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Lumen Technologies, Inc. (NYSE:LUMN) Morgan Stanley 2022 Technology, Media & Telecom Conference Call March 8, 2022 7:45 PM ET

Company Participants

Laurinda Pang - President Global Customer Success

Conference Call Participants

Simon Flannery - Managing Director, Morgan Stanley

Simon Flannery

All right. Good afternoon, everybody. And it's my great pleasure to welcome Laurinda Pang from Lumen today. Welcome, Laurinda. Thanks for your time today. Before we get started, please note for important disclosures, please see the Morgan Stanley research disclosure website at www.morganstanley.com/researchdisclosures. If you have any questions, please reach out to your Morgan Stanley sales representative.

Perhaps Laurinda, you could just give us your role at the company, just give us an overview. There's obviously a lot of moving parts with some of the transactions going on, so just help us to fill in the pieces there.

Laurinda Pang

Sure. So hello, everyone, I have responsibility for a couple of different aspects of the business. So I have everything international, anything that's outside of the US. I also have responsibility for our carrier relationships for the wholesale business and then finally the customer success organization, which looks after the enterprise customer relationships globally, everything from really mid-markets up through iGAM.

Question-and-Answer Session

Q - Simon Flannery

Great. So how is the, particularly, I guess, the international but the enterprise and carrier relationships impacted by the pending deals? You're obviously going to - I think Latin America is going to go and then certain of the ILAC [phonetic] markets. So what does that do in terms of your overall go to market and prepping for the kind of the new [Multiple Speakers]?

Laurinda Pang

Yeah, so to your point, we have made the announcement with regards to Latin America, we expect that transaction to close in the beginning of the third quarter of the year. So the entirety of that region will go to Stonepeak, so that's all of the physical network assets, that the subsea assets that connect the region, as well as obviously all of the peoples as part of that business. That will go as far. As the Apollo divestiture or the assets that are going to be or that are being sold to Apollo, to your point, that will impact our wholesale business a bit but it's - we haven't actually sized that piece of it. And we expect that transaction to close in the third quarter as well.

Simon Flannery

And you're presumably negotiating kind of transition agreements, so that you can still work with people need assets in Latin America?

Laurinda Pang

Without a doubt, it's really important to our overall enterprise strategy, quite honestly. So as we think about the North America enterprise, the multinationals effectively that are headquartered here or headquartered in Europe, they have aspirations where they need to get outside of their home countries. And so we think about the Latin America transaction as part of our strategy. So while we divested the physical assets, we're retaining a highly strategic relationship with the buyer, so that we can continue to leverage the region. We know the people, we know the leadership team, who by the way, will be staying in place. They're very strong, tenured, and capable people in the marketplace. And so we'll continue to leverage those relationships as well as those assets. And so, as I think about our kind of MNC strategy, it really is to enable our customers to get wherever they need in the world, whether we own those assets or not.

Simon Flannery

Great. Just one housekeeping item, I think you have a small exposure to Russia, Ukraine, can you just update us on where that is going?

Laurinda Pang

Sure. Yeah, thank you. We actually made some announcements this morning. We did take the decision to cease business in Russia and it's a very small aspect of the overall financial portfolio for Lumen. But what we were doing in Russia was, we were, again, delivering services for multinationals outside of Russia predominantly. And so we did shut down business today, so we've disconnected the network effectively. And so that's for all business - services that's in Russia. If there are Russia entities that had business with Lumen outside of the country, as long as they're not sanctioned, we will continue to provide those services. I think it's important to note that we don't have any consumer customers in Russia, so it's not a matter of us disassembling their ability to communicate or connect, right, the consumers that as we still have visibility into the market, but again, we've stopped. We're in the process of shutting everything down, but we did disconnect the network this morning.

Simon Flannery

Okay. But it sounds like the numbers are fairly small.

Laurinda Pang

Very small, very small.

Simon Flannery

So given all of that with the transactions, what are the key priorities for you and your organization for 2022?

