Uniti Group Inc. Q3 FY2025 Earnings Call

Good morning, and welcome to today's conference call to discuss Uniti's Third Quarter 2025 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, investor.uniti.com, beginning today and will remain available for 365 days. It is now my pleasure to introduce Bill DiTullio, Uniti's Senior Vice President of Investor Relations and Treasury. Please begin.

Good morning, everyone, and thank you for joining today's conference call to discuss Uniti's third quarter 2025 results. Speaking on the call today will be Kenny Gunderman, our CEO; and Paul Bullington, Uniti's CFO. John Harrobin, President of Kinetic, will also be joining us this morning during Q&A. 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 regarding Uniti's fiber build strategy, the business' growth potential, our 2025 outlook, and other statements that are not historical facts. Numerous factors could cause actual results to differ materially from those described in the forward-looking statements. For more information on those factors, please see the section titled Safe Harbor Statement in the accompanying presentation and the Risk Factors sections in our filings with the United States Securities and Exchange Commission. 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 3, we're very pleased to have closed our merger with Windstream during the third quarter, and we're now well positioned as the premier insurgent fiber provider. We have a scaled national wholesale fiber footprint that puts us in rare company to win large-scale Fiber Infrastructure deals, and we are first or early with fiber to hundreds of Tier 2 and 3 markets around the country, giving us the right to win for many years into the future. Our strategy is very clear and is the same simple winning formula we've had at Uniti for years. First, continue to build fiber into unique locations, including by overbuilding legacy networks and moving customers onto our owned fiber while aggressively managing out of legacy products and services; second, providing operational excellence; and third, having an insurgent obsessive focus on the customer. This formula has led to industry-leading churn and NPS scores and predictable mid-single-digit growth at Uniti. Fiber is indisputably a superior product and coupled with execution prowess, we're now firmly on the same path post our merger with Windstream. Even though we've not yet had a full quarter of performance to report, we're starting to see strong improving trends. We continue to add industry veterans to our leadership team, including with experience at Frontier and Ziply, among others, and we've now fully onboarded and are ramping up key third-party partners to accelerate our fiber build and go-to-market strategy. We now have 115 active third-party crews, which is about a 2.5x increase from before the merger, and we should have close to 400 by the second quarter of next year. Thus, even though we were behind our plan at the merger close, we fully expect to get caught up and beyond in the first quarter of next year. From an operational point of view, we're very pleased and focused on improving our customer experience and are seeing early progress. For example, in October, we had the highest first call resolution ever at Kinetic, the lowest transfer rate in over 2 years and a record low dispatch rate and a record low for fiber repeat trouble tickets, among other improvements. New leadership with experience building and executing on a scaled fiber-to-the-home strategy is focusing our field resources and go-to-market teams on what matters most to our customers in this new competitive environment. We are now an insurgent share taker and have the right strategy, leadership and assets to accelerate trends towards positive revenue and EBITDA growth. Turning to Slide 4. During the quarter, we saw strong fiber revenue growth of 13%, the highest number of fiber gross adds ever, and the highest net adds in 2 years at Kinetic. Because of our historical fiber-to-the-node investment, we were also able to quickly and cost efficiently upgrade 85% of our fiber footprint to be multi-gig capable, greatly enhancing our upsell opportunities in the coming quarters. In Fiber Infrastructure, we had an outstanding quarter of new bookings fueled by hyperscalers, and we were named 'The Best North American Connectivity Provider' by Capacity Media. The opportunity in wholesale fiber right now is generational in nature, and we are extremely well positioned with the right strategy, leadership and assets to capture share in dark fiber and wavelengths. As you can see on Slide 5, we're making steady progress towards all of our key goals. Almost 80% of total revenue today is from core fiber businesses, while nearly 40% of our total revenue for the entire company and at Kinetic is from fiber. We also grew homes passed and fiber subscribers by 11% and 17% year-over-year and are well on our path to 3.5 million homes and 1.25 million fiber subscribers by 2029. Slide 6 illustrates that our path forward is not only clear but it's also reasonably predictable as the critical fiber inflections are already beginning. By the end of this year, more of our consumer customers at Kinetic will be on fiber than legacy networks. And by the second quarter of next year, Kinetic's consumer fiber revenue will exceed DSL revenue. By the end of next year, consolidated fiber revenue will exceed 50% for the entire company. Once these important inflections happen, the flywheel starts to accelerate, leading to total revenue and adjusted EBITDA growth year-over-year in 2026 for our core Fiber businesses, setting us up for year-over-year revenue and adjusted EBITDA growth for the entire company beginning in 2027. Turning to Slide 7. A vitally important part of our growth will come from our Fiber Infrastructure business. There has never been a better time to be a wholesale fiber provider. Broadband trends are accelerating across virtually all categories, especially AI-driven use cases, as evidenced by another strong quarter of new bookings. Although we're building substantial amounts of new fiber especially for the hyperscalers, our scaled national footprint gives us terrific lease-up potential, driving our blended cash yields to 34%, the highest we've ever seen, and we believe there's more to come. On Slide 8, our hyperscaler funnel has grown approximately 13% since the second quarter with numerous large deals getting booked but being replenished with many more. Hyperscaler activity as a percentage of our total funnel at stand-alone Uniti has improved materially year-over-year to around 30% of MRR. Importantly, when measured on a total contract value basis, hyperscalers are an even higher percentage of the total combined sales funnel, highlighting that the benefit of these deals are not always apparent in traditional bookings metrics. Before turning the call to Paul, I want to briefly provide an update on our outlook with hyperscalers. We now believe the total addressable market for AI and hyperscalers for fiber providers is approximately 50% higher than what we originally estimated at the beginning of this year. Our conviction resonates from the strong new bookings we're seeing, our steadily growing qualified funnel and the bespoke conversations we're having with our customers. Our customers continue to say to us both privately and publicly that investing in AI infrastructure is mission-critical to their businesses. Demand constantly outpaces supply and quarter after quarter, CapEx assumptions go up. For Uniti, the next few quarters will likely bring the largest deals we have seen to date, and we have clear visibility into at least 3 years of strong value-accretive deal flow. With that, I'll turn the call to Paul.

