Let's get started. Good morning. My name is Greg Williams. I cover the telco, wireless, and cable space here at TD Cowen, and welcome to day two of our fifty-second annual TMT conference. I'm joined in this session by the CFO of Lumen, Chris Stansbury. Thank you, Chris, for joining us.
Yeah, good to be here.
Maybe we could just start with your TSA bondholder agreement, now that it's behind you guys. It seems like Lumen can now direct its attention to the operational turnaround. So what areas specifically are you focused on these days? What's keeping you busy?
Yeah, I mean, it's exciting, right? We're in the middle of a turnaround. I would say that our two priorities are really focusing on innovation for growth, and then also innovation for cost, which unlocks some of that growth. They're interwoven. And so on the growth side, you know, if you think about where we're going, as a company, is we wanna make the ability to access the network seamless. And today, you know, network connectivity is really static. So if you wanna get from A to B, it's very structured, it's time-consuming, it's slow, and it's messy. And, we're entering a world where you can get point-to-point connectivity on demand, and that's super exciting.
We think that unlocks an enormous amount of value for the customer because there's additional service offerings that can tie to that: security, edge compute, and the ability to seamlessly move workloads around your network. And on the cost side, to enable that, we are doing a lot of work to enable that, that frankly takes a lot of cost out of the system. So we run, for example, inside of our business segment, four discrete networks. And by the end of this year, 70%-80% of our revenue will be on a unified network, and by the end of next year, all of it will be. And that really allows that free flow of information. It also unlocks a lot of cost opportunities. So those are really the two key focus points right now.
Yeah. And maybe on the flip side, what's proving most challenging right now?
Look, the legacy declines are real. I would say that they've accelerated to some extent, and that masks progress, unfortunately, in the near term. So, you know, we're not here to bend the curve on those declines. I think there's clearly migration paths for some of that product, and we're very focused on that. But in other cases, there's not, and we manage that business for cash, and that allows us to focus on the future. And so that's always a challenge. I'd say it's aggravated by just bad behavior in the industry. You know, re-rate, off-net re-rate activity that drives short-term results. It's not customer focused.
It's, it's the old way of playing the game, and unfortunately, we've got to live through that, but it's not the way we're playing as we go forward.
Right. And you mentioned cost reduction efforts, and you recently implemented a workforce reduction of about 7%. You noted, I think $90 million-$100 million in cost-related efforts saved in Q2. But help us understand how to quantify the cost savings opportunity. Is it larger than the headcount reduction in the $90 million-$100 million, or is it-
A couple of things. We talked about a cost reduction in the fourth quarter of last year that was about $300 million of savings. And the action we just took is about the same in size on an annualized basis.
Okay.
We won't be at full run rate till the second half. But really, what we're doing is we're reshaping the company. And I talked about the legacy businesses, and I talked about, you know, where we would go in the future. Those are two different motions, and so we need to shape-shift the organization to support that. But headcount is a big piece of it, and it's a big piece of it because as we simplify processes like, you know, the comments I made around the network, and we improve the customer experience, it's because we're fixing and integrating things that were never integrated in the past, and that means you need less human beings to get an order through the system. And so these are cost cuts that are healthy cost cuts.
They're cost cuts that are coming as a result of an improved customer experience.
How should we think about the cost savings cadence now? When will the reduction in force start flowing through?
So, we'll be at run rate on the second batch by second half. And then I hope at some point later this year, we can come back to you all with some clarity around the cost trajectory as we go forward. Because as we get more efficient and as we get to a more digital product-selling motion, that will benefit our cost structure.
So you've done two in since, like, October-
Yeah
... of similar size, you've mentioned. So, maybe alluding to what you just said, do you foresee any further cost savings and opportunities as you, I guess, like you said, to steal your words, "shape-shift the organization?
