Lumen Technologies, Inc. (LUMN) Earnings Call Transcript & Summary

Good afternoon, everyone. Welcome back to the TMT Summit. I'm Eric Luebchow, senior analyst of communications infrastructure and telecom services. We're very pleased to continue our coverage today. We have Andrew Dugan, who is the CTO of Lumen, or formerly known as CenturyLink. So Andrew, really appreciate you taking some time to speak with us today.

Yes. Thanks, Eric. Glad to be here.

Sure. So maybe we can kick off with a higher-level question, Andrew. It's been obviously a challenging year for a lot of companies, but Lumen has seemed to navigate the pandemic pretty well. So what are kind of the key focus areas as CTO that you're looking at as we look into next year with hopefully an economic recovery but a lot on your plate as well in terms of just executing on your core book -- business fundamentals?

Yes. So as the CTO, a lot of the time that I spend is in developing the products that we offer. And if I take a look at where we're going to be focusing for 2021, it's going to really be building out that Lumen platform, the brand promise that we made with the company name change. And that platform is really centered around customer experience and how do we deliver the best customer experience that we can. A lot of that's going to be built on providing interfaces of portal and APIs to allow customers to manage their own infrastructure. And if you take a look at the platform, it's got 4 main components: our adaptive networking, which is our on-demand network services; our edge compute, which is a big area of focus for us as we look at future services; security; and our communications and collaboration tools that we offer to enterprises. So that's where I'm spending a good chunk of my time. And it's fun. It's exciting work and I think holds a lot of promise for us.

Yes. No, that's great. And I think the edge opportunity is one that you've talked about quite a bit at Lumen. I know you've launched some edge facilities already, and you plan to do more next year. So maybe you can just talk about what the edge opportunity specifically is for Lumen. I think you've mentioned that you can reach, I believe, 95% of U.S. enterprise within 5 milliseconds. So how do you view the edge? There are a lot of different definitions of that today, but how do you view the edge today and potentially the edge of tomorrow or the next wave of applications that gets developed that requires even lower latency?

Yes. Maybe I can spend just a couple of minutes talking about why I think edge is important. If we take a look at what our enterprise customers needs, we serve CIOs primarily. They're the buyers of our services, and they're really driven by their applications. Those applications need to collect and process data that helps shape the business that they're running. What we're finding is that applications are emerging that need higher performance than what the centralized cloud can provide. And the clouds taught enterprises that they don't have to operate their own infrastructure. Other people can operate it for them. So how do they support these high-performance applications that are becoming more and more distributed when those applications need something that the cloud -- centralized cloud can't provide for them? And we think that's edge compute. And you correctly called out that we define our edge as locations that are within 5 milliseconds of enterprise demand. And we've defined a plan and strategy to build out an edge compute infrastructure that meets that 5-millisecond need for our North American, European and some countries in Latin America. And we'll be offering the edge compute services, which include things like bare metal but also virtual machine containers. But for me, it's not just about selling edge compute. It's about the integration of that edge compute into that Lumen platform. The whole reason we're having the conversation about edge compute is because applications require performance that they can't get otherwise. And a key part of that performance is latency. And latency is determined by the distance -- primarily by the distance that data travel. So we have to integrate that compute and storage function of edge compute with high-performance networking with low-latency connectivity to the cloud because these applications are going to be running in multiple places, and it has to be highly secure. And so it's really about the opportunity that's presented by the compute storage but also the network and security. It's all one package. It's all one thing when an enterprise customer is coming to look for those services.

Okay. That's helpful background. So obviously, latency, as you mentioned, is one of the key components of a lot of these edge applications. And so do you think given what you can see in the near term that this kind of 5-millisecond target can essentially service almost all the applications that you would need to? Or over time, I mean, we hear about certain occasions that might be milliseconds, [ though that can be ] years away. So do you think that most of the addressable market can be serviced with that type of latency? And then related to that, I think you mentioned that you'd have to do some building out in certain locations. So how far do you think -- how long do you think it will take to kind of reach that 95% goal across many of your markets?

