Hi, good morning, everyone. I'm Sebastiano Petti. I cover the Communications Space here at J.P. Morgan. I'd like to welcome Kate Johnson from Lumen Technologies. Thank you, Kate, for joining us today.
Thanks. Good to be here.
So you joined Lumen in November 2022, and over that time, you've invested for growth, added several new members to the leadership team, and rolled out new enterprise products like NaaS, Internet On-Demand, and most recently, Black Lotus Labs. So what are your key priorities from here, and what are your next major milestones ahead?
So if I think about our priorities, it's really all about capturing this sort of once-in-a-lifetime opportunity that we see and a spike in demand for fiber and the associated network services that you can run on fiber. And for us, that's really two, you know, innovation pursuits. Innovating the top line, so continue to evolve our network as a service capabilities, continuing to put game-changing innovation in market, like ExaSwitch, which sort of redefines connectivity from enterprise to cloud, enterprise to enterprise, and cloud to cloud. And then continuing to evolve our security roadmap.
I think, also, innovation on the cost side, Sebastiano, is really, really important, and it doesn't sound nearly as strategic but, you know, if you look at telco over the past, you know, decade or so, most of the low-hanging fruit from cost takeout has already been done. So consolidation of companies, and people and maybe some vendor spend, there's not a lot more there, but there is a lot when you think about innovating the network itself. And how do we take... You know, we're an amalgamation of companies. We have four separate network architectures. There's a huge opportunity to create one simplified, unified architecture, and the reason why that's so important is it delivers two pieces of value.
The first is a massive cost takeout, and the second is it enables the digital experience that we're so excited to bring to customers in the telco space, which nobody else is doing.
As you look back over the business transformation under your tenure, maybe touch on some of the key learnings?
Yeah, sure. So, you know, I come from tech. I was a newbie to telco, and what I think was most striking for me was telco's really the final frontier for digital transformation. It's the last place where digital hasn't already changed everything, so it's a huge opportunity. That was my hypothesis coming in. It has proven to be more than true, and I think what the real opportunity is... And remember, remember what Amazon taught us? What did Amazon teach us? It taught us that the customer experience is the product. It's not about buying a book or WD-40 or frozen shrimp. It's about buying anything you want anytime, anywhere, instantaneously. That's the customer experience that the cloud era, digital era, has sort of made everybody's expectations set for, and that's what we're doing.
The customer experience in telco, it was static networks, super slow, embedded in deeply physical, you know, architectures and realities. And I think the biggest learning this year is the opportunity to deliver a truly differentiated customer experience, rooted in all of the expectations that our customers have for digital, is the defining opportunity, and it's what we're just super excited about. I think the other big learning is, we've seen this movie before, right? So cloud, I don't, when I worked for Oracle and then GE and then Microsoft, when we were bringing cloud to the masses, there wasn't a single CIO that said, "This is a great idea, Satya. This is a great idea, you know, Jeff and Larry." That wasn't what they said.
What they said was, "Ooh, this is a lot of change, and I'm never gonna put my data in your cloud, and I'm never gonna pivot to that model." And then, these companies were able to prove that they could innovate the experience and drive a different economic reality and a different agility, so that one at a time, each corporation crossed over the finish line. There was a deeply friction-filled change curve, but they went there, and that's what we're seeing as we bring the NaaS story, as we bring the ExaSwitch story to our customers, is they're looking for this virtual private fabric that changes the rules of traditional telco and delivers a fundamentally different CX.
Is that what you're maybe most excited about right now as you think about the opportunity in front of Lumen or maybe something that you didn't necessarily fully appreciate when you came in to this role?
Yeah. I think what I'm most excited about is this notion of we planned our way to lucky, right? You know, it's one of these things where you can basically prepare, you know, to deliver something, but the market is different today than it was even 18 months ago. And, you know, I think luck is the definition of when preparation meets opportunity. The opportunity in the marketplace is really different because of AI. AI is generating a huge need for data transport, and it's, you know, customers are grappling with the economics of cloud. How do I get my data in and out of the cloud for a reasonable cost? How do I push my data to all the different places where compute is available?
