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

Hi. I'm Simon Flannery. Welcome to day 4 of Morgan Stanley's TMT 2021 Conference. Thank you for joining us, and we're delighted to have Laurinda Pang from Lumen join us. Laurinda, welcome. Thanks for joining the conference today.

Thanks so much, Simon. Good to see you as always.

Great. And before we get started, please note for important disclosures, please see the Morgan Stanley Research Disclosure website at www.morganstanley.com/researchdisclosures. If you have any questions, please reach out to your Morgan Stanley sales representative.

Laurinda, I have to start with your new title, President of Global Customer Success. I think that qualifies as the best title of the conference. So Lumen has been through this CenturyLink, Lumen has been through this new rebranding. So help us understand what the role entails and what your priorities are as we look to '21?

Sure. So I still have responsibility for all of our international business, which is everything outside of North America from both a commercial and an operational standpoint. I have responsibility for our wholesale business. So all of our relationships with service providers around the globe. And then to your point, this new title of Customer Success, it really is a nod to protecting, nurturing and growing our enterprise customer relationships in North America. So that includes all of our GAM customers, large and mid-market enterprise customers. And so I think you and many of your clients might know Ed Morche, who is a peer of mine within the business. And so he and I partner on the North America enterprise side. He's responsible for sales, and I'm responsible for revenue retention and customer relationships. And so to your point, we kind of unveiled the title itself when we rebranded the company, but we've been moving towards this motion of customer success now for about a year. We officially launched it at the beginning of 2021. And so clearly, this transformation -- this transformational operating model in which we're facing our customers is a clear priority for me. You asked about '21 priorities, and you will have seen Jeff unveil those for the community a couple of weeks ago during earnings. And so profitable revenue growth on the Lumen platform is, first and foremost, the priority. And our deployment and execution against our edge strategy is very much a priority and front and center for my responsibilities, both in the international as well as on the enterprise side. And in addition to that, I think he shared that improving penetration on existing services was a priority for the company. I translate that into monetizing investments. We've made a lot of investments over the year from a capital standpoint in terms of putting more fiber in the ground, building to more on-net buildings in North America, expanding networks in different parts of the world. And so we really want to make sure that we're getting the returns that we anticipated. And then again, finally, just to repeat, the transformation of this customer success model is very personally on me and something that I'm accountable for and looking to deliver for '21.

Great. Thank you for that. So coming back to the rebranding, it would be great to get a sense of what you're hearing from the customers. And it's obviously -- there's been a big marketing campaign around it. But how have you seen customer behavior change? And what feedback have you had from them about the repositioning of the company and the brand?

Yes, it's really been fantastic. And I hear naysayers in the market saying, "Oh, it's just simply a brand change. It's just simply a name change for the company." And it really isn't. It was a coming out party, if you will, in terms of what we've been working up for and with for the last couple of years. And so some of the customers that understand the power of the platform, and I'll tell you what that is in a moment, they are extremely excited in giving us kudos. And in fact, last night, I was on a call late last night with one of our service provider partners in another part of the world. And they are just so impressed with not just the brand, but also, again, what it means. And I think that it is -- they kind of told me they're a little envious of what we've done here. But what we're seeing in the enterprise space, Simon, is really -- and this is not just because of technology, but also because of COVID. We're seeing more and more enterprises grappling with how are they going to innovate in this new world? How are they going to drive change within the organizations? How are they going to improve their customers' experience and how their customers digitally interact with them. And so we know that in order to answer any of those questions for themselves, data management and the use of data is critical to answer those questions. And so as we think about data, velocity really matters and performance matters, security matters. But the velocity piece is really how our enterprise customers are determining whether or not they're going to have a competitive advantage. And what I mean by that is their ability to speed up the acquisition and the use of that data and implement actions against that data is what's going to give them their competitive advantage, right? They can adjust products quicker. They can change their marketing tactics quicker. They can change or adjust their service models and tweak them as they're getting insights from that data. So that's really enabling our enterprise customers to be able to either create a differentiated advantage or deliver a better experience or both, quite honestly. And so the Lumen platform is resonating with them because we happen to think we're uniquely positioned to support all of the efforts that they need to be able to, again, increase velocity, ensure performance and ensure security.

Great. And you touched on the pandemic there a minute ago. Initially, there was a surge in demand for connectivity to satisfy work-from-home and other products. But there's been some other sectors where there's been some delayed decision-making, I think, as people just grappled with uncertainty that arguably is still with us today. And then you have the long-term rethinking of the business. So what do you think are the big lessons? And then what are you seeing right now?

