Q1 2023 Uniti Group Inc. Earnings Call
[noise] welcome to unity groups first quarter of 2023 conference call. My name is Julie and I'll be your operator for today.
A webcast of this call will be available on the company's website www dot <unk> dot com beginning today and will remain available for 14 days.
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. The company you would like to remind you that the day's remarks include forward looking statements and actual results could differ materially from those projected N D statement.
Factors that could cause the actual results to differ are discussed in the company's filings with the S. E C. The.
The company's remarks. This morning will reference lie it's posted on its web site and you are encouraged your for each of those materials. During this call.
Discussions during the call will also include a certain financial measures that we're not prepared in accordance with generally accepted accounting principles.
Conciliation of those non-GAAP financial measures to the most directly comparable got financial measures can be found in the company's current report on form 8-K data today.
Well now like to turn the call over to community groups, Chief Executive Officer, Kenny Gunderman. Please go ahead Mr. <unk>.
Thank you good morning, everyone and thank you for joining.
Starting on slide three we remain highly focused on our strategy of buying and building mission critical fiber infrastructure.
He has resulted in unity, becoming the second largest independent fiber operate in the country with 137000 route mile network.
We remain focused on discipline growth and look to strike the right balance on our bookings and installs between anger and Lisa and wholesaling not wholesale.
This balance along with suck went on a day meantime to deliver in our industry, leading monthly churn at 0.2% demonstrates the outstanding economics of shared fiber infrastructure.
This discipline has led to get another quarter of solid performance and reiterating Arkansas dated full year revenue and adjusted EBITDA outlook.
Wholesale and enterprise recurring revenue were up 10% and 15 per cent, respectively. In the first quarter and dark fiber lease up at unity leasing was up 15 per cent from the prior year.
On an overall basis, we continue to target and deliver mid single digit top line growth, increasing adjusted EBITDA and declining capital intensity.
In addition to the recent refinancings, we mentioned last quarter. We also extended the maturity on a revolver to 2027.
Ensuring unity is positioned to patiently execute during these uncertain economic and credit market conditions.
Combined with our organic growth runaway in our study performance. We now have a growth plan that is virtually fully funded.
That's why I had four demonstrates are substantially underutilized fiber network acquired largely through Sal leasebacks versus complicated company acquisitions is.
It's helping drive our shared infrastructure economics.
The anchor plus Lisa model is working driving cumulative casual yields today of 23%.
More than three or three fold increase from the anchor yield of these projects.
Slide five shows that the majority of our revenues wholesale of nature.
Which comes with longer term contracts, lower chern and less required overhead for execution.
As a result of our business and underlying performance are less susceptible to macroeconomic conditions.
The vast majority of these wholesale customers are the large wireless providers hyperscalers in international and domestic carriers.
These carriers are purchasing large pies from unity to connect towers small sales data centers fiber to the home in inner city Pops.
Which further highlights that our business is diversified across numerous use cases.
These use cases are all on ramps that are driving traffic onto our core network.
A growing number of our wholesale customers are fiber to the home providers, including ourselves leaseback times.
Overall trends of the fiber to the home business remain highly attractive getting substantial given substantial investment from private capital sources, increasing valuations and successful asset backed securitization.
Unity is uniquely positioned as one of the largest wholesale providers to the fiber to the home space and we believe our underlying network assets continue to appreciate in value as a result.
Trying to slide six scale matters and fiber.
Especially with a wholesale heavy business model like ours.
Having it all National network is a meaningful competitive advantage for unity, especially given it would take billions of dollars in many years to build a new national network.
We estimate there are only five truly our national networks, and two independent fiber providers with national networks in the U S today with unity being one of them.
Thus our ability to deploy dark fiber in waves services present, you didn't even with the unique low growth opportunity with minimal competition.
Slide seven illustrates are balanced approach to bookings.
Although the wholesale business will always be our focus a disciplined and controlled enterprise strategy can drive enhanced profitability with minimal capex and low churn, especially if they're in a legacy services.
While greenfield bookings drive growth with anchor customers and expand the network in a cost effective manner for new lease up opportunities.
A majority of new bookings continue to be lease up in nature, which are substantially less capital intensive.
Wholesale bookings in the first quarter were impacted by shifting timing.
To be clear our sales funnel remains strong and we're not seeing customers cancel orders.
In fact, our wholesale bookings forecast for this year remains largely unchanged.
