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

Good morning everybody or good afternoon. Thank you for joining us again here at the 2021 Telco Media Conference, Bank of America. We're here for our second session today, and we're really pleased to have with us today Shaun Andrews, who is the EVP and Chief Marketing Officer for Lumen, formerly known as CenturyLink. And I'd like to welcome you, Shaun. This is, I think, your first time here at a conference. So thank you for coming.

Yes. Thanks for having me, Dave. Happy to be here. Good morning.

So I guess maybe an easy way to start out would just be to kind of ask, for those that haven't had a chance to meet the Chief Marketing Officer of the Lumen organization, kind of where you come from and what you do now at Lumen.

Yes. So I come from the history of acquired companies at Lumen. I was with WilTel at one point and Level 3. I started out in sales and worked through product management. Now I find myself as the Chief Marketing Officer. I divide my time into 3 chunks. So one is I'm accountable for the products and experience that we take to market; two, I'm driving an improved digital experience really across all of the buyer's journey; and then three, the traditional marketing aspects of brand, creatives and messaging. So Chief Marketing Officer with those 3 main functions is how I divide up my day.

So a question for you from the outside looking in, with respect to some of the big changes that are happening at the organization in terms of kind of divvying up the assets and kind of selling off pieces. Has that changed your focus, your role, the kind of attitude at the organization?

I wouldn't say that it's changed our focus. I'd say it's congruent with our focus and aligned with our focus on really investing where we can grow and focusing on the Quantum Fiber experience in Mass Market and then the growth aspects of Enterprise. So it doesn't feel like so much has changed what we're working on, but more just helps us get there.

Maybe taking these in reverse order in terms of the traditional marketing function. It wasn't too long ago, I remember kind of sitting here in New York City and watching a football game and seeing a television commercial come up for CenturyLink or -- I haven't seen one of those for Lumen in a little while. Has it been a proactive decision to kind of dial back the national marketing of the organization and focus more on something else? And if it is, what is that something you're focusing on from a marketing standpoint?

Yes, definitely not so much a dial back as a refocus. So if you look at where we get the best bang for the buck on reaching our target market specifically, it's less so with mass linear TV advertising, and that was definitely a part of the campaign when we initially rolled out the rebranding of Lumen. But as we're becoming more comfortable with our sweet spot and they identify Lumen as a technology company and that brand is getting out there, then we start to pivot more of our spend for the over-the-top and really targeted medium where we can reach CIOs and CTOs that make the decisions we need them to make. So really a refocusing of those dollars rather than a kind of a cease and desist of the national approach.

And with respect to the rebranding in particular to Lumen and this notion that the company's a technology company now is, do you sense that it's resonating? Is it accomplishing the desired results in terms of perception and positioning for the company?

Yes. And it's not just that I sense it. We test it and prove it and it is working. So we had several missions really to change our purpose, to change the value proposition and to change how our customers and employees see Lumen, and that is working. We measure the perception of the IT decision makers, and I can clearly see where they've gone from viewing us as a traditional telco to a technology company. And we'll continue to try and move them along that curve. And that really helps them think of us when they're trying to do things to help acquire and analyze and act on their data and in the verve that they're trying to accomplish rather than just think of us as a set of [indiscernible]. So it's definitely working and is resonating, and I see that in the staff with employees and customers.

And as we think about the digital platform, and I apologize, I should have said this before. [Operator Instructions] So I asked this question -- I'm trying to ask this question for everybody. A year ago, we were kind of in the middle of this pandemic, and -- now we're probably not out of it, but we're coming out of it. And I'm trying to get a sense as to whether -- and to what degree the businesses that we're talking to feel like we're coming back to normal and what that new normal really looks like. So I know that Jeff has talked about the funnel has been building and the sales activity has been accelerating. But I also know that decision-making has been slower and people's architectures might be different than what they thought they might be looking like 2 years ago. So I was wondering if you kind of just at a higher level can give us a sense as to where are you on that spectrum of kind of coming back to the new normal.

