Yahoo Finance Lumen Technologies, Inc. (NYSE:LUMN) Q1 2024 Earnings Call Transcript
Lumen Technologies, Inc. (NYSE:LUMN) Q1 2024 Earnings Call Transcript April 30, 2024
Lumen Technologies, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Greetings, and welcome to Lumen Technologies First Quarter 2024 Earnings Call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. [Operator Instructions] And as a reminder, this conference is being recorded Tuesday, April 30, 2024. I would now like to turn the conference over to Matthew Debnam, Director, Investor Relations. Matthew, please go ahead.
Matthew Debnam: Good afternoon, everyone, and thank you for joining Lumen Technologies first quarter 2024 earnings call. On the call today are Kate Johnson, President and Chief Executive Officer; Chris Stansbury, Executive Vice President and Chief Financial Officer; and Jim Breen, Senior Vice President, Investor Relations. Before we begin, I need to call your attention to our Safe Harbor statement on Slide 1 of our first quarter 2024 presentation, which notes that this conference call may include forward-looking statements subject to certain risks and uncertainties. All forward-looking statements should be considered in conjunction with the cautionary statements and the risk factors in our SEC filings. We will be referring to certain non-GAAP financial measures reconciled to the most comparable GAAP measures, which can be found in our earnings press release.
In addition, certain metrics discussed today exclude costs for special items as detailed in our earnings materials, which can be found on our Investor Relations section of the Lumen website. With that, I'll turn the call over to Kate.
Kate Johnson: Good afternoon, everyone and thanks for joining us. I'm excited to have a chance to share Lumen's turnaround progress with all of you. As you know, our strategy is focused on empowering enterprises with next-gen on demand connectivity solutions powered by our fiber network. Effectively, we're cloudifying telecom to meet our customers need for blazing fast speed, ultra-low latency and dynamic capacity to support the immense expansion in data workloads, all in a secure and hybrid world. But before I get into the transformation update, I want to address our 2024 first quarter financial performance. As we shared last quarter, the debt restructuring in the second half of 2023 created uncertainty for our customers and partners, which translated into softer sales during that period.
As a result, we saw weaker 2024 Q1 revenue and EBITDA results. Now, despite these pressures, we did maintain sequential and year-over-year revenue growth in Q1 within our North America enterprise grow product portfolio, and we also made material traction in driving customer adoption of our flagship digital offering, network as a service or Lumen NaaS, both important components of our turnaround story. Now that we've successfully executed the TSA agreement with a broad group of our creditors, our balance sheet is significantly stronger. When we unveiled our transformation plans at our mid-2023 Investor Day, it would have been hard to imagine the level of financial flexibility we would achieve through this agreement that addressed over $15 billion of our debt, extending over $10 billion of our maturities due over the next four years in 2029 (ph) and beyond, while securing access to over $2.3 billion in new liquidity.
We're pleased with the runway this deal created for our transformation, and you can expect us to continue to find ways to strengthen our balance sheet and return value to shareholders. Additionally, we're continuing to reshape and right-size our business through automation and AI, continuously redeploying resources to the highest impact growth priorities and taking cost out in the form of people and vendor spend reductions. As such, we materially reduced our cost base in early Q2. These actions were a direct result of our transformation programs and were already contemplated in our 2024 EBITDA guidance. Okay. Moving on to the transformation update. I'll start with our enterprise business, focused on driving commercial excellence. This is about better sales execution, securing the base of traditional telecom customers to reduce churn, and delighting our customers with quick, secure and effortless digital experiences.
We had excellent sales performance in the first quarter, with North American enterprise sales up 27% year-over-year, our strongest first quarter performance in some time. Additionally, new logo sales increased by 21% and total contract value for all sales nearly doubled year-over-year. A great example is within our public sector business, where we recently won a $73 million contract to transform the U.S. Government Accountability Office's network, data, voice and video connectivity so the agency can better serve Congress and the American people. Overall, we're excited by these significantly improved sales results, as they should be a leading indicator for improved revenue performance. I also want to note that we're seeing a dramatic rise in demand for high capacity, low latency network and edge services, often requested in the form of custom private networks.
We believe this is driven by the advent of GenAI and the complexity of hybrid multi-cloud architectures. We've established a dedicated team focused on capturing this demand, and we are confident this will be an important tailwind for our turnaround. It is a spike in demand, perhaps a once in a lifetime kind of opportunity to leverage what we do best at Lumen. Okay. On to securing the base, a crucial program that is all about five key levers, including installs, renewals, migrations, usage and disconnects. While our Q1 sequential install trends were affected by the TSA related uncertainty that I mentioned earlier, we did see strong results in the other secure the base levers. Specifically, renewals were up 5%, disconnects improved by nearly 5%, and migrations were up double-digit percentages benefiting from a large deal.