Thank you, Kenny. Starting on Slide 11. I'd like to touch on some of the key third quarter highlights for both Kinetic and our Fiber Infrastructure segment. As a reminder, our fiber-to-the-home platform will continue to be branded as Kinetic. Fiber Infrastructure will include our previous Uniti Fiber and Uniti Leasing segments, along with the Windstream Wholesale segment, and we are now also referring to the Windstream Managed Solutions segment as Uniti Solutions. During the quarter, we continued to make solid progress on several fronts. Starting with Kinetic, we expanded our fiber network to pass an additional 56,000 homes with fiber, ending the quarter with 1.8 million homes passed. Kinetic also added 24,000 net new fiber subscribers during the third quarter, ending the quarter with 507,000 total fiber subscribers. As Kenny mentioned earlier, this was the second highest level of net adds in the past 2 years, and total Kinetic fiber subscribers grew 17% from the prior year period. Kinetic Consumer fiber revenue grew 26% year-over-year during the quarter, and this growth is being driven by strong adoption of our fiber-to-the-home product, bolstered by the performance of the various marketing initiatives at Kinetic that target both our newer and more seasoned cohorts. At Fiber Infrastructure, Uniti and Windstream combined to record consolidated pro forma bookings MRR of approximately $1.6 million, the second highest level in over 2 years. Slide 12 highlights the sustained momentum we are seeing within Kinetic Fiber. Fiber penetration of almost 29% during the quarter was up 50 basis points sequentially, the second-best sequential improvement over the past 3 years and 130 basis points year-over-year, while fiber ARPU increased 10% year-over-year. The slight sequential decrease in ARPU during the quarter was primarily driven by one-time price adjustments and the acceleration of new fiber subscriber net adds. Turning to Slide 13. The strong improvement in our cohort fiber penetration is being driven by various marketing initiatives, including our Fiber Forward efforts that we launched last year. We've seen a 200-basis point improvement in our 2023 cohort penetration levels from year 1 to year 2 and penetration levels in our year 1, 2024 cohort that are on par with year 2 penetration in older cohorts. We expect to maintain or improve this trajectory going forward, and the team is now focusing on executing the playbook to increase penetration in our older cohorts. Given our current trajectory, we remain confident that achieving our 40% terminal penetration target is very achievable. Slide 14 lays out our key targets for Kinetic this year. As Kenny alluded to earlier, we now have a target of reaching 1.9 million homes passed with fiber by the end of the year, which would bring fiber coverage within the Kinetic footprint to 42%. With respect to our previous target of 2 million homes, as Kenny mentioned, we expect to fully catch up in 2026. We also expect to end the year with approximately 536,000 fiber subscribers and realize approximately $500 million of consumer fiber revenue in 2025, an increase of roughly 25% from the prior year. In terms of cost per passing, we continue to expect the cost going forward will likely be in the $850 to $950 range, resulting in a blended cost of $750 to $850 per passing over the life of the build program. Slide 15 provides a pro forma view of Uniti's consolidated results for the third quarter. Consolidated pro forma revenue was down approximately 6% year-over-year during the quarter, primarily driven by the continued decline in legacy TDM services and Uniti Solutions. However, top line growth in other parts of the business was strong, with Fiber Infrastructure growing 3% year-over-year and Kinetic Fiber-based revenue inclusive of consumer, business, and wholesale services growing 17% year-over-year. As we execute on and accelerate our fiber overbuild plan, we expect fiber services at Kinetic will continue to deliver consistent strong growth quarter-over-quarter. In addition to the information provided in our earnings materials, we have also included additional supplemental pro forma financial information on our Investor Relations website. Slide 16 further demonstrates that the growth in each of our core fiber lines of business has been very strong, and we expect