Lumen Technologies, Inc.

Greetings and welcome to Lumen Technologies third 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. And at that time, if you would like to ask a question, please press the star followed by the one on your telephone. 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, October the 30th, 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 on our SEC filings. We will be referring to certain non-GAAP financial measures reconciled to the most comparable GAAP measures, which can be found on our earnings press release. In addition, certain metrics discussed today exclude costs for special items as detailed in our earnings materials, which can be found on the investor relations section of the Lumen website. With that, I'll turn the call over to Kate.

Thanks, Jim, and thanks, everybody, for joining the call. We had a very productive third quarter at Lumen. First, we reported strong financial results with revenue, EBITDA, and free cash flow all coming in ahead of street consensus. And we're executing well on the essential operational components of our business transformation, including things like a successful phase one implementation of our new ERP system, delivering more than $250 million in run rate cost takeout through the end of Q3, on track for $350 million this year. Continuing our balance sheet cleanup with an additional $2.4 billion debt refinancing and subsequent term loan repricing. And by making really good progress on our consumer fiber to the home sale to AT&T, now targeted to close in early 2026. But the real headline for this earnings call is the progress we're making to pivot this company back to growth, revenue growth. We signed an additional one plus billion in private connectivity fabric deals since our last update, bringing the total PCF deal value to over $10 billion. We continue to scale the adoption of NAS, reaching more than 1,500 enterprise customers since the launch of this platform. We launched our latest NAS innovation, Internet On Demand, or IOD, off-net, giving us nearly 100 times greater market reach to accelerate digital service sales and revenue growth. We're rapidly building a connected ecosystem with dozens of early adopter tech partners who see how Lumen's digital platform can accelerate their time to value with joint customers. And while we still carry the weight of declining legacy telecom revenue, our growing revenue base now comprises 50% of North American enterprise revenue, up from 35.5% just three years ago. We're proud of the significant progress our team has made this quarter, and we believe our investment thesis and strategy are showing tangible results. And those results are being recognized in both the credit and equity markets. The advent of AI has created an urgent need for structural change in network architecture, and Lumen is uniquely positioned to take advantage of the moment. So I want to share some quick thoughts on how we see the market, to provide context for the rest of my remarks. AI workloads are pushing data center footprints to grow 10 times by 2030, and public cloud spend is expected to eclipse $1 trillion in that very same period. Meanwhile, CIOs are on the hook to deliver insight at the speed of thought, while efficiently managing explosive data growth across complex, hybrid, and multi-cloud environments. But traditional network architectures, they were built for simpler times, and they just won't cut it anymore. They're not big enough or fast enough or intelligent enough or secure enough. Simply put, traditional networks let precious GPU investments sit idle. And Lumen is changing all of that, as Dave Ward, our Chief Technology and Product Officer, explained in his recent white paper. He advocates for a fundamental reset in networking to support the new era of Cloud 2.0. and identifies five essential networking capabilities required to thrive. Extreme bandwidth and low latency, data center interconnect, expansion into AI corridors, distributed cloud on-ramps, and programmable API-first networks. These requirements are the underpinning of Lumen's three-part strategy, including the physical layer, the digital layer, and the connected ecosystem. And today, I'll translate that into Lumen's evolving business model with some exciting updates, starting with building the backbone for the AI economy. Now, as I mentioned up front, we closed another billion plus dollars in PCF deals, bringing our total to over 10 billion with a healthy pipeline of deals remaining. Based on our current build schedule, the 10 billion of business in hand, plus the existing O&M run rate business for PCF, we expect we'll yield a recurring revenue stream ranging between 400 and 500 million by the time we exit 2028. I'll add two important footnotes regarding this business. First, none of the remaining deals in the pipeline have been contemplated in this revenue guidance. They are purely upside. Second, we 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. And the teams are doing a great job building that backbone. As of the end of September, we had completed more than 3,200 miles of overpulls on 27 different routes, approximately 130% of our in-year 25 targets, with a full quarter left to go for the year. But building the backbone for the AI economy, it's not just about overpulls for our hyperscaler and neocloud friends. It also requires massive upgrades to our physical network to support cloud 2.0 needs of enterprise customers. And for this, we're investing in three major fabric infrastructure projects, including rapid routes, data center expansion, and metro expansion. Market by market, we're upgrading capacity, increasing data center interconnects, and improving service delivery experience and timeframes to help our customers address the urgent needs of AI