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

Good morning, everyone. I'm Eric Luebchow, Senior Analyst at Wells Fargo covering telecom services and communications infrastructure. Really pleased this morning to be joined by Maxine Moreau, who's President of Mass Markets at Lumen. Maxine, thanks for joining us.

Thanks for having me, Eric.

So Maxine, I think many people on the Street are familiar with you by now, but maybe you could just start and provide a brief background of your roles and responsibilities at Lumen.

Sure. So as we made progress, President of Mass Markets, responsible for consumer and small business customers. Last year, we generated about $5.6 billion in revenue. We operate under 2 brands, our Quantum Fiber brand, which is our go-to-market fiber brand; and the CenturyLink brand, we've operated for many years, and we'll continue to operate for our non-fiber assets. Our growth will be driven from Quantum Fiber as we expand our footprint and increase our customer base. At the end of first quarter, we had about 2.9 million fiber-enabled locations with a penetration rate of about 28%.

Great. Yes. And obviously, today, we'll focus a lot on your Quantum Fiber build. So maybe you could start by talking about the pace of the build this year. I know, as you mentioned, it will start off slower and then pick up throughout the course of the year. So how are you feeling about your target to build 1 million premises this year and then accelerate that to a pace of 1.5 million or upwards of 2 million thereafter. Maybe you could talk about the moving parts that will kind of enable you to hit that footprint as we look out the next couple of quarters.

Sure. So we accelerate our fiber construction pace from roughly 400,000 a year to 1 million or so this year. There are a lot of moving parts. Some of these include just the shift that we're making to our market-based go-to-market approach. It's mobilizing our workforce. It's mobilizing other key resources, working with municipalities on permitting and zoning. That's really the long pole in the tent. And also just working collaboratively with all our suppliers to ensure they understand what our future supply chain needs are and they can prepare. As we complete this initial phase, you're going to see our pace begin to accelerate and ramp, mainly in the second half of this year. But we feel really good about our ability to enable 1 million or so locations this year and exit the year at that faster rate that you mentioned.

That's great. And you've talked about average build cost expected to be less than $1,000 per enabled home. I know there's a lot of ranges out there depending on population density and a variety of other factors on build costs, whether you're using aerial fiber or buried fiber. So maybe you could kind of talk about your degree of confidence in achieving that on average. Is there an expectation that your costs due to some of the inflationary pressures we've seen in the environment might be a little bit higher in some of the future years? Or do you think the fact you've pretty contracted for a lot of your materials and labor kind of helps you offset or insulate you from a lot of those higher costs?

I would start with a market-based approach. We're looking at fiber-enablement opportunities much more broadly, basically a full-market level versus neighborhood by neighborhood. Our build costs for the areas that we micro-targeted were much less than $1,000. And as you said, it leveraged primarily aerial plant. But for our market-based approach, you're going to see our mix shift. There'll be much more in-ground or buried construction. But overall, with the scale and the density that we have in our remaining 16-state footprint after we complete the Apollo transaction later this year, we feel really good about our assumptions to be able to build in these dense urban clusters averaging around $1,000 per location.

Sure. And another assumption in the build plan is your penetration rates, and you've talked about hitting 40% over time. I saw you recently talked about 2020 vintage homes are already around a 20% penetration rate in a little over a year. Any other kind of signs you can point to that may give you confidence in not just the building pace but also the rate of penetration?

Sure. Well, I'll start with saying, it's still very early of us executing our market-based plan. So it's too soon to know exactly what penetrations will look like. But penetration, it's going to vary by market and vary based on the competitive responses. But what I would say is, where we feel really confident in that number is our ability to get to that penetration level over time, and we're seeing it already in some markets at that level. And then like you said, that early cohort penetration you mentioned, we were at 22% within 12 months. But another point that gives us a lot of confidence is we're bringing new customers to Lumen. 90% of our fiber net adds are new to Lumen. So we're taking broadband market share with our superior symmetrical high-speed broadband product. Also, our NPS scores are well over positive 50s. So our all-digital, simplified customer experience that we've created in Quantum is resonating really well with customers. So when you look at all of those proof points, it gives us a lot of confidence.

