Unity (UNIT) Q2 2025: $1.5B Hyperscaler Funnel Signals Fiber-Driven Margin Upside
Unity’s Windstream merger and aggressive fiber buildout have accelerated its transformation into a national fiber-first platform, with hyperscaler demand now driving 40% of its $1.5 billion wholesale sales funnel. Fiber-based revenue is on track to comprise 75% of the business by 2029, with legacy services fading in relevance but still generating cash flow during the transition. Management’s focus on high-margin lease-up deals and network reliability positions Unity for sustained EBITDA growth as AI inference demand ramps ahead of schedule.
Summary
- Hyperscaler Demand Surges: Wholesale funnel now 40% hyperscaler-driven, supporting higher-margin lease-up deals.
- Fiber Penetration Accelerates: Kinetic fiber homes passed and ARPU both rose, with 75% revenue mix target by 2029.
- Margin Expansion Ahead: AI inference phase expected to pull forward margin-rich recurring revenue from both hyperscalers and enterprise customers.
Performance Analysis
Unity’s Q2 results reflect a business in rapid transformation, with fiber-based revenue and customer additions offsetting legacy declines. On a pro forma basis, consolidated revenue declined 6% year over year, driven by continued attrition in TDM (Time Division Multiplexing, legacy telecom protocol) and managed solutions, but this was more than counterbalanced by robust fiber infrastructure and Kinetic segment growth. Fiber infrastructure revenue rose 7% and Kinetic fiber-based revenue grew 19%, with consumer fiber revenue alone up 27% year over year, demonstrating strong demand for high-speed broadband in underserved markets.
Unity expanded its fiber network to 1.7 million homes passed, adding 52,000 homes and 19,000 fiber subscribers in the quarter. Fiber ARPU (Average Revenue Per User, a key profitability metric) increased 11% year over year and 6% sequentially, reflecting both upsell and pricing discipline. Management highlighted that 80% of current revenue comes from core Kinetic and fiber infrastructure, projected to reach 90% as legacy products are retired. While legacy service declines remain a near-term drag, these segments continue to provide predictable free cash flow, helping to fund the fiber transition.
- Fiber Revenue Outpaces Declines: 19% YoY fiber-based revenue growth in Kinetic and 7% in infrastructure offset legacy attrition.
- ARPU and Penetration Gains: Fiber ARPU rose 11% YoY, with penetration up 120bps, supporting expanding margins.
- Wholesale Bookings Momentum: $1.2M in new monthly recurring revenue (MRR) bookings, with wireless bookings up 30% YoY in the first half.
Unity’s merger integration progress and capital structure improvements (notably, a 550bps reduction in debt yields and successful debt silo collapse) further position the company for scalable, fiber-driven growth.
Executive Commentary
"With Kinetic we own one of the most strategic independent fiber to the home platforms remaining and with a focus on tier two and three markets our footprint has substantial first mover advantages with fiber."
Kenny Gunderman, Chief Executive Officer
"15 months ago when we announced the plan merger with Windstream, we laid out our key pre-closed priorities. Through the dedication and collaboration of our combined teams, we have completed nearly all of those objectives, including our go forward operating plan, the collapsing of the debt silos, and the full redesign of the kinetic fiber to the home build plan."
Paul Bollington, Chief Financial Officer
Strategic Positioning
1. Fiber-First Insurgent Model
Unity’s transformation centers on a fiber-first, insurgent share-taker strategy, targeting underserved tier two and three markets where competition is limited and first-mover advantage is durable. The company aims to pass 3.5 million homes with fiber by 2029, with fiber revenue expected to reach 75% of total sales. Management’s focus on high NPS (Net Promoter Score, customer satisfaction metric) and churn reduction underpins a customer-obsessed operating model.
2. Hyperscaler and AI Inference Tailwind
Wholesale demand from hyperscalers (cloud and AI giants) has become the dominant growth engine, now representing 40% of Unity’s $1.5 billion sales funnel. The recent 20-year IRU (Indefeasible Right of Use, long-term fiber lease) with a major hyperscaler—totaling $100 million—exemplifies the shift toward high-margin, capital-light lease-up deals. Management expects the forthcoming AI inference phase to accelerate demand for distributed fiber endpoints, driving recurring revenue and margin expansion.
3. Capital Structure Simplification and Leverage Management
Unity executed a critical debt silo collapse, unifying capital structure and reducing near-term debt maturities by over $3 billion. Debt yields have improved to 7% from over 12% two years ago, and net leverage is expected to finish 2025 within the 5.5x to 6.0x range, supporting ongoing fiber investment while maintaining balance sheet flexibility.
