Lumen (LUMN)

Telecommunications infrastructure company Lumen Technologies (NYSE:LUMN) met Wall Streets revenue expectations in Q4 CY2025, but sales fell by 8.7% year on year to $3.04 billion. Its non-GAAP profit of $0.23 per share was significantly above analysts’ consensus estimates.

Company Overview

With approximately 350,000 route miles of fiber optic cable spanning North America and the Asia Pacific, Lumen Technologies (NYSE:LUMN) operates a vast fiber optic network that provides communications, cloud connectivity, security, and IT solutions to businesses and consumers.

Terrestrial telecommunication companies face an uphill battle, as they mostly sell into a deflationary market, where the price of moving a bit tends to decrease over time with better technology. Without dependable volume growth, revenue growth could be challenged. Unfortunately, broadband penetration in their core US market is quite high already. On the other hand, data consumption from streaming entertainment and 5G expansion could provide a floor on growth for the next number of years. As if that wasn't enough to worry about, competition is intense, with larger telecom providers and hyperscalers expanding their own networks.

Lumen Technologies competes with major telecommunications providers including AT&T (NYSE:T), Verizon (NYSE:VZ), and Comcast (NASDAQ:CMCSA), as well as fiber infrastructure specialists like Crown Castle (NYSE:CCI) and specialized enterprise service providers such as Zayo Group (private).

A company’s long-term sales performance is one signal of its overall quality. Any business can put up a good quarter or two, but many enduring ones grow for years.

With $12.4 billion in revenue over the past 12 months, Lumen is larger than most business services companies and benefits from economies of scale, enabling it to gain more leverage on its fixed costs than smaller competitors. This also gives it the flexibility to offer lower prices. However, its scale is a double-edged sword because it’s harder to find incremental growth when you’ve penetrated most of the market. For Lumen to boost its sales, it likely needs to adjust its prices, launch new offerings, or lean into foreign markets.

As you can see below, Lumen’s revenue declined by 9.7% per year over the last five years, a tough starting point for our analysis.

We at StockStory place the most emphasis on long-term growth, but within business services, a half-decade historical view may miss recent innovations or disruptive industry trends. Lumen’s annualized revenue declines of 7.7% over the last two years suggest its demand continued shrinking.

We can better understand the company’s revenue dynamics by analyzing its most important segment, Large Enterprise. Over the last two years, Lumen’s Large Enterprise revenue (services provided to businesses) averaged 9% year-on-year declines. This segment has lagged the company’s overall sales.

This quarter, Lumen reported a rather uninspiring 8.7% year-on-year revenue decline to $3.04 billion of revenue, in line with Wall Street’s estimates.

Looking ahead, sell-side analysts expect revenue to decline by 12.4% over the next 12 months, a deceleration versus the last two years. This projection doesn't excite us and implies its products and services will face some demand challenges.

Adjusted operating margin is a key measure of profitability. Think of it as net income (the bottom line) excluding the impact of non-recurring expenses, taxes, and interest on debt - metrics less connected to business fundamentals.

Lumen’s high expenses have contributed to an average adjusted operating margin of negative 7.2% over the last five years. Unprofitable business services companies require extra attention because they could get caught swimming naked when the tide goes out. It’s hard to trust that the business can endure a full cycle.

Analyzing the trend in its profitability, Lumen’s adjusted operating margin decreased by 28.3 percentage points over the last five years. Lumen’s performance was poor no matter how you look at it - it shows that costs were rising and it couldn’t pass them onto its customers.

This quarter, Lumen generated a negative 6.6% adjusted operating margin. The company's consistent lack of profits raise a flag.

We track the long-term change in earnings per share (EPS) for the same reason as long-term revenue growth. Compared to revenue, however, EPS highlights whether a company’s growth is profitable.

Sadly for Lumen, its EPS declined by 15.8% annually over the last five years, more than its revenue. We can see the difference stemmed from higher interest expenses or taxes as the company actually improved its adjusted operating margin and repurchased its shares during this time.

We can take a deeper look into Lumen’s earnings to better understand the drivers of its performance. As we mentioned earlier, Lumen’s adjusted operating margin declined by 28.3 percentage points over the last five years. This was the most relevant factor (aside from the revenue impact) behind its lower earnings; interest expenses and taxes can also affect EPS but don’t tell us as much about a company’s fundamentals.

Like with revenue, we analyze EPS over a more recent period because it can provide insight into an emerging theme or development for the business.

Lumen’s two-year annual EPS declines of 63.8% were bad and lower than its two-year revenue losses.

In Q4, Lumen reported adjusted EPS of $0.23, up from $0.09 in the same quarter last year. This print easily cleared analysts’ estimates, and shareholders should be content with the results. Over the next 12 months, Wall Street expects Lumen to perform poorly. Analysts forecast its full-year EPS of negative $0.13 will tumble to negative $0.53.

Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.

Lumen has shown robust cash profitability, giving it an edge over its competitors and the ability to reinvest or return capital to investors. The company’s free cash flow margin averaged 9.8% over the last five years, quite impressive for a business services business.

Taking a step back, we can see that Lumen’s margin dropped by 10.5 percentage points during that time. Continued declines could signal it is in the middle of an investment cycle.

Lumen burned through $765 million of cash in Q4, equivalent to a negative 25.2% margin. The company’s cash burn increased from $174 million of lost cash in the same quarter last year. These numbers deviate from its longer-term margin, indicating it is a seasonal business that must build up inventory during certain quarters.

EPS and free cash flow tell us whether a company was profitable while growing its revenue. But was it capital-efficient? Enter ROIC, a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).

Lumen’s five-year average ROIC was negative 5.9%, meaning management lost money while trying to expand the business. Its returns were among the worst in the business services sector.

We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Unfortunately, Lumen’s ROIC averaged 1.6 percentage point decreases over the last few years. Paired with its already low returns, these declines suggest its profitable growth opportunities are few and far between.

Lumen reported $1 billion of cash and $17.44 billion of debt on its balance sheet in the most recent quarter. As investors in high-quality companies, we primarily focus on two things: 1) that a company’s debt level isn’t too high and 2) that its interest payments are not excessively burdening the business.

With $3.36 billion of EBITDA over the last 12 months, we view Lumen’s 4.9× net-debt-to-EBITDA ratio as safe. We also see its $1.23 billion of annual interest expenses as appropriate. The company’s profits give it plenty of breathing room, allowing it to continue investing in growth initiatives.

It was good to see Lumen beat analysts’ EPS expectations this quarter. Zooming out, we think this quarter featured some important positives. The stock remained flat at $8.45 immediately after reporting.

We think that the latest earnings result is only one piece of the bigger puzzle. If you’re deciding whether to own Lumen, you should also grasp the company’s longer-term business quality and valuation.

Lumen doesn’t pass our quality test. To kick things off, its revenue has declined over the last five years, and analysts expect its demand to deteriorate over the next 12 months. And while its scale makes it a trusted partner with negotiating leverage, the downside is its relatively low ROIC suggests management has struggled to find compelling investment opportunities. On top of that, its projected EPS for the next year is lacking.

Lumen’s EV-to-EBITDA ratio based on the next 12 months is 7.5x. At this valuation, there’s a lot of good news priced in - we think there are better stocks to buy right now.

Wall Street analysts have a consensus one-year price target of $7.80 on the company (compared to the current share price of $8.45), implying they don’t see much short-term potential in Lumen.