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

Before we begin, disclosures are available at the registration desk. And for those of you I haven't met, I'm Mike Rollins and I cover communication services and infrastructure for Citi. Very pleased to welcome back Kenny Gunderman, CEO of Uniti. Kenny, thank you so much for joining us this morning.

It's a pleasure to be here, Michael. Thank you for having us, as always.

Well, it's great to see you. And as I think back, it's been what, like a year now since you closed the Windstream deal. Back then, you set out a very detailed set of objectives for Uniti. And I'm curious if you could give us an update on how you're progressing against your key milestones that you have established for the company..

Absolutely. We are about 1 month past our 1-year anniversary. So good memory, Michael, and I appreciate you holding accountable to what we promised then versus what we've delivered on. We said at the time the merger would make us the premier insurgent fiber provider, which really to us meant that we were a large fiber provider where scale matters in the fiber business. And we have 250,000 route miles of fiber across the country and over 2 million fiber-to-the-home customers. And both of those are growing at a rapid clip. And so we think we've achieved the goal of achieving scale in the fiber business. But insurgent is important because we want to be small enough that we're nimble enough to continue to outmaneuver our larger competitors. That's very important to us in a highly competitive environment like fiber is. We also promised to clean up the complicated capital structure and MLA relationship that existed between Uniti and Windstream and was a real deterrent on our cost of capital. So we promised to clean that up collapse the debt silos. And as a result, our cost of capital has improved dramatically. Our cost of debt alone has improved 600 basis points. And so we think we've delivered on that. We talked about removing the operational complexity of that MLA relationship and really untethering our teams towards growth. And we've not only done that, we've unlocked over $100 million of true operational synergies. So we've hit that goal. But we also talked about at the time, and this seemed a little bit fanciful at the time, but we talked about the real benefit of bringing together the Windstream wholesale business with the Uniti wholesale business and how that would position us really well to capture the hyperscaler and AI investment opportunity. And boy, we're really proven right on that one, and I can't wait to talk more about that today. So that's been a terrific success for us. We talked about really ramping the build at Kinetic. So prior to the merger, Windstream had really slowed the fiber-to-the-home build, but we felt it was a strategic imperative to ramp that materially to get ahead of any overbuilders and just get ahead of the build cycle that we saw coming, and we're certainly in the middle of. So we've ramped that build materially -- this last quarter, we built over 140,000 homes and we're now building 50,000 homes a month. So that run rate is exactly where we want to be. And we talked about how the merger would put us on our front foot from an M&A perspective and how in the past, the 2 companies separately had been sort of reactive to M&A and it was challenging -- but with the merger, we knew that it would put us on our front foot. And despite the -- our inability to talk about that publicly and the reality is we're making great progress there, too. So all that to say, I think we've delivered on what we promised, and we're continuing to execute every day. And I think over the next 12, 18, 24 months, you're going to continue to see terrific execution on our part.

Great. That gives us a lot to unpack this morning. So maybe just to start off, you mentioned we're going to see more over the next 18 to 24 months. So what are the key milestones that investors should be looking out for as you look out over that period?

Well, we -- first of all, it's very important to us to set goals that we either hit or exceed. So we give our guidance -- I talk about the vanity metrics of revenue and EBITDA. But we also talk about the less exciting metrics of homes passed and penetration and churn bookings. And I think critically important will be that you continue to see us building 50 -- roughly 50,000 homes a month at Kinetic and we've been executing on that. And when you extrapolate that number, that gets you to 600,000 homes on an annual basis, which is well in excess of what we've guided towards. As you know, we've guided to $475 million to $525 million for the rest of the year. That's exactly where we want to be, a place where we can ramp the build engine higher if we want to. And so it becomes more of a capital allocation question than it is a build engine question. Secondly, you continue to look for progression and improvement in penetration levels at Kinetic. We've stated 40% of our -- as our goal terminal penetration goal, and we're currently at around 29%. So we're progressively tracking towards that, including when you look at our most recent cohorts, 1 year anniversary of those cohorts around 35%. So we're really doing extremely well there. We've talked about bringing down fiber churn to what we think could be, should be industry-leading levels. I've said many times, you can't sell your way out of a bad churn number and continue to believe that. So we're going to continue to focus on bringing churn down and continue to look at strong bookings from fiber infrastructure. So we just posted a record quarter of bookings, $2.2 million of MRR, which is, I think, 30% better than any previous quarter. That number will ebb and flow as it does in a wholesale fiber business. But over a multi-quarter period of time, you should continue to see that number tick up as well as we continue to take our share of a growing -- substantially growing fiber infrastructure opportunity set.

