Why I'm Buying Lumen Technologies After Top-Line Beat
We've got a low-risk, potentially-rewarding trade idea for the technology and communications firm.
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On Tuesday evening, Lumen Technologies LUMN released the firm's fourth quarter financial results. For the period, which ended on December 31, Lumen posted a GAAP EPS of $0.09 on revenue of $3.329 billion. The top-line number beat Wall Street's expectations despite only being good enough for a year over year contraction of 5.4%.
As for the bottom-line, the profitability was a surprise as Wall Street had been looking for something like $-0.05. This was also up huge from the $-2.03 reported for the same quarter one year earlier. That quarter had been impacted by a non-cash goodwill impairment charge of $1.9 billion. So, the results were good? Well, a whole lot better than a sharp stick in the eye.
Who Is Lumen Technologies?
Lumen describes itself as a technology and communications company. The firm provides integrated products and services domestically and internationally through two business segments.
The Business segment works toward meeting the needs of commercial clientele. Products sold by this unit include Dark Edge, Edge Cloud Services, Internet Protocol, Managed Security Services, Software-Defined Wide Area Networks, Secure Access Service Edge, Optical Services, Ethernet, VPN Data Networks, Voice Services and IT Solutions.
The Mass Markets segment caters to residential and small business customers. This unit sells Fiber Broadband, non-fiber Broadband and Voice.
Operations
As we know, revenue contracted 5.4% to $3.329 billion. Total operating expenses, however, contracted a whopping 40% to $3.175 billion. This left an operating income of $154 million, up from an operating loss of $1.776 billion (remember the $1.9 billion impairment). After accounting for interest, other income and expenses and taxes, net income printed at $85 million, up from the year ago-comp of $-1.995 billion. This worked out to a GAAP EPS of $0.09 versus $-2.03 for the year-ago period.
Fundamentals
For the quarter, Luman generated operating cash flow of $688 million. Out of that came capex spending of $915 million, leaving free cash flow of $-227 million. Adjusted (yes, free cash flow is already an adjusted data-point) for special items such as severance and litigation costs, free cash flow would have been $-174 million. Guess they thought we should know that.
The firm obviously does not return capital to shareholders. To the firm's credit, it should be noted that over the course of 2024, it paid off $2.678 billion in long-term debt, while only issuing $1.325 billion in new long-term debt and issuing another $283 million in debt to cover extinguishment costs and other fees.
As for the balance sheet, the firm ended the period with a cash position of $1.889 billion and current assets of $4.394 billion. Current liabilities add up to $3.639 billion that includes no short-term debt, but deferred revenue of $861 million, which is not a true financial obligation. This puts the firm's current ratio at 1.21, but when adjusted for deferred revenue, that ratio rises to 1.58. These ratios might not be spectacular, but they do pass the Sarge test.
Total assets amount to $33.496 billion, of which 20% is in goodwill and other intangibles. Total liabilities less equity comes to $33.032 billion. Of that number, $3.733 is in longer-term deferred revenue, which doesn't hurt, but also long-term debt of $17.494 billion. That debt is down almost 12% over 12 months, but obviously is the problem here. It's just as obvious that management is taking it seriously and is working on it.
My Thoughts
A troubled firm? Yes. A total shipwreck? Not really. Look at the chart...
Will the stock take off for us like Palantir PLTR or even Rocket Lab USA RKLB? Probably not. Could this be a low-risk, potentially rewarding investment? As long as position size is kept in check.
My plan? To initiate a smallish, long position as close to the stock's 200-day SMA as possible, which at the moment also just happens to be running concurrently with the stock's 50% retracement level of the July through early November run.
At the time of publication, Guilfoyle was long PLTR and RKLB equity.
