Lumen Technologies, Inc. (LUMN) Management Presents at Cowen's 50th Annual Technology, Media, and Telecom Conference (Transcript) – Seeking Alpha

Lumen Technologies, Inc. (NYSE:LUMN) Cowen 50th Annual Technology, Media, and Telecom Conference June 1, 2022 3:55 PM ET
Company Participants
Chris Stansbury – EVP & CFO
Conference Call Participants
Greg Williams – Cowen & Company
Greg Williams
Cowen’s 50th TMT Conference. My name is Greg Williams, I’ll be hosting today’s session. I cover the cable, telco, satellite and towers here at Cowen. I’m glad to be joined by Lumen’s new CFO, relatively new CFO, Chris Stansbury. This session is 30 minutes fireside chat. I will leave some time for Q&A.
And with that, Chris, welcome and thank you for joining us.
Chris Stansbury
Thanks, Greg. Good to be hear.
Greg Williams
So I just wanted to start with an intro question, since you’ve been in the seat only a few months now what’s the sort of CFO philosophy that Lumen is attracted to and make this the right fit?
Chris Stansbury
Yeah. I mean, for me, I think Lumen is a company that’s just got a lot of pent up potential. If you look at where they’ve been focusing in terms of the opportunities for growth both in the consumer and in the business space, I think there’s a lot that can be done there. And certainly given my previous experience where I was in a company that had to pivot from kind of relatively flat to down revenue to growth, I thought it was a great opportunity to go do something fun again. And so that’s why I’m here.
Question-and-Answer Session
Q – Greg Williams
Great. And can you share some of your early learnings and what are you focusing on today?
Chris Stansbury
Yeah. So I think the key thing is that, when you kind of get inside the ten, it’s clear that a lot of work has been done to position the company for growth. So a lot of smart people, a lot of hardworking people. And so it’s — I would say it’s more evolved than I even anticipated coming in in terms of kind of the starting point as I arrive. So that would be one. The second is that, I think around that there’s a real opportunity for Lumen to disclose more to the outside world on where and when that growth comes and how we get there. And we gave a little bit of that when we closed Q1 around the consumer business and we’ll do more as we go forward.
Greg Williams
Got it. I did want to ask one of the bigger questions I get from investors and that’s capital allocation. I know it’s still in early days for you, but is there anything you can tell us about your philosophy in capital allocation? And specifically, the pushback I get is that, you’re serving many masters, you’ve got to build out fiber to the home, keep it CapEx build, serve a dividend and maintain leverage neutrality or something relative to that and folks find it difficult to balance all three. Can you help us with that?
Chris Stansbury
Sure. Yes. And I think when you look at and you’ve list them off in order, right, between growth, the dividend and leverage neutral. The reason those are what they are as growth obviously gets us to long term returns for shareholders. The dividend is a way to return capital in the interim and then obviously we want to keep leverage in a place that’s good for running the company. The way I look at it is not an absolutes. Right? So If we take a look at our growth opportunities, our portfolio, we can talk about that more today in terms of how we think we can bucket the various activities we have, particularly in the business segment. That ultimately will inform where we can get more efficiency out of the business, both on OpEx and CapEx and ultimately what the capital requirements are.
As we move through the next few years and I think that will ultimately inform any adjustments we make. But we have options. Right? We can accelerate or decelerate spend on capital, right? There is some room on leverage, even within maintaining, I think, a responsible level of leverage. So we have options, but before we even get to really a firm level of guidance around that I want to make sure we pushed as hard as we can around the various buckets and how much more efficient we can get.
Greg Williams
Got it. Are you going to provide any updates to capital allocation in your philosophy in the next few quarters?
Chris Stansbury
I think inevitably we will as a company. I mean, we haven’t given any guidance obviously beyond 2022. And I think as we get into 2023 we’ve got to give a firm picture on what that year looks like and what our capital allocation priorities are when we get there.
Greg Williams
Sounds good. I did want to talk about the enterprise business. As you dig into the business and you’re looking for further opportunities, you did mention in the past that enterprise is your most surprising space. Can you expand on the dynamics in enterprise and where you specifically see room for opportunity, how Lumen [indiscernible] capture it?
