Telecom infrastructure operator Uniti Group (NASDAQ:UNIT) recently reported first-quarter results. The former networking assets segment of more traditional telecom Windstream Holdings (NASDAQ:WIN) delivered a decent-enough set of financial numbers, but the key takeaway from this report was actually found in the earnings call.
Spoiler alert: Uniti is becoming less and less dependent on Windstream's business. That's a good thing.
The simple facts about Uniti's Q1
In the first quarter, Uniti's top-line sales rose 17% higher year over year to land at $247 million. On the bottom line, the year-ago period's GAAP net loss of $0.14 per share tightened up to a smaller $0.01 loss per share. Adjusted funds from operations fell from $0.65 to $0.62 per share. That's the closest thing to "adjusted earnings" for real-estate investment trusts like Unity, so this is the figure you might see analysts painting earnings targets around.
Wall Street analysts had been expecting adjusted earnings -- or AFFO -- of roughly $0.63 per share on revenues near $247 million. So, the report was nearly in line with Wall Street estimates, just a touch short of the bottom-line target.
Uniti also closed a couple of strategic asset acquisitions in or after the first quarter. The standout among these deals was the buyout of 270,000 fiber strand miles of dark optical network connections stretched out between major cities in 25 American states. These fiber miles became available due to regulatory requirements as former owner CenturyLink (NYSE:CTL) closed its buyout of Level 3 Communications. One unnamed tenant has already signed on to lease 11% of these fibers in a multiyear agreement, and more contracts are in the works.
The real deal
The CenturyLink fibers play into the real takeaway from Uniti's report. Long story short, the company is separating its operations from Windstream as fast as possible. Adding new network assets like the CenturyLink fibers helps Uniti move closer to that Windstream-less ideal. As a reminder, Windstream's telecom service business is falling apart, and the company spun off its best assets to create Uniti three years ago. Widening the business gap between these two businesses can only be good for Uniti and its shareholders.
The company collected 34% of its first-quarter revenues from clients not named Windstream. Three years ago, Windstream was Uniti's only revenue source. By the summer of 2019, management hopes to have reached the point where non-Windstream sales account for more than half of the total top-line revenue stream.
Uniti CEO Kenny Gunderman provided some color commentary around this goal.
"In terms of the 50% goal that we have given for midyear 2019, we still feel good about it," he said. "And we don't just use that number and give that time period loosely. We really have put some thought into it just like we have in the past."
The current pipeline of planned projects and deals under negotiation puts Uniti on a solid path to reach these targets and relegate Windstream to supplying something less than a majority of its overall revenues. But Gunderman wanted to make it very clear that he doesn't want this diversification target to stop Uniti from achieving other goals.
"So we still feel good about it," Gunderman said, "but again, it's a target. It's not a mandate. We're not going to do it at any cost. We're going to do it where it makes sense for us."
The upshot: Uniti is cutting ties with a huge value trap
As a Uniti shareholder myself, that's exactly what I wanted to hear. Management has a clear and achievable plan in place to diversify its revenue stream away from Windstream, but they won't commit to promises that could throw Uniti's business priorities off kilter. Steady as she goes, toward a less risky future with lots of revenue sources, big and small.
At the same time, Uniti's dividend provides an ultra-generous 14% yield because investors haven't quite embraced the lower client profile Windstream presents nowadays.
Feel free to lock in those extreme yields while they last. Uniti shares are trading at less than 8 times projected AFFO per share, and that's probably a mistake.