that growth to continue given the superior nature of fiber as a product. As Kenny mentioned earlier, given this pace of growth, we expect fiber to overtake legacy services as the majority of our revenue by the end of 2026. As a reminder, we will continue to face headwinds from legacy services over the next couple of years that will weigh on consolidated revenue and EBITDA. With that said, there are 3 important points I'd like to make. First, legacy services in no way diminish the value of our core fiber business. Secondly, within a relatively short period of time, the shift to fiber revenue will make legacy services revenue increasingly less material. And thirdly, in the meantime, Uniti Solutions is generating significant and predictable cash flow. Please turn to Slide 17, and I'll now cover our updated 2025 outlook for the combined company. We have provided 2 views of estimates for 2025 on this slide. The 2025 as-reported outlook includes 7 months of stand-alone Uniti results plus 5 months of combined Uniti and Windstream. This is our formal guidance for 2025 and matches what was included in our earnings release that was filed earlier this morning. We have also provided a pro forma view for 2025, similar to what we have provided in prior quarters. The following comments on our 2025 guidance will be based on the as-reported outlook view. Beginning with Kinetic. We continue to expect revenues and contribution margin to be $945 million and $385 million, respectively, at the midpoint. We now expect to deploy $450 million of net CapEx at the midpoint of our guidance, down from $510 million previously, primarily due to the reduction in our homes passed target for 2025. At Fiber Infrastructure, we expect revenues and contribution margin to be $1.1 billion and $770 million, respectively, at the midpoint for the full year 2025. The $35 million increase in contribution margin is related to a shift of expenses from the Fiber Infra segment to corporate expenses as accounting continues to be finalized for the merger. Although we are no longer providing separate formal guidance for Uniti Fiber and Uniti Leasing, our 2025 outlook for both of those segments is unchanged from our prior guidance. Our outlook for net CapEx at Fiber Infrastructure this year is still $310 million at the midpoint of our guidance and represents a capital intensity of approximately 30%. Turning to Uniti Solutions, we expect revenues and contribution margin of $320 million and $155 million at the midpoint. Altogether, we expect consolidated revenue and adjusted EBITDA of $2.2 billion and $1.1 billion at the midpoint of our 2025 outlook with consolidated net CapEx of $805 million. Finally, I'd like to provide some brief comments on our capital structure. Slide 18 illustrates how Uniti's cost of capital has improved significantly over the past 2 years. If you go back to when we launched our 10.5% secured notes offering, our secured and unsecured debt was yielding over 12%. Fast forward to today, and our debt is currently yielding around 8% on a blended basis, a 450-basis point improvement. Over the past several months, we have continued to execute on a number of planned actions to extend our debt maturities, lower our overall cost of debt, and drive meaningful interest expense savings. With our most recent refinancing of our 10.5% 2028 secured notes, we successfully pushed $2.3 billion of debt out 4 to 5 years and will save close to $60 million in annual interest expense. We also recently closed on our second ABS financing at Uniti Fiber's assets with a blended coupon of 5.67%, which represents the tightest spreads on a fiber ABS deal in almost 40 years. Going forward, we will continue to take an opportunistic approach to refinancing our outstanding debt with near-term maturities. We also believe that ABS is likely to play a growing role in our capital structure given its comparative cost advantages. To that end, we are working to establish a separate ABS program with fiber assets at Kinetic. With that said, we are focused on maintaining a healthy mix of both ABS and non-ABS debt, and we will be balanced in our approach. At quarter-end, our pro forma combined net leverage was 5.55x, and we still expect to end the year with a combined net leverage of between 5.5x and 6x. I'll now turn the call back over to Kenny for closing comments.

