Lumen Technologies, Inc. — Q1 2024 Form 10-Q
Reporting period: Three months ended March 31, 2024; comparisons are with Q1 2023 unless otherwise noted. Lumen provides communications and technology services to business and residential customers and reports Business and Mass Markets segments. Its reported results include the EMEA business only through its November 2023 sale.
Financial performance
| Metric | Q1 2024 | Q1 2023 | Change |
|---|---|---|---|
| Operating revenue | $3.290 billion | $3.738 billion | Down 12% |
| Operating income | $45 million | $390 million | Down 88% |
| Net income | $57 million | $511 million | Down 89% |
| Diluted EPS | $0.06 | $0.52 | Down $0.46 |
| Consolidated adjusted EBITDA | $807 million | $1.137 billion | Down 29% |
| Cash from operating activities | $1.102 billion | $595 million | Up $507 million |
| Capital expenditures | $713 million | $640 million | Up $73 million |
Revenue fell $448 million; $168 million of the decrease reflected the EMEA sale and select CDN contract sales. Operating expenses declined 3%, as lower service costs and sale-related reductions were partly offset by a 14% increase in selling, general and administrative expense. That increase included higher legal and professional fees associated mainly with the debt transaction.
Operating margin was approximately 1.4%, versus 10.4% a year earlier. Net income included a $275 million gain on early retirement of debt; the comparable 2023 period included a $609 million gain. Q1 2024 other income also included $58 million of interest income and a $20 million limited-partnership investment gain. These items make reported earnings comparisons less indicative of underlying operations.
Segments and material period-over-period changes
- Business: Revenue was $2.591 billion, down 13%; segment adjusted EBITDA was $1.355 billion, down 15%, with a 52% margin versus 54%. Declines in mature VPN, Ethernet, legacy voice and private-line services contributed to weaker results. IP services grew $35 million.
- Mass Markets: Revenue was $699 million, down 9%; segment adjusted EBITDA was $376 million, down 9%, with a 54% margin in both periods. Fiber Broadband revenue grew 12% to $170 million, while Other Broadband fell 15% and Voice and Other fell 14%.
- Management cited continuing declines in legacy services, customer shifts away from copper-based broadband, competitive and pricing pressures, divestiture-related dis-synergies, inflation, and delayed customer decisions. Fiber construction labor costs have also contributed to delays in Quantum Fiber buildout targets.
Cash, debt and liquidity
- Cash and cash equivalents were $1.580 billion at March 31, 2024, down from $2.234 billion at year-end. Cash from operations less capital expenditures was approximately $389 million.
- The operating cash-flow increase was primarily driven by a $729 million federal income tax refund, including interest. The filing therefore cautions that cash flows vary with timing and the quarter is not necessarily indicative of full-year results.
- Long-term debt carrying value was $18.677 billion, including $86 million of current maturities. Aggregate debt principal, excluding unamortized discounts and issuance costs, was $19.411 billion. The filing reports $13.0 billion of secured and $6.2 billion of unsecured consolidated debt.
- March 22, 2024 debt transactions extended maturities and reduced principal maturities due on or before December 31, 2027 by approximately $10.2 billion. They raised $1.325 billion in new capital and replaced the former $2.2 billion revolving facility with approximately $1.0 billion of new facilities. Available revolver capacity was approximately $715 million at quarter-end, net of undrawn letters of credit.
- The transactions increased the weighted average interest rate on consolidated debt from 6.23% to 7.73%, and increased secured or guaranteed debt. Lumen reported approximately $6.1 billion of unhedged floating-rate debt; a 100-basis-point SOFR increase would reduce annual pretax earnings by approximately $61 million.
- Management stated the company was in material compliance with debt agreements and financial covenants as of March 31, 2024. New Lumen financial covenant tests begin with the quarter ending June 30, 2024.
Outlook, risks and unusual items
- Capital spending: Management projected full-year 2024 capital expenditures of approximately $2.7 billion to $2.9 billion, focused on network efficiency, new services, fiber expansion including Quantum Fiber, and replacement of aging assets. No quantified revenue or earnings guidance is provided in the filing text.
- Workforce: In April 2024, Lumen announced plans to reduce its workforce by less than 7%, with estimated severance and related costs of $90 million to $100 million. The plan was expected to be substantially completed by the end of Q2; no related cost was accrued at March 31.
- Debt and financing risk: The refinancing brings higher interest costs and more restrictive covenants. Management warns that the transactions may not deliver their anticipated benefits or provide enough time for transformation; credit ratings are low and future borrowing terms or availability are uncertain.
- Legal and contingency exposure: Lumen had accrued $81 million for litigation and non-income-tax contingencies, but could not estimate reasonably possible losses above that amount. Marshall Fire claims name an affiliate and have preliminary damage estimates exceeding $2 billion; Lumen is defending the claims. The company also disclosed shareholder suits, tax disputes, Huawei-related government inquiries and lead-cable-related legal and environmental risks. It had not accrued potential lead-cable costs.
- Other risks: Continued legacy revenue declines, competition, cybersecurity and service outages, regulatory changes, inflation and supply constraints, pension and post-retirement obligations, and potential future goodwill impairment could affect results. The company reported approximately $2.0 billion of remaining goodwill and noted that further deterioration in outlook or valuation assumptions could lead to impairment.
- Tax and accounting: The effective tax rate was 44.1%, compared with 24.9% in Q1 2023. Lumen extended the estimated life of owned fiber network assets from 25 to 30 years, reducing quarterly depreciation expense by approximately $16 million (about $12 million after tax, or $0.01 per diluted share). It also reported that its change in depreciation method had an immaterial Q1 impact.
Important facts for investors to verify
- Whether fiber revenue and customer growth can offset continuing declines in legacy and copper-based services, and whether Quantum Fiber expansion proceeds as planned.
- Whether operating cash generation remains adequate after removing the one-time tax refund and funding capital expenditures, interest, debt service and benefit payments.
- The practical impact of the new debt structure, including actual interest expense, covenant headroom, refinancing access and the ability to realize the stated maturity-extension benefits.
- The scale, timing and financial consequences of legal and environmental proceedings, especially the Marshall Fire claims and lead-sheathed cable matters.
- Execution and costs of the announced workforce reductions, transformation initiatives and 2024 capital-spending plan.