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

Good afternoon, everybody, and welcome to our final session of our Communications Infrastructure Summit. Thanks for joining. My name is Greg Williams. I cover the cable, satellite and telco space at Cowen. I'm delighted to be joined by Maxine Moreau. She's the Head of Mass Markets for Lumen, very topical, considering last week, the announcement of the sale to Apollo, and then you guys are turbocharging your Fiber to the Home efforts. The format of today's session will be a 40-minute fireside chat. I could leave some time for Q&A for the audience, if should there be any questions. So Maxine, without further ado, thank you very much for participating.

Thank you for having me.

Sure. And for those in the audience that don't necessarily know you or your role, can you maybe provide a brief background of your responsibilities, and what's keeping you busy at Lumen?

Sure. So I am President Mass Markets at Lumen, and Mass Markets comprises of our consumer business and our small business segment, think of businesses less than 20 employees. So businesses that -- by service, is very similar to our consumer markets that we go to market at scale. And so I have full P&L responsibility, everything from our investment strategy as well as our go-to-market distribution and overall, and then customer experience.

Okay. And with your role leading the consumer segment, these are indeed exciting times for you. Lastly, on the call, Jeff and Neel, as part of the Apollo sale, also said that they could build Fiber to the Homes as much as 15 million homes that are potentially investable. We don't know the book end yet, and they said stay tuned. But what is the timeline for when we'll have a better sense of this build plan? Is there a Board meeting? Or just help us with the process of when we would know more.

So we've been evaluating this opportunity for some time now. The transaction with Apollo is just one of the steps. So when we looked at the states that we elected to do the transaction with Apollo, those are states that when you looked at our investment prioritization, they fell sort of at the bottom of that prioritization. And so we felt like it was a great opportunity to maximize our shareholder value by monetizing those assets. And Apollo has a strategy to invest in fiber, and so it's a win-win. It's good for the customers in those states. Obviously, it's good for Lumen. And it allows us to focus our efforts on those remaining 16 states, which Neel talked about, make up about 21 million households. Of that, about 70% would be considered urban and suburban, which makes it the most attractive areas for investment because of the densification as well as the overlap with our Enterprise business. We have a lot of network within Lumen, and we can leverage that network as we expand our fiber. We have not set numbers or communicated numbers externally on what our plans are, but what I can tell you is, we are actively accelerating our fiber build and have been for some time and plan to continue to do so because we've seen from our efforts over the past couple of years, where we invest, we've grown. We've grown our fiber revenue, and we reported that in our earnings last quarter, and we are very pleased with the overall platform that we've built that enables this amazing customer experience.

And of those 16 states, you mentioned 70% are urban or suburban. Did you already do an audit at this point? So is the deciding factor of why you might build to 10 million or 8 million or 50 million, is it more of a financial decision? Or have you not done the audit on a market-by-market, home-by-home basis at this point?

We've done a lot of analysis just on a market-by-market basis. I can't give you all the secret sauce on what we've looked at, but we feel like there is a great opportunity, like I said, to invest over a period of time that will provide very strong returns for our shareholders and allow us to continue to grow our customer base and our revenue associated with our fiber -- Quantum Fiber business. We've shown that in what we've started reporting publicly, starting with the first quarter results. We show our fiber base, our penetration, our ARPU and our revenue, and you could see all of those metrics are growing quite nicely.

Great. I want to talk about the carve-out for a little minute. Because while you're ramping up the Fiber to the Home efforts, concurrently, you also need to carve out that network for Apollo. Can you help us understand the near-term and midterm steps involved in the network carve-out? I would imagine you did some of that work already in 2019. You had that strategic review for a year and you probably realize you can figure out which cabinets belong to this network and which one doesn't and which ports, et cetera. Is that work largely done? Do you still need to do that work ahead of you? What are the next few steps in terms of the carve out?

So there's a significant amount of work that has been done. There is work that will be done between now and the expected close, which is in the second half of 2020, based on the normal regulatory approvals.

2022?

2022. Second half of 2022. And every state, the regulatory approval, the DoJ, the FCC and so forth. There will be work done between now and what we would refer to as Day 1, the day the transaction were to close. And then there'll be work that's done after the transaction occurs. So we have mapped that out in a large degree. There is still work to be done, mainly for Apollo to determine what services they need to purchase from us and for what period of time.

Right. Has that been determined yet? Are they going to be using your OSS/BSS platforms in your systems? Or is there going to be a flash cut after all this?

There will not be a flash cut, and it will vary based on the services.

Okay. But they haven't ironed all that out?

That's right.

Okay. So they might take some of your systems and then some of their own proprietary systems?

All of those details are being worked out.

