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

Hey, everyone. Welcome to our next session. So Maxine Moreau is the President of Mass Markets for Lumen Technologies. Maxine, thanks for joining us this afternoon.

Thanks for having me, Bryan.

Why don't we start off with maybe just a brief background of your roles and responsibilities at Lumen?

Great. So I'm President of Mass Markets. Mass market consists of our consumer and small business customers. We generated about $5.6 billion in revenue at Lumen last year. We go to market under 2 brands, our Quantum Fiber brand, which is our new fiber go-to-market brand we're very excited about; and our CenturyLink brand, which is our brand that covers our nonfiber assets. And that's about it.

Okay. And Lumen recently announced a strategic divestiture of some of your ILEC properties while also committing to a fiber-to-the-home build across your remaining footprint. For those who are not familiar with the story, can you maybe provide some more background on that?

Sure. So in second quarter of last year, we announced that we were going to divest our ILEC operations in 20 states, and that transaction is with Apollo. And as part of that transaction, we will be selling markets that are overall less dense than the 16 states that we're retaining. We announced that transaction at $7.5 billion, and it is about 5.5x adjusted EBITDA -- projected adjusted EBITDA. We also announced prior to that the sale of our assets to Stonepeak, some international assets to Stonepeak for $2.7 billion and about 9x adjusted EBITDA.

How important is the Quantum build plan to you achieving your revenue growth? And what are the growth opportunities that you see also on the enterprise side?

So the Quantum Fiber is where the growth will come from in mass markets. We announced late last year that we plan to expand our fiber footprint to about 12 million locations across the remaining 16 states that we will operate after the Apollo transaction. So we'll expand our footprint and we will expand our subscriber base as part of that. Our objective is to reach 40%-plus penetration of those assets over time. Also, though, it's really important to think about after the 2 transactions I just talked about, over 3/4 of our revenue will come from our enterprise segment and about 25% -- less than 25% will come from mass markets. And the enterprise growth opportunities really are in a few areas. The first one is the investments that we've made in our edge cloud network, where we provide less than 5 millisecond latency services to over 97% of the enterprises across the United States. And that investment, we expect to bear fruit over the coming years as businesses have applications that have a need for that type of latency type services. We've also seen traction in our IP services, our security services and other core connection services in our enterprise space, and we expect to see growth from those areas. And if you just look at our enterprise revenue results over the last few quarters, you can see that the revenue trajectory in our enterprise business is improving over that time. So it gives us a lot of confidence that we will meet our objective, which is to drive top line revenue growth over the next 3 to 5 -- I'm sorry, 2 to 3 years across all of Lumen.

Can you talk about your pivot from a micro-targeted approach to fiber enablement to a more market-based approach and also maybe talk about what markets you are targeting?

Sure. Great question. So up to late last year, we were talking about how we were making our fiber investments in mass markets, and we would use the term micro-targeting. And basically, what we were doing is we were targeting in a very micro area those areas that were the most profitable for us to build to and achieve the penetration and the highest returns. And so we would go from market to market and we would build in pockets, I would say. We took our learnings from those builds from that execution. We're very pleased with our results from doing that. And as we step back and look at our remaining 16 states after the Apollo transaction, we looked at, okay, where does it make sense economically to build the majority of the footprint that we're keeping. About 70% of the remaining 16-state footprint is in urban and suburban areas, which are areas that have the density to where we can build cost effectively. So what we're doing is we're shifting from this very micro-targeting to overall market-based approach. So we'll -- we've evaluated our markets across all of our footprint. We've determined where we believe it makes financial sense to invest the 12 million locations that we referred to. And we will address each market on a market-by-market basis. We'll have local teams that are focused on that market or focused on the growth in that market, focused on the profitability of that market. And also, it allows us to go to market on a local basis, and we believe that provides a differentiation for us.

How do you define a fiber-enabled location?

So different companies define it different ways. When I refer to a fiber-enabled location, what I'm referring to is we've built fiber to the structure. So for an MDU, we've built it to the building. In some cases, we've built it throughout the building. We call that our instant activation service. So you move into the location. You can establish your broadband -- fiber broadband connectivity within minutes, and it's completely digital, completely electronic. And then from a single-family home perspective, we're passing your house, your home, and all it requires is a truck roll for that initial fiber install, where we're connecting from your -- call it, your driveway or the side of your home into your home for that first install. And then for the subsequent install, we have equipment that will be left into the home that will allow instant activation for the next customer that moves into that particular property. We don't count where we pass a building, and it may be a high-rise that needs significant capital investment to reach the different businesses. We don't count that. We don't count fiber to the node. We count fiber to the structure.

Okay. And the build cadence is expected to ramp significantly in 2022, accelerating throughout the year. What are the moving parts in the build plan as we think about that?

So as we pivot from this micro-targeting to this market-based approach, you're going to see us ramp. We communicated late last year that our expectation is that we're going to go from a pace of about 400,000 addresses a year to 1 million this year and exiting the year at anywhere between 1.5 million to 2 million capability exiting the year. So you're going to see us throughout the year ramp as we're getting the teams in place, working with municipalities. Permitting tends to be one of the long poles in the tent, working with our suppliers and supply chain needs so that we can see that ramp. So it will ramp throughout the year.

