No. of Recommendations: 7
Less than one month ago, on July 10, Lumen stock closed at $1.05 a share. Not quite 7 million shares changed hands.
Sixteen trading days later, on Aug. 1, it closed at $3.32 on volume of 133 million. In Friday’s tech selloff, it retreated to $3.07, its first down day during that stretch.
These are the first signs of life in Lumen stock in ages. The sudden move was built on two pieces of news: Corning disclosed a deal by which Lumen reserved 10% of its newest, thinnest optical fiber output for the next two years, and Microsoft announced a deal in which Lumen would build faster optical connections among Microsoft data centers to facilitate its AI business.
Behind the scenes, Lumen’s pivot from a telecom business to a technology business has been several years in the making.
Following the disastrous merger of CenturyLink and Level 3, a combination that initially seemed to promise a competitor to AT&T and Verizon but produced an entity with no wireless carrier and a mountain of debt, the renamed Lumen has been selling off legacy telecom assets to pay down debt. This process presented a conundrum: The legacy ILEC networks produced most of the company’s cash flows, which it used to service the debt. Selling them off allowed it to reduce the debt, but also reduced the cash flows to service the remainder. The melting ice cube of the legacy telecom business did not offer a promising trajectory.
Two years ago, with the debt cliff approaching, the company’s bonds traded as if bankruptcy was the most likely outcome. In 2022, Jeff Story, the former Level 3 CEO installed atop the merged company, announced he would retire. In the single most important decision to the company’s subsequent pivot, Lumen’s board hired Kate Johnson, the head of Microsoft U.S., to replace him.
Rapidly and systematically, Ms. Johnson named a new management team. In relatively short order, the new regime engineered a complex, costly deal with a number of financial institutions to push back the debt cliff to the end of the decade. Given that breathing room, it began to offer outlines of a new strategy.
Unlike the other big players in the fiber infrastructure space — AT&T, Verizon, and, to a lesser extent, Comcast and Charter, cable companies transitioning to fiber for their broadband businesses — Lumen was not interested in its end-user business strategically, although it continues to add high-speed fiber connections under the CenturyLink brand to maintain the asset's value for possible sale. CFO Chris Stansbury has said publicly on numerous occasions that this business is ripe for consolidation and Lumen will not be the consolidator. So, at some point, more asset sales are likely.
This dynamic — selling off legacy assets to pay down debt — presents the profile of a shrinking business. Revenues and cash flows are constantly down year over year. Wall Street takes a dim view of such numbers.
The Corning and Microsoft announcements are the first hints of the new direction — expansion of Lumen’s underlying fiber network to provide enterprises with low-latency connectivity at the edge of the cloud. Lots of tech companies offer sophisticated cloud data platforms, but none have the underlying fiber infrastructure on which all this cloud architecture is built.
Lumen still has a long way to go. It must ultimately find optimal deals to unload legacy end-user assets and pay down debt. It must produce enough new tech revenue to sustain the business once these legacy revenues are gone. And it must find the capital to fund the capex to continue building out the underlying network as the foundation of its new business model.
The new management team has been articulating this strategy for a while. The past three weeks are the first signs of execution.
No. of Recommendations: 3
lumen has the distinction of being among my largest tax-loss harvest sales.
it was quite the value favorite among the few remaining value shops, all who abandoned (except maybe front street cap?).
one item i never really thought was addressed...
a lot of revenue\profit value was once in the final hundreds of yards of premium fiber to corporate office space pre-cloud transition.
but the work from home presumably disrupted this, as employees were primarily connecting to data centers, and not much use of those last hundred yards to their (former) corporate office space.
(sure, this may be some local office service activity, but how much? maybe at the small corporation level.)
so now the pivot is to those hundreds (thousands?) of small data hubs, as where future value may lie.
