Welcome, everyone. It's been three terrific days here. Thanks to all of you for turning out. It's really an honor to welcome back to our Communicopia Technology Conference for the second year, Chris Stansbury, the CFO of Lumen Technologies. Thanks for being back here with us, Chris.
Great to be here. Yeah.
So let's start off with a little bit of a high level here. You know, over the last year and a half, Lumen's put in place a new management. You joined as CFO, Kate joined as CEO, and at your Analyst Day, you provided some long-term financial guidance, including your expectation that Lumen will return to revenue and adjusted EBITDA growth in 2025. Just to start us off, remind us, what are some of the key strategic decisions and operational changes the new management team has implemented to position the company for this?
Yeah, it's really a good question, and through the conversations today, you know, it's interesting reflecting back to sitting here a year ago, right? And I think it's important to think about, you know, where we are today versus where we were then. And there's obviously valuation metrics that we could look at, but I would say that operationally, we could not be in a more different and better place than we were a year ago. So, you know, a year ago at this time, we were contemplating what do we do with the dividend. We obviously had to make that difficult decision, and that ultimately allowed us to invest in our future.
When Kate came in, I think clarity around vision, bringing in a new management team that knows how to do and is up to the challenge of what we're trying to do, and has got the capabilities to stand up the kind of things that we need to do around managing our core. So, you know, stemming the declines through managing churn, thinking about the customer as customer first, and not being afraid to talk to customers who are on legacy products. I mean, I joked with you and others over the past year that one of the unwritten rules of telecom is, if somebody's on a legacy service, don't talk to them, right? Because they might wake up and turn things off.
The sad reality of that is that customers were divorcing us, you know, on a regular basis, and frankly, leaving Lumen to go replace those services with next gen services that we sell today. So, the management team has done an enormous amount of work about standing up processes and wiring the organization to actively manage that, to move customers from old technologies to new technologies, and to really give our sales teams the measurement so that we can use AI tools and learn and grow faster, as well as the capabilities to sell those next gen capabilities. So I would say that's probably the single biggest area of things that have been addressed to date. What still needs to happen is we've got work to do on operations.
I think we've got great efficiency opportunities on the op side, but we've got a lot of work to do to improve how we engage with customers, and we're working on that. And then the last thing is really, and I'd say this is the most exciting piece, is innovation. And we've talked a lot in the market about Network as a Service, ExaSwitch, you know, Edge Fabric and other services follow that. And I think those are the things that ultimately really disrupt telecom and help us move forward. Consumer side, we've really focused on building high-quality enablement, and I think we've got that factory running. And kind of first to hear it, but we finally, and two and a half months ahead of schedule, now have one consumer brand in the market.
We don't have CenturyLink and Quantum Fiber in the same market together. It's just Quantum, and that really now enables us now to go scale marketing.
All right. That's a lot of stuff that we can,
Yeah
... spend some time talking about. Let's start off talking about the go-to-market in enterprise. I think you had already put this in place around the time you were here last year, the Grow, Harvest, and Nurture structure. Talk about the acceptance of that in the sales force, right? Because you put the structure in place, you now have to kind of build that muscle.
Yeah.
Are you finding that you're starting to see the behavior that's properly aligned with the incentives that you've been giving the sales team?
Yes, and the reality is that was a, you know, a finance guy's attempt to try to bring kind of a product lifecycle management mindset around how we thought about the products we were selling, and we really carried that forward. And so the way we compensate our selling team today is fundamentally different than a year ago. A year ago, everything was treated the same. Today, there's an incentive to sell those next gen products, but that also puts appropriate pressure on others in the organization. Product improvements, right? So we now have, you know, Black Lotus Labs enabled SASE engagements, where we can push out blocks as Black Lotus Labs are identifying threat vectors. We continue to make those kinds of product enhancements. It's putting pressure on the ops teams. It's putting pressure more broadly.