Laurinda Pang

Well, across all of Lumen revenue growth is absolutely the top priority for us and to return the business to top line revenue growth. We think about the priorities, it is really four different buckets, if you will. The first one would be expanding our markets and what that means is really investing in growth, particularly for next gen services. So think about that, in the context of edge compute, security services, quantum cyber would, of course, be in that bucket as well, large investment case there. The second priority is around penetrating our existing markets or our existing assets. So thinking about the capital investments we've already made, and ensuring returns are happening there, but also thinking through our legacy business, and making sure that we are managing the declines in that business as effectively as we can by transitioning those customers and those products to next gen services.

Another priority for us is around operational excellence. I much prefer to call it customer experience, and customer excellence but this is really our opportunity to continue to digitally transform the operations experience inside of Lumen and what that does is it provides a much better experience to our customers ultimately. And then the fourth priority is around talent. I think in today's market, we all are very keenly focused in on making sure that we've got the right talent within the organization is becoming increasingly more difficult for I think, for any industry, given the world that we live in today.

Outside of those four priorities, I would say the separation of the two assets is incredibly important to us. We want to make sure that that both of those businesses are able to operate very effectively, day one. And so there's a tremendous amount of energy and resource that's focused in on the separation work right now.

Simon Flannery

And how are they - how are you just trying to make it as seamless as possible for your large enterprise customers?

Laurinda Pang

The separation?

Simon Flannery

Yes.

Laurinda Pang

So the - yeah, first of all, we have to put guiding principles in place. When you put the separation management office together and pull the resources from the company to focus in on separation, the first guiding principle is do no harm, and particularly around the enterprise itself. And so what we're trying to do is ensure that first of all, they understand what's happening, and they understand the timing associated with it. But as it relates to the Stonepeak or the Latin America transaction, very specifically, nothing is going to change for our customers. So, we're going to retain the account ownerships, we're going to retain the way in which they buy. They certainly can make a decision for themselves if they want to buy direct in the region at some point in time that they absolutely have that right, and we will enable them to do that. But for the most part, we're trying to make sure that we, again, do no harm to those customers.

Simon Flannery

Great. You talked about revenue growth and I know, Jeff has been quite consistent about a two to three year path to revenue growth, but the iGAM businesses are ahead of some of the mass market and other businesses. So talk to us a little bit about where we are in this transition from some of these legacy products, we hear a lot about MPLS move into SD-WAN. And I think for investors, it's a little bit hard to see exactly what the remaining exposure, how far we are through that cycle. You can see it a little bit in the sequential trends and so forth but what was the right way to think about that?

Laurinda Pang

So, a couple of years ago, we - or maybe even last year, time can fly, still are moved really quickly, I can't make a decision for myself. But recently, we made a change with regards to the segment reporting and so you do see the compute and applications category, you should look for that to grow. What's in there are things like edge compute, cloud computing, IT managed services. The second category is around IP and data services and that's where I think it becomes a little bit hard to tell what's going on because you do have MPLS in there, but you also have SD-WAN, and you have IP, both of those are growing while MPLS is shrinking. The third area of growth to look at is the fiber infrastructure line item as well.

Within MPLS, which I think is really kind of the crux of your question, Simon, we do see it declining. You can look at any IDC report out there and know that it absolutely is declining, but it's not irrelevant, it's not going away. And so what we see is that a lot of enterprise customers that have performance sensitive applications that really require a high degree of performance, they're opting to retain, maybe not all but some of their MPLS connectivity. It's important for them to have MPLS in their networking strategy. So we think about it in the terms of hybrid networking, where they'll have some broadband, they'll have some MPLS, they'll have some DIA, to enable their business. So while again, MPLS is definitely declining, it's not going away anytime soon.

Simon Flannery

Great. And can you update us on the competitive set, we had some of the cable companies here and they were talking about the Basel I opportunity to move from an SMB focus up market into enterprise, they've made some acquisitions with products like SD-WAN. So are you seeing more of cable, we had [indiscernible] yesterday. Well, what's the competitive landscape? Any big changes from your perspective?

