Uniti Group Inc. (NASDAQ:UNIT) Q2 2023 Earnings Call Transcript

Uniti Group Inc. (NASDAQ:UNIT) Q2 2023 Earnings Call Transcript August 3, 2023

Uniti Group Inc. misses on earnings expectations. Reported EPS is $0.11 EPS, expectations were $0.34.

Operator: Hello, and welcome to Uniti Group’s Second Quarter 2023 Conference Call. My name is [indiscernible], and I will be your operator for today. A webcast of this call will be available on the company’s website, www.uniti.com, beginning today and will remain available for 14 days. [Operator Instructions]. At this time, all participants are in a listen-only mode. Participants on the call we have the opportunity to ask questions following the company’s prepared comments. The company would like to remind you that today’s remarks include forward-looking statements and actual results could differ materially from those projected in these statements. The factors that could cause actual results and difference are discussed in the company’s filings with the SEC.

The company’s remarks this morning were reference slides posted on its website, and you are encouraged to refer to those materials during this call. Discussions during the call will also include certain financial measures that were not prepared in accordance with the generally accepted accounting principles. Reconciliation of those non-GAAP financial measures to the most directly comparable GAAP financial measures can be found in the company’s current report on Form 8-K dated today. I would now like to turn the call over to Uniti Group’s Chief Executive Officer, Kenny Gunderman. Please go ahead, sir.

Kenneth Gunderman: Thank you. Good morning, everyone, and thank you for joining. Starting on Slide 3, Uniti posted another quarter of solid operating performance. And as a result, we’re reiterating our consolidated full year 2023 revenue adjusted EBITDA and AFFO outlook. Our consolidated core recurring revenue grew 4% during the second quarter from the prior year, while our Uniti Fiber core recurring revenue grew 5%. Our lease-up revenue categories continue to reap terrific results with non-wireless wholesale, enterprise and dark fiber lease-up revenue growing at 7%, 15% and 25%, respectively, during the quarter. We also signed a new 10-gig upgrade agreement with one of our major wireless carriers during the quarter. The agreement covers approximately 1,100 lit backhaul sites and extends the contract term from a blended term remaining of less than a year to now 7 years.

As you will recall, we signed a similar agreement with another of our major wireless carriers in the third quarter of 2022, which also covered approximately 1,100 sites and locked in 10-gig pricing for 8 years. On a combined basis, these 2 agreements have resulted in a slight overall net price increase. Including the returns I just mentioned, the approximate average remaining term of our entire lit backhaul portfolio is an impressive approximately 5 years. Our scaled national network and exceptional network performance allows us to negotiate bespoke agreements with our wireless carriers, providing steady returns and minimizing churn. With our industry-leading 0.2% churn and no legacy services weighing us down, we believe our runway for mid-single-digit growth is long.

Slide 4 demonstrates this growth will be disciplined, and we believe profitable. Our substantially underutilized fiber network acquired largely through sale leasebacks versus complicated company acquisitions is helping drive our shared infrastructure economics. Our anchors lease-up model is working driving cumulative cash flow yields today of 24%, a more than threefold increase from the anchor yield on these projects. Turning to Slide 5. We continue to grow our 138,000 route mile network, and we added approximately 1,700 route miles during the quarter. Only approximately 20% of our available network is lit today and as we’ve mentioned before, we own dark mitral fiber in about 300 markets nationwide, which represents terrific capital and margin-efficient growth potential for enterprise, wireless backhaul and small cells.

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We continue to believe that the wireless carriers will eventually need to densify these non-Tier 1 markets and Uniti is well positioned for that growth in the future. Slide 6 shows that the majority of our revenue is wholesale in nature, which comes with longer-term contracts, lower churn and less required overhead for execution. As a result, our business and underlying performance are less susceptible to macroeconomic conditions, and we’re diversified across numerous use cases in the fiber and customer segments. As an example, even though wireless carriers are spending less this year than last year as a group, that decline is more than offset by buyers such as hyperscalers, Internet providers and fiber-to-the-home providers. Turning to Slide 7, scale matters and fiber, especially with a wholesale heavy business like ours.

Having an own national network is a meaningful competitive advantage for Unity and our ability to deploy dark fiber and wave services present Uniti with a unique low-risk growth opportunity with minimal competition. As an example, we recently announced that we signed a 20-year long call dark fiber IRU agreement with a global Internet provider who is an existing customer. The total contract value of this deal is $35 million and utilizes approximately 1,800 route miles of existing owned fiber. We believe we had minimal competition for this deal given our unique robust network. We expect these routes will be delivered to our customer throughout the second half of 2023 and into 2024. Slide 8 illustrates our balanced approach to bookings between anchor and lease-up.

