Lumen Technologies, Inc. (NYSE:LUMN ) 8th Annual Cowen Infrastructure Summit Conference August 9, 2022 6:55 PM ET

Shaun Andrews - EVP and Chief Marketing Officer

Greg Williams - Cowen and Company

All right. Let's get started. Good afternoon. Welcome to our afternoon sessions of our 8th Annual Cowen Infrastructure Summit. My name is Greg Williams. I cover the telco and comm infra space here at Cowen. I'm joined today by Shaun Andrews, the EVP and Chief Marketing Officer at Lumen. Shaun, thanks for coming.

For those in the audience and listening to the webcast, you might not necessarily know your roles. Can you just give a brief introduction of what you're doing at Lumen and what are you spending most of your time on these days?

I like that you call it roles. It feels like roles. It's a role, I'm Chief Marketing Officer. I've got product management, the traditional marketing things, and then I'm also accountable for the digital experience, which is increasingly going part of my day. So in thirds.

Yes, I would say that it used to be a little less on the marketing, but as we're kind of driving more towards digital e-commerce, that marketing piece is becoming more and more larger part of my day.

Right. And I wanted to talk about some issues from the earnings last week. I mean we saw, throughout earnings season, accelerated the weakness in business wireline really across all the large carriers. How would you characterize the accelerated secular weakness? AT&T was saying [MPLS'] attrition is now taking its toll in a big way. And what is Lumen experiencing? What's your ways to mitigate some of those accelerated [indiscernible]?

Yes. I mean I wouldn't say -- say you saw it in all the big carriers. We had pretty good revenue trends in all of our sales segments in enterprise. And we're seeing that the how is lining up with the what. Like we've always liked our reliance on fiber and the belief that fiber infrastructure was going to continue to play a big role in the enterprise, and it is, and we're starting to execute against it. So we're seeing those trends look a little differently than some of the others reported.

Right. It's interesting. I mean I know it's hard for you to comment on what they're doing, but do you think maybe if they're just distracted on other things, it's 5G, you're spinning off Warner, et cetera, and you're just more focused on it?

Okay. Good enough. And how about bookings? I mean activity has generally been picking up. Management noted you still have these extended sales cycles given the complex deals. Can you just give us an update on the pipeline and what we're starting to see -- are we going to see some top line acceleration?

Yes. I don't think we're seeing extended sales cycles. Are you referring to the question that Jeff touched on with the sales process a little bit?

So it's not -- what we're not seeing is customers with uncertainty or the sales process extending. So if you think about it, we sit down, we talk about your business needs then it jumps into something about applications and data, and we end up talking about a solution and technology and getting them to say, yes, it's Lumen. That process is the same, that timing feels the same. The very last moment, before the saleswoman slaps 5 of their boss and brings the paperwork home, that piece feels a little more thoughtful.

So whereas before there was maybe 1 or 2 people who had to bless it and sign it, that last little 2% of it, that feels a little more thoughtful from the customer, and we've noticed that since the economy started to change.

Interesting. And what's the essence of that extra deliberation you think?

I mean the first month it happens, it's kind of a bummer because those roll into the next month. After that, it's a repeated game, and it all kind of honestly comes out in the wash. We're not seeing any increased cancellations. So financially, there's not an impact, but it's just we -- I work for an engineer, we measure the hell out of everything. So we measure that, too.

Right. And what verticals are you seeing the most promising strength right now? And maybe which verticals are still hesitant?

Definitely, retail, manufacturing and logistics. We're seeing the most strength in the edge computing space. They all feel similar oddly enough in how we interact with them in edge computing. Lots of success in public sector. We're a share taker there. So that's a nice place to be. And then we're starting to see some positive signs with our sales momentum in mid-market. That was a frustrating place for us, and we're starting to see some changes there.

Also, hopefully seeing a little -- better trends from an economy perspective for them and they're buying behaviors. Probably too early to call the trend, but that's optimistic.

In the economy and the mid-market, you said?

And going back to those stronger verticals like retail manufacturing, what sort of use cases are they using for the edge solutions? So maybe manufacturing, IoT and just...

