All right, great. Good afternoon, everybody. Thanks for being here. My name's Frank Louthan, I'm the Senior Wireline Analyst here at Raymond James. We're very pleased to have Lumen back with us. Chris Stansbury, the CFO, here to present today. So, Chris, why don't you just take a few minutes and kind of tell us about Lumen, kind of where you are in the sector, who you compete with, and how you fit into the space.
Yeah, so, 80% of our business is, is enterprise telecom, 20% is consumer. Our primary competitors in the enterprise space are the AT&T and Verizons of the world. The big difference is, they've been very public in stating that their strategic focus is the consumer. We've been very public in saying the exact opposite. It's really the enterprise side, given the innovation portfolio that we have and, and where we're able to deliver the most value. So that's our primary focus.
Okay, great. So why don't we start out? Lots of changes in 2023, a lot of things went on. Kind of walk us through where you are with the balance sheet, you know, the management changes, and kind of the positioning that you announced and the things you're going after in the market.
Yeah, so, 2023 was a huge year of transition. We're effectively turning the company around, and repositioning it as we go forward. There's an incredible asset base of high-speed, modern telecommunications. But if the story stopped there, it's a discussion of commoditization and pricing pressures and everything moving down into the right over time. So our view is that business telecom, the internet itself, it's broken, right? It's not easy to consume for enterprise. And we're here to change that, through really selling digital services that make it much easier and more flexible to consume telecom, much like what the cloud providers did with a data center 10 or 15 years ago. So over the last year, there's been a lot of investment in cleaning up internal processes. There's been investment in product.
And the management team is almost entirely changed, with the latest 2 additions. Satish Lakshmanan, who comes to us from AWS. He was formerly AWS's head of AI. He has had a product for Lumen. And Dave Ward, who came to us. He was the CEO of a company called PacketFabric, which is a network as a service provider. And previous to that, he was chief technologist at Cisco for many, many years. So, we've got incredible talent inside the company today. And you'll see that innovation portfolio come to life in the coming months, as we expand more of the offering and start to shift the landscape. It's going to be a lot of fun.
Okay, great. So kind of with that, you know, we usually think of Lumen as a traditional RBOC, you know, selling products to, you know, enterprises and consumers. And you're, you're talking about doing some, some different things there. You know, what about some of these, the these more enterprise products you've got that you're focused on? Walk us through those and, and how those play out in the market?
Yeah, so the first would be network as a service. And simply, that is the ability to fire up port-to-port connectivity, through your laptop in five minutes or less. And that capability exists in a significant footprint in our network. There's more to do. But those services are starting to roll right now. And I can tell you that from a customer experience standpoint, they're blown away. They don't know what just showed up with the ability to do that. But no truck rolls, right? You power up and you go. Off of that, I would say that the next major innovation. This is something we have IP protection on. It's called ExaSwitch. And ExaSwitch is revolutionary because it allows you to move massive data loads with almost no latency. And it's becoming increasingly important because of the data explosion with AI.
Companies have data in public cloud. They have it on-prem. They have it in private cloud. And they need to move data from point to point, even from a public cloud provider to a different public cloud provider. And they need to do it quickly. And ExaSwitch allows you to do that, again, at the power of your own fingertips, where you effectively reroute the signal from one to the other. And you can do it without having to go through a third-party data center provider to get access to your data. So it's much faster. It's much cheaper. And, and that, that's something that, enterprise is telling us there's enormous value in for them as we go forward. So significant innovation there. The next would be Edge compute. So you've got workloads sitting in a public cloud. You're doing all your app development. You can't have latency.
You don't have room in your own data center. We have an edge compute environment that touches 95% of U.S. enterprise within 5 milliseconds. So the ability to pull data down from the cloud, do your work, push it back, consume on demand, is, is something that's in place and ready to go. And then the last would be security. And, and it's a big one. It's something that's never been monetized at Lumen. We have an asset called Black Lotus Labs. We see most of the world's internet traffic because of peering relationships. And they're running deep algorithms to look for different trends, right, and, and find bad actors.
Most recently, the congressional hearings from about a month ago where there was a Chinese government infiltration of network devices around U.S. infrastructure and the ability to shut down U.S. infrastructure at the push of a button, we found it. We found it because of those data trends. We have the ability to use those IP addresses to bring a higher level of network security to our clients. So there'll be more that follows there. Some pretty disruptive stuff.
