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

All right. Good morning, everybody. Welcome to day 3 of the Cowen TMT Conference. For those who don't know me, I'm Greg Williams. I cover the cable, satellite and telco space here at Cowen. I'm joined today by Shaun Andrews, Executive Vice President and Chief Marketing Officer and Product Management at Lumen. Today's format will be a 30-minute fireside chat. I could field questions through the system, so feel free to ask your questions. And I have a separate monitor where I can anonymously bring up any other questions that may come in. But without further ado, Shaun, welcome, and thank you for participating.

Thanks, Greg. Happy to be here.

Great. I know we participated last year, but for those in the audience that might not be familiar, can you maybe just briefly explain your role at Lumen and where you're spending most of your time? And then maybe how has your responsibility sort of pivoted with the reopening?

Yes. So I spend my time kind of broken down into thirds functionally. So 1/3 is kind of the arts and crafts side of the marketing, brand creative and then increasingly driving digital demand. So making sure that there's a digital journey, right? So a lot of time there. The bread and butter in my background is on the product side of the house, definitely focused on edge computing and the relationships we have with our alliance partners within that product silo right now. And then third which is really digital experience and making sure that we're driving digital experience for employees and customers that helps them thrive, whether that's APIs or portals. And how those 3 things kind of all come together is how I spend most of my day.

Got it. I did want to talk about the bookings cadence that we've been seeing. On your earnings call, you mentioned the prolonged COVID-related delay in decision-making by primarily enterprise customers. I think you guys mentioned weak bookings in December and January and February but then you had a strong March. Where have we been, now that we're in June, since March? So if we think about April and May, what's that cadence been since the pickup in bookings?

Yes. So I mean I can't get into specifics in the window on April and May. But in general, as things continue to open, that continues to be positive for Lumen. And we continue to see positive momentum in our conversations with our customers, their postures, what they want to talk to us about, how that relates to the funnel and sales and revenue activities. So I can't go into specifics on April and May, but that trend and positive momentum that you see on CNBC is things are opening up. That's good for us.

Okay. Great. And so you talked about your conversations. How have the conversations really changed? Demand trends, have their needs changed? Are customers buying differently as they rethink about the distributed workforce?

Yes. I mean that was a little -- a bit of a contrarian here when COVID hit, that there wasn't something different. It was really just escalation of what was already happening. So we're continuing to see them focus on that, right? So cloud-based security, cloud-based unified communications, hybrid connectivity. They're worried about their applications and data. That's all continued. If you were to say, well, what's different is the weight they're putting on that digital experience. So whether it's the digital experience they're providing for their customer or the one they want from us, the weight they're putting on an API or a portal to do everything across their journey with us, that's heavier and heavier and a bigger part of the conversation than it was 18 months ago.

And what verticals are you seeing this ramp-up in the digital experience? Which verticals are still maybe in that delayed mode? And which verticals are you seeing really starting to unleash?

Yes. I got to slice and dice it differently. I would say the ones that were latest to the party were kind of the smaller down market. So the smaller you were or the more hospitality-based you were, the later you were to the party. And we're starting to kind of see them come around now. From a vertical perspective, in the enterprise, the ones that are going the fastest are gaming, retail, logistics and manufacturing. And if you think about -- back to my CNBC comment, the green tickers, those companies that are embracing kind of what's happening with COVID and the digital transformation across those verticals, they're the ones that are really going fast and driving us.

Got it. So you sort of breaking it up by size. So if I look at sales channels, it sounds like IGAM and large enterprise might be picking up, whereas maybe the mid-market and the mass market, smaller businesses, might be a little bit lower. Is that the right, correct way to talk about it?

Yes. I think I would say more like there's green shoots up into the rightness of all of them. But in -- 6 months ago, the smaller the customer, the more they were seemed to be impacted and less likely to do something. Those others kind of carried through a little bit more. The other changes I would see is we're seeing a renewed activity in the public sector, both fed and SLED, and them kind of getting a level of confidence in their budget and decision-making for their large RFPs, right? So those are big slow processes anyway, but they seem to be kind of coming around and being willing to push the trigger on things now.

