Lumen Applied sciences, Inc. (LUMN) Annual Raymond James Institutional Buyers Convention (Transcript)

Lumen Applied sciences, Inc. (NYSE:LUMN) Annual Raymond James Institutional Buyers Convention March 4, 2024 2:15 PM ET

Firm Contributors

Chris Stansbury – Chief Monetary Officer

Convention Name Contributors

Frank Louthan – Raymond James

Frank Louthan

All proper. Nice. Good afternoon, all people. Thanks for being right here. My identify is Frank Louthan. I am the senior wireline analyst right here at Raymond James. We’re very happy to have Lumen again with us. Chris Stansbury, the CFO, right here to current right this moment.

Chris, why do not you simply take a couple of minutes and sort of inform us about Lumen, sort of the place you’re within the sector, who you compete with and the way you match into the house?

Chris Stansbury

Sure. So 80% of our enterprise is enterprise telecom, 20% is shopper. Our major rivals within the enterprise house are the AT&T and Verizons of the world. The massive distinction is they have been very publicly stating that their strategic focus is the patron. We have been very public and saying the precise reverse. It is actually the enterprise facet. Given the innovation portfolio that we’ve got and the place we’re in a position to ship probably the most worth. In order that’s our major focus.

Query-and-Reply Session

Q – Frank Louthan

Once we begin out, quite a lot of modifications in 2023, quite a lot of issues went on. Form of stroll us by means of the place you’re with the steadiness sheet, the administration modifications and sort of the positioning that you just introduced and the belongings you’re going after out there?

Chris Stansbury

So ’23 was an enormous yr of transition. We’re successfully turning the corporate round and repositioning it as we go ahead. There’s an unbelievable asset base of high-speed trendy telecommunications. But when the story stopped there, it is a dialogue of commoditization and pricing pressures and the whole lot transferring down into the proper over time. So our view is, is that enterprise telecom the web itself, it is damaged, proper? It isn’t straightforward to eat for enterprise and we’re right here to alter that by means of actually promoting digital companies that make it a lot simpler and extra versatile to eat, telecom, very similar to what the cloud suppliers did with the information heart 10 or 15 years in the past.

So over the past yr, there’s been quite a lot of funding in cleansing up inner processes. There’s been funding in product. And the administration staff has virtually totally modified, with the newest, the newest two additions, Satish Lakshmanan, who involves us from AWS. He was previously AWS’s head of AI. He’s Head of Product for Lumen. And Dave Ward, who got here to us, he was the CEO of an organization known as PacketFabric, which is a community as a service supplier. And former to that, he was Chief Technologist at Cisco for a lot of, a few years. So we have unbelievable expertise inside the corporate right this moment. And you will see that innovation portfolio come to life within the coming months, as we develop extra of the providing and begin to shift the panorama. It may be quite a lot of enjoyable.

Frank Louthan

With that, we often consider Lumen as a conventional ARBOC, promoting merchandise to enterprises and shoppers and also you speak about performing some various things there. What about a few of these extra enterprise merchandise you’ve got bought that you just’re targeted on? Stroll us by means of these and the way these play out out there?

Chris Stansbury

The primary could be community as a service. And easily that’s the potential to fireside up port=to-port connectivity by means of your laptop computer in 5 minutes or much less. And that functionality exists in a major footprint in our community. There’s extra to do. However these companies are beginning to roll proper now. And I can let you know that from a buyer expertise standpoint, they’re blown away. They do not know what simply confirmed up with the power to do this. However no truck rolls, proper? You energy up and also you go.

Off of that, I’d say that the subsequent main innovation, that is one thing we’ve got IP safety on is named ExaSwitch. And ExaSwitch is revolutionary as a result of it permits you to transfer large knowledge hundreds, with virtually no latency, and it is turning into more and more necessary due to the information explosion with AI. Corporations have knowledge in public cloud. They’ve it on prem. They’ve it in non-public cloud and they should transfer knowledge from level to level, even from a public cloud supplier to a special public cloud supplier. And they should do it shortly.

