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

Hi, good morning, everyone. I'm Sebastiano Petti. I cover the communications space here at JPMorgan. I'd like to welcome Kate Johnson from Lumen Communications. Thank you, Kate, for joining us today.

Thanks. Good to be here.

So you joined Lumen in November 2022, and over that time, you've invested for growth, added several new members to the leadership team and rolled out new enterprise products like NaaS, Internet On-Demand, and most recently, Black Lotus Labs. So what are your key priorities from here? And what are your next major milestones ahead?

So if you think about our priorities, it's really all about capturing this sort of once-in-a-lifetime opportunity that we see in spike in demand for fiber and the associated network services that you can run on fiber. And for us, that's really 2 innovation pursuits. Innovating the top line, so continue to evolve our network-as-a-service capabilities, continuing to put game-changing innovation in market like ExaSwitch, which sort of redefines connectivity from enterprise to cloud, enterprise to enterprise and cloud to cloud. And then -- and continuing to evolve our security road map. I think also innovation on the cost side, Sebastiano, is really, really important. And it doesn't sound nearly strategic. But if you look at telco over the past decade or so, most of the low-hanging fruit from cost takeout has already been done. So consolidation of companies and people and maybe vendor spend, there's not a lot more there. But there is a lot when you think about innovating the network itself and how do we take -- we're an amalgamation of companies. We have 4 separate network architectures. There's a huge opportunity to create one, one simplified, unified architecture. And the reason why that's so important is it delivers 2 pieces of value. The first is a massive cost takeout. And the second is it enables the digital experience that we're so excited to bring to customers in the telco space, which nobody else is doing.

As you look back over the business transformation under your tenure, maybe touch on some of the key learnings?

Yes, sure. So I come from tech. I was a newbie to telco. And what I think was both striking for me was telco is really the final frontier for digital transformation. It's the last place where digital hasn't already changed everything, so it's a huge opportunity. That was my hypothesis coming in. It has proven to be more than true. And I think what the real opportunity is, is and I don't know -- what Amazon taught us, what did Amazon teach us, it taught us that the customer experience is the product. It's not about buying a book or WD-40 or a frozen shrimp, it's about buying anything you want anytime, anywhere, instantaneously. That's the customer experience that the cloud era, digital era has sort of made everybody's expectations set for. And that's what we're doing. The customer experience in telco, it was static network, super slow, embedded in deeply physical architectures and realities. And I think the biggest learning this year is the opportunity to deliver a truly differentiated customer experience rooted in all of the expectations that our customers have for digital is the defining opportunity and it's what we're just super excited about. I think the other big learning is we've seen this movie before, right? So cloud. I don't -- when I worked for Oracle and GE and then Microsoft, when we were bringing cloud to the masses, there wasn't a single CIO that said this is a great idea, Satya. This is a great idea, Jeff and Larry, that wasn't what they said. What they said was, this is a lot of change and I'm never going to put my data in your cloud and I'm never going to pivot to that model. And then these companies were able to prove that they could innovate the experience and drive a different economic reality and a different agility so that one at a time, each corporation crossed over the finish line. There was a deeply friction-filled changer but they went there. And that's what we're seeing as we bring the NaaS story, as we bring the ExaSwitch story to our customers is they're looking for this virtual private fabric that changes the rules of traditional telco and delivers a fundamentally different CX.

And is that what you're maybe most excited about right now as you think about the opportunity in front of Lumen or maybe something that you didn't necessarily fully appreciate when you came into the seat?

Yes. I think what I'm most excited about is this notion of we planned our way to lucky, right? It's one of these things where you can basically prepare to deliver something, but the market is different today than it was even 18 months ago. And I think luck is the definition of when preparation meets opportunity. The opportunity in the marketplace is really different because of AI. AI is generating a huge need for data transport, and it's -- customers are grappling with the economics of cloud. How do I get my data in and out of the cloud for a reasonable cost? How do I push my data to all the different places where compute is available? And by the way, it's not necessarily available everywhere they need it. So they're trying to figure out how to deal with that. And it took us from a place where we were like, is everything going to go into the cloud, to no, things have to be on-prem at the edge and in the cloud and need management resources to be able to push the right compute workload, data workload to the right compute firm at the right time. For that, you need those compute farms to be everywhere. And I was reading in the papers and all the periodicals, this notion of power and cooling are essential. Well, so is fiber. And that's our opportunity. We have these big cloud companies, the hyperscalers coming to us and saying, we love your digital vision. This notion of capacity on demand is huge. We're all in, but you got to help us, we actually need to connect our data centers and we need to connect to all the various networks that are available to our customers so we can be there for them ubiquitously and in a proximate fashion.