If we double click on our migration performance, we see signs of better execution closing deals with compelling economics as customers transition from legacy services to next-gen solutions in our grow product portfolio. We are focused on securing the base because when we transition customers from legacy systems like TDM and voice to digital first solutions like NaaS and IP, we're not only supporting our customers growth, but also our own. That said, this part of our transformation is the most challenging because of well-known secular headwinds, as well as complex and unpredictable pricing dynamics across on net and off net peering partnerships. Negative growth in these areas masks the progress we are making in selling and delivering the more modern capabilities in our portfolio.
As such, we will not only continue to adjust our resourcing here to ensure the highest returns on our transformation program spend, but we will also make those investments and results more transparent to you. A foundational part of our pivot to growth involves a relentless focus on enhancing customer experience. We're delighting customers with process optimization and a truly digital platform, giving them better visibility to their orders with real-time status updates. And as a result, we're meeting and exceeding customer expectations more consistently. In the first quarter, I'm super excited to tell you that every one of our customer segments showed dramatic year-over-year improvements across all products and customer satisfaction as measured by net promoter scores or NPS.
Specifically, large enterprise NPS rose by 24%, wholesale NPS rose by 35 points, and mid-markets and public sector NPS' rose by more than 50 points each. We look at these improvements in customer experience as the cornerstone for continued momentum in sales, churn reduction and ultimately revenue growth. Alongside commercial excellence, we're driving disruption and building our future by delivering next-gen networking capabilities to our customers. Our Lumen digital team has been hard at work empowering enterprise customers with on-demand access to cloud, with direct control of network bandwidth, connectivity and latency paths. Lumen is enabling customers to design, price, order and consume networking and security services online with a truly digital, low friction customer experience.
It all started with Lumen NaaS, which we launched in Q3 of 2023, and since then the team has delivered 14 new NaaS innovations, including native DDoS and automated transport in a family of secure, composable services that span our network and edge locations. Through Q1, we saw diversity in NaaS adoption with activated customers across over 20 industries and the customer feedback is fantastic. For example, Avaya is using Lumen's NaaS to establish internet connectivity in minutes rather than the traditional service model taking weeks, improving their operational agility. Norwegian Cruise Lines recently shared that with Lumens NaaS, they've reduced the time to establish internet connectivity from weeks to minutes, which is great for their customer experience.
And speaking of delighting customers, Arena Operating Company delighted fans with a bump in bandwidth while hosting the Florida Panthers NHL playoff game thanks to Lumen NaaS. All right. Let's talk about ExaSwitch. We created this award winning high capacity optical switching platform to meet the demands of hyperscaler peering, while also functioning as a high capacity on ramp to the public cloud for enterprises. Now, the need to reimagine multi-cloud connectivity has never been more important as AI, autonomous systems and exploding data growth redefine enterprise networking and security needs, every millisecond counts. That's why ExaSwitch use cases are extending far beyond hyperscaler peering into things like AI exchanges, because it's the only optical switching platform of its kind that can rise to today's performance and security challenges.
Finally, we're taking a major step forward in security innovation by launching an exciting new subscription service that leverages patented AI powered IP based threat detection and prevention capabilities from Lumen's very own Black Lotus Labs. In the second half of 2024, this security service called Lumen Defender will be broadly available on our NaaS and DIA connections, enabling enterprise customers to have more secure connectivity as we help identify and block threats at the network level. Let's look at our mass markets business now. We continue to execute our strategy to deploy capital where we see the greatest opportunities for growth, and we're on track to deliver more than 500,000 new fiber enabled locations this year, and we're optimizing our pre-sales motions to drive penetration into those assets as quickly as possible.
Our strong fiber sales momentum from late last year continued, highlighted by our Q1 quarterly fiber net adds being the best we've ever reported. This was achieved with our sales, marketing and retention efforts, including improved results converting existing copper customers to our best in class Quantum Fiber product. And look, it's not me saying it's best in class, it's our customers. They're saying it too. We're continuing to deliver amazing net promoter scores with Quantum Fiber hitting positive 67 in Q1, once again rising sequentially and year-over-year. Finally, I'll wrap with a comment on people and culture. I said that we will rebuild Lumen from the people up and this focus on culture is enabling our transformation and it's creating a company that continues to get external recognition.
