Lumen (LUMN)

Telecommunications infrastructure company Lumen Technologies (NYSE:LUMN) reported Q1 CY2025 results topping the market’s revenue expectations, but sales fell by 3.3% year on year to $3.18 billion. Its non-GAAP loss of $0.13 per share was 51.2% 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 can indicate its overall quality. Even a bad business can shine for one or two quarters, but a top-tier one grows for years.

With $13 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 struggled to generate demand over the last five years. Its sales dropped by 9.4% annually, a poor baseline 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 recent performance shows its demand remained suppressed as its revenue has declined by 11.3% annually over the last two years.

Lumen also breaks out the revenue for its most important segment, Large Enterprise. Over the last two years, Lumen’s Large Enterprise revenue (services provided to businesses) averaged 6.9% year-on-year declines. This segment has outperformed its total sales during the same period, lifting the company’s performance.

This quarter, Lumen’s revenue fell by 3.3% year on year to $3.18 billion but beat Wall Street’s estimates by 1.9%.

Looking ahead, sell-side analysts expect revenue to decline by 6.2% over the next 12 months. While this projection is better than its two-year trend, it's hard to get excited about a company that is struggling with demand.

Although Lumen was profitable this quarter from an operational perspective, it’s generally struggled over a longer time period. Its expensive cost structure has contributed to an average operating margin of negative 5.6% 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.

Looking at the trend in its profitability, Lumen’s operating margin might fluctuated slightly but has generally stayed the same over the last five years, meaning it will take a fundamental shift in the business model to change.

This quarter, Lumen generated an operating profit margin of 3.4%, up 2 percentage points year on year. This increase was a welcome development, especially since its revenue fell, showing it was more efficient because it scaled down its expenses.

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 17.3% annually over the last five years, more than its revenue. This tells us the company struggled because its fixed cost base made it difficult to adjust to shrinking demand.

In Q1, Lumen reported EPS at negative $0.13, down from negative $0.04 in the same quarter last year. Despite falling year on year, this print easily cleared analysts’ estimates. Over the next 12 months, Wall Street expects Lumen to perform poorly. Analysts forecast its full-year EPS of negative $0.30 will tumble to negative $1.05.

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 11.2% over the last five years, quite impressive for a business services business. The divergence from its underwhelming operating margin stems from the add-back of non-cash charges like depreciation and stock-based compensation. GAAP operating profit expenses these line items, but free cash flow does not.

Taking a step back, we can see that Lumen’s margin dropped by 7.8 percentage points during that time. It may have ticked higher more recently, but shareholders are likely hoping for its margin to at least revert to its historical level. If the longer-term trend returns, it could signal increasing investment needs and capital intensity.

Lumen’s free cash flow clocked in at $304 million in Q1, equivalent to a 9.6% margin. The company’s cash profitability regressed as it was 6.2 percentage points lower than in the same quarter last year, suggesting its historical struggles have dragged on.

EPS and free cash flow tell us whether a company was profitable while growing its revenue. But was it capital-efficient? A company’s ROIC explains this by showing how much operating profit it makes compared to the money it has raised (debt and equity).

Lumen’s five-year average ROIC was negative 10.7%, 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. Over the last few years, Lumen’s ROIC has unfortunately decreased significantly. Paired with its already low returns, these declines suggest its profitable growth opportunities are few and far between.

Lumen reported $1.9 billion of cash and $17.93 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 $3.89 billion of EBITDA over the last 12 months, we view Lumen’s 4.1× net-debt-to-EBITDA ratio as safe. We also see its $694 million of annual interest expenses as appropriate. The company’s profits give it plenty of breathing room, allowing it to continue investing in growth initiatives.

We were impressed by how significantly Lumen blew past analysts’ EPS expectations this quarter. We were also happy its revenue outperformed Wall Street’s estimates. Zooming out, we think this was a good print with some key areas of upside. The stock traded up 1.1% to $3.56 immediately after reporting.

Updated: July 10, 2025 at 12:02 AM EDT

The latest quarterly earnings matters, sure, but we actually think longer-term fundamentals and valuation matter more. Investors should consider all these pieces before deciding whether or not to invest in Lumen.

Lumen doesn’t pass our quality test. To kick things off, its revenue has declined over the last five years. And while its scale makes it a trusted partner with negotiating leverage, the downside is its diminishing returns show management's prior bets haven't worked out. On top of that, its relatively low ROIC suggests management has struggled to find compelling investment opportunities.

Lumen’s EV-to-EBITDA ratio based on the next 12 months is 1.3x. While this valuation is optically cheap, the potential downside is huge given its shaky fundamentals. There are better stocks to buy right now.

Wall Street analysts have a consensus one-year price target of $5.01 on the company (compared to the current share price of $4.53).