By the way, it's not necessarily available everywhere they need it, so they're trying to figure out how to deal with that. It took us from a place where we were like, "Is everything gonna go into the cloud?" to, "No, things have to be on-prem, at the edge, and in the cloud," and you need management resources to be able to push the right compute workload, you know, data workload to the right compute farm at the right time. For that, you need those compute farms to be everywhere. You know, I always read in the papers and all the periodicals, this notion of power and cooling are essential. Well, so is fiber, and that's our opportunity. We have these big cloud companies, you know, the hyperscalers coming to us and saying, "We love your digital vision.
This notion of capacity on demand is huge. We're all in, but you gotta help us. We actually need to connect our data centers, and we need to connect to all the various networks that are available to our customers, so we can be there for them ubiquitously and in approximate fashion.
So yeah, I wanna come back to a number of those-
Yeah
... things you just touched on there. But can you talk about maybe the recent additions to your senior leadership team, and what has led this top talent to kinda come to Lumen? How are you attracting them?
They see the same opportunity that I do, which is to disrupt an industry, right? And disrupting an industry is... You just can't always get that opportunity to lead in that way. It's incredibly fulfilling. I think each of the leaders on the team. We got Satish Lakshmanan, he's our Chief Product Officer from, you know, from AWS. We got Dave Ward, he's our CTO, from Cisco and Juniper Networks. We, we've got Kai Prigg, he comes from Rogers Communications, and prior to that, Vodafone. We've got Ashley Haynes-Gaspar, she comes from Microsoft. You know, it's a combination of tech and networking that's really a better together. Every single one of those leaders is in it to win, but also to have a legacy of, "I was there when we rewrote history in telco," and they're motivated by that.
And so part of that, I think, since you've kinda come on board, focused on, you know, culture, right? And I think, can you maybe discuss some of this, you know, culture, you know, renovation underway at Lumen, and maybe some of the different programs, and how do you think that, you know, filters into-
Yeah
... impacting the results?
You know, I get asked this all the time, and it's so interesting because it's always where I start. I, I knew, first day, I said, "We're gonna rebuild this company from the people up," and, and there's a reason for that. Disruption, which I think is, is what we are doing to the industry, is a battlefield, and it renames winners and losers. The incumbents hunker down, and they protect their value props, and the, and the upstarts get excited because they stand to gain from new constructs. It's an emotional mess, and it's war, and you don't send troops into war without the right tools and skills, and that's culture. That's how do we change the way we work? How do we move from... In, in telco, there's a legacy of play not to lose. The industry is shrinking, right?
There are secular headwinds, and you wanna be, you know, last man standing, and that's very different than playing to win, which is going after growth. When you play to win, you need courage, you need a learning mindset. You know, you need to know how to team and partner. You have to be resilient, 'cause you're gonna make a ton of mistakes. And so we've rolled out company-wide training at every level, to do exactly that, and it's redefining how we work in a great way. I think when you look at just a couple of things, like we, we've innovated 30 different new capabilities since October, and those 30 new digital capabilities, that's about the number that we had over the five years prior to that.
That agile, you know, way of coming together requires people to just forget the old way of thinking, of play not to lose, and get in the game and play to win and meet every single day to be productive. That requires skills. You need, you need tools and skills to do that. That's why we focus on it.
You talked about some of the innovation on the cost side earlier in our discussion, but maybe think about how you're, how Lumen is leveraging AI tools in the business to create efficiencies and improve operations. Maybe, you know, help us think about what inning we're in, perhaps, in that AI efficiency process improvement journey.
Oh, it's a really good question. Always, it's always tough answering, right? Because you can't necessarily predict the future. But there's one thing that I knew. I'd met Jensen Huang, and you know, Satya continues to be a mentor of mine, and this notion of we're gonna lose our jobs from AI is just, in my opinion, the wrong way of thinking about it. I think the way they think about it, and they've taught me to say that, you know, people lose their jobs to people and organizations who use AI. And that's why as soon as I started at Lumen, I was like, "We're gonna write AI into this transformation story from day one." We partnered with Microsoft, with Google, with AWS. We partnered with Salesforce, and Gainsight and ServiceNow.