All right, great. So what if when I talk to investors, you know, most seem to think that, you know, large enterprise business is impaired, not just you, but it's kind of industry-wide. That's kind of their viewpoint. But you're talking about enterprise in maybe some different terms. I mean, talk to us about what you see as the opportunity to enterprise that your peers and investors aren't focused on.
I think the biggest headwind we have from a messaging standpoint is exactly that. When we, as I mentioned earlier, we've got two major competitors. Their focus is the consumer. And so they've de-emphasized investment in the enterprise segment. And as a result, when you look at their results, they're declining 8% and 10%. We declined last quarter, fourth quarter, year-over-year, 3.5%. So we're already well ahead. We're not where we want to be. But the portfolio mix, we classify it as grow, nurture, harvest. Harvest is basically private line, voice. It is going down and going down quickly. And that's just an industry trend. But I think that basket is much bigger for the competitive set. And that's why their trends are worse. Harvest for us is Ethernet and VPN. We're still selling it.
We're just selling it at declining rates. And then the grow basket, which is about 40% of what we sell, is newer forms of connectivity. It's IP. It's Waves. It's dark fiber. It's SD-WAN and SASE and, you know, edge. So, we've already done a lot to position ourselves better. But the innovation is ultimately what offsets those legacy declines. And no one else is doing that.
How long do you think it takes before we can see the top line turn around and see the growth?
We're confident in saying that EBITDA hits bottom and, and reverts to growth next year. EBITDA is easier to call because there's a lot of cost efficiency we can get out of the business as we go forward. What we're going to do, Frank, is, probably after second quarter earnings, is really lay out a new, a go-forward model that's updated that gives you visibility into, here's what's on the truck today. So our focus on those growth products. Here's the sales trends by channel, what we see happening. Here's the big, ugly legacy thing, you know, the voice and private line declines that are real and quite frankly enhanced by bad industry behavior in terms of rating, you know, rerating across, you know, off-net, consumption. And then more specificity around these growth products and, and how we see them scaling.
The reason it's going to take till that time is we've got Satish and Dave here now. And I've got to give them a little more time to get there, but we'll lay that out. I think revenue, revenue certainly lags EBITDA. It's, it's not by years. But it's, you know, it's not months either. So it's, you know, we'll see where that, that sorts itself out. But we're, we're very, very confident given some of the early reads we're getting around the innovation portfolio.
Okay. And so when you gave us sort of the nurture, grow, harvest, kind of buckets, you're going to give a little beyond that. Can we expect some KPIs? I mean, what do you think we can look for when you're portfolioing?
Yeah. So for, for each of those, we, we want to provide you the roadmap that we're using to measure ourselves internally, how we're driving the sales force, how the management team is being driven. But, in terms of the, the stuff that's, that's being sold today, really giving you sales trends so you can see how that looks, obviously, the churn will give some metrics around that. And then the innovation, yes, it's about how quickly can we scale these things. The demand is high. So we do think that they'll scale rapidly. The key question is, at what point in time does that happen? And, and that's what we'll call and we'll give you metrics around those. Yes.
Okay, great. And go back to you mentioned Black Lotus Labs. Let's go back there. It's pretty cool. Don't often get cool mentioned with telecom. But that's, you know, pretty interesting things you're doing there. What is it? Talk to us about the security angle because that's, it comes up a lot with some of our other names. But your peers haven't really looked at that as a something. How, where, why do you see that as opportunity? Is it Black Lotus Labs sort of the base for that? Or what should we expect?
Black Lotus Labs is the base for it. And, and so right away, we could help our customers with blocks for those IP addresses that are known, you know, threat actors. And it's not just the layer of security. It's the ability for us to, to push those blocks down in an automated way so they don't have to have a back office team keying in, you know, IP addresses to each device. And, and so that's an enormous value in terms of both protection and efficiency. But I think as we go forward, you're going to see a very different way of developing product and innovation than telecom has ever done. So, you know, Kate is a student of Satya Nadella , right? And, and, Satish comes from very much the same environment, having worked at Amazon.
