Lumen execs: Fiber builds a bigger bang for the buck than RDOF

Lumen
Lumen executives see a bigger ROI on continuing its fiber build outs versus RDOF deployments. (Lumen)

While Lumen reaped the financial rewards from the FCC's Connect America Fund (CAF) II, the Rural Digital Opportunity Fund (RDOF) is taking a back seat to Lumen's fiber builds.

Speaking on Wednesday's fourth quarter earnings call, Lumen CEO Jeff Storey and CFO Neel Dev said they see better returns from its fiber-to-the-home (FTTH) investments than in the FCC's RDOF project for rural broadband.  

RDOF represents a $20 billion, 10-year opportunity for service providers and their vendor partners to build and connect faster broadband speeds in rural and unserved areas across the U.S. Phase I of RDOF targeted census blocks that are wholly unserved with fixed broadband at speeds of at least 25 Mbps down and 3 Mbps up. 

In the reverse auction results that were announced in December, Lumen was awarded just over $262 million to deploy broadband in 77, 257 locations across 20 states. With the quiet period for RDOF ending near the end of last month, Lumen execs provided some color on RDOF during the call.

"We took a very disciplined and ROI-based approach to RDOF," Dev said. "In fact, even after factoring in the subsidy, we see better returns from the fiber-to-the-home investments we are making with our micro-targeting strategy. Even when you net out the subsidy, our returns that we see on fiber-to-the-home is significantly higher."

RELATED: Charter splashes some details on its fiber build outs across 24 states for RDOF

By contrast, Charter Communications won $1.2 billion in the Federal Communication Commission's RDOF reverse auction, the results of which were announced in December. Charter is expanding its service to more than 1 million previously unserved businesses and homes across 24 states, which were the most in the auction. Earlier this month, Charter announced it would invest $5 billion in rural broadband, which is partially offset by the $1.2 billion in RDOF awards.

"Just to give you another data point, one of the largest winners of RDOF just announced that it's a $5 billion price tag to build out to about one million homes," Dev said. "If you compare that to the 400,000 homes that we just enabled last year, we certainly didn't spend a couple of billion. And so we have a different profile in terms of where we're investing fiber-to-the-home, and we'll be success-based on that front."

In September, CenturyLink rebranded under three separate entities: Lumen Technologies, CenturyLink and Quantum Fiber. Lumen Technologies' platform brings together a global fiber network, edge cloud capabilities, and security and communication and collaboration solutions while Quantum Fiber is a subscription-based, digital platform for delivering fiber-based products and services to residents and Lumen's small businesses group.

"Quantum Fiber represents a growth opportunity for us along several fronts," Dev said. "Fiber-enabled homes are less than 15% of our footprint, and we continue to invest with our micro-targeting strategy. Given that a significant number of enabled units were added in the past couple of years, driving up penetration represents a near-term addressable market opportunity.

"Moreover, we have de-emphasized low-speed offerings over fiber, and our typical new sales ARPU now is generally higher than our base, representing another potential opportunity to improve the business."

Last year, Lumen added 400,000 homes passed to its FTTH footprint for a total of 2.4 million homes—compared to 2 million at the end of 2019— under the Quantum Fiber brand. For the fourth quarter, broadband revenue 2020 grew 1.8% year-over-year. Like other service providers, the coronavirus pandemic drove Lumen's customers to adopt faster broadband speeds last year.

"For the fourth quarter, in speeds of 100 Meg and above, we added 54,000 subs," Dev said. "From a mix perspective, 14% of our total broadband subs now have greater than 100-meg speeds compared to 5% at the beginning of last year."

In addition to FTTH services for residential and small business customers, Lumen's fiber is at the heart of its cloud edge compute strategy. With its fiber, Lumen has laid claim to being able to reach 98% of the enterprises in the  U.S. with a low latency of 5 milliseconds one-way with its edge compute nodes. Storey said Lumen has 180,000 on net buildings that are connected to its fiber.

RELATED: Lumen sets the stage for private cloud, multi-tenant services at the edge in Q1

"As of today, we have fully enabled edge facilities, covering roughly 60% of U.S. enterprise locations within 5 milliseconds of latency," Storey said. "Combining our unique fiber capabilities with our widespread edge infrastructure, by year-end, we expect to have more than 95% of U.S. enterprises within that same latency performance."

Applications are moving to the edge to enable low latency 5G, IoT, augmented reality and virtual reality services, among others. Lumen has launched bare metal-as-a-service on its edge compute nodes and plans to also offer virtual machine containers and private cloud and multi-tenant solutions at the edge.

"We believe the Lumen edge cloud offers a compelling solution for many of our customers’ latency sensitive applications and are encouraged that it will contribute to our improving revenue," Storey said.

RELATED: Lumen, VMware team up on innovation lab to drive edge computing, security and SASE

Storey also touted Lumen's partnerships with Zoom, SAP and VMware and said the company plans to announced additional strategic relationships in the coming months.

Lumen by the numbers

Lumen posted total revenue of $5.13 billion and diluted earnings per share of 48 cents, which marked a 3.5% decline compared with $5.31 billion and 33 cents per share in the same quarter a year ago.

Net income was $522 million for the fourth quarter 2020, a 32% increase compared to $352 million for the fourth quarter 2019. For the full year of 2020, Lumen’s revenue decreased by 3.4% from $21.46 billion to $20.71 billion in Q4.

Lumen's SBM sales were down 7% year-over-year—due in part to a decline in legacy voices services—in Q4 to $618 million compared to $665 million in the previous third quarter. Wholesale revenue decreased 6.2% year-over-year to $922 million. Consumer revenues dropped to $1,299 million compared to $1,354 million in the same quarter a year ago.

Lumen's enterprise segment, which includes high-bandwidth data services, managed services and SD-WAN services, was down .6% in Q4 with revenues of $1.430 billion compared with $1.434 billion a year ago. For all of 2020, Lumen’s enterprise segment decreased by .46% for the full year.

For 2021, Lumen announced guidance that included adjusted EBITDA in the range of $8.4 billion to $8.6 billion. Adjusted free cash flow is projected to fall between $2.8 billion and $3 billion. Capital expenditures were estimated to be between $3.5 billion and $3.8 billion.

"Looking forward, we believe the launch of the Lumen platform sets a strong foundation for growth," Storey said. "Over the last several years, we’ve been focused on integrating, transforming and operationalizing the capabilities we bring to market. With much of that work behind us, 2021 is about revenue growth and expanding adoption of our platform."