In fact, we've won 11 awards for superior culture in the past few months alone. More importantly, it helps us continue to attract amazing talent. On our last earnings call, I spoke about our key innovation hires, including Satish Lakshmanan as Chief Product Officer; and Dave Ward as our new Chief Technology Officer. And since that time, we've made three important talent additions to our team. Jim Breen, our new SVP of Investor Relations is with us on this call and as many of you know, he brings more than 25 years of tech and telecom equity research experience and will lead our efforts to clearly communicate our transformation progress to all of you. Ryan Asdourian, our new EVP and Chief Marketing Officer, joins us from Microsoft and will play a critical role in raising visibility around our game changing innovations as we disrupt traditional telecom.
And finally, Dianca Lanier, a tech company CEO with an amazing track in tech, military leadership, retail and logistics, joined our Board of Directors. The team is gelling. We're executing really well and our customers are seeing our progress. I'm confident that Lumen's future is very bright. And with that, I'm going to turn the call over to Chris.
Chris Stansbury: Thanks, Kate and good afternoon, everyone. In the first quarter, we took important steps towards strengthening our balance sheet and reshaping the business. As we position Lumen towards driving for long-term growth. As expected, our first quarter revenue and EBITDA performance was affected by TSA related customer uncertainty, as well as some seasonality factors discussed in our last earnings call. While we have more hard work ahead of us to improve trends, we're demonstrating our ability to execute. A few key highlights. First, as Kate mentioned, we successfully completed the TSA in the first quarter, which creates additional runway for our pivot to growth in terms of rephasing our debt maturities and providing more than $2.3 billion in new liquidity.
The transaction included high participation from creditors across our capital structure, underscoring their broad support in our turnaround strategy, and will continue to strengthen our balance sheet as we move forward. As planned last week, we took material cost out actions as we continue to improve processes and shape shift our organization to support our strategy. These savings were included in our full year 2024 guidance. Going forward, we expect to realize additional cost takeout opportunities as we further reshape our organizational structure, rationalize third-party spend, drive increased adoption of AI to automate manual processes and shut down non-core legacy products. Finally, and most importantly, our sales growth engines within our business and mass market segments accelerated in the first quarter as we saw a strong improvement in performance within both North American enterprise sales with a 27% year-over-year growth and quantum fiber broadband net additions.
All of this gives us confidence in our 2024 guidance, with EBITDA expected to improve from a low point in the first quarter. Before covering our first quarter results in more detail, I'd like to first discuss several changes impacting our 2024 revenue reporting. As we discussed last quarter, we're breaking out a new international and other channel within our business segment which includes all international and CDN revenue. We're also providing updated business product category reporting to move CDN from harvest to other within the international and other channel. Additionally, with the sale of our EMEA business and select CDN contracts completed in the fourth quarter of 2023, we will provide the historical contributions of these sales as well as the associated commercial agreement impacts within our financial trending schedules.
Please keep in mind, when these impacts are excluded from results, our sequential and year-over-year growth rates are substantially better than the reported rates. Finally, related to our annual customer realignment process, we moved a small amount of revenue from our mass market segment to our business segment within the mid-market enterprise channel, and historical revenue has been reclassified into our financial trending schedules to reflect this change. Let's move to the discussion of financial summary for the first quarter. On a year-over-year basis, total reported revenue declined 12% to $3.29 billion, approximately 34% of the decline was due to the impact of divestitures, commercial agreements and CDN. Business segment revenue declined 12.7% to $2.591 billion, and approximately 41% of that decline was due to the impact of divestitures, commercial agreements and CDN.
Mass market segment revenue declined 9.2% to $699 million. Adjusted EBITDA was $977 million in the first quarter with a 29.7% margin. Free cash flow was $518 million in the first quarter. Next, I'll review our detailed revenue results for the quarter on a year-over-year basis. Within our North America Enterprise channels, which is our business segment, excluding wholesale, international and other, revenue declined 5.5%. As we mentioned last quarter, we had a one-time public sector revenue benefit in the fourth quarter within our other product group and this did not recur in the first quarter. Additionally, as I mentioned earlier, the customer uncertainty related to the TSA through the second half of '23 and early this year had a lagging effect on revenue trends in the first quarter.
These pressures were fully contemplated in our 2024 guidance that we provided in early February and are expected to gradually abate over the coming quarters. We continue to expect public sector to be the first channel to pivot to sustainable growth later this year, followed by mid-markets and then large enterprise. Overall North America business declined 7.3%. Large enterprise revenue declined 5.8% in the first quarter within large enterprise. Our grow revenue increased 1.4% year-over-year and this growth was offset by other product revenue as well as continued declines in nurture and harvest product revenue. We expect continued variability in trends as we drive towards overall stabilization. Mid-markets revenue declined 7.1% year-over-year.