Yes. There's probably -- maybe there's 2 actives I could answer that with. One would be sort of the trending impact that we saw on our customers. So we had some help. And we did some studies in April of last year and then again in August before we rebranded. And the purpose of that was to find out the impact COVID was having, and it was clear that -- it was less new as far as what was driving CIOs and CTOs to do and more of a massive acceleration. That acceleration was cloud and managed services. So moving things to the cloud, whether it's UC or security and relying on managed services, we saw that accelerate quickly, and that's holding. That's sticking. If you ask me something that's come and gone, the best example I could give you is old school audio conferencing. So when the pandemic first hit, there was sort of in any port in the storm mentality that some of our decision -- our customers decided to go with, and they needed the ability to communicate. Maybe they weren't up on their game with a cloud-based UC service. They relied on an audio conferencing for a moment. We saw that peak and go away even before we left last year, but that's focused on cloud, that's focused on managed services and us partnering with them in order to do that. That continues. In the customer behavior and the buyer behavior and the decision-making, I would say that it's still extended decision-making time line compared to pre-COVID, but we're seeing them get to a decision now. We're seeing them have a level of comfort of what their world is going to look like so they can close out and make a decision. And I believe that, evidenced in our recent quarter-over-quarter sales, we did see some improvement there. And I think that, that certainty by our customers is helping contribute to that. But we still feel like there's prolonged and delayed sales cycles as compared to pre-COVID.

Got it. And is the digital side of what you're working on kind of informed by some of these changes? Or is it more of a refresh of what existed before in terms of digital interaction with the client base?

It's a refresh, Dave. Really having a digital experience for them all the way from learn, buy, get, use, pay, renew was there before COVID. And now it's just hotter. When we sit down and talk to a CIO, she's spending less time asking about feature, functionality, feed, speed, and she wants to know about the digital experience with how she accesses those. She wants to know if she can digitally spin up networking as she moves her compute and workloads around different venues. She asks about that flexibility and responsiveness via digital nature, less than she would about the actual bits and bites and speeds and feeds that she might have 3 years ago. That doesn't feel new to me, it just feels more of a hot topic and kind of top of the list.

Got it. So a combination of the Analyst Day, the rebranding, the kind of asset disposition and focus in the organization, the goal has been to kind of pivot the organization to growth. And there's a lot of legacy stuff inside Lumen today. And I think a lot of people are trying to find -- figure out what is it that's going to be the stuff that creates enough growth to offset the legacy declines? So can we start with kind of like the large enterprise? Obviously, we've got a lot of legacy private line in Frame and ATM and MPLS is growing but slowing. Things like SD-WAN are growing quickly, but they erode margin. So what is the product or the suite of products that's CenturyLink -- sorry, Lumen -- it's something -- sorry, I've been covering this company for 20 years. So you got -- apologies. I'm still working on it.

[indiscernible] the apologies part, doing it once a while myself. No worries.

Yes, sorry. So what is it that you guys are selling now where you have visibility that says, "Okay, this is going to be the thing that takes our large enterprise business from decline to growth."

Yes. I mean I wouldn't say there's the thing. Our focus is definitely on that digital experience. So even where we have those traditional products and services that are in slight decline and even where we may be doing better than the market in some of those areas. So we can still do better financially by providing a better digital experience for our customers within those spots, whether it's private line or TDM voice or MPLS facing market headwinds, right? But by far, our area is on the growers, right? And the best way to get rid of this weighted average problem is to nominally grow the growers so they outpaced the decliners, just as you posited it. Our focus is on managed technology solutions, which is really running robust and heavy since COVID accelerated it. Our focus is on SD-WAN and SASE and making sure that we have a digital experience that really allows our customers to drive a hybrid networking solution, whether that's with MPLS or Internet or leveraging our partnership with T-Mobile for their 5G wireless options. Security, connected security. We're having a lot of success with our digital DDoS experience. So increasingly, customers are really having ransomware tied to DDoS, and our ability to spin them up digitally on the fly and protect them from a DDoS perspective is growing. So the areas -- the exact areas you mentioned, so cloud-based CC, SD-WAN, SASE, MTS, edge computing, those are all growth areas that we're leaning on in the enterprise to make the balance come out to overall top line growth.

And can you kind of elaborate a little bit? Because things like cloud, for instance. I mean I know that there was a time when the company was trying to do its own cloud products. Obviously, cloud is kind of now dominated by a handful of players. Security is also kind of a very specialized capability. Are the margins that Lumen gets by growing the top line in cloud and security and SD-WAN -- what are the incremental margin dollars that you get at the -- relative to the incremental margin dollars you lose from the legacy services that they're taking place?

