UNITI GROUP INC

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.

Why it matters: Broadband competition is mounting. After showing consistent growth, revenue per fiber broadband customer dropped 3% year over year during the quarter. Management expects another drop in the third quarter and then a rebound in the fourth. Uniti blamed this decline on the cable companies' bundled broadband and wireless offers, but this source of pressure is unlikely to abate over the remainder of 2026. We suspect the firm is offering generous retention credits to keep customers, allowing it to post an increase in fiber customer additions. We see a risk that Uniti's broadband pricing is too high and its resources too limited to respond to competitors. The firm would be better off as part of a larger enterprise, but we haven't heard more about a potential buyout since rumors swirled several months ago.

The bottom line: We don't expect to materially change our $6 per share fair value estimate. Even after selling off on earnings, we think the shares include a takeover premium. The firm's hefty debt load, network investment needs, and sizable declining businesses could scare off buyers. Uniti's net debt load now stands at $9.9 billion, or 6.4 times trailing adjusted EBITDA. We expect this figure to continue creeping up over the next two or three years as the firm extends its fiber network to more locations.

Key stats: The firm didn't ink any major fiber deals with hyperscaler or other artificial intelligence-related customers during the quarter. These agreements often include upfront payments to fund network investment. However, management increased expectations for fiber segment revenue in 2026, with strong demand for services that generate recurring revenue.

After reviewing our assumptions for Uniti's fiber business, we have increased our fair value estimate to $7 from $6. This revised figure equates to an enterprise value of about 7.5 times our 2026 EBITDA estimate, which is on the high side for a telecom carrier, but not unreasonable, in our view, for a firm that should return to growth shortly. We caution, however, that debt and preferred shares comprise about 85% of Uniti's total value.

We project revenue will continue to decline in 2026, with revenue stabilizing the following year, in line with management's expectations. As the legacy enterprise and residential telecom businesses rapidly shrink, their impact on total revenue diminishes.

In the residential business, the firm's growing fiber broadband footprint should reach an adequate size to offset the decline in legacy services in 2027. We expect the firm to reach its goal of building fiber to 3.5 million homes by the end of the decade, with continued gradual expansion beyond that. We assume about 39% of the homes in this fiber footprint to take Uniti's broadband service. Fixed-wireless and satellite providers will capture a portion of the market, with the remainder split between Uniti and cable rivals in most locations. We also expect broadband pricing to increase steadily each year, with a pause in 2026 as the firm resets packaging and pricing.

We expect the fiber business to deliver solid growth over the next three years as Uniti books revenue for fiber capacity sales up front. This revenue will mostly be collected up front as well, but it will require incremental capital investment to capture. We expect the solutions segment will remain in sharp decline for the next several years.

In total, we project a 3% revenue decline in 2026, followed by 1% average annual revenue growth over the remainder of the decade. Beyond 2030, we believe growth will continue to accelerate modestly, to around 4% annually.

We project an adjusted EBITDA margin of 46% by 2034, up 6 percentage points from 2025 pro forma results. Several declining services provide very strong profits, but we expect Uniti to be able to cut costs as it shuts down old copper networks. The firm should also gain some leverage on SG&A costs as it returns to revenue growth.

Our capital spending forecast is tied to the pace of fiber network expansion. We assume $1.5 billion in net capital spending in 2026, in line with management's budget. We then expect spending to remain around this level, equal to 35%-40% of revenue, through 2029 as fiber expansion continues. As fiber expansion slows in 2030 and beyond, we expect capital spending to decline to a mid-teens percentage of revenue.

We do not believe Uniti has a moat, as we expect the high cost of building fiber will limit returns on capital to around the firm's cost of capital over the longer term. We also expect competition to provide high-capacity fiber networks to enterprises will remain fierce in most locations, especially where demand is strongest.

Residential revenue accounts for about a third of Uniti's revenue, with broadband services driving most of these sales. Uniti has steadily lost broadband customers in recent years. The broadband customer base has been shrinking about 8% year over year for the past several quarters, and fewer than 20% of homes in the Uniti service territory subscribe to its service. Nearly 40% of the firm's customers are still on older DSL technology, which isn't competitive with cable, or, increasingly, fixed-wireless offerings. The other half of Uniti's customers are on its fiber network, which currently covers about 40% of its territory.

Uniti is following the same path many other telecom firms have taken recently, expanding fiber rapidly to better compete. Earning an acceptable return on the investment in fiber networks will take a decade or more, in our view. Uniti can't compete on price to win customers in most areas without inviting a competitive response from cable rivals. As a result, its best course is to gain market share based on service quality while steadily increasing prices. After an initial burst of customer growth, achieving acceptable penetration will likely take several years.

We also generally don’t see competitive advantages in long-haul fiber ownership. Broadly, our view is that fiber on most routes in the US is commoditized. The surge in demand for network capacity to connect data centers for AI usage has created opportunities to monetize unused and hard-to-replicate assets, such as with Lumen's empty network conduits. Uniti's network routes into secondary markets promise to reach locations others can't, enabling lower prices and faster deployment. We expect Uniti will pick up additional revenue thanks to these advantages. However, the opportunity will likely be limited, as we suspect other firms will be willing to extend their networks wherever AI demand promises to be strongest.

Completing the merger with Windstream has eliminated a significant financial risk and diversified the firm’s operations into the growing fiber broadband market.

Less severe competition in the second- and third-tier cities where Uniti operates provides it with a major advantage versus other carriers. Uniti’s network will be in demand to facilitate ever-growing data transport needs.

Multiple large telecom firms, including all three major US wireless carriers, are rapidly expanding their fiber footprints. Uniti will be an acquisition target.

Uniti's financial position is precarious. Debt leverage is already high and will only rise further as the firm burns cash to build out its fiber networks. Any would-be acquirer will wait for a bargain price.

Revenue growth is unlikely to return anytime soon. Nearly 40% of Uniti's broadband customers are on old technology, and the managed services business will likely shrink for several years as customers adopt newer offerings from competitors.

Deals with hyperscale data center firms hold promise, but these customers will drive a very hard bargain.