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Uniti Group Inc. (NASDAQ:UNIT) Q1 2024 Earnings Call Transcript

Uniti Group Inc. (NASDAQ:UNIT) Q1 2024 Earnings Call Transcript May 3, 2024

Uniti Group Inc. misses on earnings expectations. Reported EPS is $0.1398 EPS, expectations were $0.35. Uniti Group Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good morning and welcome to today's conference call to discuss the Uniti and Windstream merger announcement and Uniti's First Quarter 2024 Earnings Results. My name is Michelle and I'll be your operator for today. Today's call is being recorded and a webcast will be available on the company's investor relations website, 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, Uniti's Vice President of Investor Relations and Treasury. Please begin.

Bill DiTullio: Good morning everyone and thank you for joining today's conference call to discuss the merger between Uniti and Windstream, as well as Uniti's First Quarter 2024 Results. Speaking on the call today will be Kenny Gunderman, our CEO, and Paul Bullington, Uniti's CFO. Slide numbers referenced on today's call refer to the Uniti and Windstream merger investor presentation. Before we get started, I would like to quickly cover our safe harbor. Please note that today's remarks may contain forward-looking statements. These statements include, but are not limited to, statements about the benefits of the proposed transaction between Uniti and Windstream, including future financial and operating results, statements related to the expected timing of the completion of the transaction and combined company plans, and other statements that are not historical facts.


Any forward-looking statements contained in today's discussion and materials speak only as of the particular date or dates indicated in the materials. Uniti does not undertake any obligation to update or revise any of this information, whether as a result of new information, future events, or otherwise. Numerous factors could cause actual results to differ materially from those described in the forward-looking statements. And for more information on those factors, please see the section titled, forward-looking statements in the presentation and the risk factor section of the proxy statement that we will file in due course with the SEC. Please also note that Uniti and Windstream will file a Form S-4 registration statement with the SEC that includes a proxy statement and prospectus regarding the transaction.

Investors are urged to read the proxy statement in prospectus when it becomes available because it will contain important information about the transaction. In addition, Uniti and Windstream and their Directors and Officers may be deemed to be participating in the solicitation of proxies in favor of the transaction. You may find information about Uniti Directors and Executive Officers in the company's most recent proxy statement. You may obtain a copy of the merger proxy statement and prospectus when it becomes available through the SEC website, Uniti's and Windstream's websites, or by requesting a copy from either company's investor relations website. More information on how to request these documents is available in the investor presentation that accompanies this call.

With that, I would now like to turn the call over to Kenny.

Kenny Gunderman : Thanks, Bill. Good morning, everyone, and thank you for joining. We're excited to announce that we've signed a definitive agreement to combine Uniti and Windstream in what we believe will be a transformative transaction for both Uniti and the digital infrastructure industry. On today's call, Paul and I will walk you through the details and strategic rationale for the transaction before turning to Q&A. Starting on Slide 5 of the merger presentation, the combination of Uniti and Windstream will create a premier insurgent fiber provider in the United States, serving more than 1.1 million customers with a particularly strong presence in the Midwest and Southeast. There's no other company in our industry besides Uniti that will have the mission critical fiber reach, especially in less competitive Tier 2 and 3 markets, positioning Uniti for growth well into the future.

With an enhanced balance sheet and free cash flow profile, we'll accelerate fiber to the home deployments with the option to expand builds by up to a million additional households. Importantly, the combination will also remove several dis-synergies that exist in the current landlord-tenant structure while aligning the two companies' capital allocation objectives. Additional value creation opportunities will result from meaningful annual synergies and greatly enhanced strategic optionality. Turning to Slide 6, under the terms of the agreement, Uniti shareholders will receive approximately 62% of the outstanding common equity of the combined company. Windstream shareholders will receive $425 million of cash, $575 million of preferred equity, and common shares representing approximately 38% of the outstanding common.

Certain of Windstream's largest shareholders, including Elliott, which is also a current holder of Uniti's equity and debt, will be rolling substantially all of their investment value in Windstream into the combined company. The implied valuation we're paying for Windstream using our non-affected share price from February 16th, the price prior to press reports on the rumored transaction, results in an attractive 5.3 times EBITDA multiple and 4.7 multiple on a synergy adjusted basis. Upon closing, both companies' debt silos will initially remain in place, and the combined company will become a taxable C corporation. Though Uniti will no longer maintain corporate REIT status, following the closing of the transaction, the REIT structure has served Uniti well historically.

