Lumen beat expectations in the fourth quarter of 2023, deploying fiber to 126,000 new locations and surpassing Wall Street’s financial estimates. This week CEO Kate Johnson also suggested strategic shifts in its business segment could bring Lumen's revenue back to growth.
The company brought its losses down to $1.99 billion in the fourth quarter of 2023, from a $3.07 billion loss in the prior year quarter. Its stock jumped as high as 8% today after announcing earnings for the quarter and full year.
Fourth-quarter fiber deployments saw a small decline from the previous quarter's 141,000 passings, but still fared better than expectations (113,000), New Street Research's Jonathan Chaplin said in a note. Lumen executives reiterated a goal of around 500,000 new fiber locations in 2024, with Chaplin estimating heaviest deployments in the middle two quarters.
But still facing over $19 billion in debt, the company isn’t out of hot water quite yet.
Johnson, who came to the company early last year with a plan to return the business to growth by 2025, has pushed a strategy based on strengthening its balance sheet and reevaluating core businesses like its Quantum Fiber and business segment.
Lumen’s net fiber adds were still slightly below expectations in 2023, and penetration has continued to decline. However, Johnson said that December saw record sales at a pace that continued into January, leading New Street Research to project "another sequential improvement in 1Q24."
Yet, with only 3.7 million fiber locations passed so far, Lumen's long-term fiber target of 8 to 10 million locations could be unrealistic, warned Chaplin. It will take a decade to get there at its current build pace, and the company's markets are being "targeted by overbuilders."
Along with other analysts, New Street Research has suggested that considering Lumen's capital constraints, its Quantum Fiber assets might be better off in someone else's hands.
Lumen continues to see DSL losses exceeding fiber adds by 4-5x every quarter. "With just over 1.8 million DSL subscribers still remaining at Lumen and with no sign of an acceleration in fiber adds, we expect Cable to be a net beneficiary of Lumen losses, at least for the foreseeable future," wrote Chaplin.
Business segment could bring Lumen back to growth
Speaking to investors this week, Johnson touted Lumen’s business wireline segment. She noted that the segment outperformed competitors' in Q4, with a revenue decline of only 3.5% year-over-year, compared to declines of 8% to 10% for two other unnamed legacy telco companies.
“While our competitors harvest their business wireline segments for cash, Lumen is building a fully digital platform to deliver important new capabilities to these customers,” said Johnson, specifically pointing to its Network-as-a-Service (NaaS) and ExaSwitch products introduced last year.
In 2023, Lumen tailored its go-to-market approach for each customer group within the segment, which Johnson claimed is driving better sales execution. Within its North America enterprise business, Lumen added over 3,000 customers and increased new logo sales by 13% sequentially in Q4. In the public sector segment, Lumen saw double-digit growth quarter-over-quarter and year-over-year in Q4, selling 29% more growth products to existing customers and increasing seller productivity by 18% for the full year.
“With this momentum, we expect this segment to be the first to bend the revenue curve back to growth, and we think bid market segment will follow suit,” said Johnson.
Securing its customer base “is the most challenging part of executing Lumen's turnaround for sure,” she added, but progress is evident particularly in mid-markets and large enterprises. Installations increased by 13%, migrations by 4%, renewals by 50% and Q4 usage by 3%. Nonetheless, there still room for improvement, which the company will pursue by leveraging data analytics and AI to tailor actions to individual customers' needs.
Fourth quarter total revenue declined 7.4% year-over-year to $3.5 billion. Approximately 39% of the decline was due to the impact of divestitures, commercial agreements and content delivery networks (CDN), Lumen executives claimed.
Revenue declined 6% year-over-year. But the company achieved significant progress on its strategic objectives outlined for 2023, meeting its targets for both EBITDA and free cash flow.
Adjusted EBITDA amounted to $1.1 billion, representing a margin of 31.2%. This performance was somewhat hindered by a net headwind of $13 million attributable to the divested EMEA business and $16 million from the sale of select CDN contracts. Adjusted EBITDA for 2024 is projected to range between $4.1 billion and $4.3 billion.
Capital expenditures for the fourth quarter of 2023 totaled $821 million, compared to $833 million in the same period of the previous year.
In January, Lumen reached an agreement on an amended transaction support agreement (TSA) with a group of creditors to extend its debt maturities, addressing approximately $9 billion of outstanding indebtedness. The amended agreement extends debt maturities to 2029, provides $1.33 billion of new money and grants access to a new approximately $1 billion.
Lumen CFO Chris Stansbury said the agreement means the company’s capital structure “is no longer a limiting factor in our transformation.”