So it's not just about sales, it's about getting the whole organization to think frankly in a 180-degree shift from where they were a year ago.
So let's talk about where we are in getting to the sales mix and the revenue trajectory that you're targeting. And just for context, I think you have a target of having the revenues or the products that fall into your growth category, getting to an 8% CAGR, which actually is not that much of an acceleration from where you are now.
Right.
You're right around 6%.
Right.
I think that the real shift is going to be improving the rate of decline in Nurture and Harvest, looking to get those to the-
Yeah
... 3%-4% range. They're considerably higher than that now.
Yeah.
I guess, let's start off. Why are you already at 6% on growth? You know, what's starting to work, and what gets you to that target?
Yeah. So on the Grow piece, I think it's really about giving our sales teams the tools they need to engage in those conversations with customers. It's literally that simple. Now, in that simplicity, there's obviously a lot of complexity, right? But our sales teams were never really given the tools they needed to succeed. And included in those tools is there's now a deep measurement at the individual sales rep level that never existed before. And it's on a lot of different metrics, and it's not about punitive measurement, it's about making all of them more successful, because that data is feeding AI, which is, in turn, teaching us what's working, what's not working, where to focus, where you know, where to not focus, and that's how we think we can get to that 8%.
All right, let's talk about some of the products, and the first one I'd like to hear you spend a little more time on is Network as a Service.
Yeah.
This is something you, some of your peers, like Verizon and others, have talked about. I still find investors are a little bit uncertain-
Yeah
... what that product really is. So let's talk about what type of demand you're seeing for it.
So Network as a Service is new. I certainly don't want to overstate its value in our current results, because it's not significant at this point. But what we did is we surveyed 1,000 customers, and we asked them: What is it you need out of networking that you don't have today? And not surprisingly, nobody came back and said, "I love my telecom provider," right? It was really that they needed fast flexibility in how they consume network services, and being able to scale up and scale down. So think about it much like the cloudification of the network. What we've done over the years as we've been building out what is the world's largest 400 gig, you know, wavelength network, is we've NaaS-enabled a number of the locations on our network.
There's still more coming on now, and that includes what is already, I think, over 240 third-party data centers. So NaaS, oversimplified, is a digital experience where the customer can self-provision network connectivity, point to point, no truck rolls, and it allows them to say, "All right, I need to move a large block of data, and I want to consume that for this period of time, and then I'm going to turn it off," or, "I want to turn this on and, and use it for a longer period of time." So it's, it's a much more user-friendly network experience.
So Network as a Service is not actually Grow revenue. What it's doing is it's giving you an ability to grow those products, or it could even be some harvest or nurture products that are embedded in there, but it makes it easier for that customer to buy what you have.
I would say it's really on the connectivity side. Think of it more as the most modern network that we have. So it's not really necessarily about the legacy product-
Mm.
But it is a gateway to other products and services that I would say are in that grow bucket. Because what will come behind that is additional security offerings, for example. What will come in the very near future is the ability to consume what we've already built and never monetized, our edge-of-network compute platform, where that Edge Fabric, if I need close, you know, low latency, compute power for a period of time or more permanently, I can light that up remotely. So it's enormously powerful in terms of its ability to open up that self-provisioning kind of network consumption model that we're trying to build.
Are your edge capabilities fully commercial at this point, and it's about driving adoption, or is there still some investment you need to make?
There can be the need for an additional investment, depending on what the customer wants, but the reality is there is compute today touching 97% of enterprise within 5 milliseconds of latency, which is very low. So there's compute power that exists today to consume today. And so, you know, getting that to the point where we can monetize it is really important. I would say the added nuance to all of this discussion is that digital experience is critical to the mid-market's motion, right? We've done a lot of work around expanding the number of logos and partners that sell our services.
But still a big piece of how that market will work is the ability to point and click and buy and consume, in a very efficient way, and so NaaS and that whole digital experience unlocks that.