Consolidated bookings were up 20% in the second quarter when compared to the prior quarter, while wholesale bookings were up over 50%. The interest in our network has never been higher as our sales funnel remains very strong and underscores the growing demand for fiber. But as a reminder, wholesale bookings can appear lumpy given these deals are typically larger and fewer in quantity. For example, the 20-year dark fiber deal I mentioned earlier, represented over 30% of wholesale bookings in the quarter. It is not uncommon for one wholesale deal to materially impact bookings in a single quarter from a timing perspective. Turning to Slide 9. Our enterprise strategy is highly disciplined and regional in nature. As you can see from the map, we’re only offering enterprise services in approximately 30 metros concentrated in the Southeast, which has very favorable demographics.

In fact, the Southeast has accounted for more than 2/3 of all job growth across the U.S. since early 2020, almost doubling its share prior to the pandemic and is home to 10 of the 15 fastest-growing American large cities. Our local brand is very strong in this region, helping to contribute industry-leading enterprise churn of around 0.7%. Although enterprise sales represent about 5% of our total revenue today and will likely always represent a minority percentage, it remains a critical element of our lease-up strategy. With no significant debt maturities until 2027 and given our organic growth runway and continued steady performance, Uniti is positioned to patiently execute during these uncertain economic and credit market conditions while providing a virtually fully funded growth plan aside from future debt refinancings.

With that, I’ll now turn the call over to Paul.

Paul Bullington: Thank you, Kenny. Good morning, everyone. I’d like to begin by reviewing our second quarter performance, followed by an overview of our current 2023 outlook. We had another solid quarter at both Uniti Fiber and Uniti Leasing, highlighted by 4% consolidated recurring revenue growth during the quarter when compared to the prior year. As I’ll cover in more detail in just a bit, our 2023 outlook for consolidated revenue, adjusted EBITDA and AFFO remains unchanged as we expect to end the year within the previous guidance ranges provided. Finally, I’ll conclude with additional commentary on our current balance sheet and capital structure. Please turn to Slide 10, and I’ll start with comments on our second quarter.

We reported consolidated revenues of $284 million, consolidated adjusted EBITDA of $228 million, AFFO attributed to common shareholders of $91 million and AFFO per diluted common share of $0.34. Net income attributable to common shareholders for the quarter was approximately $25 million or $0.11 per diluted share. At Uniti Leasing, we reported segment revenues of $212 million and adjusted EBITDA of $207 million representing growth of 3% for each in the second quarter of 2023 compared to the prior year period. Accordingly, Uniti Leasing achieved an adjusted EBITDA margin of 97% for the quarter. Turning to Slide 11. Our growth capital investment program continues to provide positive results for Uniti. Over the past 8.5 years, our tenant has invested over $1 billion of tenant capital improvements in our network.

Unity continues to invest its own capital and long-term value-accretive fiber largely focused on highly valuable last-mile fiber. Collectively, these investments have resulted in 24,000 route miles of newly constructed fiber and 24% of the legacy copper network being overbuilt with fiber. Based on the investments made to date, and our expectation that Windstream will utilize most, if not all, of the GCI program, we expect that nearly half of the legacy copper network will be overbuilt with fiber by 2030. During the second quarter, Uniti Leasing deployed approximately $96 million towards growth capital investment initiatives, with the majority of the investments relating to the Windstream GCI program. These GCI investments added 1,600 route miles of fiber to Uniti’s own network across several different markets.

As of June 30, Uniti has invested approximately $700 million of capital to date under the GCI program with Windstream, adding around 18,200 route miles and over 1 million strand miles of fiber to our network. These investments will be added to the master leases at an 8% initial yield at the 1-year anniversary of Uniti making such investment. They are subject to a 0.5% annual escalator and result in nearly 100% margin. The investments we have made to date will ultimately generate approximately $57 million of annualized cash rent and increase the overall value of our network. At Uniti Fiber, we turned over 363 lit backhaul, dark fiber and small cell sites for our wireless carriers across our Southeast footprint during the second quarter. These installs add annualized revenues of approximately $3.4 million, and over 50% increase from the prior quarter.