And as we said before, it has had many financial and strategic benefits. For example, with this transaction, Uniti’s REIT status has permitted us to structure this merger in a way that is intended to achieve a substantial tax basis step up. Although we don't expect to maintain corporate REIT status upon closing, and the combined company will not be taxed as a REIT, we may restructure certain of our subsidiaries to qualify as REITs, thus potentially providing additional tax savings while preserving strategic optionality. The combined company will retain the Uniti name with our corporate headquarters remaining in Little Rock. I'll continue as CEO of the combined organization, and Paul Bullington will continue in his role as CFO. We're also pleased that certain key members of Windstream's management team will remain with the combined company.

In fact, Drew Smith, Windstream's CFO, is with us today to participate in Q&A. Drew will also be participating with us in various upcoming investor conferences. The new combined company will be well supported by a deep bench of commercial and residential fiber expertise from both companies. The five-person Uniti board will remain in place and Elliott will have the right to select two new board members. Two additional new board members will be jointly selected by Uniti and Elliott, resulting in a new nine-person board. Including the dividend we declared yesterday, we will have distributed dividends totaling $0.45 per share for the 2024 tax year, which is more than our current estimated minimum required distribution. As a result, and given that the new business will have substantial value accretive internal uses for our capital, we'll be suspending our common dividend going forward.

However, we will consider reinstating a common dividend in the future as appropriate. Please turn to Slide 7. We believe that having an owned, scaled fiber network has material, competitive, and financial advantages. This is particularly true when you're a first mover into Tier 2 and 3 markets by building and operating fiber with a true insurgent go-to-market approach. We've proven this consistently with our predictable mid-single-digit growth in our Uniti fiber and leasing businesses over the past few years. By combining our fully-owned 57,000 route mile Kinetic network with the Kinetic OpCo business targeting 4.3 million households, we're now expanding the successful strategy into fiber-to-the-home. Importantly, we expect that the combined company's current operating plan will be fully funded and that we will have the ability to expand the fiber-to-the-home build by up to 1 million additional households in our existing markets.

Windstream's wholesale fiber business fits very strategically with Uniti Leasing and Uniti Fiber. With a combined 217,000 fiber route mile network, the business will be a leader in both reach and technology while offering unique routes that differentiate us from competitors. Our southeastern focused Uniti fiber business will also have a greater growth potential given the more expansive coverage that the Windstream Field Resources will bring to bear. I'll talk more later about the managed services business, known as Windstream Enterprise, but while it is not core to our fiber infrastructure strategy, there are many value-accretive options that we intend to pursue with that business. Turning to Slide 8, before going deeper into the business, let's zoom out for a moment and talk about why Uniti is doubling down on fiber.

We've been saying for some time that fiber is the mission critical asset in communications infrastructure, acting as the connective tissue for all current and future broadband delivery. There are currently more use cases for fiber than ever before, driving bandwidth usage exponentially higher. Today and in the future, fiber-to the-home will be one of the most robust use cases, and this transaction will make Uniti a direct and material player in this space. The digital transformation era of the last several years was the first time high bandwidth with consuming applications and uses were available on a broad scale to both consumers and businesses. Said differently, millions of users were finally armed with connections that could deliver 1 gig speeds driving enormous amounts of traffic onto fiber networks.

Importantly, the digital transformation era was also the first time that broadband was truly revealed to be a mission-critical asset. During the pandemic, had it not been for things like remote work, telemedicine, and the ability to stay virtually connected socially, our society simply would not have functioned. Looking ahead to the next few years as we now enter the generative AI era, all of these trends will be compounded with the advent of things like autonomous vehicles, robotics, the metaverse, and many others. Slide 9 showcases the reach of our insurgent fiber network, extending into unique and highly defensible areas, a strategic advantage that positions Uniti to meet the surging demand for high-speed broadband, including connected buildings, fiber-to-the-tower and small cell connections, connected POPs and data centers, and the 4.3 million total homes within Kinetic’s current footprint, Uniti will have the potential to reach over 5 million connected on-ramps, each driving increasing amounts of bandwidth onto our owned wholesale network.

