Lumen Technologies, Inc. (NYSE:LUMN) Bank of America Media, Communications & Entertainment Conference 2022 September 7, 2022 ET
Company Participants
Chris Stansbury – Chief Financial Officer and Executive Vice President
Conference Call Participants
Brian Fenske – Bank of America Securities
Brian Fenske
So I think we will start. Welcome everyone. Appreciate you coming off for this presentation. My name is Brian Fenske, I’m the TMT Sector Specialist at Bank of America Securities. Helping out today with a presentation from Lumen Technologies. So today we have the Chief Financial Officer and Executive Vice President, Chris Stansbury joining us. This is going to fireside chat format with some questions. We have some time for client Q&A at the end. And some of them with microphone too to work and get those questions from here.
So, first, Chris, thank you for joining us. This is — this entire conference is our first in-person TMT Conference in quite a while. So it’s great to see you. You’ve been with moment just a little over 5 months. Can you share your thoughts on what you’ve observed so far early read on the company and the industry the opportunity, the outlook for the full year, priorities, just kind of a high-level thoughts.
Chris Stansbury
Yes, absolutely. And actually before I do that, Brian, hey, don’t want to drop everybody’s attention. We filed an 8-K this morning. With more disclosure around the impact of the two divestitures that were doing this year. One is close. That’s a light MDO and presume not a one that’s six packet to close in early Q4. So, yes, it’s great to be here in-person. It’s nice to be back and seeing people live. I know — I’ve done a few of these and its interesting how things are changed even in a few quarters. Few months ago, people were still awarded the shake hands and the starting the fuel which is great. But really I came to loon because of the growth opportunity I had saw. And that’s as a wife today. It was one I came in. In factors, I’ve been able to get into the business more deeply and see the promising. My belief in that is even stronger. I think there’s an enormous opportunity before Lumen. There is obviously an investment window that comes off ad, but I think we are seeing some very positive trends. As part of that, we’ve really changed the way over the last few week months that we are allocating resourses within the company.
So one of the things it was very clear to me when I came in to the row. The really wasn’t a good way to understand what the enterprise segment was. And so as we started for look at that, we saw an opportunity to give investors more visibility, but probably more importantly, make better decisions internally on how we allocate resources on a product life cycle approach.
So, we gave some more disclosures last quarter. We continue to evolve that as we go-forward. But when you look at the portfolio that exists today, the reason I feel so positive about the growth is when you think about a growth bucket, a nurture bucket, a harvest bucket, our growth bucket is our biggest bucket. And that’s not contrived. Those are real things that are growing today. And that’s why I think you’ll see overall growth in 2 to 3 years.
Brian Fenske
So now that brings up a question I had, which is, is this new segmentation, more of a change for us, for the shareholder community and external to tell the story better? Or was it a real internal action of reorienting teams in a reorg were a little bit of both.
Chris Stansbury
It’s, I would say that the visibility aspect was the added benefit. It’s, from an investment standpoint, it’s really a change in mindset as to how we manage the business. So I would say that, because there was a lot of desire to grow within Lumen. There was a lot of, as I said, good, good activity that already existed, but that it probably spread itself a little too far. There were products that may be in growth categories, but maybe our position wasn’t as strong and in those situations, maybe we’ve been investing in CapEx or OPEX at the rate. And so this, this has done a few things. It’s focused that down, so people know what types of investments would get approved or not approved. And we’ve also put leadership in charge specifically for the harvest bucket, because that’s a muscle memory that we have to build. And it’s something that will always be there as we go forward. So there will be a natural lifecycle to these products where there will always be something in the harvest bucket. But that skill set looks very different. You’re focused on cost optimization, and price realization to basically maximize cash flow and NPV for later, lifecycle products. And so that’s all in place now. And those teams are tearing into that, as we look at what 2023 looks like.
Now cost cuts and cost control are theme at this conference and at every tech presentation right now. What are you doing in a way of cost controls this year, that have been, call it, incremental because of the macro environment we are facing?
