Lumen Technologies finally unveiled an expansion plan for its residential Quantum Fiber service, aiming to pass a total of 12 million locations within its footprint over the coming years.
On an earnings call, CEO Jeff Storey said the company already passes 2.5 million locations with fiber and has historically added 400,000 new locations in a typical year. He added the company plans to ramp the pace of new builds going forward to reach 1 million additional passings in 2021 and a range of 1.5 million to 2 million each year after that.
Storey said Lumen expects build costs to average less than $1,000 per location, though he noted it’s building “at a significantly lower cost today." It is targeting penetration rates of 40% or better in areas where it decides to expand, he added.
“We’ve built an excellent Quantum experience and product capability that is now ready to ramp aggressively, providing higher ARPU, lower churn and greater customer lifetime value," Storey said. "As we transition from micro-targeting to a broader market approach for deployment, we have high confidence in our ability to drive significant revenue growth for years to come."
In August, Lumen inked a $7.5 billion deal to sell off its ILEC assets in 20 states, leaving it with an ILEC footprint spanning 16 states and 21 million addressable locations. While Lumen’s initial target for fiber passings is 12 million locations, CFO Neel Dev indicated on the call “that number could grow over time as we continue to build out.”
Analysts at Wells Fargo Securities noted that at the pace Lumen laid out, it will take the company approximately five to six years to reach its 12 million goal. They added the passing costs Lumen shared imply “over $9B of total build capex over 5-6 years (not including the success-based connection costs). By our math, we assume LUMN's capex will step up to ~$3.5B in 2022 and then scale to $4.0-4.5B at peak fiber investment levels.”
While Storey said Lumen has diversified its supplier base and secured delivery commitments, MoffettNathanson Senior Analyst Nick Del Deo in a research note pointed out the fact that the company is “coming in behind some other players that have already announced large fiber expansions (Frontier, AT&T) could add some incremental supply chain risk.”
New Street Research’s Jonathan Chaplin made a similar observation. “The challenge for all companies with fiber aspirations will be execution – competing for deployment resources will pose a stiff challenge and competing against Cable for share should be no less daunting,” he wrote. “Needless to say, there is a boat load of upside for the equity if they get this right.”
Total revenue dropped 5.4% year on year in Q3 to $4.89 billion, with business segment revenue down 5% to $3.51 billion and mass markets revenue down 6% to $1.38 billion. Within mass markets, Storey said fiber broadband revenue was up 25% but did not provide a breakout figure. Net income rose nearly 49% to $544 million.
The CEO indicated that with its investment strategy in place “We believe that we'll return to topline growth in two to three years.”
Storey said Lumen added 28,000 Quantum Fiber customers in the quarter. However, the company’s total number of mass markets broadband subscribers declined 4.2% year on year to 4.58 million.