Despite these millions of connections, we're agnostic as to which use cases are ultimately the winners because as a national wholesale provider, we benefit even if we don't own the last mile connection. Turning to Slide 10, for those of you who aren't as familiar with Kinetic, I'd like to explain why it is such a unique fiber-to-the-home platform that we're excited to own outright, so our shareholders can benefit from the tremendous upside potential. First, fiber-to-the-home is indisputably a superior product from a latency and reliability perspective and will be for our lifetimes and beyond. Secondly, we believe after having reviewed many fiber-to-home business models over the years, including Overbuilders, Open Access, and others, incumbent providers have a big advantage when providing fiber-to-the-home.

Specifically, Incumbents have an embedded network benefiting from years of investment that allows for a faster fiber deployment at lower costs. And ironically, incumbents are now share takers with fiber-to-the-home after many years of playing defense against wireless and cable. The key to an incumbent's success going forward is shedding old brands and the utility mentality and replacing that with a true insurgent go-to-market approach with a focus on quality and customer service, both of which are core to Uniti's success as a current share taker in enterprise and wholesale and Kinetic in residential. Thirdly, Kinetic’s footprint is diverse and spread across 18 states with over 50 percent of those households located in the Southeast. We believe the Southeast is a terrific place to invest from a competitive and demographic point of view, as evidenced by our success at Uniti Fiber.

Just as importantly, 75% of Kinetic’s footprint has 20,000 or fewer households, reinforcing another core tenet of Uniti's focus on Tier 2 and 3 markets. Next, Kinetic is also building fiber passings at what we believe to be an industry-leading cost of approximately $650 per passing. It's important to dwell on this for a moment. Prior to starting its fiber-to-the-home expansion with Uniti's GCI program in 2019, Kinetic invested close to $500 million building fiber-to-the [DSLAM] (ph). This investment not only provided Kinetic the ability to provide a highly competitive DSL product with 100 meg speeds to over 40% of households. It has also given Kinetic a head start or a jumping off point to build distribution fiber and drops as part of the final fiber to the home build.

This investment not only highlights the cost and time to deploy benefits at Kinetic, but is also a good reminder of another strategic advantage of bringing together the two companies. Uniti will not only own the fiber-to-the-home connection, but also the middle mile and ultimately the backhaul network. Having a fully owned and operated network will not only provide superior customer service, but will also help us competitively. As we've highlighted in the past few quarters, some of our largest wholesale customers recently have been fiber-to-the-home providers spending substantial dollars procuring backhaul. Kinetic will be able to avoid substantial backhaul costs, which we believe equate to roughly 20 percent of the total cost of building fiber-to-the-home for others.

Aerial view of a communication site, showing the breadth of the company's real estate portfolio.
Aerial view of a communication site, showing the breadth of the company's real estate portfolio.

Owning a backhaul network will also be a tool to disincentivize overbuilders from entering our markets, as in many cases our backhaul market is the only one available. This helps segue into the final point to highlight on Kinetic. Only 15% of the footprint today has a true overbuilder, and that has held relatively constant for the last 5 years. We certainly don't expect this number to grow in the future given we're increasing our presence in offensive posture on a combined basis. If you pick the right markets, build fiber-first, you can enjoy the benefits of favorable competitive dynamics for many years to come. Moving to slide 11, you can see the numbers behind why Kinetic’s fiber-to-the-home business has such significant upside potential.

Kinetic has been demonstrating strong success the past few years. Initial penetration levels on early cohorts have consistently averaged between 15% and 18% in the first year, increasing to above 25% on average by the second year. Recent cohorts have been demonstrating initial penetration rates of up to almost 30% as Kinetic has really ramped up a more customer-focused, digitally enhanced, local go-to-market strategy. As I said earlier and as Kinetic is beginning to demonstrate, an insurgent mentality really matters and can move the needle on penetration and churn. The predictable results from initial market builds and subsequent penetration levels are right in line with Uniti's anchor lease-up economics, and another reason why we're excited to be entering this [space] (ph).

Kinetic is currently targeting building fiber to 1.9 million homes by 2027, which would result in over 40% of the footprint being overbuilt with fiber. Given the very rural nature of this footprint, achieving over 40% coverage with a disciplined and profitable model in Kinetic will be a significant achievement. With that said, we believe on a combined basis, Uniti and Kinetic can expand this build by up to a million additional households achieving fiber coverage of over 60%. There are a number of reasons for this, but it's primarily driven by having true owner's economics, especially being on the precipice of the BEAD program launching. Over the next 12 months, we'll spend more time refining the new build plan and we'll report more on that as closing approaches.