Some of these companies have native AI built into these enterprise applications, and others have algorithms that you can weave in, whether it's in the productivity suite with Microsoft Copilot or other capabilities that you can bring to stitch together really impactful solutions, and we're seeing the fruits of those labors. There's a huge adoption curve in our development organization. We've increased our productivity. I think it was before on earnings, I announced within the past 60 days, we increased it by 30%, so 30% more stories inside of each agile sprint. That is a very big deal when you're talking about, you know, having to rebuild the digital platform for a company. On the worker productivity side, we're seeing about 30 minutes a day per person saved through Microsoft Copilot, so...
And we've got dozens of examples, but we are all in on it, because we believe it's helping us transform the company at speed.
... You talked about Lumen's digital platforms, and on the call you said these new profit pools and marketplaces represent the future of the company, with TAMs in the tens or hundreds of billions.
Mm-hmm.
Are these efforts already underway in terms of driving top-line improvements for the company? And, you know, maybe help us think about where these opportunities can scale to and, you know-
Yeah, sure.
Your confidence in that.
So Lumen Digital is basically our R&D arm that's building net new digital capabilities to transform the customer experience in networking. But I look at it as there are at least three places where telco ceded innovation to digital upstarts. They ceded it to tech, and it's in connectivity, security, and communications or voice. And we have a right to win there because of our assets, because of our intellectual property. And with this play-to-win mindset, and with this belief system that the customer experience is the product, we are now going after those markets. And just, you know, a couple of examples, like this whole NaaS and ExaSwitch are virtual private fabric for customers to consume network services. Who else is doing that?
Megaport and PacketFabric are two examples of companies that have high valuations, that are completely digital, but they don't even own the network. They provide network as a service, and they lease their fiber from us. And so they can never get there from an economics perspective, but also what they can't do is they can't embed these capabilities natively into the fiber. We're integrating NaaS into layers one, two, and three, IP, Ethernet, waves, natively into the fiber so that we can provide a better experience out of the gate, and we have a right to win in that space. And what you're seeing is the evolution of us establishing that, that sort of moat out there to do exactly that. Same could be true for network security.
We took Black Lotus Labs, their data algorithms and various machine learning models, and we said, "Hey, we're really good at identifying bad actors on the internet, and we've done that eight times for the United States government over the past couple of months. Why don't we package up that capability in the form of a service, a digital service, and make it available to all enterprises?" This is the kind of innovation that we did every day in tech that is net new for telco. And so we have a right to win in those spaces, and we're doing it and making a huge amount of progress. It's super exciting, and all of that is net new profit pools for us.
Yeah, and I think another area of opportunity is, you know, custom private networks. And I think on the call, the company noted you were seeing a dramatic rise in demand for, you know, some of these high-capacity, low-latency network and edge services, often coming in the form of, you know, requests, you know, for private... You know, custom private networks.
Mm-hmm.
So it's not included in your guidance for this year, but how large could these opportunities become over time? And do you think you have the current, you know, product suite in place today to provide these solutions?
Yeah.
Just help us think about maybe the long pole in the tent to determine, you know-
Yeah, for sure.
Yeah.
So the deals are very big. You know, they range in anything from $2 million to hundreds of millions to some start with $1 billion, which is fun. I think what I'm learning, because I spend a huge amount of time with these customers because I really want to make sure that we're delivering what they need, not just today, but in 5 and 10 years. And I met with the head of networks for a very large technology company who said, "My sole job is to make sure that the network stays ahead of the business needs. And I have the capital to make a few mistakes along the way, but I got to guess, 'cause none of us know where these AI flows are gonna be.
I just know they're gonna be fast, they're gonna be huge in terms of volume, and they're gonna be everywhere. So help me figure out the right way to do it." And we talked about capacity on demand, waves on demand. That is not something that anybody in the industry can deliver today. And with NaaS and ExaSwitch, we are going to be first to market with that capability, and the deal that we are doing is a construct that takes that into consideration, which is why it's so exciting.
It's not just about conduit and dark fiber, it's about differentiation with a digital platform to help that company not just consume those services at and when they need with bandwidth control, latency control, in an ultra-low loss way, but to be able to package and provide their services to their customers in a way that takes advantage of that is truly defining and unique.
So I think, you know, you've talked about some of these maybe different areas of differentiation, but as we're thinking about just overall competitive environment for some of these next gen services, maybe give us some color on, you know, what you're seeing, and other areas by which, you know, Lumen is able to differentiate itself relative to peers.