Yes. We're actively building now to be able to meet that 95% goal. So it won't take very long. It won't take very long. But will that 5 milliseconds meet the needs of most applications? Obviously, every application will be different. And I really look at where applications will run in 3 buckets. One is that 5-millisecond edge. The other 2 buckets, one of them is on-premise, right? One of the things that we have the benefit of being able to offer our customers is private cloud capability. We acquired the cloud assets of Savvis years ago. That's given us a great cloud capability. So we can run private clouds on-premise for customers. The third place where applications will run is the centralized cloud. The centralized cloud is going to continue to be a major place for enterprise applications. But when you put together the capability to run a private cloud on-premise and edge compute within 5 milliseconds and the centralized cloud and you put those into a multicloud management capability with integrated networking and security, I think that's a pretty powerful offer. And that's really what our platform is about, allowing customers to run applications in any one of those 3 locations. In fact, I think there's going to be quite a few applications that need to run in more than one of them. So that multicloud management piece will be pretty important going forward.

Okay. So there's obviously kind of an orchestration layer that you have to have on top of the actual physical infrastructure as well. Okay. And as I think about your network capabilities, I mean, do you have enough bandwidth in your current network to service a lot of these edge locations? Do you have to kind of fortify some of your network to be able to provision higher degrees of bandwidth in order to service them? Or do you think you're in a pretty good place today? Because, obviously, Lumen has a very vast fiber network both in the U.S. and certain international markets.

Yes. We've got a great fiber network to build on, right? We are a company that has grown up through acquisition. And a lot of the acquisitions we have done have brought a pretty incredible fiber footprint to us. We're made up today of CenturyLink and Level 3, but those companies were really made up of a whole bunch of fiber builders underneath, right? Qwest, Global Crossing, WilTel, Genuity, Broadwing, Looking Glass, ICG telco, Progress Telecom, just to name a few. All of that has given us a great asset to build off of, given us a great backbone, great capillarity. So when we get an enterprise opportunity for edge compute, hopefully, it's a customer that we're already engaged with. We have fiber to the building. But we add buildings to our network all the time. So when necessary, we will absolutely extend that fiber footprint that we have and the great capillarity that already exists in it that lasts a little bit out to the enterprises with fiber. And with that fiber connectivity, yes, we have enough bandwidth. We have enough infrastructure. So yes, we've got it in a lot of places. So yes, I think we're well positioned.

And maybe you could just talk about, because this is a TMT conference, how 5G kind of fits within this discussion because I've heard before that edge compute is necessary for 5G to kind of reach its ultimate goals but 5G isn't necessary for edge compute. There's a much broader market than just 5G. So how do you think about that? I mean kind of simplistically speaking, we think about 5G and edge compute as provisioning compute very close to the wireless edge of the network, which could be a wireless tower, a CRAN hub. So maybe how do the wireless carriers' 5G [ plans ] into your edge compute plans, how do they intersect?

Yes. No, I am super excited about 5G, right? As a consumer, I'm excited to have higher-speed mobile services. But the way that I look at 5G is 5G is an evolution of wireless access, and that's really what it is. It's access. And it's going to be fantastic for mobile use cases. It'll be fantastic for backup where fiber exists, and customers want a wireless backup. And it will be very useful for places where fiber doesn't go. But if there's fiber there, I think fiber wins. Fiber will have more capacity. It'll provide a more reliable, consistent service, in my mind at least. But 5G is an important access method because a lot of IoT devices will be connected to it. And the applications that will be developed that live in edge compute will be needing to talk to those IoT devices, whether they're at the end of 5G or they're at the end of fiber and WiFi in an enterprise building. So I see it as an important access method that edge compute needs to be leveraged with. But it's just one of the access methods. There'll be lots, lots of different ones. Many of the enterprise customers that we target will be on the end of fiber in those enterprise buildings.

Great. Have you seen -- I mean not to just focus on the edge market, but more broadly, among your customers, whether they're enterprise or consumer or international, any changes in kind of the buying patterns this year during the pandemic? I imagine there was probably some activity right around the start of the pandemic, but it's probably somewhat normalized in terms of kind of network and IP bandwidth upgrades. Have you seen anything that's emerged throughout the year? And maybe any opportunities that have resulted from this where you can better serve them as we enter 2021, and hopefully, knock on wood, have a vaccine and a broader economic recovery?