Slide 12 highlights that another exciting aspect of this transaction is combining our Uniti leasing business with Windstream's wholesale business. The backhaul network I mentioned earlier that will be important to Kinetic’s success has terrific shared infrastructure potential. There's an excellent growth opportunity in national wholesale fueled by the use cases I referenced earlier, including and especially generative AI. Today, Uniti sells mostly dark fiber and we're beginning to light more and more intercity routes to become a player in the growing waves market. Windstream wholesale is already a meaningful share taker in the waves market and has a national network that is highly complementary to Uniti's existing network. Thus, on a combined basis, this transaction accelerates our national wholesale strategy by approximately 4 years, and it also enhances our relationships with the increasingly important hyperscalers.

Uniti's consolidated bookings during the first quarter were $0.6 million of MRR. However, not included in our bookings number is the Dark Fiber lease revenue from two large deals that closed in the first quarter with one of our hyperscaler customers. These deals represent approximately $20 million in total contract value and will greatly expand our network in one of our key metro markets in the Southeast, providing Uniti with substantial new network assets it can lease up to other customers. These 20-year contracts include approximately $16 million of upfront lease revenue that, under GAAP accounting rules, will be recognized upfront at the time of delivery, which is likely late 2025, early 2026. As a result, there were substantial new sales in the quarter that are not reflected in our bookings number.

Going forward, we plan to specifically call out deals of this nature that largely get excluded from our traditional bookings metric as the hyperscalers in particular often desire to structure their transactions in this fashion for their internal purposes. To be clear, the underlying attractive shared infrastructure economics to Uniti are no different than a traditional booking. As I foreshadowed on our last earnings call, we've seen multiple sizable new contract wins from hyperscalers, including the one I just covered. Some of those wins have continued into the second quarter. As a result, consolidated bookings for April are shaping up to be one of the largest months on record for Uniti, with close to 500,000 of MRR expected in April alone.

Going forward, the combined company will have many distinct Tier 2 and 3 intercity routes, which we think will be particularly appealing to the hyperscalers. This consistent strategy of building and lighting fiber on Tier 2 and 3 routes and in tier 2 and 3 markets across wholesale, enterprise, and now residential positions Uniti as a share taker for years to come. With that, I'll now turn the call over to Paul.

Paul Bullington : Thank you, Kenny. I'll start with some commentary on Uniti's go-forward business post-combination and then briefly review Uniti's updated 2024 guidance. Turning to slide 14, this combination is attractive for a number of reasons, most notably because it creates a true Fiber powerhouse with unmatched Fiber assets that are poised to deliver long-term returns and unlock significant value for shareholders. Upon closing this transaction, we will retain the Uniti name and expect to report our business segments as Kinetic Fiber Infrastructure and Managed Services. Our fiber-to-the-home platform will continue to be branded as Kinetic. Fiber infrastructure, will include our current Uniti Fiber and Uniti Leasing segments along with the Windstream wholesale segment, all of which are highly complementary and will combine to create a premier fiber infrastructure company with both national and deep regional capabilities, as well as a fiber network that is predominantly wholly-owned and operated.

In fact, over 95% of Kinetic and Fiber infrastructure generated revenue will be on owned network and almost 40% of combined revenue will be derived from highly predictable fiber-to-the-home and wholesale customers. Importantly, only a small fraction of our combined revenue will be legacy in nature. While the recombination of the Kinetic business will garner more attention, the reunification of the Windstream wholesale business with Uniti's national fiber network will be powerful in and of itself eliminating a number of operational and strategic inefficiencies and creating a predominantly on net national fiber infrastructure company, particularly when combined with the Uniti Fiber deep regional fiber business. Turning to Slide 15. The combination will also serve to strengthen our balance sheet.

For starters, it will remove the overhang and uncertainty of the master lease renewals surrounding both companies. At closing, the current capital structures from each company will initially remain intact and will be siloed, under one new corporate umbrella. This structure will allow us to preserve the current capital stack of both companies, much of which is fixed at attractive rates with distant maturities and greatly simplifies the path to a combination. As Kenny mentioned Windstream shareholders will be receiving $425 million of cash at closing. Uniti expects to fund that cash consideration from operations, revolver borrowings and our future capital market transactions between sign-and-close. To that end Uniti has entered into a bridge funding commitment with certain banks in the amount of $300 million.