Thanks, Paul. I'd like to close with a couple of comments on integration and some incremental growth areas we're focused on. First, integration is going very smoothly, and we've had virtually no system nor customer disruptions. We're also well on our path to full integration and synergy achievement within 36 months, which is in line with our original expectations. We're also excited about a number of budding growth areas, including cross-selling Uniti Solutions products into our enterprise base at both Uniti Fiber and Kinetic. Today, we estimate our managed services attachment rate to be below 3% at Uniti Fiber, for example, and we think it could rise to be materially higher over time. Also, as discussed numerous times before, with the complementary combination of the Uniti and Heritage Windstream wholesale products and networks, we're increasingly confident we can be a bigger share taker in the growing wavelengths market. Today, we estimate our market share to be less than 5%. And with our scaled national network and unique routes, we believe our growth potential could be material. Lastly, at Kinetic, we believe there's a sizable and untapped opportunity with multiple dwelling units within our footprint, and there are seemingly attractive edge-out builds off the Kinetic Fiber footprint and the existing Uniti Fiber dense fiber network. We'll have much more to say about these growth areas in the coming quarters. All said, there's never been a better time to be a fiber provider, and our strategy at Uniti is right for the moment. With that, we'd be happy to take your questions.

Our first question comes from Greg Williams with TD Cowen.

Kenny, my first question is regarding the significant growth in the total addressable market for fiber, as noted in the slide. We are also seeing hyperscalers extending their training phases now that they are engaged in AGI training, and some data centers may be combining inference and training. With this three years of strong visibility, are we seeing any shifts in deal mechanics? When can we expect a transition from more upfront NRC revenues to a model focused on lit services with lower CapEx and higher margins? My second question is about ABS deals. Paul, you mentioned the formation of a separate vehicle for Kinetic ABS. Previously, you indicated there was over $3 billion of ABS capacity within Kinetic assets. What are your plans for that ABS? Is the business fully funded for the fiber-to-the-home initiative at this point? Are the ABS deals intended to optimize the debt structure and fund other projects?

Greg, those are excellent questions. Regarding the incremental total addressable market for hyperscalers, when we estimated it at the start of this year, we relied on all available data, including internal estimates and consultant reports. We believed those figures were quite conservative at that time. Now, the key takeaway is not just the aggregate numbers but the increased optimism we feel, reflected in the 30% to 50% range, which indicates a higher level of confidence. When we compare current aggregate numbers to our earlier data, they appear more conservative than we initially thought. Industry sentiments—both from digital infrastructure and fiber perspectives—are increasingly conservative, as our customers repeatedly express that demand is surpassing supply. They've indicated they are unable to keep up with this demand, which is significant. We’ve discussed previously how we’ve sold large strand counts, such as 432 strands, only to have the same customers return for more, underscoring strong demand. These customers emphasize how critical AI infrastructure is for their operations. We are excited about their feedback and feel well-prepared for the growing needs at Uniti. We stand out as one of the few large-scale national fiber providers, particularly suited for many projects in Tier 2 and 3 markets. We're capturing a significant portion of business within our current areas and are also strategically exploring growth beyond our footprint. Looking over the next three years, we have numerous opportunities either already secured or in the pipeline that we are confident about winning. As for the types of deals we’re seeing, there are some changes. We've recognized that the distinction between training and inference phases is not as clear-cut as we initially thought. Training will remain a priority for years to come as our customers will need to update their models regularly, including for applications like AGI. We're excited about our current builds supporting these training data centers and anticipate the need for additional fiber to support ongoing expansions. We are confident that as AI adoption grows, it will benefit our approximately 5 million connected fiber endpoints, not just for hyperscalers but also for large enterprises and consumers. Our deals with hyperscalers have varied widely, from new builds with high upfront costs to selling existing capacity or leases. We expect this trend to lean more towards existing capacity as we transition into the inference phase. For instance, the major hyperscaler deal we announced last quarter utilized existing infrastructure, resulting in high margins with minimal capital expenditure. Our pipeline reflects a good mix of these opportunities for the upcoming quarters. Additionally, the increase in our free cash flow yield—from 29% to 34%—has been largely driven by high-margin hyperscaler deals. Apologies for the lengthy response. I'll pass it back to you, ABS.

Yes, Greg, this is Paul. I'll address your question regarding ABS. At this time, we're not providing specific guidance related to 2026, including any necessary capital or financing for the Kinetic build plan. However, we anticipate being in an investment phase at Kinetic and Uniti in general, especially concerning the fiber build plan at Kinetic over the next four years. We plan to raise additional capital and expect our leverage to exceed our long-term target of 4 to 4.5 times during this investment phase. As Kenny has mentioned, this is the right strategic decision for the business, similar to the strategy we've used in the Fiber Infrastructure business in previous years. We believe building fiber gives us a competitive advantage. Once we establish a superior product across that network, we can expect growth, free cash flow over time, and eventual deleveraging. Therefore, making this investment is definitely the right move for the business, and we're optimistic about ABS. We think ABS will play a significant role in financing the build plan at Kinetic due to the cost advantages of ABS debt. As you pointed out, there is substantial ABS capacity at Kinetic, with the historical capacity range of $3 billion to $4 billion still holding true. That said, we are committed to maintaining the proper amount and mix of assets within the leveraged finance credit framework at Uniti. We recognize the long-term importance of access to the high-yield market for Uniti, in addition to ABS. Thus, we see ABS as an enhancement to our financing approach but not as a complete solution for Uniti's capital structure moving forward. When discussing the 4x secured and 6.5x unsecured ratios for our capital structure, it's essential to clarify that this pertains to our non-ABS assets. We believe this detail is sometimes overlooked by the market.