Chris Stansbury
I mean, when you look at what Lumen does in the enterprise space, it matters. Right? We’re moving a significant portion of the world’s Internet traffic. And you think about the world today post-COVID, security risks and whatnot, making sure that the network runs efficiently that it’s secure that companies are able to extract value from that, whether that’s edge computing and services like that. That’s really where Lumen shines and we should own that space. So there’s been a lot of work around that and we’ve got a lot of security experts within the company that I think provide critical feedback to large enterprise and how they can make their environments safer, more secure, but also extract as much efficiency as possible. So when I look at enterprise, it’s really a tale of three or four businesses. Right? You’ve got a bucket that’s kind of nonrecurring where we do equipment sales that weren’t because we want to go do a lot of equipment sales, but because they enable a complex solution for a customer. We’ve got legacy businesses that are declining, and that’s just natural, that’s gravity, that’ll happen, that’s legacy voice, products like that.
You’ve got products that may be slower growth or even low levels of decline that will continue to be supported well into the future, right? Think about VPN, and large enterprise is still buying VPN, they need it, they use it and that’ll be critical as we go forward. And then you’ve got growth buckets where kind of the latest in security SD WAN, SASE, then you’ve also got UC&C and a lot of our edge portfolio sits in there as well. So that’s really how I look at segmenting it. And if you think about kind of that grow, maintain and the decline buckets, they’re about a third each, broadly speaking. We’ve got to give a little more clarity around that as we go forward. But I think that speaks to the fact that there’s — that we’re not starting from a small place when it comes to a growth portfolio, there’s a lot there.
Greg Williams
Right. So marrying that statement with the one you’re saying, you wish they could disclose more you’re saying that you’ll disclose maybe perhaps in this growth maintenance and legacy and maybe —
Chris Stansbury
Yeah. We got to figure out exactly how we won the depth — what we label those buckets as. But I would say broadly, that’s where we’re going to end up. And we’ll — when we do that, we’ll give more color around what’s in each of those buckets. But I think that’s probably where we’re going to end up. We’ve got a lot of people working on it. And importantly, it’s not just because we want to give more visibility externally. I think it gives us the opportunity to take a harder look about how we resource each of those buckets. Right? How do you compensate people? How do you resource, not just with human talent, but also financially? And that’s where I think we can uncover more efficiency that ultimately then drives us to what do we need to do on capital allocation.
Greg Williams
Right. And it certainly will help externally as we model, because we can kind of see that algebraically.
Chris Stansbury
Absolutely.
Greg Williams
You can see that long awaited revenue inflection. And speaking on enterprise, where are you seeing the market today? In the past you’ve seen this delayed decision making through COVID, and as we’re getting out of it or hopefully getting out of it, where are we in the macro environment? And are you seeing any green shoots wearing the narrative with enterprise and bookings?
Chris Stansbury
So what we’re seeing in the enterprise business, particularly on the large enterprise and the government side is much bigger, more complex deals. So USDA is a good example where we’re dealing with thousands of locations. It’s going to take two or three years to get to run rate revenue because of just the complexity of the install involved there. And that’s the bad news. The good news is, those are sticky relationships, they’re complicated. Customers need us to solve their problems. So that’s all good. We have not seen any slowing in decision making at all. And I think part of that is driven by the fact that when you think about IT spend during COVID, there was a shift to the immediate need to create secure work environments to support work from home. And what we’re now getting to is the work that would have naturally happened during that same window around making sure that data centers, the network, the edge network is secure. And so, I think there’s a real business need to shore that up, and I think that’s a nice tailwind for us right now.
Greg Williams
And you mentioned they’re big and complex, you sell solutions, but what products in your solution sets are most promising within this post COVID digital transformation?
Chris Stansbury
I would say that in terms of big buckets, our edge of network solution is real and there’s a lot of traction around that. So we touch 97% of all businesses in the US within five milliseconds. And when you think about the pivot particularly in a labor constrained environment to more smart businesses, whether that’s manufacturing, whether it’s retail, the need for low to no data latency around security, around devices that talk to each other, that’s critical. And so, the ability of companies to have that data sitting off-site in a more efficient way, but not lose the speed that they need to run those environments effectively. That’s a real opportunity for us. And I think we’re definitely seeing traction around that. And that was part of what we did with USDA.
The second bucket is security. And so, when you think about SD WAN, SASE, etcetera, that’s a real opportunity. And I think it’ll continue to be an opportunity in today’s environment. So I’d say those two are big ones. Obviously, there’s going to continue to be a shift towards unified communications. And I think that’ll obviously continue as well.