Beyond this $300 million commitment Uniti may look to further access the capital markets prior to closing on an opportunistic basis to further strengthen our position. For instance, our recently announced ABS financing plan may provide the opportunity to expand beyond the current $350 million ABS loan commitment. Net leverage for the combined company as of prior year end was 4.8 times, including the incremental $425 million of cash consideration at closing. Although leverage may tick up above this level, as we complete the bulk of our fiber-to-the-home build, we expect that our long term leverage target will be between 4 times and 4.5 times. Once the current Kinetic fiber-to-the-home investment plan winds down by around 2027, we expect the positive free cash flow profile of the combined business will be conducive to the goal of reducing total leverage.

Slide 16, provides an overview of the synergy opportunity, which will further enhance cash flows and returns to shareholders. OpEx synergies are expected to ramp to up to $100 million annually within the first three years. Most of these synergies will come from corporate functions, IT software and systems, and from off net expense reduction in the fiber infrastructure business. In addition, we are expecting annual CapEx synergies of $20 million to $30 million per year. We believe this combination will also allow us to realize significant incremental upside from things like enhanced sales, the acceleration of Uniti Fiber's metro-growth opportunity, and cost of capital improvements. While we believe in our ability to realize these incremental benefits, we have not included them in our accretion calculations.

Turning now to Uniti's updated 2024 outlook. We are revising our guidance for business unit level revisions and the impact of transaction related and other costs incurred to-date. Our outlook excludes the impact from the expected merger with Windstream, 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 2024 outlook for consolidated revenue and adjusted EBITDA remains unchanged. However, we are slightly increasing our Uniti leasing revenue and EBITDA to reflect higher than expected lease up activity, primarily driven by the increased hyperscale activity we have been seeing. While slightly lowering our Uniti Fiber revenue and adjusted EBITDA estimate, due to the timing of enterprise sales.

We are also slightly lowering our AFFO estimate for the full year 2024, primarily due to higher interest expense. At Uniti Leasing. We still expect to deploy $260 million of success based CapEx at the mid-point of our guidance, of which $230 million relates to Windstream GCI investments that will predominantly be weighted in the first half of 2024 versus the second half. Net success based CapEx for Uniti Fiber this year, is still expected to be $105 million at the midpoint of our guidance, and a 11% decrease from levels in 2023 and represents a capital intensity of 36% down from 40% in 2023. We expect full year AFFO to range between $1.36 and $1.43 per diluted common share. With a midpoint of $1.40 per diluted share. We expect our weighted average diluted common shares outstanding for the full year 2024 to be around 285 million shares.

As a reminder, guidance ranges for key components of our outlook are included in the Appendix to our earnings presentation. At quarter end, we had approximately $470 million of combined unrestricted cash and cash equivalents and undrawn revolver capacity. Our leverage ratio at quarter end was 6.07 times based on net debt to first quarter 2024 annualized adjusted EBITDA excluding the debt and adjusted EBITDA impact from the ABS loan facility. On May 2, our Board declared a dividend of $0.15 share to stockholders of record on June 14th, payable June 28th. With that, I will now turn the call back over to Kenny.

Kenny Gunderman: Thanks Paul. Slide 17 highlights the exciting strategic options this combination unlocks. As I've already discussed, Uniti will prioritize expanding the fiber-to-the-home build and continue investing in our Uniti Fiber and leasing businesses, as we have historically. We will also be very focused in the near term on executing on an integration plan and realizing our synergy goals. In addition, owners economics are vitally important in the Fiber business and excluding the Managed Services business, over 90% of Uniti will be on owned infrastructure, driving greater efficiencies that are not fully reflected in the synergy numbers. We also believe that there are opportunities to expand the ABS program using Kinetic assets and we expect that to be an even more significant value accretive tool to fund our business.

Lastly, M&A has always been an important tool for Uniti to realize shareholder value and we fully expect to be active in the future. Given the more simplified structure going forward, we believe the options available for the combined company will be substantially greater than in the past in a number of respects, including possible divestitures of non-core assets and separation of the businesses. With that, let me end by reiterating our excitement about this fantastic combination and the future prospects for Uniti. This combination will create a premier insurgent fiber provider in the US with a scaled platform for growth and a differentiated position in Tier 2 and 3 markets. Our enhanced balance sheet and cash flow generation will support growth, increasing our ability to expand fiber-to-the-home buildouts.

Looking ahead, the combination will also deliver additional value accretive opportunities through meaningful synergies and M&A optionality. With that, we'd be happy to take your questions.

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