starting to see that demand sooner than we expected. And we're now using words like petabytes that that are needed to capture the amount of demand. And I'd say the majority of the funnel that we talked about there is really coming from the neocloud group and these multi-terabit wave packages are more of the norm than the exception. And we talked about two of them this quarter. right down the fairway of lease up on greenfield builds that we've had over the past couple of years, driving really terrific margins in a capital efficient way. got a lot more of those coming so I would say the long shorter version of the answer your question is demand continues to accelerate and and we're starting to see the neoclouds and the super scalars as the higher growth component of that and they're and they're taking more late waves and lit capacity versus dark fiber than the hyper scalars.