On Sept. 14, CenturyLink announced it is rebranding as Lumen Technologies Inc. (NYSE:LUMN).
The phrase “lumen” comes from Latin, meaning “light-weight,” which is a apparent reference to the bodily substrate of a fiber conversation infrastructure.
The announcement incorporates (as with any rebranding) a whole lot of shiny words and phrases and ideas, as leading the 4H Industrial Revolution, Adaptive Networking, Edge Cloud agility, and many others. These subjects are of training course important and will be even far more important in the subsequent ten years, but they aren’t new. The business has been functioning on those people for various decades.
What, then, is seriously new? It is the way Lumen hopes to be perceived by the industry.
A industry notion difficulty
Jeffrey Storey, Lumen’s CEO, has not long ago progressively communicated the irritation of looking at the business becoming valued by the industry as a pure old-fashioned conversation business.
This is absolutely true: if we seem at the industry multiples, Lumen is promoting as if the total business would nonetheless be in the old copper-traces telephone business. This is due to the powerful association (especially in the U.S.) in between the title “CenturyLink” and that sort of business.
Fiber-dependent companies promote for much greater multiples, so if Lumen’s income stream basically comes from various firms (which includes the much far more worthwhile fiber-dependent enterprise one) it would at minimum are worthy of a re-rating.
All through the most latest conference connect with, an analyst asked Storey why he thinks the industry has this completely wrong notion. He answered:
“I consider that, I consider there is certainly problem about the consumer business. And I consider that men and women consider — imagined about CenturyLink, not Lumen, but imagined about CenturyLink as a consumer business with a awesome very little enterprise fiber business, which is precisely the flip of what we basically are.”
Let’s have a far more in-depth seem at how administration has resolved to composition the rebranding. The business said the pure fiber firms will belong to the Lumen Platform, noting that “the platform provides alongside one another our remarkably interconnected global fiber network infrastructure, edge cloud capabilities, and protection and conversation and collaboration methods to provide a rapidly and secure basis for the software and information expert services critical to our customers’ results.”
The old Centurylink manufacturer “will remain as a trustworthy manufacturer for household and small business shoppers about common networks.”
So the rebrand produced a apparent separation in between the fiber and copper-dependent business traces.
The legacy small business
The legacy consumer business is clearly in a secular decline.
Here is the income breakdown taken from 2nd-quarter benefits:
As we can see, the consumer-related product sales account for 25% (38% if we insert the SMB) of complete income.
What need to the business do with the consumer business? The simplest shift would be promoting it or spinning it off. An interior review was performed to establish the best option of monetizing this asset, but no announcement has been produced since then.
The most obvious concerns are: How much can you promote a declining business for? Will that dollars be equipped to swap the missing revenues or, far more precisely, to lessen curiosity fees by a meaningful sum and compensate for the income loss?
The solution is obvious that at the moment this is not the scenario, which leaves Lumen with two possibilities:
Wait around for the enterprise business to develop to a issue where by it can find the money for to dump the consumer business at any cost.
Turn all-around the consumer business to make it far more worthwhile (and desirable).
The business is by now shifting in the turnaround path.
Without a doubt, this is how it is seeking to make this obvious (taken from the rebranding announcement):
“In addition, Lumen is pleased to announce Quantum Fiber, a fully electronic platform for delivering fiber-dependent goods and expert services to inhabitants and small firms. Quantum Fiber will use the electric power of Lumen’s in depth fiber network and infrastructure.“
We you should not know if this will demonstrate to be the appropriate shift, but Lumen undoubtedly has an spectacular fiber infrastructure that can be leveraged to make it function.
The equilibrium sheet
In a earlier examination of CenturyLink, referring to the fourth-quarter 2018 dividend minimize, I wrote:
“Though asserting this minimize just after delaying the decision for various quarters (and frequently stating that it was not essential) can damage CEO and board credibility, this was the best decision they have not long ago produced, as superior debt is a true danger, especially for a business with far more than $2 billion of annually curiosity fees in a industry with probably greater price of dollars in the future.”
I nonetheless consider that the dividend minimize was a activity-switching decision. Without a doubt, the business has since initiated a slew of deleveraging initiatives (which consist of a whole lot of refinancing kinds).
Since 2018, the business has been equipped to lessen annually curiosity fees by a breathtaking $450 million.
Here is what the company’s debt maturity profile appears to be like like:
Since fourth-quarter 2018, also having benefit of the lower curiosity amount setting, Lumen was equipped to lessen the 2020 to 2025 debt maturities by $14 billion.
For the subsequent 4 decades, the sum of debt Lumen will have to pay back annually is (on average) close to equal to the existing free hard cash flow (just after deducting dividend fees).
I’ve not long ago listened to many arguments that Lumen will not be equipped to sustain the dividend, but this assertion has in no way been far more completely wrong than right now. Without a doubt, the business can sustain it for various decades for the reason that it has now far more refinancing options than in the previous.
The not long ago announced rebranding is a apparent concept to the industry, aimed at highlighting the worthwhile fiber firms and, ultimately, at a re-rating of the business.
It is also setting by itself up for a corporate restructuring.
Lumen continues to pay back down or refinance debt at a quite rapidly pace, but this is traveling a little bit less than the radar.
What the industry is seriously concentrated on is the declining consumer business. We’ll see if the Quantum fiber turnaround initiatives will bear fruit and, if productive, Lumen will be equipped to promote the consumer business.
In the meantime, Lumen Technologies continues to be a reliable business with a shiny future, and (at the existing costs) a 10% dividend to delight in.
Disclosure: The writer at the moment personal shares of Lumen Technologies.
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About the writer:
I’m a Software program Engineer with a significant enthusiasm for Value Investing. I really like hunting for undervalued companies equally to feed my financial commitment pipeline and to produce articles in get to share my financial commitment views.
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