Sure. And I just wanted to dig into that a little bit more, the go-to-market strategy. Maybe you could talk about how the Quantum Fiber build is different from the micro-targeting in the past in terms of marketing it to new customers, where you've had some early success in terms of how easy and quick it is to install. Any other signs you can point to in terms of your marketing strategy where you've kind of changed things to try to more quickly scale the footprint?

So it's an all-digital experience that was very intentional. We interact with customers in a very different way than we've gone to market before. The pricing is simple. It's subscription-based billing, all prepaid, so we don't have the bad debt risk. We have local market teams that are deployed in each market. Those teams are accountable for driving not only the footprint expansion, but driving customer growth in those markets. And we look at every market differently. We take local information and we tailor it at a market-by-market level to take into account the differences between each and every area. But we believe with the local approach, with the fully digital experience and the superior product that we have a lot of capability to take share from cable.

Sure. And then maybe that's a good transition in just the competitive dynamics that you have in your 16-state footprint, the remaining footprint, not what you're divesting. Maybe you could talk about what the cable overlap looks like. And I know it's early, but have you seen or do you expect any type of competitive response from some of the large cable incumbents in which you're looking to take share?

So in our remaining footprint, we call it RemainCo in our earnings information detail, we have nearly ubiquitous cable overlap. Comcast is about 50% overlap. Cox is around 20%. And Charter is around 10%. And then, of course, people talk about market overbuilders. I would say they don't have a lot of presence in our markets that we're targeting with fiber. Our experience has been that these insurgent fiber providers, they tend to shy away from areas where there's 2 or more established players. Competing head-to-head against us and cable probably doesn't make much sense for them in most cases. But we are always looking at all competitors in our markets and making sure we're tailoring our go-to-market to address those.

Sure. One big question in the markets today has been around the impact of fixed wireless. And I know, obviously, fiber is a higher-performing product in terms of speed and latency. But they have been gaining a lot of share and putting up some large numbers at an industry level. So have you seen any impact from fixed wireless either in any of your markets where you're building fiber or perhaps in any of the markets where it's more of a copper base that you have in terms of subscriber gains at the fixed wireless players?

So what I would say about fixed wireless is that service is good, pretty good for low-density rural areas. But the denser and the more urban a market is, and that's where we're targeting Quantum Fiber, that service would exhaust capacity very quickly with fixed wireless. We don't take fixed wireless lightly. Like I said, we pay close attention to all of our competitors. But because fiber is far superior, we continue to believe that our fiber expansion plans make good financial sense. Where we're not planning on investing in Quantum Fiber, in our RemainCo footprint, we've talked about how many households we have, how many we're enabling with fiber. So we have about 21 million locations in our remaining 16-state footprint. We just announced our plan to deploy fiber to about 12 million of those locations. That leaves about 9 million outside of those build plans. And those are not targeted for fiber. And we'll manage those for cash like we've always done. That said, we're continuing to focus on the customer experience we've been able to take from our key learnings of what we've built within Quantum Fiber to actually carry some of those capabilities over into our CenturyLink IT systems. But our penetration in those low-speed areas is low. At the end of first quarter, our copper penetration was less than 15%. So in those areas, I think fixed wireless being more of a threat in the near term. But again, where we're investing in fiber, we will grow and we will take market share.

Sure. Does that play into, maybe you could talk about the assets that you are divesting to Apollo. I guess what made those perhaps less attractive to overbuild with fiber than the footprint that you're currently building into because they've, the spinoff Brightspeed has announced a plan, I think, to deploy fiber to 3 million or more homes. And I think they're already starting to build in North Carolina. So just wondering why that wasn't attractive for you to overbuild or was it more a capital allocation decision where you thought the remaining markets you had better competitive dynamics, lower costs, anything of that sort.

