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

Hello. My name is Sumit Banerjee. I'm a Managing Director and Partner at BCG. I'm here with Wes Gibson. Wes is the Senior Vice President of Sales and Marketing at Lumen. Wes, thank you so much for being here.

Yes. Thanks for having me.

So let's kind of dive into some of the questions and start the session. My first question is around your recent divestiture. Lumen recently announced a strategic divestiture of some of your ILEC properties. At the same time, you commit -- you made a major commitment of FTTH build going forward. For people who don't know much about this program, can you talk a little bit about like what is the context behind it and what your plans are?

Sure. There's really probably 3 significant things that we announced in 2021 that are worth covering here. We had 2 large divestiture announcements and then the mass market fiber expansion plan, which I'm sure we'll get into in more detail here. In the third quarter of last year, we separately announced 2 separate transactions. First was the agreement with Stonepeak to divest our Latin America business for $2.7 billion or 9x adjusted EBITDA. Second, and more relevant to this discussion, was our agreement with Apollo to divest our ILEC operations in 20 states for approximately $7.5 billion or 5.5x adjusted EBITDA. Now the 20 states that we divested are more rural in nature than the 16 states that we retained. We're pleased with the valuation we received and the fact that we're really divesting about 1/3 of our mass markets legacy voice revenue. So our revenue mix will be improving quite a bit. And then lastly, late last year, we announced that we are going to be investing for growth in mass markets. We believe that we can pass 12 million or more locations with fiber over the next several years in the remaining 16 state footprint that I mentioned, which has a total of 21 million locations. So if you think of what's left after the 20 states are divested, it's about 21 million locations planned to build fiber to 12 million or more. And as a result of that, we really also announced that we're going to accelerate the pace of our investment. So the last couple of years, we've reported about a 400,000 living unit per year pace. We announced that we're planning to ramp that up to 1 million locations this year and then in the year with a run rate of 1.5 million to 2 million locations. So we're -- increase our pace in 2022, further increase our pace again in 2023. So as part of this, we're really transitioning from really a micro-targeted approach to a market-based approach. And what that means is we're going to be targeting larger dense areas in a more ubiquitous way than just targeting certain areas within the market. The work we're doing with Quantum Fiber is really going to play an important role for the overall goal that we announced to return to revenue growth in the next 2 to 3 years.

These are obviously very impressive targets. So can you talk a little bit more about -- like you're shifting from doing 400,000 locations annually towards 2 million living units as you publicly talked about it. How do you -- what do you have to put in place to hit some of those milestone because there are obviously a whole set of issues from supply, resourcing, policy, permitting and internal capabilities. Can you talk a little bit more about like how you're thinking about it?

Sure. First, I'll probably start with the fact that we really started planning this build well in advance of our announcement, and we feel really good about where we are in the cycle currently. So if you -- and if you think about what I said earlier, the transition from micro targeting to a market-based approach, that really is the key enabler, allowing us to focus on these clusters of living units instead of cherry picking and micro targeting different areas within a market. So by focusing on larger areas within a market, it really enables you to really focus your key resources, secure larger volumes of permits, which, historically, have been the long pole of the tent for us just to get all this permitting done, working collaboratively with suppliers, both from a labor equipment, fiber standpoint, to secure all of our future needs. So if you think about it, we started well in advance and we're really changing the way that we're doing this to focus on more density than what we have historically.

Cool. And how are you looking at it internally from an organization perspective because the other side of it is like, is the organization set up -- structured to have the rapid acceleration? So what changes are you making in-house?

Yes. So the first thing I would start with is, we're enabling really a 100% digital platform all the way from learn, shop, purchase, billing, support. And the overwhelming majority of our sales are going to come to do a digital platform. So that really is going to enable us to scale faster from a sales and marketing standpoint. Secondly, just taking the go-to-market a little bit further, we're enabling really market-based leadership and implementing more of a VPGM model out there where there's local resources completely accountable in the end both from identifying the next best places to invest in fiber to doing presales, pre-awareness, managing the customer experience and a complete P&L end-to-end at a local level. We trialed this approach in one of our markets that was traditionally lagging behind the rest of the country, so a very low penetrated market. And what I can tell you is local sales and marketing leadership combined with the local operations and the leadership there, getting those 2 linked together, the model works. So that's why I would say, there, we're significantly expanding that local model that I think is a key enabler for growth. And the third thing I would say is, our linkage between sales and marketing and operations has never been better. One of the things you think about whenever you're thinking about building all this fiber and significantly increasing sales is, can you handle the load, can you handle all of that installs? And our linkage has never been better. We have models that predict demand out months at a time in order to make sure that we have sufficient installation resources to get all these customers installed. So again, I feel good about where we are.