And if you think about how those companies have evolved, it's not about, "Hey, I need to define the pie and own all of it." It's about the—it's about the broader platform value. And I'm better off having a slice of a much bigger piece of pie. And so you're going to see us do, I think, a lot more co-development around product. So I think it'll be Black Lotus and, you know, so there'll be things that we can do individually. But I think you'll also see a lot more co-development because we can bring a layer of security that others can then build on top of.
Yep. Okay. All right. So you're an RBOC without a wireless asset. That's often thought in terms of on more on the consumer side. But there is a lot of sell-through and pull-through on the enterprise side. You know, talk to us about your ability to kind of sell bundles to customers. And, and how does that impact you on, on what you do have in consumer and then what you're doing on the enterprise side?
Yeah. On the enterprise side, it's really not an issue for us because to the extent that there are wireless solutions that are required as part of a broader enterprise solution, we work with partners to bring in that aspect of it. So that's, that's something that's been in place for some time. And we continue to leverage that. On the consumer side, we really haven't run into the scenario where that wireless bundle is important to how they're consuming our product. We've got a very high-scoring product from an NPS standpoint, best in class. It's, it's an easy-to-consume product, fully digital, easy to scale up, scale down. There's no contract, all, all, taxes and fees included. And so it's, it's a very customer-friendly product.
That's the Quantum broadband. Yeah.
Yeah. So, we think that plays well by itself. But again, because of those enterprise relationships, if it ever came to the point where we thought that the wireless bundle was important, that's something, you know, we could obviously add.
What about fixed wireless? And how do you see that, as a competitor in your for the consumer side and then also for small business that are maybe less concerned about getting gigabit speeds, and so forth? How has fixed wireless impacted that?
Fixed wireless is a definite player in more rural areas. It does not play well in major metros, which is where we're building out fiber because it needs a line of sight to be at its best performance. There's real spectrum issues that the providers are having. So there's only so much to give away from a fixed wireless standpoint. Major metros are not the place. Rural areas, I think it plays much better. You know, the good news, which is the same as the bad news, is that our penetration on legacy copper is only 10%. So in the rural areas, it may be a little higher than that. We definitely have seen some of those issues. But our penetration is so low, it's not a material impact to us.
Yeah. Okay. All right. So you continue to be focused more on the enterprise business. But, but you've also said, you know, you're on the consumer side, you're open to transactions to kind of limit that, either a sale of that business, joint ventures, other things. Walk us through the spectrum of things you could do on the consumer side and where you see that ultimately with the business and, and opportunities there.
Yeah. And again, we've got two great businesses. Our view is that they, they're better off apart. They have completely different return models around them. And the consumer space is one that desperately needs to be consolidated. I mean, those are much longer time frames to pay back. And the only way to shorten those is through scale. And so, that needs to happen. We're just not going to be the consolidator. So in the interim, well, I, you know, I don't think the market is conducive right now to a big transaction. We're looking at it market by market. We may sell some markets. We may wholesale some markets, where we've got fiber because that fiber's got a lot of capacity on it.
We may joint venture a lot like what AT&T and Gigapower have done, where you, for same investment, get a bigger footprint because you've got both pools of capital that you have access to. So that's the way we're looking at it. And we should have that done in the next few months. And then we go from there. The key thing, though, is in the interim, as long as we continue to own that asset, we're going to continue to invest in it because the ultimate value in that to us is the fiber that's in the ground. And so we're going to keep building at the 500,000 units a year pace that we're at, the 500,000 enablements.
So, you're going to be done in a few months. Is it a series of small transactions? Or is that a transaction? Is this a multi-year process? And how much of that consumer business to not have on your books anymore? What is what creates the right amount?
There's not a target. I mean, if there's a target, the ultimate target is that, again, I think these two assets are better separated. Our belief is that it's not going to be one big transaction. It would be a series of smaller things, just given where the market is. But we'll see how that plays out. And we'll obviously, you know, let people know, you know, as we do that.
You mentioned wholesaling part of it. Can you describe kind of what that looks like? That's an interesting concept. I assume you're saying that because you've probably got some interest in doing that. What does it look like?
