Lumen Technologies, Inc.

Ladies and gentlemen, greetings and welcome to Lumen Technologies second quarter 2025 earnings call. During the presentation, all participants will be in a listen only mode. Afterwards, we will conduct a question and answer session. At that time, if you have a question, please press star followed by the number one on your telephone keypad. If at any time during the conference you need to reach an operator, please press star zero. As a reminder, this conference is being recorded Thursday, July 31st, 2025. I would now like to turn the conference over to Jim Breen, Senior Vice President Investor Relations. Please go ahead.

Good afternoon, everyone. And thank you for joining Lumen Technologies on today's call. On the call today are Kate Johnson, President and Chief Executive Officer, and Chris Stansbury, Executive Vice President, Chief Financial Officer. Before we begin, this conference call may include forward-looking statements subject to certain risks and uncertainties. All forward-looking statements should be considered in conjunction with the cautionary statements and the risk factors in our SEC filings. We'll be referring to certain non-GAAP financial measures reconciled to the most comparable GAAP measures, which could be found in our earnings press release. In addition, certain metrics to assess today exclude costs for special items as detailed in our earnings materials, which can be found on the investor relations section of the website. With that, I'll turn the call over to Kate.

Thanks, Jim, and thanks to everybody for joining the call. I'm happy to share that Lumen had a very productive quarter. We announced the sale of our consumer fiber to the home business AT&T for 5.75 billion, providing us strategic clarity and a path to financial freedom. We signed nearly $500 million of new PCF contracts since our last deal update. We strengthened our balance sheet with a successful $2 billion bond offering that extends maturities and reduce the coupon rate by over 3.5%, saving another 50 million or so in annual interest expense. And we reported strong revenue in EBITDA despite a one-time RDOF gift back. We're focused and executing extremely well. So now I want to get some context as to where I think we are in Lumen's transformation story. We see three critical financial milestones. The first is to clear a path to a healthy balance sheet and free cashflow to support our transformation. To that end, we're raising 2025 free cashflow guidance by 500 million. The second milestone is to return to EBITDA growth. And to that end, we're raising our 2025 run rate cost out target from 250 million to 350 million. This will put us near the high end of our EBITDA guide and gives us confidence that we have a path to EBITDA growth. With free cashflow and EBITDA milestones on track, I'll focus my comments on the third milestone, our pivot back to revenue growth. And I'll start with an update on building the backbone for the AI economy. The global AI race is a matter of economic development and national security for the United States. We are pleased with the administration's AI action plan and recent tax legislation, which not only reduces regulatory barriers and helps accelerate our current network build out, it also provides us with additional capital to invest in our nation's digital infrastructure. As such, we're making huge progress executing on the 8.5 billion of PCS contracts we announced last year. We're constructing 119 ILA sites. We've already deployed 1200 miles of fiber on 16 routes. And we've completed IRU conduit deployments across 55 additional routes. In another two years or so, we expect to finish this construction and overpull work generating over 400 million of annual revenue for Lumen for the remaining duration of the 20 year contracts. And as I mentioned upfront, we now have just under 9 billion in PCF business, adding nearly 500 million in new contracts since our last update. Our pipeline of PCF opportunities remains strong with a combination of demand for overpulls on existing conduit, which are higher margin and lower risk, as well as new route construction, which is inherently expensive, risky and lower margin. For any new route construction, we're working with our customers on creative deal structures to mitigate risks and manage costs. But please note, none of these remaining deals in the pipeline have been contemplated in our guidance or long range growth plans. They are purely upside. Additionally, I want to assure our investors that we will remain deeply disciplined in our approach by only inking deals that are value accretive to Lumen shareholders, even if this means stepping away from an opportunity. We simply won't be pulled back into the field of dreams route construction practices of legacy telecom. We're building new capacity trumped every other investment opportunity. At Lumen, we will build new capacity only where we need it and can get the right commercial terms. Our focus is on driving higher utilization of our assets and therefore better economic returns for our shareholders. Speaking of better network utilization, AI is forcing a pivotal shift in customer needs, driving unprecedented bandwidth demand for real time data processing and