Chris Stansbury
Yes, it — I would say that we are doing the same zep that you would normally do. We are just doing them a little more aggressively. And then by the way you can also be in the grammar pricing as well, right? To the extend that CD opportunities to take price we will do that. To help us that’s some of those pressures. I would see the balancing accurate now though and that want to be really clear on this. Our focus is growth. We do see a pathway to growth. And I think the company is in a position where in a very tough space for years with consolidation or whatnot. There’s a lot of playing of defense. And I think we are in that pivot now. We are starting to start playing more often.
And in support of the balancing act this year, is managing costs, but also making sure that we are now at imperial international — next year and the reverse gear on. So that’s the balancing act. And so we’re trying to be very mindful about where we focus on costs.
Brian Fenske
Got it. Now let’s talk a little bit about the areas that you’re focused on for growth now. In various business sales channels and Q2, you had good results. You saw improved revenue performance. What are the services for which you’re seeing the most demand right now? And related to that, were you putting your capital behind?
Chris Stansbury
Yes, it’s a great question. We get it a lot, because I know there’s a lot of negative messaging around the business segment. I would say in the competitive environment we’re in today, we’re performing, I think better than most. And that really does get back to the offering. So back to the commentary on the buckets, and the biggest bucket being growth. The Lumen platform that we’re continuing to build is, has become a real value for large enterprise and government. So a lot of those contracts are multiyear contracts. And as they come to the end, where they’re asking the customer what they want to do to support secure work in a hybrid environment. So things like sassi, things like edge of network computing, those are big growth areas for us where we can monetize the network. And customers are appreciating the offering that we have.
I think the other thing that’s really important, and that is, those are big — when we talk about large enterprise, those are big complex deals, that take a long time to sell. They take a long time to enable. That’s the bad news. The good news is in complexity, there’s margin and in complexity there’s stickiness. And once we have that relationship in place with the customer, we tend to get add on business that goes well. So that’s the large enterprise bucket. I would say, well, in the mid market space, we still have a lot of work to do. I think our offering continues to strengthen. And that’s largely around digital motion, self service. And if you if you look at the Lumen offering online, you’re going to continue to see more and more product becoming available online, where the customer is walked through a process, okay? What do you want to buy?
Here’s different ways you could configure that and what that gives you. Here’s what that looks like for more on-prem office. And by the way, if you want to also configure with that work-from-home seats around that, then we can do that, too. So I think you’ll continue to see strength in that area as we bring more and more product alive there.
So just thinking about that topic and your relationships, your long standing relationships with the public sector, is there a bigger opportunity to partner with some of the SaaS companies, some of the consulting companies, or other vendors? Two, we’ve seen it with AWS partnering with various software company areas for partnerships that can open doors for you. I mean, partnerships are a critical piece of succeeding in those space. So when you think about something like our sassi product, there’s partner product in there around the security layers, and so I think you’ll continue to see us expand that.
I think that’s very important. I also think there’s partnership opportunities around how you get to more smaller customers, right? That’s something where there’s other partners that have that reach in those relationships that I think we can leverage. So — and by the way, that’s true in the digital landscape as well, right? There’s other properties that have a lot of traffic, they have a lot of awareness, a lot of customer reach, and we can be part of that ecosystem. So I think you’ll continue to see us evolve that as we move forward.
Brian Fenske
So in this growth bucket, because let’s stick with this for a while. It’s selling some of these technology services to mid market. What else is in that bucket that excites you when you see this opportunity?
Chris Stansbury
Now, there’s obviously things like wavelengths leveraging the very large fiber network that we have. It’s — I think it’s a network that, that people would kill to have. And so you’ll continue to see growth in that area as well. And then there’s other products that will continue to come into that space.
Brian Fenske
Now, you mentioned, you already filed the 8-K that has the particulars with the deal. But can you walk us through the rationale behind the divestitures allowed and the Ilac assets?