And ExaSwitch permits you to try this once more on the energy of your personal fingertips, the place you successfully reroute the sign from one to the opposite. And you are able to do it with out having to undergo a third-party knowledge heart supplier to get entry to your knowledge. So it is a lot quicker. It is less expensive. And that is one thing that enterprise is telling us there’s huge worth in for them as we go ahead. So vital innovation there.

The following could be edge compute. So you’ve got bought workloads sitting in a public cloud. You are doing all of your app growth. You possibly can’t have latency. You do not have room in your personal knowledge heart. We have now an fringe of community compute atmosphere that touches 95% of U.S. enterprise inside 5 milliseconds. So the power to drag knowledge down from the cloud, do your work, push it again, eat on demand is one thing that is in place and able to go.

After which the final could be safety. And it is a huge one. It is one thing that is by no means been monetized at Lumen. We have now an asset known as Black Lotus Labs. We see many of the world’s web visitors due to pairing relationships. They usually’re working deep algorithms to search for totally different traits and discover dangerous actors. And most just lately, the congressional hearings from a couple of month in the past, the place there was a Chinese language authorities infiltration of community gadgets round U.S. infrastructure and the power to close down U.S. infrastructure on the push of a button, we discovered it. And we discovered it due to these knowledge traits. And we’ve got the power to make use of these IP addresses to deliver a better degree of community safety to our shoppers. And so there will be extra that follows there. So, some fairly disruptive stuff.

Frank Louthan

Once I speak to traders, most appear to suppose that giant enterprise enterprise is impaired. Not simply you, but it surely’s sort of trade large. That is sort of their viewpoint. However you are speaking about enterprise and possibly some totally different phrases. Are you able to speak to us about what you see as the chance to enterprise that your friends and traders, do not — aren’t targeted on?

Chris Stansbury

I feel the largest headwind we’ve got from a messaging standpoint is precisely that. Once we — as I discussed earlier, we have two main rivals. Their focus is the patron. And they also deemphasized funding within the Enterprise phase. And because of this, whenever you take a look at their outcomes, they’re declining 8% to 10%. We declined final quarter, fourth quarter year-over-year, 3.5%. So we’re already properly forward. We’re not the place we need to be. However the portfolio combine, we classify it as develop, nurture, harvest. Harvest is mainly non-public line bill. It’s happening and happening shortly, and that is simply an trade development. However I feel that basket is way greater for the aggressive set and that is why their traits are worse.

Harvest for us is, is Ethernet and VPN. We’re nonetheless promoting it. We’re simply promoting it at declining charges. After which the develop basket, which is about 40% of what we promote is newer types of connectivity it is IP, it is Waves, it is Darkish Fiber, it is SD-WAN and SaaS and Edge. So we have already accomplished quite a bit to place ourselves higher, however the innovation is finally what offsets these legacy declines and nobody else is doing that.

Frank Louthan

How lengthy do you suppose it takes earlier than we are able to see the highest line turnaround and see the expansion?

Chris Stansbury

We’re assured in saying that EBITDA hits backside and reverts to progress subsequent yr. EBITDA is less complicated to name as a result of there’s quite a lot of price effectivity we are able to get out of the enterprise, as we go ahead. What we will do, Frank might be after second quarter earnings is actually lay out a brand new go ahead mannequin that is up to date. It offers you visibility into this is what’s on the truck right this moment, so our deal with these progress merchandise. This is the gross sales traits by channel, what we see occurring. This is the massive ugly legacy factor, the voice in non-public line declines which are actual and fairly frankly enhanced by dangerous trade habits by way of ranking, rerating throughout off web consumption after which extra specificity round these progress merchandise and the way we see them scaling. And the explanation it will take until that point is we bought Satish and Dave right here now, and I’ve bought to present them a little bit extra time to get there. However we’ll lay that out.

I feel income actually lags EBITDA. It isn’t by years, but it surely’s not months both. So it is — we’ll see the place that kinds itself out. However we’re very, very assured given a number of the early reads we’re getting across the innovation portfolio.

