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

Hi. My name is Phil Cusick. I follow the comm services space here at JPMorgan. Thanks for joining us. I'm pleased to welcome Maxine Moreau, President of Lumen's Mass Markets division, and previously, Executive Vice President of Global Operations. Maxine, thanks for joining us.

Happy to be here.

Great. [Operator Instructions] Otherwise, I can certainly carry it for the next half hour. Maxine, the U.S. seems to be more open almost every week. Can you start with an update of what you see recently from your consumer and business customers?

Sure. Well, first of all, I think we're all feeling the need for that fast, reliable broadband connection. This shift that we've been seeing over the last several years accelerated with COVID. And that's why our strategy to continue to invest in fiber to support that ongoing demand and growth is core. I think about the world, and I don't think it will ever go back to the way it used to be. I'm a good example of that. I work from home. I plan to work some from home going forward. I'll be hybrid. so that need for a reliable connection in the home and a reliable connection in the office is right in our wheelhouse at Lumen. The other thing is there's a lot going on in the home now between working from home, learning from home, streaming video, the WiFi connections in the home and the complexities of that. And so I think the services that we offer with Quantum Fiber fit nicely into that in helping consumers and small businesses. We're not seeing that big spike in demand that we saw right at the beginning of the pandemic. But we are seeing some good things, more and more businesses and schools are opening. And we're not seeing customers disconnect their service as much as prior to COVID because they need this connection. And we're also starting to see some of the small end of small business, some positive trends there. More leases are being signed and occupancy is improving. Now with that being said, most office buildings are still at 50% capacity or less, so it's going to take some time.

Okay. Okay. And before I follow up there, the mass markets business is a fairly new category at Lumen. Just give us an overview of the pieces of the company that you oversee.

Sure. So we cover about 25 million locations within our territory. Obviously, more than that when you go outside our territory and you look at our national fiber footprint that Lumen has. Those locations include single-family homes, MDUs or multi-dwelling units, small business, which we typically classify as businesses with less than 20 employees and MTUs or high-rise business buildings.

And what's the mix of sort of business versus consumer in that 25 million?

Yes. So if you look at the financials that we started showing this last quarter, consumer makes up about 95% of our broadband revenue in mass markets. So our footprint and our customer base is heavily weighted to residential. Now that being said, we haven't historically put a great deal of focus on the really low end of small business that's part of mass markets now. We refer to that as SBG. But we believe we've got tremendous upside there. We've got a lot of businesses that are passed with our fiber and then outside our footprint, we've got a lot of buildings that are near net or on net. And we've got a big focus right now on expanding that coverage and expanding that distribution. And we think that we've got a lot of -- like I said, we've got a lot of upside in that area in small business. And then over time, although most of our revenue right now is in the consumer area, you're going to start to see that revenue split shift a bit to small business as we put more focus there. But keep in mind, it's a really small number right now.

Okay. There's about 30 -- since you bring this up, there's about 30 million small businesses in the U.S. And I just looked that up. I didn't know it off the top of my head. So about 10% as many as consumers. Is that a good mix of sort of consumer versus small business within your available footprint?

I don't know the exact number, but that seems about right. Like I said, though, our focus historically has not been on that really low end of small business. And one of the reasons why -- probably the primary reason why we decided to move the small end of small business over to consumer and call it mass markets was, their buying habits and their needs are very similar to consumer. So we need a scaled approach to the go-to-market, a very digital approach. And the services that they're buying look much, much like what consumers buy. So that was our rationale there, and we think we've got a lot of upside with the scale that mass markets brings to the market.

I think that makes a lot of sense. So let's start with the consumer side, and Quantum Fiber has been a big growth driver. You just rebranded that recently. I think you've said 2.4 million, is it locations, addressed with fiber today?

Yes. Actually, to be more precise, after first quarter, we announced in that earnings, we have about 2.5 million locations. That's consumers and small businesses. That's mainly consumers, that are enabled with fiber, and we have about 715,000 fiber broadband customers today. Now when you look at our mix, about 15% of our current mass market customers are on fiber today. We added about 400,000 locations in 2020 and we'd like to see that network expansion pace accelerate, but we're not targeting a specific number. But what I can share is our fiber-first strategy is our focus and will continue to be our focus. And we'll continue to expand our footprint where it makes sense using our market targeted fiber approach with that urban densification where it has attractive returns.

