Lumen Technologies, Inc. (NYSE:LUMN) New Street Research and BCG “Fiber to the Future” Global Infrastructure Conference March 29, 2022 2:20 PM ET
Company Participants
Wes Gibson – SVP, Sales and Marketing
Conference Call Participants
Sumit Banerjee – BCG
Sumit Banerjee
Hello, my name is Sumit Banerjee. I’m a Managing Director and Partner at BCG. I’m here with Wes Gibson, Wes is a Senior Vice President Sales and Marketing at Lumen. Wes, thank you so much for being here.
Wes Gibson
Yes, thanks for having me.
Question-and-Answer Session
Q – Sumit Banerjee
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 nostalgic divestiture of some of your ILEC properties. At the same time you commit — you made a major commitment of FTTH, well 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?
Wes Gibson
Sure, there’s really probably three significant things that we announced in 2021 that are worth covering here and two large investiture announcements, and then the mass market fiber expansion plan, which I’m sure we’ll get into more detail here.
In the third quarter of last year, we separately announced two separate transactions first was the agreement with Stonepeak to the best our Latin American business for $2.7 billion or nine times 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 5.5 times adjusted EBITDA.
Now, the 20 states that we divest that are more rural in nature than the 16 states that we retained, are pleased with the valuation we received. And the fact that we’re really divesting about a third 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 and the remaining 16 site footprint that I mentioned, which has a total of 21 million locations. So if you think of what’s left, after the after the 20 states are divested, it’s about 21 million locations, plan to build fiber to 12 million or more. And as a result of that, and 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 a million locations this year, and then in the year with a run rate of a 1.5 million to 2 million locations. So we’re increased 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 two to three years.
Sumit Banerjee
Thank you, these are obviously very impressive targets. So can you talk a little bit more about like, you shifting from doing in a 400,000 locations annually just in 2 million living units as your publicly talked about it? How do you — what do you have to put in place to hit some this milestone because there are obviously a whole set of issues from supply, resourcing, policy, permitting in internal capabilities? Can you talk a little bit more about like how you thinking about it?
Wes Gibson
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 dense 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 in the long pole in the tent for us 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.
Sumit Banerjee
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 the structure to have the rapid acceleration? So what changes are you making in-house?
Wes Gibson
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 through 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 do in pre-sales, pre awareness, managing the customer experience and a complete P&L into in at a local level.
We trialed this approach in one of our markets that was traditionally lagging behind the rest of the country. So, very low penetrated market, and what I can tell you as local sales and marketing leadership, kind of bond with the local operations, leadership, they’re getting those two link together, the model works. So that’s what I would say there, are 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 increase in sales is, can you can you handle the load? Can you handle all that installs? And our linkages 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.
Sumit Banerjee
And then 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, so pretty impressive milestone. So how are you achieving that?
Wes Gibson
Yes, what I would say is, we don’t really disclose how long it’s going to take those cohort penetrations are really something that we’ve shared publicly. But I would tell you, as 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 this 12 million locations over time.
Sumit Banerjee
And what impact are you seeing an early days here at from fixed wireless, do you see that, capturing a relatively higher market share in some of the markets you are going after you’re already in, or it’s too early to tell.
Wes Gibson
We’re not really seeing, to be honest, not really seeing a lot of impact from fixed wireless today. As a matter of fact, our fiber churn rates are really at historic lows, that we’re not seeing much churn from fibre 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 and 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 fiber is going to win. So I really don’t see a fixed wireless being a displacement for a high quality low latency fiber service over time.
Sumit Banerjee
Talking of fibre service, your fiber customer net adds just slowdown a little bit in second half of 2021. I mean, what caused that slowdown, was it predominantly a function of COVID or other variables?
Wes Gibson
If you break — you’re right, 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 three quarters of the year, if you look at our net ads, they were all three quarters were pretty consistent north of 28,000, net adds per quarter. And that represents a quarterly sequential growth of 3.5% and customers per quarter. So, wireless slowed down, we still feel like that’s pretty strong growth. And we do expect that, that our net ads will continue to ramp over time as we continue to deploy more and more fiber into the network.
Sumit Banerjee
Let’stalk a little bit about subsidies. You have mentioned in the past that you plan on participating in the recent and upcoming broadband infrastructure subsidy program. How many locations do you think you have in market if you can talk publicly about it, that eligible for the subsidies?
Wes Gibson
Just to break down the remaining footprint. So I’ll talk about the 16 states that are remaining. 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 as 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, 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 there’s no subsidy, really contemplating 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 costs builds.
Sumit Banerjee
And related to the subsidies, but even in conjunction of your overall fiber deployment, supply chain and labor, you had those two 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 going about workout?
Wes Gibson
Yes, we’re not immune to supply chain challenges, for sure. What I said earlier, though, as we started planning for these builds in the middle of last year, so we didn’t really start — we didn’t start 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 with project management, engineering it and as well as other activities within the business, from equipment and supply standpoint, we place those orders well in advance, nine to 12 months in advance to make sure that we get in the queue early.
