On Sept. 14, CenturyLink declared it is rebranding as Lumen Technologies Inc. (NYSE:LUMN).
The phrase “lumen” comes from Latin, indicating “light,” which is a apparent reference to the actual physical substrate of a fiber conversation infrastructure.
The announcement contains (as with any rebranding) a lot of shiny phrases and ideas, as major the 4H Industrial Revolution, Adaptive Networking, Edge Cloud agility, and so on. These topics are of course significant and will be even additional significant in the future 10 years, but they aren’t new. The enterprise has been operating on all those for quite a few many years.
What, then, is truly new? It really is the way Lumen hopes to be perceived by the current market.
A current market notion concern
Jeffrey Storey, Lumen’s CEO, has not long ago progressively communicated the distress of seeing the enterprise remaining valued by the current market as a pure previous-fashioned conversation business.
This is certainly legitimate: if we search at the current market multiples, Lumen is offering as if the full enterprise would however be in the previous copper-strains telephone business. This is due to the potent association (particularly in the U.S.) involving the identify “CenturyLink” and that type of business.
Fiber-primarily based companies provide for much greater multiples, so if Lumen’s income stream basically comes from unique firms (together with the much additional worthwhile fiber-primarily based organization one) it would at minimum ought to have a re-score.
During the most the latest convention phone, an analyst requested Storey why he thinks the current market has this improper notion. He answered:
“I feel that, I feel there’s worry about the customer business. And I feel that persons feel — thought about CenturyLink, not Lumen, but thought about CenturyLink as a customer business with a pleasant very little organization fiber business, which is specifically the flip of what we basically are.”
Let’s have a additional in-depth search at how administration has decided to construction the rebranding. The enterprise explained the pure fiber firms will belong to the Lumen System, noting that “the system brings jointly our hugely interconnected worldwide fiber network infrastructure, edge cloud capabilities, and security and conversation and collaboration alternatives to deliver a speedy and safe basis for the software and information expert services vital to our customers’ accomplishment.”
The previous Centurylink brand name “will keep on being as a dependable brand name for residential and tiny business customers about standard networks.”
So the rebrand produced a apparent separation involving the fiber and copper-primarily based business strains.
The legacy small business
The legacy customer business is obviously in a secular decline.
This is the income breakdown taken from next-quarter final results:
As we can see, the customer-relevant gross sales account for twenty five% (38% if we increase the SMB) of complete income.
What should the enterprise do with the customer business? The easiest move would be offering it or spinning it off. An inside critique was carried out to determine the ideal option of monetizing this asset, but no announcement has been produced since then.
The most evident issues are: How much can you provide a declining business for? Will that funds be able to replace the lacking revenues or, additional exactly, to minimize curiosity fees by a meaningful amount of money and compensate for the income loss?
The response is evident that now this is not the scenario, which leaves Lumen with two choices:
Wait around for the organization business to grow to a issue in which it can pay for to dump the customer business at any cost.
Convert about the customer business to make it additional worthwhile (and eye-catching).
The enterprise is previously moving in the turnaround way.
In truth, here is how it is trying to make this evident (taken from the rebranding announcement):
“In addition, Lumen is pleased to announce Quantum Fiber, a entirely electronic system for providing fiber-primarily based merchandise and expert services to residents and tiny firms. Quantum Fiber will use the electricity of Lumen’s intensive fiber network and infrastructure.“
We don’t know if this will demonstrate to be the suitable move, but Lumen undoubtedly has an outstanding fiber infrastructure that can be leveraged to make it work.
The equilibrium sheet
In a earlier analysis of CenturyLink, referring to the fourth-quarter 2018 dividend lower, I wrote:
“While saying this lower just after delaying the final decision for quite a few quarters (and continually stating that it was not desired) can damage CEO and board credibility, this was the ideal final decision they have not long ago produced, as high financial debt is a genuine danger, particularly for a enterprise with additional than $2 billion of annually curiosity fees in a current market with perhaps greater value of funds in the upcoming.”
I however feel that the dividend lower was a match-transforming final decision. In truth, the enterprise has since initiated a slew of deleveraging initiatives (which incorporate a lot of refinancing kinds).
Considering the fact that 2018, the enterprise has been able to minimize annually curiosity fees by a amazing $450 million.
This is what the firm’s financial debt maturity profile appears to be like like:
Considering the fact that fourth-quarter 2018, also getting gain of the very low curiosity price surroundings, Lumen was able to minimize the 2020 to 2025 financial debt maturities by $14 billion.
For the future four many years, the amount of money of financial debt Lumen will have to fork out annually is (on ordinary) roughly equivalent to the recent absolutely free dollars circulation (just after deducting dividend fees).
I have not long ago listened to several arguments that Lumen will not be able to sustain the dividend, but this assertion has by no means been additional improper than today. In truth, the enterprise can sustain it for quite a few many years simply because it has now additional refinancing prospects than in the previous.
The not long ago declared rebranding is a apparent message to the current market, aimed at highlighting the worthwhile fiber firms and, finally, at a re-score of the enterprise.
It is also setting alone up for a company restructuring.
Lumen proceeds to fork out down or refinance financial debt at a pretty speedy pace, but this is flying a little bit underneath the radar.
What the current market is truly focused on is the declining customer business. We’ll see if the Quantum fiber turnaround initiatives will bear fruit and, if successful, Lumen will be able to provide the customer business.
In the meantime, Lumen Technologies proceeds to be a good enterprise with a dazzling upcoming, and (at the recent rates) a ten% dividend to get pleasure from.
Disclosure: The writer now very own shares of Lumen Technologies.
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I’m a Software Engineer with a significant enthusiasm for Price Investing. I appreciate wanting for undervalued companies the two to feed my investment decision pipeline and to write content articles in get to share my investment decision thoughts.
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