All right. What's the mix within that 2.5 million of sort of MDUs, MTUs that you mentioned earlier? Is it a pretty heavy sort of multifamily or -- and multitenant?

We have not provided that breakout. But what I would say is it's actually more heavily weighted to single-family homes.

Okay. Okay. That makes sense. And you've said your -- or Jeff has said, you're not capital constrained on this. What does it take to accelerate that pace like you talked about?

So that's correct. We are not capital constrained. I'm not capital constrained. Basically, we have a very disciplined approach. So as we continue to improve our penetration and our performance, we plan to continue to expand our footprint. The faster we can grow our penetration, the faster we will deploy new households and businesses with fiber. We're constantly evaluating how quickly we can generate cash from those investments. We want to do that as quickly as possible because we don't want stranded capital sitting out there. But as you see our penetration rates improve, you will see our build pace also improve. We don't have a set target. I know a lot of our peers and others have set a specific number that they're shooting for. Ours is success based. So the better we perform, the more we will invest and grow. And we've got a long runway.

Yes. Do you have an estimate of how many of the -- of that 25 million customers have been addressed by another fiber provider already? One of your peers has said 12% of their footprint is addressed by a separate fiber provider, not cable. I'm curious if you have something like that.

No. I'm not seeing that. We have very little fiber overbuild in our footprint. I would say -- I don't have the exact number, but I would say single digits. So we are not seeing that in our markets.

That's interesting. Okay. Okay. So you've -- the 700,000 divided by 2.5 million sort of a high-20s penetration of fiber in the last quarter. I assume that a lot of these customers haven't moved over yet. Is it fair to think that the penetration of copper and fiber in those homes is quite a bit higher than that 28%?

Yes. So we don't report the combined number. As you know, we focused our reporting going forward on Quantum Fiber because that's where our growth is coming from. The 28% is strictly fiber customers with a fiber service. Our primary focus, Phil, is we want to go after new customers. We want to grow our base, and we want to go after new customers. And we believe we have a differentiated offer. Now with that said, we absolutely want to upgrade our existing customers in that same footprint over to a fiber-based service, but our #1 priority is capturing new customers. And most of our inward activity is new customers.

Okay. Help me think about the micro targeting effort. This is something you've been talking about for -- the company has been talking about for quite a few years. What are the sort of the hurdle rates, and what goes into those numbers? I would think that with COVID and with consumers have a lot of desire for broadband today, that a lot of the math behind that might have gotten better in the last year or so.

So what I will talk about on our micro-targeting strategy is there's a lot that goes into it. I'm not going to give away our secrets, but I can share some that are pretty obvious. First, we'd look at what's the overall growth opportunity in that particular area. We look at how our prior fiber deployments have performed. We obviously looked at the cost to do the construction to enable it. We looked at what the future demand's going to be, what the population growth is, what the population density is as well as many other variables. And what we've seen is by using this strategy, our go-to-market is very local-focused. So very neighborhood-by-neighborhood, building-by-building focused. We have teams on the street that focus before the network is enabled all the way up to the enablement and afterwards in making sure that we are blitzing that area and making sure people understand what services that we offer. Now with that said, we want to continue to expand. Right now, we're focused in using our material assets, but we don't limit it to that. We should build every new greenfield subdivision MDU business complex that's in our targeted fiber areas, as dense urban clusters we refer to. Like I said, we've got dedicated sales teams that focus on that at the local level and they're doing really well. We're really pleased with their performance.

Yes. And you have some pretty massive cities. This is -- a lot of the old U.S. West, big Western cities.

We do have some very large NFL cities, yes.

Yes. I'm surprised that you haven't seen more overlays by other fiber companies. We talk to a lot of these guys and the amount of capital that's being thrown at them by private equity and infrastructure funds is tremendous. You don't worry that, that accelerates in the next few years if you don't get there first?

Well, with our micro-targeting strategy, and it's focusing on those dense clusters -- like when we report that we have, what is it, a little over 10% fiber enablement across our entire footprint, when you look at those markets that we're targeting, that number looks significantly different. I think I've shared on the Analyst Day, we have one of those markets where we have 40% of the homes enabled with fiber today. And the investments that we're making this year, next year, the following year are targeted to those, let's call it, dense urban clusters. So the percentages there look very different than when you look at the percentage across the entire Lumen footprint.