Laurinda Pang

Not sure, I would say any changes. I mean, I think we absolutely respect our competitors. There's formidable competition out there. You have your traditional players, and then you have the, what I would call, kind of bored in the cloud, or more specialized players out there, we're competing against most of them. As it relates to the SD-WAN acquisition that was recently made, we're not seeing that in the marketplace at this point, in terms of true big changes.

Simon Flannery

Okay. I mean, COVID was quite disruptive, obviously, globally, but for carrier spending, but particularly for enterprise spending, to some extent it drove demand for voice and collaboration services, but denied decision making in other areas. So well, I guess we're through most of that now, but how would you describe the overall IT, the budgets, and the project, momentum? I think that being concerned about delayed decision making, what was the latest on that?

Laurinda Pang

Yeah, so you characterized it absolutely correctly, right, which is, it did drive demand for voice services, collaboration services, everybody went into a remote working environment, they needed those productivity tools, in order for them to continue to operate well. What it also did, though, is I think, well, it paused decision making, it also forced people to truly think about their digital transformation strategy, realizing that everything that was traditionally brick and mortar could no longer be that. So they've started to make some strategic decisions for themselves.

We see decision making, not necessarily accelerating but probably returning back to pre-COVID time, and so we're seeing in the form of increase in the enterprise funnel, as well as we had a really nice fourth quarter from the sales perspective, in the North America enterprise in particular. So I don't see the need for bandwidth and connectivity going away, it is quite the opposite. We are seeing a return for a more managed services as enterprises are making that transition in a hybrid IT environment, the need for help in that transition is real. So, really, the whole notion of consulting on their IT environment, figuring out the migration strategy, and then ultimately managing that environment for them, there's a real need out there.

Simon Flannery

Okay. Great. You talked about edge just being one of the priorities and we've seen a lot of mobile fixed convergence, you've got a partnership with T-Mobile, perhaps just give us an update on how that's working and what are the opportunities there too.

Laurinda Pang

Yeah, so the T-Mobile relationship is a really - it's a good one. They are a customer, they are a supplier, they are a partner from a go to market standpoint and now it is a relationship that's been in the making for many, many years. So we very much appreciate that partnership. We've seen some success, particularly in the public sector, and the large enterprise space to have a go to market partnership with T-Mobile.

Simon Flannery

So can you expand on that? Is that you - there's a rep from T-Mobile and a rep from Lumen going in together?

Laurinda Pang

That's right.

Simon Flannery

Okay.

Laurinda Pang

Yeah, that's exactly right. So it's - and would start at the marketing level, quite honestly, right. So, that partnership has been established and CMO to CMO, CEO to CEO relationship that has kicked that off, and then working it through down into the enterprise, into the field sales organization. Some account directors are more entrepreneurial and enterprise mind oriented than others, and those that have figured out how to leverage that relationships are very successful. And that's the challenge with any sales organization, right, is to make sure that they fully appreciate the full suite of capabilities and the partnerships that they really have at their fingertips when they go in to talk to these enterprises.

Simon Flannery

And how do you do the economics between the two companies or in a deal like that and the sort of sales incentives and things like that?

Laurinda Pang

So the sales incentives on the Lumen side, our enterprise sales folks are quoted at the very highest of levels, it's not product specific and they get paid on new sales order values. So it's absolutely in their best interest to go in and sell the biggest deals that they possibly can whether that's via a partnership or via on-net services, we don't differentiate. We will incentivize certain products, so edge is a really good example. That's something that we'll do an over the top sort of incentive to make sure that they are our focus there.

The other side of the equation, though, is the customer success organization. So while sales is incentivized to sell new business, the customer success organization is lifecycle managing that customer and that relationship and it's really interesting, because the CS person doesn't have a sales quota and it is amazing how much of a more in-depth conversation and the enterprise might be willing to share with the CS professional, and all of a sudden new opportunities arise as a result of that.

Simon Flannery

Great. And on the wholesale side, where are we on carrier consolidation churn, and Verizon was here earlier talking about building their own fiber-to-the-towers and maybe saving on access costs. Is that still a headwind for you or are you working through that?

