Lumos' aggressive fiber build strategy will help it overcome TDM transition growing pains

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Sean Buckley, FierceTelecom

Lumos Networks' fiber expansion plans to support fiber to the cell (FTTC) tower for wireless backhaul and business services ambitions are taking shape. But in the near-term, the reality is that its gains continue to be hindered by ongoing declines in legacy voice and access. This trend was evident its first-quarter 2014 earnings statement.

Due to the drag of legacy migrations to IP-based services, the service provider reported that its Enterprise Data and Transport segments both declined sequentially to $10.5 million and $11.1 million from $10.6 million and $12.1 million, respectively.

FTTC revenues, in particular, rose slightly to $4.4 million from $4.1 million. The service provider is confident it can reach 825 sites with fiber by the end of the year, while maintaining its target for 1,500 FTTC sites over upcoming years.

"Our expectations for continued TDM carrier grooming, as evidenced by the 8.4 percent sequential decline in our Transport revenue, lead us to reduce our target for 2014 Data revenue growth from 6-8 percent to a range of 1-3 percent," said Tim Biltz, CEO and president of Lumos Networks, in the earnings release.

Rob Powell, chief editor and CTO of Telecom Ramblings, wrote in a recent revenues preview post that Lumos' gains in strategic data offset by declines in the legacy voice and access side of its business is a trend that "will probably continue for another few quarters."

Despite these near-term struggles, Lumos has set what could be multiple paths for new fiber-based growth that will eventually eclipse its TDM legacy transport and data revenue streams.

Future growth will come from a number of sources.

One of those growth sources will be Project ARK, a fiber and Ethernet MPLS/IP-based overlay network specifically designed to handle FTTC traffic. Connecting four markets within the telco's footprint, Project Ark will provide total bandwidth of about one terabyte and is built to handle FTTC traffic from 1,500 sites on Carrier Ethernet from an average of 1.5 tenants per site and 400 Mbps of throughput at each cell site.

Scale is the key message with Project ARK. Lumos will increase bandwidth without major network equipment upgrades and it could also offload traffic from its existing network to free up capacity for business and data center customers.

There are two things that are attractive about the FTTC opportunity overall: recurring revenue and the opportunity to serve multiple tenants on each site.

"These FTTC contracts are also long term and provide recurring monthly revenue," wrote John Leonard, a research analyst, in a Seeking Alpha article. "Again, similar to the data centers and on-net buildings, LMOS should be able to generate incremental, high-margin revenue by adding more customers to the same cell site."

Besides wireless backhaul, the service provider is expanding its fiber network into more data centers and buildings. Lumos noted in its first-quarter results that it raised its target for connected data centers to 20 by the end of 2014. Having connections into more data centers will be important as more of its own customers and data center partner customers migrate more of their applications to the cloud.

At the same time, the telco has also been making progress on its "edge out" strategy by building out more of its own fiber network facilities, particularly in metro areas such as Western, Pa., where it traditionally had rented dark fiber facilities from other service providers. By adding 53 fiber route miles to its network in the first quarter, it now has a fiber route mile network of 7,467. Having more of its own fiber facilities also enables it to better control the quality of the customer experience.

The legacy to next-gen revenue lag is hardly specific to Lumos. CenturyLink (NYSE: CTL) saw that strategic wholesale revenues remained flat at $570 million as increases in wireless carrier bandwidth demand and Ethernet sales were offset by declines in copper-based revenue, for example.

While Lumos faces some inevitable near-term challenges, its ongoing investments put the company on a path to becoming a fiber and IP-based company that is equipped to thrive in the long term.--Sean