Yes, it's IoT. So from where I sit, which is not in with the customer every single day, but they all are in a big box. They've got robots moving around touching things, and they have IoT applications, whether it's AI, ML, facial recognition, some sort of security application, and they all have tons of data and very low latency requirements because of those things moving around. So they're the ones that are moving from premises-based solutions to our edge solutions. That's where we've seen the fastest uptick on the edge.

Got it. It sounds like things are on the upswing for you guys. But of course, now we have this sort of looming recessionary pressures. And I'm just trying to understand, how would a recession impact your businesses? Which segments would be more vulnerable as I think of large enterprise, IGAM? It sounds like mid-markets are actually moving decently well.

Yes. I mean I don't have a good crystal ball for how that may all play out. I watch CNBC and I can't even figure out if we actually are in a recession or one's coming, but we're hedged. I mean we're across all of them, right? And we're relatively well weighted across all of them. I will say that in COVID, we saw a delay, right, but we also saw just the importance of networking, connectivity applications and data. And it is critical like space and power and I would assume that we'd see the same benefit through a recession if we do see one.

And speaking of macro stuff, I mean, how are the impacts inflation affecting your company and then pricing and customers?

Not seeing any impacts on customers from like a payment perspective or a bad debt perspective, if that's what you're getting at. From a pricing perspective, we definitely take price where we can, and we'll continue to do so.

Do you need to? Is your cost structure vulnerable to inflation?

I mean, we got super healthy margins, right? You can see our margins, every dollar goes to the bottom line in a pretty good manner. So it's not so much as a need to as they want to, right? So if you've got elasticity on your side and you can take some price, we take price.

Can you just generally talk about the pricing environment? It's sort of a loaded question. But like when a customer renews the contract, how often do they come in and look for a reduced bill? Or does it stay the same? Or do you offer more solutions upon renewal and it sort of goes up? I'm just trying to understand the pricing [environment].

No, that's like a huge part of my job. When we do it well, it's the latter. It's, hey, [Ms. Customer], we know you're changing your applications, you're moving to ServiceNow and you acquired this company, let's move you from this technology to this new go-forward technology and let's put you on a new agreement that's a win-win for everybody, and we steal share from our competitors and sell them design and consult. That's when it's good.

Are there use cases in times where someone buys a speed and a feed and a widget from Cleveland to Milwaukee, and when the contract is up, we renew it at a lower price? Yes. But everybody is in a technology transition so the opportunity is there to do it right, and it's just up to us to execute.

All right. And then another macro concern is supply and labor bottlenecks. Are there -- maybe let's talk first about equipment and supply. Any bottlenecks you're seeing in terms of customer installs or any other issues in that matter?

I mean it's still there. I wouldn't call it a bottleneck. It's still there. We're still managing through it. It's better. It's not so much better for so long that it feels like it's behind us forever. We're still watching it, managing through it, but it's definitely better. We -- in all cases, we're a pretty large customer, and our partners and vendors know that. And they know we've got a long memory. So they tend to treat us right. Some are better than others. Some are more creative and transparent. But we're managing through it pretty well.

So the vendors will prioritize you being a top customer?

And then how about on the labor side. With the great resignation and getting labor and contractors and even like putting fiber into a building, you're competing with a lot of other companies even fiber-to-the-home contractors, what's the labor environment looking like?

The labor environment is still tough. I think it's a little better than it was 4 to 6 months ago, still seeing a lot of competition in security and up the stack with applications, with our managed services people, professional services. So those are still really tight labor markets for those highly skilled kind of tip-of-the-spear conversations. But besides that, it feels a little more comfortable.

And when you talk about competition, not on the labor [side], but just competition in general, who's generally your top competition? Help characterize maybe AT&T and Verizon at this point. Again, they're struggling a little bit on the business wireline? Who are you competing against the RFP table?

So if you zoom out far enough, it's AT&T and Verizon. But that's not how I go through my day. I mean the way we think about it is look at each use case, look at each niche market and who's the best in breed there, who's driving the best feature functionality, competitive economics and the best experience. And if we can beat that best-in-breed within that niche, right, then when you roll all those niche use cases in different solution areas up, that's what manifests us into a place where we can outperform AT&T and Verizon.

And do you see cable at all? I mean it sounds like mostly just downstream in the very small businesses still?