Yes. As you pointed out, during the initial phases of people going home, we did see surge in Internet. We saw surge in voice traffic, saw surge in things like CDN. And also, as you pointed out, a lot of that has sort of tapered back to more normal levels. But one of the things that I've sort of -- I've been -- I don't want to say surprised at but pleasantly -- it's been a pleasant outcome for me, is that we've continued to see growth in our Enterprise segment. And if you take a look at our last quarter, we continue to see growth there, and it was on par with what we saw last year, a year ago. And so for me, that just reinforces the fact that pandemic or no pandemic, we've got the set of services that enterprises need, whether people are working in the office or working from home. So I don't see a huge change in trajectory for the enterprises on their buying habits, just the reinforcement that what we're doing is working.

Okay. And that's totally fair. I'll ask a question that you've probably gotten a million times in the last few years, but I'll ask it anyway. So the idea of MPLS right now, I think, have you seen any change in people buying something like an MPLS versus maybe an SD-WAN solution, which I know you also offer? You've said in the past that there's not really any cannibalization, that they're kind of complementary services, but wondering if you see any shift in the buying patterns from some of your customers for those products in particular.

Yes. I just said we haven't seen any material shifts. But yes, we have seen a little bit of shifting in this space as a result of the pandemic, right? We've probably seen a slight change in demand for MPLS versus SD-WAN, with MPLS maybe getting a little bit softer. But we do continue to see demand for MPLS, and we see increasing demand for SD-WAN. Although SD-WAN is comparatively smaller than MPLS at this point, it has been growing pretty rapidly. But over the long term, we talked about not seeing a lot of cannibalization. Over the long term, we're in the business of providing high-quality, comprehensive networking security and IT services to enterprise customers. And that's going to definitely include a mix of services. And some of it will include Internet-based services that people normally associate SD-WAN with, and some of it will include more performance deterministic services that people normally associate MPLS with. We're in a good position that as our customers, if they shift strategy, our portfolio allows us to shift with them. But yes, that is an area where we have seen a little bit of change, not big but a little bit.

Okay. That's fair. I wanted to switch to kind of the voice and particularly the collaboration tool side. So that's been an area that you performed pretty well and particularly in the second quarter. And then you've announced some interesting partnerships with Zoom as well. You also announced a partnership with VMware. So just wondering, as you look at particularly collaboration tools or some of these cloud-based platforms, do you think you have the right partners in place? Are there other partners that might be interesting to add to your platform, particularly if you're going to orchestrate it and kind of provide a holistic solution? And how are they kind of playing into some of the future products that you want to offer, whether they're edge products or just core products for enterprise customers?

Yes, yes. So great question. Yes, we are excited about the partnership that we've signed with Zoom. It sort of helps us with our collaboration portfolio and our voice services portfolio with the Zoom video conferencing and Zoom Phone capabilities. Also excited about the partnership with VMware focused on their SD-WAN solution and better supporting the work-from-home. But those are just examples of partnerships that help leverage the infrastructure and help provide solutions for enterprise customers. Particularly as we build out our edge compute strategy, we will be building out more partnerships. Those applications that run on the edge compute platform are going to be largely done through partnerships. We did a press release a while back about our edge compute. And we had mentioned that as soon as we got up our customer experience center, which we stood up in Denver, it's an edge compute node where customers can come experiment with the capability. And as soon as we got that stood up, one of the large cloud providers started experimenting with running some of their software in that edge compute node. Partnerships like that will be an important part of how we service the enterprise from an end-to-end perspective because we can build fiber to their building. We can do managed IT services and building for private cloud. We can manage WiFi networks or wireless networks for them. We can stay at the edge compute. We can handle connectivity to the centralized cloud, but we likely won't be able to build all the software capability and applications that those enterprises will need in the edge compute. So software partnerships like VMware and Zoom are going to be a key part of our strategy, absolutely.

