Lumen Technologies is facing headwinds in its Consumer segment from broadband trends and the recent outcome of the Rural Digital Opportunity Fund (RDOF) auction. The company’s Consumer segment provides broadband, voice, and video services to residential customers. Additionally, the Consumer segment also generates regulatory revenue which consists of federal and state support payments from the Universal Service Fund (USF) and Connect America Fund (CAF).

Indeed, the Consumer segment comprised $5.4bn of revenue for the twelve-months ended September 30, 2020, equating to 25% of the company’s total revenue.

The four sub-segments of Lumen Technologies’ Consumer segment include:

  • Broadband: high speed, fiber-based and lower speed Digital Subscriber Line (DSL) broadband services. Lumen has 4.6 million consumer broadband subscribers and generates $2.9bn of revenue from this sub-segment
  • Voice: local and long-distance calling revenue. Lumen generates $1.7bn of revenue from this sub-segment
  • Video: facilities-based linear television service. Lumen generates $194m of revenue from this sub-segment
  • Regulatory: USF and CAF support payments to reimburse Lumen for costs related to its telecommunications service build-out. Lumen generates $626m of revenue from this sub-segment

Broadband Sub-Segment – Q3 2020 Update

In Broadband, which represents 53% of the Consumer segment revenue, Lumen Technologies lost 75k broadband subscribers, during Q3 2020. Of these losses, 35k subscribers were part of the Keep Americans Connected pledge from the Federal Communications Commission (FCC).

Specifically, Lumen Technologies is losing a significant number of broadband subscribers from its lower speed Digital Subscriber Line (DSL) offering. Conversely, Lumen was able to add 62k subscribers to its higher speed broadband offering of 100+ megabits per second. Indeed, 13% of Lumen Technologies’ broadband subscribers are now on plans with speeds of 100 megabits per second or greater. This compares to only 5% at the beginning of 2019.

Overall, the company has 2.3 million homes passed with fiber, which compares to 2 million at the end of 2019. In particular, fiber deployments allow Lumen to offer higher speed broadband offerings, which are important for continued subscriber growth.

However, Lumen Technologies is cautiously deploying fiber, as demonstrated by its growth pace of only 100k homes passed with fiber per quarter. Therefore, this fiber-to-the-home (FTTH) deployment will be unlikely to offset the company’s overall decline in its 4.6 million consumer broadband subscriber base. Indeed, Lumen had 4.8 million consumer broadband subscribers at the end of 2018.

In terms of revenue, Lumen Technologies grew its Broadband sub-segment by 1.7% year-over-year from $718m in Q3 2019 to $730m in Q3 2020.

Regulatory Sub-Segment – RDOF Update

In Regulatory, which represents 12% of the Consumer segment revenue, Lumen Technologies generates a significant portion of its revenue from the Connect America Fund (CAF) II program, that will expire at the end of 2021. Indeed, Lumen generates $500m of annual revenue and a similar amount of EBITDA, from CAF II.

The Federal Communications Commission (FCC) is replacing the funding from CAF II with a new program called the Rural Digital Opportunity Fund (RDOF). Indeed, the FCC announced the winning bidders of the RDOF Phase I Auction on December 7th. Specifically, Lumen Technologies will receive support of $262m, over 10 years, in 77k locations, equating to $3,396 of support per location.

Notably, the broadband support that Lumen Technologies is receiving through the RDOF program of $262m, over 10 years (i.e., ~$26m per year), is significantly less than the $500m of annual revenue the company will be losing from CAF II. Furthermore, this CAF II revenue has nearly 100% EBITDA margins. Therefore, this loss will have a meaningful impact to Lumen’s earnings in 2022 and beyond.

Broadband Competition Driven by Fundamental and Regulatory Factors

Lumen Technologies is facing increased pressure on its Broadband and Regulatory sub-segments driven by cable, telecom, and fiber companies. Specifically, Charter Communications and Verizon are two notable examples.

Charter Communications – Competition in Broadband and RDOF

Charter Communications was the highest and second highest winner in the RDOF Phase I Auction, in terms of number of locations and support, respectively. Indeed, Charter will receive support of $1.2bn in 1.1m locations, equating to $1,156 of support per location.

Charter’s aggressive approach in the RDOF auction, in turn, adversely affects Lumen Technologies’ future broadband prospects. Specifically, Charter has a considerably lower cost of capital than Lumen. Additionally, Charter has the ability to build-out their cable service in regions where Lumen Technologies is still offering speeds of less than 25 megabits per second.

Verizon – Competition in Broadband

Verizon launched a Fixed Wireless Access product branded as “5G Home“. Indeed, 5G Home is Verizon’s alternative to wired home broadband. 5G Home is currently available, in twelve cities across the United States. Specifically, these cities include Atlanta, Chicago, Dallas, Denver, Detroit, Houston, Indianapolis, Los Angeles, Minneapolis, Sacramento, San Jose, and St. Paul.

Verizon’s coverage of households is initially small through 5G Home. However, 5G Home presents more of a long-term threat to Lumen Technologies. Indeed, Verizon has a target to cover 30 million households in the United States with 5G Home, over the next 5 to 8 years. Short-term Verizon is already encroaching into Denver and Minneapolis, which are existing broadband markets for Lumen.

Lumen Technologies is particularly susceptible to competition from Verizon in areas where it offers services on its legacy copper footprint. Indeed, copper connectivity can not offer the same speeds, of 300 megabits per second, which Verizon is targeting through its 5G Home product.

LEAVE A REPLY

Please enter your comment!
Please enter your name here