2023-11-07 02:28:50 ET
Summary
- Lumen Technologies has made significant progress in reducing debt and simplifying its operations through divestitures.
- The company has shown operational improvements and is actively addressing challenges in its business segment.
- LUMN's recent insider buying and creditor agreement suggest a potential turnaround, making it a speculative strong buy.
I last wrote about Lumen Technologies Inc ( LUMN ) back in September of 2023 and claimed it was a solid buy based on the risk reward analysis. You can read more about my past thoughts in this article here .
Since that article came out, a few interesting things have happened. Lumen acquired 1.2 billion in long-term debt from creditors. This long-term credit helps eliminate the worst short-term concerns and extends the runway for the company. The CEO Kathleen Johnson bought 1 million shares and the CFO bought 500,000 shares . These purchases are significant open market purchases at prices of around $1 per share. Although I do not think the company's future is particularly bright, I do think that the shares are trading as if bankruptcy is assured and the likelihood of bankruptcy over the next few years has likely been mitigated. Combine this with the potential billions of dollars of legacy assets and it appears as though Lumen is a current speculative strong buy based on possible mean reversion.
The current price could still conceivably go to zero over the next five years, but it appears more likely that the price could easily rebound to multi-bagger gains. This type of risk-reward scenario is well worth a speculative investment and I have recently doubled my current position.
Recent Transcript Q3 Highlights:
Kathleen Johnson
Structural Accomplishments and Debt Reduction:
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"We've made significant progress in simplifying Lumen with two divestitures. We expect to close the sale of our EMEA business to Colt tomorrow, November 1, earlier than planned. This transaction will generate approximately $1.5 billion in net after-tax proceeds, which we anticipate will be used for debt reduction."
These divestitures show that Lumen is actively reducing its non-core assets to focus on core business areas and reduce debt. This aligns with the strategy of creating value through streamlining operations.
Balance Sheet Restructuring:
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"The transaction will extend a large portion of our debt maturities and remove questions regarding the company's compliance with this debt covenants. The creditor group will also provide $1.2 billion of new financing."
Restructuring the balance sheet and extending debt maturities will improve Lumen's financial stability, which is crucial for a company aiming to recover and grow.
Operational Improvements in Business Segment:
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"We're making progress against all three. Securing the base boils down to five things... We saw a 4% reduction in disconnects, a 9% increase in installs, a 5% increase in usage, a 4% increase in VPN customer renewals, and a 21% increase in voice migration."
These operational improvements indicate that Lumen is actively addressing challenges and improving its business segment. Reducing churn and increasing customer renewals are positive signs for value investors such as myself.
Commercial Excellence and Net New Markets:
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"First, we added more than 2,500 new logo customers so far this year across large enterprise, mid-markets, and public sector segments despite the headwinds. A big part of driving commercial excellence is going after net new markets."
The acquisition of new customers and expansion into new markets are key drivers of growth, which can be appealing to deep value investors looking for a potential turnaround. Many of the turnarounds that I have successfully invested in previously made a drastic change to their respective business. This step is a difficult one, but the pivot is also the only chance at survival and could unlock a potential rebound.
Innovation for Growth:
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"We've made great progress driving adoption of our first NaaS offering called Lumen Internet On-Demand. We are cloudifying telecom, it's going to be disruptive to the industry, and we are playing to win."
Innovation and disruptive technologies can be catalysts for growth. If Lumen can successfully execute on these initiatives, it may present an opportunity for value investors to get in on the ground floor.
Recognition as Best Place to Work:
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"Lumen was recognized by U.S. News & World Report as one of the 2024 Best Places to Work in telecom."
Although I acknowledge that this could be viewed as immaterial to many investors, I have found that companies with toxic work cultures or impossible quotas rarely make good investments. This is especially true in turnaround scenarios where you need all hands on deck. Recognition as a great place to work can also signify a positive change in the company culture, which is important for attracting and retaining talent.
