Lumen Technologies, Inc. (LUMN) Earnings Call Transcript & Summary

Good morning, everybody. Welcome to our fourth and final day of our Cowen TMT Conference. My name is Greg Williams. I cover the cable telco satellite space here at Cowen. I'm here today with Shaun Andrews, the Chief Marketing Officer at CenturyLink. We'll have a 30-minute discussion. There's an opportunity for the listeners of the webcast to ask questions. Just put in the question as you should see down below on your screen. I have a separate screen off to my right where I can see the questions anonymously and I can relay them to Shaun as we see fit. So let's get started. Shaun, thank you very much for joining us.

Thanks for having me, Greg. Nice way to cap off the week.

Yes, great. Can you just tell us what you do, what your role is as the Chief Marketing Officer at CenturyLink? And where are you spending most of your time, and what are your priorities?

Yes. So I've got responsibility for our corporate marketing functions, traditional brand, creative, digital, messaging and product management, as well as customer experience. So I spend most of my time on either what it is that customers want, what solutions they want from us. And increasingly, I spend time on how they consume them from us. What that experience is that they have with us directly rather than the feature functionality of the whats.

Got it. And I guess the big question is, how is that sort of pivoted given the COVID situation?

We keep looking to find reasons that it's pivoted, and I'm outside of the work from home variable that's entered the equation. It's really more of the same. It's the digital transformation. It's managed services. It's cloud. Unified Communications certainly bumped up to the top of everybody's radar. But it's not really different as much as it is, maybe just a reprioritization or an urgency.

Got it. And so for each business unit, if we can dig down a little deeper, enterprise, IGAM, small business consumer, are you seeing these customers change their behavior, their patterns given COVID? Has the conversations with them, maybe we'll start with the enterprises' conversations, changed? Demand trends changed? Are they buying differently?

Yes. I'd almost describe it in like a pattern or a continuum. Initially, I think second half of March, early April, there was just this mass rush of increased usage and capacity ads. More bandwidth. That was kind of Phase 1. Phase 2 was we got on the other side of the critical bandwidth emergency ads, but the usage kind of held and stayed up at those kind of high levels. Then there was a pause. Definitely, RFPs got delayed. We got a little bit of a cold shoulder, just give us a minute. And you could feel CIOs, she'd be deciding whether her plan fit the COVID world. Now we're seeing the fourth phase, we're seeing that loosen up. And it's not ubiquitous. Those customers that have determined their digital roadmap is the right one are moving more quickly, and others are quickly chasing, but we're starting to see stuff loosen up.

Got it. Because I think on the quarter call, Jeff Storey had mentioned that to be a 60 to 90-day sort of pause. But you're already seeing this Phase 4, if you will, of a slow trickle in of RFPs again?

Yes. And I mean, I can certainly point to areas where that's not the case. We're not getting a lot of fast movements from hospitality across the board. I'd say that the low end of the market is still very, very cautious and quiet. But yes, I do feel...

And low end, you mean the small business segment, SMB? Or...

Yes. Yes, SMB.

Okay. Can we talk about SMB a little bit? Those at-risk verticals: restaurants, hospitality, theaters. What are you doing now as there is sort of concessions going on? Are they cutting their cord or their connections? Or are they positing them? Just understanding what the environment is like for those at-risk SMB?

Yes. It's been more of the same. I haven't really seen much of a transition from where we were a couple of months ago. A little -- definitely more quiet than some of the large enterprise pieces. But really, at this point, we're still kind of -- we're certainly not out of the woods, so I'm not willing to predict anything at this point. But nothing too drastic one way or the other with the SMB. Just a little more quiet.

And then talking about consumer, I guess, we just got off a call with Cogent about an hour ago, and they're mentioning the acceleration of data to access our networks, which would be cable, things like that, including telco like you guys. And that makes sense with the over-the-top video. What are you seeing in the consumer world? And are you marketing differently because of the COVID environment? Or is this still par for the course?

No, it's still -- it's all about fiber for us. And micro-targeting and [Technical Difficulty] add to the fiber experience, that's certainly enhanced and as more employers are working from home. But really, that work-from-home aspect for us is back to the enterprise portion of the business. So it's our enterprise customers who now are looking to include the remote workers in the WAN, in the infrastructure, in the solution. So that's actually the work-from-home environment for us is more of an enterprise conversation.

