Good morning, everybody. I'm delighted to introduce Maxine Moreau, President of Mass Markets at Lumen. Maxine, thanks so much for joining us this morning.
Thanks for having me.
Yeah, we're thrilled to have you today. We think the business that you're responsible for within Lumen, the Consumer business, could be worth $40 billion on its own if you hit your fiber deployment targets. I hope that doesn't put you too much on the spot. With that as a backdrop, you know, it struck us from the outside that the old management team was mostly focused on the enterprise opportunity, and Consumer historically didn't get the resources it needed to flourish. Would you say that sort of true of how things were before the new management team came in?
Well, actually, I've been solely responsible for this part of the business for over six years.
Yeah.
Both the Consumer and Small business. Last year, we did go through a transition at Lumen. We pivoted from our micro-targeting to our market-based approach. When Kate Johnson, our new CEO, joined in November, she, you know, she hit the pause button to evaluate kind of all aspects of our operations, as well as to evaluate the returns profile of our fiber investment plan. She separated out Mass Markets operations. I now have full responsibility for all the operational and P&L responsibility of the business. At that time, we also narrowed our fiber investment focus to slightly over 8 million-10 million locations. The BEAD program, which I and look forward to speaking with you about, may provide us an opportunity to expand that number. We'll have to wait for more details.
I believe our 2023 vintage build will be very successful, be a very successful cohort. Our reevaluation pause was not resource-related. It was more rather returns-oriented. We feel really good about where we are today. We've also seen many of our peers reduce their build expectations, some likely due to resource constraints and inflation. We think others may be doing the same thing we did, which was reevaluate the return profiles of these investments. I feel super excited about being here today and sharing what we're doing at Lumen, and particularly with Quantum Fiber.
Got it. Maxine, from your perspective, Kate, is fully committed to that 8 million-10 million, that 8 million-10 million build. I guess, you know, this is when you hear the messaging around the company overall, enterprise is still a very big focus, and with the pullback in the build, some of the challenges that we've seen in the industry, investors are, have been unsure how committed the company really is to getting to that 8 million-10 million.
I'm gonna start with saying at Lumen, we are allocating resources to drive top line and EBITDA improvements in both enterprise and Mass Markets, in both segments of the business. We have a lot of opportunities to drive attractive returns for both parts of the business, with Quantum Fiber being a top priority. Growth in Quantum Fiber remains a top investment priority at Lumen. In fact, this year, we will increase our capital spend related to the fiber build by some $200 million-$250 million compared to 2022, while we also continue to invest in our digital platform. At the same time, we're ramping our operating expenses through success-based spending and marketing initiatives throughout the year, promoting our fiber services. I'd also like to point out that the factory has been retooled.
We're already seeing, you know, the build factory, we're already seeing nice improvements in the unit yields, and we expect this network investment will likely increase next year as we expect our enablements to be higher in 2024 than in 2023, and we'll share more on that at our Investor Day on June 5th.
Got it. It help us sort of unpack in a little bit more detail the shift from 12 to 8 to 10. A couple of things have come up in your comments so far. You know, one is that resources wasn't the issue. Number two was that You know, you sort of, it sounds like, honed the analysis that went into figuring out where the best returns were to be had. Maybe some of the initial 12 million, you know, that analysis was in need of revision. We've just seen costs rise fairly significantly across the industry, which has got to also impact the portion of households that can, that you can upgrade with attractive returns. Sort of how do we think about the interplay of those factors?
Like I said, you know, late last year, Kate made this significant operational change within Mass Markets where, you know, I became responsible for, you know, basically top to bottom, full control over the P&L as well as operational responsibilities to deploy and operate the fiber network. As part of that, we recalibrated, to your point, our build plan to the 8 million-10 million locations, primarily to take into account the slightly higher cost to build per location passed based on the inflationary pressures that we saw throughout 2022, and to focus on areas where we have high levels of confidence that we expect to drive, you know, 40%+ penetration over time. You know, we are investing for growth. Our number one capital allocation priority is to invest for growth.