We currently have around 890 lit backhaul, dark fiber and small cell sites remaining in our backlog that we expect to deploy over the next few years. This wireless backlog represents an incremental $8 million of annualized revenues. At Uniti Fiber, we reported revenues of $71 million and adjusted EBITDA of $25 million during the second quarter, with core recurring revenue up approximately 5% from the prior year period. Both revenue and adjusted EBITDA during the quarter were impacted by lower-than-expected nonrecurring equipment sales and installs and ETL fees. As we have mentioned before, the exact timing of our nonrecurring revenue can be difficult to predict and thus can fluctuate from quarter-to-quarter. Uniti Fiber net success-based CapEx was $31 million in the second quarter.

We also incurred $2 million of maintenance CapEx during the quarter. Please turn to Slide 12, and I’ll now cover our updated 2023 guidance. We’re revising our guidance primarily for the impact of transaction-related and other costs incurred to date. Our outlook excludes future acquisitions, capital market transactions and future transaction-related and other costs not specifically mentioned herein. Actual results could differ materially from these forward-looking statements. Our current full year outlook for 2023 includes the following for each segment. Beginning with Uniti Leasing, we continue to expect revenues and adjusted EBITDA to be $850 million and $825 million, respectively, at the midpoint, representing adjusted EBITDA margins of approximately 97%.

Revenue and adjusted EBITDA each include $32 million of cash rent associated with the GCI investments and $23 million relating to the straight-line rent associated with the Windstream master leases and GCI investments. We now expect to deploy $288 million of success-based CapEx at the midpoint of our guidance, of which $250 million relates to estimated Windstream GCI investments. The $18 million increase from our prior guidance is due to higher GCI investments and accelerated capital requirements associated with the lease-up in our dark fiber leasing business. As a reminder, the $250 million of GCI is the maximum annual amount we would be responsible to fund. Turning to Slide 13. We still expect Uniti Fiber to contribute $314 million of revenues and adjusted EBITDA of $123 million at the midpoint for full year 2023.

We continue to expect core recurring revenue growth of 5% from the prior year. However, even though our sales funnel remains extremely strong, we are seeing some delayed buying decisions from certain wholesale and enterprise customers, which could slightly impact our recurring revenue growth estimate for the year. We also expect revenue and adjusted EBITDA at Uniti Fiber for the remainder of the year to be more heavily weighted in the fourth quarter versus the third quarter. To be clear, we still expect consolidated revenue to be at or above the midpoint of our current outlook. We also still expect ETL fees in 2023 to be approximately $15 million compared to $24 million in 2022. Net success-based CapEx for Uniti Fiber this year is still expected to be $115 million at the midpoint of our guidance.

Turning to Slide 14. For 2023, we continue to expect full year AFFO to range between $1.38 and $1.45 per diluted common share with a midpoint of $1.41 per diluted share. As a reminder, AFFO in 2023 will be impacted by incremental interest and diluted shares relating to our recent convertible and secured Niv refinancings. On a consolidated basis, we still expect revenues to be $1.2 billion and adjusted EBITDA to be $925 million at the midpoint. Our guidance contemplates consolidated interest expense for the full year of approximately $517 million, which includes a $10 million write-off of deferred financing costs and $32 million of early repayment premium in the first quarter of this year related to the redemption of our 7 [indiscernible] senior secured notes due 2025.

Corporate SG&A, including — excluding amounts allocated to our business segments, is expected to be approximately $30 million, including $7 million of stock-based compensation expense. Our weighted average diluted common shares outstanding for full year 2023 is expected to be around 290 million shares reflecting the full year impact of the incremental diluted shares relating to the accounting of the recently issued convertible notes using the if-converted method. As a reminder, guidance ranges for key components of our outlook are included in the appendix to our presentation. Turning now to our capital structure. At quarter end, we had approximately $452 million of combined unrestricted cash and cash equivalents and undrawn revolver capacity.

Our leverage ratio at quarter end stood at 6.0x based on net debt to last quarter annualized adjusted EBITDA. On July 28, our Board declared a dividend of $0.15 per share to stockholders of record on September 8, payable September 22. With that, I’ll now turn the call back over to Kenny.

Kenneth Gunderman: Thanks, Paul. As I mentioned earlier, we continue to focus on driving high-margin recurring revenue while targeting disciplined mid-single-digit top line growth. Slide 15 demonstrates the investments we are making in our fiber network will lead to a more sizable and valuable fiber business over the next several years. We also expect the end of 2025 to be the inflection point where we become free cash flow positive after dividends, and we expect to generate cumulative free cash flow of over $1 billion during the 5-year period ending in 2030 if we maintain our current dividend and approximate level of annual capital spending. This trajectory, along with our predictable organic growth outlook would lead to a substantial deleveraging, resulting in net leverage between 4 to 5x and roughly doubling the size of our fiber business by 2030.