And maybe just dig deeper on 2 of those quick things and then we'll come back to a higher level, starting backwards. So the $2.2 million of MRR, does that include or exclude some of these large fiber wholesale deals that you're winning and going after.

So it largely excludes those. So when we show a onetime revenue or EBITDA effect in a quarter, that is not picked up in bookings. So only MRR is what's shown in our bookings. That, however, we do show dark fiber in our bookings. So you do have some element of MAR in our bookings, but it's not the onetime revenue or EBITDA that we sometimes report. With that said, the hyperscalers only represented 10% of our bookings for that quarter -- for second quarter. So the $2.2 million hyperscalers actually represented a pretty small percentage of that number, which is part of what excites me about the quarter. We had such a diversified mix of customers in the quarter, which we may get into later. But I know everyone likes to talk about the hyperscalers and we do too, but it was really only 10% of the total for the quarter.

Great. And then the other thing, you said 35% penetration. Is that in a single year, you're getting 35% penetration? Or is that over a few years, you're getting that in some of your markets already?

That's within 1 year of a cohort built less than a year ago. So that's -- that is very -- that's terrific penetration in a very short period of time in our most recent cohorts which is -- and even before that, Michael, as you know, our early cohorts were showing mid-20% penetration, which is also very good. But as part of the merger, we brought in a new leadership team at Kinetic with a true insurgent mentality, a share taker mentality, and we've really started to see the effects of that team as they've ramped in the past 6 months or so.

So maybe actually, we'll go well out of the order that I was going to focus on. Just given the progress that you're making in both of these businesses, maybe we'll just spend a little bit more time on each of these and maybe just sticking with Kinetic for another couple of minutes. So with Kinetic, you're doing really well. It sounds like with the penetration with the builds one of the things that we're seeing in the broadband market right now is that ARPUs for the category just seem to be softening a little bit. And the question is, for you guys as you look at what your performance is and what you're seeing in the industry, is this a function that like the consumers just having a tougher time to keep pushing price and mix of tiers of speed, is it just competition you guys wanted to get to your end destination more quickly. So there's a little more discounting along the way. What are you seeing? And what does this mean for pricing power in broadband over time.

