Analysts wary after Lumen posts weak Q4 revenue, light 2022 guidance

Lumen Technologies’ revenue fell across the board in Q4 2021 and the company offered weaker than expected guidance for 2022, reinforcing analyst skepticism about its ability to achieve a stated goal of returning to revenue growth within two to three years.

Net income of $508 million in the quarter was up sharply year on year from a net loss of $2.3 billion, which was largely related to a non-cash impairment charge of $2.6 billion Lumen recorded in Q4 2020. However, consolidated revenue fell 5.4% to $4.8 billion, with Business segment sales down 4.7% to $3.5 billion and Mass Markets revenue down 7.3% to just under $1.4 billion.

Revenue fell across all of its Enterprise product categories, including Compute and Application Services, IP and Data Services, Fiber Infrastructure Services, and Voice and Other. Within Mass Markets, Consumer Broadband revenue declined 3.4% year on year to $706 million, though CFO Neel Dev noted on an earnings call fiber broadband revenue specifically grew 22%. He did not provide a breakout figure for fiber revenue.

Lumen added 29,000 Quantum Fiber customers in the quarter, up year on year from 25,000. It ended Q4 with 803,000 fiber subscribers and 2.8 million fiber enabled locations, with the latter figure up from 2.4 million. Penetration was roughly flat at 29%.

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The company previously announced a plan to expand its fiber footprint to a total of 12 million locations over the coming years. During the call, CEO Jeff Storey insisted “Quantum will help drive revenue growth and lower the operating costs for our Mass Markets segment, improving the profitability and durability of the business.”

He added “we do not expect a straight-line revenue growth, but our forward indicators provide us confidence that we can achieve our stated long-term goals. Quarterly sales were once again strong, and the funnel remains above pre-pandemic levels.”

For 2022, Lumen forecast adjusted EBITDA of $6.5 to $6.7 billion, free cash flow of $1.6 to $1.8 billion, and capital expenditures of $3.2 to $3.4 billion.

Analysis

Analysts, by and large, were not reassured. MoffettNathanson pointed out that Lumen’s 2022 EBITDA guidance was “notably shy of expectations” and said its forecast would fuel investor concerns about the company’s ability to “concurrently ramp investment, sustain the dividend, potentially repurchase stock, and keep leverage roughly unchanged.”

Looking further ahead, New Street Research’s Jonathan Chaplin noted Lumen is expected to spend somewhere around $15 billion on its Quantum Fiber expansion. While this investment will “generate an attractive return” at a 40% or higher penetration rate, he warned that “at 30% the company would likely destroy value.” Chaplin concluded “results at this stage don’t give investors confidence in the company’s ability to earn an adequate return.”

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Frank Louthan of Raymond James was more optimistic that Lumen would achieve success with its fiber build over the next five years, but pointed out “that alone will not place the top line in the black.”

“This leaves enterprise and wholesale to do the job, yet management cannot articulate what will be different about these businesses to make that happen,” he wrote. “Until management can describe what they will be doing that is different this time to turn these products into a meaningful (~$1 billion+ annually) additional revenue, we believe 2-3 years to top line growth is a stretch.”