Okay. You mentioned supply chain impacts on your fourth quarter earnings call like a lot of companies. Can you just talk about that, maybe provide an update?

Sure. So we have seen supply chain challenges in equipment and labor. But we feel like we have a really good ecosystem that we've built over many years. We're a large company. So we have multiple suppliers for our equipment, for our fiber, for our labor, and we feel like that we have many avenues to mitigate any near-term supply chain challenges, but we watch it every day. We're in close contact with all of our suppliers. They understand what our investment plan looks like. They understand where we're building and the pace in which we plan to build. And so we feel like we're mitigating those not only with our suppliers but also internally as we stay aligned on what our strategic plan is.

And maybe to talk about costs a little bit. Average fiber enablement costs, I think, you've said are expected to be less than $1,000 per passing. We've seen peers give ranges of lower costs and, in some cases, higher costs where there isn't real fiber or they've got other constraints. If you were to bucket the homes and cost per passing, what would it look like?

So our investments up to this point have been primarily aerial. That was our micro-targeting approach. And our costs were significantly lower than the $1,000 average that you mentioned and that we've communicated that is our plan going forward. The reason for the $1,000 is because as we expand our enablement and go more dense within a market, we're going to have a higher mix of buried construction. Buried construction typically runs more expensive than aerial. So you're going to see that mix shift. But because of the densification that I talked about, we believe that we can still be very cost-effective in the markets that we plan to build because of how dense we plan to go and the economies of scale that we will get by doing that. And so that's why we're confident in our targets of $1,000 or less.

And as you start building in new markets in 2022, were your costs per units lower and trend higher going forward or going to sustain it?

Average that this year, I think we've communicated we plan to spend about $1 billion to enable the 1 million addresses that I referred to. And I keep saying addresses because it's homes and small businesses, so it's not just homes. And so that's roughly $1,000 per address passed. We don't expect that to fluctuate much year-over-year. It will somewhat. Macroeconomics can make that shift somewhat. But we believe over the entire build program, that it will be within that $1,000 range. And keep in mind, we will be ramping this year. So we'll be ramping up to that 1.5 million to 2 million as we exit the year at that run rate.

Okay. How should we think about Quantum spending as we go into 2023? Will cost per location fluctuate from '22 at all? Or...

So where we're spending for Quantum expansion is, a, the cost to build. As we build, we expect to penetrate those assets. We tend to penetrate new fiber construction at a pace more rapidly than fiber that had been constructed several years ago. So we'll have the cost, the OpEx success-based costs associated with connecting that customer. Also, we're making investments in the platform. The Quantum platform is 100% digital. We'll be making investments to scale that platform and to make continuous improvements in that platform. We're also adding -- we'd started late last year, adding multi-gig capabilities through XGS-PON. And so we'll be making those investments. We are deploying new technology in the home that provides a device. It's a lead-in device in the home for the next homeowner as well as a WiFi -- in-home complete home WiFi management system. And it gives us also the ability to be more proactive at managing and monitoring and services in the home to ensure a reliable and secure connection. We'll also, of course, make investments in additional products and add-on services to make that connection even more valuable to the customer.

You mentioned cost to connect. Can you talk about what those look like?

We don't publicly disclose that, but our costs are in line with our peers. The truck roll is a truck roll. And as we do that first install, our cost is very similar to that of our peers.

Another assumption in the fiber-to-the-home build plan is the terminal penetration of over 40%, as you mentioned. Are there any signs that you can point to that give you confidence in your ability to achieve those penetration levels?

Actually, several. One is if you look at our NPS that we exited last year, we had a positive 60 NPS score. That is considered excellent for those of you that track NPS scores. And that gives us a lot of confidence that what we're doing is resonating with customers. We have a superior service. It's a symmetrical fiber connection that can offer gig [ sources ] today and multi-gig in the future. Where we've deployed our instant activation services today, we achieved over 40% penetration within the first 12 months. We have certain areas where we've deployed Quantum. We were already above 40%. Overall, our penetration is right at 30%, which is double that of what our DSL penetration rates are on copper.

If I could ask a follow-up there. 40% in less than 12 months in certain areas. Is there anything that's unique about those areas? For example, there are new build areas where they're just new homes, so they're choosing something or if those are areas where you still had high DSL share that you're able to convert. Or is that -- competitively, you're just kind of gaining that much share?

So it's a little bit of all of them. So some of it is brand-new construction. Some of it is where we've overbuilt our copper network with fiber, where we've gone into an MDU, signed an exclusive marketing agreement and have what we call our instant activation services. And what we're seeing, because it's very -- it's a very easy, frictionless service to sign up, to activate the service, it's all subscription-based billing. It's easy. It just is resonating with customers. And so we're really, really excited about that capability. And in the single-family environment, as we deploy this new hardware in the home with the smart WiFi services, we'll be able to do that in single-family homes on a success base.