Yeah. When you think about our fiber footprint, we're at, I think, 3.7 million enablements right now. So it's not small. We're still building penetration on those assets ourselves. But the fiber's got so much capacity that if we wanted to wholesale that, just like we have wholesale relationships on the enterprise side, to a competitor who wants to reach to the home in those markets, that might be something we consider as a way to monetize that faster. So, it's a trade-off, obviously. Our intention was never to get, you know, a level of penetration that was dominant in those markets. We thought we could get to 40%. And that's still a target. But there's still room beyond that to share that fiber with others.
Okay. And you've so you pulled that build back to about 500,000 homes. It, you know, is that the right amount? What would make you decide to build more or less? How do you think about that coming at that target?
Yeah. We think that's the right pace. I mean, a year ago, just over a year ago at our investor day, we said that we'd go from 500,000 to 750,000 this year to 1 million next year. And when the cost of capital started to skyrocket, we obviously went through the debt restructuring. That was a driver as well. We decided to hold at the 500,000 units. The reality is if you look across the competitive set, everybody has pulled back, because the cost of capital has gone up so much. So we don't think that's creating a competitive disadvantage in any way. It allows us to continue to build the value of the asset. So we think that's the sweet spot.
Okay. Are you concerned about overbuilders coming in in the meantime?
No. It's really interesting because 18 months ago, you know, you'd be at an investor conference. And all, all the talk was about overbuilders. And every new overbuilder that there was, like, every week, somebody popped out of the woodwork. And it's like, "We're going to build it cheaper. We're going to sell it for more. And we're going to get better penetration." And that flamed out fast because it's hard to do. It's really hard to do. You need to build a consumer brand. You need to market it. You need to, there's a lot of work that goes into it long after the difficult construction phase. So the overbuild activity is largely dried up. And I think we're now dealing with a set of industry players that, at some point, will consolidate.
All right. Great. So, all right. So we don't want to disappoint the investors. They're going to do, you know, a search on the term AI in the transcripts. We've got to make sure we come across mention that. So, you know, we touched, you know, we've touched about this a little bit on the enterprise space. But you were on a panel with us a few months ago at our conference talking about Microsoft Copilot and what y'all are doing there. Talk to us about how AI fits in with, with, with you guys and particularly with the networks. I think people forget, you've got to get data in and out of the data center. And net and, and, oh, we've built all this stuff. And where's the network to support it? How do you guys feel that you're going to play in the in the AI space?
Yeah. So I'll do the smaller part first, which is actually a really big deal, which is just internal to Lumen. Like a lot of telecom, I mean, there's been massive underinvestment in the company in just basic capabilities. So we're at the point where, as we address that, AI can help us leapfrog a lot of those antiquated systems. So there's a lot of work that's being done internally in terms of integrating AI with how we manage sales, right, is service delivery of, you know, financials. So there's enormous amounts that we can capture internally. And that's part of the cost savings over time. The much bigger thing is, you're right, that I cannot understate just how much of an explosion there's been in data and data consumption. What is AI? They're machines that learn. They're insatiable.
They don't go to sleep. They don't stop to eat. They don't take a vacation. It's 24/7, 365. And what you're seeing when you talk to others is, they can't build data centers fast enough. And those data centers are getting further and further away from the point of consumption. I have a nephew who works for a large construction company. And they're building data center farms in western North Dakota because that's where there's power. So you've got that, okay? That's a real thing. And I think it's broadly known. The issue is that as you get further and further away from the point of consumption, you now need really high-speed networking because data latency is a slaying thing for the apps that run the economy today. So, we've got the largest 400-gig wave network on the planet.
We've added 6 million route miles over the last number of years. We've also got, at its core, a conduit-based infrastructure. Yep. It's boring. But it works. It's literally PVC pipe that crisscrosses the U.S. And we can pull out an old fiber and shoot a new one through it. That underlying capability has capacity left in it. And so when you combine the raw transport need, which is a commodity, with the power of things like NaaS and ExaSwitch, where we're now giving you not just speed but also flexibility to consume more efficiently, that's an enormous tailwind for the company. And importantly, Frank, those, those big, big deals around either conduit IRUs or dark fiber, those are never in our guidance because we don't know when they're going to hit. They're huge. They're chunky, and they're difficult to predict.