Chris Stansbury
Yes, when you think about the transformation that Lumen’s going through it. Ultimately, you got to make choices, right, you can’t do everything. And these were both attractive assets was strong EBITDA. But ultimately, to compete effectively going forward, they were going to require investment and management time that we felt would be better served with better returns, if we focused elsewhere. Things like the growth products. So that was really the decision point. And we got good multiples on those sales. And we were also able to take advantage of some NOLS that obviously helped with those returns. But that’s really the key driver is. Let’s focus the business. We will obviously take the opportunity with proceeds to keep leverage in a good space. And when we wake up, post closing, we’ll be in a new world where our teams can stay focused on the growth agenda.
Brian Fenske
Have you just said what the use of proceeds is to pay down debt, or …?
Chris Stansbury
We haven’t been super specific, but we have said that keeping leverage in the neighborhood that it is right now is very important. And so when you do the math on that, then obviously a big chunk of the proceeds would go to debt repayment.
Brian Fenske
Got it. And to remind anyone who — will have, raise your hand for questions throughout as well. But I wanted to ask you kind of the obligatory macro question. What are you seeing in the marketplace? What how is business decision making being impacted quarter-to-quarter? Or what’s the freshest kind of commentary you can offer us?
Chris Stansbury
Yes, really no change from our last earnings call. So we’re not seeing extension of decision making, we’re seeing a little more administration, you may, when you may have needed three signatures, now you might need four or five, like cancellations aren’t increasing. We’re not really seeing a slowing in the in the pace of incoming sales. The biggest issue that we have is we tend to get, big logos signed. But it takes a while for that to turn into revenue, right? Because you’ve got to deploy to hundreds, if not 1000s of sites, down the line, but I’d say the sales funnel remains strong.
Brian Fenske
And no real change in the public sector or government sector?
Chris Stansbury
No, I mean, that’s frankly been, I’d say a bright spot for us. We’ve picked up a lot of large government contracts U.S Postal Service, USDA, to name a couple. And we’re performing very well in that space.
Brian Fenske
Now, what are some of the ways other than I guess some of the divestitures, strategic divestitures, that the growth businesses can offset the declining businesses and get kind of the mix shift happen over time where you guys are a growth company again, or yes, modest growth company again, when does that happen? So at this point, I think that’s 2 to 3 years until we get to that growth. Part of it is, yes, there’s a pruning, with a divestitures that helps us in that regard. But even if you just take kind of remain quo, that growth bucket is the biggest bucket. And so we’re starting in a very strong position. And frankly, I think that’s why we’re taking share and why. Our [indiscernible] declines are far less than what I think others are seeing right now.
Brian Fenske
Right. Now, if we think about the pandemic’s impact on technology It’s been varied. But a big part of it is the so-called digital transformation. It’s pulled forward decision making process, force companies to modernize their tech stack. How have you guys seen that manifest in demand for your business?
Chris Stansbury
Yes, complexity is our friend, right. Complexity means margin. That means stickiness, as I mentioned earlier. So as we move into the new world of, yes, there’s some on-prem, there’s some public and private cloud. There’s work from home and remote work. All of that is complexity. And so we’re seeing that shift. And that shift is good for us. So I think, the pandemic specific issue where there was a rush to enable remote work, and then we had the lap that I think that’s largely behind us now. But we’re certainly seeing as we go forward, more of a more bundled sale that deals with the complexity of remote work, as well as in office. And that’s a good thing. I’d also take your point on digital. We’re definitely seeing an increased desire for self service. So that’s the focus of the digital marketplace and combined with a Lumen platform. And as I said, you’ll continue to see more offerings, we got five requests, we’ve got sassy, and there’ll be more and more that comes alive in the coming months. And that’s getting very positive traffic. So that’s good for us.
Brian Fenske
Now, just as we sit here, it strikes me that a lot of the topics we’re talking about are high tech, it’s cybersecurity. It’s edge computing, it’s not your legacy wireline kind of telco business. So being five months in a job, what’s the culture like at Lumen? Has it evolved to feeling like a fast moving tech culture? Are you hiring tech savvy people? And if not, how’s that going to change?