That's great to hear. And that brings to my next question, which is related to adoption, which is that you have publicly stated that your long-term penetration growth of 40%. Two-part question. How long it is typically taking to get to that number? And what we have also found in some markets, you've got to the number less than 12 months, which is pretty impressive and a milestone. So how are you achieving that?

Yes. What I would say is, we don't really disclose how long it's going to take -- those cohort penetrations aren't really something that we share publicly. But what I would tell you is, we have markets today that are already in excess of 40%. And we have portions of markets that are at 40% of the newer cohorts that we're building in where we're really happy with the penetration uptake that we're getting and very confident that we'll be able to get the 40% penetration on those 12 million locations over time.

Got it. And what impact are you seeing and early days here from fixed wireless. Do you see that capturing a relatively higher market share in some of the markets you're going after you're already in? Or it's just too early to tell?

We're not really seeing -- to be honest, we're not really seeing a lot of impact from fixed wireless today. And as a matter of fact, our fiber churn rates are really at historic lows. So we're not seeing much churn from fiber to wireless. And if you think about the dense urban areas that we're talking about investing in, we think that fiber has a significant competitive advantage over wireless over the long term. If you think about the application that we're using right now to collaborate, it not only has this streaming video down but video upload as well. And there's more and more bandwidth intensive applications over time. We believe that the fiber is going to win. So I really don't see fixed wireless being a displacement for a high-quality, low-latency fiber service over time.

And talking of fiber service, your fiber customer net adds did slow down a little bit in the second half of 2021. I mean what caused the slowdown? Was it predominantly a function of COVID or other variables?

Yes. If you break -- you're right that the first half was higher than the second half. If you really break that down into quarters, we had a really strong first quarter. I think what we were really pleased about is the last 3 quarters of the year, if you look at our net adds, they were -- all 3 quarters were pretty consistent, north of 28,000 net adds per quarter. That represents a quarterly sequential growth of 3.5% in customers per quarter. So while it slowed down, we still feel like that's pretty strong growth, right? And we do expect that our net adds will continue to ramp over time as we continue to deploy more and more fiber into the network.

Let's talk a little bit about subsidies. You have mentioned in the past that you plan on participating in the recent -- the upcoming broadband infrastructure subsidy program. How many locations do you think you have in market, if you can talk publicly about it, that maybe eligible for the subsidies?

So just to break down the remaining footprints, I'll talk about the 16 states that are remaining.

Yes.

We publicly disclosed that there's 21 million or so households left. We have a plan, we believe, for 12 million of those. So if you take that 9 million that's left, that's really -- a portion of that could perhaps be eligible for some sort of government subsidy. What I would say about that is, we really do have a long history of working with states on subsidy programs and deploying broadband to unserved and underserved markets. But it's really just too early to tell what the rules are going to be. We are engaged, highly engaged and will participate where it makes sense for us. And what I would say is, to the extent that we do that, there's upside to the 12 million. So there's no subsidy really contemplated in the 12 million that we've already announced. There's -- but there's potential upside to the extent that we can capture some of these dollars to offset these higher-cost builds.

And related to the subsidies, but even in conjunction of your overall fiber deployment, supply chain and labor, we hear those 2 words a lot nowadays. And you obviously, like any other telcos, use outside labor for fiber construction, for splicing, et cetera. Are you facing any labor constraints so far? Are you anticipating? And how are you going about working on it?

Yes. I mean we're not immune to supply chain challenges for sure. What I said earlier, though, is we started planning for these builds in the middle of last year. So we didn't really start -- we just thought about the planning once we announced that we were already kind of in the middle of the planning. From a labor standpoint, we have diversity, we also have internal resources that we believe that we can redeploy to help project management, engineering and as well as other activities within the business. From an equipment and supply standpoint, we placed those orders well in advance, 9 to 12 months in advance to make sure that we get in the queue early. And we have a diverse supplier set that's on the labor side and the supplier side. So we feel really good about where we are. We're not really seeing anything today, but it's something that you definitely have to say constantly engaged in and make sure you have mitigation plans in place that we do. So again, I feel good about the -- our ability to execute on the plans that we've laid out. But I'm sure it won't be without challenges and bits along the way.

