Since its separation from nTelos in October of 2011, Lumos Networks has steadily waded deeper into the world of fiber infrastructure, adding over 3,000 fiber route miles, largely in their primary markets in Virginia, West Virginia and western Pennsylvania. They spent much of the last couple of years investing heavily in new fiber in central and southeastern Virginia. The Virginia market has been getting a lot of attention lately, with several new submarine cables expect to land in Virginia Beach. Now the company is turning its attention toward enterprise growth and new expansion projects. With us today to tell us what the future may hold for Lumos is CEO Tim Biltz.
TR: Is the buildout into the Richmond and Norfolk markets now complete?
TB: We are done; the team did an incredible job completing this 822 mile build to provide mobile backhaul (Fiber to the Cell, or “FTTC”) to about 260 sites in the Richmond, Va. and Hampton Roads/Norfolk markets for a major wireless carrier. We were supposed to have this network live in August of 2016, but we were able to pull it forward several months. At the end of the first quarter we were effectively complete. By the end of the second quarter, we only needed a few zoning permits to have full redundancy, and the last remaining sites left for completion were within the MSA for isolated laterals. We saw the effective end to the capital expenditures for the project in the second quarter, and now we are focused on monetizing the network in the Richmond and Hampton Roads/Norfolk markets
TR: So can we expect to see Lumos Networks’ capex trend lower for the remainder of the year?
TB: Yes, you will see it start to taper off. We guided the street to $85-95M this year, down from nearly $116 million last year, and that build is effectively behind us. But my position on capex is that if I can sign another of large market-expanding deals I will do it. We haven't yet, but we are working on those.
TR: Does your expansion into Norfolk put you close to the new cable landing station planned by Telefonica?
TB: Yes, it's very close, about a half a mile away from our fiber. We expect not only the two Telefonica cables, one from Spain and one from Brazil, to land in Va. Beach over the next 12-18 months but there is talk of others coming in as well. We've built very deep, thick fiber counts throughout our core to help carriers get from the landing point back to our network and then to Ashburn, Va. and New York and other destinations, primarily for data center connectivity. In addition, there are a number of other European telcos seeking access to their customers in our expansion footprint.
We've felt all along that Norfolk was a very strategic expansion for us and we knew the market was dynamic and growing. As we indicated on our 2Q16 earnings call, Norfolk accounted for 20% of our direct enterprise sales in the first half of 2016, the highest of our 24 markets. We are shifting resources to both our Richmond and Norfolk markets.
TR: What’s next on your expansion list? North Carolina? Maryland? Pennsylvania?
TB: It has been our strategy to utilize an anchor tenant to support our fiber market expansions and we are sticking to our guns on that. We are quoting and studying and designing various options for our carrier customers in all three of those markets. We are working closely with them, but ultimately they decide the timing of these network expansions. There are also other regions of Virginia and West Virginia that we'd like to enhance and make more robust. But what we'd like most is to edge out using our existing network. Where we really succeed is when we leverage our existing core infrastructure, and we're very excited about the opportunities in Virginia. The reason we were successful on the Richmond/Norfolk expansions is because we were able to leverage not only those markets but our existing assets in the core of Virginia. We look to work with carriers where we can expand this leverage, monetize our assets, and as our network expands, we can make those programs even more attractive under the shared infrastructure model.
TR: You posted some strong revenue growth in the second quarter, where were you seeing the most progress?
TB: We reported 14% year-over-year growth in enterprise in Q2. Our churn rate for our enterprise business is the lowest it's been since I've been CEO and has far exceeded our expectations. Our network investments are paying off.
Additionally, our wholesale partnership program, known as carrier end user, is now ramping to scale and we have signed or pending MSAs with 76 partners. Our long term goal is for it to represent 50% of our new enterprise sales. It hasn't quite gotten there just yet, but it's approaching that.
TR: Where does your optimism come from for enterprise growth at that rate?
TB: While we completed the build into Richmond and Norfolk, we commissioned a new study to assess the enterprise opportunity within a mile of our network. We've added almost 1,400 miles of fiber across our footprint since our last study. There was substantial growth in the enterprise opportunity in both our core and expansion markets, even larger than we had projected when we were building our business case for Richmond and Norfolk.