Yes, it feels like the constant answer there is they're starting lower and moving up, and we were starting higher up and moving down. But I haven't seen them move up from where they've been over the last few years.

Okay. And then on earnings, very helpful disclosures on a new way of looking at things, growth and nurture other legacy buckets. I'm just curious, it's good for us to kind of see the algebra of when it can power...

How we're going to grow.

Yes, how you're going to grow and when you can see those long-awaited revenue inflections. How are you positioning the sales force in the company with that in mind and thinking about the revenue inflection and, subsequently, the EBITDA inflection?

Yes. So if you move products into the different chunks of the life cycle like we highlighted, it becomes natural to then think differently about training salespeople more heavily weighted towards the growth side of the house, right; adjusting sales compensation so that they're more heavily incented to lean in on SASE and unified communications and security and really leaning into those growth markets, edge computing; thinking about how we manage and hold product managers accountable. If you have a product -- a set of products that are in the harvest stage at more near the end of the life cycle, let's really hold those people accountable for words like cash flow and EBITDA and margin, and make sure that they're spinning enough of that up to drive and reinvest in the growth segments.

Right. So you highlighted a couple of solutions like SASE, UCaaS, edge. And in the past, you talked about adaptive networking. So can you talk about which ones of these are showing the most promise? And how do you go when you go in as a full solution set and sell these as well on top of that? Just describe, I guess, the growth trajectory for these and which ones are showing the most promise.

Yes. They're -- all of those -- I mean, that's why I listed them, right, because those are all the ones that are doing well. I'm very excited about the progress we've got relative to the market growth in SD-WAN and transitioning that into a more broad and comprehensive SASE solution. You'll see quite a bit from us come out over the next couple of months in a differentiated manner there. Unified communications continues to be strong, wrapping that with SIP Trunking and managed services and security. We continue to be very happy with the progress against our business plans with edge computing. So all those that you mentioned are doing well.

Right. And edge, you already mentioned a couple of use cases of possible manufacturing IoT. I think that seems like obviously really compelling. But the ramp just seemed to be a little slower than perhaps initial expectations, but I guess we're starting to really see traction now. When does it really start to move the needle?

So I mean I wouldn't be here if the ramp wasn't doing well. Back in 2020 when we started the edge computing investment, the market didn't know where edge was going, where it was going to come from and just how viable it was. The guesstimates of where we were headed were all over the place. We've been doing really well against the business plan within edge computing. We've built out to over 97% of the United States with 5 milliseconds or less.

And as IoT and data and latency continue to become more and more important, we're going to see more and more success there. As Chris becomes more and more transparent with those different buckets, I think that you'll see edge play a large role in that conversation.

And you have all these conversations. So you have probably deeper knowledge -- a lot of folks about the use cases that are most promising. You said a little bit about retail and manufacturing, but any more specific -- like what are you most excited about in terms of edge use cases that could really take off and move the needle for you?

I mean the ones -- I mentioned within retail, manufacturing and logistics, that's for sure. Within there, certainly, AI and ML both have massive data needs and latency is super important, and those are here now. We're seeing growing use cases within health care and finance. And then the other one that we're seeing a ton of success in edge computing from and it's partially because that part of the market is taking off, but we also have really strong latency relationships there toward the CDN side of the business, is gaming. So gaming is going really quick too.

You mentioned health care. What's the specific use case that helped in this low latency? I'm just curious.

A lot of it is, if you just think about the applications that they're running and if you're a woman running a string of health care hospitals, and you've got different applications, you've got Netflix for your patients, but then you've also got remote surgery or robotic surgery, right, they actually need some help carving those applications of treating them differently. And then the latter part of that conversation definitely needs a low latency.

Right. So bifurcating mission-critical apps versus latency [indiscernible] apps?

Okay. Got it. And then in finance, just curious one too. Is this like high-frequency trading or...

High-frequency trading, that's kind of always been there. They're just more interested in really strong infrastructure with crazy security. That really hasn't changed. Decentralized finance, leveraging Ethereum or some of those other alternative currencies is still growing pretty well. They have tons of need for compute storage and low latency.