Yes. So when we elected to do the Apollo transaction, we looked at all of our assets and we looked at all of our footprint. And I would say just if you stack rank the markets, those markets would just have been further out in when we would want to invest in them. Of what we retained or are retaining, 70% of it is in urban, suburban areas, which are from a go-to-market and from a cost to build just were much more attractive than those less dense, more rural markets. I mean, there's some exceptions to that because we looked at kind of the footprint and the geographic locations of these markets and made some decisions there that cluster markets for the transaction to be more attractive. But again, we feel really good about the markets we're retaining in our path to growth with our investment plan.

Great. I wanted to turn to the subject of pricing. And we looked at this recently in a note we wrote. And we concluded that when you accounted for some of cables' exploding promos, when their promotional periods wear off, that telco fiber-to-the-home is, in many cases, undercutting them on price, in some cases by as much as 20% or 30%. So maybe you could talk about your approach to how you price your products. Are you looking to price it lower than maybe some of your cable incumbents to gain share more quickly? Do you think the fact this is more of a premium product means you can price it at parity to maybe some of your other competitors? How do you think about that equation as you roll out these new markets?

So we're seeing pricing as we look at pricing across all the markets. But more than price, I think customers are valuing or they are valuing the all-digital customer experience, the Quantum Fiber experience with the, like I said, the simplified product offer, the simple prepaid subscription-based billing and a complete set of self-service options. However, where we are seeing success, in some cases, cable does react with lowering price. But in general, we are very optimistic about ARPU, fiber ARPU. And over time, we see the opportunity to improve that as the market appreciates the symmetrical nature of our fiber offering and higher speed capabilities and as we layer on the additional services. Now in the near term, we are focused on taking market share, and that can cause some fluctuations, small fluctuations in ARPU. But over time, we expect to see an upward trajectory in ARPU.

Will some of that be customers self-selecting into higher-speed tiers? Like what have you seen so far in terms of customers taking gigabit-plus type plans or maybe a lower speed tier? What is kind of in the initial mix or any color you have there?

Yes. So whether customers need a gig or not in their home or in their office, more than not, they want to have the highest speed available for them. So more than 50% of customers are signing up for a gig from the beginning. We are starting to deploy our multi-gig services. It's still very, very early. And we expect to see the same thing, give me as much as I can get, whether I need it or I use it. It's more of a dynamic of, open it up, give me all I can get, all I can eat, and so very, very optimistic. The demand for a reliable, high-speed broadband connection is very strong. Pandemic has made that even more a point.

And I think that's a point that sometimes investors miss. There's this obsession over speed and I get it. But the reliability of the network is still probably of paramount importance. And so maybe you could talk about versus some of your cable competitors versus your copper footprint in terms of reliability, in terms of actually being able to achieve the speeds that you market, how fiber stacks up versus some of the other competing technologies out there?

So a symmetrical fiber offering is faster than cable. It's more reliable than cable. And customers, they have a need. They're working from home. They're learning from home. They're entertaining themselves from home. And all of those things require them to have a reliable high-speed service. And so we feel really good about our ability to offer that service to customers. This is a service that I said most customers were not willing to do without even during a recession.

Yes. Yes. So one of the big developments recently has been some guidance that was released about the $42.5 billion infrastructure build, the BEAD program. There's a deadline coming up in July for participating states letter of intent. Maybe you could talk about what you see as the opportunity with this infrastructure bill over time. From our read, it looks like they're prioritizing fiber over other technologies with the funding. So is there an incremental opportunity perhaps for you to extend beyond the 12 million homes, perhaps go into some markets that may not have been economical for you to do on your own, with just your own balance sheet?

Sure. So I'll start with there is upside. So of the 12 million locations we announced last year, none of that contemplated any subsidy program, this program or any other program. It's still very early, but we saw the same thing you did and noticed the funding opportunity, that it's clear that there's a strong preference for fiber broadband to the end user. And we've got a proven track record of participating in federal grant programs and marketing with states, where possible, to deploy broadband to underserved or unserved areas. And we think this program provides yet another opportunity to connect more locations across our footprint. The size of the subsidy opportunity within each state still will be largely determined by the program rules established by the state and federal funding administrators, and we're still waiting on those details. But we absolutely believe we have upside in our plans to the extent that we can participate in this program or any other programs. And our teams are very engaged at the state and federal level and are very closely monitoring those developments.