Okay. And then Neel spoke on the call about the synergies. Can you help us understand what are the biggest examples of dyssynergies that would be happening? And how you can mitigate them? I imagine some of it is like enterprise customers now having to pay local access in that footprint. It used to be your footprint and now it's Apollo's.

Actually, no. Think of it as -- so we have this very large company. There's a lot of resources that are dedicated to those particular states, and then there's some amount of shared resources that work on not only those states, but other states. And so think about your corporate overheads and a percentage of those corporate overheads, it would be allocated to that portion of our revenue stream. And then there are certain systems, that there is a certain cost to operate an OSS or a BSS system, whether you have 6 million customers on it or 5 million customers on it. But we've done an excellent job over the years of managing our cost and aligning our cost with our revenue streams. So we have great confidence that we'll be able to work through those dyssynergies over time.

Right. So a lot of an allocation issue to your homes.

That's right.

But then you can rightsize the business accordingly.

That's right.

Okay. I just want to talk about the current fiber to the build that's going on in terms of Quantum Fiber, particularly the cost per home passed. What are the costs to deploy the fiber in general? We've seen Alex pretty public about it, talking about $500 to $800 per home passed. Do you resonate with those sort of levels? And what are the components that go into your cost per home passed?

So we don't disclose our cost per home passed. What I can say is, one of the things, one of the advantages that Lumen has is, we have this very large fiber network that runs our enterprise business. And we have those fiber assets that we can leverage in our -- where we extend the network to neighborhoods or subdivisions or multi dwelling units or small businesses and high rises. What I will say is that numbers I've seen and heard from other companies all looked reasonable and within ranges, but every market varies. It depends on if you're digging in rock or you're placing aerial fiber or other issues with different types of geographies and densification.

What percentage of your fiber is aerial fiber and the residential fiber?

Well, what we've constructed today with our fiber overbuild has been predominantly aerial, but we believe that we've got still more opportunity in buried fiber in the coming years. So we think that we can cost effectively build to a significant portion of that urban, suburban footprint that we talked about earlier.

Okay. And what's the time to typically build? When you do your planning and you say, I'm going to build to these neighborhoods and then you actually go and do it.

It varies. I would say one of the longer poles is the permitting process, and it varies from municipality to municipality, but it can range from months to a year.

Does Lumen have in-house construction or do you have to...

We do both. We have a lot of supply chain, a lot of distribution through third parties, and we also leverage our own internal resources.

Are you seeing any bottlenecks, any labor resource issues?

We have not. At this point, we have not seen any issues. We've got a great supply chain system and ecosystem that we've developed over the many years, and we've got great partners and are pleased with their performance. And we have diversification not only in equipment and fiber, but also in labor.

And how about any inflation, the cost of resin for conduits or something that went with the cost issues?

We've not seen any significant changes there.

Okay. And what are your general cost of connects? I mean, probably this sounds like you don't disclose it as you disclose the cost so, but the other, like, around $700 of connect and that includes the drop, the ONT in the side of the house and maybe some equipment inside. Do you resonate with those numbers generally?

We do.

Okay. What are the top challenges currently to deploy fiber keeps you up at night?

What keeps me up at night? Can we go faster.

Okay.

Yes. This is a service that our customers desperately need and want, specifically, as a result of COVID and now that we're all working from home and working from work and learning from home and entertaining ourselves, the need for speed and the need for a reliable connection and symmetrical capabilities is a service that customers need, and we want to be able to be that provider that can provide it with a differentiated service. With Quantum Fiber, one of the things that we did from Day 1 was build an experience that enables customers to interact with us completely digitally. They can -- they buy the service digitally. They can interact with us, if they choose, completely digitally, we call them born digital. Their billing statement looks more like your Apple Pay notice on your cell phone versus a telephone bill, and we can interact with them through SMS and in text. And that's the way many customers want to interact today.

Sure. I do want to talk about the digital engagement for sure, and what it does even on the margins and transactions. But before we go there, you said, can we go faster? When I think about that, I think of what could your cadence of fiber deployment build be? And I think of AT&T, they were building at 3 million a clip, 3 million a year. They're double the size in terms of how fast as you guys. But then there's Frontier, who's now probably similar size, right, with your divestitures event. And their peak, I think it's going to be a 1.6 million, 1.7 million homes a year. Do you resonate with that sort of cadence? Or maybe you can ramp up this engine that you're building?

So we've not shared what our build pace will be and over what period of time. But what I can tell you is that we will continue to be disciplined in how we deploy capital. We are not capital constrained. We've been very clear with that message multiple occasions, and we don't want a bunch of stranded investment out there. So we want to be thoughtful and we want to ramp. We expect to ramp. We expect to accelerate. But right now, we're not sharing what those plans are. We will look to do that possibly in the future, but right now, we're very comfortable with our plans based on our prior results, our prior execution and the fact that we know we can provide great returns with the results that we've had today.