You know, like, so we were born to create a NaaS platform, Network as a Service platform. That, that is what we should have been doing all along, and that's why we were able to do it very, very quickly, 90 days from conception to in-market. Because we have all the capabilities and because we have some pretty strong digital skills, especially now with this new leadership team, and we're really accelerating. But I, I want to go back to the customer experience. Everything traces back to that. The vision is any port, any service, anytime, anywhere, right? Right now, it takes six months to order a circuit with most telcos. So this notion of instantaneous gratification, which we've all come, you know, become accustomed to-
Yeah
... in the digital era, is really unique. And we had a small company that wanted to do a move over a weekend. We tried to sell them NaaS. They, they were like, "We're not sure. We're a little uncomfortable." Well, they went with a different provider, couldn't get it up and running. They basically fired up a NaaS circuit in about five minutes and, you know, saved the move-in on Monday to have internet. Well, now they're buying security from us, and now they're, you know, they're, they're looking at other considerations because we were able to give them that defining customer experience as table stakes. That's, that's where our R&D is going. That's how we're positioning ourselves in the, in the marketplace. I'll tell you a, a story. I met...
When I first got to the company, I met with a CIO of a major bank and sat down and said, "You know, will you co-innovate with us? Will you sit with me and my team and think through what you need?" And she was like, "I don't even know what you mean." And I said, "What do you mean?" She said, "Well, I don't co-innovate with telcos. That's not what we do." And I said, "Well, you do now, because you can really influence our roadmap," and that's exactly what's happened.
Okay. So you touched on Black Lotus Labs. Obviously, security has been key to your enterprise offering. And maybe tell us a little bit more about, you know-
Yeah
... about the service, and yes, you've, you know, able to help the U.S. government with it, and you just now recently packaged it for, you know, it to be provided digitally to other companies. But, how big is this opportunity? I mean, in particular, as you think about, you know, the state of, you know, maybe cyber and some of the incidents out there.
Yeah, for sure. So it's obviously a super hot topic, right? And it's one where we have a lot of game, but for some reason, we sort of kept it a little bit of a secret, and I'm not sure why. But even from my own learning experience, you know, I was asked to go to the White House to meet with, you know, a bunch of other carriers and technology companies and the national security team for the United States. And we talked about some of these nation-state threats that are becoming more and more aggressive towards the United States, and we partnered together to figure out how we could actually address those threats. And it was an important moment for me.
I was super proud to be at the table with, with the other CEOs, and also super proud that Lumen was able to contribute in that way. And, you know, about 6 or 8 weeks later, we were the ones that actually found the signature, pattern for the threat that we were there to, to, address with urgency. And sharing that threat pattern with all of the other companies and having them, you know, sort of value our net flows and our intelligence, our algorithm, was a huge learning curve for me. And since then, we've blocked 8 nation-state threats, and we're getting great at sort of templatizing the way that we do that, and that is the service that we've offered with Lumen Defender. It's a no-brainer, right? But not...
You know, we were always sort of focused on managed services, and managed services are important, and valuable, and, and a part of our go-forward strategy. But from an economics and evaluation perspective, they're not interesting, 'cause they're very lumpy, they don't have a high margin, et cetera. Subscription services in the digital world do-
Yeah
... and subscription services that are aimed at protecting networks, so those threats never get up to the endpoint layer, are hugely valuable. 'Cause if I'm a company and I say, "Okay, I know my network is protected," I don't have to spend all that money remediating once I've hit the endpoint. So it's a much more proactive approach. We call it proactive blocking, and Lumen Defender, you know, is in beta right now with customers getting value today. So we're excited about the pace that we can bring these capabilities to market as well.
I want to maybe shift gears to the TSA, which Lumen completed in 1Q2024.
Mm-hmm.
So this should allow the company to focus solely on its turnaround efforts that we've been outlining here this morning. How important was this agreement for Lumen to get across the finish line? And, you know, now what changes have, you know, that you're able to, you know, complete after the deal?
