Lumen Technologies Fiber Build Out Plans Questioned by Analysts

Lumen Technologies is one of a large and growing number of telecom companies counting on a broad expansion of its fiber network. The Fiber Broadband Association (FBA) recently reported that the fiber industry is entering its “largest investment cycle ever” thanks to the efforts of companies like AT&T, Verizon and Lumen.

Lumen hopes to build its fiber network to 12 million new locations over the coming years. But it won’t be easy, according to Lumen CEO Jeff Storey.

“Supply chains are stressed, and we continue working very closely with our diverse and valued suppliers to mitigate risk as we execute on our growth objectives,” Storey said this week during his company’s quarterly conference call, according to a Seeking Alpha transcript. Others have issued similar warnings.

“I don’t want to overstate the issue, but it’s something that we are really paying attention to and working with vendors. We are starting to see some companies hold off on taking new orders. And as we see that, then we are working to put in our mitigation plans to make sure it’s factored into our build plan. But it is an issue that I will highlight as a real one that we have to mitigate.”

Lumen Technologies reported fourth-quarter results and 2022 expectations that generally fell below the forecasts of some financial analysts.

“Lumen’s 2022 guidance will fuel concerns that the company will have no choice but to eventually let leverage rise to inappropriate levels, dial back on investment, cut the dividend, or choose some combination thereof,” wrote the financial analysts at MoffettNathanson. “In particular, 2022 EBITDA [earnings before interest, taxes, depreciation, and amortization] guidance was noticeably below expectations at a time when capex will be elevated.”

“Results at this stage don’t give investors confidence in the company’s ability to earn an adequate return,” wrote the financial analysts at New Street Research.

Lumen and other fiber providers like Frontier Communications and AT&T are moving forward with their fiber buildout plans. Some, like AT&T and Frontier, are reporting big gains in the number of their new fiber customers. But others, like Lumen, are not.

“The past few quarters have been relatively weak for broadband net additions for Lumen, even for its higher-speed fiber offering,” MoffettNathanson said of Lumen’s consumer broadband business. “This quarter’s broadband net adds were at the low end of what the company has reported over the past few years and were shy of consensus estimates.”

The financial analysts at Evercore wrote that Lumen’s business segment drives three-quarters of the company’s revenue, and that too remains stressed. “The jury remains very much out on the company’s prospects in this sector,” they wrote, noting that sales in the company’s business segment declined slightly in the fourth quarter when compared with the third quarter of last year.

New Street analysts say a key metric for Lumen will be the percentage of customers in a given area who opt to purchase its new fiber optic access. If Lumen gets 40% of potential customers to sign up, the company likely will generate profits. “At 30%, the company would likely destroy value,” they warned.

Lumen CEO Storey stated that the company has already managed to get an average of around 29% of customers in its new fiber markets to sign up for its service. And that, he said, is with relatively little marketing.

He expects that number to be above 40% in the months and years to come. “If you look at the quality of the product that we have, we have a very effective competitive product and even with the limited marketing, we are doubling our penetration rates in our traditional copper areas,” Storey said.

New findings from the financial analysts at Cowen are supportive of Lumen’s fiber optic build out plans.  The Cowen analysts recently conducted a nationwide survey of more than 1,000 respondents and found that fiber-to-the-home (FTTH) “take rates” reached 56% among those surveyed.

“Take rate, or more specifically, market penetration, is a key driver of the FTTH business case,” they wrote. “We have previously noted that a penetration rate of 30-35% is the typical minimum break-even threshold when underwriting FTTH projects. When there is one broadband competitor, fiber penetration can approach high-50s and even 60% penetration levels in mature markets.”

Lumen CMO Shaun Andrews said: “One of the things that really differentiates us right now is our focus on fiber as part of the core infrastructure to an edge experience versus a distraction with 5G or content.  And being able to look an enterprise in the eye and say ‘Not only do we have these capabilities, but we will build the fiber to you where you are.’ That resonates with customers, and I think that’s a differentiator.”

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Last month, Lumen reported that they secured a massive $1.2 billion contract with the U.S. Department of Agriculture (USDA), setting it up to give one of the biggest government agency networks a major makeover.

Under the contract, Lumen will “completely transform” the USDA’s network covering 9,500 locations across the country. It will provide a range of services, including SD-WAN, managed trusted internet protocol, zero-trust networking, edge computing, remote access, virtual private networking, cloud connectivity, unified communications and collaboration, contact center, voice-over-internet protocol, ethernet transport, optical wavelength, and equipment and engineering.