Okay. And in many ways, is it fair to say, I mean, obviously, you can resell some of their services as kind of a partner. But you're probably also providing transport services for like Zoom already, and I imagine they've only become a more important customer during the pandemic or maybe some of the other collaboration tool type of applications. So there's, I guess, multiple ways to potentially monetize those relationships. Is that fair?

Yes. Absolutely. Zoom, in particular, they've been a great long-standing customer for us. So it's -- we get the benefit of partnering with them on the sales side, but we get the benefit of the usage on the back side as well. And in many of the cases where we are an underlying provider, a networking provider to many of the cloud-based applications, we see that sort of effect.

Yes, yes. That's fair. I guess another question that I had related to the wireless business. So are you seeing a lot of the carriers looking for dark fiber these days? That's a business that you haven't done as much of historically versus maybe some of your peers. Like I'm thinking of Zayo when they were public. Is that a business where there are opportunities to wholesale dark fiber beyond what you've currently done? Is that in demand among not even just wireless carriers but potentially other hyperscale-type customers, whether they're cloud customers, social media, Software-as-a-Service? Just wondering about that.

Yes. We continue to invest heavily in fiber. Some of the stuff we've talked about publicly, we've talked about the fact that we're overbuilding our intercity network with newer generations of fiber. So the latest generation, lowest lost fiber out there for that type of use case. And we have the benefit, through all those acquisitions I mentioned earlier, of having a multiconduit infrastructure that makes it easier for us, easier than most others, to be able to put new fiber into that infrastructure. We've said we're building that 5 plus million fiber miles just on the intercity side. And that build is largely driven by exactly what you're talking about. It's supporting those large web companies that are building their own backbones to be able to transfer data between their own data centers. And it's been great for us. It's allowed us to refresh our infrastructure with the newest-generation technology in a profitable way. So that's been fantastic. But also, we're building out and expanding our metro networks. We're building new regional networks. We're adding fiber to that metro infrastructure and putting more buildings on that. So yes, we do dark fiber sales in that area as well. And those tend to go more into supporting the 5G builders and people who are building their own metro networks between data centers in a metro. And so yes, we don't talk a lot about how successful we are in the dark fiber business. Others may talk about it more because it's a bigger part of their overall business. But we're very active in that space on the construction side and making offers to our customers.

Okay. That's helpful. I guess I wanted to shift. I know you may not focus on it quite as much, but -- the consumer side. So in general, if I look at the whole industry, there's been pretty good subscriber adds, people tiering up to higher amounts of bandwidth in residential broadband. And obviously, you guys have had some success in your consumer business with that as well. So how do you look at the kind of -- I know you have a micro-targeting strategy to do it economically. So how do you look at your current footprint, the success you've had with that micro-targeting strategy? And do you think that where you're competing with whether it's another incumbent telco, a cable provider that you're winning your fair share of business when you have that fiber plant all the way to the premise?

Yes, yes. We have been investing heavily in our consumer fiber business. Just to give you some stats on that. We exited last year with about 2 million homes passed with fiber. We have about 2.3 million homes now. The way that we look at that micro-targeting is we take -- we look at where can we build fiber to meet consumer demand. But the micro-targeting also includes where can we meet demand for SMB, where can we meet demand for other enterprise customers and where can we meet demand for towers to support wireless builders. And through that micro-targeting strategy, we've been pretty successful. So we look at a couple of things when we decide to build in an area from a consumer standpoint. We look at the cost per home passed, and we have an expected penetration rate. We've been meeting our financial objectives where we've done that micro-targeting. So it's been a really great thing for us, and it's really helped us increase our broadband revenues in the consumer business. Our broadband revenues are continuing to grow. We continue to increase the number of subscribers at that higher speed, which gives us a higher ARPU. If we take a look at where we exited last year with fiber customers as a percentage of our consumer business, we had about 5% of our customers being fiber-based. Where we are now is about 13% of customers being fiber-based. So yes, it's been great for us. It's something we're excited about.

