Lumen: At The Crossroads Of Despair, A Turnaround Is Possible

Discovering hidden gems in the market takes time and effort. I often look at stocks that have seen serious declines and try to determine if a turnaround is possible. I am willing to look at any company worldwide. I prefer to buy stocks that are unloved but have potential. Oftentimes the search bears little fruit but when successful it becomes a veritable goldmine and the search is well worth the time and effort. Today this search brought Lumen Technologies (NYSE:LUMN), a severely unloved and under fire stock, to my attention. The company had great growth through the 80’s and 90’s but more recently the stock price has fallen to prices not seen since 1985.

Lumen's current price presents the possibility of a turnaround and makes a decent speculative buy given current negative sentiment and risk reward profile. Shares are now appropriately priced like an option that doesn't expire. If Lumen shows that it can navigate their current problems and handle debt due in 2027, the stock will appreciate greatly. However, this company has many risks detailed below. These risks should not be ignored and make bankruptcy a real possibility. For those concerned by the possibility of bankruptcy, the debt would make a better investment. Anyone investing in shares should realize that a total loss is a real possibility.

Turnaround stocks and inflection points are difficult to predict. We believe the current downside of Lumen shares to be 0 and the possible upside to be at most $10. This creates a decent risk to reward ratio for a speculative purchase. I prefer taking small positions in these opportunities so that I have the ability to average down and I limit my own personal risk. Using options could also limit the downside risk and Leaps seem pretty cheap currently reflecting the overall negative sentiment.

Previously known as CenturyLink, Inc., the company adopted the name Lumen Technologies, Inc. in September 2020. It is often a bad sign when a company has to change its name in order to get a fresh start. The negative connotation associated with CenturyLink definitely became an albatross that management decided to cast off. In the words of former CEO Jeff Storey, "Our people are dedicated to furthering human progress through technology. Lumen is all about enabling the amazing potential of our customers, by utilizing our technology platform, our people, and our relationships with customers and partners." Investors have not bought into the hype since the name change and the stock has lost over 85% of its value.

The rebranded Lumen delivers a range of services through its Lumen, Quantum Fiber, and CenturyLink brands to both residential and business clients across the globe. The company operates through two segments: Business and Mass Markets. Their comprehensive offerings encompass edge cloud services, IT solutions, unified communication and collaboration tools, colocation and data center solutions, content delivery services, and managed security services. Lumen also provides IP and data services, including VPN data networks, Ethernet, IP, and voice over IP. Their expertise extends to fiber infrastructure services, encompassing high-bandwidth optical wavelength networks, unlit optical fiber, and related professional services. Furthermore, they offer private line services, traditional time division multiplexing voice services, optical network-based Ethernet, data hosting, and conferencing services.

The greatest current strength that Lumen has is its previously built network. The costs of reproducing that network would be prohibitive to any new businesses and represents the greatest asset that the company has. This network is also a possible liability as we discuss later. As technology has progressed, Lumen’s legacy business has been an anchor to revenues. Since 2018, revenues have dropped by $7 billion.

Net income has not been much better and a recent $8 billion dollar write down has made the worst out of a bad situation. This could possibly mark the low point in Lumen’s recent history or it could predict a possible future bankruptcy. In my opinion, rebranding the company and then going into bankruptcy would be a huge waste of Lumen’s rebranding efforts.

This dire situation has caused quite a bit of concern from investors, debt holders and analysts. Without the $8 billion dollar write down for tax payments due to divestments, the company had a decent though unamazing quarter. Management seems aware of the problem and the need for change. This has also created a cloud of uncertainty around the company and perhaps provides an opportunity.

CEO Kate Johnson’s comments from the most recent earnings call highlighted the recent steps that Lumen has taken towards transformation.