It is also important to remember that wholesale bookings in the prior quarter included one of the largest customer contracts immunities history, resulting in the best quarter, we've ever had for bookings.
Turning to slide eight.
Our enterprise strategy is highly disciplined and regional in nature.
As you can see from the map, we're only offering enterprise services on approximately 30 metro's concentrated in the southeast.
Our product said a sample.
All sales are on are owned and controlled desk Metro fiber network and we have virtually no legacy services.
The majority of operational expenses within fiber businesses, our employees and often that fiber purchases.
Those were selling largely on that products and services and the majority of our employees, including sales field ops maintenance construction et cetera are concentrated in a certain geographic area, we're able to maximize efficiency and therefore drive 50 per cent plus cash yields on our enterprise lease up sales.
In addition, our our local brand is substantially enhanced in this region in our enterprise monthly churn is industry, leading at around 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 ups strategy.
As a result of our consistently strong bookings activity enterprise recurring revenue was up 15% during the quarter.
Equally exciting and as we mentioned before we own dark metro fiber in about 300 markets nationwide, which represents terrific capital and margin efficient growth potential for enterprise wireless backhaul and even small cells.
With that I'll now turn the call over to fall.
Thank you and good morning, everyone.
Like to begin by reviewing our first quarter performance, followed by an overview of our updated 2000 twenty-three outlook, we continue to execute well on our strategy of leasing up our existing fiber network of 137000 route miles with high margin recurring revenue.
This lease up activity was reflected in the strong growth during the quarter.
Also of note. We recently entered into an amendment on a revolving credit facility that extends the maturity of the facility.
September 2027 <unk>.
Combined with our other recent refinancing activities over 97% of our outstanding debt now matures in 2027 or later.
Because I will cover in more detail in just a bit R 2023 outlook for consolidated revenue and adjusted EBITDA remains unchanged. However, we are slightly lowering our unity fiber adjusted EBITDA estimates.
We are also increasing our ASF per share for full year 2023, as a result of Finalising, the accounting impact relating to our recent refinancings.
Finally, I'll conclude with additional commentary on our current balance sheet and capital structure.
Please turn to slide nine and I'll start with comments on our first quarter.
We reported consolidated revenues of $290 million consolidated adjusted EBITDA of $231 million <unk> attributed to common shareholders of $107 million in a F. F O per diluted common share of 39 cents net.
Net loss attributable to common shareholders for the quarter was approximately $19 million or eight cents per diluted share, which includes the right off of $10 million of deferred financing costs and $52 million of course related to the early repayment of our 778% secured notes do 2025.
At Unity leasing we reported segment revenues of $211 million, an adjusted EBITDA of $205 million representing growth of 3% for each in the first quarter of 2023 compared to the prior year period. Accordingly unity leasing achieved an adjusted EBITDA margin of 97% for the quarter.
Turning to slide 10, our growth capital investment program continues to provide positive results for unity over the past eight years or tenant has invested over $1 billion a tenant capital improvements in our network.
Unity continues to invest its own capital in long term value accretive fiber largely focused on highly valuable last mile fiber collectives.
Collectively these investments have resulted in 22200 route miles of newly constructed fibre and 24% of the legacy copper network being overbuilt with fiber.
Based on the investments made to date and our expectation that Windstream all utilized 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 first quarter unity leasing deployed approximately $72 million toward growth capital investment initiatives with the majority of the investments relating to the Windstream GCI program. These GCI investments added 1200 round miles of fiber to unity network across several different markets.
As of March 31, Unity has invested approximately $612 million of capital to date under the GCI program with Windstream, adding around 16600 route miles and 930000 strand miles of fiber to our network.
These investments will be added to the master leases on 8% initial yield at the one year anniversary of unity, making such investment they are subject to a 0.5% annual escalator and result in nearly 100 per cent margin the.
The investments we've made today will ultimately generate approximately $49 million of annualized cash rent and increase the overall value of our network.
A unity fibre we turned over 197 lit backhaul dark fiber in small cell sites for our wireless carriers across our southeast footprint during the first quarter.
These installed at annualized revenues of approximately $2.2 million we.
We currently have around 1100 twenty-five lit backhaul dark fiber in small cell sites remaining in our backlog that we expect to deploy over the next few years.
This wireless backlog represents an incremental $10 million of annualized revenues.
And unity fiber, we reported revenues of $79 million and adjusted EBITDA of $34 million during the first quarter achieving margins of 43% <unk>.