Got it. And when I think of your roles in terms of marketing consumer, and you mentioned that you're really going after fiber. How do you market differently? Whether it's the slow DSL customers, whether it's the faster speed DSL customers, and then it's the fiber, are you able to do direct marketing? Is it like ZIP code-based? For fiber, I guess, this can be home-based direct marketing. Can you just help me differentiate how your marketing changes between the different profiles of the homes?

Yes. It's a Rubik's cube. So it's -- I mean, the targeting segmentation and positioning tied to that is as micro as we can get. So first and foremost, it's all about fiber. And from there, it's about competitive positioning. It's about homes passed and opportunity. It's about MDUs. So it's a yes and it's all of those. And the more micro and targeted we can get tied to fiber focus, that's where we're putting our money.

Got it. And when we think about getting out of this lockdown experience, what do you anticipate in terms of -- let's go back to enterprise, the trends, how will they continue? How will they change? And what would you be different -- doing differently when we become out of lockdown?

Yes. So we've definitely -- we actually partnered with an outside agency to ask that customer -- ask our customers that same question. We're seeing an increased focus on managed services. So they're really thinking about what's core to their knitting and what they'd rather partner with CenturyLink on. So managed services is rising in the volume. The security aspect of managing professional services is gaining a lot of momentum. I think the movement of premise-based security to the cloud will see an uptick. Certainly, Unified Communications and contact center conversations are gaining a little bit of speed. And then just general cloud, just general migration, whatever you had planned, whatever you were hemming and hawing about, physical premise versus cloud, lots of cloud momentum.

And then how about on the consumer side? It seems like there's going to be some sort of permanency, if you will, from a work-from-home environment. Is there -- other than that, I mean, how do you see the trends coming out of lockdown? And how has that changed your approach in your go-to-market strategy?

Yes. I feel like a contrarian and in that I keep saying there's not a whole lot, it's different, but rather more that's enhanced. I mean, really, the same phenomenon that existed 3 months ago, both parents working, both parents on calls, gaming, content over the top. You can certainly see the explosion of the over-the-top. All of those drivers fit hand-in-glove with our fiber-first strategy in the consumer space. So that's just really kind of reinforces where we were already focused there.

Got it. And if I think about risks and challenges, maybe on the enterprise side again, I guess, as you've hired this firm to figure out how to tailor a suite of services coming out of this and you're looking at cloud and VPN and security, what does it say about your legacy services? Would that perhaps accelerate the decline in legacy services as they take on newer services? How do you figure out managing that? It's interesting because I just got off the call with Cogent again an hour ago and they're saying things like MPLS, where the private line is actually at a pause, because what you mentioned earlier is there's a pause out there in terms of decision-making. But also, it means it's pausing legacy services, which is kind of good for you for a little bit. And then coming out of it, though, how do you think about those legacy services?

Yes. We -- in many ways, this is kind of the same conversation I've been having for 3 years about SD-WAN over the top versus MPLS. And there is not an oar. Large enterprises do not do an oar. It is hybrid. It is almost always hybrid. And the fact that we offer all of those technologies across the whole stack: fiber, waves, MPLS, Ethernet, broadband, SD-WAN, we have mobile backup options and partnerships, that's what we're seeing. And now, we're just seeing one more type of node added to those hybrid solutions. So over the last 6 weeks what's different is we've added a work-from-home capability to our existing hybrid WAN and SD-WAN solutions. So customers don't want to buy a technology. They don't want to have a contract for MPLS or SD-WAN or Internet. They just want WAN. And that's what we're providing. Is there the possibility that, that transition will slow down and speed up over the course of the next year? Yes. But I'm comfortable with either direction because I can bring all of those different types of nodes to the table. I'm all about winning the RFP and stealing share. So the faster the movement happens, I'm equally comfortable.

Right. Because you're selling the solution with many tools in the toolbox. Okay?

Yes. Yes.

I do have a question coming in that's topical. Shaun, can you share the enterprise customer concerns related to the work-from-home risks as we think about security and compliance for the enterprises?