Okay. And let's go back to the conversation about OpEx margins, savings, et cetera. Help us understand, I guess, first, the OpEx savings of fiber over copper. This morning, we had a workshop worth noting. The power cost is so meaningfully different, that's one. I mean, can you talk about the advantages of the fiber deployment and what those margins look like vis-a-vis what your copper homes look like?

So without going into the specifics of the exact margins between the two, what I can tell you is, when we sell a fiber service, we see that the customer stays with us longer. We see significantly less churn, and as a result of that, the customer lifetime value is higher. When you look at the service itself, the number of times a customer needs to call in for any type of service issue, fiber infrastructure is more reliable than copper infrastructure. And as I said, what we've done with Quantum Fiber by standing up a completely different system stack, we were able to build a digital experience that doesn't require a customer to need to call us and interact with us human to human, we can do it digitally. And as a result of that, it's much higher margins through that digital experience.

Right. The industry is certainly going through this automation, digitalization, lower transactions, et cetera. Where is Lumen in that journey? What inning if [ you would that ]...

So we stood up the platform with that enablement from Day 1.

Okay. So you have the Quantum Fiber subscribers now on this [indiscernible] new system.

That's right. Now our Quantum Fiber base is small. We're migrating all of our fiber assets owned to this platform. And so as we do that, we expect to have that done this year, where all of our fiber enablement today is living in that ecosystem, and then any new fiber deployments that we do will be enabled in that platform. And only subscribers that join us will experience that experience. We've seen so far year-to-date about a plus 75 NPS score for customers that go through that Quantum experience. We'll continue to evolve and enhance and add more capabilities, but it was -- it started from Day 1.

Yes. It doesn't like -- sound like self-install is part of the options, though, right? Because you still need to put an ONT on the side of the house...

Yes. So right now, our focus and our strategy around the initial of a fiber customer is that the first install will be a professional install, where we ensure that when we leave the home or business that the customer is experiencing 100% of what they expect. Many customers do not understand the difference between a connection to the wired device versus a connection on the patio or in their living room or in their basement or in their home office. And the whole WiFi connectivity is -- many people understand it, but most don't. And so we want to leave that home understanding all of that. And if we need to provide a WiFi extender or WiFi booster or whatever for that particular home, every home is different, we want to leave with that customer being satisfied. Now once we leave that home, we don't want to go back in that home. We have remote testing that gives us visibility into what that experience is.

Great. Self-monitoring.

Do that connection -- that's right. And then when that customer decides to move that there is equipment that is left that the next customer can come in, open up their laptop and get an instant connection to our service without ever having to make a phone call to our company.

And you drove a good point about customers don't necessarily know the WiFi versus the wireline. And to them, it's just mainly got speed these days. At some point, it's going to be upload speed, right? But that's a key point...

It's upload speed now.

Yes, it is. So I guess that's my question. Is the awareness of -- how much do -- are customers aware of the upload speeds as we do Zoom calls, et cetera? And then the differentiation of fiber versus cable to educate a customer that you actually have Fiber to the Home. Is that differentiation being appreciated by customers today yet? Or will it? Does it really matter?

I would say, it's a journey. It's an evolution. If you were to ask me a year ago how much customers understood -- or take it 2 years ago, how much customers needed or not needed, but expected or wanted of their upload speeds is very different than post-COVID when all of a sudden you had 3 people in the home doing Zoom calls or Teams calls, and you're not only on a call with one person, but you're on the call with 20 people. The amount of bandwidth required to have that experience is very different than when you're not doing that in a home. Obviously, we've always had gamers. We've always had streaming video and those needs. But the needs today, and this is today, require much greater upload speeds, requires a symmetrical speed that our fiber enables. And so more and more customers are becoming aware of it, but I'll tell you, my mother, who doesn't use any of those services, doesn't understand and probably doesn't need to. So part of our go-to-market and education as we bring on new customers is really asking them, how do you use the service in your home? What applications do you use? What goes on in your home from a video, a conferencing, all the different types of services so that we make sure that they do understand what type of upload speeds they need or other services that they may need to help them be for it to provide the solution that they want. Fiber, you can ask 10 people what fiber means or doesn't mean and you may get 10 different answers. So...

So the consensus still isn't necessarily there yet in terms of appreciating the fiber as...

It's all about -- it's our job to educate what that means.

Yes. Okay. And talking about your go-to-market strategy and the penetration. For penetration levels from telcos all over place, AT&T says 50% after 3 years is a bookend. And Frontier, I think, is saying after year 4, 35% and Consolidated was here just a moment ago and mentioning 35% for 3 years. When you deploy Quantum Fiber and you have your go-to-market strategy, what are you seeing in terms of penetration levels after 1 year build, 2-year builds and 3-year builds?