Lumen Technologies, Inc. (LUMN) Presents at New Street Second Annual Fiber to the Future Conference (virtual) (Transcript)

Lumen Technologies, Inc. (NYSE:LUMN) New Street Second Annual Fiber to the Future Conference (virtual) March 28, 2023 11:15 AM ET

Company Participants

Maxine Moreau - President of Mass Markets

Conference Call Participants

Jonathan Chaplin - New Street Research

Jonathan Chaplin

Good morning, everybody. I'm delighted to introduce Maxine Moreau, President of Mass Markets at Lumen. Maxine, thanks so much for joining us this morning.

Maxine Moreau

Happy [indiscernible].

Question-and-Answer Session

Q - Jonathan Chaplin

Yes, we're thrilled to have you today. We think the business that you're responsible for within Lumen, the consumer business could be worth $40 billion on its own if you hit your fiber deployment targets. I hope that doesn't put you too much on the spot. With that as a backdrop. It struck us from the outside that the old management team was mostly focused on the Enterprise opportunity, consumer historically didn't get the resources it needed to flourish. Would you say that sort of true of how things were before the new management team came in?

Maxine Moreau

Well, actually, I've been solely responsible for this part of the business for over six years. But the consumer and small business last year, we did go through a transition at Lumen, we pivoted from our micro targeting to our market based approach. When Kate Johnson, our new CEO joined in November, she hit the pause button to evaluate kind of all aspects of our operations as well as to evaluate the returns profile of our Fiber investment plan.

She separated out mass markets operations, now have full responsibility for all the operational and P&L responsibility of the business. And at that time, we also narrowed our fiber investment focus to slightly over eight to 10 million locations. The BEAD program, which I look forward to speaking with you about, may provide us an opportunity to expand that number, we’ll have to wait for more details. But I believe our 2023 Vintage build will be very successful be a very successful cohort. Our reevaluation, Paul was not resource related. It was more rather returns oriented, we feel really good about where we are today.

We've also seen many of our peers reduced their build expectations, some likely due to resource constraints and inflation. And we think others may be doing the same thing we did, which was reevaluate the return profiles of these investments. But I feel super excited about being here today and sharing what we're doing at Lumen and particularly with Quantum Fiber.

Jonathan Chaplin

Got it. And I say that, from your perspective, the case is fully committed to that eight to 10 million. That eight to 10 million build, I guess. This is when you hear the messaging around the company overall, enterprise is still a very big focus and with the pullback in the build some of the challenges that we've seen in the industry, investors are have been unsure how committed the company really is to get into that eight to 10 million?

Maxine Moreau

Paul, I'm going to start with saying it Lumen, we are allocating resources to drop top line and EBITDA improvements in both enterprise and mass markets in both segments of the business, we have a lot of opportunities to drive attractive returns for both parts of the business, with Quantum Fiber being a top priority.

Growth in Quantum Fiber remains a top investment priority at Lumen. In fact, this year, we will increase our capital spend related to the fiber build by some $200 million $250 million compared to 2022. While we also continue to invest in our digital platform, at the same time, we're ramping our operating expenses, through success by spending and marketing initiatives throughout the year promoting our fiber services.

I'd also like to point out that the factory has been retooled, we're already seeing the build factory, we're already seeing nice improvements in the unit yields and we expect this network investment will likely increase next year, as we expect our enablement to be higher in 2024 than in 2023, and we'll share more on that at our Investor Day on June 5.

Jonathan Chaplin

Got it. It's helped us sort of unpack a little bit more detail the shift from 12 to eight to 10. Couple of things have come up in your comments so far. So, you know, one is that resources wasn't the issue. Number two was that you sort of -- it sounds like, honed the analysis that went into figuring out where the best returns were to be had.

So maybe some of the initial 12 million, that analysis was in need of revision. And then we've just seen costs rise fairly significantly across the industry, which has got to also impact the portion of households that can that you can upgrade with attractive returns. So sort of how do we think about the interplay of those factors.

Maxine Moreau

So like I said, you know, late last year, Kate made this significant operational change within mass markets where I became responsible for basically top to bottom, full control over the P&L as well as operational responsibilities to deploy and operate the fiber network. As part of that we recalibrated to your point, our build plan to the eight to 10 million locations, primarily to take into account the slightly higher costs to build per location pass based on the inflationary pressures that we saw throughout 2022. And to focus on areas where we have high high levels of confidence that we expect to drive, you know, 40 plus percent penetration over time.