Well, I think, again, certainly, to your point, customers, both on the enterprise and the consumer side, needed our services. So it became very clear to us that we provide essential services globally. And we enable enterprises to rapidly move to a work-from-home environment. But let's face it. I think the way of the future or the work of the future has changed forever. I don't know exactly what those answers are. But in speaking with another large enterprise yesterday and the new CIO, her team was praising the work that we did do at the time of kind of the start of the pandemic, where we upgraded their network from 1 to 10 gig very quickly. It enabled them to go and work from home and operate and continue to generate their business and execute against their business model. And that company actually grew year-over-year by over 5%. So it was an extraordinary year for them, and they were thanking us for what we did for them. So we did see a surge. We saw a surge in bandwidth requirements. We saw a surge in collaboration tools and enabling all of their employees to be productive. And I would say that those haven't necessarily gone away. We haven't seen anything necessarily incremental as a result of the pandemic as it relates to those 2 areas. But certainly, we see those enterprises continue to be remote and continue to have the need for both that bandwidth as well as those productivity tools. But again, the work has changed forever. And I think what we're seeing now is that decisions have slowed, to your point, because enterprises are really determining their future of work, what is their location strategy, how are they going to engage with customers, with employees, with their partners and -- but at the same time, they're also recognizing the need for digital acceleration. So the businesses that we saw throughout the past year that were probably more successful were ones that were already further down the path of their digital journey, right? They had already enabled their business model. So that lack of brick-and-mortar, that lack of face-to-face engagement was less impactful on them. And so those enterprises that weren't further along in their journey are recognizing the fact that they have a lot to catch up on. And so they're looking to advance their proposition around transformation. So I call it a tale of 2 cities because, again, we're seeing both of these dynamics happen. And at the end of the day, we don't know exactly where it will end up. We're cautiously optimistic because we think that our platform will enable all of that digital acceleration. And we're having great conversations, and the funnel is really in good, healthy shape. But the decisions are a little bit slower than we would like and what we have seen in the past.

And what are the overall pricing discussions like? Is there any change in pushback or re-rates, things like that?

Last year, I would say, for some customers, we did have to make some arrangements with regards to payment terms just to help them with their liquidity situation. I would say that those have, really, for the most part, subsided, and -- particularly in the larger enterprise. In the smaller enterprise, we didn't see as much, quite honestly, requests, which, personally, I was surprised with, given the state of the economies around the world. And -- but not a whole lot of pricing re-rates. I will say that we -- whenever we renew contracts, right, there's always a rerate discussion that takes place. That's normal business as usual, but I wouldn't say that, that's as a result of COVID.

Okay. Great. So what we've seen, and you referenced this, is with the digital transformation, companies may decide, I want to take these workloads from in-house and put them in AWS or Azure or move a lot of those workloads. So how does Lumen insert themselves in that process? And where do you have the leverage to help the customers with that and to drive additional revenue for the company.

Yes. I mean, again, it's kind of squarely in our sites and in our core. If you think about Lumen and you take the physical assets, the network assets that we have and the infrastructure that we have globally, combine that with the software-defined nature of our network, right, our ability to dynamically change, whether it be bandwidth or actually setting up the services, and you layer on top of that our capabilities around compute and storage now with our edged locations and then the orchestration layer that we're putting on top of that to give our enterprises the flexibility to move workloads, to your point, from any of these cloud services providers, again, I think we're uniquely positioned to be able to provide that. And to your point, Simon, I think we are certainly seeing more and more enterprises leverage what we'll call next-gen applications, right? They're doing things within their business that are going to differentiate. So whether that's applying artificial intelligence to the way that they contemplate their supply chain, whether that is inserting robotics into manufacturing facility, whether that's using real-time video analytics to prevent theft in stores, all of these different use cases are starting to come to bear that are requiring much lower latency than we have ever seen before. So these next-gen applications are requiring what we think are sub-10 and even sub-5 milliseconds latency in order for them to be performing at a level where it makes sense for them. And so the edge initiative or the edge investment that Lumen has been embarking on is to ensure that our edge nodes, where we have compute and storage capabilities, are less than 5 milliseconds away from any enterprise location in the U.S. I think we use the number 95% or 95% or more of the enterprise locations across the U.S. and a version of that internationally. And so again, when you think about our assets, the distributed nature of our network, the -- just the scale of our network and the security that we have that's layered into the network, we think we're uniquely positioned to service those needs.

Great. And are you putting these nodes in your own switching centers? Or might this go in a third-party facility? Or...

Yes. Certainly, within the U.S., they are all ours, whether they'd be the central offices that the company owns, gateways. We've got a lot of infrastructure and real estate owned and hardened real estate throughout the U.S. that we can leverage. So that's about 100 locations here. We'll do the same internationally. But as you know, the assets look very different internationally. And so we will leverage third parties when necessary.