Sure. I'm just curious when you see your peers, AT&T, Consolidated, Frontier, Windstream all talking about pushing fiber a lot harder. What of their strategy sounds not correct? Like why is their strategy not as good as your targeting strategy?

So I'm not going to address their strategy because, a, I think each of those companies has somewhat different assets in total as a company. What I'm going to focus on is our strategy. So our strategy, and we've been very clear, is to focus on fiber. We're going to get growth within Lumen, within mass markets, with Quantum Fiber. It is our growth engine. It's our growth vehicle. We're going to grow customers. We're going to grow ARPU. We're going to go grow penetration. We're going to grow our footprint. That's where our growth is going to come from. Where we choose to invest, we will grow. And you've seen it in our numbers, our overall broadband revenue has grown ever so slightly, but grown quarter-over-quarter. We spoke last quarter that small business, thus fall into small business. Revenue grew sequentially. That is 100% because of our focus on broadband and specifically on our focus on fiber.

Okay. Okay.

And look, we get asked, so how many homes are you going to build to? We don't have a set target. We want to enable as much network as it makes fiscal financial sense, that is a good return on our shareholder. And we don't have a lot of stranded capital sitting there that's not generating for our shareholders. But look, we want to continue to penetrate, continue to improve our performance, continue to invest and accelerate the pace in which we're building.

Okay. Okay. I'm curious -- and I think I asked Jeff about this on a call in the past. The -- as much as 40% coverage within a market, when I've talked to companies who've been successful in fiber in the past, they target much higher numbers. because of the way they want to go to market. They're sort of marketing on a mass-market basis. What's changed in the way you go to market that you can be much more successful even if you don't cover an entire footprint.

So when I listed the 40% in a market today, that was just a point-in-time metric. I'm not saying that I believe that 40% is the right number across every market. Every market is going to vary, but what I will say is, is that we don't have a limit, like we're not targeting to reach a certain limit in stock. If it makes economical sense, we're seeing the penetration, the investments are good returns to our shareholders, we will continue to expand. There is no limit on what that number is. As it relates to the question around ubiquitous coverage or a much broader build. What I would say is in the days where the only way you could reach customers was through mass media, television ads or newspaper or radio. Today, with digital marketing and one-to-one marketing and local sales, feet-on-the-street in these neighborhoods, selling door-to-door and neighborhood by neighborhood, you could be much more targeted. And that's what our market targeted approach has enabled us to do is target a particular area, whether it's pricing at a more granular level, go to market at a much more granular level. We're able to do that and earn a very good return on the investments we're making. And we don't have to offer a nationwide offer. We can be very specific market to market depending on that market's dynamics.

Yes. Yes, we've come a long way from when I remember I think it was CenturyLink, used to advertise nationwide on football games, and I'd see it in the Northeast. And I actually tried. Let's see if they'll sell me service. You mentioned very granular pricing. How do you think about the right pricing for the fiber business over time? Do you take a sort of very targeted market-by-market approach? Or do you want sort of a very standard and simple pricing?

So absolutely, the first. It's going to vary market by market. It's going to vary based on what the competitive response is. It's going to vary based on what our penetration is in that particular market. It's going to vary based on the type of customer and the services that we're selling. So we have the flexibility, and we're building even more flexibility where we can be very, very granular. And we're going to let our local insights, our local market intelligence because we don't look at these markets kind of at this level. We look at them at a market-by-market, area-by-area basis, and we adjust as we need to adjust, whether it's price up or price down to be able to continue to grow that market share. I fundamentally believe, though, over time, as we demonstrate the value that fiber provides over cable or wireless services, I do believe that we will be able to charge more over time because the value will be seen by customers.

Okay. I think -- yes, I agree with you. I think it's a great customer experience, and I think there's tremendous demand for the product right now. And between what's naturally driven to above 80% national penetration, and then federal efforts for both affordability and coverage, I think the demand is tremendous. With fiber, you could get 50% penetration in any market you really go after. Where you're a duopoly with cable, but my fear is, and I spend a lot of time with fiber builders in the last few months, is that they're coming so fast. And there's money being just poured down that channel. I think it will be really interesting to see what happens there. Go ahead.

It will be. I would, though, also add, it's more than just the fiber asset in the ground, which we all know is not as easy as some people may think. Others -- many have tried and not been successful. It's also about, though, the experience. We were very intentional when we developed Quantum Fiber that we wanted an experience that was completely differentiated from anything that they had ever experienced before. And we built it purposefully to be 100% digital, 100% subscription-based billing, prepaid billing. It's very simple. Their bill looks like, literally like an Apple Pay statement that you get on your phone every month.

