Lumen comparables, earnings thoughts and more ?3

08:48 30-Jan-23

Before I get to the main subject, I'll document that Amdocs has scheduled its fiscal 1Q23 report for tomorrow evening, January 31st.  The average of 5 analyst estimates is $1.32 of EPS from $1.2b of revenue, which is expected to remain flat.  See the second to last paragraph below for the latest of the ways that Amdocs is managing well through the tough economic environment.  That comes as no surprise, but with a 20 P/E, I see DOX as at least fairly priced.  Thus, I will monitor the report for surprises and insights, but will not necessarily write about it.

Similarly, Shell's board reduction deserve mention, ahead of its earnings on Wednesday.  I expect it indicates a further pivot toward natural gas & renewables, but an opposite move back toward oil can't be completely ruled out.

Also a reminder that Xebec's assets should be liquidated by next week.  Getting back to the subject...

Lumen filed an 8-K after the close on Friday, providing figures for its last 7 quarters excluding the Cirion and BrightSpeed divested businesses so far.  Assuming new management excludes fiber build out costs, the base EBITDA figure comes in better than my prior calculations.  Keep in mind, though, that those build out costs should accelerate in the near term and persist for at least the next 3 years.  Furthermore, new management is highly suspect in my eyes.  In conjunction with that, I note that a big and still unspecified non-cash expense is ongoing Depreciation & Amortization for the business that remains with Lumen.  Analysts seem to have been modeling that as reduced by more than half, which makes sense based on the transaction amounts.  However, based on continued operations, I'd guess that up to three quarters of the expense could still remain.  Good info is not available and accounting is not my area of expertise.  So, hopefully the analysts know better than I do, in this case.  Just in case I'm right, though, I feel obligated to mention that the higher costs would leave Lumen not even breaking even in the upcoming 4Q22 report.

I will take the unusual step of actually attempting to monitor and report on analysts revisions in the week that remains.  21.6K open puts at the $5 strike before earnings this Friday, before the report, combined with over 13K puts at each of the $5 and $6 strikes at the monthly expiration after the report on February 17th could each serve to amplify short term volatility.

Figures beyond earnings that I will be paying special attention to are detail on the fiber build out progress, associated cost, and initial adoption.  My long term fiber target is $75 ARPU (average revenue per user) at 40% penetration, but Lumen's latest figures were $60 ARPU with 27% penetration on 3M locations.  As noted there, penetration ticks down when new locations are first enabled, of course.  So, I'm estimating the company will spend up to $2.5M to reach 3.3M (up sequentially from 3M, versus 3.5M targeted) enabled locations at year end, with 20-25% penetration and at least the same ARPU, thereby contributing over $120M to the top line.  This is barely over 3% of revenue and just under 10% of EBITDA.  Thus it is likely to be overlooked.  However, I think it is strategically important as an enabler of other services, and the percentages will certainly multiply as build out progresses.

I note that the latest Netflix report showing an 8.9% jump in subscribers together with the overall degradation of streaming toward ad-supported models indicates consumer demand.  It's also noteworthy that the latest announcements from Amdocs and fellow fiber network owner Uniti indicate corporate demand for Lumen's core long-haul networking services.

In summary, I can't be sure, but think investors should be prepared for the possibility of an earnings miss.  Obviously, there would be a magnitude-dependent short term impact if that happens.  I do not think revised earnings should trump the company's cash rich position and its use of that toward growth over the medium to long term.  My base case is still for LUMN to trade above $7 over the next year.  For those who want more long term safety and income, I reiterate that Lumen's baby bonds are worth considering, even well above early November and late December levels, especially if we actually are seeing peak Fed.  There is nothing of much importance left on the schedule before that now.