Frank Louthan

While you gave us form of the nurture develop, harvest sort of buckets, you are going to give a little bit past that group expectation KPIs. I imply, what do you suppose we are able to search for whenever you put collectively?

Chris Stansbury

For every of these, we need to present you the highway map that we’re utilizing to measure ourselves internally, how we’re driving the salesforce, how the administration staff is being pushed. However by way of the stuff that is being offered right this moment, actually supplying you with gross sales traits, so you’ll be able to see how that appears. Clearly, the churn will give some metrics round that.

After which the innovation, sure, it is about how shortly can we scale this stuff. The demand is excessive. So we do suppose that they will scale quickly. The important thing query is at what time limit does that occur. And that is what we’ll name and we’ll provide you with metrics round these.

Frank Louthan

And return to you talked about Black Lotus Labs. Simply return there, it is fairly — do not usually get cool point out with telecom, however fairly attention-grabbing belongings you’re doing there. What’s it? Discuss to us concerning the safety angle as a result of that is it comes up quite a bit with a few of our different names, however your friends have not actually checked out that as one thing. How do — why do you see that as alternatives Black Lotus Labs have been the bottom for that or what ought to we count on?

Chris Stansbury

Black Lotus Labs is base for it and so instantly, we may assist our prospects with blocks for these IP addresses which are recognized menace actors. And it is not simply the layer of safety. It is the power for us to push these blocks down in an automatic manner. So they do not should have a again workplace staff keying in IP addresses to every machine. And in order that’s an unlimited worth by way of each safety and effectivity.

However I feel as we go ahead, you are going to see a really totally different manner of creating product and innovation than telecom has ever accomplished. So Kate is a scholar of Satish and Adela. Proper. And Satish comes from very a lot the identical atmosphere having labored at Amazon. And if you concentrate on, how these corporations have advanced, it is not about, hey, I have to outline the pie and personal all of it. It is concerning the broader platform worth and I am higher off having a slice of a a lot greater piece of pie.

And so you are going to see us do, I feel, much more, co-development round product. So I feel it’s going to be Black Lotus and so there’s issues that we are able to do individually, however I feel you may additionally see much more co-development as a result of we are able to deliver a layer of safety that others can then construct on prime of.

Frank Louthan

So that you’re an ARBOC and not using a wi-fi asset. That is usually thought by way of extra on the patron facet, however there’s quite a lot of promote by means of and pull by means of on the enterprise facet. Discuss to us about your potential to sort of promote bundles to prospects and the way does that impression you on what you do have in shopper after which what you are doing on the enterprise facet?

Chris Stansbury

On the enterprise facet, it is actually not a problem for us as a result of to the extent that there are wi-fi options which are required as a part of a broader enterprise resolution, we work with companions to usher in that side of it. In order that’s one thing that is been in place for a while, and we proceed to leverage that.

On the patron facet, we actually have not run into the state of affairs the place that wi-fi bundle is necessary to how they’re consuming our product. We have a really excessive scoring product from an NPS standpoint, finest in school. It is a simple to eat product, absolutely digital, straightforward to scale up, scale down. There is no contract, all taxes and charges included. And so it is a very buyer pleasant product.

Frank Louthan

And that is a quantum broadband.

Chris Stansbury

Sure. So we predict that performs properly by itself. However once more, due to these enterprise relationships, if it ever got here to the purpose the place we thought that the wi-fi bundle was necessary that is one thing we may clearly add.

Frank Louthan

What about fastened wi-fi? And the way do you see that as a competitor in your — for the patron facet? And in addition for small enterprise which are possibly much less involved about getting gigabit speeds and so forth? How has fastened wi-fi impacted that?

Chris Stansbury

Mounted wi-fi is a particular participant in additional rural areas. It doesn’t play properly in main metros, which is the place we’re constructing out fiber, as a result of it wants line of sight to be at its finest efficiency. And there is actual spectrum points that the suppliers are having. So there’s solely a lot to present away from a set wi-fi standpoint, and main metros will not be the place. Rural areas, I feel it performs a lot better.