and multi-cloud architecture. These investments are how Loon is creating a ubiquitous, high-capacity networking fabric that enables our customers to connect everywhere that matters quickly, securely, and effortlessly. Okay, moving on to our digital platform update. We've created Looming Connectivity Fabric and NAS to address the need for programmable API-first networks in the world of Cloud 2.0. And I think our growth metrics confirm the market need for what we're offering. The number of active customers in the third quarter grew by 32% since last quarter. and the number of NAS fabric ports deployed grew by 30%, and the number of services sold by 36% in that same period. Across all three KPIs, we're showing strong growth. Now, I share these metrics with you each quarter because they're essential to our new business model, which is different than traditional telecom. I'll share more about that now so we can all ground ourselves in a common understanding of how Lumen will pivot to revenue growth. At the center of our new P times Q business model is the fabric port, one digital port that delivers many services. And when we say Q, we mean total active ports, or the number of net new ports in service. When we say P, we mean average selling price, average selling price of each service purchased through LumenConnect and deployed on the port. And in early 2026, we're going to extend this model with the launch of Project Berkeley, a pre-provisioned cross-carrier fabric port that lights up first and third party services on and off net, AI ready from day one. Simply put, Berkeley enables intelligent and universal access no matter who owns the pipes. Customers will be able to install the port and light up standard kits of services, including IOD or internet on demand, Lumen Defender, Voice, VPN On Demand, and a range of cloud on-ramps. Soon, through our connected ecosystem work, they'll also be able to light up third-party services. The commercial motions to drive digital growth are simple and repeatable by both our direct sales force and our partner channels. First, they land customers on new ports with a mix of starter services, and then they expand by attaching more services on installed ports, creating a P times Q flywheel of sorts. And at Investor Day next quarter, we'll share more about what we're learning as this new digital marketplace takes shape. Here's what we know. Growth will come through selling more ports and upselling more first and third party services. And that's why I'm so excited to share the next two announcements with you. On October 20th, we launched IOD OffNet, expanding our addressable market by close to 100 times, and that's just in the United States. Since Lumen NAS became generally available in January of 2024, the number one piece of customer feedback has always been, hey, bring Lumen NAS off the market, and here we are. It's early days, but the feedback so far has been very positive, with great customers like Xcel Energy noting how Lumen's off-net NAS will help them achieve important business outcomes, such as more resilient operations and more intelligent services. Now, the second announcement is about the Lumen connected ecosystem, a major driver of commercial expansion for both ports and services. Last week, we announced a strategic partnership with Palantir, where we not only agreed to buy services from each other, but we committed to bring those capabilities to joint customers. I want to call your attention to an article from the street entitled Palantir just signed a deal that could shift the AI power balance. The piece does a really nice job explaining how Lumen's network has become critical infrastructure in the AI race. The purpose of the connected ecosystem is to help more technology companies like Palantir gain competitive advantage by leveraging our platform and allowing Lumen to gain commercial reach. We're excited to report that we're working with dozens of other companies that not only understand the power of our new business model, but they also understand that our AI-ready network enhances the delivery of their solutions. Just some of the marquee tech companies we're working with include, of course, Microsoft, Google, and AWS, the big hyperscalers, but also data center companies like Digital Realty and QTS, AI platform companies like Palantir and Meter, data cloud services companies like Databricks and Snowflake, security companies like Palo Alto, Zscaler, F5, and Netscope, and backup and recovery and data protection services companies like Rubrik, Commvault, and Cohesity, and so many more. Together, Lumen Connectivity Fabric and Lumen's connected ecosystem offer a meaningful source of revenue growth. Our early read on growth from all of our digital capabilities That includes NAS, Edge Solutions, security, and the connected ecosystem. It's somewhere between 500 and 600 million of incremental revenue run rate exiting 2028. And while it's hard to accurately forecast revenue when you're creating a new market, we do feel good about these numbers and we'll continue to be super transparent about all of our assumptions and learnings as we go. To bring our revenue story home, PCF, should yield between four and 500 million of incremental revenue exiting 28. Lumen Digital should yield between five and 600 million of incremental revenue in the same period. That's 900 to $1.1 billion of incremental revenue exiting 2028. And that's the path for Lumen's business segment to achieve revenue growth. We're changing the game in networking by building the fastest open platform mesh network connected to everywhere that matters. while delivering a digital, on-demand experience so enterprises can quickly, securely, and effortlessly move their data. It's what our customers need, and it's what our investors deserve.