Lumen Technologies has been through a rollercoaster of financial challenges, management changes, and debt exchanges to stay afloat. The company recently announced $5 billion in AI-driven sales, with negotiations ongoing for an additional $7 billion in sales, causing the stock to surge to over $5.50 per share. For investors not interested in equity, there’s an option to consider the 22% yielding debt due in January 2028.
In the second quarter, Lumen faced headwinds with a decrease in operating revenue by $850 million to $6.5 billion compared to the previous year. Operating expenses also dropped by $250 million, leading to operating income falling to $180 million, which was insufficient to cover the $664 million in interest expenses.
A debt exchange earlier in the year changed Lumen’s balance sheet, reducing long-term debt by $1.4 billion to $18.4 billion. The company’s cash balance decreased by $750 million, but it still holds $1.5 billion in cash and saw an increase in shareholder equity to $466 million by the end of the second quarter.
Lumen’s ability to generate cash is crucial for debt reduction and solvency. Operating cash flow surged to $1.6 billion, allowing free cash flow to turn positive at $150 million. The company used the extra cash to pay down $800 million in debt in the first half of the year.
Management highlighted that the recent sales announcements will accelerate the company’s transformation plans, leading to $1 billion in cost savings by 2027. The influx of cash from these sales will also close the free cash flow gaps projected in the turnaround plan, making Lumen free cash flow positive moving forward.
Looking ahead to 2024, Lumen expects Adjusted EBITDA of $3.95 billion, with free cash flow projected at $1.1 billion, five times higher than previous estimates. The company’s capital expenditures have also increased, allowing for greater capital expenditure and free cash flow.
While some may hesitate to invest in shares after a significant runup, Lumen’s debt maturing in 2028 offers an attractive opportunity with over 20% yield to maturity. However, the company faces risks, such as the reliance on AI for funding and the challenge of generating cash if the AI market falters.
In conclusion, Lumen’s transformation journey has taken unexpected turns, benefiting shareholders and debt holders. The ongoing negotiations for additional sales add excitement to the company’s future prospects. For investors seeking opportunities, the 2028 notes provide steady income potential with a growing likelihood of capital return.