And the next question will come from Frank Louthan with Raymond James.

What do you need to do to take more share in the wavelength market? And who do you see your main competitors there? And then you've made some key hires at Kinetic. Any more positions to fill there? Do you think the teams rounded out for what you need to do?

I'll start, and then I'll ask John Harrobin to address the second question. Welcome to John, who is joining us for his first Uniti earnings call. Regarding the wave market, at Uniti, before the merger, we were just beginning to expand our presence in that area. Our wholesale offerings primarily focused on dark fiber, which we appreciate due to its lower capital intensity, higher margins, and considerably lower churn. However, we are now moving into the wave market because we've identified unique routes on our network that we believe will provide opportunities for growth. Similar to our strategy in targeting Tier 2 and Tier 3 markets, we think we can gain share by focusing on these less trafficked routes, particularly as new fiber networks are being developed across the country. With the merger, we've not only expanded our network but also brought on experienced team members who specialize in selling waves. We now have enhanced engineering, product, and marketing capabilities that complement our existing resources, along with a significantly larger network to offer. In the past, the waves market has often been dominated by pricing competition, particularly on Tier 1 routes where several providers operate. We prefer to compete based on our unique infrastructure rather than solely on price. To address your question about future opportunities, we believe there will be increasing wave traffic in less trafficked markets, specifically in Tier 2 and Tier 3 routes. Hyperscalers and other large-scale providers tend to prioritize route diversity, unique paths, reliability, and customer service over price. We are already observing these trends with our customers. Therefore, we are optimistic about capturing market share based on these attributes rather than pricing competition. As for identifying where this share will come from and estimating the opportunity, we're still analyzing that and will provide a more detailed response later. Currently, we hold about 5% of the market, suggesting significant growth potential ahead. Additionally, we are thrilled to have John on our team. He has made substantial contributions not only to our leadership but also within Kinetic. He has already recruited key individuals for his team, and I believe even more enhancements are on the way, so I'll let John provide further comments on that.

Yes. Thanks, Frank. Good to be here. And the Kinetic team as it exists today is highly talented. Their results and their resiliency going through a number of changes and the results that they produced during those changes is really a testament to their capability. When it comes to team structure, we first look at what's our strategy and what's our operating plan. And that's what we've really been finalizing over the last few months. We finalized our build strategy. Now it's our operating plan strategy. We'll end November with that kind of tucked in, in a way in a good spot. And then it goes into structure. And we've realized early that we needed a couple of key roles in the business. We've hired a growth leader, David Oliveira, who I've worked with at a couple of other companies, and he is a spectacular leader with a long runway and career ahead of him. Twenty years from now, when we're watching the industry from afar, he'll be running it. And I'm proud to say that he's part of the team and making a large impact already. We have an active search right now for a construction lead. We've got some good people in that part of the business doing double duty as a few folks have exited that department, and we expect to fill that soon with highly capable leaders as well. And then as we look at other opportunities in our operating plan, there's probably going to be a few additions we need to make and refinements around capabilities that we are not so strong at today or even new areas that Kenny mentioned before that are untapped in the Kinetic business. So, when you think about the trajectory, we've got what we need now, and the target is 6 months after the close. So, we closed on August 1, 6 months after the close by February 1. We have the go-forward in-person, highly capable team in place.

And the next question will come from Michael Rollins with Citi.

First, I wanted to ask about Slide 15 a little bit more. So, thanks for sharing this pro forma outlook, both for revenue and EBITDA. I’m curious if you could just share with us how to think about these trends going into 2026 in terms of the type of growth for Fiber Infrastructure. You talked about the tailwinds in Kinetic that you're seeing for this year and just trying to understand maybe some of those headwinds. And then finally, on the EBITDA side of that chart, as revenue moves for each of these big buckets, these segment buckets, how do you think about the operating leverage or the incremental margins that you can extract as the revenues evolve in each of those pieces? And then just secondly, just curious if you have an update on the strategic front. Last quarter in the slides, I think you referenced starting a review for the acquired assets. And just curious if you have any updates on how you're thinking about optimizing your portfolio of assets.

