Lumen has reduced its fiber network deployment target as it focuses on generating better returns on those buildouts and the company undergoes a broader recalibration.

Lumen has cut its "Quantum Fiber" target to a range of 8 million to 10 million homes, down from a prior expectation of 12 million. Lumen, which has built fiber to about 3.1 million locations so far, now expects to expand fiber to 500,000 "enablements" this year at a cost of about $1,200 per passing.

Figure 1: (Source: dpa picture alliance/Alamy Stock Photo)

'Reset year'

That reduction follows Lumen's evaluation of its Quantum Fiber opportunity, a reassessment that caused the company to pause its build toward the latter half of 2022.

"2023 is a reset year" as the company moves ahead under new leadership and a revised mission, Lumen President and CEO Kate Johnson said on Tuesday's Q4 2022 earnings call. Johnson, an exec late of Microsoft, GE Digital and Oracle, joined Lumen in 2022.

As for the new fiber target, "this change in strategy will continue to impact Quantum metrics until we get to scale with our new plan, which we expect to occur late this year," Chris Stansbury, Lumen EVP and CFO, said.

Lumen's not alone here. Several other telcos have lowered their 2023 fiber targets.

Notably, Lumen's revised fiber buildout projections do not include any BEAD (Broadband Equity, Access, and Deployment) program funding. "We really don't know how that story is going to pan out, but it does represent a potential upside to our story," Johnson said.

In Q4, Lumen built about 97,000 fiber enablements, well off the 150,000 expected by SVB MoffettNathanson. The company, which ended Q4 with 3.1 million fiber locations, added 19,000 Quantum Fiber customers, for a grand total of 832,000. MoffettNathanson expected Lumen to add 35,000.

Fiber penetration of Lumen's legacy copper broadband footprint was less than 12% at the end of the period. Lumen also shed about 89,000 non-fiber subs in the period, for a Q4 net loss of 70,000. Those losses were better than the -95,000 expected by analysts.

Overbuilder risks

On the call, an analyst asked if Lumen was concerned that the reduction in its fiber buildout would open up opportunities for third-party overbuilders to swoop in and steal share.

"That's obviously, I think, a risk," Stansbury said. "I was very concerned about putting fiber in the ground for the sake of putting fiber in the ground. We need to make sure that we remain focused on those large metros that we have talked about and that we stop being so focused on a cost per enablement and on a number of enablements, and more around making sure that in those markets that we are serving, that customers are going to want our product."

He acknowledged that the decision will be "a little painful in the near-term," but believes Lumen's updates plan will generate attractive returns.

Stansbury also reiterated that Lumen's fiber builds will focus on dense, urban areas and major metros. "We are not going to be looking to run fiber to lower density areas because the numbers just don't make sense," he said.

Analyst skepticism

On the call, Lumen execs were also pressed on whether the company's recalibration and new management team will be enough to turn things around, and if there was a dramatic change "under the hood" that will make a difference this time.

"I'm excited to be here now because there is a huge opportunity," Johnson said. "And one of the things that I'm bringing to the table is this maniacal focus on execution. And I think that that's a really important shift."

2023, she promised "will be a year of rapid change for Lumen as we execute on our plans and pivot towards growth."

Some analysts aren't yet convinced that Lumen can exit 2024 with stable revenues and EBITDA as a result of the changes that are underway.

"[W]e're skeptical that the company can achieve that level of success in such a short period of time given broader market trends," MoffettNathanson analyst Nick Del Deo said in a note issued after the call.

Del Deo maintained his "underperform" rating on the stock and reduced his price target from $5 to $4.

Lumen shares were down $1.22 (24.44%) to $3.77 each in late morning trading Wednesday. That punishment seems to be stemming from updated 2023 free cash flow and EBITDA guidance that fell short of expectations.

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— Jeff Baumgartner, Senior Editor, Light Reading