And we have a diverse supplier set, both on the labor side and the supplier side. So we feel really good about where we are not really seeing anything today. And it’s there’s something that you definitely have to stay constantly engaged in and make sure you have mitigation plans in place that we do. So, again, I feel good about our ability to execute on the plans that we’ve laid out. But I’m sure it won’t be without challenges along the way.
Sumit Banerjee
Wes, I got a question from the audience, if I can just add that to the list.
Wes Gibson
Sure.
Sumit Banerjee
The question is, like, what are your plans to retire copper assets and fiber and non-fiber markets? And are you anticipating any regulatory issues around it? And also costs potential cost savings through in setting copper?
Wes Gibson
Yes, so I know there’s been some other companies here very recently that have announced their plans publicly to retire copper. We haven’t announced any plans. What I would tell you as are, in these areas that we’re investing in fiber, our copper penetration is 15% or less and declining over time. So if you — we’ve announced that our fiber penetration is about 30% and growing. Our copper penetration is less than 50% 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 duplicated 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, all the time. And there’s a lot to work out from a regulatory standpoint as well.
Sumit Banerjee
Okay. So let’s move to fiber and let’s talk a little bit about products. Is your existing fiber footprint 10gig capable? Means even the optical equipment you’re deploying is that now predominantly 10gig capable, or what’s the plan?
Wes Gibson
Yes, if you think about the enablement of the product, you got two things really, you’ve got fiber and electronics, the overwhelming majority of the capital that we deploy is on fiber, its fiber, it’s not electronic. So all the fiber that we have out there is definitely ticket 10gig capable. Although it’s not 10 gig capable today. We started deploying the next generation of pioneering the network XGS-PON.
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, that 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 wouldn’t say that, not really see a lot of demand from a mass market standpoint. Today, if you look at the providers that have the service, it’s actually quite priced quite high, not a lot of up 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.
Sumit Banerjee
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 on customer care, pricing, marketing, et cetera? And second is like, how’s it different from like, in fiber markers versus copper market?
Wes Gibson
Yes, so the plus 60 that we’ve talked about, at the end of the years is the Quantum Fiber NPS score. And we’re happy with plus 60. But we don’t think that that’s the same. And 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 fibers, 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 our 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 a much lower churn rate. So, I’d be remiss to say that the product does a lot better it is that symmetrical low latency. Gigabit service is absolutely a fantastic service. It 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.
Sumit Banerjee
Can you talk a little bit more about it, what are you doing in the [indiscernible] expense you talked about? Is it an end to end holistic and experience to the customer from the time the customer gets on board, or day to day? So what has changed causing this uptick?
Wes Gibson
Yes, we really in 2020, we set out building a different experience for our fiber. And, we really had two 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 is it 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 have to have to happen from when a customer says, yes, I want to buy till we get it installed.
And then if you think about early life experiences, it’s not just that 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, and then new system stack is really been a key enabler of that new experience.
Sumit Banerjee
Let’s kind of talk about from an experience perspective competition. We are always worried about competitive response. So what kind of responses are you seeing from a competition in the markets where you have rolled out fiber, where you have announced the role of fiber in the next 12 to 18 months. And specifically, we are coming at it from the marketing promotion, pricing discount, or the standard levels picking deals?
Wes Gibson
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 kind of regionalize. But they all have some combination of low speed, low priced offers some sort of a bundle to get the best deal with a contract, or some sort of a save offer. And they’re saved us, 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 like folks out with the contracts. And 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 in different situations. Now, 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 heaven, G-PON available, or XGS-PON available to the whole market at one time, it’s really pocket to the market. And that makes it a little more difficult for them to kind of navigate, there’s not going to lower their price in all of the market and advance up a bill in a portion of the market.
So, we believe that things are going to continue to be rationally that we really haven’t seen any pricing lower than what we typically see that they normally have a $20 price point out there for a lower speed. And then that increases over time and then higher prices for higher speeds. But their playbook hasn’t changed much as we deploy more and more fiber.
Sumit Banerjee
Is it fair to assume that from your perspective, you’ll always be judicious about like where and when to deploy and balancing the price, because all of the other side of it?
Wes Gibson
Yes, so, we publicly announced that, we believe we can build out these 10 million locations for $1,000 or less. And so we built some inflation 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 us and 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 that the cost is at a 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.
Sumit Banerjee
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 in 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 all of it? Can you talk a little bit about it?
Wes Gibson
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’t tell you why you should invest in us. But we are — our number one 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 type that we’re getting.
And we really have a unique opportunity to build it 12 million locations, and to have a really large scale fiber asset located across some of the most attractive markets there that are really fast growing market. So that’s the mass market store, separately from mass markets for enterprise standpoint, which will be about 75% of the revenue, post divestiture.
We’re also investing in growth there on 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 two to three years. From a business standpoint, our trajectory has improved the last two to three quarters on a constant currency basis.
Lastly, I would say that 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 shouldn’t be. So I think once we return to growth, that’ll be much better value proposition for shareholders. So I guess that’s it. I appreciate the time, the opportunity has been fun.
Sumit Banerjee
Thank you so much Wes. I think we are at the end of our time, will enjoyed the discussion and anything else you wanted to add as we close out?
Wes Gibson
I don’t have anything else. I appreciate the time and the opportunity to share our story.
Sumit Banerjee
Thank you.
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