Lumen Technologies is going all out to turn around its precarious financial situation by signing a series of contracts related to artificial intelligence (AI). The telecommunications company, headquartered in Monroe, Louisiana, is burdened with a staggering $20 billion in debt and is desperate to find a way out of this predicament and return to profitability.
Since the arrival of Chief Financial Officer Chris Stansbury in 2022, he has recognized the challenging debt structure issues Lumen faces. Past acquisitions, particularly the $25 billion acquisition of Level3 Communications in 2017, have led to the current debt burden. He stated, "I know Lumen's debt structure is very poor, and in addition to the total debt, the maturity profile is the worst I've ever seen. Half of our debt matures in 2027."
Image source note: The image was generated by AI, and the image authorization service provider is Midjourney.
To turn the situation around, the company spent several months negotiating with creditors to restructure the debt, ultimately reaching an agreement in March to defer billions of dollars in maturities, alleviate repayment pressure, and secure a new $1 billion revolving credit facility. After the debt restructuring, Lumen turned its attention to new growth opportunities. Last month, the company announced it had secured $5 billion in contracts to provide AI connectivity services, with an additional $7 billion in potential sales under negotiation. Stansbury noted that the $5 billion obtained could help the company repay debts due in the near term.
"We are committed to enhancing customer experience through digital telecommunications, and AI plays a crucial role in this process. As AI continues to evolve, so will Lumen," Stansbury confidently said. He anticipates that the company's earnings before interest, taxes, depreciation, and amortization (EBITDA) will start to grow from 2026 onwards, although last year's significant revenue decline is not expected to recover until 2028.
However, Lumen's journey remains fraught with challenges. Last week, the company issued a debt swap aimed at extending the maturity of some near-term bonds from 2026 to 2032. This move will increase the interest expense of new debt, and credit rating agency S&P Global Ratings downgraded Lumen's credit rating three notches to CC, indicating that creditors did not receive sufficient compensation to offset the risks of the extended term. S&P expects further downgrades to selective default upon completion of the transaction, while Fitch Ratings maintains Lumen's long-term rating at CCC+.
Lumen could have used these AI contracts to repay near-term debts, but Stansbury said that after the swap, the company could use these funds for other financial structure needs. If Lumen successfully signs the $7 billion in additional contracts, Stansbury said the company would use most of the funds to reduce debt. Although the recent contracts are very important, analyst Matthew Dolgin said these measures are not enough to put Lumen in a strong position.
He believes these measures give Lumen some breathing room, improving its financial situation in the short term, but it still faces many challenges in the long term. The company is still burdened with massive debt and shrinking business. It must turn around its business situation, and while they claim to be doing so, we have yet to see much evidence to prove this."
To support the construction of the new network, Lumen has increased operating expenses. Last year's operating expenses reached $24.14 billion, an increase of nearly 40% from the previous year. Stansbury mentioned, "We have increased our expenses in advance to achieve faster savings." Lumen owns underground cables, leases them out through 20-year contracts, and provides fiber services to customers through these cables. The construction of a new network takes two to four years, depending on the scale and complexity of the network. "About 90% of the $5 billion in AI funds will be received within the construction phase, as we receive payments from customers before paying suppliers," he added, and usually also pays for Lumen's space, energy, operations, and maintenance costs.
In 2023, Lumen's revenue was $14.56 billion, a decrease of 17% from the previous year. The net loss expanded from $1.5 billion in 2022 to $10.3 billion, after a profit of $2 billion in 2021. By streamlining the corporate structure, more cost savings are expected. Stansbury said the company will reduce the number of networks from four to one, allowing for more efficient management of customer service and delivery. This measure is expected to save about $1 billion by 2025. Stansbury noted that about 60% of Lumen's business is declining due to a decrease in customer installations, while the rest of the business is not meeting expectations. "We can offset these declines because we can find savings in our business, which is why we are confident in EBITDA growth."
Due to the depreciation of legacy assets from past acquisitions, Lumen recorded the largest goodwill impairment among U.S. companies in 2023, amounting to $10.69 billion. The company said this expense was unavoidable due to financial pressure and price declines. In the past six years, Lumen has undergone five goodwill impairments, including $3.27 billion in 2022. Since announcing the $5 billion in new business contracts, Lumen's stock price has doubled, closing at $5.36 per share on Tuesday. Stansbury said he is not worried about the risk of another goodwill impairment in the short term. He said, "This risk will only occur if the stock price falls to a very low level again, and I am optimistic about the current support level."