The excellent news, which is identical because the dangerous information is that our penetration on legacy copper is barely 10%, and within the rural areas, it could be a little bit increased than that. So we positively have seen a few of these points, however our penetration is so low, it is not a fabric impression to us.

Frank Louthan

You proceed to be targeted extra on the enterprise enterprise, however you’ve got additionally mentioned on the patron facet, you are open to transactions to sort of restrict that both a sale of that enterprise, joint ventures, different issues. Stroll us by means of the spectrum of issues you possibly can do on the patron facet and the place you see that finally with the enterprise and alternatives there.

Chris Stansbury

And once more, we have two nice companies. Our view is that they are higher off aside. They’ve utterly totally different return fashions round them. And the patron house is one which desperately must be consolidated. I imply, these are for much longer time frames to pay again and the one solution to shorten these is thru scale. And so that should occur. We’re simply not going to be the consolidator.

So within the interim, properly, I do not suppose the market is conducive proper now to an enormous transaction. We’re it market by market. We could promote some markets. We could wholesale some markets, the place we have fiber as a result of that fiber has bought quite a lot of capability on it. We could three way partnership quite a bit like what AT&T and Gigapower have accomplished, the place you — for similar funding get an even bigger footprint since you’ve bought each swimming pools of capital that you’ve got entry to. In order that’s the best way we’re it. And we should always have that accomplished within the subsequent few months after which we go from there.

The important thing factor although is within the interim, so long as we proceed to personal that asset, we will proceed to put money into it as a result of the last word worth in that to us is the fiber that is within the floor. And so, we will preserve constructing on the 0.5 million items a yr tempo that we’re at, 0.5 million in eight months.

Frank Louthan

You are accomplished in a number of months, is it a collection of small transactions or is {that a} transaction? Is that this a multiyear course of? And the way a lot of that shopper enterprise to not have in your books anymore? What’s creates that proper now?

Chris Stansbury

There’s not a goal. I imply, if there is a goal, the last word goal is that, once more, I feel these two property are higher separated. Our perception is that it is not going to be one huge transaction. It might be a collection of smaller issues, simply given the place the market is. However we’ll see how that performs out and we’ll clearly let individuals know as we try this.

Frank Louthan

And also you talked about wholesaling a part of it. Are you able to describe sort of what that appears like? It is an attention-grabbing idea. And I assume you are saying that since you’ve in all probability bought some curiosity in doing that. However what does it appear like?

Chris Stansbury

When you concentrate on our fiber footprint, we’re at 3.7 million enablements proper now, so it is not small. We’re nonetheless constructing penetration on these property ourselves. However the fiber has bought a lot capability that if we wished to wholesale that, similar to we’ve got wholesale relationships on the enterprise facet to a competitor who needs to achieve to the house in these markets that could be one thing we take into account as a solution to monetize that quicker. So, it is a trade-off, clearly. Our intention was by no means to get a degree of penetration that was dominant in these markets. We thought we may get to 40% and that is nonetheless a goal, however there’s nonetheless room past that to share that fiber with others.

Frank Louthan

And you’ve got, so that you pulled that construct again to about 0.5 million houses. Is that the correct amount? What would make you resolve to construct roughly? How do you concentrate on that coming at that focus on?

Chris Stansbury

Sure. We expect that is the proper tempo. I imply, a yr in the past, simply over a yr in the past at our Investor Day, we mentioned that we go from 0.5 million to 0.75 million this yr to 1 million subsequent yr. And when the price of capital began to skyrocket, we clearly went by means of the debt restructuring and that was a driver as properly. We determined to carry on the 0.5 million items. The truth is should you look throughout the aggressive set, all people has pulled again as a result of the price of capital has gone up a lot. So we do not suppose that is making a aggressive drawback in any manner, and it permits us to proceed to construct the worth of the asset. So we predict that is the candy spot.