In November of 2014 we had calculated $362M of annual enterprise opportunity within a mile of our entire footprint, including the planned Norfok and Richmond builds. When we re-cut that number it had grown to $550M, a 52% increase. Over that time, the fiber mileage only increased around 20%. The larger opportunity can be explained by strategically placing the routes in high traffic areas and by our view that enterprises are spending more on data, services, and higher bandwidth. That has given us the confidence to announce to the markets that our 5 year goal is to increase our annual enterprise revenue from approximately $50M to 100M. That would imply reaching roughly the same market share in our expansion markets as we currently enjoy in our core markets, which is mid-teens.
TR: The other big infrastructure project you have been working on is Project Ark, can you give us a status update on that?
TB: The Ark is our new carrier-grade closed network initially focused on FTTC. We launched the core network of the Ark about 2 years ago. Since then, we have been closely coordinating with carriers to migrate each FTTC distribution ring and access ring, region by region, off of our existing Ethernet network and onto the Ark. We temporarily slowed down the Ark migration to focus resources on pulling forward the Richmond/Norfolk expansion build. All of those resources are now shifting back to the Ark and we expect to have migrated all of our FTTC traffic onto the Ark by the end of 2016. It's been a major project, and we will continue to add new sites to the Ark as we expand our network. In a sense, the Ark will never be done; it’s a fundamental part of our growth strategy. It's layer-2 only, so there's no IP traffic -- nothing but our native Carrier Ethernet. It's also geo-redundant, which may seem like overkill but the carriers love it because we've all experienced losing colos or PoPs that were supposed to be redundant facilities.
TR: How do you see the wireless backhaul opportunity evolving from here for Lumos?
TB: Wireless and wireless backhaul has been a very important part of our growth strategy. We've gone from about 100 unique FTTC sites at our separation from nTelos to nearly 1,300 at the end of the second quarter, taking advantage of the build-out of wireless backhaul in 2nd and 3rd tier markets. More recently, we believe that the market has gone through a phase where the carriers are digesting spectrum, preparing new plans, trying to manage their capital expenditures and taking a breather before committing to their next network evolution.
Looking ahead, I think we are probably going to witness the most significant network evolution the wireless carriers have ever undertaken. The level of preparation work for 5G in the next 4-5 years is going to be huge. Each carrier is going to have different dates when they go live with 5G, but that evolution is going to happen and it will be here before you know it. We expect to partner with some of the big national and regional carriers over the next 18 months to help them accomplish these 5G aspirations.
TR: How do you think the next generation of wireless backhaul will differ from what we have today?
TB: You will see 60-80% of incremental capital focused on building networks and increased densification of wireless networks, whether it's C-RAN, small cell, etc. To prep for 5G there has to be a substantial investment in the micro network, and that will require significant investments in fiber. I contend that many carriers are still going to require a lit macro system, and those companies that are positioned to do both lit macro at a carrier grade level and also integrate small cells, etc. will be best positioned. I've never seen a more robust pipeline of business to be quoted, designed, worked, reworked. It reminds me of the tower business back in '99. We will be a player in our markets.
TR: You have also been talking about separating out your RLEC and related businesses. What are your plans at present and what is the rationale behind them?
TB: Internally, we call it Project Clarity, which is our project to prepare our regulated assets to be separated or sold. We have consistently told the financial markets that on our third quarter of 2016 earnings call, we will disclose our “playbook” for the separation of our regulated assets. The goal is to be in the position to know what's possible and what's not. The playbook can demonstrate what our options are, but not necessarily which route we will take. Essentially, we are taking the separation from a concept to an executable strategy.
We recognize that the regulated businesses don't have the same attributes as our fiber business. They don't have the same long term contracts with large enterprise and carrier customers. They are more consumer driven. There's nothing wrong with consumer-driven businesses. We have a great RLEC and we probably don't talk enough about it. But the regulated assets don’t have enough scale to move the needle for us and prevents us from monetizing our fiber revenue streams in the same way as our national competitors. And that limits our ability to grow the company. We will make the separation decision only after having sufficient scale of our fiber business to handle any dis-synergies from the separation.
TR: What needs to be done? How long will it take?
TB: First, we are actively engaged with the same people who helped spin Lumos out of nTelos. We are identifying each customer, network element, operating system, and employee that would either stay with the fiber company or be separated. As I mentioned, we expect to lay out our “playbook” on our third quarter call in November. The playbook will have several different plays. Do we sell it? Do we just report it separately? Do we create a tracking stock? Do we spin it? We'll be in a position by our third quarter earnings call in November to do it, but it is unclear yet which one of the plays we actually run. We want to be prepared to be a pure play fiber company sometime in 2017.
TR: Thank you for talking with Telecom Ramblings!