Lumos' Biltz: Dark fiber deal pipeline will grow throughout 2016

Lumos Networks may still be early in the dark fiber game, which only makes up a small portion of its revenue, but the service provider is getting more inquiries from a host of wireless, wireline and enterprise customers.

Speaking to investors during the first quarter earnings call, Tim Biltz, CEO of Lumos, said that the company expects more dark fiber deals to culminate throughout the remainder of the year.

During the first quarter, Lumos signed a dark fiber fiber-to-the-cell contract with an unnamed wireless operator and it is getting similar requests from other providers.

"Dark fiber remains a small piece of the Lumos' overall revenue stream, but a continually growing pipeline of dark fiber deals is being driven and improving sales results," Biltz said during the earnings call, according to a Seeking Alpha earnings transcript. "In the first quarter we signed one dark fiber deal in the FTC space and two in the enterprise space, one in healthcare and one in education. Total contract value for these three deals was around $3 million."

However, Lumos cautioned that it is not seeing large dark fiber deals yet.

"We expect to sign some nice dark fiber contracts smaller, not these large state-wide here in the second quarter," Biltz said. "But the larger deals I think it happened later in the year third, fourth quarter. It's not breaking news for me that into the macro environment for the builds is the carrier spend is down and being pushed, so lots of quoting going on, not a lot of signing happening on the big dark fiber contracts right now. But the pipeline is very robust."

To accelerate its growing dark and lit fiber businesses, Lumos said it plans to articulate how it will separate its RLEC and fiber-based businesses during its third quarter earnings call.  

Lumos has completed the first phase of Project Clarity, which is the separation of its RLEC customers from its fiber-based customers in preparation for a potential sale or spinoff. The service provider has developed a business support and operating system disposition plan to support two discrete groups of customers. Additionally, Lumos has created an approach to allow the physical network to be provisioned so there are two discrete service provisioning lanes.

"Our goal is to have a pure-play fiber entity supported by long-term contracts with large enterprise and carrier customers focused on the following products and services, fiber to the cell, Ethernet, wavelengths, dark fiber, small cells, and colocation and data center applications," Biltz said. "Our target is to have limited TDM exposure in the range of 10 percent to 15 percent with targeted adjusted EBITDA margins of 60 percent at scale. In order to build the scale necessary to execute on this pure-play entity, we will continue to consider a wide range of organic and inorganic opportunities in and around our footprint."

Analysts have been supportive of Lumos' plan as it would enable them to pursue additional fiber-based opportunities in its growing network footprint.

"We believe this separation should help unlock the value of its fiber-based infrastructure assets, which it is actively seeking to scale," said Jennifer Fritzsche, senior analyst for Wells Fargo, in a research note.

Driven by gains in fiber-to-the-cell (FTTC) and enterprise services, data revenue growth continued into the first quarter, rising 7 percent year-over year to $29.6 million. Total first quarter fiber-to-the-cell and enterprise revenue was $20.5 million, up 19 percent year-over-year.

Lumos noted that FTTC/enterprise constitutes 69 percent of total data revenue versus 62 percent in the prior year and collectively reached, on a run-rate basis, 95 percent tied to Ethernet and other advanced fiber technologies.

Growing its fiber network was a key element of the quarter. Lumos added 127 route miles to its network and a total of 779 miles over the past year.

Biltz said a limited amount of "our 222 mile network expansion is included in the first quarter total route mile figure," adding that by the end of 2016, Lumos expects to have over 9,000 route fiber miles.

Along with increasing its fiber route miles, the service provider increased its connections to cell towers, data center connections and on-net lit buildings.

Lumos had a total of 1,252 FTTC towers, up 345 in the last year, and up over eight-fold since the end of 2011. In the first quarter, the service provider also added 80 lit buildings to end the quarter with a total of 1,821, up over 18 percent year-over-year. Having a greater amount of on-net buildings means that Lumos has more opportunities to sell business customers a larger suite of cloud and Ethernet services.

"In the last year, we averaged nearly 24 new lit buildings per month which more than doubled the pace of 2013 and 2014," Biltz said. "These new lit buildings are essentially all success-based producing revenue on day one of installation, and is a great leading indicator for enterprise revenue acceleration. We now have nearly 3,100 total on-net locations, which is nearly tripling of the 1,200 when Lumos became a public company at the end of 2011."

Additionally, Lumos increased its connections to data centers. As of the end of the quarter, Lumos had 36 data centers connected to its fiber network, up from 31 since the first quarter of 2015.

Total revenue in the first quarter of 2016 was $50.8 million, up 0.6 percent from the prior year period.

For the full year 2016, the company reiterated its financial guidance for revenue of $206 to $210 million, adjusted EBITDA of $93 to $96 million and capital expenditures of $85 to $95 million.

For more:
- see the earnings release
- see the Seeking Alpha earnings transcript

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