And are there particular industry verticals that are focused on the edge opportunity right now?

Well, we've seen -- again, I think the use cases are just going to continue to make themselves known. We've seen really good success right now in the U.S. with manufacturing firms, large manufacturing firms, large retail and large restaurant chains. And internationally, I'm seeing some good success with gaming companies as well, as they want to get closer and closer to their end users. So those are a couple of the industries that we're having good successes so far.

Great. And perhaps just more broadly coming back to the growth opportunity for IGAM, more broadly. I think one of the things that Jeff has talked about before is there's a really good opportunity to just take up share of spend. But relative to your larger competitors, you still have a lot of opportunity to take share. So how does that look today? And is that -- what does the competitive environment look to kind of go from, let's say, a 20% share of spend to a 30% share of spend.

I wish we had 20% share of spend, to be honest with you. So I think Jeff's comments continue to be very true today as he's made them in the past. We continue to have a relatively low share of wallet in most of the markets that we operate in. So I think the addressable opportunity is quite large. And that's no matter if you're taking share from incumbents with existing services or whether you are winning in a new space such as edge compute, which, again, is a nascent but significant opportunity, we think. And I would characterize addressable spend as having not necessarily grown, although I'm sure you can find industry analysts out there that will give you one number that's really appealing and then another one that might not be as appealing. But I think about addressable spend as one that is shifting rather than expanding, right? So technology transitions are generating a lot of activity and a lot of opportunity for companies like Lumen, because, again, we do have relatively low share. But our growth, our path to growth is really about delivering a flexible, a secure and a performance set of solutions for our customers. And so it really is about focused execution on our part.

And I know this is the -- some of the other companies, including T-Mobile earlier today, are -- they are using wireless as a way, an entrée into the enterprise segment. And how do you think about the wireless opportunity? There's some larger -- potentially with DISH doing an MVNO and so forth is -- so is that something where you think you might need to have a bigger position going forward to be able to offer some of those services to your customers, as we're going to 5G?

Yes. We certainly do see enterprises looking for that mixed wireless/wireline set of solutions, and they're leveraging 5G for that. The good news for Lumen is we haven't invested billions of dollars in spectrum that we're beholden to. So therefore, we can have those -- we have those relationships with other wireless providers, and we can create a solution for those enterprise customers on a case-by-case basis and come to them with what we think is the best solution, ultimately. But we'll play in the wireless space from a couple of different angles. Number one is, certainly, on the wholesale level, we've got good long-standing relationships with the who's who in terms of who's building and investing in 5G. And so we've got those relationships, and we certainly will participate in their build-outs, but where it makes financial sense for us. We won't go after that business if it doesn't make economic sense for us. So that's one aspect of how 5G will impact Lumen. Another piece will be 5G also means more data moving through the Internet. And as one of the largest ISPs, we see much of the world's traffic across the Internet. Much of that data will find itself traversing our network. So that's good news. And then, to your point, the enterprise play itself, leveraging partnerships that we have to be able to give them that hybrid wireless and wireline set of solutions that they're looking for.

Right. And on that wholesale point, how much exposure do you have to churn from the Sprint, T-Mobile consolidation and merger synergies?

Yes. I think that continues to -- remains to be seen. The wholesale business as a whole has declined over the past couple of years and at a slower rate, by the way, than the rest of the industry, at least per our numbers. And it has been driven by industry consolidation, to your point, with regards to Sprint and T-Mobile, but it also is the migration of private line and legacy voice services. And so -- we do see, however, opportunity in wholesale around the likes of Ethernet and Wave and then potentially for some of these 5G build-outs. But while we're managing the revenue and mitigating churn as much as we possibly can, we continue to also be very focused on the cost structure as well, right? So -- that's both in terms of the OpEx as well as the network that supports that wholesale business. So we'll continue to manage both sides of the ledger.

Okay. That makes sense. You've announced a number of interesting partnerships over the last little while, including Zoom and VMware. And just talk about how the go-to-market on those happens and any early successes you've seen.