Yes. That's a good question. I'd say those are 2. So there's 3. One is security. Two is kind of compliance in privacy laws, right? Like there's -- we're reaching into people's living rooms as they work from home, and lots of people are watching lots of different content, having lots of conversations from their home. So you got to make sure you have that aspect covered. And then 3, is prioritization of workloads and use cases of the broadband and the fiber coming into the home. So our new hybrid WAN capability makes sure that we cover those 3 things. It's with an existing solution. But those are the 3. It's privacy, security and then prioritization.

And you have the product set, you're saying to tackle that, the opportunity?

Yes. And I'd love to make it sound like it was some sort of new fangled capability. It's really not too hard to provide a new type of solution in box to put into a consumer's -- end users endpoint in the house.

Got it. So it's taking another club from your bag and putting that in the forefront versus another?

Yes. Yes. Definitely.

Okay. I want to shift gears over another product, the edge. I mean, the edge has been a very common theme at this conference. And CenturyLink has been quite vocal about the edge and launching new edge facilities nationwide for low latency solutions. But what specifically are you doing? What are you building? How does your relationship with the AWS Outposts partnership work? Just provide some color on your edge capabilities, and when are we going to see that?

Yes. I'm glad to hear that you see us as being vocal there. I don't think we're bragging enough about the role that we'll be playing here in edge. It's not so much about what we're building maybe, but more about what we're leveraging. So if you think about early on, we had mainframes and things were centralized. And then we had laptops and the compute moved to the end user. And then we had centralized cloud. And now, we have Internet of Things. The Internet of Things really requires that compute to get closer to where the actions are happening, where the verbs are. Our customers have low latency needs today and they're faced with 2 bad options. Option 1 is that they put premise-based gear in all 2,000 sites. It's expensive. They've got security risks. They need people to manage it. Option 2 is that they keep that application in the centralized cloud and they have latency concerns. So it's really about us leveraging 2 things that we've kind of found ourselves fortuitously sitting on. One is space, power, bare metal in the right spots. We can serve 2,000 or 3,000 locations with 100 locations, and we can reach 95% of the U.S. with 5 milliseconds of latency. The other thing that we've been doing is we've been investing in adaptive networking to those customer endpoints where the verbs are happening. So as they've got robots moving around in the warehouse, they have financial institutions with low latency requirements, and they need to move their applications among data centers, among cloud points, that movement of the capacity and the ability to move in and have their network breathe and adjust just as their instances do, that's what we're leveraging. The 4 areas that we're building are around storage, application management, general compute and then data, actually kind of number crunching and making data available and closer to the edge. Those are the 4 areas that we're building on.

So of those 4 areas that you're building on, help me visualize where these facilities are? Do you have one pop per market, and that's where you're putting -- and what -- are you putting your own equipment? You're putting AWS [Technical Difficulty] in your facilities?

Yes. So I won't get too much into the ecosystem and the partnership, but it's safe to assume that we will be with these cloud partners, and that we will enable their efforts in the same vein. We're putting -- we have these -- we're sitting on 2,200 data center or access to 2,200 data centers public and private globally. We've got central offices all throughout the United States. They're big. They're robust. They used to carry massive semi-sized TDM infrastructure. And last year, we announced that we would be upgrading them so that they're really cloud edge-enabled. So think about those, I think there was originally about 100, 106 sites that we targeted. Those 106 sites alone can reach 95% of our enterprise customers' endpoints. And early on, the use cases we're seeing are our customers putting their applications on our bare metal. That's the early use cases that we're seeing. And most of the use cases are big box, logistics, manufacturing and finance. I wish it was flying cars, but right now, it's really mostly about manufacturing and logistics and finance.

And what's the go-to-market strategy? Okay, these enterprises are putting these applications in your edge servers. How do you monetize that? So are you charging them for the space power cooling in these facilities? Is it part of this solution set? Like, I'm just trying to understand how you monetize the situation?

Yes. It's really -- it's core to the strategy where we already are. Most of the financial win that we end up contracting for looks like network. So it's a lot of Ethernet work from our edge to their locations. And then there's space and power and storage within our facility itself. So it looks a lot more -- it looks very traditional in the way that the contracts written up, serving an edge compute application.