Yeah. Not this year, but as we pivot from the sale of and support of legacy services to more digitally consumed products, the organization will obviously change to support that. And we do see cost savings opportunities. I mean, look, as you're well aware, you know, I mentioned the four networks. You've got Level 3, CenturyLink, US West, and Global Crossing.
Right.
What that means is that if you wanna buy a product that, too, as a customer, to service your footprint, you're often buying four discretely different products that could originate from one of 13 order entry systems or multiples of, you know, in that.
Right.
It's just a mess, and so there was never a focus on unifying those. And there's been a lot of work that's been done to do that. That unlocks a lot of cost potential as we go forward.
You sort of answered this question, but there's a worry out there that you're cutting to the bone or starving-
Yeah
... the business, quote, unquote.
Yeah.
But it sounds like, you know, you sort of answered this. It could, something I didn't even fully realize that, you know, even Global Crossing's billing systems or order entry systems, et cetera, might not be fully integrated. So-
Yeah
... maybe this isn't about starving the business. I was gonna ask you how-
Absolutely
Would you respond to that, but it's-
Yeah
... also.
No, definitely not. Definitely not burning furniture. Let's put it this way: it would be burning furniture if we wanted to play telecom the old way and not integrate anything, and just, yeah, yeah-
Yeah
... continue to manage declines and just, yeah, MacGyver it, so to speak. And that's not what we're doing. Our focus is on the pivot to the future, and so these are really healthy cost reductions that come with an improved customer experience.
On the EBITDA side, you guided $4.1 billion-$4.3 billion. You just posted $977 million in the first quarter-
Yeah
... so this implies you're gonna continue to see these cost savings ramp through the year.
Yeah.
So maybe you can help us with the EBITDA cadence through the balance of the year?
Yeah
... as I think that your third quarter seasonality, of course.
Yeah, we do have third quarter seasonality. That's typically our highest cost quarter. Our second highest cost quarter is the first quarter. Like, Q2 and Q4 are, you know-
Sure
... pretty even, on the balance. But we do expect to see EBITDA grow through the year, and the reason is the cost savings, but it's also because we're seeing sales rates improve. And we know that our installs on big public sector deals, you know, those multiyear deals that take a long time to get up and running, are really starting to get to scale. And the combination of those things are what give us confidence.
Right. And you mentioned we mentioned seasonality here. Typically, the cost, I think, it was around $30 million of seasonal cost in the third quarter. Is that gonna be smaller now that you're a bit of a smaller company?
I don't, I mean, I don't know this year, but it's in the tens of millions, to your point.
Yeah.
So it's not, in the greater scheme of things, it's not material, but it is seasonally higher. I think the other thing that I would just say on EBITDA is, you know, I said we're 18 months in, into a turnaround. It's really a, I think a five year turnaround story. And so as we move through the next 18 months, it's gonna be lumpy, right? There's gonna be, better quarters and worse quarters, and I'm not concerned about that. The reality is, I think there's some really strong tailwinds that are going on in the industry, which I'm sure we'll get to.
Sure.
I think that more than compensates for free cash flow, you know, fluctuation. I'm not, I'm not worried about that at all.
As I think about EBITDA, you've mentioned in the past getting to an EBITDA inflection, maybe late 2025. Is that pulled forward because of the reduction in force, or maybe drawn out further because of legacy pressures, or is-
I again, it really depends. I think that's the window, right? Is it late 2025? Is it early 2026? I mean, who knows? But I think that's the likely window because of the timing of our ability to take cost out, because of where we see legacy performing, which you know, as I said, legacy declines are a real thing. What that doesn't contemplate is big IRU deals and how those start to flow through.
Yeah.
I think as we go forward, you know, I think the real exam question that I think investors probe us on when they ask about EBITDA, and they ask about CapEx, they're trying to get to cash flow, right? What's free cash flow gonna be? I don't think free cash flow is gonna be an issue, as we go forward because of AI-driven demand in the market today.
