Uniti Group Inc.

Good morning and welcome to today's conference call to discuss Unity's second quarter 2024 earnings results. My name is Lateef and I will be your operator for today. Today's call is being recorded and a webcast will be available on the company's investor relations website, .unity.com, beginning today and will remain available for 365 days. At this time, all participants are in a listen-only mode. Participants on the call will have the opportunity to ask questions following the company's prepared comments. It is now my pleasure to introduce Bill D'Attulio, Unity's Vice President of Investor Relations and Treasury. Please begin.

Good morning, everyone, and thank you for joining today's conference call to discuss Unity's second quarter 2024 results. Speaking on the call today will be Kenny Gunderman, our CEO, and Paul Bullington, Unity's CFO. Before we get started, I would like to quickly cover our Safe Harbor Statement. Please note that today's remarks may contain forward-looking statements. These statements include, but are not limited to, statements about the benefits of the proposed transaction between Unity and Windstream, including future financial and operating results of either company or the combined company. 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. Please also note that Unity and Windstream, through the entity that will be combined, that will be the combined parent company following the merger, recently filed a preliminary form S4 Registration Statement with the SDC that includes a proxy statement and prospectus regarding the transaction that has not yet become effective. Investors are urged to read that proxy statement and prospectus as it contains important information about the transaction. In addition, Unity 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 Unity's directors and executive officers in the company's most recent proxy statement. You may also obtain a copy of the preliminary proxy statement and prospectus through the SEC website, Unity'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 presentation that accompanies this call. Unity does not undertake any obligation to update or revise any of this information in today's remarks, whether as a result of new information, future events, or otherwise. Numerous factors could cause actual results that 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 factors section of the recently filed preliminary form S4. With that, I would now like to turn the call over to Kenny.

Thanks, Bill. Good morning, everyone, and thank you for joining. Starting on slide four, Unity delivered another solid quarter of performance led by the continued strong demand for our mission-critical fiber infrastructure. As a result, we're reiterating our consolidated full-year 2024 revenue and adjusted EBITDA outlook. Our core recurring strategic fiber business grew 3% in the second quarter, fueled by exceptional growth in enterprise, wholesale, and dark fiber revenue of 12%, 15%, and 18% respectively. When paired with our industry-leading .3% churn, we remain on track to deliver 4% to 6% MRR growth for the full year. We continue to execute well in our unique strategy of being a pure-play fiber provider in Tier 2 and 3 metro markets and on intercity routes. We believe that if you build fiber first in less competitive markets, you secure a right to win for many years into the future. Turning to slide five, we had a strong quarter of new bookings. As we have discussed previously, the demand from hyperscalers driven by generative AI is real and represented approximately 40% of this quarter's bookings. We're increasingly confident that this demand will be sustained as a meaningful percentage of our entire wholesale sales funnel is from hyperscalers. With wireless bookings for the quarter, while wireless bookings for the quarter were muted, we continue to expect a pickup in wireless in the second half of this year. We're not only seeing a meaningful pickup in wireless RFPs, but we're also starting to have conversations about 25 gig upgrades at tower sites. Growth in mobile broadband, fixed wireless, and fiber to the home connectivity are all driving substantial data traffic growth, and we do not see any of those trends dissipating. Finally, fiber to the home carriers are driving an increasing amount of demand, procuring middle mile and intercity backhaul to connect our neighborhoods. The amount of bookings Unity saw relating to fiber to the home carriers increased threefold in 2023 versus 2022, and we expect a similar level in 2024. On a consolidated basis, our net capital intensity during the quarter was 31%, down from 44% in the same prior year period, and we believe it will continue to decline. There are a number of encouraging trends in bookings driving that capital efficiency, including our continued focus on lease-up and a higher mix of hyperscaler deals that generally come with higher NRCs, and therefore better than our typical anchor yields. We also continue to see price stability, especially in dark fiber sales. Turning to slide six, our growth capital investment program continues to provide positive results for Unity, and given our pending merger with Windstream, we wanted to highlight a few key points which we believe the market is underappreciating. First, Kinetic and Unity have invested a substantial amount of capital in its network, with over $2 billion invested since 2015. These historical investments include backhaul fiber and ultimately fiber to the node. In fact, prior to starting the fiber to the home program in 2019, close to 100% of all broadband customers at Kinetic were already served by fiber-backed D-SLAMs. Each of these D-SLAMs has a minimum 1 gig backhaul link to the market level central office, and a minimum 10 gig link from that CO to the network core. This historical investment helps enable Kinetic's approximately 650 per home passing cost, as we estimate that backhaul equates to roughly 20% of the total cost of building fiber to the home for others. I'll speak more on our pending merger shortly, but to complete our