Wes, I got a question from the audience, if I can just add that to the list.

Sure.

The question is like, what are your plans to retire copper assets in fiber and non-fiber markets? And are you anticipating any regulatory issues around it and also cost -- potential cost savings to sunsetting copper?

Yes. So I know there's been some other companies very recently that have announced their plans publicly to retire copper. We haven't announced any plans. What I would tell you is our -- in these areas that we're investing in fiber, our copper penetration is 15% or less and declining over time. So we've announced that our fiber penetration is about 30% and growing. Our copper penetration is less than 15% and declining. So over time, as we overbuild these markets with fiber and we are able to successfully migrate those copper customers to fiber customers, there will be an opportunity for us to not operate a duplicate network and take those costs out, which we do today. But again, we don't really have any publicly disclosed plans yet on exactly what that will look like or the timing. There's a lot to work out from a regulatory standpoint as well.

Okay. So let's move to fiber and let's talk a little bit about products. Is your existing fiber footprint 10-gig capable? And is even the optical equipment you're deploying, is that now predominantly 10-gig capable? Or what's your plan for...

Yes. If you think about the enablement of the products, you've got 2 things really, you've got fiber and electronics. The overwhelming majority of the capital that we deploy is on fiber. It's fiber, it's not electronic. So all the fiber that we have out there is definitely 10-gig capable, although it's not 10-gig capable today. We started deploying the next generation upon the network, XGS-PON. And if you think about all of the deployments that we've announced that we are going to do versus the deployments that we've already done, the new deployments are going to be a much larger percentage of our total deployments. And I would expect those new deployments to be deployed based on the newest technology. So we believe over time, a large portion of our network is going to be XGS-multi-gig capable. Although we haven't really publicly announced our plans both for kind of retrofitting the existing fiber base, we really don't believe there's going to be a heavy lift to enable XGS-PON in the existing base either. I would say that I don't really see a lot of demand from a mass market standpoint. Today, if you look at the providers that have this service, it's actually priced quite high, not a lot of uptake yet. But we'll definitely have that capability. And the other thing I would add is, we've been very successful taking share with symmetrical gig and expect that to be the case for the foreseeable future.

So a related question on -- both on product and I'll also bring in NPS into the mix. You've recently talked about having NPS scores of plus 60, which is really impressive looking at what's out there. Two parts. Is it really a function of just the product you have? Or is it also like the other things you're doing around customer care, pricing, marketing, et cetera? And second is, like how is it different from like in fiber markets versus copper market?

Yes. So the plus 60 that we've talked about at the end of the year is the Quantum Fiber NPS score. And we're happy with plus 60, but we don't think that that's the same where we think we have an opportunity to drive that much, much higher. And if you look at NPS scores and churn rates, what I would say is, there's a really strong correlation in NPS in early life experience. And so if you think about speed to activation, communications, pre-install, clear expectations all the way through the installation and clean billing experience that we have with Quantum Fiber is kind of like a Netflix-type experience, subscription-based billing, digital customer support, all of those things that oftentimes that are old stacks could go wrong in the early life experience. If you get that right, what we found is a great early life experience translates all the way through the customer life and as a result has much lower churn rate. So I'd be remiss to say that the product is a lot better. It is. That symmetrical low-latency gigabit service is absolutely a fantastic service that provides a much better product experience. And it's difficult to separate the product experience from the customer experience. They're linked together. But that early life experience that I believe that we're managing a lot better today is also a key enabler to that NPS score being very high or churn rates being very, very low.

Can you talk a little bit more about it, what are you doing in the [indiscernible] as you talked about? Is it an end-to-end holistic kind of experience with the customer from the time the customer gets on board or day to day? So what has changed causing this uptick in...

Yes. We really -- in 2020, we set about building a different experience for our fiber. And we really had 2 choices, we could try to alter our existing stacks or we could start from scratch. And we made the difficult decision to start from scratch. So the Quantum Fiber brand isn't just a name change. It's a completely new platform that was built with the customer in mind. And it really is enabling us to more effectively manage all of the activities that has to happen from when a customer says, yes, I want to buy until we get it installed. And then if you think about early life experience, it's not just about installation, but you have to set expectations for the 30 to 90 days after that. What we see is if you get 90 days post sale and you have a great experience, you have very, very high NPS and very low churn rates, then that new system stack has really been a key enabler of that new experience.