Can your competitors do that? It's really been the cable companies that have done particularly well in the mid-market.
I would say that they-- there will be pockets where it can be done. What can't be done today is the data volume. You know, again, the 400... The backbone of all of this is that 400 gig wave network, which no one else has at the scale that we have it. And so as you look at where the market is going, and you look at the need for a massive increase in data consumption as we move down the path of AI, AR, VR, it's coming. And, and when you talk to hyperscalers, that's their primary concern. They see it coming. They're building for the future, and, and they were a big reason why we built ExaSwitch.
And so, you know, ExaSwitch is the ability, through NaaS, to effectively move workloads at very high speeds from point to point, and it allows hyperscalers and customers to increase their capacity by being able to move workloads around the broader network very efficiently, very seamlessly, and it's powerful.
All right, so we, we've touched on a couple of things that can help you get from the 6% growth rate to that, that targeted 8%.... What are going to be the principal things that you can do, that you can control, that can moderate the rate of decline in some of the harvest and nurture products?
Yeah, it's, you know, I share some anecdotes. We haven't really shared data around this, but we brought in some consulting help to help us understand why customers were leaving us. And what was shocking, but also really highlighted the opportunity, I'm talking now specifically about VPN, and this was largely a mid-markets focus where a lot of the churn exists. And the staggering thing is that customers were turning off services that we had to go to next gen services. They were going to other companies, and they were going to other companies because we weren't engaging with them, telling them that we had the next gen solution in-house. I mean, that's an oversimplification, but that was the problem.
So not engaging with your customer, not putting them first, not thinking about that relationship in terms of customer lifetime value, is really where the opportunity comes, because as we start to think about it in that regard, that's how we stem the churn. We have those next gen solutions, and quite frankly, differentiated solutions like the Black Lotus Labs, you know, SASE SD-WAN thing that I mentioned, where we can bring incremental value that our competitors can't. And so resourcing the mid-markets team so that they have the right tools, the right number of people, expanding the partner ecosystem, that allows us to reach those customers so that we can engage in those conversations.
Thinking about some of the larger customers you target, particularly in the public sector, you've had some decent wins. Is that early evidence that some of these new motions and approaches to the customer are working?
I actually think it's early evidence that we have the capability to do it. We just have to think about large enterprise and mid-markets like we do about public sector. Our public sector team is fantastic. They have deep customer knowledge. They understand what the customer problem is and what the customer is trying to solve. And as a result, the solutions that we win with are often very complicated, right? There's elements of VPN, but there's also elements of SD-WAN and SASE, as an example. There's different security offerings. And so the team has done phenomenally well. I think we'll continue to win well there. I would say what we're trying to do in large enterprise, more broadly, looks a lot like what we do in public sector. It's frankly about that deep understanding of the customer.
I'll just pause and sort of go off on a tangent for a second. When you're talking to your large enterprise customers right now, how much is the macro environment influencing the decisions they're making about what they want to spend? Because if you listen to our economists, who've been pretty spot on, it's way better, and the outlook is way better than I think a lot of people feared. I'm wondering if that's starting to trickle into the minds of CIOs.
We haven't seen it yet, but I hope that's coming soon. I think we're closer to there than we, you know, certainly than we were six months or a year ago. We're still in a soft-ish kind of environment. I would say, in a way, that's a good thing for us because we're driving a lot of change at a time when we're not losing share-
Mm.
Because of the change that we're driving. So I think the tooling that we're doing, the capability building that's taking place inside of Lumen, positions us well for that recovery. So the answer is not yet, but hopefully soon.
Before we get over to your mass markets business, I'm going to wade into a debate, and I'm not the first one here, but a competitor of yours, Cogent-
Yes
-and which has just entered, literally just entered the wavelengths market-
Yeah
... is convinced that you guys are overearning, and they're gonna take a lot of share from you.
Yeah.
Can you frame out for us, you know, how do you see the wavelength market? What's your position in it, and how confident are you that you can hold your share?