Before turning it over to Q&A, I’d like to briefly comment on the recent press reports about [indiscernible] cable within the telecom industry. Similar to the rest of the industry, Uniti is taking this issue very seriously. Based upon what we have learned thus far, there appears to be no reason to believe that these cables pose a health or safety risk to employees on the broader public. For Uniti specifically, the networks that we operate actively are all fiber-based, and therefore, our employees are not in contact with lag cabling. In coordination with our sale-leaseback tenants, including Windstream, we’re currently estimating the amount of lead sheeting cable being used today in our copper networks represents less than 1% of the total copper route miles that we own.

Based on what we know today, we believe any cost of remediation would be de minimis. We will continue to investigate and monitor this issue very closely along with our industry partners and will report any material Uniti specific developments as they arise. With that, operator, we’re now ready to take questions.

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Q&A Session

Operator: [Operator Instructions]. Our first question comes from the line of Gregory Williams with TD Cowen.

Unidentified Analyst: Thanks for the insight on some of the toxic lead cables, that’s helpful. My first question is on the M&A landscape. Kenny, if you can describe what you’re seeing and hearing. It doesn’t sound like there’s a lot of deal flow here, but are conversations picking up or staying the same as other buyer or seller. And then just looking at the lease-ups, it looks like the mix came a little bit lower at 64%. Is that just the variance as usual? Is there anything here to call out was there a pickup in greenfields on purpose?

Kenneth Gunderman: Greg, yes, on M&A, we’re big believers in it. As you know, we’ve done a lot of M&A over the past number of years. I think, successfully we continue to think that there’s a conglomerate discount in our stock. If you look at how we think the market is valuing the Windstream MLAs, for example, they’re putting a 15% to 20% yield on that income, and we think it should be yielding inside of where secured debt is trading for the ILEC community. And so we think there’s a big discount there, [indiscernible] share of value right there alone that’s not being reflected. And so we’re looking at M&A and as I mentioned last quarter, getting our financings done behind us was an important ingredient for helping us have a runway to really focus on it in a patient manner, either as a buyer or a seller.

And so to that end, I think there’s good conditions and there’s bad conditions. Good conditions, meaning we’ve got a nice runway to be patient. Our business is performing very well, and there’s a clear line of sight to go-it-alone strategy with the business performing and capital spending falling off in the next few years. So there’s a substantial amount of free cash flow coming into the system. So having that ability to be patient is critically important to executing on good M&A. But with that said, the credit markets continue to be challenging, and I think that’s pretty obvious. And so that’s one of the things dampening M&A at this point. I think you see it industry-wide and certainly within the telecom industry, and it’s no different for us from our vantage point.

But that can change overnight, frankly. And so we continue to be very engaged with both strategic and financial parties within the industry, and that’s not going to change in the coming quarters. And Paul, do you want to comment on the lease up.

Paul Bullington: Yes. On the lease-up percentage, I think, Greg, I would just characterize that as normal fluctuations from quarter-to-quarter based on the bookings that we’re bringing in. No change in strategy or shift to more anchor deals. We’re still very focused on a good mix, but a mix that’s dominated by lease-up going forward. So just normal fluctuation. .

Operator: Our next question David Barden with Bank of America Merrill Lynch.

David Barden: So a few, if I could. Kenny, the tower industries, specifically American Tower most recently, talk about abrupt slowdowns in wireless carrier network services related requirements I think you kind of touched on it in your prepared remarks. But if you could elaborate a little bit on how we should think about Uniti’s exposure to what might be kind of a material slowdown in wireless carrier activity as it relates to densification and network development. The second question I had was I haven’t had a chance to ask this. So I’m interested in your view here because on the lead cable issue, there’s really 2 pieces to it, right? There’s the cost of the remediation potentially, if it’s required. And that’s one thing. And then there’s the other thing, which is the X factor, the ambulance chasers, the people that come after everybody hoping to make a buck.

And I’m interested in kind of how you wrap your arms around that piece of it. And then the third piece is just from a fundamental standpoint, on the book-to-bill, are you seeing any delta as we kind of progress through time on kind of how wholesale and nonwholesale bookings are converting to the retail revenue business.