Lumos Networks (Nasdaq: LMOS), a growing regional wireline service provider based in Waynesboro, Va., has developed a growth engine based on enterprise data services.
Biltz (Image source: Lumos)
Speaking at the recent 40th Annual Global Media and Communications Conference, Tim Biltz, CEO of Lumos Networks, said Q3 2012 was the tipping point in terms of the still relatively young company's growth.
"It was the first time in many quarters where we saw year-over-year revenue growth, and even more importantly we saw margin expansion," Biltz said. "That margin expansion should continue driven by the fact that 50 percent of our revenues are coming from our strategic data business."
The margin expansion effort includes a dual strategy of leveraging the existing network infrastructure and growing its strategic data products. This process has been paying off for Lumos.
During the third quarter, the service provider reported that enterprise data rose to $9.4 million, up sequentially from $9.04 million, while carrier data and IP services climbed to $11.9 million and $4.7 million, respectively. Overall, strategic data rose sequentially to $26.1 million, up from $24.9 million.
Lumos' data services investment strategy is not based on speculative network buildouts, but rather is one that leverages a success-based model.
"About three-quarters of our capital expenditures are success-based," Biltz said.
The service provider sees two macro trends that its data services are a fit for two new emerging trends: big data and the drive toward mobile data. On the enterprise side, Lumos is taking advantage of the growth in IP traffic and the ongoing outsourcing of data services.
A new Cisco study forecasts that business IP traffic is going to grow at a CAGR of 20 percent over the next five years, while nearly 20 percent of all enterprise traffic will either originate or terminate on a mobile device.
At the same time, more enterprises are outsourcing various IT functions to a service provider by placing them into the cloud. A recent Oppenheimer & Co. report revealed that enterprise cloud spending will grow at a CAGR of 87 percent by 2016.
"What's important to us is that a third of that cloud spending is on connectivity," Biltz said. "A subset of that enterprise business, and where the two become synergistic, is that not only are enterprises embracing cloud computing and the use of big data, they are now bringing that to the mobile world."
Lumos is targeting mobile and cloud data growth via three solution sets: wholesale carrier data, enterprise data and IP services. What's common across all of these segments is the use of Ethernet-based services.
Today, Lumos has 10 percent of TDM mindshare in its current markets, but sees various opportunities to "edge out" to new customers that are within 10 miles of its fiber footprint to provide Ethernet and IP-based services.
As TDM-based service revenues remain flat or decline, the provider is seeing Ethernet services grow 3 to 4 percent.
"We saw that IP data is going to grow two-and-a-half fold, and I think we can create huge headroom for our market opportunity," Biltz said. "Within a subset of that what we are really competing for is not the TDM world, but the Ethernet world as more enterprises migrate from TDM to Ethernet."
The service provider's message is resonating with the four vertical enterprise segments it serves--healthcare, government, education and manufacturing.
For example, a regional health care provider that initially was just using a few voice circuits had Lumos interconnect almost 30 of its sites onto metro Ethernet. As a result, Lumos saw monthly revenues on that customer climb to almost $370,000 per year with a three-year return on investment.
Like other traditional wireline service providers, Lumos continues to see declines in its ILEC and CLEC voice businesses.
Ethernet and IP services are creating new opportunities in existing markets where the company operates as a CLEC and are offsetting these losses.
"Our legacy business is moderating and is creating strong cash flows that is funding our growth, and we are focusing on taking our CLEC businesses and upselling those businesses we can with our fiber business," Biltz said.
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