I think we're talking about two different customer experiences. Two totally different customer experiences, and, and I think both have their place. We're not going to fight the battle going forward, playing the game the way telecom has played it for decades, which is a race to the bottom on consolidation and cost out, and selling on price. The evidence of that is the fact that customers are demanding from us 400 gig waves. They're demanding more than we have, and we already have the largest footprint in the world. If that was the end of the conversation, even those 400 gig waves would ultimately become a commodity discussion. But what the, the problem. So if, if Kate were sitting on stage, she wouldn't talk about TAM, she would talk about TAP, Total Addressable Problem. The problem is the problem I discussed earlier.
There's a tidal wave of data consumption coming. We're not ready for it. There are power problems. We need high-speed connectivity. We need flexibility. We need ease of consumption. We need security and, and, zero latency compute around all that. That's where we're focused. So Cogent, I'm sure, has a role, and they can duke it out with others on who can get to the lowest price faster. The reality is, is we have the most efficient, fastest network that there is, and yeah, we can compete on price, but that's not what we're here to do. We're here to compete on services and solving the problems that the customer is asking us to solve right now. That's where our focus is. So I just think we're talking about two different things.
... All right, so let's talk about mass markets. Your fiber network, your Quantum Fiber network, passes over 3 million customer locations now. Your long-term target is to get to 8-10 million.
Mm-hmm.
Very capital intensive. What gives you confidence that this is the, a good allocation of your capital right now?
Yeah, it's a really good question, and it's a constant debate because I think what's not debatable is the return profile of the enterprise business and the return profile of the consumer business could not look more different, right? The enterprise business is one of high margins, the need for innovation, quicker product turnover, and as a result, quicker paybacks and higher returns. The consumer business is one of build it and they will come. And, you know, you just look to history as evidence. The dividend that we were encumbered by really came from the consumer business, right? And so that was a situation where they did a build-out years ago, they got penetration. All of a sudden, they were in the annuity stream of money raining from the sky, and that's why dividends get paid.
I think the only myth in that was they didn't get to investing in fiber fast enough for that next wave of annuity. So that's a thing, that's a fact. The way we monetize that consumer asset is by getting fiber in the ground, high-quality fiber locations in markets where we can get good penetration and good ARPU, and I think we've got that solved, and we're on track to do that. But there's still this question as to, you know, if you had another dollar, where would you spend it? In a constrained environment, the next place you'd put the dollar is probably on the enterprise side because of those faster, higher returns. But the way we really extract value from the consumer business for our investors is by getting fiber in the ground.
So it's both, and it's a balancing act, and we'll continue to look at ways, you know, on how we pay those bills as we go forward, but we've got to do both.
And you're open to toggling what those targets are as you learn more and more about what the penetration is, whether you should be doing more of it or less of it?
Of course, of course. I mean, really, it's interesting because I know we get asked a lot of questions about, "Well, what's your cost to enable?" And my answer is, I actually don't care. What I care about is returns. And so if there's a high cost to enable because it's a really difficult market to build in, but we're gonna be the only game in town, and we're gonna get really high penetration and really good ARPU, then the cost to build can be higher, right? So that's the mindset that we have to bring to it. But I think the bigger question in terms of, you know, how aggressively do we go is one of, you know, where can we where can we capitalize ourselves such that we can go do more of that?
And those are things we'll continue to look at.
You mentioned earlier that you completed the rebranding fully to Quantum Fiber.
Yeah.
What's that gonna allow you to do from a go-to-market standpoint? And how long is it gonna take for investors to start to see that-
Yeah
... in your KPIs?