Michael, I believe I've noted all the questions. We'll address most of them, and I'll start, with Paul able to chime in on some of the trends before I return to the specific question. Regarding the trends, we prefer not to delve too deeply into forward guidance at this stage, apart from what we've outlined as key inflection points for next year, which will shape our progress towards 2027. More details on guidance will be shared when we reconvene in February next year. Focusing on the Fiber Infrastructure business, it’s an area we’re quite familiar with and enthusiastic about, particularly with the integration of the Windstream Wholesale operations alongside our legacy Uniti Fiber and Uniti Wholesale services, which we see as a strong synergistic combination. We anticipate returning to the historical mid-single-digit growth in this sector. The merger presents significant cost-saving opportunities but also avenues for revenue growth, such as our wavelengths and the hyperscaler opportunities, which enhance our ability to sell a wider range of products to a larger customer base. As we consider the legacy services within this sector, it's important to note that we will inherit some TDM revenue from the Windstream Wholesale operations; however, we project that by 2027 or 2028, TDM revenue will decline to under $100 million. We are actively managing this transition, which may pose a slight headwind, but as Paul noted in his earlier remarks, this TDM revenue does not diminish the underlying strength of our growing fiber business with consistent, predictable results. While this segment may experience some headwinds, it is still generating cash flow and will likely become a negligible part of our overall operations soon. At Kinetic, we’re optimistic about our strategic approach there. With John now aboard and key leadership positions being strengthened, we are closely focusing on the critical turning points for next year, which are becoming increasingly predictable. While we acknowledge John’s experience at Frontier and the playbook they used, we are adapting that strategy to fit our unique footprint and making some enhancements in specific areas. The growth trajectory in Kinetic's fiber business appears highly predictable, and although we are working through the existing copper and DSL segments, we are committed to doing so responsibly. We aim to overbuild and replace these legacy services with superior fiber products, actively enhancing our customer migration process. Thus, we expect to soon see steady growth at Kinetic. Combining these two segments, we believe we are generating substantial value by expanding our fiber infrastructure and transitioning away from legacy services, comprising roughly three-quarters of our operations. As for the Uniti Solutions business, it’s here where we face most of the legacy headwinds and revenue declines. By the end of this year and early next year, we expect to have largely exited the TDM component of this business. We’re refocusing on large enterprise clients by shifting away from new customer acquisitions to strengthen relationships with long-standing customers and refine our offerings. While this strategy may continue to result in some revenue decline, we believe the remaining business within two or three years will be robust, comprising longstanding clients and large enterprises that may require our fiber services, especially as AI demand increases. In answer to your question about our strategic direction, we have been very active on that front. Our approach to M&A remains consistent, encompassing four categories: asset sales, joint ventures, strategic bolt-on opportunities, and the broader option of selling parts of our business. In the asset sale category, we’re exploring various opportunities to enhance cash flow, such as leveraging existing fiber assets that we do not plan to activate soon and examining underutilized real estate within our footprint. Within joint ventures, there is significant outside interest in funding fiber and AI infrastructure projects, which presents potential collaboration opportunities; although we are currently well-capitalized, we are evaluating these options for future flexibility. Regarding bolt-on acquisitions, we receive numerous proposals, but overall, we believe that investing internally may yield better returns than pursuing acquisitions at this time. Lastly, as the industry undergoes significant shifts, we feel very confident in the value of our two substantial fiber businesses, Fiber Infrastructure and Kinetic, with this confidence growing rather than waning. Paul, do you have anything to add regarding the trends or our outlook?

No, I think that's good.

And the next question comes from Richard Choe with JPMorgan.

I wanted to follow up on the hyperscale opportunity. It seems like that pipeline is just going to continue to grow. But can we get a sense on timing maybe on when you should start signing these deals and coming through and how that should pace over the next few years because it seems like such a big opportunity.

We have signed a significant number of deals in the last couple of years, particularly in the last 18 months. This total addressable market emerged unexpectedly in a short time. Two years ago, we were questioned about the reality of this opportunity, and at that time, we found it challenging to provide a confident answer, even though the numbers and outlook appeared very promising. Fast forward to today, and we are having difficulty keeping up with the numbers, as they seem to be evolving rapidly. We've indeed been signing agreements, and more are on the horizon. As I mentioned earlier, in the coming quarters, we will likely see our largest deals to date begin to impact our revenue and EBITDA. For the past year, many of these deals haven't reflected in typical metrics like bookings or EBITDA due to their structure. We've been hearing from investors about their desire for more clarity on these agreements and their economic implications, and we plan to provide that transparency as these significant deals materialize. In summary, we have been securing deals that may not have shown up in the usual metrics, but looking ahead, I believe we will continue to secure more substantial agreements and offer greater insight into them.

And then one on the Kinetic side. In terms of the churn for the fiber there, the residential customers, where are you losing customers to? And what's the plan to maybe reduce that churn, if you can?