secure uninterrupted access to critical business applications. Our digital platform and network as a service or NAS offerings give customers the flexibility and agility needed to thrive in a multi-cloud hybrid world. In 2Q, we saw continued strength in adoption across three critical KPIs all quarter over quarter. The number of customers that purchased and used one or more ports was up 35% from first quarter. Total active NAS ports were up 31%, total active services were up 22%. So across all three metrics, the quarter over quarter growth rates in Q2 remained consistent with Q1, showing continued adoption growth and ultimately a significant driver of network utilization. Additionally, we're encouraged by the healthy patterns we're observing in repeat purchases and lower churn rates. Big name brands are buying Lumen NAS for their cloud connectivity needs. Companies like Pacific Life, Columbia, DXC Technology and so many more. There's even a large investment bank on this call that's using Lumen NAS, but they were too shy to let us talk about them with this audience and don't worry, we understand. As we continue to build and deliver quick, secure and effortless customer experiences, NAS adoption will continue to accelerate, ultimately becoming a significant part of our revenue growth story. Last quarter, I shared some detail about our digital platform architecture, talking about Lumen Control Center, Fabric Ports and Cloud Onramp. This is how we're building a platform to deliver cloud economics, enabling scaled revenue growth at declining marginal costs. We're continuing to innovate all of these important capabilities and we plan to announce some exciting Fabric Port innovation later this year, so stay tuned. But today, I'm happy to give you an update on our cloud on-ramp innovation. We're now working with all three major hyperscalers to connect our network directly into their cloud infrastructure, creating the fast lane for AI powered businesses, bypassing non-value intermediaries. Our goal is to build fully automated API driven up to 400 gig on-ramp offerings, so customers can move as much data as they want, wherever and whenever they need it. We're building fast, fast, fast, fast, fast, fast, quickly, securely and effortlessly. Today, we have more than 30 paying customers leveraging our existing multi-cloud networking capabilities through Lumen NAS. As we launch cloud on-ramps with each hyperscaler, we'll be able to democratize the networking fast lane for all AI powered businesses and bring multi-cloud networking to everyone digitally. which is my backbone, and the digital layer where we sell NAS. Here comes the third and it's an important one. By putting our physical network together with our digital platform, we're fulfilling our mission to connect people, data and applications quickly, securely and effortlessly. Ultimately, we've created a connected ecosystem for our customers in both the public and private space to purchase, provision and manage their network services as easily as they do their cloud solutions. Again, fully automated, API driven and available in digital marketplaces. This helps us scale Lumen offerings to new customers faster than ever before and more efficiently than in traditional telecom. Now there's obviously a lot of work to do, but what's exciting is that this isn't some far away vision we've already have many of the pieces in place. We have close to a thousand NAS customers. We have the three biggest cloud service providers connected to our fabric and co-building high speed on-ramps with us. And we already serve more than 1500 data centers across the US and that number is growing. So the newest piece of the puzzle is working with technology companies to integrate our digital network solutions directly into their cloud offerings. Today, networking and connectivity solutions are purchased separately from tech solutions. Soon, customers will be able to purchase their tech solutions bundled and integrated with Lumen networking services available in online marketplaces. So not only will this yield frictionless customer experiences, it gives Lumen scale commercial reach by turning any technology company into a sell with and a sell through channel partner. To start, we're working with AI companies, backup and recovery solution providers and security companies, all of whom are eager to create first mover advantage with this new business model. This connected ecosystem gives Lumen market velocity and reach, positioning us to win in the fast growing $15 billion multi-cloud networking market. We offer unparalleled cloud agility with carrier grade performance, engineered for AI, built for scale and designed for the demands of today. So in summary, we're pivoting Lumen back to revenue growth by restoring value to once commoditized cyber assets with innovation and new business models. We started by leveraging our physical network to create the backbone for AI. Then we built a digital platform to make it easy for customers to consume network services in a cloud-like consumption model. And now we're tying it all together into a digital commercial ecosystem so that our fiber network can help fulfill the ambition of AI. I think you can all agree, this is not your mom of Lumen.