Thank you, Kenny. I'd like to begin by reviewing our second quarter performance, followed by an overview of our current 2024 outlook. We had another solid quarter highlighted by near-record consolidated bookings MRR of $1.1 million, 3% core recurring strategic fiber revenue growth, and declining consolidated net success-based capital intensity, which stood at 31% for the quarter. As I'll cover in more detail in just a bit, our 2024 outlook for consolidated revenue and adjusted EBITDA remains unchanged as we expect to end the year within the previous guidance ranges provided. We have also provided Windstream's second quarter financial information in an 8K filed with the SEC earlier this morning. Please turn to slide 7, and I'll start with comments on our second quarter. We reported consolidated revenues of $295 million, consolidated adjusted EBITDA of $237 million, AFFO attributed to common shareholders of $92 million, and AFFO per diluted common share of $0.34. At Unity Leasing, we reported segment revenues of $218 million and adjusted EBITDA of $211 million, representing an adjusted EBITDA margin of 97% for the quarter. During the second quarter, Unity Leasing deployed approximately $70 million towards growth capital investment initiatives, with the majority of the investments relating to the Windstream GCI program. With the GCI amount funded subsequent to the second quarter in July, Windstream has now reached its GCI funding limit for 2024, and there will be no further GCI payments for the remainder of the year. At Unity Fiber, we reported revenues of $77 million and adjusted EBITDA of $31 million during the second quarter, achieving margin of approximately 40%. Both revenue and adjusted EBITDA during the quarter were higher than expected due to one-time, non-recurring revenue items. Unity Fiber Net Success Base CapEx was $21 million in the second quarter. We also incurred about $2 million of maintenance CapEx during the quarter. Please turn to slide 8, and I'll now cover our updated 2024 guidance. We're revising our guidance for business unit level revisions, the $300 million add-on to our .5% secured notes, 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 Unity Fiber revenue and EBITDA to reflect the one-time revenues I referenced earlier, while slightly lowering our Unity Leasing revenue and adjusted EBITDA estimate due to lower than expected non-cash straight-line revenue and the timing of delivery on a recent lease-up award that is now expected to start billing in early 2025. Given the expected timing of one-time sales, including strategic dark activity and Fiber sales to hyperscalers, we expect the second half revenue and adjusted EBITDA to be more heavily weighted in the fourth quarter versus the third quarter. I will point out that current consensus estimates do not reflect this expectation, as third-quarter estimates are currently higher than our expectations, while fourth-quarter estimates are lower. We are also lowering our AFFO estimate for full year 2024, primarily due to higher interest expense related to the recent $300 million or add on to our .5% secured notes. At Unity Leasing, we expect $250 million of net success-based capex at the midpoint of our guidance, of which approximately $230 million relates to Windstream GCI investments. Net success-based capex for Unity Fiber this year is now expected to be $100 million at the midpoint of our guidance, representing a capital intensity of 34%, down from 40% in 2023 and 45% in 2022. Further demonstrating the success we are having in transitioning to less capital intensive, higher return lease up deals. We expect full year AFFO to range between $1.33 and $1.40 per diluted common share, with a midpoint of $1.36 per diluted share. 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 $619 million of combined unrestricted cash and cash equivalents and undrawn revolver capacity. Our leverage ratio at quarter end was 5.97 times based on net debt to second quarter 2024 annualized adjusted EBITDA, excluding the debt and adjusted EBITDA impact from the ABS loan facility. As it relates to the ABS market, we continue to view it as an attractive alternative source of financing that complements our existing capital structure well. To that end, we continue to make good progress and we're replacing our current ABS bridge financing with a permanent ABS solution, which we expect to be in place later this year or early next year. With that, I'll now turn the call back over to Kenny.