So I want to come back to a number of those things you just touched on there, but can you talk about maybe the recent additions to your senior leadership team and what has led this top talent to kind of come to Lumen, how are you attracting them?

They see the same opportunity that I do, which is to disrupt in the industry, right? And disrupting in the industry is -- you just can't always get that opportunity to lead in that way. It's incredibly fulfilling. I think each of the leaders on the team, we got Satish Lakshmanan, he's our Chief Product Officer from AWS; we got Dave Ward, he's our CTO, from Cisco and Juniper Networks; we've got Kye Prigg, he comes from Rogers Communication and prior to that, Vodafone; we've got Ashley Haynes-Gaspar, she comes from Microsoft. It's a combination of tech and networking that's really a better together. Every single one of those leaders is in it to win, but also to have a legacy of I was there when we rewrote history in telco, and they're motivated by that.

And so part of that, I think, since you've kind of come on board, you've focused on culture, right? And I think -- can you maybe discuss some of this culture renovation underway at Lumen and maybe some of the different programs? And how do you think that filters into impacting the results?

Yes. I get asked this all the time, and it's so interesting because it's always where I start. I knew -- first day, I said we're going to rebuild this company from the people up, and there's a reason for that. Disruption, which I think is what we are doing to the industry is a battlefield. And it renames winners and losers. The incumbents hunker down, they protect their value props and the upstarts get excited because they stand to gain from new constructs. It's an emotional mess and it's war. And you don't send troops into war without the right tools and skills, and that's culture. That's how do we change the way we work. How do we move from -- in telco, there's a legacy of play not to lose. The industry is shrinking, right? And there are secular headwinds and you want to be last man standing, and that's very different than playing to win, which is going after growth. When you play to win, you need courage, you need a learning mindset, you need to know how to team and partner. You have to be resilient because you're going to make a ton of mistakes. And so we've rolled out company-wide training at every level to do exactly that. And it's redefining how we work in a great way. I think when you look at just a couple of things, like we've innovated 30 different new capabilities since October. And those 30 new digital capabilities, that's about the number that we had over the 5 years prior to that. And that agile way of coming together requires people to just forget the old way of thinking of play not to lose and get in the game and play to win and meet every single day to be productive, that requires skills. You need tools and skills to do that. That's why we focus on it.

You talked about some of the innovation on the cost side earlier in our discussion, but maybe think about how you're -- how Lumen is leveraging AI tools in the business to create efficiencies and improve operations. Maybe to help us think about what inning we're in, perhaps in that AI efficiency process improvement...

Well, that's a really good question. It's always tough to answer innings, right, because you can't necessarily predict the future. But there's one thing that I knew, I met Jensen Huang, and Satya continues to be a mentor of mine. And this notion of we're going to lose our jobs from AI is just in my opinion, the wrong way of thinking about it. I think the way they think about it and they've taught me to say that people lose their jobs to people and organizations who use AI. And that's why as soon as I started at Lumen, I was like, we're going to write AI into this transformation story from day 1. We partnered with Microsoft, with Google, with AWS. We partnered with Salesforce and Gainsight and ServiceNow. Some of these companies have native AI built into these enterprise applications and others have algorithms that you can weave in, whether it's in the productivity suite with Microsoft Copilot or other capabilities that you can bring to stitch together really impactful solutions. And we're seeing the fruits of those labors. There's a huge adoption curve in our development organization. We've increased our productivity. I think it was before -- on earnings, I announced it's -- within the past 60 days, we increased it by 30%. So 30% more stories inside of each agile sprint, that is a very big deal when you're talking about having to rebuild the digital platform for a company. On the worker productivity side, we're seeing about 30 minutes a day per person saved through Microsoft Copilot. So -- and we've got dozens of examples, but we are all in on it because we believe it's helping us transform the company at speed.

And you talked about Lumen's digital platforms. And on the call, you said these new profit pools and marketplaces represents the future of the company, with TAMs in the tens or hundreds of billions. Are these efforts already underway in terms of driving top line improvements for the company? And maybe help us think about where these opportunities can scale to and your confidence in that?