• Executive Team Enhancements: Lumen Technologies has made significant additions to its executive team, bringing in experienced leaders like Kye Prigg and Ana White, bolstering their management talent.
• Transformation Plan: The company is diligently executing its transformation plan, focusing on three key elements: securing the base, driving commercial excellence, and innovating for growth.
• Securing the Base: Lumen is actively migrating customers from legacy telecom platforms to modern ones to enhance customer experiences. Early results show promising signs of increased pipeline, close rates, and customer lifetime value.
• Commercial Excellence: Lumen is employing digital tools, AI, and data-driven strategies to enhance its commercial operations. The focus on tech sales talent and programmatic approaches is yielding positive results, reducing sales cycle time and increasing win rates.
• Innovating for Growth: Lumen is innovating by introducing groundbreaking technologies such as ExaSwitch, a 400-gig optical interconnection platform, and Lumen Internet on Demand, a flexible networking services platform. These innovations position Lumen as a leader in adapting to emerging technology trends.
• Strategic Partnerships: Collaborations with tech giants like Google and Microsoft showcase Lumen's ability to leverage partnerships to create cutting-edge solutions that meet evolving customer demands.
• Focus on Customer Experience: Lumen's emphasis on customer experience and business outcomes is a key differentiator in its sales process, contributing to growth in product sales.
• Network-as-a-Service: Lumen's launch of the Lumen Internet on Demand platform, which is oversubscribed, represents a significant step towards its vision of disrupting the telecom industry by offering customers unprecedented flexibility in managing networking services.
• Cloudification of Telecom: Lumen is on a path to cloudify traditional telecom, aligning its strategy with emerging trends such as Gen AI and Edge Cloud to meet increasing network demands.
• Positive Outlook: Lumen is confident in its transformation progress and the potential impact of its strategic initiatives, positioning itself as a competitive player in the telecommunications industry.

Awareness is a powerful tool and from the above points we can reasonably assume that Kate Johnson is aware of the problems at Lumen and has started the long turnaround. Whether Lumen can survive until then depends on managing the debt and growing the profitable broadband business. This leads us to the most recent concerns regarding Lumen’s debt which have to be at the forefront of investors’ concerns.

The Question On Everyone’s Mind:

The recent earnings call transcripts provided one of the most interesting parts of the recent earnings call during the question and answer period. Addressing a rumor about possible debt covenant issues, Dave Barden asked a key question and Lumen Management didn’t hesitate to answer. If earnings calls had highlight plays, then this interaction was the play of the day. Let’s go to the tape and see for ourselves.

Dave Barden from Merrill Lynch asked:

“Hi, guys. Thanks so much for taking the questions. I guess the first one, Chris, I mean, I know you're expecting this question. If you can talk a little bit about what this group of Level 3 bondholders is asking for from you guys. I think we understand on our side of the fence that, there's been a letter sent to you guys, you guys said that we're getting ready for the quarter, we can't comment. So, if now that the quarter is over, you have a comment, it will be super helpful for us to hear that.

Chris Stansbury, CFO

“And as it relates to the debt questions and the rumors that have been swirling in the market over the last few weeks, I want to step back in addressing the question. And just to reiterate, Kate talked about the progress that we've been making against the strategy. We had really exciting news yesterday with NAS. And the reason the debt conversation is so important is we've got to get the debt structure right at our capital structure right so that we can fund what we think is a very bright future.

So with that, we obviously understand the obligations of our credit instruments, and we don't believe that there's been any default under those debt agreements. We remain focused, as we said before, on addressing the upcoming maturities through 27. And we want to do that in a manner that benefits the company and all of its stakeholders. So just without getting into specifics, I'd say that - we're open to engaging with our stakeholders to achieve that. And as we previously indicated, we're going to continue to assess other options to address upcoming maturities in the overall capital structure.”

Dave Barden also asked

“And then I guess, second, more of a business question maybe for Kate. Kate, you at the Analyst Day, talked about this a-third, a-third, a-third people buying in, people not buying in, people in the middle, having to be on over, specifically with respect to the sales force, could you talk a little bit about where we are in terms of, a scale zero to 10 full strength with the sales force that you think needs to be in place to execute on your plan to get enterprise services and others moving in the right direction? Thanks.”