Got it. And on your Analyst Day, if we can go into the product level, you guys showcased sort of 4 solutions. I think it was edge computing, adaptive networking, connected security and then UC&C, unified communication. I kind of want to go over some of these products and these solutions as the future of Lumen, but let's start with edge. It seems like the most impactful because for, one, it's not really cannibalizing anything. It's also fast growing. But you guys put out a number, a total addressable market of $15 billion to $40 billion. What portion of that is connectivity and colocation, space, power, cooling, which I assume is your take? I'm trying to understand how much of that can you actually get and when will you see...

Yes. Your question is timely, and we're seeing it shift. The TAM you used is a good one. I could also show you some TAMs that are multiples of that, like the estimates are all over the map. And most enterprises are still cloud-native, let alone like moving to the edge. And Gartner, IDC, they're all saying 2021 is the year of the edge, where it will come mainstream. The only part I'd correct you on is what portion is addressable to us. We actually are out closing deals where we're winning the whole solution. So to answer your question specifically, if you made me pick a number of our typical edge compute deals we've been closing over the last 3, 4 months, half looks like what you would call network, colo, space, power. And then the other half would be something that felt more like a compute word like bare metal, private cloud, public cloud, with some managed services wrapped into that second half. That's probably more than 100%, but half-ish on the network stuff, half-ish on the upstack application compute stuff. And then there's usually some sort of a managed service wrapper that we're providing.

Got it. So half is this full suite of services. I guess that brings up the next question in terms of partnerships. You've announced a couple of partners and alliance partners, if you will, IBM Cloud. How does that work? So do you go in and lead? Or does, say, IBM Cloud lead in? What's the go-to-market strategy? What's the business model? Is it a rev share agreement? I'm just trying to understand the partner ecosystem that you guys developed.

Yes. In most cases, we'll look to put it on our paper and make that partners' capabilities an ingredient in our solution. And then we would pay them by the drink for those ingredients within that solution. That's in most cases. We are wide open to a situation where a VMware or an IBM or a T-Mobile has an established relationship, and they'd like to make our ingredients part of their solution that they paper. We're not going to bite off our nose despite our face. But the general model and the motion that we're driving is the work -- talking to the CIO about her applications and data, her journey to the cloud, what portion should be edge, how can we help her with a managed wrapper with security and compute and space and power. And then, yes, we can bring VMware or we can bring IBM to the table or T-Mobile. That's usually the mojo.

Got it. So you generally lead, but you don't have to?

Not at all.

You mentioned T-Mobile. Can you explain the opportunity there? And could you go deeper into maybe even mobile partnerships?

Yes. They're -- so T-Mobile and Lumen are a great peanut butter and jelly, right? So if you think about our head start coverage and position in edge compute and theirs in 5G, but we don't have a whole lot of each other's backyard. So together, within IoT and the edge compute use cases, we can really bring a pretty robust solution to a customer. So where the manufacturing, logistics, retail has a 50-foot wireless tether at the end because there's a robot or a device that's got a wireless chunk, we can partner with T-Mobile, whether it's Wi-Fi or CBRS or 4G, private LTE with 4G/5G. That's really the model. And then we also partner with them on fixed wireless. So if you imagine a large distributed gas station, maybe some of their locations are on net for us. We could throw in some T-Mobile into that kiosk for their point of sale. We just closed a large deal with the public sector where we partnered with TMO for a fixed wireless portion of the solution. So it's those 2 main use cases, IoT or fixed wireless, within the adaptive connectivity.

So you're selling edge solutions today. You're up and running, it seems. And you mentioned 2021 is the year of edge. When does it start to really move the needle for you? I know it's a vague word, but when does it -- when do you really start to see real bookings in edge computing that really start to make a difference?

Now. Like it's picking up. We're going faster with edge computing than anything I can remember in history going quickly with.

Okay. Good to know. And since you're up and running and it's quickly increasing in terms of bookings, have you had any early learnings, maybe some challenges that you've worked through?