Look, it was incredibly important for us to, you know, pivot the balance sheet to support our runway, and that's exactly what we did. It was painful, a painful process, but one that I'm really glad with the outcome. It's giving us the time that we need to push our way through what everybody knows with a digital company is called the J-curve. And, you know, we've got ample time and liquidity to do what we need to do. I think the other thing is, customers now know that we have that time, and they're more interested in having those co-innovation discussions with us in particular because we're healthy.
Now, pivoting to the enterprise, you know, the company has outlined expectations, you know, for public sector to return to growth first-
Mm-hmm
... relative to the other segments.
Mm-hmm.
Now, what gives? Remind us, you know, the management team's confidence in getting public sector, you know, back to growth first.
So what we see in public sector are these really big contracts with agencies that we have deep, deep relationships with, that were done and announced a while ago. But, you know, they don't convert to revenue for a while because of, A, they're super complex, with multi-site locations requiring a lot of design work, a lot of implementation time required to start getting to the benefit part of the life cycle. But with, you know, US Post Office, with DISA, you know, with the government admin office, these are really, really large deals that just continue to layer in the goodness that we'll be benefiting from for a long time. So we see a backlog that's very healthy. I think new to the scene, which I'm super excited about, is at the state level.
So, we all know that the federal government decided to help, you know, the country bridge the digital divide, super important to our education system, to our healthcare system, et cetera. And with that funding, a lot of states are looking for a way to bring broadband to all of their citizens, and we are uniquely suited to provide the mid-haul, long-haul capabilities, and are chasing after that business, which is, you know, deeply strategic and very profitable. So we're super excited to be going after it in about 15 states with pipeline, where we stand a reasonable chance to win.
This is the BEAD program, which you're-
No, this is the federal infrastructure, you know, government infrastructure, where I think Biden gave-
Ah
... you know, $40+ billion-
Yeah
... to the states. Each one has an amount. And then, at the end points, there could be BEAD funding to make sure that they give, you know, that they get broadband-
Yeah, yeah
... to underserved markets. But this is the long-haul piece, where they have to take it and actually set up the whole-
Understood
... broadband story in their state.
And so after public sector, Lumen expects mid-markets to return to growth. I think you've characterized this on the most recent call as a huge opportunity, but need to get more feet on the street, I think you put it.
Mm-hmm.
You talked also about fixing the product set and expanding partnerships. Does this relate to the, you know, partner ecosystem and direct sales force changes? Maybe how are you thinking about the timing?
Yeah, sure. So mid-markets is this space where you've got to be fast, you've got to be agile, you have to have super clear value props for your products, and you've got to be long on the channel. And we started off by augmenting our direct sales force by tightening up our product bundles by instrumenting the sales life cycle. So we're training everybody to be able to bring the pitch, we're training everybody how to sell NaaS, we're training everybody how to make sure that they have the next capability, you know, the next three steps. "Okay, you want some security with that? Okay, how about running some of those workloads at the edge?" And I think we've got the direct sales force really at a good place from a productivity perspective.
I'm very pleased with their sales order value growth results. I think the opportunity that I spoke about on the call was really the ecosystem story-
Mm
... of having an indirect sales force that gives us the feet on the street. And I would say over the past five or eight years, we just haven't really thought about that as strategically important, and maybe there's a bit of neglect there. And now we're bringing those partners back into the forefront. We're making sure they understand the value, and that we're differentiated, and that they can really help us grow, and that we can help them grow. And so that's where we're going to be focused, you know, sort of the next step in our transformation evolution.
Okay. And lastly, we have large enterprise, which you expect to return to growth last. And then on the call, you did say that large enterprise was probably least prepared for where you're trying to go with the business, because maybe it lacks process and measurement capabilities. Maybe help us think about the timeline to improving that, and does that require... In order to improve some of these process and measurement capabilities, does that require a step up in systems investments or just overall just, just better execution?
So the systems are there. We didn't have a sales and marketing platform with good data. Now, we do. And we've instrumented the whole sales life cycle so that we can understand where our salespeople are in terms of their learning curve, their productivity, et cetera. So all of that is there, which is really, really important. The thing you have to know about large enterprise is it's every industry, and it's, you know, companies that can range from absolutely gigantic global conglomerates down to, you know, fairly small companies. So every single one of their networks is a snowflake, right? And that requires, you know, a lot of sales engineering, a lot of technical support for us to help these companies modernize. It's also half of the enterprise business, so it's big.
