How can an outside investor even begin to figure out their business model? Who really knows? Many things do not add up. No analyst report i've seen, no LUMN presentation, no questions in Qs, no one on this board to my knowledge has answered some basic questions:

 

1) What's the payback/IRR on incremental capex

2) How is lumn priced vs competition in key segments? What's the industry situation and their nuts and bolts strategy given this?

3) Why, inspite of very high capex that cumulatively exceeds the market cap, is revenue still declining. What's the breakdown of capex? Why does capex remain very high when years ago they were already within 5 miles of "95% of all US businesses".

4) Whey do LUMN's competitors, zayo, CCOI etc show better revenue trends 

5) Why couldn't they bucket a) high cashflow declining businesses which are being harvested and b) new invest & grow businesses? Why did they keep changing metrics

 

Absent specific knowledgeable responses, these are my thoughts/answers/guess to above which are purely speculative but add up if you look at the resulting performance of the company over the past years:

1) high single digit IRR, slightly above the previous cost of borrowing which was in the 5-6% range

2) Lumn services (except for their consumer fiber product) are priced very significantly above market in an industry with tons of overcapacity. Maybe not all capacity is as fast as LUMN, but it's fast enough for a significant portion of the market. CCOI hinted lumn prices were 66+% higher than theirs in one interview. Overcapacity has been increasing as many players have expanded fiber networks for 5g, etc.

3) Purely a guess but I believe most of LUMN's capex is to connect new customers to their network. Since no one else makes use of this connection, then after the contract is over or if the customer churns then this capex is basically useless. This interpretation adds up if u think about them no longer disclosing customer churn. So this fiber juggernaut is actually a hamster on a treadmill running as fast as it can to just stay in place. 

4) In a commodity business, the low cost provider wins. LUMN's pricing and overhead in spite of cost cuts remain too high.  

5) The truth is that all the big segments were declining overall. The hyperscale customers will not let LUMN earn a high return (when the traffic justifies it Google will build their own connection. Why not when you have Google has so much cash earning close to zero). These cloud guys pass their LUMN discounts on to their enterprise customers. LUMN gets the crumbs. The enterprise/corporate guys ask for repricing every year because they can just switch to someone cheaper. LUMN has to give in or the capex they spent connecting these guys goes to zero.

 

Reshuffling the buckets made the declines less obvious, kept management and BOD in the money, allowed them to stay in the game and wait for another super low interest rate environment bonanza to save them like it saved LVLT.

 

I have no insider knowledge. It's just that the above framework makes sense given the results of the company.

 

What do I need to see to get back in?

 

1) Proof that LUMN's network is really better, faster and cheaper to run. People assume this but is it really?

2) As corollary to 1) IF LUMN is really the low cost network, then the correct strategy imho for LUMN is undercut competitors. They need to do a massive price cut and a corresponding overhead cut. If 1 is true this is a better use of the dividend cut as it will drive customers to them and drive higher priced competitors out of business. IF this is true...They will underearn for a while but will then establish a solid base going forward.

3) Honesty, courage to tell shareholders what's really happening and just ffing deal w it.

 

If 1 is not true, then some buyout guys will buy LUMN at 30% higher than last 30 days trailing stock price. It will not be 2x or more of market. The majority here will sell and just be happy to get out and move on. The buyout guys will fire everyone and run LUMN off Zayo's (or equivalent) much hungrier, smarter and leaner organization. They will be the ones to harvest 2-3x. Kate will make her 100-200 mn over 4-5 years.

 

Anyway, the best way to have invested in and divested out of lumn imho was with a lot of realism/cynicism. 

 

Best wishes to all and happy holidays.