Thanks Paul. As a reminder, we announced last quarter that we've reached a definitive agreement to merge Unity and Windstream, creating a national fiber powerhouse. We continue to expect the transaction to close in the second half of 2025 and we're making great progress on our timeline. In fact, we've already received six of 18 required PUC approvals, including from Washington, DC. Given the transformative nature of this transaction, I wanted to reiterate a few key highlights. Slide 12 showcases the reach of new Unity's insurgent fiber network, extending our successful strategy of targeting tier two and three markets for wholesale and enterprise now into residential fiber to the home. Our true north is building fiber first in less competitive markets, giving us the right to win for many years into the future. 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, Unity will have the potential to reach over five million connected on ramps in largely unique locations, each driving increasing amounts of bandwidth onto our own wholesale network. Please start at slide 13. Kinetic is a unique fiber to the home platform for a number of reasons. First, fiber to the home is indisputably a superior product from a latency and reliability perspective and will be for our lifetimes and beyond. Second, incumbent providers have a big advantage when providing fiber to the home, given the embedded network benefiting from years of investment. And ironically, incumbents are now share takers with fiber to the home after many years of playing defense against cable and wireless. Thirdly, over 50% of Kinetic's footprint is 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 in Unity fiber. Just as importantly, 75% of Kinetic's footprint has 20,000 or fewer households, enforcing our focus on tier two and three markets. Kinetic is also building fiber passings of what we believe to be an industry-leading cost of $650 per passing. As I highlighted earlier, the historical GCI, TCI investments have given Kinetic a head start from a cost and network quality perspective. In addition, owning the backhaul network will be a tool to disincentivize overbuilders from entering our markets, as in many cases, our backhaul network is the only one available. This helps segue into the final part of the presentation. Over only 15% of the footprint today has a true overbuilder, and that's held relatively constant for the last five years. We certainly don't expect this number to grow meaningfully in the future, given we're increasing our offensive posture on a combined basis. Slide 14 highlights how Kinetic compares favorably to other providers in the industry. I've already discussed the dearth of overbuilders and the attractive cost to pass, but you can also see on this page that Kinetic compares favorably on penetration levels, ARPU, and of course, the support of the expansive owned backhaul network. Moving to slide 15, you can see Kinetic has been demonstrating strong success the past few years. Initial penetration levels on early cohorts have consistently averaged between 15 to 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 30% as Kinetic has really ramped up a more customer-focused, digitally enhanced, local -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. Winstream reported solid quarterly results yesterday, so on slide 16, we've taken the liberty of showing a consolidated -to-date view of revenue and adjusted EBITDA for new unity by each segment we expect to report on post-close. Both Kinetic and Fiber infrastructure consists of a highly predictable core recurring