I think it's a really big deal. I mean, the SLT was with our Seattle team in the warehouse, the men and women that talk to our customers every day. Quite frankly, we listened, and I feel their pain. I mean, if you looked around the room, I saw CenturyLink shirts, I saw Quantum Fiber shirts, I saw Lumen shirts. I saw a lot of CenturyLink trucks. I saw Quantum trucks. It was a dog's breakfast, right? It just didn't. It was messy. What this allows us to do now, once and for all, is sell only Quantum. What that allows us to do, in turn, is market one product to the consumer. Our ability now to invest in marketing and scale that efficiently, that opportunity now exists.
That gives us, I think, the opportunity to drive faster subscriber growth as a result. So that's a real focus for that team. And with that IT work now behind us, that gives them the opportunity to go do that.
How do you think about the ARPU opportunity? Because, you know, your ARPU is just over $60, kind of close to cable, but, you know, it seems relatively actually low relative to the tiering that you have in the fiber product.
Yeah. So a year ago, we said we thought that there may be opportunities there, and our, you know, our entry point for Gig was $65 a year ago. It's now $75. So we're at $75. Customers are responding positively to that. Our NPS scores remain high. And so I think the ARPU opportunity is one that's real, and we've capitalized on that quickly.
Your cable competitors, who are really your biggest competitors, they're upgrading their networks. They've really leaned into these converged service bundles. Where do you see yourself having the advantage versus cable, and are there instances where you'd say: "You know what? This actually, this competitive environment doesn't work for us?
So the six major metros where we're focused, and that's for those that don't know, Seattle, Portland, Minneapolis, Salt Lake, Phoenix, Denver, and then I would add Florida broadly to that, which is a very good market for us. There's not a lot of fiber competition. There's very little, and the overbuild noise that existed 9, 12 months ago has stopped, right? Because I think the economics they were tossing around just didn't play out. Fiber will win in the consumer experience every day, and remember, Quantum, there's no contract. You turn it on, you turn it off, and so the shackles of what cable offers, yes, there's some attractive pieces in that, but long term, we think that's a losing proposition. Our product is symmetrical, it's clean, it's easy, and it's highly scalable.
So as customer needs change over time, we'll see where they go, right? I mean, it wasn't that long ago that we were saying that customers would never use a gig, and here we are, right? So our ability to scale the product itself is largely future-proofed, but the underlying customer experience is very clean, it's fully digital, and I think that wins long term.
How are you managing the part of the footprint that you're not upgrading or not part of the upgrade plan now?
So we talk about our DSL network having, you know, I think the last number we shared was 11% penetration. Think of that as being really low in the markets that I just talked about. In major metros, it's already lost to cable. And think of it being higher in rural areas. The 16 states that we kept, the piece that's sub 20 meg is about 20%. So 20% of roughly 2 million subscribers, so 400,000 subscribers. I think that piece is definitely where fixed wireless, I think, has an argument. But the reality is we still have a large footprint outside of that, where the DSL plays very well. And so, you know, that's good for us. But in terms of the broader opportunity, in those major metros, we effectively have no share today.
Got it.
And so everything we do is upside, and I think that gives us a lot of runway with our cable competition.
Let's talk a little bit about operating leverage. You have a target to expand your EBITDA margins by about 300 basis points. You'd be driving, I believe, about $100 million of annualized savings from all sorts of product-productivity opportunities to get there. How are you going to do it? Like, what are the key areas where you still have an opportunity to take costs out of the business?
There's a lot. So, if you look at what we have today, it's really... and I would say it's probably true of our competition. Telecom is kind of a wasteland of layered on top of layered, on top of layered old technologies. No one ever truly consolidated and turned off old things. We're not good at turning things off. And so, we have Kye Prigg, who joined right around Investor Day. He's now fully up to speed. He comes to us from Rogers, Vodafone before that. He runs operations, deep, deep industry experience. He sees enormous opportunity for us to get more efficient, and the most important thing is that as we improve the customer experience, we actually start to deliver things quickly and meet expectations. But in that, there's cost opportunity.