Continued strength in IP and enterprise broadband within grow product revenue was offset by lower VPN and voice, which contributed to the declines in our nurture and harvest products. Public sector revenue declined 2.8%, influenced primarily by declines in nurture and harvest which more than offset growth within our grow and other product revenue. As Kate mentioned, we continue to see traction with large bookings in this space which take time to ramp to revenue and these wins give us continued confidence, the public sector will be the first sales channel to return to sustainable growth this year. Wholesale revenue declined 11.3% year-over-year. The harvest portion of the wholesale portfolio, which is comprised of products like TDM, voice and private line saw revenue contract by 17.2% year-over-year in the first quarter.
This is primarily driven by telco partners that are shedding legacy services. Our harvest product revenue will likely continue to decline over time and is an area that we will manage for cash. International and other revenue declined 65.2%, driven primarily by the divestiture of our EMEA business and the sale of select CDN contracts in the fourth quarter of last year. Moving to our business product life cycle reporting. I'll reference the results based on our North America enterprise channels, which represent our core strategic revenue category. As Kate shared, we maintained higher growth products revenue both year-over-year and sequentially in the first quarter despite the TSA related headwinds. The 3.3% year-over-year improvement was driven by strength in IP and enterprise broadband across all channels as well as dark fiber and edge fabric growth, primarily within large enterprise.
While results can vary in any quarter, we expect sustained strength in the grow product revenue as we execute on our core turnaround. Grow represented approximately 43% of our North America enterprise revenue and for our total business segment carried an approximate 81% direct margin this quarter. Within nurture and harvest, we continue to see expect – to expect headwinds in these markets declining categories. However, we continue to take proactive steps to migrate customers to newer technologies and these actions improve our customers experience and provide an uplift in customer lifetime value for Lumen. Additionally, we will continue to pursue opportunities for cost optimization when we help customers migrate from off net legacy and TDM based services on to Lumen's network.
Nurture products revenue declined 13.3% year-over-year, with VPN and Ethernet services driving their performance. Nurture represents about 31% of our North America Enterprise revenue and for our total business segment carried an approximate 67% direct margin this quarter. Harvest products revenue declined 11.9% year-over-year and continues to be negatively impacted by declines in TDM based voice and private line. Harvest represented less than 17% of our North America enterprise revenue in the first quarter, an improvement of approximately 120 basis points year-over-year. For our total business segment, it carried an approximate 78% direct margin this quarter. Other products revenue declined 1.8%. Our other product revenue tends to experience fluctuations due to the variable nature of these products.
Now moving on to mass markets. Our fiber broadband revenue grew 11.8% and represented approximately 35% of mass markets broadband revenue. Also note that our exposure to legacy voice and other services revenue improved by approximately 170 basis points year-over-year. During the quarter, fiber broadband enabled location adds were 129,000, bringing our total to approximately 3.8 million, as of March 31 and pacing towards our targeted annual 500,000 build target this year. During the quarter, we added 36,000 quantum fiber customers, which is our best fiber net add quarter reported to date and this brings our total to 952,000. Fiber ARPU was flat sequentially and increased year-over-year to approximately $61 in the first quarter. At the end of the first quarter, our penetration of legacy copper broadband was less than 10% and our quantum fiber penetration stood at approximately 25%.
As we look ahead, we will continue our market-by-market assessment of the mass markets business as we explore a range of strategic options to maximize its value. Those options include potential joint ventures and wholesaling arrangements to improve its EBITDA contribution and asset backed securitization and future divestitures to generate incremental cash. Now turning to adjusted EBITDA. For the first quarter of 2024, adjusted EBITDA was $977 million compared to $1.251 billion in the year ago quarter. The first quarter of this year included a net headwind of $43 million related to the divested EMEA business and that benefit of $2 million from divestiture related post-closing commercial agreements and a net headwind of $18 million from the sale of select CDN contracts.
These items represent approximately 22% of the year-over-year decline. Due to expected revenue benefits from our strong first quarter sales bookings and previously won large deals, as well as efficiency improvements from our second quarter and ongoing cost actions and overall margin management, we expect the first quarter to be the low point for EBITDA in 2024. Special items impacting adjusted EBITDA this quarter totaled $170 million, reflecting expected charges related to the negotiation and execution of our TSA agreement. For the first quarter of 2024, our adjusted EBITDA margin was 29.7%. Capital expenditures for the first quarter of 2024 were $713 million. For free cash flow $518 million was generated in the first quarter and this included an expected tax refund of approximately $700 million.
Importantly, we're leaning into our network investments to support the rapid growth in demand our customers are facing and remain confident in our free cash flow guidance. Moving on to our financial outlook, we're reiterating all of our 2024 full year guidance metrics. And with that, we're ready for your questions.
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