And any updates you've [indiscernible] on the fiber-to-the-home? And you're in charge of marketing for that as well, what's the go-to-market strategy once you light up a neighborhood and tell us about the traction there?

I mean yes, so I partner closely with our President of Mass Markets, Maxine, and she's leaning in on the customer experience she provides. The NPS scores that we have with Quantum Fiber are through the roof and where we deploy and put Quantum Fiber in with the new Quantum Fiber experience, the NPS resonates and the penetration is coming through.

Right. So when you put your marketing hat on, the NPS is making your job easy, but of course, you're a product manager as well. So you're the one responsible for automation, digitalization, customer care and making sure that they [get to see] that experience?

Yes. And the partner closing with IT and really most of the heavy lift there is getting the locations passed. So there's a huge focus on getting to the million locations passed by the end of the year. We've made really good progress in the last couple of quarters. I think we got over 350,000 locations passed, put through the system. Our pace has more than doubled in the last couple of quarters. So that's a big focus because we've already proven out that the experience, the product, the digital experience, the NPS, they're all there when we put Quantum Fiber in front of the customer. Now it's just increasing that opportunity and getting more out there.

Right. So I guess you sort of already answered this rapid pace, but clearly no supply chain or labor issues there.

No, they're there. We're working through -- we're definitely working through supply chain and labor issues. They're dealing with municipalities and planning. That was largely upfront work that we've had to do. And now that we've got that upfront work and planning behind us, we're increasing the scale and pace.

Right. So is the permitting and planning, that was sort of the gating factor?

That was a big part of it, right? And then we've had some -- there were some CPE challenges that we've had that we've worked through that are improving as well.

Okay. And then I want to talk about a more philosophical topic is just that the whole cloudification of telco services. Help us think about the cloudification of telco. How is Lumen thinking about cloud and the growing involvement of CSPs within telco? And where is it going from here? How much of it is in the cloud taking over the network functions and even reaching the end customer versus Lumen? Do you see it as a threat or a partner?

Yes. Yes, a threat and a partner. There's one public cloud. There's not going to be a separate telco public cloud. There's one public cloud. And our partners had a huge role in that public cloud, right, Microsoft, Amazon, IBM, Google. We look to leverage our edge computing facilities, our storage facilities, our fantastic network connectivity, low latency capabilities and complement those edge computing cases, right? So as customers are moving more of their compute off-premises, yet they have increasing lower latency needs, we're right there to partner with, right? So the partnership I'm most excited about right now is Microsoft and Azure. And I think they really see the value we bring to that story. We certainly see the value they bring. So it's a with...

Right. And maybe you can put a finer point on that. What are you bringing to the table? And what is the cloud bringing to the table? Where is the cloud? And where do you end? And you kind of mentioned that you have the facilities. You have the edge facilities, you've got the storage facilities, you have the network connectivity. I'm just trying to figure out.

Yes. So think about it as a continuum. And on the left side of the page, you've got premises, and customers who are currently concerned about high data security and low latency. They have a lot of their compute on the premises. Think about the other alternative, 3 years ago was in a core cloud. It was somewhere far away, maybe it was in some part of Washington or some part of Oklahoma. And you had a massive public cloud scaler with a great digital experience and a great cost point and your developers loved it.

Well, if you tie that together as a continuum, there's a new alternative in the middle that's a little closer to the prem, that's edge computing. And that's where we are, and that's where we can house compute and storage, wrap it with managed services and bring the connectivity to those premises. Otherwise, there's no way to connect them.

Right. I want to talk about CapEx and the dynamic CapEx budget.

Dynamic, but possibly that as well as you think about the dividend. Management often talks about flexibility and the capital budgets. Just describe -- maybe provide more color here specifically in the context of shedding the legacy CapEx. You mentioned it earlier with the growth versus nurture versus legacy, pivoting more to success [fix], CapEx, obviously, and the higher growth initiatives like the fiber-to-the-home plan. How are you balancing it all?