We are investing for growth, our number one capital allocation priority is to invest for growth and our ability to invest in fiber and ramp up our factory over the course of the next several quarters, we expect to see like I said, you know, 500 or so 1000 locations this year, and ramping throughout the year and into 2024. We've also spent some time working through some of the issues that we had with long permit cycles, as well as contractor capacity issues. So we feel really good about where we are. And we feel like they're great investments for Lumen going forward.

Jonathan Chaplin

Got it. And at the sort of the pace that you think you will be able to accelerate to, when do you think you'll be at the end of that, eight to 10 million that initial eight to 10 million?

Maxine Moreau

Now, we haven't set a specific timetable for the plan. We do, like I said, we have our investor day in June, where we plan to share our three year financial forecasts to the investor community to give you a longer term view of our business. And at that point, we'll consider sharing more about our longer term plans. But what I will say is that we're very comfortable with the targets that we've set this year to 500,000 locations, that'll put us at around 3.6 million fiber enabled locations exiting this year, with a ramp throughout the year quarter-over-quarter. And like I said earlier, we expect 2024 to be a higher build enablement year than 2023.

Jonathan Chaplin

And this might be a little unfair given that it'll sort of albeit laid out at the analyst day in June. In terms of the steady state that this factory could move out, can you get? Can you get up to a million homes a year at some point over the course of the next couple of years? Or is with labor constraints, permitting processes being where they are, is that too optimistic?

Maxine Moreau

Well, first of all, I'd say, and we said it before, it's going to take time to ramp the factory back up. We want to do it in a responsible way. We don't want to chase enablement for the sake of reporting higher enablement count, we want to ensure that the rate we deploy is producing highly economic units that will generate good returns.

So the pace the rate of deployment is less important than the quality of the deployment. And like I said, we want to improve our ramp and I'm definitely pushing the team to increase the ramp. But at this point, we haven't set a limit on what that would look like on an annual basis.

Jonathan Chaplin

Got it. So that seems to take the other side of that a little bit the -- as you guys have slowed down, we've seen some of your peers rush into your markets to build out in markets like Meza Colorado Springs. By not moving faster, you're not maybe losing some of the potential opportunity in good markets?

Maxine Moreau

I would say, first of all we are not seeing a lot of overbilled activity in the major urban and suburban metro areas that we're currently targeting. So in most cases, those are not primary areas of focus for us. But they do create good opportunities, secondary markets for us to build into later on. Where we have seen, third-party over builders come in, we, of course, will monitor those very, very closely.

However, we see the most attractive returns are in the two player markets, where we're completely competing, head to head with cable, we see a lot of low hanging fruit in those markets that we're already targeting. I also want to point out that there's a significant disadvantage in not being the incumbent provider when overbuilding a market, having that incumbent advantage means having employees, facilities, technical capabilities at scale. And having these capabilities are critical to serve customers in our existing fiber network provides us with that embedded advantage.

I think that many of these third party over builders over time, we're going to have a tough time in the long term due to this disadvantage.

Jonathan Chaplin

We totally agree. So how do you respond to that? Maxine, do you avoid the markets that the over builders get to first or you do build in those markets anyway on the thesis that ultimately they're going to struggle, and it probably ends up being a two player market in time, just it'll take a while?

Maxine Moreau

So, at Lumen, we're deploying a market based approach in the major markets like Seattle, Portland, Phoenix, Salt Lake City, Minneapolis, Denver, several others. We are not going to pull resources away from those markets to compete with subscale over builders in smaller markets, we have a great deal of confidence in our approach, and we're sticking to our plan.

Jonathan Chaplin

Yes. And it sounds like, the key issue is you're not really seeing over builders in those -- in the big important markets. It's mostly [indiscernible].

Maxine Moreau

[Multiple speakers].

Jonathan Chaplin

Okay, so I think that cost for deployment this year, is right, around $1,200 per location past, higher than the sort of 1000 that we were sort of anticipating from the initial plan. Is that just a function of where costs are now? Or is it something specific to the markets that you're building out this year?

Maxine Moreau

It's primarily related to inflation. Everything I think of from labor to fiber components to fleet calls, but also targeting in dense urban metros, there is some more expense associated with that, than more rural and suburban aerial builds that we built historically. I'm also seeing other companies raising their cost to build assumptions. That said, we think that the return profiles and the competitive landscape meaning no real fixed wireless threat to our fiber based service, will continue to provide excellent returns for Lumen.