Our ability to invest in fiber and ramp up our factory over the course of the next several quarters, we expect to see, you know, like I said, you know, 500 or so thousand locations this year and ramping throughout the year and into 2024. We've also spent some time working through some of the issues that we had with long permit cycles as well as contractor capacity issues. We feel really good about where we are, and we feel like they're great investments for Lumen going forward.
Got it. At the sort of the pace that you think you will be able to accelerate to, when do you think you'll be at the end of that, $8 million-$10 million, that initial $8 million-$10 million?
We haven't set a specific timetable for the plan. Like I said, we have our Investor Day in June, where we plan to share our three-year financial forecasts to the investor community to give you a longer-term view of our business. At that point, we'll consider sharing more about our longer-term plans. What I will say is that we are very comfortable with the targets that we've set this year, the 500,000 locations. That'll put us at around 3.6 million fiber-enabled locations exiting this year with a ramp throughout the year, quarter-over-quarter. Like I said earlier, we expect 2024 to be a higher build enablement year than 2023.
This might be a little unfair, given that it'll sort of all be laid out at the Investor Day in June. In terms of the steady state that this factory could move at, can you get up to 1 million homes a year, at some point over the course of the next couple of years? Or is, you know, with labor constraints, permitting processes being what they are, is that too optimistic?
Well, first of all, I'd say, you know, we said it before, it's gonna take time to ramp the factory back up. We wanna do it in a responsible way. We don't wanna chase enablement for the sake of reporting a higher enablement count. We want to ensure that the rate we deploy is producing highly economic units that will generate good returns. The pace, the rate of deployment is less important than the quality of the deployment. Like I said, we wanna improve our ramp. And I'm definitely pushing the team to increase the ramp. At this point, we haven't set a limit on what that would look like on an annual basis.
Got it. Maxine, to take the other side of that a little bit, You know, as you guys have slowed down, we've seen some of your peers rush into your markets to build out in markets like Mesa, Colorado Springs. By not moving faster, are you not maybe losing some of the potential opportunity in good markets?
I would say, you know, first of all, you know, we are not seeing a lot of overbuild activity in the major urban and suburban metro areas that we're currently targeting. In most cases, those are not primary areas of focus for us, but they do create good opportunities, secondary markets for us to build into later on. Where we have seen, you know, third-party overbuilders come in, we, of course, will monitor those very, very closely. However, we see the most attractive returns are in the, you know, two-player markets, where we're competing head-to-head with cable. We see a lot of low-hanging fruit in those markets that we're already targeting. I also wanna point out that there's a significant disadvantage in not being the incumbent provider when overbuilding a market.
You know, having that incumbent advantage means having employees, facilities, technical capabilities at scale, and having these capabilities are critical to serve customers. Our existing fiber network provides us with that embedded advantage. I think that, you know, many of these third-party overbuilders over time are gonna have a tough time in the long term, due to this disadvantage.
We totally agree. How do you respond to that, Maxine? Do you avoid the markets that the overbuilders get to first? Or do you build in those markets anyway, on the thesis that ultimately they're gonna struggle, and it probably ends up being a two-player market in time, you know, just it'll take a while?
At Lumen, we're deploying a market-based approach in the major markets like Seattle, Portland, Phoenix, Salt Lake City, Minneapolis, Denver, several others. We are not gonna pull resources away from those markets to compete with, you know, subscale overbuilders in smaller markets. We have a great deal of confidence in our approach, and we're sticking to our plan.
Yeah. It sounds like, you know, the key issue is you're not really seeing overbuilders in those in the big important markets. It's mostly...
That's right.
I think the cost for deployment this year, is around $1,200 per location passed, higher than the sort of $1,000, that we were sort of anticipating from the initial plan. Is that just a function of where costs are now, or is it something specific to the markets that you're building out this year?
It's primarily related to inflation. You know, everything think of from labor to fiber components to fleet costs, but also targeting in dense urban metros, you know, there is some more expense associated with that than more rural and suburban, you know, aerial builds that we've built historically. I'm also seeing other companies raising their cost to build assumptions. That said, we think that the return profiles and the competitive landscape, meaning, you know, no real fixed wireless threat to our fiber-based service, will continue to provide excellent returns for Lumen.
