Lumen's new CEO restarts fiber buildout amid turnaround

CEO Kate Johnson said Lumen Technologies is slowly but surely entering a fiber renaissance.

"It's still early days in our transformation journey. We're staffing up the change programs with the right talent. We're standing up an agile project framework to standardize how work gets done, and we're implementing business analytics across the company to help drive execution rigor," she said during her company's earnings conference call this week, according to a Seeking Alpha transcript. "These things have the basic scaffolding needed to support our transformation efforts. Now that said, in addition to an improved revenue story this quarter, we're seeing green shoots of progress in several areas."

Financial analysts, though, generally argued that it's too soon to tell whether Johnson – who took over Lumen late last year – is making progress.

Figure 1: (Source: the lightwriter/Alamy Stock Photo)

"In some ways, the new leadership team plans to break Lumen in order to fix it. It is attempting to simultaneously change virtually every aspect of the company to enable growth: culture, systems, operations, sales and marketing, products, and so on," wrote the financial analysts at MoffettNathanson in a recent note to investors. "But, broadly speaking, the current narrative is almost all 'break.' It will take some time to see if the 'fix' is starting to work."

Others agreed.

"We're encouraged by early signs of progress, but Lumen has a long way to go to reach revenue/EBITDA [earnings before interest, taxes, depreciation and amortization] stability," wrote the financial analysts with Wells Fargo in their own note to investors following the release of Lumen's quarterly results. "With ~90% of its enterprise value comprised of net debt, the equity story likely will remain challenging until we get better visibility on its turnaround efforts."

Among Johnson's many transformation projects: a shift to a hybrid work environment and the sale of the company's Broomfield, Colorado, campus.

Restarting fiber

Lumen's newest financial results follow the company's decision in late 2022 to pause its fiber buildout in order to reassess its business. Johnson joined the company amid that reassessment.

In February, Lumen cut its "Quantum Fiber" target to a range of 8 million to 10 million homes, down from a prior expectation of 12 million. The company described 2023 as a "reset year."

Partly as a result, Lumen's stock has lost roughly 75% of its value during the past 12 months.

But now the company's fiber operation is "up and running fast," according to Johnson.

As noted by the Wells Fargo analysts, Lumen built fiber to around 120,000 new locations, with passings accelerating throughout the quarter.

However, Lumen's loss of 80,000 copper Internet customers outstripped its gains of 24,000 fiber Internet customers.

"It all comes down to execution – the new team have to demonstrate that they are capable," argued the financial analysts at New Street Research in a recent note to investors.

Broadly, Lumen is one of a number of big US telecom network operators hoping to invest heavily in a fiber expansion amid a post-pandemic flood of government subsidies for networks in rural areas.

Looking to the future

Lumen updated its 2023 financial outlook to raise its cash income tax expectations to between $300 million and $400 million, up from previous expectations of $200 million to $300 million. But company officials said ongoing improvements and cost cutting would help further buoy Lumen's finances.

"The more we can digitize our physical assets and bring those capabilities to bear in all of the existing and net new business problems, the more you'll see Lumen being recognized as not just customer-obsessed but a very innovative company," Johnson said. "We're simplifying. We're driving a digital enterprise. We're getting rid of the stuff that doesn't make sense. We're optimizing not just for efficiency, we're optimizing for growth."

But analysts in general said they're going to wait for the company to release more details during its analyst day, scheduled for June.

"We believe the goals on analyst day will be to (1) provide clarity on why they believe the transformational strategy will work, (2) why it's different from the old Lumen strategy, (3) how Lumen will differentiate itself from the competition, and (4) provide metrics to benchmark their progress going forward, including a 3-5 year outlook," wrote the financial analysts at TD Cowen in their own assessment of Lumen's latest finances. "The outlook could be received positively as management puts 'ink on paper' to execute upon and for the capital markets to digest, but could be a 'show me' story – though we'll reserve judgement until June."

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— Mike Dano, Editorial Director, 5G & Mobile Strategies, Light Reading | @mikeddano