But there's been a lot more discussion in the market around those. And I think that's something that, you know, certainly, as we get later into this year, we'll have more clarity about. But that could be, you know, some nice tailwinds for the company.
What's an ancient history lesson of where those Level 3 conduits came from? I'm glad to walk you through. But it's, I think they expected to monetize those a lot sooner than 25-28 years ago when they built them and put them in and were telling us how much value, how they were going to crush all the competition out of it. Glad you're getting the value out of it now.
I can tell you, I'm very glad it's there already.
Yeah. Okay. All right. So I got another question or two. And let me take some questions from the audience. So all right. So we've laid this out. You've got, you know, enterprise opportunity. You're going to give us more disclosure. You've addressed the balance sheet largely, you know, pushed it out for the next couple of years. Maybe, you know, walk us through how those changes kind of at a high level, what can we expect next two or three years from you now that you've gotten some of those things out of the way and can focus on the execution?
Yeah. I think the big thing was the debt renegotiation, clearing a path. I mean, the reality is, I think the most important thing about our debt structure today is that's no longer a limiting factor in our ability to execute the turnaround. And without that in place, it was a limiting factor. And there was $10 billion due in 2027. And people were concerned not just about our ability to turn the company around but turn it around in time, given the quantum of that debt. So this renegotiation has fundamentally changed that landscape. There's additional work that we'll do around the capital structure as we go forward. But that gives us a great foundation.
Then it's really about what I was talking about in terms of those pieces earlier that we'll give you in the second half, which is it's about executing against the core business as it exists today and doing the absolute best with that that we can. And there's a lot of internal metrics and a deep attention and inspection around that. And then the third is the innovation portfolio. And that's really what changes everything as we go forward. And we'll be giving you more on that, as I said, so.
Okay. All right. Great. Any questions from the audience? Yeah, Fred.
Can you give us a little bit of a picture of how the cap structure and which I think is what's leveraging and what the maturities are and?
Sure.
What the amortization looks like.
Sure. And there's actually a good page from the last earnings that's on our investor page. By the way, I should have.
What's your debt?
Yeah. It's a, there's three chunks: the before, the kind of current participation, and participation at 100%. The basic issue thing was this, is that, at a very high level, about $20 billion in debt leverages 4.2-4.3. So leverage itself, not crazy high. The issue is that the underlying EBITDA is in decline because of the legacy drain. And so that's what we're focused on. The $20 billion, $10 billion of it was due in 2027. It's across three entities internally. They were kind of at war with each other. And so we went through a comprehensive, out-of-court restructuring where we basically cleared a pathway through 2027. The bigger maturity is now.
That was a three-year drop, right?
Yeah. Yeah. And so you can imagine, right? And so now, that sits largely in 2029 and 2030 and beyond, which gives us plenty of time. And then, you know, ideally, over time, I'd like to collapse that structure. But it's going to take some time, so. But the big issue, which was 14 tranches across, you know, 70-80 investors, key investors, we moved about $17 billion in debt, 12.5 of it between now through 2027. Sorry?
You must have had a lot of fun.
Yeah. I used to. I'm really only 26. I just look this way, right? So, yeah.
Okay. Great. Any other questions? All right. Let me jump back to something to talk about. So the macro side from Washington, D.C. Got a couple of signs after three years of nothing from the FCC. They wanted to go out with a bang, in an election year. And we've got Title II. We've got digital discrimination. Hear a lot of pushback in D.C. Talk to us about how you see those affecting your business, potentially affecting the attractiveness of deploying capital, whether it's quantum or other things and or subsidy money and things like that. How do you think about those?
We really don't see it as an issue. I mean, closing the digital divide is a key focus for us. The State of California deal that we did last year, again, getting back to kind of some of that capacity that exists in the network, the State of California deal was really to help California bring, you know, internet connectivity to more rural, less advantaged areas. And so, that is a focus of ours. We're looking at some other areas where we could do that as well. So we don't view that as a threat.
All right. Great. Any other last questions?
I should have said, because I forgot at the beginning to read our Safe Harbor statement on our investor page. So I've checked that box now.
Of course. We'll, we'll have that committed to memory shortly. All right. Thanks, everybody, for coming. Appreciate it. Thank you, Chris, for coming back this year.
Thanks.