And this is commercially launched now, correct? And I guess my question, too, is of the 106 edge facilities that you're building, are all 106 complete? Are you 10%, 20%, 50% complete with this initiative?

I don't know exactly where we are on a percentage basis. We continue to move towards the 106 or whatever that number was, don't hold me to the exact number, I know we're not entirely complete with all 106. But I also know that as we win anchor tenants, they tend to get us to choose #87 and #88. And yes, these deals are happening today. They're wins that we're getting on a regular basis, and it's our customers pulling us in to enable the CBRS or private LTE or WiFi 6 movement of Internet of Things devices within their facility, and it's happening today and we're closing deals.

Got you. Verizon had similar comments, there was more 5G-related at how do they have to educate the customer. But you guys are more of a wireline edge solution. So it feels like there's less education going on. It was -- more of the enterprises know it's there and they know what they can do with it. I guess the question is, is there an education process? But it sounds like you're not going to the enterprises, the enterprises are coming to you for the solution?

Yes. We always start use case first. So we're always having a conversation with the CIO on what it is she's trying to solve for. And then we come with the solution rather than -- we're not leading with a 5G or a private LTE or a WiFi 6 for the WAN. We're not fussed about that. So we talk about the use case, the latency, the security, what it is they're trying to solve for. And then we can partner for the actual last 50 feet. But it's the fiber into the location and our edge real estate that's the consistent part of the story. We're not seeing a lot of 5G in the story right now, that's mostly kind of like stadium applications that we're seeing. Most of the solutions we're doing enable a Wi-Fi 6 or private LTE.

Got it. And talking about the AWS Outposts partnership. How do you monetize that? Is that a revenue share between you and AWS? Or are they paying to be in your facilities? Just help me understand how that partnership works?

Yes. I'm not going to give any specifics with any of the hyperscalers or cloud partners until we officially release exactly what those relationships are. But we cherish those relationships. We work with them a lot on their content and their fiber, and we've got excellent ecosystems and relationships there and definitely looking to enable them and have our solutions help them in their journey rather than fight them head to head.

Okay. Well, my next question will be on the next new products outside the edge, but I also have a question coming in on the legacy product. Shaun, can you give us perspective on CenturyLink's voice product and the usage of voice? Has it been impacted by COVID-19, VOIP, et cetera?

Yes, definitely. So there was definitely a bump in IP, CDN, Voice and Unified Communications as a function of COVID. We continue to do a fantastic job with our SIP products. So we have a product in the marketplace called Voice Complete that enables a PRI handoff and a SIP handoff. That's been in market for quite a few years, and that continues to do well. And then recently, we launched a capability called Engage, which is a hosted voice solution aimed at SMB and mid-market, and we have seen an increased uptick and a success uptick in the SMB and midmarket space with that hosted voice solution.

Got it. And then when it comes to strategic new products, what are the high-growth differentiated in products and solutions CenturyLink is selling today? You guys talked a lot about dynamic connection, capacity and configuration, cloud application manager. What are the products that are selling today in the field?

Yes. You listed a couple of them. So on the cloud edge space, definitely, dynamic connections, and mostly Ethernet connections with the capacity that you can turn on with the flick of a switch. So that's definitely growing. SD-WAN, we continue to do very well there. And it's exciting to see not only that percentage continue, but now that it's starting to get -- become a bigger nominal portion of the pie. Managed services in the security space, I mentioned that. We're seeing that continue to grow. And then Unified Communications. Really ramping Unified Communications with a stable network, security, managed services, professional services. Those are some of the high-growth areas.

Got it. And if I can think about CenturyLink 5 years from now, how do those product sets evolve? Where do you think the networks are going to go? And where are you skating to the puck is -- where it's going to be when I think about what the products will be selling years down the road?

Yes. That's my favorite topic. So hopefully, any of my product managers have ear muffs on, but I actually don't see product management in the traditional sense of the word being much of a thing in 5 years. So what I envision is CenturyLink's assets and capabilities is a set of ingredients with a platform on top of it. And our customers reaching in and consuming those capabilities as ingredients through APIs, portals, managed services in creating their own commercial wrapper. So not siloed products that we're pushing at a customer. Not hardwired bundles of siloed products that we're pushing at a customer, but opening up our set of ingredients and capabilities to a large bank and letting them reach in and create what it is they need for their own use case through APIs portals and managed services.