So let's kind of talk about from an experience perspective, competition, right? We're always worried about competitive response. So what kind of responses are you seeing from your competitors in the markets where you've rolled out fiber, where you have announced that you're going to roll out fiber in the next 12, 18 months and specifically, coming at it from the marketing promotion, pricing discount or the standard levels type of deals?

Yes. So from a competitive standpoint, each market is different, each competitor is different. And a lot of the competitors are even different in each region. They're kind of regionalized. But they all have some combination of low-speed, low-priced offers, some sort of a fourth bundle to get the best deal with the contract or some sort of a save offer in their save desk that kind of rolls off or increases over time. That's kind of -- that's the cable playbook. And if they think that competition may be coming in advance, they may go and try to lock folks out with the contracts, we do see that as an inhibitor to sales in the short term. We don't think that's an inhibitor in the long term, but that's kind of their playbook. And in spite of that and across different markets, different competitors and different situations, we're seeing really good penetration growth in these newer cohorts that we're building. If you think about cable managing a market, we're not really just flipping a switch and having GPON available or XGS-PON available to the whole market at one time. It's really pockets of the market. And that makes it a little more difficult for them to kind of navigate because they're not going to lower their price in all of the market in advance of a build in a portion of the market. So we believe that things are going to continue to be rational. We really haven't seen any pricing lower than what we typically see. They normally have a $20 price point out there for a lower speed and then that increases over time and then at higher prices for higher speeds. So their playbook hasn't changed much as we've deployed more and more fibers.

Is it fair to assume that from your perspective, you'll always be judicious about like where and when to deploy and balancing the pricing because that's sort of the other side of it?

Yes. So we publicly announced that we believe we can build out these 10 million locations for $1,000 or less. And so -- and we built some inflation in the numbers into that because we believe that's a good number. There's lots of different types of living units out there. You've got into use -- single families and small businesses and small business complexes out there into use. There's lots of variables in the market. But you're absolutely right, we're going to be prudent about where we invest to make sure that the cost is in place and the penetration targets are in place that we continue to drive a really good return on invested capital and return for shareholders as we continue to invest in RAM.

That's a great segue into the last topic, which is around investor perspective. As an investor, obviously, there are a lot of fiber company choices in the market today within Frontier and AT&T and some of the smaller companies and Lumen. Why should an investor invest in Lumen? And what gives you the competitive advantage, is it your assets, is it execution, is it all of it? Can you talk a little bit about it?

Yes. I mean, I think all those are great companies. I really can't speak to why you wouldn't invest in them. But I can tell you why you should invest in us. We are -- our #1 priority is investing for growth. We're investing for growth in mass markets, and we have a track record of delivering on those investments. If you look back at the fiber investments that we've made, we're delivering returns on those, all the new investments, we're very pleased with the penetration take that we're getting. And we really have a unique opportunity to build the 12 million locations to have a really large-scale fiber asset located across some of the most attractive markets that are really fast-growing markets. So that's the mass market story. Separately, from mass markets from an enterprise standpoint, which will be about 75% of the revenue kind of post divestiture, we're also investing in growth there on the Lumen platform. I think we have a really great opportunity to continue to grow there with all of the things that we've announced, edge compute, IP services, security services. There's a lot of opportunity there for us to grow there. So I guess the summary of that is, we've committed publicly to return the top line to growth in the next 2 to 3 years. From a business standpoint, our trajectory has improved the last 2 to 3 quarters on a constant currency basis. Lastly, I would say, our teams are aligned, focused and committed to making the pivot to growth, like this is what we get up and eat, sleep and breathe and do every day. And we think that as a result of all of that, our equity value is low relative to where it should be. So I think once we return to growth, that will be a much better value proposition for shareholders. So I guess that's it. I appreciate the time and the opportunity to spend time.

Thank you so much, Wes. I think we are at the end of our time, really enjoyed the discussion. Anything else you wanted to add as we close out or...

I don't have anything else. I appreciate the time and the opportunity to share our story.

Thank you. Okay.

Bye.