Kate Johnson, CEO

“In terms of our evolution, gosh, it's still early innings, right? I mean, we've just had the strategy in place for a couple of months. We've done a really, really good job hiring in sales with - I think the number that I saw earlier today was 295 net new or sorry, new salespeople that's not net. It's a new salesperson number. Getting all those people up to speed and with all the tools and enablement materials that they need, some of them coming from markets that - they need to learn some of the telecom. That's going to take a little bit of time.

So, I'm excited about where we are, because we're - as I discussed, we're starting to see fruits of the labor. We also have low-hanging opportunities because in the past, we haven't used sales platforms, data and analytics and AI in the way that I think modern sales forces do. So, I hope that our ramp is quicker. I do think it takes a bit of time for somebody to get to full productivity. And so we'll be leaning in and trying to accelerate that as often as possible. But more to follow as we can report on the fruits of the labor of the sales team over time.”

Thoughts:

The responses provided by company executives shed light on important aspects of the business. When asked about the Level 3 bondholders' requests and the debt situation, Chris Stansbury emphasized that they did not believe they had defaulted but were aware of the need to get the debt structure right to fund Lumen's promising future.

Lumen demonstrated that they are open to engaging with stakeholders and assessing options to address upcoming maturities. This stance suggests a commitment to financial stability and leaves room for potential debt management strategies, though specifics remain undisclosed. We believe this also provides some reassurance that imminent bankruptcy is highly unlikely and that the company has a plan to be prepared for 2027 when some of its debt comes due.

On the topic of expanding the sales force, CEO Kate Johnson discussed the early stages of their strategy and their recent addition of nearly 295 new salespeople. These additions are part of their plan to execute enterprise services and other segments more effectively. Johnson noted that getting these new team members up to speed with the necessary tools and enablement materials takes time. However, she expressed optimism about early results, including a reduction in sales cycle time, shortened customer onboarding, and increased win rates. This expansion is critical to their growth strategy and is worth monitoring for investors as they gauge the speed of productivity attainment.

Johnson also touched on their focus on modernizing sales practices with data analytics and AI. This approach aligns with the evolving demands of the telecom industry and positions Lumen for growth. Johnson emphasized that it is still early in their strategic evolution, but the signs of progress and adaptability in their sales force are encouraging.

Stansbury reiterated the importance of aligning the debt structure with their vision for the future. This reflects a commitment to long-term sustainability and the need to secure funding for their growth initiatives. Investors should closely follow how Lumen manages its capital structure and addresses debt obligations, as these factors will significantly impact the company's financial health and growth prospects moving forward.

Additional Concerns

Recent reports and this article from the Wall Street Journal have increased awareness over the concerns and possible health ramifications of telecoms using lead sheathing in their cables. This could be a huge liability for most major telecom companies including Lumen.

Chris Stansbury provided this commentary in regards to the concerns, “Now before we go to Q&A, I'd like to take a moment to address recent media reports regarding lead sheet cables and telecommunication networks. We began phasing out lead sheet cables from our network infrastructure during the 1950s. And based on our initial analysis, we currently estimate that less than 5% of our approximately 700,000-mile copper network contained lead, of which we believe the majority, is buried and conduit based infrastructure.” Addressing these negative concerns directly shows Lumen’s awareness and commitment to transparency in its operations. It also shows how legacy cables from before 1950 could still be a liability for the company. If the company is found guilty of causing Lead exposure health concerns might be too much for the company to overcome.

Final Thoughts

Lumen Technologies stands at a pivotal juncture, offering both potential rewards and significant risks. Investors should closely monitor the company's debt management strategies, its potential liabilities, its ability to harness its existing network assets, and its progress in executing its transformation plan. The path forward for Lumen is fraught with challenges, but for those willing to take on calculated risks, it presents an intriguing speculative opportunity with the potential for substantial rewards. As always, please do your own due diligence prior to buying any equities and good luck investing. Thank you for reading.