Jonathan Chaplin

And let's go into that a little bit more detail, Maxine. Is that excellent returns, but not quite as good as they might have been if the cost to build was at 1000? Or do you think you can recover that incremental cost with higher ARPU?

Maxine Moreau

I would start with saying, we've communicated that for 2023. We're expecting our build costs to be $1,200, approximately $1,200 per location passed. At this time, we're not providing longer term views. But we believe, like I said that the services still fiber based services to consumer and small businesses are still very good investment for Lumen.

There's a lot of optionality in the future with higher speeds that we can enable with our technology, and we have a lot of flexibility in our ARPU, certainly the prices that we're offering today.

Jonathan Chaplin

And the higher speeds is sort of a real bright spot for you guys. I want to come to that in a second. But you mentioned a moment ago that fixed wireless broadband isn't really a competitor. Do you mean it just they T -Mobile and Verizon haven't really launched in any of your core markets yet? Or do you think it's a product, it's not competitive?

Maxine Moreau

I would say as a product, the symmetrical nature of fiber and the multi gig services that we can offer today are far superior to what you can get with a fixed wireless service.

Jonathan Chaplin

So I totally hear that. And it was our assumption going in to the last couple of years that fixed wireless broadband would never take customers away from the sort of the core cable and fiber product. Hasn't impacted fiber and a discernible way, because fiber is sort of going from low penetration to high penetration, but it's taking a lot more share from cable than we anticipated.

So with your product had on, Maxine, help us understand kind of what consumers need from a sort of a speed and capability perspective, and sort of what informs your view that fixed wireless broadband, although it's at a slower speed, it's just not going to be adequate to the needs of most households over time?

Maxine Moreau

I'll give you an example where we -- so today we offer an 8 gig symmetrical broadband service in certain markets where we're deploying multi gig services. And where are we see customers that have purchased that service? In looking into it, like, what types of services are they using, it's, households with multiple members streaming, multiple streaming online, or gaming applications. And they're requiring more bandwidth than the traditional one gig service. And that's eight gig symmetrical today.

In the future, that service can be upgraded, we're working on other technologies to allow us to upgrade that service. So we believe that our product roadmap our Quantum Fiber brand promise, which is to be a thought leader for technology in the markets we serve. And that promise requires us to drive innovation, to digitally connect people data and applications quickly, securely and effortlessly. And while it may not be used widely today, we believe that customers will require more and more symmetrical speeds in the future for things like I said, multiple streaming, multiple gaming within the home are the small business.

And we believe that the halo effect that we provide with Quantum Fiber provides improved take rates, even though the customer may not be buying multi gig services. They're buying broadband from us, we're buying fiber services from them, because of the reputation and the fact that we are offering industry leading, eight gig up, eight gig down, not an up to offer, but a guaranteed service offer that also has the best latency in the market using our Lumen fiber backbone. And latency is very important today, but going forward for virtual reality applications will become even more important.

Jonathan Chaplin

Right. It really is, as far as we can tell the sort of the best offer the sort of highest speed offer in the consumer market. But as you look at the households taking that product, Maxine it are they -- is this a portion of the base that is price insensitive. And we'll just buy whatever the best product is available. Or the people on that product, got usage patterns and use cases that really demand eight gigabits per second.

Maxine Moreau

I would say it's both. It's still very, very early in the multi gig world, so it will take time for customers to adopt the new technology at scale. But what I will tell you again, is that it drives near term, that positive near term halo, by providing a superior service. And like I said earlier, it enables us to expand ARPU over time because it allows customers an upward migration path to more and more and more states.

Jonathan Chaplin

Got it. And it sounds like your old penetration targets of 40% plus still hold and fixed wireless broadband sort of hasn't impacted your view of where penetration goes ultimately for this product?

Maxine Moreau

Yes, we still believe and expect that 40% terminal penetration with our Quantum Fiber service is a viable penetration rate.

Jonathan Chaplin

Got it. And the -- Maxine given eight gigabits symmetric today with the potential to upgrade that over time, why isn't it higher than 40%? It's -- you've really got an unmatched product in the markets where you've upgraded to fiber? Why do you only have a right to sort of 50% of the market?

Maxine Moreau

I would say there's several reasons, there will be some subset of customers where a lower speed service is good enough for what they need, and possibly at a price point much lower than a fiber base service price point. So there'll be some piece of the market that will want to go for that kind of lower quality, lower value, lower priced service.