Public sector and mid-markets, each 25%, a little bit smaller, quicker to the turn. The bigger one is harder to the turn, but also we stand to have the most amount of potential in that market. I'm super excited about it. NaaS and ExaSwitch are game-changing for large enterprise. So, we've got a good story there, but more tightening to do in terms of our process and how we actually partner. This is where we partner with SIs. You know, a large SI with a $10 billion cloud implementation business, putting NaaS and ExaSwitch in their catalog of, "This is how you connect to the cloud," that's a game-changing story that didn't exist before.
So adding it all up, North American enterprise sales were up 27% year-on-year, with new logo sales up 21%, and contract value for sales nearly doubling. So-
Mm-hmm
... so there's quite the acceleration, we touched on a lot of this. How does this fit in the roadmap or your vision for Lumen as you think about over the multi-year period? I mean, this is obviously great results, but how does this fit into the multi-year strategy?
Yeah, so, so look, we've got secular headwinds on legacy, and we've got a sales force that's learning how to be productive, selling the, the grow bucket of products, but also this net new digital capability, and I think that it's going to continue to be lumpy. I think it's going to continue to be hard because, you know, changing networking needs is existential to a digital footprint for any company, and they do it cautiously. I, I'm not seeing decision-making pressure per se, but I am seeing contemplation of: What direction should I go? Because there are a lot of different choices and options now, in terms of how you design a network to support your digital estate. So with that said, I, I think we have some levers that we're pulling, which is, I think a leading indicator.
I think the hyperscalers and the other large cloud companies coming to us and saying, "Oh, my God, we've got to address, you know, this huge data problem that we have coming from Gen AI, which, you know, we see because we're building the training models, we're building the inference models, and we know what our flows are, and as soon as we get mass adoption in market from an enterprise perspective, they're gonna need different things from us, and we've got to address that now. That's a leading indicator, in my opinion, because it's those big companies kind of being in the middle of it, on the razor's edge of the innovation curve.
What I think is gonna come next are the enterprises that start to realize, "Oh, I gotta get my act together, and I gotta, I gotta skate to the puck, too." And, you know, think about data and, on-prem, at the edge, and in the cloud, maybe multi-cloud. So you've got hybrid, and you've got multi-cloud, and you've gotta push that data to the right compute farm. That's an economic problem, and you don't wanna be thinking about network when you're trying to solve an economic problem. You want management resources, and you want a completely friction-free customer experience to push the right workload to the right place at the right time. That is the platform that we are building. It's a virtual private network that is available to any company, you know, a big, small, medium, and it's completely differentiating.
So the sales force will have to learn how to sell to the company that's not ready for it yet, as well as the net new company, and it will continue to be in transition. But I'm really excited with how they're adopting these net new capabilities already, and I think our sales results from last quarter speak to the new Lumen.
Great, and I think lastly, you know, the team has driven improved results in the Quantum Fiber, which is encouraging. But you have said that maybe it makes sense to separate the consumer and enterprise assets over time. Maybe help us think about, you know, timing of potential announcements and, you know, some of the different or more interesting opportunities-
Sure
... there.
Sure. Well, we've been super clear that these are two businesses that are each great businesses, but with very, very different return profiles. So there's, you know, the year and a half to three years on the enterprise side, and then there's the, you know, the nine or 10-year payback period on the consumer side. Long term, we think that separating them makes a whole lot of sense. It's about timing, and what we've been focused on over the past 18 months is making each of them as healthy as they could possibly be. That's the first thing, 'cause when we do sell, we wanna get the right price for our shareholders. We're seeing a change in the market. The market has been a bit quirky.
It was like, "Everybody go as fast as you can." Then it was like, "Wait, slow down. Cost of capital. Maybe we should pull back." Then it was joint ventures, and now it's everybody recognizes you need critical mass for share if you're gonna win in this space. And so I think there's a consolidation coming. I do not think that we will be the consolidators, but we're gonna wait for the right moment, and we're gonna make the business as healthy as it can possibly be, for when we do make that decision.
Well, thank you so much for joining us. Thanks, everybody.
Thank you. Thanks.