Lumen's 'Quantum Fiber' push fits into grander growth plan

Lumen Technologies used its investor day Monday to present the company's grand plan to return the company to overall growth. A focus on fiber network buildouts and upgrades and the marketing of gigabit and multi-gigabit broadband services under the "Quantum Fiber" banner represents one key piece of that puzzle.

Lumen has plans to build fiber to an additional 5 million to 7 million locations (overbuilds and greenfield opportunities) in the coming years, expanding its overall fiber footprint to 8 million-10 million. That total does not include any potential participation from Lumen in the Broadband Equity, Access and Deployment (BEAD) program.

Lumen added about 120,000 fiber locations in the first quarter of 2023, and expects to add more than 500,000 locations for all of 2023, a pace that puts the company on a path to end 2023 with more than 3.6 million fiber locations.

From there, Lumen expects to ramp that annual build pace to 750,000 fiber locations in 2024 and expand that to 1 million starting in 2025, Maxine Moreau, president of Lumen's Mass Markets unit, said.

Lumen expects its build costs to be in the range of $1,000 to $1,500 per location.

The company is also aiming for customer penetrations of more than 40% in its fiber footprint, and expects its revised focus on fiber to drive subscriber growth.

Lumen's penetration on its copper assets is a meager 12%. "We have a lot of upside potential" as Lumen overbuilds those networks with fiber and tries to take back share, Moreau said.

Lumen expects to add about 125,000 net fiber subscribers in 2023, rising to +225,000 in 2024 and climbing to +450,000 in 2027.

(Source: Lumen 2023 Investor Day presentation)
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Lumen is also investing in a marketing campaign focused on its relatively new "Quantum Fiber" brand. Moreau said Lumen expects the company's marketing spend to rise 85% this year to tout the new brand.

That's taking shape as Lumen expands access to new 1-Gig and multi-gigabit broadband services. This week, the company announced it has launched those speeds in 18 cities, including Boise, Idaho; Denver and Colorado Springs, Colorado; Des Moines, Iowa; Las Vegas; Minneapolis; Omaha, Nebraska; Phoenix and Tucson, Arizona; Portland, Oregon; Salt Lake City, Utah; Seattle, Spokane and Vancouver, Washington; and Cape Coral, Fort Meyers, Naples and Orlando, Florida.

With all of its fiber plans rolled up, Lumen expects to drive up broadband revenue and subscriber growth by 2025.

Broader growth plan

Lumen's Quantum Fiber strategy is taking shape against a broader reset/turnaround of the company that aims to unlock "pent up value" in the company and drive aggregate growth of about 5%, Kate Johnson, Lumen's president and CEO, said.

The company's broader plan includes a focus on migrating customers from legacy telco offerings in declining markets, such as traditional voice, to modern platforms such as unified communications and collaboration (UC&C) and secure access service edge (SASE).

That strategy also includes a cloudification of Lumen's core fiber networks and a focus on network-as-a-service (NaaS) capabilities. Lumen's fiber network is "the crown jewel of our assets," Johnson said.

Lumen Chief Technology Officer Andrew Dugan said Lumen is about halfway through a plan to build an incremental 12 million fiber miles across its inner-city fiber network. Less than half of the capacity that's been installed so far is being consumed.

Lumen, he said, has already received orders that justify the buildout of the remaining 6 million fiber miles. He also envisions the overall network to expand beyond 12 million fiber miles over time.

Lumen launched its 400G product about five to six months ago, and has already connected more than 240 data centers to its 400G footprint. The company, Dugan added, has already realized about $25 million in annualized revenues from the 400G product.

Meanwhile, Lumen is digitizing the network to support a NaaS capability that will enable customers to turn on and add services "within a few clicks" via a self-service, he explained.

Lumen sees a serviceable addressable market for NaaS in the range of $25 billion to $35 billion by 2027. Lumen is in position to get a "fair share" of that addressable market, Dugan said.

Lumen presented updated guidance. It expects 2023 revenues of $14.2 billion, rising to $14.8 billion in 2027. Meanwhile, adjusted EBITDA is expected to grow from $4.7 billion in 2023 to $5.3 billion in 2027. Free cash flow is expected to reach a range of $300 million to $500 million in 2027, up from $0 to $200 million this year.

Skepticism about long-term targets

Some analysts aren't convinced that Lumen will hit all of its long-term targets.

"We don't doubt that many of the steps the company is taking can improve its results," MoffettNathanson analyst Nick Del Deo explained in a report (registration required) issued after Lumen's investor day. "But we've also been students of the telecom market for long enough to observe that companies in this space rarely meet their longer-term projections. Unfortunately, we remain skeptical that results will turn out the way management suggests."

He views Lumen's projections in a declining US wireline business segment as "too optimistic" and questions how rapidly the company can ramp up in areas that have not been well-monetized, such as edge and security.

However, the analyst sees projections in its Mass Markets unit (where the Quantum Fiber initiative is housed) as "more reasonable, so long as it can deploy fiber at the pace it has outlined."

Del Deo lowered his price target on Lumen from $3 to $2 and kept his "Underperform" rating on the stock. Lumen shares were down 10 cents (-5.50%) to $1.80 each in afternoon trading Tuesday.

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— Jeff Baumgartner, Senior Editor, Light Reading

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