With AI-driven demand, help us understand, you know, where Lumen sees the revenue growth for AI. You know, we had Uniti yesterday speak and Cogent, they're tying a lot of data centers with waves.
Yeah.
I'm just kind of curious where AI fits into Lumen's revenue growth picture.
So as Kate said, in the first quarter earnings call, this is a generational opportunity. This is not a one and done. This is demand that we see coming for the next, you know, five to 10 years. And it's interesting because there's been a lot of really good research written around how AI will impact industries. Everything from, you know, rare earth minerals, all the way through to construction and power and water.
It can touch really every vertical.
Every vertical. What hasn't happened until very recently is people making the connection to this explosion in data to connectivity. And so at its core, if you really wanna simplify it and think about telecom in the old way, yeah, there's more connectivity demand. We're selling so many waves right now that we've reallocated our capital budget-
Okay
... to make sure that there's capacity to meet the significant demand we see. But hyperscalers and large enterprise are planning for an uncertain future that is going to need data transport that's multiples of where it is today.
Yeah.
They don't know where that ends, but they know they need to make sure that their futures are secure. So there's that, that layer to it. But the second piece is, and this is the, this is our right to win. No one else is doing this, and I wanna emphasize that. We're not here just to sell dumb pipes and figure out who can sell it at a lower price next quarter and next quarter. Our customers aren't coming to us solely based on price. They want to be on Lumen's network because of the digital layer that we're bringing. So you connect all the pieces, you've got data sitting in Upstate New York and data sitting in Wyoming because it's looking for power and water-
Sure
and cool temperatures.
Yeah.
But you need to get it to San Francisco in a millisecond.
Yeah.
The only way to do that today is, well, let's build another dumb pipe between Wyoming or Upstate New York and San Francisco. We're getting to the point of saturation where you can't build from every to every, a direct line.
Sure.
Being able to digitally access that data on demand-
Right
... and route that through-
ExaSwitch
... our IP, you know, which is ExaSwitch, means that you can, you can hit, you know, a switch that sits in a city and reroutes that traffic instantly. We're the only ones-
Yeah
... focused on that, and who can do that. So it's not just about selling the capacity, it's about selling it so that you can have connectivity on demand, and you can meet the uncertain demands of the future.
Right.
That's our right to win, and that's what we're focused on.
That, that's a great way of saying it, 'cause there's a concern that maybe this AI, you know, from a network perspective, is like a sort of a two-year stint when you connect all the training data centers with new network, then what? But to your point, you're going up the stack, and you're-
Yeah
providing solutions for multiple verticals that will-
That's exactly right.
Okay.
We're doing it in a deeply embedded way in the network-
Yeah
... and in a very secure way. And things like Black Lotus Labs allow us to bring a level of security around that that others don't have.
How can AI help in Lumen internally? You know, it could be part of the cost savings opportunity.
Yeah. It's huge. I mean, we've saved with Copilot, we're one of the original launch partners with Microsoft. It's been a tremendous relationship. We've saved over 700,000 person-hours in productivity. I actually was on the plane last night and needed to get a letter to the board, and Copilot wrote it, and I went in and edited a few things. It's significant. The other is the integration of Copilot with GitHub, where we've seen a 35% reduction in research time associated with writing code, and a 25% reduction in time to write code. So AI is alive and well inside of the company, and we're gonna continue to expand that.
You mentioned earlier that you're reallocating your CapEx budget towards some of this AI-driven demand. So I guess two questions: Can you help us size that relocation, and what, what's gotta give? You got-
Not yet. No, I mean, I don't wanna give all of that away.
Okay.
But there's just other projects that we've decided that we'll just defer a bit.
Mm-hmm.
And the waves
Right
... you know, demand is so significant. So-
Got it. I wanted to switch gears up and talk about the ILEC business a bit-
Yeah
... and the consumer strategic review. You made it clear you're exploring options for the consumer business. Are these conversations happening in the current environment? Maybe you can just help us with the-
Well, there's always conversations, right? What I would say is, it's definitely heating up.