References:

https://www.lightreading.com/opticalip/analysts-fret-over-lumens-fiber-plans/d/d-id/775229?

https://www.fiercetelecom.com/telecom/lumen-reels-12b-contract-overhaul-usdas-legacy-network

https://www.fiercetelecom.com/telecom/lumen-cmo-we-think-differently-about-fiber-than-our-competitors

Lumen’s big fiber roll-out push from 2.5M to 12M locations passed in the next few years

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Lumen’s big fiber roll-out push from 2.5M to 12M locations passed in the next few years

At the 2022  CitiApps Economy Virtual Conference yesterday, Lumen Technologies, Inc (formerly CenturyLink) President and CEO Jeff Storey said his company plans to increase its fiber deployments from 2.5 million locations to 12 million, which represents a five-times increase over the company’s traditional deployment rate.  Storey said Lumen had been investing about 400,000 new fiber locations passed every year. “We have been very strategic and targeted and micro targeted in our approach to. We wanted to build — all digital experience of the quantum fiber platform, we’ve done that our NPS scores are really, really exceptional for quantum fiber. And so we’ve proven that we can build successfully, we proven that we can deliver successfully, and built all of the systems around the customer unnecessary to do that. So we’ll continue to invest there.”

Storey did not state how many years it would take company to reach 12M locations passed.

Separately, Lumen is expecting to close a sale of its local exchange business (formerly US West) to Apollo Funds in the second half of the year, which means it will retain mostly markets in metro areas.  “We’ve rewritten the consumer playbook,” said Storey, noting that the company is now positioned as an “all-digital fiber brand.”

Like other broadband providers that have relied, in large part, on traditional copper network infrastructure, Lumen has been losing broadband customers in recent years. The company hopes that its investment in fiber will reverse that trend and has set a goal of returning to revenue growth within two to three years.

“Fiber wins. If you are competing with any other technology, fiber wins.  And we’ll continue to deliver the majority of our services over fiber infrastructure and integrate those capabilities into an all digital experience. And when you do that, I think Lumen wins.” Storey said.

Lumen’s office building at 1025 Eldorado Blvd, Broomfield, CO 80021

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Not surprisingly, considering Lumen’s emphasis on the business market for telecom services, Storey went on to note several advantages that are likely to be most appealing to business customers. In particular:

Fiber and data communications are more important than ever. But we don’t just look at it as data growth opportunity. For example, enterprises are shifting. I already said this, but more and more to hybrid environments. With hybrid employees, hybrid computing, hybrid network connect those employees, the computing, the applications that they use in the most sensible manner.

We look at combining our fiber infrastructure with capabilities like SASE, edge computing, and dynamic connections. Dynamic connections is really our network as a service capability. We create hybrid computing and networking environments that empower the enterprises to acquire, analyze and act on their data.

And looking over the Lumen platform, we enable new technologies and expanding our addressable market and we believe we’re in a great position to deliver. At the beginning of last year, we announced we’d have edge computing resources within five milliseconds, from 95% of U.S. enterprises. By the end of the year, we actually completed that somewhere in the middle of June, July, and today we’re around 97%. So we believe we have a great infrastructure tightly coupled with our fiber capabilities and we think there’s a great opportunity. Lumen and industry analysts agree, that is a major opportunity with 10s of billions of dollars in revenue potential. But it’s more than focusing on one product. It’s our ability to combine our services into holistic solutions for our enterprise customers.

Because we are a fiber-based platform… bringing our services to our customers with the connectivity of the fiber but also to cloud service providers, major data center providers,…private data centers of our customers [and] to eyeball networks,” he said, “we are in an excellent position to… help [customers] acquire their data, analyze their data [from] all of these different cloud options… and then act on their data.

In his opening remarks, Storey summed up Lumen’s strategic plan for 2022:

Our top priority is revenue growth, and we’re very focused on that, 2022 will be somewhat an investment year for Lumen, something CapEx and OpEx. CapEx is generally success-based initiatives that we have. But OpEx is a little more proactive investing in things like product development, marketing, brand, and other go-to-market initiatives that we have. We will continue to focus on investing and augmenting the Lumen platform, we believe it’s a great way to enable new technologies and expand our capabilities and our addressable market. We’ve already announced our accelerated quantum fiber bill, and plan to add more than 12 million locations over the coming years in the remaining 16 states that we operate in the states.

Lastly, we continue to invest in transforming our business for better customer experience, and operational efficiencies. We’ve done a great job of improving our customer experience, at the same time taking costs out of the business by using the technologies that we sell to our customers and then using other technologies in our business direct.

This strong increase in fiber deployment echoes what was said earlier this week at the 2022  CitiApps Economy Virtual Conference from Scott Beasley of Frontier Communications and AT&T’s CEO John Stankey.  Also, from MSO Cable One’s joint venture with three private equity firms.

References:

Lumen’s Fiber Internet Offerings:  https://www.lumen.com/en-us/networking/business-fiber.html

Transcript: https://seekingalpha.com/article/4478335-lumen-technologies-inc-lumn-ceo-jeff-storey-presents-citis-appseconomy-virtual-conference

Webcast Replay: https://kvgo.com/citi-apps-economy-conference/lumen-technologies-jan-2022

CEO: Lumen Plans Fiber Deployment Rate of 5x its Historical Rate