That's a great question. A question -- one of the Board members, she asked me the same thing a couple of weeks ago. I would say that we assumed that most of the movement in the use cases would be about coming from like the core cloud towards the edge. So someone had an application on a core Google, Microsoft, IBM, AWS and they wanted to move it towards them for latency and do so in a way that provided total cost of ownership savings. We're actually finding that a lot of the early adopters have an absolutely mission-critical application on prem, and they're open to moving it to the edge so that instead of putting it on 2,000 sites and having people managing that at 2,000 places with space and power, they can move it to 60 and manage the same thing. That was an assumption that I was wrong about, that it's kind of equal as far as the movement from core to prem -- or core to edge as prem to edge.

So it sounds like mission-critical apps moving to the edge is maybe an upside surprise. If we could talk about use cases, I think you mentioned, on the Analyst Day, a few use cases like machine-to-machine, let me see, robotics, warehouse, IoT, AI retail video analytics, gaming, AI security, health care, et cetera. A lot of use cases there. Which ones are happening today? And then which ones are you possibly most excited about a couple of years from now?

Yes. I'm kind of a media guy so I'm always excited about today. Definitely manufacturing, logistics and retail. And within that retail, it looks like a use case that mimics manufacturing or logistics in many cases, so things moving around, don't want them to bump into the shelves, moving boxes. That is immediate here today. That's huge. The second biggest, most common today use case is gaming. So if you think about distribution, you think about latency and you think about kids wanting to be connected with each other in a real-time experience, gaming is moving very quickly. And then the one that's kind of fun and new that I didn't see coming is blockchain opportunities. And there's not 30 of them, but recently, we've had a couple of big blockchain opportunities that were kind of fun and just need to learn about and see.

Blockchain as in blockchain contracts, data warehousing, not like blockchain currency?

Not currency, more like DeFi like distributed financing applications.

Okay. I wanted to move on to the adaptive networking solution. For that one, it seems to me it could be a little bit cannibalistic, and maybe I'm wrong. Because when you're a customer, you don't have to harden your network now that you have sort of dynamic capacity. Is that the right way of thinking about how you sell it?

Yes. It's within a given node, right, like so if you think about a manufacturing place, one place in Milwaukee, Wisconsin, that node has gone through a journey, right? It went from X.25 to ATM frame to MPLS to hybrid MPLS and IP with SD-WAN on the top. And now we've got SASE coming. So within a given node, yes. But if you step back and look at the total sum of these people's networks and that it's not just P but it's P times Q and the amount of data is exploding, then it's not cannibalistic as much as it is. You've got to be kind of self-disruptive and make sure you're always bringing something new and helping them migrate because if you don't help them migrate, someone else will. So yes, within a given node, for sure, there can be a cannibalistic aspect of it. But as long as you're growing the customer and taking share and getting more of their sites and use cases, then it's in your best interest to be a little self-disruptive and grow the total pie.

No, that makes sense. And on that note, unified communication is sort of in the same vein. If you don't help them migrate to unified communication and possibly cannibalize your legacy voice, et cetera, somebody else might. The question I have there is when it comes to the cloudification of telco, for a lack of better words, can you contextualize the threat there? I mean 10 years from now, will all of enterprises be looking at their cloud -- telco services and operate in the cloud? We're seeing AWS with DISH in that partnership, they're looking to take on the -- at least the wireless world in a cloud-native environment. And just trying to see where does Lumen sit in all of that. And how much of it would be a risk to your legacy and even your incumbent businesses?

Yes, yes. I mean I agree. I think it was Andreessen with the software is eating the world thing. It's in telco, it's here. So yes, if you're going to move forward and help customers acquire, analyze and act on their data, you have to do it in a software-enabled way and leverage the cloud. And yes, more and more is moving to the cloud. But if you think back to your first question about edge computing, right, half of that solution is in network, in space, in colo, right, and wrapping it with security and wrapping it with managed services. And so all of that kind of core knitting is actually becoming more and more important as data is exploding in the cloud. The connectivity among your locations and among your hybrid cloud locations is more important than it ever was. So yes, cloudification of telco, totally going that way. The importance of the connectivity tied to it, more and more important than it was before.