It's probably a two-year journey to clean up processes and IT systems to get there. But in addition to that, we've got the ERP, which starts to turn on next year, and we're fully right by 2025. We're looking at ways to aggressively use Gen AI around, if I look at my own shop in finance, how we do internal reporting, external reporting, there's opportunities there. So, you'll continue to see us go there, but I think there's definite opportunities for us to drive efficiency.
Let's turn to the balance sheet. So, your target is to delever from over 4 turns net leverage today to something that's in the low threes, I think 3.3 times by 2027. You said on your most recent earnings call, "It's also important to get the debt structure right.
Yeah.
Can you elaborate? What do you mean by that?
Look, I think if anybody and we are where we are, and it's not, you know, I think we got here because, again, there's a lot of acquisitions and whatnot, consolidations that take place over time. But if you were designing how you would manage the various towers and maturities around an $18 billion debt structure, you wouldn't put half of it in one year, right? So we are where we are, you know? That's okay, and we've got time to deal with it. But that's what I meant by that. And so, we've got a few maturities between now and 2027. The 2027 tower is large, but there's opportunities to start to deal with that and push some of that into the future, and that's what we're focused on.
Can you elaborate? One of the questions we get is: would you consider going to the ABS market? We've seen Frontier do that with their fiber to the home revenues in Dallas.
I think it's a real opportunity, and when you look at the valuation around that transaction, it was really attractive. We've got some work to do internally. We know what needs to be done. We're doing it now so that we can unlock the ability to do those things. I don't think that's part of how we'd necessarily deal with 27 right now. I, I view that more as an adjunct discussion on how we finance the consumer build longer term. But, but that's something that I think we're going to be spending a lot more time on as we go forward.
We had this curveball of an issue around lead sheathing in legacy telecom-
Yeah
networks that popped up. Does that in any way influence the discussions you have with creditors about what you need to do with the debt structure and the extent to which it's a whole-
No.
- underlying liability?
It was obviously a real concern, and it's unfortunate, I think, the reporting that took place around that. But look, we take the safety of our employees and our customers very seriously. If you look back through history, you really haven't seen any claims that would suggest that there was a problem. But that aside, what we disclosed on the earnings call was that of our copper footprint, less than 5% was lead sheathed or is lead sheathed, and it is less than 5%. We'll get more precise about that over time. But the majority of that is either subterranean and/or conduit based. And there's, I think, real debate that isn't going to get solved anytime soon as to whether disturbing that is actually a good or a bad thing.
And so that has to play itself out. We'll obviously participate in those conversations, but the net of all of it is, I think the exposure for us is very low.
So as you think about your delevering targets, one of the things you've done is you've sort of refined the asset mix, right? So you sold off Latin America, you sold off a portion of the ILEC footprint. You have a process in EMEA that's ongoing now. How do you think about the rest of the portfolio? And really, the question we get is, your remaining ILEC-
Yeah
... that you're fiberizing-
Yeah
Does it fit long-term into the portfolio?
It's a good question. I mean, first of all, I think there will be some really small opportunities around, product as to whether it's strategic or not, and do we keep it, not keep it. So, you know, more to come on that, but those aren't material. The sixteen-state question is a tricky one, and the reason that's tricky is when you look at the twenty-state ILEC sale, first of all, they were much more exposed to low data consumption customers, which I think are bigger risk for fixed wireless. It allowed us to reduce debt. We didn't delever, but we got rid of a sizable chunk of debt on an asset whose EBITDA was declining. We also got rid of a significant pension liability.
And so, you take those things, then combined with the fact that we were able to capitalize on NOLs, we effectively took the multiple from, you know, a 5-ish to roughly 7 because of the NOLs. We don't have NOLs anymore. We also have an asset whose characteristics are different. It's, it's not as dependent on low data consumption. It, the EBITDA is more stable, and we, and we don't have the NOLs. So we'll continue to look at it, but it's not a no-brainer.
All right, Chris, well, we're out of time. Thanks so much for being here.
Yeah, thanks a lot.