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

Good morning, everybody. Thank you for rejoining us for our 2020 Bank of America Telco Media Entertainment Conference. I'm Dave Barden. I cover telecom services and communications infrastructure for the bank based in New York. And this presentation, we're really pleased to have Laurinda Pang, who's President of the IGAM International Global and Managed Cost Business at CenturyLink. And the reason why I think this is super interesting is because I think the international opportunity represents the largest total addressable market that CenturyLink really represents. And I think that it's an underappreciated part of the company, which is that it actually has one of the largest global footprints in the world from a fiber optic perspective.

And so maybe to kind of just kick things off, Laurinda, could you maybe just for the investors that are joining us here kind of elaborate a little bit on what is IGAM inside CenturyLink? And how does it fit into the larger CenturyLink puzzle?

Yes. Absolutely. And thanks very much for having me here today, David. And our business is pretty unique, I think, in respect to how you just articulated it, which is we're one of the very few providers out there that have this global capability, this global assets that we can call our own. So as I think about the IGAM business, and we do love acronyms at this company. So it does, to your point, stand for International and Global Accounts Management, and it's really comprised -- I think of the business in really 4 pieces parts, if you will. So the international regions themselves, so we do business in EMEA. We do business in Latin America, and we do business in Asia Pac. So I think about those as 3 particular markets. Obviously, there's a lot of markets within that, but as I run the business, that's how I think about it. And then in addition to that, we have the global accounts management business, which is the company's top, call it, circa 200-or-so customers, global customers. The vast majority of them are actually headquartered out of North America. So you think about the large banking institutions like yourselves as well as the large -- the hyperscalers, large manufacturing companies, et cetera, people who or companies and organizations who have pretty big global aspirations and global needs. The way that we organize the business, as I said, in those 4 different segments themselves, but we have people and assets tied to each of those businesses. So if you think about EMEA as an example, we've got about 2,000 employees on the ground in the regions. Similarly, in Latin America, about 2,000 or so people. So that local presence in the market is incredibly important for the customers that we do business with because while they have global needs, they also have people deployed around the world as well who look after their environments, their technology landscapes. And so as we have people on the ground, it just gives us a nice advantage to be able to support those folks locally. And as we think about the business as well, we also -- we work with the global product organization, the global IT organization within CenturyLink, the global operations organizations. So our value proposition is global. So while we have people and assets that are deployed locally, we leverage the global value proposition so that we can provide really an end-to-end capability for our customers anywhere in the world that they need to go.

Excellent. So I want to kind of get into the regions and such, but the most important question everyone's going to want me to ask is when does revenue grow?

It's the right question. And it's the question that we continue to push ourselves on a daily basis within CenturyLink. So -- and it's not just an IGAM question. It's broader across enterprise, across the small business groups, et cetera. I know you follow us very closely and you listen to what Jeff and Neil both say in the public domain. The opportunity is here. And I think you and I have talked about this in the past. The international business certainly has a large addressable market that we have the opportunity to grow within. And so it's an interesting time, I think, for our business because you're dealing with some of the legacy technologies and the legacy products services that have traditionally been in the marketplace. And as customers continue to migrate their businesses and take advantage of more digital capabilities and migrate, quite frankly, their business models to be more digitized over time, the need for our services continues to be there. We're an essential service, and we saw that through this entire pandemic experience. No matter where in the globe you are, no matter what you are, whether you are an individual consumer or if you are a an entity in the public sector, an entity in the private sector, the need our services became incredibly clear to everybody. It was an essential services. It was this need to connect and to interact was more evident than ever before. So we feel very good about the fact that we're in a space that continues to be critical to the way that the world's economy works. And so it's -- but we're dealing with some headwinds, right, that you are very familiar with and that we've been articulating with regards to legacy services. And again, these technology transitions. So without giving you a definitive answer, I think you should just know that we continue to focus in on that day in and day out here as a company.

Jeff has actually called out IGAM, the business you run, in addition to enterprise, is kind of the 2 businesses that are most likely to inflect positive the quickest. And I think the last time you and I met, you were pretty optimistic about the total addressable market and the growth in that total addressable market being somewhere in the double digits. And it's really about trying to get traction in the global marketplace through your selling effort to kind of grab on to that toll road, if you will, to kind of pull the business up into positive growth. Could you talk about kind of like -- could you revisit that? What do you think the total addressable market is? What do you think it's growing at? And what steps still need to be taken to kind of grab on to that toll road?