Laurinda Pang

So yeah, I mean, yes, wholesale is definitely a headwind, we manage it for cash, for the most part. We do participate in the fiber bills themselves to enable our wireless partners, so that's the opportunity for growth in wholesale, but in mass it is a declining business, and we will manage it for cash.

Simon Flannery

Okay. And on the data center side, you've divested your data center assets but, obviously, there's the architecture of a lot of your customers networks is moving more to the cloud, so that data center connectivity becomes very important. So what are the opportunities you're seeing there?

Laurinda Pang

So we sold the physical assets but we connect, I believe, over 2000 data centers, it's incredibly important for us to have that connectivity. And we've got a substantial amount of onramps into the cloud services providers themselves. Because again, our customers need that hybrid IT environment and they need a hybrid network, in order to get there.

Simon Flannery

On the fiber, the quantum fiber program, that I think from an investor point of view is seen more as a mass market product, consumer product, but sounds like it's going to play importantly into business opportunity on your side of the equation as well.

Laurinda Pang

I agree, I think the places in which we're making the investments for quantum are urban, dense areas, and so their businesses in those same markets. So certainly mid-markets and up into large enterprise will take advantage of the quantum bills.

Simon Flannery

And so is the opportunity, it sounds like you want it to sell drive penetration on your existing assets. So presumably, you're going to be looking at where you pass the buildings with both the existing assets and the new assets. Is that in saying within half a mile, there's this much time? And I guess the question always is, what's that - even going back to the time of telecom days, I remember that that was one of their growth initiatives there. But are there specific steps that you're taking that will help realize that?

Laurinda Pang

Yeah, so on the quantum side, I think what we said is we're expecting or we anticipate getting to about 40% penetration over time. On the enterprise side, we've got about 180,000 buildings in our footprint that are on that. And so we do have very specific initiatives around penetrating those assets. And so our thought process behind that is how do we make it as simple and easy as possible for both our sales people as well as our customers. And so our operations teams have partnered with the sales organization to think through and deliver an end to end experience that's much more automated than it ever has been before. And that you can easily quote it that the equipment is there ready to go with any service that we need to sell to those customers? So, it's a focus that we have some key leaders, both on the operations and the sales side partnered up. There's a lot of reporting and program management around that. So the expectation is that we'll start to see higher penetration.

Simon Flannery

Great. And you talked about the bookings, trends being strong. Where are we on installs and supply chain and any big issues that you're seeing or using at this point?

Laurinda Pang

Yeah, those are both really big topics, themselves. So, from a supply chain standpoint, you hear it from all of our competitors and our suppliers, it's not getting better anytime soon, that's our expectation. But it is something that we're managing at this point, right.

Simon Flannery

Are there specific products that are most problematic?

Laurinda Pang

Supply chain will affect us in a lot of different areas, whether it be the infrastructure just upgrades in the network, customer equipment, quantum fiber that it could affect us anywhere. But at this point, it's something that we are managing, but it is something that we pay attention to really closely. And each of us have relationships with different suppliers and so we spend a lot of time on the phone, trying to ensure that we continue to be at the top of their list and not find ourselves back - at the back of the bus, if you will. So supply chain certainly is something that we're very focused in on and have to actively manage on a daily basis.

The other piece around installs, I would say, as you know, some of the big wins that we've gotten over the past couple of months, whether it be USDA is a big one, I know we announced publicly, there are a number of large fiber builds that we won as well, those are deployments that will take a while. So it's not your traditional roughly six months, three to six month install, they could take multiple years, in some cases, depending on the who and what services we're providing to customers. So it's probably not going to be as linear as we might have won CNET.

Simon Flannery

And I guess that's you mentioned talent, I guess that's one of the challenges is finding the people to build these networks.

Laurinda Pang

Yeah, it's definitely a challenge, right. There's a lot of people out there that are vying for the same talent. And so again, it's something that we have to actively manage ourselves. It's not like the good old days where it happened and that there was a surplus, it's something that has to be managed very carefully and closely.