You can see that, that is working, right? You can see that we expanded our EBITDA and our margins in this most recent quarter, right? You can see that as we're making that transition, the overall margins are expanding. And part of the reason is, is as you continually rely on the digital experience, not only does it make your customer happier because they can thrive and they can be more office efficient, but you get a faster time to market with revenue. And then we need less hands and feet to turn up that experience, right? We'd rather have that be an all-digital experience rather than having a bunch of humans focused on turning it up, and then we can take and repurpose those humans to building more forward-looking digital experiences and thinking about what's next rather than dealing with a specific [ 1B, 2B ] transaction. So they're complementary. And overall, that piece of it is working as we drive increased margin expansion. So that balance, we're very good at.

So should we -- should the investor base then be looking at margin expansion incrementally as a function of product mix and less as a function of some of the cost containment initiatives and synergy initiatives that Jeff initiated subsequent to the merger between the Level 3 and CenturyLink? Or -- because I guess it seems like -- I would argue that the consensus would be that it's primarily cost-cutting and not mix shift because mix isn't really changing that quickly in order to affect the consolidated EBITDA margin of an organization as large as yours?

Yes. I would say that they're not mutually exclusive whatsoever. And that my tying in with our product mix and our go-to-market improvement and appropriate kind of digital experience that the customer likes, and are tying in with our CFO and our ops groups to provide a better digital experience for our own employees, they're one and the same. We leverage the same platforms. We leverage the same outside party, whether that's ServiceNow or Salesforce or Adobe. We leverage partners to make that experience end-to-end better, and all boats rise with that tide, whether it's a better product mix, whether it's better digital experience for the customer or whether it's a more efficient way for us to deliver that service, which results in your cost savings that you leverage. I don't see them as mutually exclusive as maybe you would have set them up to be.

Okay. Got it. So you mentioned the partnerships that you have like with Adobe. Obviously, I think one of the partnerships that people are very interested in is that mobile partnership with T-Mobile. Has that borne any fruit? Could you elaborate a little bit on how that's working and what it's accomplishing?

Yes. It has started to bear some fruit. We had a big hybrid networking win very recently where Lumen is the main [ paper ] holder with the customer, and a big part of that solution is the wireless and 5G nodes as part of that hybrid solution. We continue to see a lot of traction, not only with the hybrid networking aspect of that relationship, but even more so when IoT is the driver of an edge compute solution, there's often a wireless last 50 feet or 100 yards. And where we can go to that manufacturing company, or that online retailer, or a distributor who's got robots and boxes moving around at night in an automated fashion, being able to go with T-Mobile hand-in-hand and leverage RX compute, leverage our fiber and leverage their 5G coverage, whether it be in a private networking aspect or a broader from the tower-based service is resonating with customers.

And I think one of the things that's kind of emerged, there's been a couple of things that you guys have had focused on. One is, I think you have stood up a new -- a customer success organization and kind of retooled the sales force and divided it into kind of a selling function and a kind of -- for lack of a better word, a maintenance function. Could you elaborate a little bit on how you've retooled that kind of go-to-market and customer maintenance function and kind of the impact that the customer success organization is having?

Yes. So at the end of the day, our model is a little differentiated and that we have a general manager accountable for a set of customers in a given area. And now that general management structure not only has sellers focused on selling new capabilities to existing customers, or new capabilities to new customers and prospects, but they partner with our customer success organization who's really aimed at helping our customers thrive. And if you think about how much of our day and the customers' day is in that learn, buy, get, pay, renew cycle, that isn't about a sale, right? Let's let the customer success professionals help the customer thrive there. And then there's not an opportunity cost of helping the customers thrive to the seller who's focused on selling that next big edge compute deal or hybrid networking deal. I'm seeing success in a couple of areas that I could measure and share with you. One is NPS. We're seeing up into the right movement with our NPS scores. And the map shows you that customers with higher NPS buy more and have a lower rate of churn. And then two, I'd point to the sales success we had in Q2 over Q1 as proof that the model is starting to resonate. The more you allow sellers to focus on selling, the better success you're going to have there. So those are 2 ways that I would tell myself that we're seeing success is that -- because there's a large big pivot.

