2023-11-03 13:53:20 ET
Summary
- Lumen Technologies is facing constant restructuring and slashing of financial targets, leading to a serial decline in the telecom company.
- The company had to restructure its debt and negotiate with creditors holding $7 billion in debt, with limited free cash flow generation to repay the debt.
- The stock might appear attractive at ~4.2x EV/EBITDA targets, but the debt restructuring and other corporate moves will only lead to weaker financial results.
When the new CEO joined the company and started down another path to restructure the business, our investment thesis turned Bearish on Lumen Technologies ( LUMN ). Now, the company is restructuring debt due to the constant slashing of financial targets from constantly restructuring the business. The stock is around $1 likely leading to more pain for the business and investors shouldn't look back at this telecom company in serial decline.
Source: Finviz
Serial Declines
Lumen shareholders have learned the painful lesson that a company can't cut their way to growth. The company announced further restructuring efforts, signaling the ongoing downward spiral isn't likely to end anytime soon.
The telecom company announced another restructuring in Q4, with plans to reduce the workforce by 4% and make other business optimizations. Lumen forecasts saving $300 million annually, but these workforce reductions come at a cost due to these employees supporting operations.
In addition, the company sold CDN contracts at the start of the quarter. The deal involves the elimination of $20 million in revenue and $10 million in adjusted EBITDA, when management needs to hold onto every dollar of EBITBA as possible.
Again, Lumen cut a unit with above company average EBITDA margins of 50%, which only contributes to the constant downfall of revenues and profits. The cash deals help the balance sheet, but the stock value is based on the profits produced by the business and the ability of those profits to repay debt.
For Q3, the telecom reported revenue of only $3,641 million. Revenues only dipped 0.5% sequentially, but the amounts fell ~$740 million YoY due in part to the divestitures, but also the weak business model contributed to $201 million in declines.
Source: Lumen Technologies Q3'23 presentation
The constant revenue declines, whether due to divestitures or organically from lost customers, is a huge focus of the market with the cause almost irrelevant. The general view is automatically negative when the revenue stream dips quarter after quarter.
The adjusted EBITDA picture is very similar. Lumen has seen $1,688 million in Q3'22 adjusted EBITDA dip to only $1,049 in the last quarter. The amount includes $267 million worth of declines following the restructuring plans of the new CEO since starting September 2022 when the business had stabilized.
Debt Restructuring
Now, CEO Kate Johnson has restructured the business so much that the company had to negotiate with creditors holding $7 billion in debt. The new plan involves extending current debt maturities and adding access to $1.2 billion worth of new financing commitments.
The company did reiterate 2023 financial targets for adjusted EBITDA of $4.7 billion and free cash flows of $0 to $200 million. Unfortunately, the lack of free cash flows don't provide much level of safety anymore.
Source: Lumen Technologies Q3'23 presentation
The problem is that the company no longer has any flexibility, and investors were warned of this potential outcome. Lumen has shown for years no ability to grow the business and every new year brings a move to restructure operations and divest low value assets when the only solution that rewards shareholders is to fix the problem units, or at least reduce the losses in these areas and focus on the growing products.
On the Q3'23 earnings call , CEO Kate Johnson even alluded to financial worries leading to customer delays as follows:
..made the difficult decision to reshape and right-size Lumen for growth. We're taking immediate actions, which will result in about 4% fewer people inside the company. This reorg, along with additional optimization initiatives, will generate annualized savings of approximately $300 million. And as you might expect, this is a difficult, but necessary decision given the revenue pressure we felt from the noise in the market regarding our creditor discussions , as well as global macroeconomic pressures.
Lumen still has nearly $20 billion in outstanding debt, with limited free cash flow generation to repay the debt. The company is still watching sales decline sequentially, and the stock isn't investable until this scenario changes.
The actual news of the debt restructuring and the acknowledgement of the revenue pressure from the market noise has sent the stock below $1. At this stock price, Lumen is only likely to face even more pressure from customers questioning whether to work with a company struggling financially so much that the need to restructure debt was required in the first place.
The market cap has dipped below $1 billion, but the enterprise value sits at over $20 billion. The stock might appear interesting at ~4.2x EV/EBITDA targets, but Lumen doesn't have the cash flows to ultimately repay debt and the business continues to drip lower and lower. The stock won't have any value until the telecom can return to strong cash flows, which doesn't appear likely now.
Takeaway
The key investor takeaway is that investors shouldn't look back. Lumen continues the ugly path of trying to cut their way to growth, and it doesn't ever work. Just the combination of the new workforce reduction and the sell of the CDN business will lead to more financial drips in 2024 before even contemplating the potential for lost business due to the negativity surrounding debt restructurings.
For further details see:
Lumen Technologies: Don't Look Back