Yes. And I guess from my perspective, are you -- have you seen any shifts where you potentially could win customers from cable companies because of the amount of upstream traffic that cable networks aren't necessarily architected to provide? And I know that the HFC plant, in many cases, does have pretty good speeds. But usually, that's very asymmetrical, whereas fiber, you can get like a gigabit plus upstream and downstream. So how do you think that evolves? Because it seems like, ultimately, fiber is a technology that longer term should win in that scenario. But the cable company has also have done very well in attracting new subscribers as well. So how do you think about that competitive dynamic and the kind of architectural changes within the network?

Yes. Well, from an architectural standpoint, you're pointing out something that I don't think a lot of people see, which is when you look at our fiber network supporting consumers, it is a symmetrical service. So you get a gig both directions. Cable networks aren't built that way. And so there's added confidence for customers that they're getting a high-quality service. And I unfortunately don't have our fiber service at my house. I wish I did. But I know lots of people who buy it, and they're very happy with the experience. It's part of our whole rebranding. We created another brand when we rebranded as Lumen called Quantum Fiber. It's not just about providing that superior bandwidth service, but it's about providing the digital experience that customers want to have a simple digital experience. So we're putting our fiber customers into that experience over time. And I think the combination of a great service and a great experience will absolutely let us win.

Yes, yes, yes. Totally fair. So I guess as you look out, it seems like if you look at your investment priorities, obviously, fiber is the #1 focus. So maybe you can just help me sort it out. So it's a combination. Is it primarily intercity fiber, some metro fiber, connected buildings? Maybe just help us kind of parse through your objectives on a capital allocation front to really help continue driving the business and driving this higher margin, more recurring revenue of fiber?

Yes. We haven't given out detailed capital numbers around how we're investing from the fiber build, but it's -- you can assume it's relatively evenly balanced, right, between 4 main categories. We build a lot of intercity fiber to meet that dark fiber domain we talked about earlier. We build a lot of metro fiber to meet the increasing demands for our enterprise customers in the metro. We add a lot of buildings in the network, and we're supporting the fiber to the home for consumer. So it -- those are all relatively significant investments for us. And so we can't speak to the specifics of each, but they're all important for us.

Sure, sure. And one of the customer segments that I think we assumed early in the pandemic would be more challenging for you as SMB, and I know it's been -- it's had some challenges. But I'd say overall, you fared pretty well considering some of the economic disruptions that's around you. So maybe you could just update us on what kind of products they're interested in, if you're seeing some kind of hopefully improving fundamentals from that customer base or at least hopefully improving fundamentals into next year, particularly with the vaccine on the way and at least optimism around the broad economic recovery. Just give us an update on SMB, that'd be great.

Yes, yes. So yes, SMB has been pretty good for us, I think, better-than-expected through the pandemic. Sales have been softer as customers are delaying buying decisions, sort of waiting to see what their future is after the pandemic or through the pandemic. Our churn has been normal. We haven't seen an increase in churn, which is great. In terms of the services that they buy, they're buying Internet services, and they're buying voice services. Those are the 2 primaries. And those are fundamentally things that they need to run their businesses. So we're looking at more cost-effective ways to get to the buildings where customers want to buy our services. That, I think, will help us in the future. This micro-targeting strategy, when the SMB market does finally get some confidence behind it, then that micro-targeting will let us support -- use fiber to support higher-speed services. So hopefully, that gives you a little bit of color.

Yes. No, no, that's all very helpful. All very helpful. And I guess I'll just ask one more before we wrap. I guess what are you most excited about? Any technology trends that are emerging that we haven't talked about that you think is something exciting on the horizon that we should keep our eyes on over the next couple of years, not necessarily near term?

There's exciting things that's happening all up and down the technology stack, but the thing that gets me most excited is how orchestration platforms are changing over time and what that's letting us do from a customer self-service standpoint. If we take a look at where the industry will be 5 years from now, if you don't have customer self-service, if they can't order new services, increase bandwidth, integrate security and networking with their applications, I'm not sure that you'll be that relevant in the market. And so we're really pushing on building out that Lumen platform that delivers on that promise. And when I look at what the opportunities at the end of that, I get really excited about how we bring together all those technologies into the right experience.

Okay. Well, Andrew, that's great. We'll wrap it there. Appreciate you taking the time today to speak with us, and we look forward to continuing to follow the story closely. So take care.

All right. Thanks, Eric.

All right.