Yes. I mean a lot of our CapEx is discretionary. So maybe if you pick a rough number, we spent $3 billion a year on CapEx, $400 million to $500 million of that is probably what we call maintenance CapEx or keep the lights on. The rest of it is us choosing what to do with it to drive growth. I think that when you're a large company with a large legacy, it's hard to change and stop and shed and pivot. And we've been doing better and better at that. But by moving the products into different stages of the life cycle, it really brings more rigor and discipline to the CapEx that is being spent in that harvest part of the conversation and making sure that if it's being spent, it's driving cash flow and EBITDA. Otherwise, we can draw a circle around it and repurpose it and put it in the growth part of the story, which is what we did to fund the Quantum Fiber build.

Right. I want to flip back to mid-market. You said it's a little healthier with some economic green shoots because in the past, it's been a bit of a challenge, but you built this new platform or sales portal to better capture this market. Maybe you can help us with what is happening in the mid-markets with the economy and then you're what investing into it? And where should we see the trajectory from here?

Yes. That's probably been the most frustrating part of my tenure over the last couple of years is our lack of traction there. We're a share taker in that space. We've got the products necessary to win, but we really haven't had the digital experience that customers have been wanting. We turned up a digital marketplace earlier this year. It's completely tied to our Adobe-based learn part of the system. We've got products in there. We're driving demand. We're focused on conversion, and we'll continue to add new products in there throughout the year. And we like the ramp. I just need to get more and more products in there so that ramp covers a more nominal base.

And who's the competition in the mid-market that you're seeing most?

So mid-market is at the lower end of enterprise is where you start to get into those niche conversations, right? So you have one set of customers that's a little in the voice or the unified communications conversation. You have another set of competitors when you're talking about broadband that would be some of the traditional cable [indiscernible].

Right. [indiscernible] against those. Okay. And but the ones that are more sophisticated, that obviously hurts margin. But I guess this portal that you guys have developed to help out in the margin profile, could they just enter the portals and pick the...

Yes. So we use the word portal that's traditionally -- we think about that more for like an existing customer. This marketplace is someone that we can reach out to capture their attention, pull them into the dot-com. And even if they're not a customer today, within about 12 to 15 minutes, they can become a customer and they can purchase Fiber Plus, they can purchase DDoS. They can purchase edge computing. They can drive their edge computing experience through there. And we take them from that e-commerce experience into our existing portal in a seamless manner. So it's all digital.

Got it. Just a few minutes left. I just want to see if there's anybody in the audience for any questions. No. I want to talk about the M&A landscape. Just in general, from where you sit, what's on your M&A wish list? And specifically, is it product M&A, technology M&A, geography M&A?

Me, personally, it's -- I would think about it as I like to kick the tires on companies that would help us hasten and improve our customers' journey as their transitioning technology, right? So what's the lever that can kind of help with all of our customers in the experience when they're moving from traditional voice to SIP Trunking or UC or someone that's moving from an existing SD-WAN solution to a more robust SASE solution, right? I'm interested in those.

So is that like an acquirer because I mean it sounds like a human capital that needs the help [indiscernible]?

I would say more of a -- on the digital experience piece of it than the actual human.

Okay. The digital products that -- to transition them over.

Yes. I'm not looking to add humans to the story. I'm looking to add digital experiences.

Okay. And how about product in particular, are there products that you're looking at, network-as-a-service kind of stuff? Or do you think you've got the full product suite to continue...

I mean we'll always be improving our products and increasing our partnerships. But no, that's less a piece of it.

Okay. And I know it's tough for you to answer these questions, but I'm just curious to hear your thoughts. You divested a couple of companies and -- in the last 12 months. Are there other legacy or noncore assets in the mix that you can consider something that you can live without?

I mean Jeff has been saying it for a while that we're always open to increase shareholder value if there's an opportunity to improve shareholder value, and we can do it at the right valuation. And if it fits strategically, we'll be open to it. We just announced that we closed out the Apollo LATAM or the Stonepeak LATAM. We're working on getting the Apollo one done early Q4. That's a big undertaking. So that's really front of mind right now. But yes, we're open to it if there's others that are right.

Sure. I mean you sold of LATAM. So what's the strategic criticality of selling the European assets? It's another geography that's not in the U.S. Just curious to know how integral -- is that part of your success?

Yes. I mean EMEA is a great part of our success and having that connectivity for our global enterprise customers is a huge part of the value proposition.

Great. With that, we'll wrap it up. Thank you very much.

All right. Thank you. That's great.