Yes, this is John. Thanks, Richard. On the fiber churn side, our churn rate is higher than the benchmark. This is similar to Frontier in 2021 when it began its transformation. We're primarily losing customers to cable providers within our fiber footprint, rather than fixed wireless access or low Earth orbit satellites. Our strategy involves implementing five tactics that have proven effective, and we are currently in the process of executing them. The first tactic is to eliminate any distractions. We are making two key changes to achieve this. First, in July, we recognized that we were retaining some nonpaying customers, which resulted in bad debt. We now have a policy to write these customers off earlier, which will slightly increase the churn rate on the fiber side. We anticipate this will normalize by the end of the year. The second change involves exiting the ACP credit business. After the ACP program ended, we extended credits to affected customers, but on September 1, we communicated that this would no longer continue, which is expected to create about a 16-basis point impact on fiber churn in the fourth quarter. However, this is part of our effort to prepare for future growth. The second tactic focuses on being more strategic with price increases. Over the past 18 months, the previous company implemented broad price hikes. Instead, we will adopt a more tailored approach, customizing price changes based on each customer's competitive profile and speed tier, aiming to offer fair and inflation-adjusted pricing. In many situations, we can provide increased speeds for a bit more money, reflecting our "more for more" strategy. The third tactic involves redesigning our value proposition. We have shifted from national pricing to a regional approach to capture more market share. We’ve removed the concept of rack rate pricing and adopted a more dynamic promotional strategy, allowing us to respond to market conditions effectively. We've also updated our call center practices, which is our fourth tactic. This includes directing customers to the appropriate queues, streamlining our interactive voice response system for quicker access to representatives, and aligning employee incentives to focus not only on save rates but also on net retained revenue. We are utilizing AI to pinpoint the reasons for churn and improve performance management, identifying top-performing representatives and sharing successful practices across the team. Lastly, we are addressing broken customer experiences. My leadership team meets weekly to proactively identify and resolve issues, building our capacity to act quickly. We have made substantial progress in reducing customer transfers and simplifying the IVR. For instance, we recently resolved an issue for small business customers who previously couldn't schedule fiber installation dates, leading to a significant increase in sales. These initiatives are aimed at tackling churn and enhancing customer loyalty, and I believe we'll see substantial improvement. This is manageable and straightforward.

It sounds like a good playbook and nice to clear the decks for next year.

And the next question will come from David Barden with New Street Research.

I guess I got a couple of questions for John. John, there's a philosophical divide in the fiber market right now, which is building in-house versus outsourced building and how that contributes to your cost to pass and your efficiency and your ability to scale. I was wondering if you could kind of elaborate a little bit on kind of where you are landing on that in the kind of the new kinetic. And then the second is the chart where you guys show the penetration rates for fiber, I mean, 25% to 30% penetration year 1 is pretty incredible. But then it tails off really quickly, only getting us a few more percentage points over the next couple of years. Could you kind of talk a little bit about that arc? How do you get that really high penetration year 1? And then how are we going to scale that further in years 2, 3 plus?

Thank you, David. In response to your first question, we have implemented three significant changes to our build plan in recent months. Firstly, we've transitioned from having no plan to establishing a detailed strategy that sequences our builds for the next three years, identifying every household in order. Secondly, we are shifting from primarily subsidized builds to strategic builds, with 2025 being the final year we build more subsidized households than strategic ones. Lastly, we are moving from mainly internal construction teams to predominantly external teams. We have taken inspiration from the Frontier model, securing multi-year volume agreements that enable cost-efficient scaling. Our internal team provides us with the ability to hire and deploy quickly, giving us leverage in negotiations with external partners. We see value in using both internal and external resources. Our internal teams possess a cost advantage and, combined with our nearly complete transition to fiber, allow for rapid and cost-effective fiber deployment. They also have the flexibility to adapt and pivot as needed for specific builds. We intend to leverage both internal and external teams efficiently without solely relying on one or the other. If we can establish the right costs externally, that will be our preferred route for scaling, but we will not abandon our internal construction workforce. Regarding the rapid penetration and the challenges in later years, we have observed similar trends with overbuilders. In 2021 at Frontier, there was skepticism about growth in legacy markets, which had a 40.5% penetration rate at the time. We aimed for 45% penetration in four years and achieved that one year early, with Frontier recently reporting a 48% rate in those markets. The Kinetic team has efficiently penetrated homes in new fiber areas with a focused initiative called Fiber Fast. However, we have not concentrated as much on legacy markets, though we are starting to do so. We are witnessing improvements in these older markets by strategically approaching them with promotions, enhancing distribution methods such as door-to-door outreach, and increasing performance-based media engagement. This multifaceted strategy—combining promotions, distribution, and media—is how we successfully penetrated markets at Frontier, and I am optimistic about making progress in these areas. These legacy markets have favorable profiles, and we aim to capture our fair share there.

David, just to build on John's comments on the build and philosophy there. We've said for several quarters now leading up to this pivot to more external that our build costs would increase. So going from that historically low $600 to $650, all internal that we were going to make the sacrifice to let that cost per passing increase some. But the benefit of that would be that we bring all the things John just said about the benefit and able to build more faster. We think that trade-off is well worth it. So, to your philosophical point, that's where we land. Let's bring in a good mix as opposed to doing it 100% internal. Yes, you spend a little bit more per passing, but all the benefits that John just mentioned accrue eventually to the bottom line.