Let's go into that in a little bit more detail, Maxine. Is it excellent returns, but not quite as good as they might have been if the cost to build was $1,000? Do you think you can recover that incremental cost with higher ARPU?
I would start with saying, you know, we've communicated that for 2023, we're expecting our build costs to be approximately $1,200 per location passed. At this time, we're not providing longer term views, but we believe, like I said, that the service is still, you know, fiber-based services to Consumer and Small businesses are still a very good investment for Lumen. There's a lot of optionality in the future with higher speeds that we can enable with our technology, and we have a lot of flexibility in our ARPU than the, you know, prices that we're offering today.
The, the higher speeds is sort of a real bright spot for you guys. I wanna come to that in a second. You mentioned a moment ago that fixed wireless broadband isn't really a competitor. Do you mean T-Mobile and Verizon haven't really launched in any of your core markets yet? Or do you think as a product, it's not competitive?
I would say as a product, you know, the symmetrical nature of fiber and the multi-gig services that we can offer today are far-
Yeah.
superior to what you can get with a fixed wireless service.
I totally hear that. It was our assumption going into the last couple of years that fixed wireless broadband would never take customers away from the sort of the core cable and fiber product. You know, it hasn't impacted fiber in a discernible way because fiber is sort of going from low penetration to high penetration, but it's taken a lot more share from cable than we anticipated. With your product hat on, Maxine, help us understand kind of what consumers need from a sort of a speed and capability perspective, and sort of what informs your view that fixed wireless broadband, although it's at a slower speed, it's just not gonna be adequate to the needs of most households over time.
I'll give you an example where we today offer an 8 Gb symmetrical broadband service in certain markets where we're, you know, deploying multi-gig services. Where we see customers that have purchased that service, in looking into it, like what types of services are they using? It's, you know, households with multiple members streaming, you know, multiple streaming online, or gaming applications, and they're requiring, you know, more bandwidth than the traditional, you know, 1 Gb service. That's, you know, 8 Gb symmetrical today. In the future, you know, that service can be upgraded. We're working on other technologies to allow us to upgrade that service.
We believe that our, you know, product roadmap, our Quantum Fiber brand promise, which is to be a thought leader for technology in the markets we serve, and that promise requires us to drive innovation to digitally connect people, data, and applications quickly, securely, and effortlessly. While 8 Gb may not be used widely today, we believe that customers will require more and more symmetrical speeds in the future for things, like I said, multiple streaming, multiple gaming within the Home or the Small business. We believe that the halo effect that we provide with Quantum Fiber provides, you know, improved take rates.
Even though the customer may not be buying multi-gig services, they're buying broadband from us, they're buying fiber services from them, because of the reputation and the fact that we are offering, you know, industry-leading, you know, 8 Gb up, 8 Gb down, you know, not an up to offer, but a guaranteed service offer that also has the best latency in the market using our Lumen fiber backbone. Latency, you know, is very important today, but going forward for virtual reality applications will become even more important.
Right. You know, it really is, as far as we can tell, the sort of the best offer, the sort of highest speed offer in the Consumer market. As you look at the households taking that product, Maxine, is this a portion of the base that is price insensitive and will just buy whatever the best product is available? Are the people on that product got usage patterns and use cases that really demand 8 Gb per second?
I would say it's both. It's still very, very early in, you know, the multi-gig world, so it will take time for customers to adopt the new technology at scale. What I will tell you again is that it drives near term, that positive near-term halo, by providing a superior service. Like I said earlier, it enables us to expand ARPU over time because it allows customers an upward migration path to more and more and more speeds.
Got it. It sounds like your old penetration targets of 40% plus, still hold, and fixed wireless broadband sort of hasn't impacted your view of where penetration goes ultimately for this product.
Yes, we still believe and expect that 40% terminal penetration with our Quantum Fiber service is a viable penetration rate.
Got it. Maxine, given, you know, 8 Gb symmetric today with the potential to upgrade that over time, why isn't it higher than 40%? It's, you know, you've really got an unmatched product in the markets where you've upgraded to fiber. Why do you only have a right to sort of 50% of the market?