And I think another way that Lumen has been trying to differentiate itself has been this kind of ultra low latency capability on the fiber network. I think that there's some questions that exist around the idea that people can really take advantage of this. So for instance, people talk about gigabit mobile speeds. And then the question is, "Okay, well, that's great, but I can only watch Netflix so fast. There's really -- I don't know what to do with a gigabit of speed." And so the flip side of that would be, "Okay, well, I can get 5 milliseconds of latency instead of 20 or 50, but what does that really do for me?" And can you kind of elaborate a little bit on what kind of traction does that posture with respect to your network have with the client base? And to the extent it has traction, what are the things that they can do that they couldn't otherwise do if they didn't have the Lumen network powering their applications?

That's a fantastic question, and it's pertinent. And we're dealing with that balance right now. So we speak about the cloud journey like it's been around forever and everybody is already on the cloud. The truth of the matter is that most people still have quite a bit in a data center, and most people are still early on their cloud journey. But a good portion of them are very far along. And those that are very far along see the benefits of migrating to the cloud from an agile perspective. From a service level, they'll be able to provide their customers from a total cost of ownership perspective. Those customers tend to be finance customers, health care customers or, as I mentioned earlier, logistics, online retailers, manufacturers, people who have a big space with a lot of activity moving in there with IoT. Those customers that are early along their cloud adoption, they come to us. They understand the benefits of the edge. They understand the role the edge plays in a continuum from on-premises applications, to agile applications, to applications that are best placed in the core. They get that. It resonates and they come to us and say, "we're trying to drive a better total cost of ownership. Can you help us move applications to your edge so we can house them in 24 sites instead of 1,300 sites?" That resonates. The customers that are earlier on their cloud journey and are actually for the first time thinking about how they move from on-premises to the cloud or from data centers to a hybrid cloud model, we often have to help them understand the value that the edge plays in there and the value of having an orchestration capability so that as they're setting this up, they can move their workloads to a hybrid cloud environment across the continuum, from premises to edge and the value of latency as it pertains to specific applications. So there's a little bit of a -- If you're super savvy, you already get it. If you're nascent and early on your cloud journey, we do have to help you understand the role that the edge plays and the latency plays. I think we're coming into the peak of the hype cycle with edge. And over the next 6 to 12 months, you'll start to see that become more mainstream. And customers understand that clearly before we sit down and kind of help them design something.

Okay. Cool. So the last time I was able to actually go somewhere, I went to CES in 2020, I guess. And I went to a presentation, and there were 5 Luminary presenters. And the topic was the mobile edge or the edge of the network. And for an hour, we spent debating where the edge is? What the edge is? What applications are relevant to the edge? And that sort of thing. So you mentioned the edge and a lot of people do, but I'm interested in kind of, from a product and marketing perspective, where is the edge? What is it? And how are you monetizing it?

So the edge from our perspective is in between premises and the core cloud, right? And if you didn't have the edge, and we weren't debating on where it is, and you just had those book ends, you'd be saying, "Okay, my choice is to put things on premises or my choice is to put things in the core cloud. And my trade-offs are I can outsource and put my applications in the core cloud, but I have less control over them and there's latency concerns. Or I can put this low latency application for robotic surgery, for crypto mining, for robots moving around with humans, and we want to make sure that they don't bump into the human. So we need ultra-low-latency for safety and accuracy. I can put those all on premises. But now I've got to spend and house that compute and space and power in 2,300 of my sites. And I have to have management worry about the management of those applications and cleaning them and orchestrating them at all 2,300." Where edge is in between. And that's where we, today, already, our goal was 95% by the end of 2021. We're at 97% right now. We can cover 97% of enterprise applications with 5 milliseconds or less in the Lumen edge. So where the edge is in the Lumen data centers where we can offer you the best of those both worlds and tie it together as a continuum so that the orchestration of those applications, you don't have to make those difficult trade-offs. You can have applications in the premises. You can have them on our edge. You can have them in core in a way that's congruent with each other. And you can see and move your applications and workloads to the cloud provider that's set for that application. Maybe it's IBM. Maybe it's AWS. Maybe it's Azure. Maybe it's Google Cloud. Maybe there's a time in place for that application to be in your data center, right? And maybe on the weekends, you move it from the data center to the edge or from the edge to the core. And as you do that, you need to spin up networking to help you acquire and analyze and do something with the data. If your networking is fixed but your compute and applications are all moving around, you're creating bottlenecks for yourself. So what Lumen does is it provides an experience where we can not only move those applications, move them where they are best suited, but also stand up the networking on a dynamic basis so you get the throughput you need sort of the application side. So I would say the edge is in between premises and the core cloud.

