All right, great. Thank you very much, everybody, for being here. My name's Frank Louthan. I'm the senior wireline analyst here at Raymond James. Proud to have Chris here with Lumen again with us this year. Chris, Lumen's one of my companies that we cover that, I think, you know, investors, consumers use almost every day and have no idea how pervasive it is.
Yeah.
This hotel's probably on your network and people accessing the webcast and over their cable modems that buy internet access from you. Tell us a little bit about Lumen, where you are, how you fit into the space, relative to some of the other telecom names that folks know.
Sure. Good to be here, Frank. Thanks for having me. The business is about 80% enterprise, 20% consumer. If you think about the enterprise side, it is the largest ultra-low loss fiber network in the world. We've added about 6 million fiber miles over the last number of years, and there's another 6 million to come. We reach 240 third-party data centers with 400 GB service. We have about 150,000 on net buildings and the ability to expand from there. Connectivity is what we do. It's what we do really well. We also have strong portfolios in security, in Edge Compute.
We have an Edge Compute network that's built that passes 97% of U.S. businesses within 5 milliseconds, and that's something that increasingly, you know, companies are looking for. There's a real opportunity for us to be expanding into the whole solution space, managed solutions and where partner networks can come in and consume our network assets. On the consumer side, we are largely in the West, so 16 states, also Florida, so good to be in Florida. We're doing a significant fiber build across those assets that we expect will reach up in the neighborhood of eight to 10 million homes in the coming years. We're at about three million right now. That's a much longer-term opportunity for us as well.
That can reach also small business, depending on what their needs are. It's a very scalable product. It's a very easy to consume product that is scoring very well with consumers.
All right. Great. 2022 was a year of management turnover in.
Yeah
-my sector, including Lumen. You joined just under a year ago, have a new CEO since, named a whole new e-executive suite there. Talk to us about the differences and how the new leadership team, management team are gonna go about the business that may be different from what folks knew about the company before?
Yeah. It's really an interesting space to me. I came from outside of telecom. Kate Johnson, our CEO, and a lot of the leadership team came from outside of telecom. That's with intent, right? I think when you look at broader telecom, one of the more interesting things to me is it's a sector where I think a lot of people in management have this belief that everything's gonna continue down and to the right, and that there really aren't opportunities for growth, and they manage accordingly. When you look at Lumen historically, it was a very internally focused company. It was focused on efficiency. It acquired a lot of assets. They did great work with that. Longer term, that wasn't a winning strategy.
If you look at what we do on a daily basis as it relates to connectivity, that's increasingly getting commoditized. That's not an interesting ending to the story. The way we monetize that is by selling the services and bringing value added to market that companies are buying, but really rely on that network. That's where we think we can compete very effectively, and the management team that we brought in is focused on that. Very heavily tech-based in terms of their backgrounds, companies like HP and Red Hat, and Microsoft. They're very aligned and focused on where we're going. If you look at our vision as we go forward, it's quite simply to connect people, data, and applications quickly, securely, and effortlessly.
It's those last three words that are really hard to do, and that's where our, where our focus is. From a priority standpoint, we have five for this year, and they're really important to share because I think they speak to the shift that's going on inside the company. The first is develop customer obsession. Again, like a lot of companies in our space, Lumen was very internally focused on driving efficiencies. It worked for a number of years, but it's not a pathway to growth. Building something and expecting customers just to show up and buy it, that's not gonna work. You gotta be really focused on what customer problems are and how you're gonna solve them, and that's developing a customer obsession. The second is innovate and invest for growth.
We, this year, and probably next, are investing about $700 million of our free cash flow in really three things. The first is how do you digitize the end-to-end selling process? We've got a really good front end. It's a great customer experience, but provisioning and billing and all the things that come after that front-end experience are broken. That needs to be digitized, so it's a much more seamless way to buy, and that's particularly important in the mid-market space, but even on some products in large enterprise. The second would be the investments that are required for us to sell more network as a service. You think about solutions integration and the expansion of a partner ecosystem that consumes network. We wanna make that really easy to take place on Lumen's network.