I would say there's several reasons. You know, there will be some subset of customers where a lower speed service is good enough for what they need, and possibly at a price point much lower than a fiber-based service price point. There'll be some piece of the market that will wanna go for that kinda lower quality, lower value, lower priced service. As far as the fiber-based service and the highest quality service, not just speed, but also the customer experience that we're providing, you know, we have a service experience end to end that, you know, is world-class with our NPS scores reflecting that.
As a result of that, we believe that we will be able to charge a premier, a premier price for a premier service, and there'll be a certain piece of the market that will adopt that over time. Like I said, we still believe that 40% plus is achievable, because over time, you know, the market will move in that direction.
Got it. When you look at the markets that you had deployed with fiber, the very early markets before the sort of the recent build-outs, are those at that 40% plus range already?
It varies, market to market. Overall, we are very pleased with where we are in our penetration. We have not reported that. We have reported like our 2020 cohort build that was at 22 penetration at the 12-month mark and 27 at the 18-month mark, and now is over 30. We haven't provided the cohort data prior to that, overall, we're very pleased with our penetration of our entire footprint and still believe it's a great investment for Lumen.
Got it. I've got sort of lots more questions about the product, but I'm worried about running out of time. Sort of switching to BEAD. In the homes that aren't within that 8 million-10 million, I would imagine a large number of them are gonna be BEAD eligible. Do you have a sense for how many?
we are actively engaged in the process. It will likely be later this year, early next year before the funds begin flowing. we will be very disciplined in the process and participate if we see the opportunity to drive profitable growth. you know, right now in our 8 million-10 million enablement plan, we don't assume BEAD funding, so that would create incremental upside to our plan. right now we don't have an actual number of locations because it's still very early. you know, the states have a pretty broad latitude in how they implement the program, until we see the initial state plans, it's too early to make those projections.
We expect to see those plans later this year, and then we'll evaluate how we will participate and how we will deploy.
Maxine, you sound very measured on the opportunity. We're quite excited about it. When we do the analysis on some of the state-funded subsidies that cable companies have secured, we think they're getting, you know, maybe even high teens returns in markets outside of their footprint. If they were getting those subsidies to build where they already had infrastructure like you would, the return should be even better. You know, there's still a lot of uncertainty about how the states are gonna administer these funds, but there's a decent chance, at least from sort of how we're doing the analysis, that the returns on those bills could be really, really good.
Are you less enthusiastic about the opportunity than I am, or are you just taking a sort of more of a wait and see approach?
I think more of a let's get the details, let's understand the programs at a state, you know, state by state level. Let's look at how those investments look compared to our organic BAU overbuilds, and then how we would basically overlay those investments from a geographic synergy standpoint, so that we can ensure that those opportunities, where we can prioritize them aligned with our organic builds, we can maximize the available resources. Overall, I'll tell you, I'm personally super excited because I think it gives us an opportunity to provide broadband to more parts of our footprint.
Yeah. What we're hearing from some of the others that we've spoken to today is it'll allow you to provide broadband to areas to more of your footprint with subsidy-funded builds. The process of getting to those very rural markets will open up a lot of other areas within your footprint as well that wouldn't have been economic previously. Then, you know, potentially even areas at the edge of your footprint that you can sort of edge out into. The opportunity in aggregate could be quite significant.
I agree.
Yes. Yeah. My sort of next question is: What about the places in between? There'll be a portion of your footprint that you'll upgrade to organically, a portion that will be maybe BEAD funded. What about the sort of the bits in between where it'll just never make sense to upgrade the copper to fiber? What do you do with those locations?
I mean, we'll continue to evaluate all our options for creating shareholder value through accretive transactions. Right now, the best way to create shareholder value is by executing the plans that we have today. Where we don't see investing fiber in a particular market, we'll continue to manage those markets to maximize cash, just like we do today.
Maxine, one last question for you. Do you need a wireless product in order to compete effectively longer term?
Right now, we don't see the consumer demand for that bundle. We think the value of our fiber broadband capabilities stand on their own. We'll continue to evaluate our customer needs, and if the need arises, we'll explore wireless partnerships if it makes sense. Right now, we don't see the customer demand for it.
Got it. This has been a great conversation. Really appreciate your time this morning.
Thank you, Jonathan. Appreciate it. Appreciate having me.