Chris Stansbury
Yes, it’s a great question. And it really gets to, I think, the fun part of what I get to do every day, which is, I love situations where companies are going through a transformation, right? They’ve been successful in their own right, but it’s time to change, it’s time to think differently. And that’s exactly what’s going on at lumen today. So, I think about the deeply entrenched knowledge base around the network, and our harvest teams and nurture teams and how they’re going to extract value that that generates cash for us to invest in growth. And when I think about our growth teams, and the technologies behind that, but frankly, as much as that’s important, also the marketing savvy, how do customers want to buy today? How are we going to engage with them? So you’ve got both of those things going on. So there’s this wonderful conflicts too strong a word, but just dichotomy of what’s required to manage those different businesses at either end of the spectrum. A lot of fun. So I’d say we’ve got a lot of the work. But there’s always the need for more, and I think you’ll continue to see us pivot in that direction. But is it fair to say that sort of cultural identity transformation is kind of early days internally? Or I’d say it’s not necessarily early days, but it’s we’re probably an inning three. I feel very strongly growth is a mindset, right? And if you walk in every day and say, how are we going to grow? Then that’s what you’re going to go do. If you because that’s playing offence, right? If you’re playing defense, that’s very different. So I think we’re really starting to see that cultural shift internally, where people want to win, they want to play offence, and it’s, exciting to be around, we’re starting to see green shoots as a result. It’s great.
Brian Fenske
Digging into the fiber business, can you provide an update on the quantum fiber build? Are you still on track to meet the 1 million homes pass this year? And just broadly on fiber trend?
Chris Stansbury
Yes, one 1 million is a target. We’d like to get there, I think we’ll be in the neighborhood of that. The biggest issue that we face is, is quite frankly, permitting and getting the approvals that we need so that we can get the fiber in the ground. I’d say the second biggest issue, is it just labor right and finding those resources, but we’ve been able to navigate that the supply chain headaches, crop up from time to time, but again, generally speaking, we’re able to manage that. I think the that’s the near-term stuff, though, I mean, and we’ll continue to manage with that. I think the longer term proposition remains very strong. So when we look at the product itself, it’s one price all taxes and fees included, there’s no contract customers pay up front. So there’s no bad debt risk. It’s getting very high NPS scores from customers. And the penetration continues to improve on a trajectory to get us to the 40% target that we’re aiming for. So the 2020 cohort after 12 months was I think, 22%. And after 18 months was 27%. And it continues to improve. So all the things that ultimately drive long-term success, we’re continuing to see the momentum build in our favor. So that’s a real positive. I think the other positive, frankly, is we’re focusing on dense urban areas. And we’re starting with this is a remain code number, a copper penetration, that’s about 12%. So a lot of what is getting signed up are new customers. So there’s not a big cannibalization threat or impact to what we’re doing this is there’s a lot of upside. So we feel very positive about this business and the growth bucket. So the fiber it is — but I would say that growth kind of nurture harvest is really more of a business segment focus. But yes, definitely, quantum is a growth vehicle.
Brian Fenske
No, when are you concerned about competition from fixed wireless or in general?
I think fixed wireless has its place, but I don’t think that place is dense, urban areas, right. So I just don’t think it plays well. When you look at the symmetrical nature of our product. It’s very strong. And I think the other thing is, and we don’t talk about it a lot, because we certainly don’t want to overstate it. But what we’re building is future proof. It’s [indiscernible]. We’ve got an eight gig product out there today. Yes, we’ve had some sales. Is that going to move the earth right now? No, but it speaks to how future proof that product is that cable is going to be in around for in the ground for decades. And as we humans have an insatiable appetite for data. And that continues to grow. We are ready to expand that. And there’s not too many other people that can say that. So from an offering standpoint, from just a raw technology and architecture standpoint, we’re in a good spot.
Brian Fenske
You announced a eight gig fiber broadband offering in select markets Q2. What’s your strategy behind the offer? How much uptake do you expect to see with that?
Chris Stansbury
I don’t think we’ll get a lot near-term. I mean, there’s certainly a customer that’s out there that does require it. It’s really more — it was more of a statement to say, hey, this isn’t in a lab. This is what we’re doing today and able to do today. And it speaks to that future proof. So it’s there for customers that want to buy it. But as I said, I don’t think that’s, that’s near-term going to move the needle, I think longer term, it’s just more a statement of our ability to grow with customers’ needs.