The third would be to really automate internal processes like a lot of telecoms, a lot of M&A over the years that has created inefficiency, too many IT systems, and we're gonna clean that up. That's really innovate and invest for growth. We need to build a far more reliable execution engine. That's the third one. If you look at our execution in the marketplace today, we've got great product, we compete well, but we're not performing at the same rates in a lot of our product categories as the market. A deeper focus on execution, making sure that incentive systems are aligned is a key focal point for us. Radically simplifying the company.
I talked a bit about that with the IT investment. The last is to develop a growth mindset culture. Telecom is a space where winning is defined as losing last, which is not what we wanna be. Winning is gonna be defined as growing. That's what the new management team is focused on.
Okay. You've laid some of those out, what are some of the tactics to get to top positive top-line growth? I mean, that's kind of the long-term challenge here. It's a slow process to understand, what are some more... Can you be a little more specific on some of the things you're tactically you do that can put all those pieces together and?
Sure
... develop?
If you look at just the products that we have in hand today, and again, I would say that we're starting from a position of strength vis-à-vis our competitive set with investments that have already been made, things like Edge Compute, I talked about, SD-WAN, SASE. It's twofold. It's how do we bring better product, more differentiated product to market. Think of things like, we own Black Lotus Labs, which is world-class proactive threat detection on bad actors around the network. The U.S. government relies on it. Governments around the world rely on it. We can monetize that. We haven't, and we can. That can be part of our security solutions going forward. There's some near-term things that we can do there.
The other piece of it really comes down to making sure that everybody is aligned around execution. I would say that the accountability model, the incentive model has fundamentally changed in the last four months. The way we set quota, the way we focus all of our resources, around who gets what financial and human resources, depending on which products that they're in. All of those things are now aligned this year. With all of that's why we believe we can get to relatively stable revenue and EBITDA by the end of 2024, and growth thereafter.
All right. Great. One question I get a lot from investors, especially more generalists: you're an RBOC without a wireless asset. Talk to us about that. How does that affect your ability to sell, and talk about it both from the large enterprise and also the consumer side.
It really hasn't impacted our ability to sell at all. I mean, if you think about data, and yes, more and more data is connecting through wireless. I've been doing it here today, data wants to find its way to fiber as fast as it can, right? It's, if you think about all the 5G towers around the country, they're connected to fiber. We have relationships with the wireless providers so that if we have an on-campus environment or a customer who has a wireless need, we can bring that. We don't feel we need to own those assets, again, back to the kind of a partner ecosystem, to compete effectively.
There's people that do that far better than we ever will, and we're gonna stick to what we're good at, but we can bring in those partners when we need to bring the right solution to a customer.
All right. Great. One of the things that you promised right off the bat was bring some more KPIs, and how we can look at, look at the business, give us some more information there. You know, you gave us some, the grow, nurture, and harvest buckets. Talk us through what, you know, what goes into those, how you came up with that, and how investors should view those?
Yeah
... parts of the business going forward.
Yeah. When I came to Lumen, you know, like a lot of our investors, there was not good visibility into what was inside of enterprise. When you think about the way we talked about products, it was a very high level, as well as channels. The reason for the shift to grow, nurture, and harvest was really twofold. One of it was disclosure, 'cause we think it gave a much better picture of why we saw a pathway to growth. But it was also a way for us internally to bring more of that product lifecycle mindset to the way we allocated resources. So when I arrived at Lumen and started to unpack what was in the enterprise segment, 70% of our product managers thought that they were in products that needed to grow.
They were asking for CapEx and OpEx, I mean, it was just nuts, right? Even products that weren't number one or two in their category, or they were in categories that were in steep decline. That nomenclature forced us to think about who got what, where we were gonna focus resources, and where we weren't. That has now led right into all the changes that we've made this year. It's been tremendously helpful. If you think about what's in those buckets, high level, think of harvest as legacy voice, things that aren't really sold anymore. Nurture, think about things that are being sold, but at declining rates, VPN, Ethernet. In the grow bucket, think about IP, Wavelengths, SD-WAN, SASE, Edge Compute type solutions.