And so the monetization opportunity there for you is kind of the housing of the applications in the data center plus the connectivity?

Yes. I forgot to answer that part of the question. Thanks, Dave. So the monetization is, a, we have the ability to resell compute, right? So if you need some of that compute in a specific cloud provider, we can resell that. That's the lower margin kind of part of the holdback to the solution that we'd like to bring to the table. The better, more bread and butter part of the way we monetize it is through space and power in the edge, through connectivity. So as that data is exploding and as you're moving in all over the place and you're moving the applications all over, that connectivity that's spun up on the fly, that's how we monetize it. And then imagine the challenge that our customers are facing with moving all of these applications across hybrid networking and data centers and edge. The managed services aspect of us helping them as a certified provider for all those hybrid cloud experiences for SAP, for VMware, right? Now we can come to them as an expert and help them on that journey. That's another way to monetize it. And then finally, wrapping it with security. That's always part of the conversation, and that's in upsell that we have monetized that edge experience as well.

Got it.

I lost you, Dave.

So going back to kind of the core business, you kind of talked a lot about the large enterprise side and the products and services there. Obviously, international is a big part of the total puzzle here. Is there something dramatically different about what the international customer base requires relative -- relevant to either the edge or the latency kind of -- or some of the products and services we kind of already talked about?

No. I don't believe there is a big, massive differentiator. Obviously, there's in-region competitive differences. There's slight in-region buyer behavior. EMEA has always leaned on managed services a little heavier than the rest of the world. But by and large, the value propositions to help customers acquire and analyze and act on their data, whether that's through edge computing or networking or flight communications or connected security, our value proposition resonates very similarly in North America, EMEA, Latin America, Asia Pac. And when we go to market, we do so in an aligned ubiquitous way globally. We don't break it out region by region.

Okay. Got it. And so then kind of going down the income statement a little bit. On the wholesale side, to the extent that there is a pitch to be made at the network latency and reliability is a premium at the Lumen network, is there a way to create products in the wholesale segment that are differentiated? Or is that business just not differentiable and it's just purely about kind of pricing kind of a Machiavellian race to the bottom?

The option #2 that sounds a little more doomsday is definitely the long-term runway for wholesale. In the long run, wholesale will decline. But you can do it by -- in a way that drives higher margins and cash flow. You can do it in a way that earns a little bit more of your share while that market decline. And I don't believe that it's so much through differentiated products, but more so through differentiated digital experiences for those products. So one recent example where we're having some success is with building APIs. So a lot of these large wholesale customers, they don't want to make mass transactions and many moved ads and changes through emails or portals or speaking to a human. They'd rather have their computers speak to our computers through a rental API. So that would be a good example of where -- with a digitally differentiated experience. In the long run, you're still going to face decline in the wholesale space, but you can do so with richer margins and at a slightly slower pace.

That makes sense. Got it. And so look, the enterprise market, you're an 800-pound gorilla in that market. There's a lot of other 800-pound gorillas. It is kind of more of a fight. But when we get down to the small and medium business marketplace, that's an opportunity for you guys to kind of come back and take share. It's not obvious that things like cloud compute and 5-millisecond latency and edge compute are going to be the things that win back the small and medium business market. How do you attack that market? What is the product that you're bringing? UCaaS is something you guys have talked about. What are the products that you're bringing to market that's going to win back market share in SMB?

Yes. So first and foremost, having a fiber experience wrapped with security with 2-way speeds that are differentiated and superior to the cable experience is one way that we can drive growth in the mid-market. Second is partnering with best-in-breed unified communications providers. So we have a strong relationship with Zoom and Cisco and Teams. And our ability to bring that high-speed 2-way fiber connectivity, rapid security tied with a Zoom experience, tied with the Team experience, tied with Cisco and bring the SIP Trunking, all in one experience for that mid-market customer in a way that they can consume digitally, that's differentiated. So really, if you think about it as wrapping the applications that they need with connectivity, security and a managed capability that's digital, that's how we can differentiate ourselves and drive growth. And then there is one -- I don't disagree with your point about edge compute as it sits right now with the mid-market, with the exception of our SAP alliance. So we are the first provider chosen to partner with SAP to move their mid-market customers onto a cloud-based SAP solution. So that's a huge opportunity for us that we've been enjoying and driving.