And our next question will come from Brendan Lynch with Barclays.

Just on Kinetic home passings, you're a little below the pace that you originally anticipated, but expect to kind of recapture that original trajectory in 2026. Can you just walk us through what you expect to change next year to help you get back on track?

Yes, we're slightly below our expectations, but we anticipate making up for it in the first quarter. This is just a timing issue. After the merger, we found that not all projects were permitted or ready to proceed, which caused delays, especially in new subsidized markets where we lack experience. This is a common industry challenge, not just ours. There are efforts to improve the permitting process, and we support those initiatives. We have good visibility on each project’s status, and we're actively working to address any delays. Our team, which previously focused on subsidized build planning, has shifted to prioritize managing the permitting process, resulting in increased efficiency in recent months. We've achieved a record number of permits cleared, which is crucial for moving forward with our plans. Therefore, we are confident that we will be back on track in the first quarter.

Great. That's helpful. And then, Kenny, you kind of teased multiple dwelling units as a growth opportunity. Maybe just help us understand why that wasn't part of the plan in the past and what's changing to make it part of the plan now?

Yes. Great question. I'm going to start and then turn it to John to pile on, Brendan. So, look, I think the short answer is it just wasn't a priority because there were so many other priorities that were being focused on, number one. But number two, I think that we've talked many times about bringing in fresh leadership, a fresh set of eyes, a proven playbook. This is one of those great examples of how with John coming in and taking a look at where we were focusing, where our resources were targeted and just servicing the concept that, 'Hey, this was a big opportunity at prior companies. And here, it's a big opportunity as well, and we don't have the resources next to it that we should. And on a go-forward basis, we're going to.' So, it's just really a question of leadership and priorities.

No, I think that's well said. At Verizon, I managed the MDU business and you kind of have to win there in Verizon. I mean, with New York City, Boston and other large cities, you kind of have to nail that. And then at Kinetic, there really wasn't investment there. So, we kind of built it from the ground up. And to this day, I mean, at Frontier, I think it's delivering double-digit nets every single quarter right now in terms of customer growth. So, once you get it rolling, it's really strong, and the IRRs are really even higher than single-family business. So, I'm very bullish on it. It will take a little bit to build, but we'll get it done. You've got to have the right motion, if you will, and leadership. You also have the right product. We have the right product. In fact, our EOR deal that we just announced has certain MDU and community capabilities that we can use to deliver effectively on that segment. So, we're going to get after this. And it might take a few quarters or a year to really show the results. But once we get involved there, I know that we will succeed.

And the next question will come from Matthew Griffiths with Bank of America.

I want to ask about consumer fiber ARPU. You mentioned that the sequential decline was due to price adjustments and net additions. To what extent did your comments on churn affect the ARPU change? Additionally, are you seeing that new net additions are coming in at a lower ARPU, or is this just a situation specific to this quarter that may not happen again? Any additional insights on this would be appreciated.

Yes, Matthew, that's a great question. I'll address the first part, then get to your second part regarding new customers. There is indeed a link between churn and ARPU. We experience high churn alongside some of the highest ARPU figures in the category, which grew by 10% year-over-year on top of an already elevated level. This situation warrants thorough analysis, and I have spent considerable time examining it. Our high ARPU is partly due to our attractive market profile. The 10% year-over-year growth is mainly a result of several price increases we've implemented over the last 18 months. Similar to our strategy with copper customers, we'll adopt a more targeted approach to enhance ARPU further by encouraging customers to upgrade their speeds. Currently, 65% of our fiber customers are on plans below 1 gig. Recently, we launched 2-gig plans across 85% of our footprint, and new customer adoption rates are already in the double digits. We plan to introduce additional value-added services to increase sales to customers, which not only boosts ARPU but also reduces churn since more services correlate with lower customer turnover. Another factor contributing to ARPU is the more effective use of credits. We've implemented stricter controls on credit usage recently and aligned our retention representatives' compensation with net retained revenue. This means we can better qualify customers without having to drop to the lowest pricing for retention. Regarding new customers, I recall Moffet's description from a couple of years ago about our promotional strategy for new customers—it’s really about value being deferred rather than forgone. For years, the industry has recruited new customers at a discounted rate, allowing for an inherent capacity to upsell to higher speed packages and raise prices over time. We fully embrace this concept and have recently adjusted our go-to-market strategy to leverage it. We have concrete plans to grow ARPU using our four main strategies: enhancing speed options, offering value-added services, implementing price increases, and optimizing credits. While a 10% ARPU growth rate may not be sustainable, we do believe there's a pathway toward consistent ARPU growth.

I show no further questions in the queue at this time. This does conclude today's conference call. Thank you for participating, and you may now disconnect.