Okay. How should we think about the life cycle of the nurture and the harvest? Those are both, yet myself and I think investors were a little surprised at how much those were declining.
Yeah.
How should we think about, you know, how you can, as you talk about bringing the life cycle, mindset there, move those out and then re-replace them with other products?
You know, it's a, it's a really interesting opportunity because one of the things that I think existed certainly in Lumen, and I think more broadly across telecom is there is this mindset of, hey, if you've got an EBITDA-rich customer buying an EBITDA-rich product, don't go talk to them, right? Leave them alone because they might wake up and turn something off. If you look at the opportunity that exists here, first of all, this is a motion that will continue forever, right? What is currently a grow product, 10, 15 years down the road could be a harvest product, and then there's the next thing. This needs to be a muscle memory that we build.
The shift is, no, we need to be having proactive conversations with customers where we can shift them from an old technology to a new technology. It's about customer lifetime value. Again, it's about that outside in, you know, customer focus rather than inside out operational EBITDA dollar focus. There's specific programs that we have for this year around voice migration, legacy voice migration, around, you know, TDM-based VPN migration. That's not just about maintaining a longer-term revenue cycle around those customers. It also unlocks our ability to get at some really cost-inefficient technologies where we could go in and start turning off very expensive switches, TDM. That's a huge focus for us. It's part of how we've built targets and quotas and everything else for the year. Everything cascades from that.
Okay, great. With that, you made some divestitures.
Mm-hmm.
There was the Latin America, the Midwest asset sold and the European business. Talk us through the thought process. You got good multiples for all of those, but so besides that, talk us through sort of the thought process of how that simplifies the business and how does that help you move forward with what you've been describing?
Sure. You know, I think the winner in this space longer term is gonna be the company that has the easy button, if you will, for our customers. They can still provide that global connectivity, but now through a much more regionalized footprint that exists around the world. This is a space that needs scale. It's a space that needs constant investment to keep pace with technology change. There was no way that Lumen could continue to support all of those assets, as well as invest in the spaces that we feel we need to grow. That's really what drove the decision to divest. The LATAM transaction was a really great valuation, but it was an asset that on a free cash flow basis was generating very little.
It gives us the opportunity to still have those relationships, but to let them focus on success and scale. EMEA looks much the same as that. The 20-state ILEC, those are more mature assets in more rural areas, where we just simply weren't gonna invest and do what that business needed going forward. All those things are a way for us to monetize those, reduce debt and focus our efforts where we think we can play best.
Okay, great. Another conversation I often have with investors, they look at the large enterprise part of the business, which is now an even bigger part of your business, and they believe it's somewhat impaired. They don't see a lot of growth, even if you look at AT&T and Verizon, who arguably don't care as much about those anymore. What would be your answer to that, and how do you see gonna be able to get growth out of that bucket again?
Yeah. If Kate were sitting here today, she'd talk about total addressable problems rather than total addressable market. Again, that's that customer mindset. What problems are they trying to solve? They're buying these services, they're just not buying them from us. There is some special sauce we can bring with things like Black Lotus Labs, with our edge and network compute solution that is differentiated. We really should play well there. Those kinds of investments, nobody else has made in this space. You're right. Look at our competitive set, they're more focused on the assets where they play well. There's a huge obvious focus on wireless. You know, they've got tough competitors, they're all fighting with each other over that space.
We don't have any competitors who have made the investment in the underlying network that we have. We're starting with something that's incredibly strong. It's how do you monetize it? Our focus is on that, and certainly the management changes and the refocusing of our resources on those growth products is why we think we will do well. I think there's also some real data there when you look at public sector. You know, the public sector space, things move in a chunky way, so you gotta be really careful about looking at year-over-year changes. Huge wins last year for Lumen. These are share taking gains, DoD, Borderland Security, USDA, USPS. Every one of those contracts is incredibly complex.
If you think about the new world of hybrid work, which we firmly believe is here to stay. That requires complexity in terms of communication, security, everything else. In complexity, there is margin. Those wins we're also experiencing in large enterprise. We're not able to talk about those logos, but you'd know what they are. We can do better, and that's why we think we'll continue to take share and grow.