Awesome. And so then we get kind of to the consumer mass market element. Here, again, I think -- it's interesting because I look backwards, and this is something I have real interest in. We go back to 2005, Verizon launches their Fios bill. You go back like 10 years ago, Cincinnati Bell overbuilt their network with fiber. Now you've got AT&T talking about doubling the size of their fiber overbuild from 14 million to 30 million homes. You've got Frontier coming out of bankruptcy. They want to overbuild the fiber. Ziply, who bought assets from Frontier, they're overbuilding the fiber. Windstream is using Unity to overbuild fiber. And it's interesting that it appears from the outside to me that Lumen is one of the relatively few companies, not the only large company, that has kind of scaled back the fiber-to-the-consumer strategy. It's very -- it's been concentrated down to multi-tenant unit buildings and where it's highly obviously economic. But there hasn't been a grand plan to retool the network. Now that might -- maybe I'm talking out of school and maybe that's coming or something. But I'd be interested in kind of getting the view of Lumen today about the consumer Mass Market, broadband opportunity and how you think about it?

Yes. I mean I think that our DNA is always financial discipline, EBITDA expansion, cash flow, margin expansion. And early on when we were looking at the Mass Markets opportunity, we were clear. We're going to invest where we can grow, and we're going to invest where we can grow with fiber, and Maxine has done a fantastic job with that. Now we have Quantum Fiber in the marketplace, where not only do you get a fiber experience, but it's all digital and seamless and quick. As we get that financial discipline and those margins are expanding and we're getting the returns that we want and the machine gets more efficient, then that opens up our ability to invest. I think you heard Jeff referenced that we're still looking for the same leverage ratio that we've been targeting previously across the company, but we have a little bit more leniency on the time line that we're going to get there so that we can further invest in growth opportunities. That further investing in growth opportunities is not only along the lives of edge compute and connected security and unified communications, but it's also within Quantum Fiber and Mass Market. So there is an opportunity for us to grow there. We do have our line -- our eyes set on where that is. And we are extremely focused, and part of the transaction with Apollo was really to cleave off the part where we weren't going to invest and grow and leave us with the part that's really ripe for further investment and growth.

Awesome. So I guess the last piece then is just related to what happens as the organization kind of gets a little smaller towards the next year and you kind of talked about some of the flexibility around the timing of reaching the leverage goals. Kind of how would you kind of prioritize or characterize management's perspective on capital allocation priorities? Is it investment business, delever, maybe think about stock buybacks? Investment in new business opportunities? Like how would you kind of characterize that?

Yes. So the Board doesn't necessarily call the CMO when it's talking about capital allocation. But I can tell you they're very purposeful and methodical. And while they orient us and steer us towards improved growth, they're also really mindful about returning capital to shareholders. You saw that recently in the announcement of the share buyback of $1 billion over 2 years, I believe, right? So I think that the balance of how we allocate funds to solve returning capital to shareholders, to drive investment in growth across Quantum Fiber, edge computing, connected security, buying back shares opportunistically, that's for Jeff and Neel and the Board to decide. But those are the exact levers that you'll see us pulling. My job is to drive growth through investment in Enterprise and in Quantum Fiber. And that's where my focus is. So I'm really happy with the what -- with where we've lined up to invest and grow. I'm not happy with the pace that we've gotten there. So my focus has been how can I enable the employees at Lumen to drive a faster time line to providing better digital experiences for our customers in those growth areas. And that's where my focus is on. Within that one particular lever. I'm not the one to answer on how we're going to allocate or prioritize across those other levers.

Totally fair. I appreciate it. As Chief Marketing Officer, that makes all the sense of the world. Shaun, thank you so much for being with us here. We've run out of time. We have tons more questions, obviously, but thank you for being a part of this. As always, we really appreciate you being here.

Yes, Dave, that was fantastic. Super tough, provoking and great questions. I appreciate your team's preparation. That was really fun. Thank you.

Thank you, guys.

Bye-bye.