Brian Fenske
We’ll talk a little bit about capital allocation, the financial profile, being 5 months in the seat, is there anything about the operating cost structure, cost of goods, just the overall income statement that strikes you as an opportunity to be more efficient?
Chris Stansbury
I mean, certainly, as we look at two major divestitures, the company’s going to get smaller before it gets bigger again. And in that there’s a — definitely an opportunity for and, frankly, a need for us to relook at our corporate overhead and say, all right, for a smaller company, how much do we really need? And that’s everything from the size of workforce in those functions, all the way through real estate and other areas. So I think there’s a lot of areas there that we can we can improve on, and they’ll certainly be a focus as we go forward.
Brian Fenske
And do the divestitures make your marketing dollars more efficient? Or ….?
Chris Stansbury
Yes, because the reality is, I would say, it’s not just marketing dollars, it’s also just our investment dollars more broadly, right? We’re going to be focusing on a narrower set of products that are going to get those resources and I think it increases their chances of success as a result.
Brian Fenske
And now, I wanted to talk about your philosophy. As much as you want to expand, we’d love to hear it on capital allocation. Obviously, you have a dividend. We were talking here multiple times on stage about growth, and about investment needs. So how — what’s your early read on capital allocation strategy moving forward? Where the dividend fits in the context of that? I know it’s a hot topic sure company.
Chris Stansbury
And it’s a fair question. I mean, the reality is, we invest heavily in transforming the company, and that question is going to come up. So we’ve talked as a company about the undebatable number one objective is growth. Obviously, the dividend is an important part of how we provide returns to shareholders. We’ve talked about the divestitures of non-strategic assets. And also, keeping leverage in the area that it is. At some point, all of those things in tandem, start to conflict with each other. So, I would say that it is a an ongoing conversation, the Board’s very engaged with me with Jeff. And we know that that’s part of the puzzle that we have to solve as we navigate through this. But there’s also some other things going on that we can’t talk about yet. There’s things going on, like the product lifecycle approach and the harvest buckets, we’ve got to see what they can generate. And those are all going to be inputs to that decision. But the broader focus of Jeff, myself, the board, is making sure that we’re driving the maximum return that we can for all stakeholders. And we’ll look at everything as we go through that. So I think you’ll continue to hear from us on that as we go forward. But, again, there’s still some work to do before we can really understand what that decision is, because some of the things have to come to fruition at first.
Brian Fenske
And now, when you talk about growth investment, are you kind of splitting that between OpEx and CapEx? And how are you thinking about CapEx dollars moving forward and more near-term in this, muddy macro environment?
Chris Stansbury
Yes, it’s interesting. So yes, we look at both CapEx and OpEx. And as we go forward, and you think about more of the of the platform sales, a product, you do have a heavier OpEx, lower CapEx model. So over time, I think that transitions. Near-term, we’ve given some I think, good guidance around quantum. And so you guys can model what that number is, we’ve also said that we’re going to spend 400,000 or 500,000 million a year on. On maintenance CapEx, just to keep the trains running. And the rest of what we spend is largely success based. So there’s a little bit of product development in there. But that’s largely been done. So the edge network is built that exists today, you can turn it on this afternoon, if you want to buy that product. And what we mean by success base, that’s business spend, those are those big contracts. You go sign a 10 year contract with the U.S Postal Service, there’s going to be capital that goes with that. And there’s a return that goes with that. So the capital, I would say, is, is very focused today. There’s always room for improvement. And I think, certainly the product lifecycle approach helps with that. But those are smaller numbers, the bigger numbers, I think there are good controls, and it’s driven by demand, either in the consumer side or in the business side.
So, I’d like to, on the nurturer, grow harvest kind of context. I think one of the challenges with this, we know from this group is, some of the harvest or the low growth segments have been declining at a more rapid pace. I’m not even saying for Lumen, just for many companies in the industry see it a broadband, so can the good offset the bad fast enough? Talk about the bad, talk about the harvest segments are? What are the prospects for those businesses over the next 1, 2 years? Should we brace for really tough conditions? Is it actually potentially surprised to the upside? How are we thinking about those?
