Lumos expects to create pure-play fiber company in 2017, begins RLEC separation

Now that it has completed the analysis of separating its fiber and RLEC operations, Lumos expects to create a pure-play fiber entity sometime next year.

Tim Biltz, CEO of Lumos, told investors during its third quarter earnings call that by spinning out its fiber-centric business it can become a more formidable competitor in the rapidly consolidating fiber-centric service provider business.

While he did not mention the deals specifically, last month CenturyLink announced its intent to acquire Level 3 and yesterday Windstream announced it is purchasing EarthLink. Lumos itself is purchasing Clarity, giving it an instant footprint in North Carolina, South Carolina and Georgia, while enhancing its public sector and school district E-Rate opportunities for dark and lit fiber services

“Recent M&A activity in the fiber space has only reinforced our view that becoming a pure play fiber entity will allow us to fully participate in these industry dynamics,” Biltz said during the third quarter earnings call, according to a Seeking Alpha transcript. “In light of recent industry consolidation of fiber assets and the fact that our data business now has $100 million in annualized data contribution margin, we believe our data business is now perhaps one of the three or four largest private public – or private – regional fiber companies in the United States.”

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As part of the evaluation process, Lumos has hired UBS Investment Bank to help it search for a possible buyer for the company's regulated Local Exchange Carrier (LEC) assets. 

By selling the RLEC assets, Lumos said it could maximize shareholder value and strengthen its efforts to become a pure-play fiber bandwidth infrastructure company.

While the telco said it would not make any further public comment during the strategic review process, Biltz said that during the third quarter “we began to migrate traffic off of our ILEC backbone.”

Biltz added that Lumos did not reveal the specific details about the timeline of the separation process because “the buyer or the strategy that we use to separate this is still dependent and so there would be so many variables that are in the marketplace that would be kind of messy.”

Jennifer Fritzsche, senior analyst for Wells Fargo, applauded Lumos’ moves saying in a research note that “it shows clear progress in LMOS's desire to become a pure-play fiber provider in 2017. ... While LMOS still has some headwinds from TDM (time-division multiplexing) churn and legacy revenue declines, we believe they are making the right moves to enhance long-term shareholder value.”

As Lumos moves forward with its separation plans, the service provider continues to see positive results in its fiber-driven business and wholesale segments. Data revenue was $31.4 million, up nearly 10 percent year-over-year. Lumos said it expects to see data revenue continue to grow 8-10 percent in 2016.

Fiber to the Cell and enterprise were the star performers in Lumos’ revenue mix again, driving $22.9 million in revenues, up 20 percent year-over-year. The total FTTC/Enterprise made up nearly 73 percent of total data revenue versus 67 percent in the prior year, of which 95 percent was tied to Ethernet and other advanced fiber technologies.

In particular, Lumos said that as it moves forward with its network expansion in Richmond and Norfolk, Virginia it is seeing strong demand for enterprise network services. The Richmond and Norfolk network build was driven by a 257 unique FTTC site contract that has average metro fiber density of 175 strands.

Revenue growth in its FTTC/Enterprise unit was coupled with strong metric fiber expansions. During the quarter, Lumos reached a total of 1,297 unique FTTC sites, up 26 percent year-over-year and 1,642 total FTTC connections, up 20 percent year-over-year.

Biltz said that while it did not win a major FTTC contract during the quarter, “our pipeline with multiple carriers remains robust.”

“We continue to consistently win small patches of new Ethernet backhaul contracts within our footprint,” Biltz said. “We continue to benefit from strong bandwidth increases and our average bandwidth per Fiber to the Cell connection is about 120 Mbps, that's up about 20 percent over the past six quarters [and we] expect these upgrade churns to continue.”

Lumos was no less aggressive on expanding fiber to more business locations, adding 62 lit enterprise buildings in the quarter to reach a total of 1,984 buildings, up 21 percent year-over-year. Enterprise revenue per lit building rose sequentially for the second straight quarter.

From an overall fiber build perspective, Lumos completed 219 fiber route miles in the third quarter with an average strand count of 179. Likewise, Lumos reported that its fiber strand count rose 15 percent year over year to 52 across the service provider’s footprint.

In its Residential and Small Business R&SB segment, Lumos reported $15.9 million in third quarter revenues. RLEC access revenues were $4.5 million in the third quarter of 2016, down $1.3 million year-over-year. 

Total revenue in the third quarter of 2016 was $51.8 million, up nearly 2 percent from the third quarter of 2015.