Revenue and adjusted EBITDA growth during the quarter of 8% and 7% respectively from the prior year period was higher than expected primarily due to the timing of nonrecurring ETS fees relating to the early termination of legacy spread sites.
Unity Fibernet success based Capex was $36 million in the first quarter and was higher than originally anticipated due to the early receipt of equipment purchases as networking equipment delivery lead times continued to improve we also encourage $2 million of maintenance capex during the quarter.
Please turn to slide 11, and I'll know cover are updated 2023 guidance.
We were revising our guidance for business unit level revisions to finalize the counting impact from our recent convertible unsecured note offerings and related redemptions and the impact of transaction related and other costs incurred to date or outlook excludes future acquisitions capital market transactions in future transaction related and other costs not specifically mentioned.
You're in actual results could differ materially from these forward looking statements.
Current full year outlook for 2023 include the following for each segment.
Beginning with Uni leasing, we continued 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 $33 million of cash rent associated with the GCI investments and $21 million relating to the straight line rent associated with the Windstream Master releases and GCI investments.
We now expect to deploy $270 million of success base Capex at the midpoint of our guidance of which $237 million relates to estimated windstream GCI investments.
$10 million increase from our prior guidance is due to capital requirements associated with the lease up in our dark fiber leasing business.
Turning to slide 12, we still expect unity fiber to contribute $314 million of revenues at the midpoint.
We now expect adjusted EBITDA of $123 million for full year 2023.
A slight decrease in adjusted EBITDA from our prior outlook is due to lower than expected core recurring revenues as a result of the timing of bookings of Kinney highlighted earlier, partially offset by higher than expected non-recurring equipment sales, which come with lower relative margins.
Despite this we still expect healthy core recurring revenue growth of 5% from the prior year.
13 further emphasize at this point is we now expect our run rate monthly recurring revenue at unity fiber to grow between 5% to 7% in 2023, the solid growth demonstrates our continued success and executing on our lease up strategy that leverages, our existing dense southeast fiber footprint.
We still expect E T L P. As in 2023 to be approximately $15 million compared to $24 million in 2022.
Net success based Capex for unity fiber. This year is now expected to be $115 million at the midpoint of our guidance a 14% decrease from levels in 2022 and $5 million lower than our prior guidance, primarily due to lower equipment purchases as a result of the bookings delays mentioned earlier.
Turning to slide 14 for 2023, we expect full year <unk> to range between $1.38 and $1.45 cents per diluted diluted common share with the midpoint of $1.41 per diluted share.
As a reminder, <unk> in 2023 will be impacted by incremental interest and diluted shares relating to our recent convertible unsecured note 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 right off of deferred financing costs and $32 million of early repayment premium in the first quarter of this year related to the redemption of R. 770 per cent senior secured notes do 2025 <unk>.
<unk> SG&A, excluding amount allocated to our business segments is expected to be approximately $30 million, including $7 million of stock based compensation expense.
We're revising our weighted average diluted common shares outstanding for full year 2023 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 F 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.
On March 21, unity repurchased approximately $50 million in principle of its 4% exchangeable notes do 2024 for total cash consideration of $13.7 million. The outstanding balance of these notes at quarter end is approximately $123 million on.
On March 24th Unity entered into an amendment to its credit agreement that upon receipt of routine regulatory approval extending the maturity date of each lender's commitment under the company's senior secured revolving credit facility to September 24th 2027.
<unk> also transitions the $500 million revolving credit facility from LIBOR to Sopher.
A quarter and we had approximately $495 million, a combined unrestricted cash and cash equivalents in undrawn revolver capacity or leverage ratio a quarter and stood at 587 times based on net debt to last quarter annualized adjusted EBITDA on.
On May 2nd R Board declared a dividend of 15 cents per share to stockholders of record on June 16th payable June 30th.
With that I will now turn the call back over to Kenny.
Thanks, Thanks, Paul.
So I have 15 illustrates investments, we're making it our fiber network will lead to a more sizeable and valuable fiber business over the next several years.
We also expect the end of 2025 to be the inflection point. When we were we become free cash flow positive after dividends and expect to generate cumulative free cash flow of over $1 billion. During the five year period ending in 2030, if we maintained our current dividend an approximate level of Daniel capital investment.
This trajectory would lead to substantial deleveraging, resulting in that net leveraged between four to five times and roughly double the size of our non windstream fiber business about 2030.
Turning to slide 16.
Over the past few months, we filled in many questions about the merits of remaining of Reed and paying a required dividend. So we thought it would be helpful. If we explained our current views.
