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Lumen (LUMN): 3Q23 Earnings Snapshot
Davis Hebert, CFA - Senior Telcom and Cable Analyst
Savannah Buzzeo - U.S. TMT Analyst
EXECUTIVE SUMMARY
- We are still thinking through the impact of Lumen’s planned liability management transactions, but ultimately fundamentals matter. We saw little this quarter that suggested Lumen has turned a corner and management acknowledged more revenue pressures are coming. If anything, the LME will only serve to make Lumen an even more complicated structure, layering on additional interest expense, while forcing the company to cut back on resources with layoffs and reduced capex investment.
- 3Q revenue slightly ahead, but EBITDA misses. Lumen missed expectations on EBITDA (-21%) as heavier costs played through, while revenue (-5%) was slightly ahead of expectations due in part to lumpy one-time items. Lumen saw top-line declines in each segment this quarter.
- Enterprise shows slight sequential growth, but revenue headwinds to pick up through mid-2024. Enterprise revenue showed modest improvement on a sequential basis, however, management expects pressures to continue through mid-2024 with macro weakness and the negative impact from Lumen’s strained financial situation.
- Broadband losses persist, Lumen adds 141k new fiber locations. Lumen continues to be well behind its peers on FTTH, losing another 73,000 broadband customers this quarter. The company anticipates adding 500,000 fiber locations in 2023 and a similar number in 2024, which is behind the plan provided at the Investor Day as the company looks to conserve capex.
- EMEA sale set to close Nov. 1, Lumen adjusts certain near-term targets. Lumen is set to receive $1.5bn in after-tax proceeds from the EMEA sale, with proceeds set aside for 2025 debt maturities. Meanwhile, management expects to be at the low-end of the cumulative FCF ranges provided at the June investor day, with incremental revenue pressures and higher interest costs, partially offset by opex savings (4% of the workforce, ~$300mn annual run rate) and lower FTTH capex (by ~$300mn).
- New-money deal ($1.2 bn) reached with certain creditors; exchanges aim to extend maturity wall to 2029. Lumen announced a complex liability management plan that involves $1.2 billion in new money (11% Level 3 1L notes) and a set of exchanges targeted to extend much of the daunting 2027 wall. We see the proposal as positive for secured paper of Level 3 and Lumen and negative for unsecured debt at Level 3, Qwest and Lumen holdco due to the priming nature of the transactions.
Relative Value
Financial Metrics
Credit Impact: Mixed. There was a lot to take in this quarter for Lumen investors and the credit “impact” depends on who you ask within the cap stack. The “big reveal” was Lumen’s transaction support agreement with debtholders comprising $7 billion of the $20 billion total debt in the capital structure. Lumen is aiming to not only solve for the Level 3 default question, but also aiming to extend its debt maturity wall from 2027 to 2029 through $1.2 billion of new-money (raised via 11% first-lien Level 3 debt) and a series of exchanges for debt at Level 3 and the Lumen holding company. Those that do not participate would get primed by the exchange debt at Level 3 (via new first-lien and second-lien debt) and Lumen (via super-priority debt). Our immediate thought is the transactions are positive for priority debt at Lumen and secured debt at Level 3 and negative for any unsecured debt in the structure (Level 3, Lumen and Qwest). The planned capital structure overhaul overshadowed 3Q results that showed continued strain on the top line (-5%, with more pressure to come in the next few quarters) and EBITDA (-21% pro forma). Management says the capital structure stress has slowed its progress on revenue so it is aiming to reduce opex (4% of the workforce, $300mn in savings) and capex (similar FTTH spend next year) and anticipates receiving $900 million in cash tax refunds that help near-term FCF but pressure long-term FCF (essentially brings forward NOL carryforwards, as explained by CFO Chris Stansbury).
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