Yes, great question and hugely important topic. And look, we came into the year expecting a competitive environment. And we thought really for 2 reasons. One, the wireless carriers especially AT&T and Verizon have been talking a lot about convergence. And really, what does that mean? Convergence means a lot of really great exciting things from a strategic point of view, but as an operator -- which I'm happy to talk about that, too, but as an operator, what it means is they're discounting their fiber-to-the-home product to pull in wireless, right? They've been very vocal about how that drives greater penetration for wireless and it drives lower churn, but it means lower fiber pricing, right? And I think you've also seen the big cable providers looking for a defensible line of retreat, right? They've been losing a lot of broadband subs over the past 12, 18 months. And they're using creative promos, they're using creative giveaways and that also effectively results in lower broadband pricing. So we anticipated that. We didn't know exactly what the moves would be, but we anticipated that environment. And as a result, we've seen lower ARPU. So to your question, lower ARPU largely driven by competitive pressures and we've historically had a higher ARPU than most in the industry, as you know, Michael, and we sacrificed some of that ARPU in the first half of the year to retain customers. So we gave away some retention credits. We gave away some other things to save our base thinking that this competitive turmoil right now is temporary, and we really do think it is. So as we look at the second half of the year, I think we've already started to see some stabilization across some of the competitors. So we've seen some price ups from some of the folks I just mentioned, and we think that's going to continue to stabilize in the second half of the year. For us, we've got an increasing amount of value-added services to sell. So we've just rolled out YouTube TV -- we've got always on WiFi. We've got some more added features coming on the security side in particular. We also have less than 50% of our base that's taking 1 gig. So we've got a terrific upsell opportunity. And ultimately, very importantly, our team is now fully in place and functioning. So in the first half of the year, it really wasn't. We were still putting pieces in place, putting our systems in place. But in the second half of the year, we now have AI monitoring all of our calls in coming and out. So we've got the ability to refine our scripts. We've got the ability to refine our offerings. So back to the insurgent mentality, we have the ability to be a lot more nimble than our competitors. So I do think it's going to continue to be competitive, and I think it's going to be competitive on price, but I think there's going to be an increasing stabilization in the industry, and we're going to have the ability to continue to be nimble and I hope out maneuver our competitors. I think very, very importantly, though, we also have a superior product. I mean we do have the superior broadband product, whether you're competing against cable or fixed wireless or LEO, and that gives us an advantage. And in our markets, as you know, Michael, they're less competitive. They're smaller. They're Tier 2, they're Tier 3. So we compete against big cable in less than 50% of our markets, and that's substantially less than most. And we don't compete against AT&T and Verizon at all on the wireline side. So we've got a really good competitive environment. We've got the right team in place. Now we have the right systems in place. So I feel really good about our ability to compete.

I mean that's 1 of the things that I remember just about historic Windstream, right? It's just that they're competing in these less populated areas, less competition. What about Starlink -- what about -- what are you seeing from them as they're boosting broadband capacity? And do you think they'll move to more of a price-based approach? Are you seeing any evidence of that? And how do you compete against that?

So Starlink is a great customer of ours. So again, we're a wholesale fiber provider in addition to being a broad residential broadband provider. So they're a terrific customer of ours. And so -- and I think they're going to continue to be a great customer and a growing customer over time. So we're a little bit hedged against that competitive threat, I'd say probably substantially hedged. We have definitely seen a leaning in from their perspective, leading up to and around their IPO. So from a promo perspective and from a pricing perspective, I'm sure that was designed, and we saw a little bit of that in the first half of the year, and we were public about that. We also have a build plan, as you know, that's aggressive, and we're ramping it quickly. And that build plan is intentionally designed to build into markets where we have a competitive threat -- potential competitive threat from overbuilders, fiber overbuilders from cable. So we're not -- our build today is not tooled towards competing as Leo. We're not viewing LEO or fixed wireless as a long-term competitive threat. So as a result, we're leaving our flank a little bit exposed, if you will, to those 2 products. So we're losing a little bit more to both of those than we are to fix than we are to cable or to fiber overbuilders. And I would take that trade-off all day long because as we move forward, when we do build fiber into these markets, we have the ability to take back share from LEO and take back share from fixed wireless because I do think as we've now gotten further and further from the IPO, you're starting to see more stabilization in now Starlink is approaching the market. And it's an expensive product, right? It is more expensive than fiber. You do have to buy the equipment. So I think over time, we've got an ability to compete very effectively against LEO.

And then pivoting over to the fiber infrastructure business. So we were just talking earlier, so you have kind of these 2 components, this recurring MRR business, and in some of these larger hyperscale opportunities, can you frame the growth opportunities from each? And I know you have in your guidance, right, some expectations for significant bookings and flow through. I think on the earnings call, you may have mentioned some of that could actually maybe be early '27. So maybe give us an update on fiber growth, the wholesale opportunity and the timing.