The arguments that we've been presented with her D reading or that we could use the free cash flow allocated to our current dividend payout to invest more in our business.
Pay down our outstanding debt at a discount and strengthen near term liquidity.
I'd like to briefly address each of these arguments and share a few other observations.
First we've never under invested in our business just to service the dividend.
In fact, our capital intensity historically was over 50% as we build out our dense fiber networks in the southeast and is now more normalized 30 per cent range on a consolidated basis.
As we said many times. We believe this is the appropriate range for fiber business in order to optimize growth and profitability.
Said differently, we could certainly invest more in our business through organic capital or M&A, if we didn't pay a dividend.
But not materially more.
And as we sit here today, we believe our forecasts it ongoing capital intensity is appropriate given the returns on capital that we're currently seeing.
With respect to the argument of D reading and paying down more debt. We have always said that five and a half to six times as a comfortable leveraged level for us and we've consistently maintained that range.
Given these volatile capital markets. However, we certainly understand the desire for lower leverage and we suspect the recent trading pressure on our stock is partly related to our leverage being perceived as.
Thus deleveraging overtime to four to five times seems appropriate.
By deleveraging are forecasted leverage would only would only declined marginally to around 3.8 to 4.8 times [noise].
As the dividend savings would be largely offset by higher taxes.
Thus, the reading would not achieve materially lower leverage.
In fact, we estimate the NPV of cash savings to be approximately one and a half billion dollars in the future. If we remain a reed.
The reading and eliminating the dividend would certainly bolstered near term liquidity, which could be helpful. In these volatile times.
With that said, we size or recent financings to service our current dividend until we become free cash flow positive in about 24 months.
It is not uncommon for reach to borrow to service their obligations during temporarily elevated time to spending and that's essentially what we're doing.
We have a robust prosperous predictable business with contractual step downs and spending and therefore, a very clear path to substantial free cash flow generation.
Our dividend payout ratio as a percentage of 2023 I F. F O per share is approximately 42%.
Which is lower than the average for other infrastructure Reese and suggests there is room to increase our pay out over time is free cash flow grows.
Finally, I reached structure has significant strategic value.
As a reminder, we were created as a <unk> and 2015 before certain IRS rules changed and making it harder to elect read status.
And many of the strategic opportunities we've considered in the past and in our real time conversations are reached status has proven to be very valuable.
Yeah.
Over the past eight years, including during other periods of extreme volatility. We've had we've steadily maintained are targeted five and a half to six times leverage.
Built a best in class U S fiber business built and sold at a premium Latin American and U S tower businesses, all while returning over $11 per share value to our shareholders in the form of the dividend.
In conclusion.
Under our current circumstances, we continue to believe maintaining our reach that is the appropriate corporate structure is it provides a meaningful return of capital to our investors, which has always been important part of our of our investment thesis, while preserving a strategic value.
With that operator, we're now ready to take questions.
Thank you as a reminder to ask a question. Please press star one line on your telephone and wait for your name to be announced.
July your question. Please press Star one one again please.
Please stand by where we can file the Q&A roster.
Our first question comes from the line of Gregory Williams from T D counting.
Hey, Thanks for taking my question.
First of all and Kenny you just need the case.
Two two main <unk> can you just remind us.
As your 15 cent dividend how much of that is above and beyond the minimum requirements. In just a second question is on in a softer about things, especially in the wholesale <unk> can you just maybe expound on what's causing relating to make that complicated R. P processor customers dragging nephew. So then you reiterated.
Guidance on booking so we should expect what a meaningful pick up in the second quarter then.
Hey, Greg I'll start with your bookings question.
Yeah, I I don't think we we obviously follow the bookings very closely but but even more closely follow our federal development because that's what leads to the bookings.
And our funnel is very very strong I think we've we continue to maintain a funnel that's as as large as it's ever been.
Given that we have a wholesale heavy business, which by definition means you have fewer customers with larger deals.
When when a handful of customers two or three or four make different decisions about timing it and it can impact it can impact bookings in any one quarter and for example in the fourth quarter of last year. We had one deal for 200000 of them are are that caused us to have a record.
Quarter of bookings.
When when that deal was originally at our final earmarked for the for the first quarter of this year. So if you just normalize the fourth floor in the first quarter you basically.
Have a pretty level bookings that are consistent with historical levels, all that to say, one or two or three deals slipping from one quarter are being pulled into a prior quarter can can can might reveal soft bookings, but we really don't view it that way.