Great. On the consumer side of the business, let's talk a little bit about the fiber upgrade, you know, what the goal is there and the opportunity, and then we'll come back and talk a little bit about what the current status is.
Sure. I mean, I think if you think about our existing copper plant footprint, that's a really good example of where Lumen did a fantastic job of not cannibalizing itself, and it's why we've only got 10% penetration right now, right? It was truly one of those things of, "No, don't invest because the customer might leave." The customer left anyways. They just went to cable, broadly speaking. The investment in fiber is a big one for us. The product that we have has been received incredibly well by our customer base, so NPS score is above 50. It is a there's no contract, so there's no termination clause. It's a prepaid product. The price point is right. It's $65 a month, all taxes and fees included.
It's very scalable. Once you have, the device in your home, very easy to scale up or scale down. It plays well. We've done very little marketing 'cause we haven't been at scale, and the penetration rates have looked good from that. We're focused on six major metros, so Seattle, Portland, Denver, Minneapolis, Salt Lake, and Phoenix. Those are tough markets to build in. We're talking about rocky soils. We're talking about a lot of permitting, and we have physical plant in those markets, which we think is critical in terms of the ability to execute. That's the plan.
On the prepaid side, that's interesting 'cause I know of a couple of smaller private companies who are doing that. I think it actually makes a lot of sense.
Mm-hmm.
I haven't heard any of your public peers doing that. What's sort of the response from customers? Do they care? It must be much easier from your standpoint and lower bad debt as well.
Yeah. There's been no pushback on that because, again, we're also not asking them to sign, you know, a fixed term contract. They can turn it on, they can turn it off. The whole point here was to make it very easy to interact with our Quantum Fiber product. As a result, there's really been no resistance to that.
Okay. you made a decision to sort of pause the build there. generated a lot of inbound calls for me, so appreciate that.
Yeah. For me as well.
Tell us, what is the rationale here, for sort of pausing the spend, and is it something that is about the opportunity? Is it just... How should we think about it?
Look, there's a few layers to it. When I came to Lumen, the operations team only had two metrics. Get to 12 million enabled locations at $1,000 per enablement. Well, that's troublesome as a CFO. You wanna make sure that you're building to the right markets, and maybe $1,000 isn't the right number. We're now at $1,200. If you can earn a return on the locations in the markets that you're in, that's what matters. That's what the focus was. The real early tell was that what we were doing in 2021, we were seeing lower penetration rates than we were seeing on the 2020 vintage. The 2020 vintage, after 12 months, was at 22%. It's now over 30%. The goal is to get to 40%.
The 2021 vintage was 17%. That's not good enough in terms of the ramp that we expected. Clearly something wasn't right. We hit pause to make sure that we were doing the right things. Just one data point that we'll share as we go forward. There's something that we look at internally called planning yield. If you think about the top of the funnel being, here's all the locations we plan to go to, then people do site walks, then the engineers start doing a whole lot of work around what the specific build is going to look like, and they come up with a cost estimate. Then it goes to my finance team, and the finance team says, "Yeah, that makes sense," or "No, it doesn't." Our planning yield was horrendous.
It was sub-20%, so over 80% of our resources were wasted. When Kate came in, she made some immediate changes in the first week. The first thing she did is she took operations and split it. It was a horizontal function that supported both enterprise and consumer. The consumer build now reports to Maxine Moreau, who owns that entire business internally, so dedicated resources. The second thing we did is we took the planning function out of operations and moved it into finance. Within a month, that planning yield went to over 90%, and what we've seen consistently since, and we measure it weekly, is a seven to eight-fold increase in the number of units coming through that are passing, if you will. That flywheel is really starting to get moving in the right direction.
I think what's interesting now, you know, as we've done that and we're gonna build half a million units this year, we've seen a lot of our competitors start to adjust. I think some of that relates to the inflationary pressures that are real. I think there was also a little bit of a gold rush mentality as it relates to fiber to the home. I think that emotional exuberance has been at least tempered somewhat with some more rational thought. I think people are pulling back on their build plans, more realistic, cost estimates and ARPUs, coming with that as well.