Chris Stansbury
I think from an EBITDA standpoint, there’s a real opportunity for us to have positive news coming out of that bucket. Because you’ve got years and years of business consolidations and technology deployment where there’s opportunities to manage cost or realize price. And I don’t want to oversimplify it. It’s tricky. It’s hard because you may have technologies that are shared across products, you may have a situation where in one market, it makes sense to turn something off and save the cost. And convert customers to other products where you can, and in another market, you’re going to do cost savings, light, but you’re really going to focus on maximizing pricing where you can. And that’ll be dependent on how many users there are in a specific geography that’s supported by that technology. So I think there’s probably more good news than bad news in that segment. But again, I think we’re starting in a great place, the biggest bucket is growth, the smallest bucket is harvest. So, that’s a great place to start. And if we can make sure that we’re not killing those harvest businesses, we’re extracting as much cash as we can from those businesses and for lack of a better term, increasing the NPV over their remaining life cycle. That’s really the focus there.
Brian Fenske
If I could ask you just on competition in the marketplace, when your sales force is out there in the field, what are the reasons they lose a deal? Or an opportunity? Typically what are the one or two big reasons? And conversely, what are some of the success stories?
Chris Stansbury
Yes, I think on the success side, it’s really driven by our ability to meet a complex customer need in today’s environment. Really as we started our conversation today. I think where we lose full disclosure, I’m going to get closer to that. One of the great things of Lumen is each of the SLT members is a sponsor for a market. And so five months in I now have my market. And, and so I’ll be spending more time with customers. So I couldn’t tell you exactly, I do think there’s a need for us to be even faster, with response times and quotes and whatnot. So there’s probably something in there. But beyond that, I don’t think it’s a technology gap.
But at the same time, if somebody wants to buy a commodity service, we’ll sell it to them. But that’s not where we compete. So if somebody wants to just buy, at DIA, and they want to buy it at a price, we’re probably not the right provider. So …
Brian Fenske
In what ways have as inflation reared its head with either labor costs, materials costs, just the fiber build, some of the things what how have you felt most acutely? Or maybe it’s not as bad as that.
Chris Stansbury
Yes, no, it’s I would say, it’s two buckets. It’s labor and its energy. And I think the labor, while still an issue, I think we’re seeing that slow a little bit. I think that certainly, the actions of the Fed to try to cool things off a bit that helps there. And on the energy front, while it’s better than it was a couple of months ago, it’s certainly not better than it was a year ago. And so, that that’s probably our biggest near-term pressure. And very near-term, Q3 is our biggest energy consumption quarter. So it’s real time in terms of were focused on that. But those are the two big buckets.
Brian Fenske
Of a higher level question. But if we’re sitting here a year from now on stage, hopefully, David, not me.
A – Unidentified Company Representative
I don’t know I’m enjoying this.
Brian Fenske
I’m enjoying it. Yes. [indiscernible] new job. But what do you hope to be talking about, like, another year? And what do you hope some of the successes are? Are there any businesses you hope you’re out of or less in, that you can talk about? Just how would things look and feel?
Chris Stansbury
Yes, it’s a great question. I would love to be sitting here a year from now talking about a bigger growth bucket, a smaller harvest bucket. But having realized our goal of driving EBITDA out of the nurture and harvest buckets, I’d like to be much further down the path on the deployment of quantum. And, yes, there’s probably a little more pruning in the broader portfolio, whether that’s product or geographies that that we may do a bit of. But I think, if we can do all of that, I think there’s going to be much greater clarity around the bigger questions that exist. That give back to capital allocation and whatnot, and what the roadmap looks like as we start to return to overall growth. So that’s where I’d love to be.
A – Peter Mills
Right, any questions from the ground? All right. Well, with that, I want to thank you.
Chris Stansbury
Yes, Appreciate.
Brian Fenske
Yes, thanks a lot. Appreciate it. Yes, thanks a lot.
Question-and-Answer Session
Q –
[No formal Q&A for this event]
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