revenue base that continues to grow and yield attractive margins. As a reminder, our Fiber at the Home platform will continue to be branded as Kinetic. Fiber infrastructure will include our current Unity Fiber and Unity Leasing segments, along with the Winstream Wholesale segment, all of which are highly complimentary and will combine to create a premier Fiber infrastructure company with both national and deep regional capabilities and a Fiber network that is predominantly owned and operated. As you can see, the core Fiber business demonstrated solid top-line growth for the quarter. Managed Services is made up of Winstream's cloud-based enterprise business and is not core to our Fiber infrastructure strategy. The current strategy at Managed Services is to focus on retaining existing customers and upselling those customers versus focusing on top-line growth. This strategy has led to very stable to growing adjusted EBITDA. New Unity intends to continue that strategy in addition to evaluating other value-created alternatives. Importantly, on a consolidated basis, the combined business is demonstrating solid EBITDA growth. Turning to slide 17, we expect steady, predictable top-line and EBITDA growth well into the future, and the combined business should be free cashflow positive in 2026. In the meantime, our current build plan in the next two years of cash burn are fully funded with on-hand or available liquidity. We believe this is another key highlight of New Unity and gives us confidence in our long-term leverage target and our ability to generate outside of equity returns. Our fully funded plan, steady, predictable results, and unique, -to-replicate fiber assets all suggest substantial intrinsic value in the New Unity as highlighted on slide 18. Recent industry valuation multiples in the ABS market, the M&A market, and publicly traded comparables all reinforce this value. Further, we recently filed a proxy statement for our transaction, which includes a history of both strategic and financial interest in the combined assets of the company. The valuation metrics on this slide are further supported by those historical indications of interest. Turning to slide 19, while the closing of the transaction is still a number of months out, we have begun and will continue to make progress on key priorities, including continuing to demonstrate strong results at both companies and educating the market on the merits of the combined transaction. We're also using the time between now and close to actively evaluate refinancing opportunities that would allow us to collapse the dual silo capital structure. We're also actively working with Kinetic on an integration plan to achieve our synergy goals, as well as refining our Fiber to the Home Build plan to incorporate up to an additional one million homes. Lastly, we're never idle when it comes to M&A, and with this new exciting portfolio of assets together, there's no shortage of interested counterparties with whom we're engaging. In summary, on slide 20, let me reiterate our excitement for this fantastic combination and future prospects for Unity. We'll be a premier insurgent fiber provider in the US with a scaled platform for growth and a differentiated position in tier two and three markets. Our enhanced balance sheet and cashflow generation will support growth, increasing our ability to expand the Fiber to the Home Builds. Looking ahead, this combination will deliver additional value-accretive opportunities through meaningful synergies and M&A optionality. With that, we'd be happy to take your questions.

