Company Reports

Uniti's legacy Windstream telecom business, known as Kinetic, is rapidly converting its old copper-based networks to fiber, following the same path as other phone companies. Undertaking this capital-intensive effort with revenue in decline will cause the firm to burn cash, likely for at least the next couple of years, adding to its already sizable debt load. The new fiber network would be attractive to several larger telecom firms, but we suspect Uniti will need to stabilize revenue before it can command a premium for the business.

Uniti's revenue fell 5% in the second quarter. Consumer revenue was especially challenged, falling 9%, by far the worst performance of the past two years. Enterprise fiber sales growth weakened, but this business tends to be lumpy. The firm burned nearly $400 million during the quarter.

Uniti's adjusted revenue increased 1% during the first quarter. Recognizing up-front lease revenue offsets ongoing declines in most business segments. The firm claims it has signed $755 million in contracts with hyperscale data center firms, implying $85 million of new agreements in the quarter.

The new Uniti consists of three parts. The legacy Windstream telecom business, known as Kinetic, is rapidly converting its old copper-based networks to fiber, following the same path as other phone companies. The fiber business, primarily made up of the Windstream wholesale business and former Uniti leasing business, has good growth potential as demand for network capacity among data center and cloud computing firms ramps up. Finally, the managed services business provides a range of telecom-related services to enterprise customers. Like similar businesses at AT&T and Verizon, managed services are in sharp decline as technology shifts render many of these offerings obsolete.

Uniti's revenue declined 5% in the fourth quarter, adjusted for the Windstream merger, and nearly 7% for the full year. Management expects the rate of decline in 2026 to hold roughly at the fourth-quarter level and return to growth in 2027, as the firm invests aggressively in its fiber network.

The new Uniti consists of three parts. The legacy Windstream telecom business, known as Kinetic, is rapidly converting its old copper-based networks to fiber, following the same path as other phone companies. The fiber business, primarily made up of the Windstream wholesale business and former Uniti leasing business, has good growth potential as demand for network capacity among data center and cloud computing firms ramps up. Finally, the managed services business provides a range of telecom-related services to enterprise customers. Like similar businesses at AT&T and Verizon, managed services are in sharp decline as technology shifts render many of these offerings obsolete.

Adjusted for the Windstream merger, Uniti's third-quarter revenue declined 6%, in line with the prior quarter. The decline in residential and small-business revenue improved modestly, while fiber growth slowed slightly due to a tougher comparison with the prior year.

Pro forma for the Windstream merger, which closed on Aug. 1, Uniti posted a 6% year-over-year revenue decline during the second quarter. With lower-margin business running off, EBITDA was roughly flat. For the full year, management still expects pro forma revenue to decline by about 8%.

Uniti reported 2.6% revenue growth year over year, including 4% higher strategic recurring revenue, which excludes Windstream lease payments. Windstream's revenue declined 10% as it prunes unprofitable businesses ahead of the firms' planned merger, which is still expected to close this year.

Uniti's fourth-quarter revenue was up 2.7% year over year, while adjusted EBITDA grew 3.6% to close a year where each grew less than 2%. Management still expects the Windstream merger to close in the second half of 2025 and for the combined firm to have compelling fiber opportunities.

Uniti’s merger with Windstream will primarily result in Windstream’s business going public, while the bulk of Uniti disappears. About 70% of Uniti’s revenue and almost 90% of profits come from the firm’s master lease agreement with Windstream. This lease expense for Windstream—and lease revenue for Uniti—will disappear when the firms merge, leaving Windstream’s residential and enterprise telecom business and the relatively small amount of other fiber leasing revenue Uniti currently has.

Uniti’s third-quarter results were consistent with the steady, low-growth path it has been on for years. Management continues boasting about the opportunity and success it has had in offering customers the ability to meet the network demands associated with artificial intelligence. Still, this incremental business doesn’t materially move the needle relative to the Windstream lease that continues to dominate Uniti’s revenue base.

Uniti’s second-quarter results were steady as usual, as master lease agreements dominate the business and carry predetermined revenue and profits to a great extent. Bookings for new leases were especially strong and offer encouragement for future growth prospects, though these other leases make up a small part of Uniti’s business, as currently comprised. However, uncertainty surrounding what impact the pending merger with Windstream will have on the future corporate structure and operating prospects continues to be much more consequential than Uniti’s results, and we are maintaining our $4 fair value estimate.

After placing the stock under review following the Windstream merger announcement, we are relaunching coverage of Uniti with a $4 fair value estimate. The big decline from our previous Uniti fair value estimate of $12 is a function of stand-alone Uniti’s fractional level of equity relative to debt, the loss of real estate investment trust, or REIT, status, comparable debt leverage given the cash and preferred equity portions of the deal, and absent planned cost savings. It also reflects uncertainty around Windstream, especially the managed services business.

Uniti’s merger with Windstream will primarily result in Windstream’s business going public, while the bulk of Uniti disappears. About 70% of Uniti’s revenue and 90% of profits come from the firm’s master lease agreement with Windstream. This lease expense for Windstream—and lease revenue for Uniti—will disappear when the firms merge, leaving Windstream’s residential and enterprise telecom business and the relatively small amount of other fiber leasing revenue that Uniti currently has.

Along with its first-quarter results, which were uneventful as usual, Uniti announced an agreement to merge with Windstream, the company from which it was originally spun out. Consistent with Uniti’s modus operandi, the transaction appears to be financially complicated and opaque, which we suspect is behind the market’s negative reaction.

As usual, Uniti’s results were stable in the fourth quarter, and guidance for 2024 calls for more of the same. The growth rate can fluctuate from quarter to quarter, mostly as nonrecurring revenue arises. However, the Windstream master lease is still dominating the revenue base, and incremental fiber lease-ups are relatively small and steady. As a result, we see little realistic chance to deviate from low-single-digit growth each year as long as the Windstream lease is in place. That said, financial maneuvering could bring out some value in Uniti. We see the stock as undervalued relative to our unchanged $12 fair value estimate.

Uniti’s business is dominated by its triple-net leases, which results in little variability in operating results. The firm’s lease with Windstream makes up nearly 75% of total revenue and 90% of EBITDA. Following Windstream’s bankruptcy in 2019, Uniti and Windstream renegotiated the lease, which has an initial term that runs through 2030. The renegotiation leaves Uniti with very stable and predictable financial results, but the firm has sought to grow and diversify. We doubt the non-Windstream business can become large enough to move the needle.

Uniti’s third-quarter results were generally in line with our expectations, but the firm’s long-term capital structure continues to take center stage. Management indicated that it is pursuing asset-backed debt financing, similar to what Frontier Communications recently issued. In addition, management sees multiple opportunities to sell or possibly acquire assets. This discussion comes amid the backdrop of a CEO change at Windstream, by far Uniti’s largest customer. We expect Uniti will be able to navigate the capital markets and maintain a reasonably healthy Windstream relationship, and we are not changing our $12 fair value estimate.

Uniti missed FactSet consensus revenue and EBITDA estimates and said activity from some of its customers has slowed. The stock sold off 10% in response, but we think that’s an overreaction to surface-level optics. We are not changing our forecast or $12 fair value estimate. We think the biggest reason for the undervaluation is fear about the firm’s debt level and corporate structure, but we don’t expect Uniti to face financial pressures that force it to make unattractive decisions.