Greg Williams
Right. So you’re not seeing delayed decision making, but your revenue is not really showing, which indicates that there’s legacy services that are coming off pretty large rather — or maybe just customer churn and maybe we’ll get into that. We will start with legacy and pricing, help us understand the legacy churn, voice, private lines, MPLS. Are you managing this business for cash? And are you migrating customers to lower priced solutions? So help us understand that, there’s no late decision making, yet the revenue still [indiscernible]
Chris Stansbury
Yeah. So legacy, I think is, as I said earlier, that’s just gravity. Right? It’s the — you’re not going to change it. I do think there’s opportunities within that around can we be more cost efficient? Are there pricing opportunities? But it truly is a manage for cash portion of the business. Those declines are obviously faster than products that I think will be here for a long time, like VPN. So again, I don’t want to get too much into specifics around that. But that’s something that I think you’ll see a lot more from us on as we go forward.
Greg Williams
And how about the pricing environment in general? I mean, we’re hearing MPLS pricings coming down, but SD WAN solutions are coming up. I know you sell solution sets, but can you just talking about the pricing environment generally.
Chris Stansbury
Yeah. I think you just said it. Right? We’re always going to have a product portfolio where there’s products that are on the rise, where the pricing environment is stronger and there’s products on the decline where it’s weaker. And then there’s products that sit somewhere in the middle where it’s under less pressure and more stable. So that’s just I think a natural part of being in any technology business. And it’s about managing the portfolio, making sure that you’re out in front and you’re looking for that next thing. And I’m really pleased with what I see inside of Lumen in terms of our ability to look into the future and see where we want to place that next bet. I think the company does a good job of that.
Greg Williams
And you mentioned unified communication as a service. Maybe a level deeper is this whole telco versus cloud debate. Are cloud providers taking any network business? We saw Amazon come out last November with a private 5G network product. But just trying to understand the threat of a cloud provider maybe taking on some more network services?
Chris Stansbury
Yeah. We’re not seeing that in any kind of major pronounced way. And look, I would say that it’s interesting in my previous life when cloud was really starting to gain traction. I think there was a belief by some that cloud was going to eliminate every data center and potentially every PC on the planet. And the reality is, we ended up in a hybrid environment. And we ended up in a hybrid environment because some workloads can be in public environments that companies are less concerned about. When it comes to more proprietary information or compute power that there can be no data latency, that’s when things start to get closer to on-prem or edge or private cloud environments. So there’s different I would say degrees of freedom around that. And so, no, I don’t think cloud is going to massively disrupt the space. I think it’s an element. I think cloud is an important part of what we provide. We have good relationships with the major cloud providers and that’s part of the overall solution. So cloud plays a big role, but I don’t think it’s the only role when we’re dealing with a complex solution.
Greg Williams
Right. If we talk about the risk of a recession, it seems like if we do enter a recession, usually never good for companies that rely on enterprise business. But at the same time, these enterprises just went through years now of figuring out how to work their networks in this hybrid workforce environment. So they still need to upgrade their networks but at the same time we’re in a recession. I’m just wondering how recession improves your business.
Chris Stansbury
It’s a really good question. I mean, and again, typically, I think IT spend generally moves with the economy broadly. Right? But we’re dealing with a portion of IT spend that’s absolutely critical. Right? And when you look at more complex sales, we’re dealing with the CIO. And if you’re the CIO, you never get fired because you’re going to save 10%. You get fired if the network goes down or it gets infiltrated and the business is put at risk from a technology standpoint. So again, as I said when we opened, what Lumen does matters, I think that speaks to that. And businesses, I think are in a position today where they actually do need to shore up the level of investment around the network and the data center. So that insulates us to some extent. So I don’t want to say we’re recession proof. But I would say we’re not seeing any signs of slowdown right now and I do think there’s some tailwinds around needing to continue to make sure those environments are safe and efficient.
Greg Williams
Right. And if I think about a stagflation environment, maybe help us understand the impacts of inflation, specifically in the enterprise business. What are the pain points and what would be the ability to pass across along your customer? I mean, you’re saying it’s recession proof, I’m just wondering if it’s also price elastic?
Chris Stansbury
Yeah, I think to some extent that’s true. I mean, we’re the reason we’re seeing inflation is because, broadly speaking, prices are going up, right, as input costs go up. So, yes, I think there is an ability to do that. Is it across the board? Is it instantaneous? No. but that’s definitely an opportunity. And frankly, there’s an opportunity for us to continue to get more efficient. Lumen has done an incredible job over the years of taking cost out. There’s still opportunity to do more of that. I think continuing to innovate around automation and making sure we’re putting the resources where they matter the most. That uncovers opportunities that we can take advantage of.