Thank you. To ask a question, you will need to press star 11 on your telephone. To remove yourself from the queue, you may press star 11 again. Please limit yourself to one question and one follow-up to allow everyone the opportunity to participate. Please stand by while we compile the Q&A roster. Our first question comes from the line of Greg Weigel, of TD College.

Great, thanks for taking my questions and congrats on some solid bookings here. And that's what my question is really about is, what sort of the cadence of the deals going forward? Are we gonna see plus $1 million in bookings in many quarters going forward? And I think you mentioned 40% of that is from GNIIs. Is that percentage mix gonna maybe hold as well? How many Huntsville-type deals are in the funnel and for how long? Any color there would be great,

thanks. Hey Greg, good morning. I don't think you should expect million dollar plus quarters sequentially. I think they'll be a little lumpy. Wholesale deals are lumpy, as we've always said, including the hyperscaler deals. But I think in general, you're gonna continue to see solid bookings. And over the mid to longer term, that's gonna persist. We're increasingly confident in a more regular cadence of hyperscaler deals. And we're confident in saying that just based upon the building funnel that we have. And obviously a funnel is a leading indicator of bookings. And we've got an increasing number of opportunities in there that have been through costing and pricing, have been vetted through sales engineering, and vetted through grant of authority approval levels that are at Unity and presumably at our customers. And so we feel good about those opportunities. But equally importantly, when you hear what the hyperscalers say publicly about the opportunity around AI, they're extremely bullish on it. Comments ranging from, there's greater risk to under investing than there is to over investing. And raising CAPEX guidance and materially higher CAPEX related to AI next year, for example. So I just think that, we just think that the opportunity is meaningful. It will persist for some time. And we expect to achieve at least our fair share of it, especially given we continue to hear a trend of the hyperscalers looking to grow into markets that have less stressed power grids and less stressed distribution grids. We're interacting more and more with our utility partners in some of these markets to talk about ways to collaborate because they also view the hyperscaler opportunities as a big one for them. So I think view it as a terrific opportunity and we're gonna get our fair share of it. We're also gonna continue pushing on all the other wholesale threads that are driving broadband growth, including wireless, including fiber at the home, including traditional wholesale. As we've said many times, we're diversified as a wholesale provider against which use case eventually is the most successful. And frankly, one of the most encouraging comments I've heard from the hyperscalers publicly recently is that even if they don't use the infrastructure capacity that they're procuring for AI, they're gonna use it for something else. And that's music to my ears because it just says there's going to be broadband growth. They're gonna need this infrastructure for all manner of things, including and especially AI. So very bullish on it, hard to predict the cadence, but the funnel is building and we're excited about the opportunity.

Got it,

thanks, Eddie. Thank you. Our next question comes from the line of David Barden on Bank of America.

Hi, thank you. This is Shepra calling in for David today. Thank you for all the details on the call. We went through the S4, of course, it was pretty dense. So just wondering from your point of view, what in the filing on the merger are the most important pieces of information that we don't already have that we should take away from the filing? And if you could just go over the moving parts to achieving that positive free cashflow goal in 2026, particularly the CapEx outlook and how fiber expansion plans might impact the current outlook. Thank you.

Good morning, Shepra. I'll take the first one and then Paul, you can take the second. I think a lot of information in there for sure. Proforma financials, which obviously, folks have been asking for, so I think that should be a focus area and there shouldn't be any surprises and we look forward to engaging with the market and answering whatever questions arise from that, but we still feel very bullish and confident in the forward trajectory of the business and Paul will comment on that as it relates to the bridge to free cashflow positive. I think a section that really should get a lot of focus and attention is the background reading of the merger and those are always sections that provide juicy details, but in this case, we think there's a lot of, very interesting facts and circumstances in there, including number one, that Unity and really Windstream began thinking about our relationship in a much more strategic manner going back to the bankruptcy and even before and I think when you think about the settlement and the bankruptcy and how we decided to invest materially in overbuilding the copper with fiber, that was meaningful when you look at bifurcating the MLAs in the way we did to provide for strategic optionality and also just opening up the C-Lag network to Unity's use, all were very intentional and strategic in nature, which many of those things led to a substantial amount of strategic and M&A related dialogue post the bankruptcy and I think that's the second point that there has been and continues to be a lot of financial and strategic interest in our collective assets and at valuation metrics that we think are validating of what we believe the intrinsic value to be and while you can take a point of view on whether those multiples are, where those multiples should be at any point in time, I think one thing that's indisputable is they validate intrinsic value, which is substantially higher than where we currently trade and where we've traded recently. So we're just very excited about the intrinsic value of the business and I think many of the data points in that background reading validate that and the final point I would make is, just on the background is, as you can see, we never sit on our hands when it comes to having strategic dialogue. We're regularly constantly engaging with the market and even when transactions aren't being announced publicly, which up until recently there hadn't been any from our perspective, we would always say that we were very active regardless and I think that's important to note because it's hard to flip a switch off and on on M&A, you need to stay engaged with the market and that's always been a core tenet of ours and I think something that will persist going forward. So Paul, you wanna take it?