Great. Yes. It will be interesting to see how that all plays out. So switching gears, wondering how the fiber build, the residential fiber build impacts your opportunity to sell into either enterprise customers or mid-market or small and medium business customers. What is the kind of revenue synergy you think you could see by building all of this fiber to maybe connect it into some of these other adjacent markets that drive additional upside from the build cost?

Sure. I can't share specific numbers, but what I can say is that as we deploy fiber to new developments, mostly greenfield builds, there certainly are opportunities when we have resulting adjacencies with enterprise customers. In many cases, though, with single-family homes, they're in different areas than business districts. So we don't see as many opportunities for network synergies between those 2 customer segments. But our planning is very focused on network densification and looking for opportunities where we can bring fiber closer to enterprise customers as we deploy Quantum Fiber to the roughly 12 million locations over the next several years.

And the cable companies have historically done quite well in the SMB category. It seems like with more fiber being built by yourselves, it appears you'd have a chance to perhaps gain some share with SMB in addition to residential. Maybe you could talk about that opportunity as well.

Sure. Sure. So a little over a year ago, we made the decision to align our small business customers, which are typically businesses with less than 20 employees, like the very low end of small business. We made the decision to align that segment within Mass Market. And the reason we did that is those customers' buying behaviors are very similar to a consumer, highly digital, the services they need are high-speed broadband, reliable voice services. And so we felt like leveraging all the capabilities that we had built in the consumer part of our business, leveraging that across small business would bear fruit over time. And we're seeing that. We're seeing our revenue trends in small business improve year-over-year. And we see that there's a lot of opportunity in front of us with the small business space because our market share has been relatively low compared to our competitors in that space.

Sure. And I'll ask the inevitable question. There's some concern about a recessionary risk in the economy right now with inflation, obviously, very high. How do you think the business performs in a recessionary environment? I would think it's fairly defensive. Broadband has become like a utility. It's an essential service. But are there any parts of the business that you think could be impacted more than others, like small business versus residential, if we see a prolonged period of an economic slowdown? How do you think the business reacts? Or do you change your decision-making at all based on some of the macro factors that are out there?

So like I said, we feel very well insulated from a customer demand standpoint that customers need reliable, high-speed symmetrical fiber broadband service. And like I said, it's a service most customers are not willing to let go of. I will say, though, that we are managing cost pressures relative to inflation. One of the areas is around equipment. And we've built some of those cost increases into our plan already. On the labor front, it's a hot-job market. So we're dealing with that as well as rising inflation, just like everyone else is. Right now our employee attrition is at an acceptable level. We believe this is due to several things, including our very flexible return-to-work approach as well as our focus around overall employee engagement. This employee engagement focus includes employee growth, employee development, well-being, inclusion. We are upskilling and reskilling our workforce. There's a lot of opportunities for growth and career advancement at Lumen. So we feel strong that we can withstand any effects of a recession, again, because of our workforce and the service that we're providing to customers.

And I guess related to that, on the supply chain, obviously, the cost component is one issue. The availability of resources, whether it's equipment, whether it's labor, is another issue. And it seems like there's this broad-based move to more residential fiber overbuilding by you and some peers in the next couple of years. And is there enough of a labor force out there to build, whether it's 8 million to 10 million homes per year, to hit some of the targets that are out there? Are you finding it challenging to find, whether it's in-sourced labor or contractors you work with, enough people or technicians, fiber splicers to actually get out there and do the work or is that something that you feel like you can manage through?

Well, and I talked about us scaling our builds from 400,000 to 1 million to north of that in future years, all of that is about ensuring we have the available resources, whether they're our own resources or third-party resources. And we've entered into multiyear contracts with various different suppliers. We have ordered equipment to handle our near-term needs for our fiber construction plans. So we have line of sight into reaching that 1.5 million to 2 million run rate exiting this year. But it's a lot of work, right, working with all the supply chain partners to ensure that we have the available and capable resources. And like I said, we're using a hybrid approach in leveraging our own resources, hiring up in certain areas as well as using third parties.