So Lumen Digital is basically our R&D arm that's building net new digital capabilities to transform the customer experience in networking. But I look at it as there are at least 3 places where telco ceded innovation to digital upstarts. They ceded it to tech. And it's in connectivity, security and communications or voice. And we have a right to win there because of our assets, because of our intellectual property. And with this play-to-win mindset and with this belief system that the customer experience is the product, we are now going after those markets. And just a couple of examples. Like this whole -- NaaS and ExaSwitch are virtual private fabric for customers to consume network services. Who else is doing that? Megaport and PacketFabric are 2 examples of companies that have high valuations, that are completely digital, but they don't even own the network. They provide network as a service and they lease their fiber from us. And so they can never get there from an economics perspective, but also what they can't do is they can't embed these capabilities natively into fiber. We're integrating NaaS into layers 1, 2 and 3, IP, Ethernet, waves, natively into the fiber so that we can provide a better experience out of the gate. And we have a right to win in that space. And what you're seeing is the evolution of us establishing that sort of more head out there to do exactly that. Same could be true for network security. We took Black Lotus Labs, their data algorithms and various machine learning models. And we said, hey, we're really good at identifying bad actors on the Internet. And we've done that 8x for the United States government over the past couple of months. Why don't we package up that capability in the form of a service, a digital service, and make it available to all enterprises. This is the kind of innovation that we did every day in tech that is net new for telco. And so we have a right to win in those spaces, and we're doing it and making a huge amount of progress. It's super exciting. And all of that is net new profit pools for us.

Yes. And I think another area of opportunity is custom private networks. And I think on the call, the company noted there -- you were seeing a dramatic rise in demand for some of these high-capacity, low-latency network and edge services often coming in the form of request of custom private networks. So it's not included in your guidance for this year, but how large could these opportunities become over time? And do you think you have the current product suite in place today to provide these solutions? Just help us think about maybe the long pole in the tent to determine [ scaling things up ].

Yes, for sure. So the deals are very big, they range in anything from a couple of million to hundreds of millions to -- some start with B, which is fun. I think what I'm learning because I spend a huge amount of time with these customers because I really want to make sure that we're delivering what they need, not just today, but in 5 and 10 years. And I met with the Head of Networks for a very large technology company who said, "My sole job is to make sure that the network stays ahead of the business needs. And I have the capital to make a few mistakes along the way, but I got to guess because none of us know where these AI flows are going to be, I just know they're going to be fast. They're going to be huge in terms of volume and they're going to be everywhere. So help me figure out the right way to do it." And we talked about capacity on demand. Waves on demand. That is not something that anybody in the industry can deliver today. And with NaaS and ExaSwitch, we are going to be first to market with that capability. And the deal that we are doing is a construct that takes that into consideration, which is why it's so exciting. It's not just about conduit and dark fiber, it's about differentiation with the digital platform to help that company not just consume those services at and when they need with bandwidth control, latency control in an ultra-low loss way. But to be able to package and provide their services to their customers in a way that takes advantage of that is truly defining and unique.

So I think -- you've talked about some of these maybe different areas of differentiation. But as we're thinking about just overall competitive environment for some of these next-gen services, maybe give us some color on what you're seeing in other areas by which Lumen is able to differentiate itself relative to peers?

Look, so we were born to create a NaaS platform, network-as-a-service platform. That is what we should have been doing all along, and that's why we were able to do it very, very quickly, 90 days from conception to in market. Because we have all capabilities and because we have some pretty strong digital skills, especially now with this new leadership team and we're really accelerating. But I want to go back to the customer experience. Everything traces back to that. The vision is any port, any service, anytime, anywhere, right? Right now, it takes 6 months to order a circuit with most telcos. So this notion of instantaneous gratification, which we've all come -- become accustomed to in digital era is really unique. And we had a small company that wanted to do a move over a weekend. We tried to sell them NaaS. They were like, we're not sure, we're a little uncomfortable. Well, they went with a different provider, couldn't get it up and running. They basically fired up a NaaS circuit in about 5 minutes and save the move in on Monday to have Internet. Well, now they're buying security from us. And now they're looking at other considerations because we were able to give them that defining customer experience as table stakes. That's where our R&D is going. That's how we're positioning ourselves in the marketplace. I'll tell you a story. When I first got to the company, I met with the CIO of a major bank and sat down and said, "Will you co-innovate with us, will you sit with me and my team and think through what you need?" And she was like, "I don't even know what you mean." And I said, "What do you mean?" She said, "Well, I don't co-innovate with telcos. That's not what we do." And I said, "Well, you do now because you can really influence our road map," And that's exactly what's happened.