Okay.
You know, two years ago, if we sat here, we would've been talking about the gold rush mentality and everybody trying to get their hands on fiber, over builders and whatnot, and then that abated last year with cost of capital concerns. And now what we're seeing in the marketplace is a lot of JV structures. I think the big guys who ultimately will consolidate this space want access to fiber today, but they don't want it on their balance sheets. So there's all kinds of interesting structures out there. Here's what we know. We've got a great performing asset. The team's done remarkable work at building good enablements and driving penetration. And we are in attractive markets, so our fiber is attractive, and we've been very clear in saying it's a great business.
But these two businesses don't belong together. So, you know, we'll see. We'll see what happens, you know, in the near term, but, yeah, we will look for the right exit ramp at the right valuation on an ongoing basis.
And do you have a timeline, or a position to... Are you just waiting for the best deal, best price? Will there be a moment in time where maybe you'd say, "We've completed the strategic review," and you, you captured that first?
There will, yeah. And then I think that'll be at some point this year. But you know, I think it's too early to say where we are because we just don't know yet. But again, it's a good business. It's a strong performing business, but it's one that requires a heavy level of investment in the near term, and then if we can get the right valuation, that would unlock a lot of free cash flow for us.
Got it. And then, switching gears to your business segments. We'll start with large enterprise. You noted in the past that the debt restructuring created some noise, and some customers were naturally expressing concerns and uncertainty. So how far into the year might this be a drag, or are those conversations-
Yeah
... officially over now that the TSA occurred?
It's really interesting. I mean, it was a pretty binary reaction once the TSA was closed. We didn't. You know, the phone calls that I got pulled into, the end-customer engagements to talk about our financial future basically abated. So that was good. We saw strong sales results in the first quarter, and we're very focused on continuing that. And again, that excludes any of these large, you know, IRU deals. The other reality, though, in that business is that it's hard for the market to see it because you do have legacy declines. And there is bad behavior in the industry right now that I think is accelerating some of those declines, and that is what it is.
But, our focus is on driving execution, and we continue to see improvements. Again, I think some of these big deals more than provide the free cash flow flexibility we need to pivot to the future.
And you mentioned bad behaviors accelerating declines, but it's interesting, through earnings season, one of your competitors, or peers, AT&T, I think they mentioned that what's also accelerating the declines is, enterprises were sort of, during the COVID lockdown, not making those decisions-
Yeah.
And so there was pent-up demand. And so now they're making the decisions, and they're adopting cloud-based services, network as a service. So, are you sort of seeing that same dynamic as well? And I guess it's in a way helping you since, you know, they're-
Yeah
... they are migrating to you guys, maybe you can talk about the migration.
Yeah. So it's that really is our future, right? So the ability to consume things digitally is how we win. I think what's happening more in the near term outside of the bad behaviors is companies are back. They've figured out how they want to manage their workforces. You know, how many days in the office are you going to be? And they're also rationalizing their real estate footprint, right? We're doing it, right? I'm sure you're doing it. And that has implications, good and bad. But I think some of those decisions are impacting things as well. Yeah.
Got it. And then we can switch to mid-markets. That's supposedly gonna be the second segment to inflect after public, so-
We think, we think.
Yeah.
We'll see.
Okay.
Yeah.
Help us understand, you know, the progress being made in mid-markets and-
Yeah
... your specific efforts. What do you
Yeah, so every month, we do segment reviews. So, you know, large enterprise, mid-markets, public sector, wholesale, mass markets. And those reviews were yesterday. And we look at a number of factors, right? So we look at sales and how that's impacting pipeline, we look at installs, we look at disconnects, and you kind of work your way to revenue. We are seeing, you know, a notable rate of improvement in sales. We've got a product portfolio that continues to evolve, that is very mid-markets focused. That was not the case when Kate arrived. It was kind of trying to sell large enterprise solutions into a mid-market customer, not an easy path. And we've also dramatically expanded our partner ecosystem, and they're performing very well.