Not like the phone bill, right?

No. No. It's not like a bill. And then even through the life cycle from when they purchase a service to how they want to make changes to their service or interact with us we've built that completely digital end-to-end. And that's the way customers -- most customers want to interact with companies. They want to interact with companies like they're a technology company, and we did that with Quantum Fiber. And again, it's still small, and we're growing, but plus 70s in NPS, I mean, that's unheard of.

Right. Right. Well, let's talk about that. You talked about that all-digital sale process. Where are you with things like self-install and adding services on top of it like mesh WiFi and things like that?

So I would start with -- like I said, we purpose-built this platform. And what we've done is we've built it in a way that is highly configurable with APIs that allow us to interface with multiple other providers. So as you see us layer other services on top of the broadband connection, whether it's managed-in-home WiFi or security or privacy or voice solutions or other solutions. We're partnering with third parties. We already partner with many over-the-top video providers. And we have the ability to plug-and-play different partnerships into these services very quickly with our platform. And that also allows us to kind of go where the market is going and making sure that we're partnering with the best-of-breed when it comes to all of those different services. And what our customers are telling us is they enjoy the frictionless aspect of the service. And the other thing that we're doing is we're educating customers. A lot of customers don't understand what fiber is and what's the advantage of fiber and what symmetrical speeds mean and all of those kinds of things. So part of our go-to-market when we are talking to customers is, a, what is it you're looking for? What is it you need? Then recommending what is the right service for them and then helping them through that journey. And look, some people are very technically savvy. They don't need any help. But other customers do need help in figuring out how to get their WiFi signal working in their home. So you asked about self-install. Our strategy for Quantum Fiber is that initial fiber install is 100% professional tech install, and there's a reason for that. We want to make sure that when we leave that home or that business that we are delivering 100% to the customers' expectations. Because the customers, like I said, they don't understand that difference between the wired connection and the WiFi connection and the coverage in their living room versus the coverage in their home office versus their patio. And so as we provide them WiFi extenders or WiFi pods that expand the coverage, we're able to make sure that when we leave, a, they understand that. And b, we're meeting their expectations or hopefully exceeding their expectations. And we leave a device inside the home or office that remains there when they move. So the next tenant or the next homeowner, when they come into that home or that office, they can have instant activation that's -- through a fully digital experience. They never need to call us, and they can get our service instantly. We're also building in some of our greenfield areas where we're building to new subdivisions or new housing developments or new businesses. We're working with the developers and either we're negotiating what we refer to as a bulk arrangement where we have 100% of the coverage in that facility or we have an exclusive marketing agreement where we're the only provider that can market to the customers on site of that property. And we are prebuilding what we refer to internally as instant on, which is when the customer moves in to that either living unit or that building, they open up their computers and they can point, click and have our service instantaneously with fiber.

That sounds great. That would be a lot easier. Let me ask -- I want to get to business, but a couple more things. One, a good one from the line. If other people are more willing to invest or to invest more quickly in fiber across your footprint, would you consider partnering with a private equity or infrastructure fund who was interested in doing that?

Yes. I think that question was actually asked on the earnings call, and I don't remember if it was Neel or Jeff, and the response was yes.

Okay. Okay. And then still in consumer, I just want to turn quickly to copper, which I know isn't the growth strategy, but it's still the majority of customers in the broadband space. What are you doing to sort of keep those customers longer and to reduce the churn rate there?

So I would say there's a few things going on. A, we need to provide a good customer experience. We have areas where our copper penetration is north of 50%, where we have done a really great job competing against cable and customers love our service. But we have other areas where our penetration is extremely low, where it's highly competitive, and there's other options for those customers. And we recognize that and we acknowledge that, and that's why we've made this pivot to Quantum Fiber as our #1 priority. But look, half areas, we love. We've done really great in those areas. This is the last year of our build. We'll finish out that program. We'll pivot those resources that are doing that construction over to doing our fiber construction as we continue to deploy more fiber. But look, it's all about the target we're going after and being very intentional on where we're spending our marketing dollars and what customers were going after knowing that we want to keep every customer, but not at any cost.