Simon Flannery

Inflation certainly comes into mind with those pressures but perhaps you could just talk about the operational excellence whose, I think, margins were, I think, one of the concerns investors had coming out of the '22 guidance, and, obviously, the divestitures mean there's some legacy costs. But what are you - what do you focus on in terms of driving some cost out of the business and trying to protect the margins with inflation out there?

Laurinda Pang

Yeah, I think we're all dealing with the same inflation, right. So that's absolutely a challenge. But if you think about the year-over-year changes, as it relates to cost, there's a couple of different buckets, some of which are recurring, some of which will cease over the course of the next year or so. So, the first one is around invest for growth. We have said that we're absolutely going to invest in the growth areas, the next gen solutions, again edge, security, SASE to name a few, quantum, of course, there's OpEx associated with it. So it's not just capital investments, there's OpEx associated with those growth areas. And if we get the return that we expect to get in those growth areas, we'll continue to invest and we'll continue to see those costs, so that's what I would consider more recurring in nature.

Another bucket is the dis-synergies associated with the separation of the assets and so there are real resources that are focused in on a successful separation. And some of those costs will get back, we'll get paid back for that, but it'll be below the line. So we'll get hit from an OpEx and EBITDA standpoint, but then reimbursed to a certain degree but that'll go away, right. That'll go away probably in the next one to two years, depending on the transition services.

Simon Flannery

Both the cost and the revenues?

Laurinda Pang

Correct, yeah. And then the third area I would call out is the transformational savings, which is what you were talking about, Simon. We are very good at that. The vast majority of the cost savings have come through a lot of the digital transformation that we've been embarking on for the past number of years and a lot of that is sitting in the operations organization very specifically. And so there's opportunity costs associated with the separation of those assets. So a lot of the same people who would traditionally be focused in on transformational savings and the digital transformation in the business is focused in on the separation. So once the separation is done, we'll get back to those savings again. And so I would expect that to happen shortly after the deals actually close.

Simon Flannery

Do you have any good examples of how that can be operationalized? Is this the customers being able to order without talking to a human being or dispatching technicians or anything that are really big wins, both in terms of saving costs, but also, maybe customer SAP?

Laurinda Pang

It's all about customer experience, without a doubt. So simplifying the delivery experience itself, simplifying the service management experience. So in the service management, you asked for an example, what we're talking about is the ability for a customer to go into a portal, full visibility of their network, and to be able to triage if they have an outage, if they have an alarm of some sort to triage that network before they ever talked to a human being. And for that triage to happen electronically, and to actually provide back a full assessment of their network health before they actually even enter a trouble tickets, so that eliminates a lot of calls into call centers, it eliminates texts to our engineers on the other side, they having to do the triage themselves. And sometimes it's as simple as Mr. Customer, your router is not plugged in, we don't see the light and so that eliminates a lot of the operational hardships on people, back in the knock [phonetic].

Simon Flannery

Is there a particular timeframe we should think about for getting a lot of this done?

Laurinda Pang

Well, a lot has happened already. But I've been asked that question repeatedly today, there's more to be done. There's more opportunity there and there's a lot of - there's simple things from a process optimization standpoint and an RPA, really looking at automation around repeatable processes. How people issue credits, how people request credits, how people ask for billing dispute, help people, customers that is, looking for changing their passwords, all of that can and should be automated and that's the work that we're - the journey we're on.

Simon Flannery

Great. Well, one last one, just the infrastructure bill or infrastructure act, a lot of that's going to, presumably, be on the beyond the consumer side, but how do you see that benefiting Lumen?

Laurinda Pang

I think it's hard to tell at this point. I think it remains to be seen. We're excited for it, as a country, quite frankly, but it's hard to say at this point.

Simon Flannery

Early days, okay.

Laurinda Pang

Yeah.

Simon Flannery

Great. Laurinda, thank you so much for your time today. Appreciate it.

Laurinda Pang

Thanks, Simon. Appreciate it. Okay. Thanks.

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