Frank Louthan

Are you involved about over builders coming within the meantime?

Chris Stansbury

It is actually attention-grabbing, as a result of 18 months in the past, you would be at an investor convention and all of the speak was about overbuilders. And each new overbuilder that it was like each week anyone popped out of the woodwork. It is like, we will construct it cheaper, we will promote it for extra and we will get higher penetration. And that flamed out quick, as a result of it is laborious to do. It is actually laborious to do. It’s essential to construct a shopper model. It’s essential to promote it. It’s essential to there’s quite a lot of work that goes into it lengthy after the tough development part. So the overbuild exercise is basically dried up. And I feel, we’re now coping with a set of trade gamers that in some unspecified time in the future will consolidate.

Frank Louthan

We do not need to disappoint the traders. They’ll do a search on the time period AI within the transcripts. I’ve bought to ensure we point out that. So we have touched about this a little bit bit on the enterprise house. You have been on a panel with us a number of months in the past at our convention, speaking about Microsoft Copilot and what you all are doing there.

Discuss to us about how AI suits in with you guys and notably with the networks. I feel individuals neglect you bought to get knowledge out and in of the information heart and we have constructed all these things and the place’s the community to assist it? How do you guys really feel that you’ll play within the AI house?

Chris Stansbury

Sure. So I will do the smaller half first, which is definitely a very huge deal, which is simply inner to Lumen. Like quite a lot of telecom, I imply, there’s been large underinvestment within the firm in simply primary capabilities. And so we’re on the level the place as we tackle that, AI will help us leapfrog quite a lot of these antiquated techniques. So there’s quite a lot of work that is being accomplished internally by way of integrating AI with how we handle gross sales, service supply, financials. There’s huge quantities that we are able to seize internally and that is a part of the associated fee financial savings over time.

A a lot greater factor is you are proper. I can’t understate simply how a lot of an explosion there’s been in knowledge and knowledge consumption. What’s AI? They’re machines that be taught. They’re insatiable. They do not fall asleep. They do not cease to eat. They do not take a trip. It is 24/7, 365 and what you are seeing whenever you speak to others is they can not construct knowledge facilities quick sufficient. And people knowledge facilities are getting additional and additional away from the purpose of consumption.

I’ve a nephew who works for a big development firm they usually’re constructing knowledge heart farms in western North Dakota, as a result of that is the place there’s energy. So you’ve got bought that. Okay. That is an actual factor, and I feel it is broadly recognized. The difficulty is that as you get additional and additional away from the purpose of consumption, you now want actually excessive velocity networking as a result of knowledge latency is a slaying factor for the apps that run the economic system right this moment.

So, we have the biggest 400 gig wave community on the planet. We have added 6 million route miles over the past variety of years. We have additionally bought at its core, a conduit primarily based infrastructure. It is boring, but it surely works. It is actually PVC pipe that crisscrosses the U.S., and we are able to pull out an previous fiber and shoot a brand new one by means of it. That underlying functionality has capability left in it. And so whenever you mix the uncooked transport want, which is a commodity with the ability of issues like NAS and ExaSwitch, the place we’re now supplying you with not simply velocity, but additionally flexibility to eat extra effectively that is an unlimited tailwind for the corporate.

And importantly, Frank, these huge, huge offers round both conduit IRUs or Darkish Fiber, these are by no means in our steering as a result of we do not know when they’ll hit. They’re big, they’re chunky they usually’re tough to foretell. However there’s been much more dialogue out there round these. And I feel that is one thing that actually as we get later into this yr, we’ll have extra readability about, however that may very well be some good tailwinds for the corporate.

Frank Louthan

And what’s an historical historical past lesson the place these Degree 3 conduits got here from? I am glad to stroll you thru. Nevertheless it’s a — I feel they count on you to monetize these quite a bit prior to 28 years in the past after they constructed them and put them in. And we’re telling us how a lot worth, how they have been going to crush all of the competitors out of it. However glad you are getting the worth out of it now.