And do you think that, in some cases, you'll have to have a robust training program to maybe reallocate resources toward the fiber build that might have been working on in a different part of the business? How do you think about that at Lumen versus at an industry level as well?

Sure. Well, I've talked to you about some of our employee engagement program, so a lot of that is in that reskilling and upskilling our workforce to be able to handle the new skills that will be needed at a bigger scale than they have been historically. And it's not just in the construction part. It's the go-to-market. It's the sales. It's the marketing. It's the support, all of those jobs. We have this all-digital platform. So it's the programmers and the analytical resources that are evaluating data and making data-driven decisions as we expand our digital journey.

Sure. Sure. That makes sense. So I wanted to touch on the copper footprint. Obviously, you mentioned before that you have, I think, less than 15% penetration that you're managing that for cash. Have you seen any pressures at all on the copper business from some of your competitors that might be moving to cable or fixed wireless? And then I think you said 90% of your customers are new. Do you think that trends down as you overbuild some of these copper customers with fiber and you're able to effectively move them to a higher-speed tier and they become less of a churn risk down the road because they're on more competitive product?

I think you answered my question. So like I said, our copper, low-speed copper penetration is very low. And as we deploy fiber in a much larger percent of our footprint, we will grow. And we'll migrate customers and are migrating customers from copper to fiber. But because our market share is so low in that piece of our footprint, we are absolutely taking share now from cable and adding new-new customers to Lumen. As far as fixed wireless, we're not seeing any significant changes in trends. If you look at our churn, historical churn and our current churn in copper, we're not seeing any large uptick in that. And our focus, again, is we're not taking our eye off the ball. The long-term game here is to deploy fiber, take share and provide that exceptional customer experience and in managing the remaining copper base for cash.

And I would imagine, too, just from a financial standpoint, the maintenance cost, the points of failure in the network once you move to a fiber network from copper are substantially lower. So there's a financial benefit you get as well after you spend the upfront CapEx from maintenance, from customer satisfaction, from a lot of those other factors that probably drive down churn in the business as well. Is that fair?

Right. That is fair and accurate.

Great. So I wanted to touch on, maybe this is a better question for your new CFO. But we've looked at the kind of returns from all this overbuilding. And it seems like if you can hit your targets, 40% penetration, less than $1,000 per passing, you should be able to generate pretty compelling returns in the mid to high teens in many cases. Not that you need to necessarily bust those numbers, but just wondering if you can give any kind of ballpark ranges of what your return expectations are for the fiber build in totality and any updates there based on any of the inflationary items that we touched on earlier.

So as you know, we haven't disclosed specifics around our expected return profile. But when you consider the symmetrical, low-latency, high-bandwidth performance of fiber and the increasing demand for connectivity, the economics make a lot of sense. We have seen positive early indicators from our micro-targeting which give us a lot of confidence as we scale. We're seeing strong ARPUs with future upside from add-on services like security, speed upgrades, other advanced in-home services. You also talked earlier about our more than 22% penetration of our enablement that we did in 2020 once it reached the 12-month mark. I'll reiterate our positive 50-plus NPS scores and the fact that we aren't cannibalizing our existing base as we drive penetration. The 90% of new fiber customers are new-new to Lumen. All those things being said, we believe that these are very good solid investments for Lumen and will obviously help us grow. We said that our plans are to grow. We expect broadband growth within Mass Markets in the second half of next year. And we expect Lumen overall to reach revenue growth within the next 2 to 3 years. And this fiber investment in Mass Market is a big piece of that growth plan.

That's great. I think that's probably a good place to end it, Maxine. So I appreciate your time today. Thanks for the update on the fiber program. We look forward to continuing to watch the progress.

Thank you, Eric. Thanks for having me.

Take care.