But as far as the Firebase service and the highest quality service, not just speed, but also the customer experience that we're providing, we have a service experience end to end that is world class with our NPS scores reflecting that. And as a result of that, we believe that we will be able to charge a premier price for a premier service. And there'll be a certain piece of the market that will adopt that. Over time, like I said, we still believe that 40% plus is achievable, because over time, the market will move in that direction.

Jonathan Chaplin

Got it. When you look at the markets that you deployed with fiber, the very early markets, but before the sort of the recent build outs are those that 40% plus range already?

Maxine Moreau

It varies market to market. But overall, we are very pleased with where we are in our penetration, we have not reported that we have reported like our 2020 cohort build that was at ‘22 penetrations at the 12-month mark and 27 at the 18-month mark, and now it's over 30. We haven't provided the cohort data prior to that. But overall, we're very pleased with our penetration of our entire footprint, and still believe it's a great investment for Lumen.

Jonathan Chaplin

Got it. I've got sort of lots more questions about the product, but I'm worried about running out of time. So sort of switching to BEAD. In the homes that aren't within that eight to 10 million, I would imagine a large number of them are going to be BEAD eligible. Do you have a sense for how many?

Maxine Moreau

So we are actively engaged in the process, it will likely be later this year, early next year before the funds begin flowing. We will be very disciplined in the process and participate if we see the opportunity drive profitable growth. We right now in our eight to 10 million enablement plan, we don't assume BEAD funding, so that would create incremental upside to our plan.

Right now, we don't have an actual number of locations, because it's still very early. And it's the states have a pretty broad latitude in how they implement the program. And so until we see the initial state plans, it's too early to make those projections. But we expect to see those plans later this year. And then we'll evaluate how we will participate and how we will deploy

Jonathan Chaplin

Maxine some very measured on the opportunity, we’re quite excited about it. So when we do the analysis on some of the state funded subsidies that cable companies have secured, we think they're getting, maybe even high teens return in markets outside of their footprint. And so if they were getting those subsidies to build, where they already had infrastructure like you would, the return should be even better.

And there's still a lot of uncertainty about how the states are going to administer these funds, but there's a decent chance at least from sort of how we're doing the analysis that the returns on those builds could be really, really good. Are you less enthusiastic about the opportunity than I am? Or are you just taking a sort of more of a wait and see approach?

Maxine Moreau

I think more of a, let's get the details, let's understand the programs state by state level. Let's look at how those investments look compared to our organic BAU over builds, and then how we would basically overlay those investments from a geographic synergy standpoint, so that we can ensure that those opportunities where we can prioritize them aligned with our organic builds, we can maximize the available resources. But overall, I'll tell you, I'm personally super excited, because I think it gives us an opportunity to provide broadband to more parts of our footprint.

Jonathan Chaplin

Yes, and what we're hearing from some of the others that we've spoken to today is it'll allow you to provide broadband areas to more of your footprint, with subsidy funded builds. But the process of getting to those very rural markets will open up a lot of other areas within your footprint as well, that wouldn't have been economic previously.

And then, potentially even areas at the edge of your footprint, that you can sort of edge out into and so the opportunity in aggregate could be quite significant.

Maxine Moreau

I agree.

Jonathan Chaplin

Yes. Yes. My sort of next question is, what about the places in between? So there'll be a portion of your footprint that you'll upgrade to organically portion that will be maybe BEAD funded? What about the sort of the bits in between that where it'll just never make sense to upgrade the copper to fiber? What do you do with those locations?

Maxine Moreau

I mean, we'll continue to evaluate all our options for creating shareholder value through accretive transactions. Right now, the best way to create shareholder value is by executing the plans that we have today, where we're we don't see investing fiber in a particular market. We'll continue to manage those markets to maximize cash, just like we do today.

Jonathan Chaplin

Maxine, one last question for you. Do you need a wireless product in order to compete effectively longer term?

Maxine Moreau

So right now, we don't see the consumer demand for that bundle. We think the value of our fiber broadband capability stand on their own. We'll continue to evaluate our customer needs and if the need arises, we'll explore wireless partnerships if it makes sense. But right now we don't see the customer demand for it.

Jonathan Chaplin

Got it. This has been a great conversation. Really appreciate your time this morning.

Maxine Moreau

Thank you, Jonathan. Appreciate it. Appreciate having me.