Chris Stansbury

I can let you know I am very glad it is there. Proper.

Frank Louthan

I bought one other query or two and let me take some questions from the viewers. So all proper, so we have laid this you’ve got bought enterprise alternative and it offers some extra disclosure. You’ve got addressed the steadiness sheet largely, pushed out for the subsequent couple of years. Perhaps stroll us by means of how these modifications sort of at a excessive degree? What can we count on subsequent two or three years from you now you’ve got gotten a few of these issues out of the best way and may deal with the execution?

Chris Stansbury

Sure, I feel the massive factor was the debt renegotiation, clearing a path. I imply, the truth is, I feel crucial factor about our debt construction right this moment is that is now not a limiting think about our potential to execute the turnaround. And with out that in place, it was a limiting issue. And there was $10 billion due in 2027. And other people have been involved not nearly our potential to show the corporate round however flip it round in time given the quantum of that debt. So this renegotiation has essentially modified that panorama. There’s further work that we’ll do across the capital construction as we go ahead however that offers us an amazing basis.

Then it is actually about what I used to be speaking about by way of these items earlier that we’ll provide you with within the second half, which is, it is about executing towards the core enterprise because it exists right this moment and doing the very best with that that we are able to. And there is quite a lot of inner metrics and a deep, deep consideration and inspection round that. After which the third is the innovation portfolio. And that is actually what modifications the whole lot as we go ahead. And we’ll be supplying you with extra on that as I mentioned.

Frank Louthan

Any questions from the viewers? Sure, Fred.

Unidentified Analyst

[indiscernible]

Chris Stansbury

Positive. And there is really web page from the final earnings that is on our investor web page. By the best way, I ought to have. There’s three chunks, the earlier than, the sort of present participation and participation at a 100%. The essential the factor was this, is that at a really high-level about $20 billion in debt leverages 4.2, 4.3. So leverage itself not loopy excessive. The difficulty is that the underlying EBITDA does not decline due to the legacy drain. And so that is what we’re targeted on.

The $20 billion, 10 of it was due in 2027. It is throughout three entities internally. They have been sort of at conflict with one another. And so we went by means of a complete out of courtroom restructuring, the place we mainly cleared a pathway by means of ’27. The larger maturities now. And so you’ll be able to think about, proper?

And so now that sits largely in 29 and 30 and past, which supplies us loads of time. After which, ideally, over time, I would prefer to collapse that construction, however it will take a while. However we the massive difficulty, which was 14 tranches throughout 70, 80 traders, key traders, we moved about $17 billion in debt, 1$2.5 million of it between now by means of ‘27. Sorry?

Unidentified Analyst

[indiscernible]

Chris Stansbury

Sure, I used to. I am actually solely 26. I simply look this manner, proper?

Frank Louthan

Another questions? All proper. Let me bounce again to one thing to speak about form of the macro facet from Washington, D.C. Obtained a few after three years of nothing from the FCC, they wished to go down, exit with a bang in an election yr. We have Title 2, we bought digital discrimination, right here quite a lot of pushback in D.C. Discuss to us about the way you see these affecting your corporation, probably affecting the attractiveness of deploying capital, whether or not it is quantum or different issues and/or subsidy cash and issues like that. How do you concentrate on these?

Chris Stansbury

We actually do not see it as a problem. I imply, the closing the digital divide is a key focus for us. The State of California deal that we did final yr, once more, getting again to sort of a few of that capability that exists within the community, the State of California deal was actually to assist California deliver web connectivity to extra rural much less advantaged areas. And so that may be a focus of ours. We’re another areas the place we may try this as properly. So we do not view that as a menace.

Frank Louthan

Another final questions?

Chris Stansbury

I ought to have mentioned as a result of I forgot at the start to learn our protected harbor assertion on our Investor web page. So I’ve checked that field now.

Frank Louthan

After all, we’ll have that dedicated to reminiscence shortly. All proper. Thanks all people for coming. I respect it. Thanks, Chris, for coming again this yr.

Chris Stansbury

Thanks.

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