Lumen Technologies, formerly known as CenturyLink, is a global communications company that offers cloud infrastructure and managed services to businesses, governments, and consumers. With a commitment to innovation and a focus on customer satisfaction, Lumen is positioning itself as a leader in the digital landscape by investing in its network and expanding its portfolio of solutions. However, the company’s recent suspension of its dividend and high level of debt has led to selling pressure, making it a risky but potentially rewarding investment.

Introduction to Lumen Technologies Lumen Technologies is a global communications company that was founded in 1968 and is headquartered in Monroe, Louisiana. The company offers a wide range of services, including network connectivity, data centers, cloud computing, managed IT services, cybersecurity, and communication solutions. Lumen operates under three brands: Lumen, Quantum Fiber, and CenturyLink. With 190,000 on-net buildings and 500,000 route miles of fiber optic cable globally, Lumen is one of the largest providers of communications services to domestic and global enterprise customers.

Challenges Facing Lumen Technologies Lumen’s inability to grow meaningfully has been a major factor in its recent struggles. Over the past nine years, the company’s revenue growth has been a disappointing 7%. Additionally, the proportion of debt to equity is alarmingly high, with debt roughly five times the market cap. This high level of debt makes traditional measures of valuation, such as EPV and DCF, unreliable.

Lumen’s Transformation Efforts Lumen is in the process of transforming its business model from a telecommunications company to a technology company. The company is entering new sectors such as hybrid IT, cloud, and edge computing to keep pace with technological advancements. The recent appointment of a new CEO, Kate Johnson, is a positive sign in this regard. Johnson, who previously served as the president of Microsoft for US operations, brings valuable expertise to Lumen in addressing its two main challenges: growth and transformation.

The Suspension of the Dividend and Sale of Non-Core Assets Historically, Lumen’s strategy has been to return capital to shareholders in the form of dividends and share buybacks, returning roughly $19 billion to shareholders. However, this strategy has hindered the company’s growth potential. The recent suspension of the dividend and sale of non-core assets highlights Lumen’s eagerness to turn things around. The company has announced the sale of three businesses, including its Latin America operations for $2.7 billion, its ILEC business for $7.5 billion, and some of its operations in Europe, the Middle East, and Africa for $1.8 billion.

Future Outlook for Lumen Technologies Lumen has several options for how it can use the incoming funds from the divestiture of non-core assets. The company could use the funds to repay debt, which would be a welcome relief given its overleveraged capital structure. Alternatively, Lumen could use the funds for share repurchases, as the company has a $1.5 billion plan in place. Finally, the riskiest option would be to use the funds for growth initiatives.

Conclusion Lumen Technologies is a risky but potentially rewarding investment opportunity. The company’s recent divestiture of non-core assets, combined with the appointment of a new CEO with a strong background, presents a unique opportunity for growth. However, due to the high level of risk involved, we recommend taking a cautious approach and limiting any investment to a 1% position until we have more clarity on the future of the company.