4. Legacy Cash Flow Management and Segment Realignment
Legacy TDM and managed solutions are being actively wound down, with predictable cash flow redeployed to fiber growth. Unity Solutions (formerly Windstream Enterprise) is expected to stabilize by 2028, and management is focused on retaining high-value enterprise customers who may drive future fiber demand as AI workloads proliferate. Segment realignment clarifies reporting and highlights progress in fiber-led growth areas.
5. Regulatory and Subsidy Tailwinds
Improved regulatory environment and subsidized rural builds are enabling cost-effective fiber expansion, particularly in markets with limited cable competition. FCC and state PUC support for copper retirement and technology-neutral voice delivery reduce compliance costs and accelerate the fiber transition.
Key Considerations
Unity’s Q2 marks a turning point as the company transitions from legacy telecom to a fiber-led growth platform, with strategic bets on AI-driven demand and disciplined capital allocation. The following considerations will shape Unity’s trajectory:
Key Considerations:
- Wholesale Funnel Composition: Hyperscalers now drive the largest share of pipeline, signaling sustained demand for high-capacity fiber routes and lease-up economics.
- Fiber Build Economics: Cost per passing is rising as builds shift to less dense markets and third-party contractors, but remains favorable at $750–$850 per passing versus industry benchmarks.
- Churn and Upsell Opportunity: Industry-leading churn and only 20–25% of customers taking maximum speeds suggest significant ARPU and margin upside as bandwidth needs increase.
- Legacy Drag Diminishing: Declines in TDM and managed solutions will weigh on consolidated results near term, but will become immaterial as fiber mix surpasses 75%.
Risks
Execution risk remains high as Unity accelerates its fiber build into less dense, more rural markets, where cost discipline and subsidy reliance are critical. Increased competition from wireless carriers and cable overbuilders, as well as potential delays in AI inference adoption, could temper revenue growth and margin expansion. Legacy revenue attrition, while expected, still presents a near-term drag that must be offset by rapid fiber uptake and successful wholesale monetization.
Forward Outlook
For Q3 and the remainder of 2025, Unity guided to:
- 2 million homes passed with fiber by year-end (45% coverage in Kinetic footprint)
- Approximately 530,000 fiber subscribers and $500 million consumer fiber revenue in 2025
For full-year 2025, management maintained guidance:
- Consolidated revenue of $2.2 billion and adjusted EBITDA of $1.1 billion
- Net capex of $875 million, with fiber infrastructure capital intensity at 30%
Management cited robust hyperscaler demand, improved regulatory tailwinds, and accelerating AI inference adoption as key drivers for the second half, while reiterating confidence in margin expansion and cash flow growth as legacy drag recedes.
- Continued focus on high-margin lease-up deals in wholesale
- Ongoing capital structure optimization and debt extension
Takeaways
Unity’s merger integration and fiber pivot are unlocking a new phase of growth, with hyperscaler demand and AI-driven use cases accelerating the shift to high-margin, recurring revenue streams. The company’s disciplined go-to-market focus and capital structure overhaul provide a solid foundation, but execution in rural fiber builds and legacy wind-down remain key watchpoints.
- Margin Expansion Engine: Lease-up deals and AI inference phase will drive higher EBITDA and capital efficiency as fiber endpoints proliferate.
- Strategic Realignment: Segment reporting, capital allocation, and regulatory clarity are aligning the business for fiber-led growth and reduced legacy drag.
- Investor Watchpoint: Monitor fiber uptake, ARPU growth, and wholesale win rates as indicators of Unity’s ability to sustain the transformation and capitalize on AI-driven demand.
Conclusion
Unity’s Q2 demonstrates a decisive pivot to fiber-first growth, with hyperscaler partnerships and AI tailwinds positioning the company for margin expansion and cash flow resilience. While legacy headwinds persist, the business model is increasingly future-proofed, and execution on the fiber buildout will determine the pace of value creation going forward.
Industry Read-Through
Unity’s results underscore the intensifying demand for fiber connectivity from hyperscalers and AI workloads, signaling a secular tailwind for wholesale fiber providers and rural broadband platforms. The pivot to high-margin lease-up deals and rapid funnel growth suggest that national scale and network reliability are becoming decisive differentiators as AI inference activity ramps. For telecom and infrastructure peers, the regulatory shift favoring copper retirement and technology-neutral delivery may accelerate legacy transitions, while subsidy-driven rural builds remain a critical lever for profitable expansion. Investors should monitor how rapidly fiber-first models can capture AI-related demand and whether legacy drag can be contained across the sector.