Company Reports

Lumen clearly saw some progress during the first quarter, mostly in its fiber broadband sales, but total revenue and EBITDA were awful, and the firm gave no way to judge comparable results for products that are core to its future versus those that we know are in perpetual decline. The firm completed a significant amount of debt restructuring during the quarter through a transaction services agreement, or TSA, with many of its creditors. The TSA pushes the next big maturity out until 2029 from 2027 and gives the firm another $2.3 billion in liquidity and relaxed debt covenants at the cost of higher interest rates. Lumen now has a much longer rope to turn around its business, but we’ve yet to see any meaningful signs of a turnaround. We’re maintaining our $1.50 fair value estimate.

Within the last decade, Lumen has transformed its business to focus primarily on enterprises rather than consumers. The shift became even more pronounced in 2022, when Lumen sold its incumbent local exchange carrier, or ILEC, in 20 of the 36 states where it operated, ridding Lumen of nearly half its remaining consumer revenue.

We’re yet to see tangible signs of real improvement in Lumen’s business, a year into CEO Kate Johnson’s tenure. Sales and profits continue to decline while Lumen manages its debt, divests businesses, and, yet again, introduces a new reporting structure in an attempt to show where progress is occurring while instead leading to further obscurity. While Johnson doesn’t deserve to be held to prior management’s rhetoric and legitimately could need more than a year to show results, the company’s current financial performance, outlook, and talking points are little different than they’ve been in the last several years. We’re maintaining our $1.50 fair value estimate and Extreme Morningstar Uncertainty Rating.

Within the last decade, Lumen has transformed its business to focus primarily on enterprises rather than consumers. The shift became even more pronounced in 2022, when Lumen sold its incumbent local exchange carrier, or ILEC, in 20 of the 36 states where it operated, ridding Lumen of nearly half its remaining consumer revenue.

Lumen was busy in the third quarter, finalizing the divestiture of its European business and restructuring a chunk of debt. Lackluster operating results were consistent with what the new management team has foreshadowed, but encouraging signs are not yet apparent. We believe the company remains undervalued, but the threat of insolvency continues to grow as the debt restructure buys time but otherwise puts the firm on weaker financial footing. In addition, management’s sensing a need to take an otherwise unfavorable deal so that it could extend maturities leads us to believe recent trends will persist. We are changing our uncertainty rating to Extreme and reducing our fair value estimate to $1.50 from $5, which balances the value we believe Lumen has with its precarious current financial and operating positions.

Within the last decade, Lumen has transformed its business to focus primarily on enterprises rather than consumers. The shift became even more pronounced in 2022, when Lumen sold its incumbent local exchange carrier, or ILEC, in 20 of the 36 states where it operated, ridding Lumen of nearly half its remaining consumer revenue.

Within the last decade, Lumen has transformed its business to focus primarily on enterprises rather than consumers. The shift became even more pronounced in 2022, when Lumen sold its incumbent local exchange carrier, or ILEC, in 20 of the 36 states where it operated, ridding Lumen of nearly half its remaining consumer revenue.

Lumen’s second-quarter earnings were poor, as expected, and are tracking full-year guidance. Management continues sounding an optimistic tone about its transition to more modern services, but sales declines are continuing at the same pace as the past few years. Despite its struggles, Lumen is undervalued relative to our $5 fair value estimate, which is underpinned by a forecast that doesn’t assume a drastic improvement. That said, we don’t expect the stock can move much higher until the business improves and quells investors’ fears, which we don’t expect in the next few quarters. We expect Lumen will be able to pay off all debt maturing over the next three years, but if Lumen’s financial performance doesn't improve by the time it reaches its large debt maturity in 2027, we question its ability to maintain adequate liquidity.

Lumen’s investor day provided a bit more granularity into management’s plan to return the business to growth and some specificity on the multiyear financial forecast. More broadly, however, there was no change to the narrative that a turnaround will occur in 2025 and the firm can be a long-term grower despite the continuing decline of the firm’s sizable and profitable legacy businesses. We have no doubt that Lumen’s stock is extraordinarily undervalued if management can achieve anything close to what it projects, but with a large debt maturity looming in 2027, the question remains whether Lumen will find credit available to roll over the debt. Here again, if management is close to its projections, we think debt refinancing in 2027 will be no problem. However, after years of hearing similar narratives under past management teams, we believe only results will comfort investors, meaning there’s no substitute for time when contemplating what could calm the market. We are maintaining our $5 fair value estimate.