Have you seen any go the other direction and that we're building in your territory and see your pause as an opportunity to take some share? Are you concerned about the opportunity cost there at all?
Not really. I mean, again, to succeed in this space, you really do need operations on the ground. The markets we're in, we have strong, you know, a strong operating model. They're tough markets to build in, as I mentioned earlier. You know, I'll give you an example. You know, we're obviously out of the greater Denver area. We see overbuild activity if you think about 90 miles outside of the Denver area. You think about Fort Collins to the north, Colorado Springs to the south, Greeley. You see a little bit of activity in those markets. You don't see it in the core of Denver, where there's really high density, and it is hard to build.
There's a little bit, but it's really not at the core of what we do. Frankly, you know, I think over time there'll be fallout from some of those players as well, and that may provide future opportunities for us down the road. We'll see.
All right. Great. Do I take a second, see if anybody has any questions from the audience. No? All right. As you know, also with this, how do you think about it where there has been some overbuild activity, right? If you're looking at a market, there's a cable company there, someone else is already overbuilt. As like you mentioned, you've got network there. You've got a lot of advantage on the make-ready costs and everything else.
Mm-hmm.
to start in there. Is that enough, do you think, if there's already two wires there, is that something you would just move on?
Yeah, I mean, if.
Would you build?
Yeah, no, if you think about it, I mean, really being first or second with fiber, I think is critical. The reality is, this is a share taking opportunity from cable, period, right? The share that we lost, you know, that 10% copper penetration that we have today, that was lost to cable because cable had a better offer than DSL. Fiber is a much better offer than cable. It's, you know, the tables are turned now. When you look at the markets that we're focused on, it really is cable that we're competing against. In most cases, we will be number one, but even if we're number two, there's a tremendous opportunity for us to take share there, and that's our focus.
Yeah. Yeah.
The cable companies, they're already, you know, they're migrating everything to DOCSIS 3.1, but also going fiber deeper, and they can get to something much more comparable to fiber. Now, I guess I'm just wondering, how do you differentiate from some of the more advanced, you know.
Yeah.
cable products?
I mean, DOCSIS is a thing, but it's not symmetrical. I mean, our $65 a month, again, all taxes and fees included product is a gig up and down. It's, you know, symmetrical gig. It's a far more superior product. There is obviously activity where they're obviously trying to bundle wireless wherever they can and everything else, but their price point is higher than that. The ability to compete going forward, I think is tough for them because they've got a very high margin product. They're obviously subsidizing wireless right now to compete. That's a real opportunity for us. I think it's gonna be hard to compete with the product offering we have. Again, no contracts.
All, you know, it's not just the price and the performance, but I think that's that's our opportunity.
Thanks.
Yeah.
How do you guys decide, you know, when to sort of put the pedal down on passing more on beyond.
That, that comes after this. Really, if you think about it's a simple model, you know, financially, right? It's you invest the money up front, it's P x Q, you've got your return. The hard part is getting that flywheel of the factory moving. Now that we've got the planning nailed, I think you'll see that grow quickly. By the way, that's really critical because that allows us to more effectively negotiate for things like third-party labor. You need to have a volume base to be able to negotiate effectively. When you're only just doing a few or you're trying to micro-target markets, you're dealing with what you can get. There's really a twofold piece to this.
One is, you get better momentum just internally in terms of the resources, but two, you get much more leverage externally, with the third parties that you need. We'll come back. We're having the investor day in June, to provide a lot more detail around how we see ourselves turning to growth in total, but that will also provide some more detail on the consumer build and how we see that ramping from here.
I got that little confusion with that, kind of came out last week and said that you guys are at 100% and forecast looks good, but you guys are constantly supplying.
Yeah. To be honest with you, I don't know where that number came from. You know, from our standpoint, we're focused on the right markets. Frankly, from our standpoint, the fact that a number of our competitors are now pulling back on their build plans, I think is a good sign that that supply-demand equation on third-party labor could be coming closer to equilibrium.
All right. Great. Chris, thank you very much for being here. We'll have a breakout session after this, a moment to continue the conversation.
Thanks, Frank.
Thank you very much.