Verizon (NYSE: VZ) and Sprint's (NYSE: S) ongoing move to small cells could provide a potential wireless backhaul windfall to Lumos Networks, a telco that's been aggressively expanding its fiber network in Virginia and Pennsylvania.
In the first quarter, Lumos reported that it continued to progress with its fiber to the cell (FTTC) tower buildout, adding 49 sites to the network to end the period with a total of 907. FTTC connections rose by 50 percent year-on-year to 1,236. The company continues to target 1,300 FTTC connections by the end of the second quarter of 2015 and 1,700 by the end of 2015.
Tim Biltz, CEO of Lumos, said during the first quarter earnings call that although wireless operators are at different stages of adoption the company is seeing strong interest from wireless operators to use dark fiber for cell site backhaul. Verizon itself has been a major advocate of such solutions, while other operators have mainly used managed fiber-based Ethernet solutions.
Unlike other traditional telcos like CenturyLink and even Verizon which have shied away from offering wholesale dark fiber, Lumos launched a dark fiber offering to provide connectivity for both wireless backhaul to macro sites and fronthaul for small cell sites.
Kevin Smithen, an analyst with Macquarie Capital, wrote in a research note that dark fiber could be leveraged to not only serve wireless operators, but also with content owners and another element for its growing data center business.
"As Lumos improves its average strand count from the current 46 over the next year or so vs. Zayo at ~80, we believe that dark fiber can become a meaningful product for Lumos," Smithen wrote. "We believe the data center initiative could provide further upside to the dark fiber story. Lumos is currently under-penetrated in this vertical and mgmt. has pointed to $1 of data center revenue driving $2-$3 of bandwidth activity on their network."
Similar to other wireline wholesale providers, Lumos still faces the ongoing near-term revenue challenges of their wireless operator customers shutting down TDM networks and migrating to IP/Ethernet. As of the end of the first quarter, Lumos said less than 3 percent of its FTTC backlog is TDM and they expect to have no TDM in this segment later next year.
"Management said that they expect to be completely TDM-free in the FTTC segment sometime in 2016," Smithen wrote. "Transport churn headwinds from DS1 and DS3 revenues remain the most unpredictable aspect of the transformation story, but those impacts will continue to dissipate over time."
Given all of the recent multibillion-dollar deals, including Lightower's bid for Fibertech and Crown Castle's pending purchase of Sunesys, the next question for Lumos is whether they will also purchase other providers that could augment their current fiber network holdings.
While Lumos has not addressed any specific M&A plans, Smithen says it sees "Lumos being active in acquiring adjacent metro fiber assets if such assets become available."
- see this report (.pdf)
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