It appears Lumen sufficiently prepared the market for a year of atrocious financial metrics as first-quarter results were generally in line with—but not much better than—the very low bar management has set for 2023. We did see a couple of encouraging nuggets and we thought the new management team struck a more optimistic tone regarding its long-term plan. We’ve acknowledged the impaired performance that we expect from Lumen over the long term, but we still think the market is too pessimistic in seemingly predicting a death spiral. Unless management’s plan is such a flop that Lumen’s cash flow continues to deteriorate from here, we think the stock is materially undervalued relative to our $5 fair value estimate.

Following a terrible 2022, Lumen’s stock has been atrocious in 2023, with the company’s equity and debt trading like there’s danger of bankruptcy. We’ve taken a close look at Lumen’s financial position and believe the level of fear is too severe. Given the current environment, we have increased the cost of capital we assume for Lumen and have cut our long-term projections. Still, we arrive at a $5 fair value estimate, which is down from the $10 fair value we had previously, but remains more than double the stock’s current level.

Within the last decade, Lumen has transformed its business to focus primarily on enterprises rather than consumers. The shift became even more pronounced in 2022, when Lumen sold its incumbent local exchange carrier, or ILEC, in 20 of the 36 states where it operated, ridding Lumen of nearly half its remaining consumer revenue.

Lumen had a disappointing fourth quarter, provided a disappointing 2023 outlook, and intends to spend heavily on a declining business. After two big divestitures and a leadership transition last year, we see this as CEO Kate Johnson taking the opportunity to completely reset expectations and do away with any pretense of near-term hope for improvement in business performance. We’re concerned, however, that high spending plans—including fiber capital investment as well as new operating expenses in areas like marketing and salespeople, platform simplification, enterprise resource planning, and digitization—isn’t the antidote to reverse Lumen’s decline, making it a poor use of cash. We’re adjusting our model to account for much higher costs but not making much change to our continually declining revenue forecast, leading us to reduce our fair value estimate to $10 from $14.

Within the last decade, Lumen has transformed its business to focus primarily on enterprises rather than consumers. The shift became even more pronounced in 2022, when Lumen sold its incumbent local exchange carrier, or ILEC, in 20 of the 36 states where it operated, ridding Lumen of nearly half its remaining consumer revenue.

Lumen Technologies plays an integral role in making up the backbone of the internet and transporting data around the world, but the company faces overcapacity, numerous competitors, and technological advances that cannibalize older, more lucrative services.

Lumen’s third quarter was generally not good, mainly because revenue declines remain steep. The firm also finally announced it was eliminating its outsize dividend, and it announced another divestiture—this time its Europe, Middle East, and Africa business. While we are lowering our $16 fair value estimate to $14, we maintain that the company is on solid financial footing and is worth significantly more than where the stock is currently trading, even if it never achieves the return to growth that management expects.

Lumen announced CEO Jeff Storey, who's been in the role since shortly after he came to Lumen in the Level 3 acquisition in 2016, will retire in November after a 40-year career and be replaced by Kate Johnson, a tech industry veteran who has previously worked for Oracle, General Electric, and Microsoft. Lumen said succession planning had been taking place for several years, and Johnson left her last role— the president of Microsoft U.S.— in 2021. Recent divestitures make this a logical time for a new CEO to get a fresh start with a revamped business, but Lumen's inability to turn a corner toward growth in recent years may also be a catalyst for new leadership.

Lumen’s poor second-quarter sales results were about what we expected and were clouded by noise, including pressure from foreign-currency movements, a small divestiture, and the loss of Connect America Fund Phase II revenue. More disappointing to us was poor margin performance. A dour narrative pervaded most of Lumen’s second quarter, as the company is seeing pressure from multiple angles of the macroeconomic environment—inflation, supply chain issues, and customer reticence, to name a few. In all, Lumen is a story of a no-moat company not performing very well and citing headwinds that stronger performers—or companies with durable moats—often overcome.

Lumen Technologies plays an integral role in making up the backbone of the internet and transporting data around the world, but the company faces overcapacity, numerous competitors, and technological advances that cannibalize older, more lucrative services.

Lumen’s revenue was weak, and its adjusted EBITDA margin was mildly disappointing during the first quarter. However, the firm’s fate rides on its prospects following big divestitures it plans to complete this year, and Lumen revealed several metrics that give comfort that its revenue and subscriber outlook will significantly improve in 2023 and beyond. Lumen now expects the sale of its incumbent local exchange carrier, or ILEC, business to occur in the fourth quarter rather than third and materially raised its full-year free cash flow and EBITDA guidance to account for the delay. While increased transparency is welcome, it doesn’t alter our view, and we are maintaining our $16 fair value estimate. We believe the stock is materially undervalued but think investors will have to be patient to see the business turn up.