Greg Williams
Got it. I did want to switch to mid markets. It continues to be challenging for Lumen, even Jeff Storey said on the call, earnings call that there’s work to be done there. Help us understand the high single digit losses, is it COVID related? Is it technology risk competition? And what are you doing about it?
Chris Stansbury
Yeah. So I would say it’s multifaceted. Certainly, COVID impacted that segment, I think, in a deeper way than it did on large enterprise. But Lumen, I think admittedly also had not made the investments that it needed to around how to reach that customer in a way the customer wanted to be reached both from a product standpoint, as well as a sales standpoint. So a lot of work has been done. We launched the Lumen Marketplace little over a month ago. It’s a great platform, very easy to use and you’ll see more and more product being stood up in that marketplace where frankly, customers can self-serve around their needs in a very clean, easy to use manner. So we’re excited about that. It’s definitely something that converts to revenue faster and we need a lot of that as well as the large sticky deal. So I think Jeff really highlighted that because it is important and we have made those investments and so, more to come as we add more product over the course of the balance of this year and into next year.
Greg Williams
So you’re putting the products on all digital platform, it’s self-serve, new account reps and you said you’ve launched it or you’re going to launch it?
Chris Stansbury
It’s launched. They’ll continue to be product that’s added to that. And again, we do have ways of reaching mid markets that is salespeople, so it’s both. But the reality is, as that segment of the market in particular converts to a more digital self-service experience, that’s what customers are looking for. So we’ll sell to a customer however they want to be sold to, but digital is obviously a big piece of that.
Greg Williams
Got it. And then just switching to mass markets and everything that’s going with quantum, your private home build was off to a slower start than expected, though you’ve noted it was more timing and you do expect a meaningful third quarter ramp. As we consider the goal of ending 2022 with [1.5 million] (ph) passing run rate, would this suggest that a fair amount of the planning design and permitting is already done and you’re ready for that third quarter ramp? Just help us feel comfortable with the cadence there.
Chris Stansbury
Yeah. If you think about what has to happen to take fiber to the home, you’ve got to do your market identification, you got to do sidewalks, engineering, permitting. And so, all of that activity to fill the 2022 build funnel really started in early fourth quarter of last year. And so the work to get 2022 filled has been complete, we’re waiting for permitting now. We’re not waiting to order equipment. So any of the supplies we need to build out those markets has been ordered. And as soon as we get permit approvals, then we’re going to be in market. So that’s why Q1 and frankly even Q2, you’re not going to see huge numbers, but you will see a dramatic ramp in Q3 and Q4. And importantly, as we exit this year we will have the funnel full for next year. So it really is about getting up to run rate. This is how I characterize it. And we’re really confident in where we are on that.
Greg Williams
So that confidence, because my next question is going to be materials. That’s been an issue for some — usually the smaller fabric of the home providers and you’ve ordered your equipment, but are you warehousing it? Did you get it? Help us with their supply chain and your visibility out of the next year or two?
Chris Stansbury
Yes, we are getting what we need to build those markets. We’re a big buyer of those supply’s. So we have long memories. And our suppliers do a good job of getting us what we need so that we can build those markets out. So I don’t think that’s a constraint. We know a lot of the labor that we use is internal labor. And we’re —
Greg Williams
And unionized.
Chris Stansbury
Yeah. And so we’re able to retrain that labor, which is important to that population, it’s important to us. And that’s allowed us as well to help get these markets build out.
Greg Williams
So I came back from ConnectX conference and some of the smaller labor players were saying that they really need to train, train, and train, and that sounds like you can do that internally since you’ve got a heavy base of field employees that are unionizing and retrain them for private loan deployment, which is why you feel confident about it.
Chris Stansbury
That’s a big piece of what we’re doing, yes. Right.
Greg Williams
And if there are rising costs as your CapEx guidance contemplate the rising costs? Or is that already baked in?
Chris Stansbury
Yes. I would say that it does. We’ve talked about $1,000 per enablement as a guideline. We still believe that’s a good number. And obviously, that’s an average, right? Some are going to be lower, some are going to be higher, but I would say that it’s a very targeted approach. We’re only taking fiber into dense urban areas where the returns are going to be there. We’re not trying to take it into less dense, more rural areas. So the reality is, it’s a more efficient build as a result, but that also gives us the opportunity to drive a lot more usage and penetration over that fiber than we otherwise get.