Yes. The addressable market is, again, it's massive and whether -- no matter what numbers I put out there, I think the key message is that we continue to have a fairly low market share. So the opportunity is quite large. As I look at the different regions around the world, and I look at the growth that we're seeing there, we're actually quite pleased. In -- we're -- I think my particular business unit tends to have lumpiness that comes through in our results is some of these very, very large enterprises, particularly in the GAM business area. They are they're highly demanding. They've got purchasing power. They are price sensitive. They're obviously performance sensitive. Otherwise, they wouldn't be talking to us, and we wouldn't be doing so well with them. But there's -- there are pressures. And in those larger customers, they will have the opportunity. We have to be market competitive. And so you've seen us talk about specific situations or items that we call out around re-rates, and those impact us. So while we continue to have very strong relationships with these global companies and our global customers, the reality is that it's a very competitive marketplace. And so we will see revenue fluctuate as a result of some of the -- just the market dynamics, quite honestly. The really good news, I think, in the space that I focus in on within IGAM specifically is the relationships with the customers have maintained. I see very little churned customers in my space. You might see revenue movements. Certainly, we see revenue movements, both up and down, but the relationships with those customers remain very strong. So I continue to be very bullish on the opportunity itself. I think the great thing within CenturyLink and the way that we face the market is we're focused on solutions rather than products. So as our customers think about their overall total cost of ownership, we're trying to move more in a direction where total cost of ownership is more of a discussion rather than products and pricing, and we're focused in on solutions. So that's a good thing. We're also creating digital experiences for our customers, which is incredibly important as they continue to, as I mentioned earlier, evolve and digitize their entire business models. And so we're squarely in the middle of that. And we're highly focused on our for customer success. So I mentioned that the good news is we don't see churned relationships. The pivot from just being a supplier of products and services to being a core component for how enterprises are creating and evolving their digital business models and us being a partner in that process and ensuring their success and ensuring that they meet their business outcomes, that's really how the conversation is changing for us at CenturyLink. That's what we're driving towards so that we can actually see more and more traction in that addressable marketplace.

And a question I had was, Jeff has kind of made a pillar of the CenturyLink brand to focus on latency within the network. Is that -- I guess my question is how important is that to evolving the relationship? Is that being driven by what your global accounts are telling you assuming that it will filter down into a shorter amount of time? Or can you kind of walk us through what is that pillar? How did it become a pillar and how important is it?

It's incredibly important. I think, first of all, we consider ourselves one of the fastest and most secure networks out there. And we've been, over the past couple of years, really creating a platform environment such that we can leverage the network as well as the other capabilities that we prepare to be able to support customers on the enterprise side. Latency is incredibly important. And so I think it pivots into -- it's a fiber discussion, but it's also a discussion around how enterprises and, quite frankly, the governments are thinking about where the -- where their compute, where their applications need to reside. So if you think about -- over the, obviously, the last 10-or-so years, the cloud services providers have, obviously, done extremely well for themselves and have been providing a capability to enterprises for them to be able to host their applications in the cloud. If you think about, that's a really centralized model. And so in terms of latency, you can think about cloud services providers being in the tens of milliseconds away from where the actual data is created, where it has to interact, rather, and where they are consuming some of that information. So that's further away than today's application, some of the critical applications and really the next-gen applications are requiring. If we look at some of the critical applications that companies are starting to leverage, whether that be real-time video analytics, whether that be robotics. If you think about how the supply chain works across different industries, the need for performance, including large amounts of bandwidth as well as performance for speed. So again, the reverse from a latency standpoint, when you think about that, those applications are looking for less than 10 milliseconds away. So we think about our edge strategy and the capabilities and, quite frankly, the assets of infrastructure and real estate, what we bring forth is our ability to have a secure network, a fast network as well as real estate where we can host applications for customers within 5 milliseconds. So that's a pretty dramatic shift and a dramatic difference, quite frankly, between a centralized compute and a centralized cloud environment versus what we're bringing to the market in terms of our Edge cloud solutions. So latency is incredibly important really for how enterprises are operating today. Their applications require a much lower latency and a higher bandwidth capability and performance.

So a year and a bit ago, when we met, Jeff articulated kind of a post-merger integration strategy that I think had 3 pillars to it, right? #1 was putting the right bodies in the seats after integration. #2 was expanding the footprint, and #3 was expanding the service portfolio. And I think that the -- it's my earlier question about trying to get traction in the international markets. You have a number of initiatives. You were trying to connect a couple hundred data centers in Europe. You had a big fiber initiative in Korea. You had a big fiber initiative in Mexico. You were working on a multiyear project to integrate service portfolios in Latin America. So who do you think could kind of give us, like, today's version of that? Like, what is on the burner for IGAM on a global basis to try to increase that traction?

Yes. Good memory. So yes, all of those things are correct. And I think I'm incredibly proud of the organization because we've made traction in all of those things. So you mentioned Mexico as an example. I think when we met, we said that was probably a 2-plus year project, and we certainly are well through that at this point. And so after you do the build, you're looking for, obviously, the market penetrations, right? And we had to hire a lot of people in Mexico to be able to go and execute against that strategy and monetize the capital and the investments that we put in terms of deploying that network. And so we are seeing that traction. And Mexico happens to be really a good opportunity and good market for us. I wasn't putting fiber in Korea, but was doing some further expansion plans throughout Asia, and particularly focused in on CDN deployment in some of the Asian markets, specifically Singapore, Japan, and we continue to look at India as a really important market for us and a good growth opportunity for us. Connecting data centers in Europe, absolutely, that continues to be an objective for us. I think you called it out. It was a couple of hundred across the region, and we continue to execute against that. I would say, in that particular market, I'm not as pleased in terms of we're slower than our plan had originally called out for, but the opportunity continues to be there. So I think we have sized the demand appropriately. It's just our timing for deploying some of that fiber has been a little bit slower than I would like. So I think from an IGAM perspective and particularly in the international markets, we continue to focus in on all of those things, which is continue to invest where we get the right returns and continue to invest in our people as well and build those customer relationships. But you've heard us across the broader company talk about capital investments and the fact that we continue to be predominantly success based, but there are certainly these larger projects that we just talked through -- a few of those examples that we just talked through that are longer term in nature, and we manage it really tightly because we continue to demand very good returns on that capital.