Right. Right. Okay. You mentioned CAF, there may be another round of broadband sort of infrastructure efforts coming from the Biden administration, is that interesting to you? I know you participated in the RDOF program, but that was a little bit of a mess. If this comes around again, is that interesting?

So I think you know kind of where we landed with RDOF. We took a really measured approach, ROI-based approach. And when you looked at the RDOF plus the subsidy, we saw better returns from our fiber-to-the-home investments using our micro-targeting strategy. And so our level of participation in RDOF was indicative of that. But what I would say with the new infrastructure plan. The White House has made some really broad statements with the announcement. Just like we've said in the past, we won't know until we have more details around what exactly is going to get approved by Congress. But what I can say is we've demonstrated an ability to invest in our network and deliver reliable broadband. We did that with CAF. We've done it with how we managed the spike in demand with the COVID, post-COVID with traffic increases on our network, providing a reliable broadband service to customers, small businesses is at the core of what we do. So I remain really hopeful that President Biden's infrastructure plan will allow Lumen to continue to do what we do so well. So anxious to get more details, and we'll engage when and where appropriate.

Good. Good. We're coming toward the end of our time. I do want to hit -- I think I would be remiss to not hit small business quickly because it's so important. But what tools can you do -- can you use to push harder in the space at a reasonable return?

So I'll start with our market share in small business is pretty small right now. But one of the reasons we combine small business with mass market or with consumer, now mass markets, is going to market at scale in a mass markets way. So some of the things that we've already done is we've put the shopping flows on dot-com for small business through our consumer flows. We've simplified the offers. And we did that a few years ago in consumer and saw the benefits of that. We have expanded our distribution -- or I should say we have dedicated distribution, sales distribution into some targeted MTU buildings that we have already connected to our network. And so we're leveraging really the learnings over the past several years of what we've learned in consumer over into the small business space. Because what those customers need is the same things that, for the most part, that consumers need: fast, reliable, secure broadband connections with other value-added services on top of that. And our Quantum Fiber platform was built to support both consumer and small businesses.

Okay. Okay. Sort of stepping back to big picture, the mass market segment declined by about 5%, I think, in 2020 and about 4% in the first quarter. What will it take to get this business to stability or even growth?

So we're going to continue to feel pressure from legacy revenue streams and low-speed copper, that's a given. But Quantum Fiber will provide us a vehicle for growth. It will provide us a vehicle to stabilize our mass markets revenue over time because where we invest, we expect to grow. So our focus is on expanding our fiber footprint, expanding our customer base, expanding our ARPU and continuing to drive that penetration up using our very disciplined targeted dense urban hyper-local focus, leveraging the wonderful experience of Quantum Fiber.

Can I ask what are you judged on? What drives your annual sort of performance review?

It's really 3 things. I'll add a fourth, but it's driving the expansion of that fiber network I talked about, cost effectively and using that micro-targeted approach; it's growing our customer base on those strategic assets; and then third, it's managing all of mass markets' assets and maximizing the financial returns to Lumen and our shareholders. And then, lastly, I can't not say -- and doing it in a way that improves the customer experience and the employee experience.

Right. Right. Yes, not just -- not driving in the short term but in the long term. Well, to go back to that. I mean it's -- so drive growth in fiber. I get the message, and I think that makes a lot of sense. And I think you can hear that I agree with the strategy. But how do you sort of -- as we go back to that copper side and managing that downturn, what can you do differently to sort of keep that customer base around as long as possible?

Well, I mean, a, we've got to continue to ensure we're providing a good quality service. And as we bring new -- so we have -- we pivoted a lot of our advertise -- or digital marketing to be more -- much more fiber-focused. So you're going to see, and we show the numbers each quarter, the low-speed copper customer declines and the growth in the higher-speed services, that's by design because we're targeting more of our inwards coming from higher-speed, fiber-based services and higher speed copper-based services because they're much more sticky. So the key is to look at what overall broadband revenue is doing in mass markets, what ARPU is doing. And we'll continue to focus on making sure that we are smart about how we retain the embedded base of copper customers, and maximize it for cash.

Okay. That's really helpful. Maxine, we're out of time. Thank you very much for your time. It's nice to meet you.

Very nice to meet you.

And thanks, everybody, for joining us, not just for this one before our whole conference. This is it for me. I know there's one more hour of presentations, but I am done. Thanks to you all for listening in. Thanks, Maxine.

Thanks, Phil.