What's your go-to-market strategy in the new fiber-to-the-home areas? Have you seen any early successes that give you confidence that Quantum Fiber is the preferred service provider?

So I'll start with we were very intentional about creating a platform that was 100% digital end to end. So from your shopping experience to your ordering experience, all the way through to subscription-based billing, all prepaid, there's no bad debt, all the way through to managing your count, and that's resonating with customers. It's easy. It's simple. They don't need to call us. They can take care of their service the way they want to do it, online. So that's one. Secondly, our go-to-market is very locally focused. We are expanding our sales distribution. We're making some adjustments in our marketing, where we have more one-to-one marketing capabilities. But that local focus, along with that digital experience and then following with a superior product, the symmetrical gig capabilities, all coupled together, we believe we have a marketing advantage to be able to take the share that we expect.

Are you seeing much cost savings benefit from enabling this digital customer experience?

I'll give you one example. So if you look at just the number of calls into our call centers last year, year-over-year, we saw a significant reduction in call volume. And that's because those transactions are converting into digital transactions. So they don't need to call us, and we'll continue to make investments to drive more and more interactions with customers in a digital manner.

And on your earnings call, it was mentioned that you're investing heavily in Quantum in areas such as product development, marketing and sales initiatives. Could you maybe provide some more detail on those types of investments?

So that would include the multi-gig service that I was referring to. That would refer to the systems enhancements that we're making to scale the platform. It would also include the software development within our mobile app to make it easier for customers to manage their account, make changes to the their account as well as the expansion in our sales force and distribution channels.

Okay. Maybe talk about just the competitive environment a bit. Are you saying or expecting much competition from cable or fixed wireless providers in your Quantum markets?

So if you look at our footprint, we are nearly ubiquitously -- we have overlap with cable pretty much across the board. So we've been competing with cable for years. Our penetration in our DSL markets is very low. Like I said, overall, it averages 15%. So we feel really good about taking share as we deploy fiber in those markets. Clearly, our fiber service is far superior to any fixed wireless technology. And with people working from home and entertaining themselves from home and all the things that drive the consumption of bandwidth, we believe that -- and we see that our technology is far superior to any of that of fixed wireless. And in the dense markets that we're building in, it's difficult for fixed wireless technologies to cover those markets.

Yes. I always think you're 15% DSL penetration. Why are there still so many DSL customers? Are they just very long-tenured customers who haven't made a switching choice? I mean I imagine there can't be many new connects in DSL. I don't know.

So part of that is in our CAF footprint where those markets were either unserved or underserved, and we participated in the CAF program over the last 7 years. So that's a piece of it. Some of it is just people who still have a phone line. They just don't want to change. They're comfortable with the service. It's all the service that they need. And we expect that, that tail of DSL will be a very long tail, just like the tail on voice. It will decline, and we expect it to decline, and we've built that into our plans as we projected to reach revenue stability and then revenue growth within the next 2 to 3 years, but it has a very long tail [ line ].

Yes. Okay. What can you do to expand ARPUs going forward?

So a few things. One, we need to continue to produce extraordinary experience. So continuing to focus on that 60-plus NPS from our customers is telling us that we're doing a lot of things right, so continue to do that, as well as other value-added services, things like managed in-home WiFi, managed security, bundling with other over-the-top video subscription services. So there's a lot we can do to just continue to make that connection more and more valuable to our customers. And we believe, again, with the superior service, that over time, it gives us the ability to have increasing ARPU. Initially, you'll see some ups and downs as we are in a gain market share mode. But over time, again, we expect that because of the value proposition to allow us to grow our average revenue per subscriber.

What's your strategy for areas where you're not planning to upgrade with fiber?

So we'll continue to serve our CenturyLink footprint. We'll continue to focus on providing a good quality service. We'll continue to make investments to drive more digital experiences, which enable us to operate those areas at a lower cost structure. And we'll manage those areas for cash, just like we always have. But keep in mind, with the Apollo transaction, about 1/3 of our legacy voice revenue will go with that Apollo transaction. So a big piece of that revenue decline will go away with the Apollo transaction.

Okay. How are you thinking about the $65 billion infrastructure bill? Is there an incremental opportunity for Lumen to invest beyond the 12 million homes that you've outlined prior to the building pass?

So we think it's a great opportunity for us to deploy our Quantum Fiber symmetrical services in unserved and underserved areas across the country in the 16 states that we'll be retaining after the Apollo transaction. We're working with the state and the federal administrators that are developing the program. It's unclear right now exactly how much money will be allocated to each state. But we have a history working with the states on federal grant programs to deploy broadband to unserved or underserved areas. We'll continue to do that work and work very, very closely at the state level and the federal level and would actively participate in those programs. Once the rules and the funding and all of that gets worked out, that's still not worked out. But our 12 million addresses that we plan to build contemplate none of the subsidy dollars. That would be an opportunity for us to expand that footprint.

Okay. We have a little bit of extra time if anyone in the audience has any questions. We could go to them. Anyone? [indiscernible] questions. Okay. Well, why don't we wrap up then? Thanks very much, Maxine.

Thank you for having me.

It's a real pleasure. Thank you.