Great. And I apologize if there was some people that heard some cross-talk in the background, I didn't hear anything, but hopefully, it's been addressed now. I've got a couple more, and there's some investor questions that have come in as well. If you have a question underneath us, Laurinda and myself, there's a little box where you can and ask questions. So go ahead and ask them. So one question, Laurinda, is Verizon, about, I guess, it was the fourth quarter kind of took a big hit in their enterprise margin as a function of making a renewed commitment to invest in the business, recognizing that if 5G is going to be an enterprise-centric application, they wanted to make sure they kept all their enterprise customers because it didn't seem like maybe they were as interested in that business. And they were pretty honest about having said that they didn't make as much of an investment in that business as maybe some of their other competitors had to. Have you felt an increased presence now that we're kind of 9 months into Verizon's initiative, an increased presence in the marketplace and increased competitiveness in the market? And then kind of another question related to that, is who is the competition? Is Verizon the competition just for the global guys or just for the domestic guys? And who are you competing against with the margin?

So I certainly heard that or read that in their transcripts as well. I -- to be honest with you, I haven't seen them necessarily from a proactive standpoint. I do think both Verizon and the other large one in the U.S. spend a lot of time and energy retaining their enterprise customers. And so as you talk about margin hits, I do see them being very aggressive to hold on to their existing customers. So while we are much more active on the acquisition side to go and win new business. When we are competing against a legacy Verizon or repeat customer. We've seen them be incredibly aggressive from a pricing standpoint just to retain those customers. And to your point, both of those organizations have certainly voted with their capital investments in terms of where they are focused in the marketplace. And CenturyLink, certainly, has not done that. We continue to be squarely focused and holistically focused on the enterprise, and you'll continue to see us do them. So in terms of competition for global WAN, global network opportunities, sure, I see, again, coming up against Verizon and AT&T legacy customers. So they certainly are in the mix from a retention standpoint. But I do see the likes of an Orange out there. I do see the likes of system integrators for these global solutions or these global network opportunities in a managed services environment. When we're competing in a single solution, so if you're thinking about in the context of collaboration services or CDN capabilities, we can do all of those things. Fiber, obviously, is core to who we are. So if you're competing just on kind of the core fiber or transport services, there are certainly more niche players that you might consider as our competitors. But at the global networking managed services side, I've named them, right? It's Orange. It's the system integrators and then it's Verizon and AT&T from a retention standpoint.

So I want to talk a little bit more about applications and regions. But one of the big things that came up in the quarter -- and I know that there's FX adjustments that we have to make. But looking at just the GAAP numbers in your unit, CenturyLink breaks down each business unit into 4 sub pieces, IP managed services, transport, voice and collaboration and IT services. And the weird thing in this quarter was that the IP managed services business was down 5% change, but the voice and collaboration was up 9% for the first time, like ever. So can you kind of elaborate a little bit on what happened? Obviously, COVID happened. But related to that, like what happened?

Yes. So I'll address the voice and the collab piece first. To your point, COVID happened. And so the need for people to collaborate, first of all, go work from home and then collaborate was incredibly important. We saw that increase, both in terms of collaboration for the services that we support and sell to our enterprise customers. But you'll see our voice line, it's kind of lumped together, but it will translate into voice services for CenturyLink because we provide voice capabilities to other collaboration service providers. So as their business started to also expand significantly as a result of COVID, you saw our voice services go up with them because we, like I said, supply them termination and origination capabilities. So I would attribute the vast majority of that line item to this explosion of remote working and the need for collaboration services. On the IP and data services side, again, the -- I'm not exactly sure what was in there that moved us more significantly than prior quarters, but this is where it's a big part of our base, right? It's over -- it's about 50% or close to 50% of the revenue that I support from an IGAM perspective. And this is where you'll see fluctuations, particularly around those large customers that I mentioned earlier.

So presupposing that the experience that you had in IGAM with voice and collaboration, which was kind of outsized in terms of its performance, and that happened also in domestic enterprise, are we seeing -- like if we kind of thought about second half trends, are we watching the U-turn happen in voice revenues because we needed a little bit of collaboration in the second quarter by the -- when we all recognize that we weren't going to be working in the office anymore. But now we need even more collaboration in voice in third quarter, fourth quarter 2021 because things are never going to change? Or is this more of a anomaly where we're kind of starting from a higher plateau, but the trends in voice are more likely to continue than not.