Yes. It's really good. We're thrilled by some of these announcements, right? I mean, when you think about who are the up and coming technology companies, we're partnering with them. We just did one with IBM, I think, last week or maybe even earlier this week. So as we think about partnerships, we're no longer in a space where we feel like we need to build everything and deliver every single product to our customers. There are far greater companies out there that have specialized in particular applications that they can bring to market and we can partner and leverage those -- that innovation as well. So we've kind of changed the mindset within Lumen to say partnerships are a good thing, right, and we should go and leverage those as much as possible. And so we've also seen -- or we believe that critical business applications run better over a distributed network rather than just simply in a centralized public cloud environment. And so leveraging our network, and again, the investments that we're making at the edge is also very appealing to our partners. And so those partners will take shape in a couple of different ways, to your direct question, Simon. It might be a go-to-market relationship where we've got sales organizations that are going to the market and selling collectively. They might be pursuing co-innovation opportunities. VMware, in particular, is a co-innovation opportunity where we're actually going to create product together and capabilities. Or it could be simply hosting the SaaS services and SaaS applications on our edge, which is what the IBM Cloud Satellite announcement was earlier this week. So we think about our alliance relationships across a couple of different dimensions. And we're just thrilled to be able to partner with the likes of VMware and Zoom.

Great. Talking about distributed networks, it makes me think of SD-WAN. And I think that's been a strong growth product. So where does that stand within the post-COVID world, and I think there's been investor concern about what that does to your MPLS stream. So what's the latest on that?

Sure. You're absolutely right. It's been a good growth product for us. And most of our enterprise customers are straddling this decision about public and the private world, right, and where they're going to host their applications and how they're going to connect locations. Now part of it is still, I think, in a wait-and-see mode given the COVID environment and how are they going to think about their location strategy over the course of time. But they're trying to figure out what the best answer is for them and their businesses, what's going to give them a secure environment, but also the flexibility that they need. So we're thinking about WANs or adaptive networks, and that's inclusive of private and public. It includes your traditional MPLS private IP VPN networks. It includes SD-WAN. It includes something that we call Hyper WAN, which is a fully digital experience to connect sites and to give them the bandwidth as well as the security services that they need. And so we think about it in the terms of, we need to be as flexible as the enterprises are needing us to be. So we've seen good growth in SD-WAN. I don't think it's going to completely take over VPN. And the reason why I say that is because we know many of our customers that we are deploying SD-WAN, still want to retain IP VPN connections as well. And so as we think about it again, we're thinking about how do we -- how are we going to provide them with the best solution that addresses the needs that they have and bring to them, again, an adaptive network that will help them over the long term.

Great. And what about the cloud, the hyperscalers more broadly, the Facebooks, the Amazons, the Googles, are they friend or foe? They have tremendous needs for bandwidth, but then they may be building their own subsea cables. So what's the net for Lumen?

Yes. I mean, they're significant partners to us, right? They certainly purchased quite a bit from us in terms of backbone fiber subsea. They're building subsea. We partner with them on their build-out. So it's a very integrated relationship and one that we value tremendously. Obviously, their cloud services, we are one of the most connected service providers into many of those cloud environments. Again, we relish those relationships. And as we think about, again, leveraging the edge even more so, making sure that those CSPs understand the value. And I think that they do understand the value of having such a highly distributed network so that they can get their capabilities closer and closer to the end customers that they want to reach. So yes, it's a buy-sell relationship. It's a go-to-market relationship at times. It's integrated and complex.

Great. Well, maybe we'll just wrap up on the international side, if we can. I think one of the promises of the CenturyLink, Level 3 merger was maybe to leverage some of those international assets with the customer bases of both organizations. So it'd just be great to hear what the progress has been on that. And what some of the key trends you're seeing internationally are?

Yes. Well, just to make sure that the audience has a full appreciation, we do have services that reach over 110 countries, I think at the latest count, both in Latin America, in EMEA and in Asia-Pac. What's different amongst those regions is, there's a couple of things. The assets are different, right, ranging from a mostly leased network in Asia-Pac, where we're primarily supporting B-end -- the B-end of multinationals that might originate in either the U.S. or in Europe to a set of assets in Latin America, as an example, which is very deep, right? It's robust. It's got really extensive terrestrial network assets, deep metro assets as well as subsea cables that are fairly unique. So the assets are a bit different. Having said that, though, our products and the way that we develop product capabilities at Lumen is on a global basis. And so the proposition that we have to offer enterprises is that we can get them anywhere in the world and still be able to deliver a fairly ubiquitous set of solutions for them. And so we're -- we see growth in those regions. They're slightly different, but there's really terrific opportunity in each of the regions. And our job is to make sure that we continue to focus in on delivering the expected returns from a lot of the investments that we've made. We've expanded into Mexico, as an example. We will have some expansion opportunities in Asia so that we can get to the places where our enterprises need us to be.

Great, great. Well, it sounds like there's a lot going on, and we really appreciate you giving us the update today, Laurinda, very interesting. Thank you so much.

Thanks, Simon. Appreciate it.

Thanks, everybody, for listening.