Lumos lays foundation to spin out fiber-centric company in 2017

Lumos Networks is putting together a foundation to potentially create a fiber-centric company by the end of the year that would focus on selling wholesale and retail services to carriers and enterprise customers in its territory.

Speaking to investors during the fourth quarter 2015 earnings call, CEO Tim Biltz said that based on its strong fiber-to-the-cell (FTTC) and enterprise sales, the company could reach a decision about the future of its structure by the end of the year.

"We continue to expect we will lay out a timeline by the end of 2016 that would lead to the creation of a pure play fiber entity," Biltz said. "This pure play entity will be supported by long-term contracts with carriers and enterprise customers focused on fiber-to-the-cell, Ethernet, wavelengths, dark fiber, small cells, and colocation."

Biltz said that the company will consider a number of options to expand the fiber business organically and through acquisitions of similar fiber-centric providers in or near its territory.

"In order to build the scale necessary to execute on this pure-play strategy, we'll consider a wide range of organic and inorganic opportunities in and around our footprint," Biltz said.

Analysts applauded Lumos' proposal, saying that it will provide the telco with a better long-term source of growth and return on its fiber network investments.

"LMOS has repeatedly signaled that it's seeking to shed its Residential & Small Business and RLEC Access businesses to reduce its legacy exposure," said Jennifer Fritzche, managing director of the equity research group at Wells Fargo, in a research note. "Ultimately, we believe this approach, with a focus on fiber-based bandwidth infrastructure, will generate better long-term returns."

During the fourth quarter, wireless backhaul continued to be a star performer in Lumos' portfolio, ending the quarter with 1,099 unique fiber-to-the-cell (FTTC) sites, up 69 percent sequentially and an increase of 28 percent from the prior year. Lumos ended the quarter with 1,440 total FTTC connections, up nearly 25 percent from the prior year period.

"Our fiber to the cell pipeline remains large, but the timing of contracts is fluid," Biltz said. "We're engaged with multiple operators in our footprint for large fiber to the cell RFPs, including lit services, dark fiber and small cells that incorporate C-RAN technology."

Biltz added that "our small cell exposure is limited due to the lack of activity in our footprint, but we feel well positioned to capitalize on the small cell marketplace as those deployments begin to ramp in our markets."

During 2015, Lumos renewed Enterprise accounts totaling $726,000 in monthly recurring charges, up over 17 percent from the prior year. Total contract value of renewed Enterprise contracts in 2015 was nearly $32 million, up over 19 percent from 2014.

Total Data revenue grew over 9 percent year-over-year to approximately $29.8 million and constituted nearly 58 percent of total revenue, up from 54 percent in the fourth quarter of 2014.  

Lumos reported sequential gains in Enterprise Data, Transport and FTTC. Enterprise data was $11.9 million, while Transport was $10 million and FTTC revenue was $7.9 million.

However, it saw declines in its legacy Residential and Small Business and RLEC Access segments with revenues declining to $16.3 and $5.6 million, respectively. The service provider said it continues to see positive growth in its FTTH broadband subscribers and it has begun offering 1 Gbps services in a number of its markets such as Botetourt County, Va.

"We have rolled out 1 Gbps bandwidth speeds in many of our markets and we plan to have all of our markets by the beginning of the second quarter," Biltz said. "Our fiber-to-the-premises broadband connections have increased 39 percent year-over-year and nearly all of these are in our RLEC footprint."

By the end of the first quarter, Lumos said it expects to have completed the vast majority of its 822-mile network expansion into the Richmond and Hampton Roads/Norfolk metro markets. The service provider has already sold annualized Enterprise revenue of $500,000 in the Norfolk/Hampton Roads markets.

Fiber expansion was also a key element of Lumos' growth story in 2015. Lumos Networks added 785 organic route miles of fiber, nearly double the 408 miles added in 2014. Additionally, the telco added 255 Enterprise lit buildings in 2015, up over 90 percent from the 133 buildings added to the Lumos fiber network in 2014.

Looking toward the full year 2016, Lumos has forecast revenue of $206 to $210 million, adjusted EBITDA of $93 to $96 million and capital expenditures of $85 to $95 million.

Lumos reported that total fourth quarter 2015 revenue was $51.9 million, up more than 2 percent from the same period a year ago. Total adjusted EBITDA reached approximately $24.6 million, up more than 9 percent from the prior year period.

For more:
- see the earnings release

Earnings summary: From Adtran to Zayo: Tracking wireline telecom earnings in Q4 2015

Related articles:
Lumos gains VITA authorized vendor status, deepens Virginia government presence
Lumos steps up 1 Gbps FTTH drive with Botetourt County, Va. launch
Lumos eyes colocation providers as potential acquisition targets
Lumos sees dark fiber dollars in wireless small cells, enterprise customers
Lumos Networks gets $150M investment from Pamplona Capital, sets stage for growth

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