Fact, when you look at April bookings that are now.
I don't think we're going to have any herculean months or quarters. I think we're just going to our expectation is that we make up.
The roughly 200000 over the course of the over the course of the year.
And I wouldn't attribute the timing to any particular, certainly not we don't think macro environment issues I think it's just customer specific buying patterns.
I I don't have anything really to attribute those too.
Oh, the depth with respect to the to the dividend.
Your dividend question about how much were distributing over 90%, we've not disclose that number but what I would tell you is if you look at 2024 and 2025 and really the the remainder of this year, we're probably distributing look similar.
Somewhere between 100 $150 million additional over the 90% based on our forecast.
And so I don't I don't know what that is.
<unk> two on a per share basis, but in aggregate that's roughly the roughly the number.
Got it thanks for the call I appreciate it Sir.
Sure.
Thank you one moment for next question.
Our next question comes from the line of David Bargain from Bank of America.
Hi, This is kept up handy on for David could you just elaborate on your comfort level with your relationship with Dash. There are some concerns out there like Lady status and commitment to their five G network out as one of my customers are unity are there any ramifications for you idiot dishes on <unk>.
<unk> their network commitments. Thank you.
Hi, Jeffrey yet dishes actually still a small customer for us, but a growing customer.
And so.
Last year was a was a very very active year with with dish on turning up sites and we've been we've been fairly active in the first quarter and we think the first half of this year as they.
As they strive to reach milestones that they have.
So.
An active customer, but not a large customer, but we do expect them to be over time, and we haven't seen any change in their behavior and and we obviously followed the macro environment and follow each of our customers in terms of their progress performance balance sheet liquidity.
Et cetera, that's just part of our normal.
Thank you one moment for next question.
On your overlap with the sprint network that could you just close your thoughts on how that might impact dark fiber pricing in your market.
Hey, Frank I'll start with your second question and let Paul take the first one but.
We're very familiar with the sprint Gmg network.
And there's not a lot of overlap I don't have a percentage that overlap that I could share with you, but I can just.
Tell you, there's not a lot of overlap historically, they and frankly cogent had been good customers of ours, and we expect that to continue going forward.
And the impact on our dark fiber sales and certainly not the pricing of dark fiber.
Frankino pricing of dark fiber is held pretty steady in the industry for gosh 10 years 20 years, maybe so we don't expect a big change there I think I think the impact on the industry.
Is going to be more on.
On the waves product so lit transport.
And as you know Frank we don't do a lot of let transport today, it's predominantly dark but by design, we're starting to light some routes, where we where we have a very clear line of sight to both an anchor and lease up and so very clear economics.
Dominantly in our southeastern footprint, where we also have the supporting field operations to maintain it.
By definition networking solutions may create more more demand for us in terms of dark fiber or even additional ways solutions. So net net I think it will be a positive for unity.
And break I'll I'll just.
Talk about the Windstream settlement payments going forward and you're right. There is a step down in those obligations that we made to show instruments part of that settlement in 2020, and that's a that's a big piece of the of the story in terms of our trajectory towards free cash flow in the next couple of years is.
Any kind of alluded to so there's two pieces to it.
Just shy of $100 million.
On an annual basis paid paid in quarterly payments. Those those are completed in the third quarter of 2025. So we've got a couple of years left.
Discount.
Discount rate.
And we exercise that option.
And prepaid all of 20 twos payments in late 2021.
But in 2023, we're back on the regular schedule now are paying on a quarterly basis. So we've got a couple of years left of that obligation and then the second piece is the GCI program and.
We committed to making.
$1 billion $750 million.
Available to Windstream.
To date invested in that program, so little over $1 billion left in that program over the next.
Seven years through 2030 those obligations those are capped every year. This year. The cap is $250 million and we expect them to spend to utilize the majority of that.
The least through 2030, but the other piece of that as well as theirs.
There's GCI rent that is paid on those investments so over time, not only does the GCI capital.
Program that we are investing step down, but the cash rent from those previous investments start to step up so by the end of the.
Pretty small number out in the out years of the program. So that step down for both of those obligations are definitely a part of our free cash flow projections and trajectories going forward.
Alright, great. That's very helpful. Thank you.
Thank you one moment for next question.
Our next question comes from the line of Simon Flannery from Morgan Stanley .
So we're not afraid of getting involved in situations that may be considered distressed, but only if the actual asset underneath the distress is a quality asset with quality operations.