Greg Williams
Got it. And just want to talk about penetration and cost. I mean, as you begin a more broad based deployment versus previously you were doing micro targeting, how do you think about the cost across the past versus getting meaningful penetration now early on in more of a mass build?
Chris Stansbury
Again, I think $1,000 or in that vicinity is reasonable, but we do have — I think we do have flexibility around that. When you look at the fact that we’re building penetration rapidly, and quite frankly, we’re not cannibalizing ourselves heavily because we’re starting with a product in those markets that frankly isn’t performing well. Right? So there’s a lot of upside to what we’re bringing in. And as we said in our Q1 call, the 2020 vintage was at 22% penetration and it continues to grow from there. So we feel good about the 40% target. I think we’re well on our way to that. And we think that’s a good conservative target. And the customer experience has been very well received. And our net promoter score being above 50 really, I think bolsters the fact that customers want this product and they like the pricing and the ease of use. So I think all of those variables are things we can play with in time, but we’re committed to not doing promotional pricing and easy to turn on, turn off no contracts. And as a result, I think we’re getting a lot of good usage.
Greg Williams
There’s about five minutes left. I just want to see if the audience had any questions. Okay. I did want to talk about the edge. You guys invested pretty heavily in that. You recently talked about — is that part of that one-third growth revenue?
Chris Stansbury
It actually crosses that growth bucket as well as what I would call more the maintain bucket, because there will be products that are not necessarily legacy decline products, but maybe products that are a little further down the maturity curve that’ll still play a big role on that.
Greg Williams
So how is the edge in the in the maintain bucket? I’m just — what do you define as the edge?
Chris Stansbury
Well, great question. Right? Because Edge Connect is going to have compute power, it could have storage, it could have VPN associated with it. Right? We can go to security. So it depends on the kind of environment somebody wants and what services they want to acquire. But it could be multilayer and that’s why it could really cross both buckets.
Greg Williams
Got it. And what are the most compelling low latency use cases that you’re seeing? Maybe examples of Verticals that would take advantage of the edge –
Chris Stansbury
Yeah. We actually talked about getting some video content out into people’s hands, because we do have some great use cases. But think about things like smart retail and clearly that’s where the world I think is going to end up pretty rapidly as there’s labor shortages and whatnot. But you have environments now where you can walk out of the store without checking out and the store knows what you’ve used. But that’s an environment where there needs to be security. So think about the immediate need to see if there’s any kind of theft, the automated checkout, those kinds of things, automated factory floor, another good example. But VR, AR those kinds of environments as well.
Greg Williams
As you’re looking at showing up the balance sheet, I had one last question about media reports saying that Lumen could be exploring a sale of your EU assets, and more specifically not just selling [US] (ph) and I know you wouldn’t be able to opine on that necessarily, but selling maybe the infrastructure side of it, that way you get a higher multiple on that piece and keeping the operating side. The question is, one is, is Europe considered a core asset for Lumen? And then I have a follow-up.
Chris Stansbury
Yeah. So I can’t get specific about what we’re looking at this point in time. Here’s what I will say. Whether it’s a geography or frankly a product line, like a legacy product line, if there’s an asset that we have that we don’t view as strategic and we can earn a really good return by selling it, then we’re going to look at it very seriously. When you think about the dispositions we’re doing in Latin America and the 20 states, the reason we’re doing that is, it’s not where we’re choosing to focus our resources in a concentrated way. We’re doing that around quantum fiber, dense urban areas, we’re doing it on the enterprise side and those businesses have future potential, but they’re going to need investment and they’re going to need attention. And that’s not where we want to focus our resources. So we would look at the rest of our portfolio in the same way and through the same lens.
Greg Williams
Got it. And then the structure I mentioned where you maybe sell off infrastructure. Do you need owner’s economics? Could you entertain a financial engineer or something where you’re spitting off the investment side — I’m sorry, infrastructure side and keeping the services side like OpCo, PropCo, is that something that you can entertain?
Chris Stansbury
I mean, again, I think as long as those two conditions that I mentioned are met, we would look at things. So I don’t want to get too specific about whether we would or we wouldn’t at that level of detail. Again, I think it depends situationally on those assets and how important they are to our overall strategy and operations.
Greg Williams
Got it. With that, we’re about out of time. So thank you, Chris.
Chris Stansbury
Great. Thanks a lot.

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