So it's a number of factors: it's product, it's the partner ecosystem. But again, churn is a real thing there as it relates to, you know, disconnects. And so, we're focused on the rate of sales and then doing what we can on the disconnect front, but eventually, you know, that's where-
Are they disconnecting-
we're seeing growth.
to cloud-based competitors, to cable attacking mid-markets, to CLECs?
It's all those things. And it really comes down to us being in front of the customer and showing them the migration path to move from what they have today to the, you know, the next innovation that we can bring. And so, that's part of that motion, and again, I think the teams are executing really well.
Do you have any general expectation on when this second to inflect will inflect?
It's too early to say, really. Look, candidly, it's part of my job to be impatient and say: Are we there yet? I think what I'm coming to realize is the product that we're really selling is the experience. When Amazon started, you know, they didn't talk about revenue and EBITDA, they talked about customer adoption.
Yeah.
And that's really, I think, what you'll see more from us on as it relates to these new capabilities, because ultimately, that is what leads you to the, the revenue and EBITDA. And so I've had to change the way I think about it as well, because we think these things will scale in a J-curve-like manner. Where on the timeline that happens is the hard part to predict.
Got it. And then moving on to the public sector, which should be the first segment to inflect.
Yeah.
What's working well in the public sector? I mean, how are you getting these wins? And help us translate the wins we see in the press releases to, you know, actual-
Yeah
install and revenue.
Yeah, so these are huge deals. These are ten-year contracts, generally. They're very complex. They take a long time to win. We've taken share in that space, unquestionably, and it's really the only place inside Lumen where we had a selling motion that was focused on the customer. And there was deep, deep knowledge of the customer need, and I think that's why we've done well. A lot of the contracts that we've won over the last couple of years, they're starting to scale now. It takes a long time to install, for example, USPS with 3,000 locations. You've got, you know, there's a lot of logistics behind that.
So we're just at the point now where a lot of those big contracts are starting to scale on that install rate, and that's why we expect to see growth this year.
Got it. And then you have an upcoming investor day. Maybe you can provide a sneak peek on, on-
Uh
... what we can expect on investor day?
Uh, here-
Like in terms of outlooks or-
Yeah
... just generally.
Yeah. So I don't wanna commit to an investor day, so to speak. What I will commit to is that I think sometime this fall, we'd love to give more visibility around what our free cash flow streams look like when you take into account legacy declines, you know, big IRU-type deals, what we think the cost paradigm could look like, and we'll see. You know, hopefully, we'll know more on where we think consumer is headed. Because those are things that I think we can scale and put some parameters around that will give a lot of confidence to the investor community.
On the innovation piece, by the fall, we will have launched Lumen Defender, which is our Black Lotus Labs-based IP blocking security product, and we may be able to provide some color around that. But I think giving confidence to the market, not necessarily through an investor day, but certainly through an update on what we see coming on the free cash flow side, is a starting point. And then obviously providing more metrics around customer adoption on the innovation.
Got it. And on the innovation, you know, or the growth buckets, if you will, on those products, what are you most excited for? What's really working as I think about VoIP, UC&C, SASE, SD-WAN, you mentioned Lumen Defender, you know, just help us-
I would say we're excited about two things in the near term. The first is, again, big connectivity deals. There's a lot of conversation going around right now across large enterprise and hyperscalers. The second is our security product. I mean, Black Lotus Labs is a unique asset that is ours, and we've blocked eight nation-state threats since the beginning of the year. We see 200 billion net flows a day, and we know who the bad guys are and continue to identify new ones. So I think our ability to monetize that and bring value to enterprise near term is probably one of the faster to scale products you'll see.
Got it. And with that, we're about out of time, so thank you, Chris.
Great.
Yeah.
Thanks a lot.