Hey HR, this is Paul. I'll take your second question. Yeah, so as you mentioned and as Kenny mentioned earlier, this is a fully funded business plan to get us through the combined company plan and cashflow, inflection to cashflow positive in 2026. And really the pieces of that are really just executing on both companies' plans as they have in place today. Continuing to, at Kinetic, continuing to drive fiber deeper into that business, replacing copper and hitting those marks and hitting the penetration goals for the fiber product, fiber to the home product at Kinetic is gonna be key. Doing that at a cost that's as projected and that's been going really, really well. As Kenny mentioned, the cost per passing at Kinetic is coming at $650 per home, which we think is an industry leading number and so that continuing to execute on that capital plan, bringing fiber to those homes and then achieving the penetration rates that Kinetic is showing good progress toward achieving are certainly important. And then at fiber infrastructure, it's really continuing to execute, continuing to execute on just what we've been talking about, lowering capital intensity, delivering more and more lease up higher return type deals. But investment levels in that fiber infrastructure business are relatively consistent with what they are today. And then also for that Windstream business, continuing to drive efficiencies, drive TDM costs out of that business, which is a big part of their plan over the next couple of years and they're making great progress with regard to doing that. We saw some nice efficiency gains in their costs this quarter and the results that were just published today in our 8K, saw some good efficiency gains in that business, so continuing to drive that through. So it's really just executing on that plan that's in front of both of our companies that we're executing on today, going through the completion of that fiber to the home build plan at Kinetic and kind of 2026, 2027 zone gets us to that free cashflow profile that we were talking about. One other thing I will mention is synergy. There's some synergy built into that as well. So we're gonna have to do our job in achieving those synergies, which we are confident at. We think the $100 million kind of run rate of synergies that we've got baked into the plan are conservative and highly achievable. Yeah, I

agree with all that. I think one thing to add, Shipra, and tie it back to the question about the hyperscalers, I do think that when we look at capital intensity going forward, we don't anticipate pulling back on investing in our fiber infrastructure business as Paul mentioned. So just to be clear on that, but I do think that there's an increasingly amount of our bigger deals, whether it be anchor deals or lease up deals that have higher NRCs as a part of them, which will drive down capital intensity as I mentioned in our prepared remarks. And I also think independent of NRCs, there's a likelihood that we'll see higher IRU fees going forward as well. And so those things are both, I'd say, additions to our original plan when we think about bridging to that free cashflow period in 2026. So that's a trend that's developing and we're excited about it.

Thank you.

Thank you. Once again, to ask a question, please press star one one on your telephone. Again, that's star one one to ask a question. Our next question comes from the line of Frank Lothan, Raymond James.

Hey guys, good morning. This is Rob Lorn for Frank. You might've spoken to this earlier, if so I didn't catch it. Are you expecting to do any builds for bead within Unity fiber, not within Windstream in 2025, or is that more likely to be a 2026 event at this point?

Morning, Rob. So we're currently not having conversations related to bead at Unity. The bead related conversations are entirely at Kinetic, which as an aside, gives us the ability to communicate directly with Windstream about that, as opposed to being competing bidders. I do think on a combined basis, once the transaction is closed and on a go-forward basis, there will be opportunities to build in or around or off of our Unity fiber network. There are some really attractive metro fiber markets that we have, as you know, and taking the build and execution expertise of Kinetic and expanding that into that footprint, I think is an opportunity that we really haven't started to fully evaluate yet, but we do believe it's an opportunity that's on the dashboard, but that will be post-closing. And when you look at the bead opportunity, we entirely agree with the way Paul and Paul Sanu and Drew Smith over Windstream communicate about bead. It's a terrific opportunity for Kinetic. It's really targeting the tier two and tier three markets where Kinetic operates and thrives today. And so we think it's a real opportunity and it's a big part of us expanding the number of homes targeted with fiber up to a million. So we're really leaning into that on a combined basis and we're excited about the opportunity that we think it's gonna bring.

Great, thank you guys.

Thank you. I would now like to turn the conference back to Kenny Gunderman for closing remarks, sir.

Great, we appreciate your interest in Unity Group and look forward to updating you further on future calls. Thank you for joining us today.

This concludes today's conference call. Thank you for participating. You may now disconnect.