Right. So you'll have this orchestration layer where they can click on products, put down products, having a knob to turn up, turn down bandwidth, which you do today. Got it. That's going to be kind of difficult to sort of price and monetize, right? I mean, I think about clicking on a service, clicking off a service, and they got like a price next to it. And I'm just trying to envision that situation?

Yes. I mean, there's definitely a transformation that we're making as we go from telco to tech to be smarter about those consumption models and the value of the relationship and the consumption that comes behind it and how you incent a salesperson and how you set up the contract and pricing. You're right. That is definitely a piece that you have to get right. That's not easy.

And your competition, are they doing the same sorts of things? And how should we think about the competition overall? I mean, AT&T and Verizon, they don't seem to attack their base. Everyone seems to be siloed off. So who is your top competition? And what are they doing about these future products?

So I won't speak for AT&T and Verizon. I'll tell you that I don't mind the fact that they're holding on 5G in their content concerns. I think that leaves some breathing room for us in the wireline focus and the fiber focus that we bring. The competitive approach that we take is really to pick, you pick the use cases that really resonate with our customers and those niche use cases, and name the best-in-breed competitor for those use cases. So think CDN, think Unified Communications or Hosted Voice, think security, think professional services, managed services. The way we partner with corporate strategy is to pick the niche guy that we're going to go after, compete on a niche basis. If we do that, then that will automatically take care of us vis-à-vis a Telefónica or an Orange or a VT or Verizon and AT&T. That's our approach.

And how about cable? Are you seeing them play in the enterprise space at all? And if they are, what products, are they still in the world of SMB?

I would say that it feels similar to where they've been over the past couple of years. They're definitely kind of starting from consumer up through SMB and trying to make inroads upmarket. But I wouldn't say I'm seeing anything materially different than we've seen over the last couple of years.

Got it. And just my last set of question, I guess, are on margins and costs. Management made it clear to expect near-term EBITDA pressure. Though I imagine where you sit, marketing spend is a place where near-term cuts are happening. I mean, why would you market during a softer environment? I'm not sure if that's true. So how have your costs been impacted in the second quarter or just during this lockdown period? What's being cut or transformed in your budget within the CMO role?

Yes. I so agree with you that, traditionally, the marketing side of my patch, they are the first ones to get a little pressure when there's headwinds. I tend to keep quite a bit of gas in the tank from an OpEx perspective. I like to be able to say yes to good ideas quickly. So I always run with headroom. So I'm actually not needing to cut back on my digital marketing efforts or any large programs. I also caught a little wind at my back in the reduced travel, helped my OpEx a little bit. And then I carry the budgets for the trade shows. And for a company as large as CenturyLink, those are some large budgets. So those are dramatically reduced. They're moving to virtual. So I've been able to kind of repurpose some of that travel and trade show budget, and focus in on improving the customer experience, developing our digital strategy, building new products and services. So it's been, I don't want to say comfortable, but it hasn't been painful.

Got it. My travel to said trade shows has also been going down. So when I think about the cost transformation efforts, they've talked about $800 million to $1 billion of savings over 3 years. They're about $500 million into it. Where do you fit in the cost transformation efforts? How -- what role do you play in this effort?

So we're all aligned on that effort. I would say I'm accountable for the digital strategy and design. I'm accountable for making sure that we're providing that experience to the customer, how they want to consume our services. And you asked that question about the ingredients in the platform and the APIs and portals on top of where we're headed. That's what our customers want. In order to get there, we are executing against our own digital transformation. That digital transformation is not only what drives revenue because it's what customers want, but it's what actually brings the operational efficiency so that we can reduce costs in a long-term strategic manner. So there are 2 sides of the same coin, where we're headed for our customers and what we have to do to deliver for them, is also what brings increased operational efficiency and reduced costs and EBITDA. So we're all on that piece. I play a pretty large role on where we're headed there.

Got it. Well, I think we hit our 30-minute mark, so we'll wrap it up there. So Shaun, stay safe. And I hope to see you in person sooner rather than later. And everybody on the call listening, stay safe and hope to see you in person as well. Thank you.

Thanks, Greg. I appreciate it.

Yes. Take care.