CFO Chris Stansbury
Creditor Agreement:
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"We view the formation of the creditor group as an opportunity to both fund our future as well as address our challenging maturities profile. The agreement we announced today meets both of those objectives and will allow us to continue our transformation journey and the disruption of telecom."
The creditor agreement helps address the company's challenging debt maturity profile, making it a critical part of its transformation journey. It highlights the financial strategy to fund the future while stabilizing the company's debt structure. This quote is key to understanding how and why I expect Lumen shares to have a chance to rebound significantly. Extending debt maturities is a crucial financial strategy for Lumen, particularly in a turnaround situation, as it provides the company with more time to recover and execute its transformation plans. This is good a sign of financial stability.
Financial Impact of Divestitures:
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"The CDN sale will not have a material impact on our financials. We estimate that these CDN contracts contributed roughly $20 million in revenue and $10 million in adjusted EBITDA to our third quarter 2023 results."
I often look at the financial impact of divestitures. Understanding the impact of these sales on revenue and EBITDA is important for assessing the company's financial health.
Expectations and Guidance:
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"The macro environment and the overhang of our creditor discussions has resulted in revenue headwinds which will pressure our results over the next few quarters."
Understanding the challenges and headwinds a company faces is critical. Anyone expecting an immediate turnaround will be disappointed. By setting expectations for the next year, the company has also shown us that this headwind will not last indefinitely.
Revenue and Segment Performance:
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"Our third quarter total revenue declined 0.5% on a sequential basis to $3.641 billion. Adjusted EITDA was $1.049 billion in the third quarter with a 28.8% margin."
These numbers show us that revenue might still be dropping slightly but appears to have stabilized somewhat and is not dropping precipitously anymore. As revenue might continue to drop, it will be important for Lumen to show that revenue remains stable.
Segment Performance - Business and Mass Markets:
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"Within our two key segments, Business revenue declined 0.1% sequentially to $2.894 billion and Mass Markets revenue declined 2.2% sequentially to $747 million."
The segment-specific revenue performance here shows a company that is still shrinking and that most of the lost revenue comes from the Mass Market revenue. As Lumen focuses on providing business services, it would be a great sign in the upcoming quarters if Lumen can show growth in this segment.
Capital Expenditures and Free Cash Flow:
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"Capital expenditures for the third quarter of 2023 were $843 million. In the third quarter of 2023, the company generated free cash flow of $43 million."
Explanation: Deep value investors pay attention to capital expenditures and free cash flow to assess a company's ability to generate cash and manage its investments effectively.
Outlook and Reiteration of Guidance:
- "Our financial outlook for 2023, we are reiterating all guidance metrics. We'll provide our outlook for 2024 when we report our fourth quarter results in early February."
Reiterating guidance here shows that they are well aware of the company's near-term future and that no material changes to the business are expected. The upcoming fourth quarter results and 2024 outlook could be a major positive catalyst for any good news because the current view of the company is so negative.
Final Thoughts:
Lumen has really disappointed investors over the last five years losing over 94% of its value. Many investors will never again purchase the company, and many investors are still holding the shares at a significant loss. My last article stated that Lumen was trading at max pessimism, but as one shareholder correctly pointed out, "Oh, it can get worse and it probably will."
Yet in the short period of time between my last article and this one, a few rays of hope have trickled through the clouds. Officers have been buying a healthy number of shares in the open market. This has not happened for quite a while and I can't fathom a reason for the CEO to spend almost a million dollars on shares or the CFO to spend over $500,000 on shares if they expect a poor return or even a possibility of bankruptcy.
We have seen Lumen during its darkest hour. The shadows of concern and pessimism are still long right now as they always are at first light. These first glimmers of hope could be a sign of a turnaround or they could be the last burning embers of Lumen's past successes about to be snuffed out by debt costs and poor plans.
For further details see:
Lumen Technologies: Debt Financing And Recent Insider Buys Signal Turnaround