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Lumen Technologies (NYSE: LUMN)
Q3 2024 Earnings Call
Nov 05, 2024, 5:00 p.m. ET

Lumen Technologies Reports Positive Signs Amid Ongoing Transformation

Overview of Today’s Call

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks from Leadership

Operator

Greetings, and welcome to Lumen Technologies’ third quarter 2024 earnings call. Following the speakers’ remarks, there will be a question-and-answer session. [Operator instructions] This conference is being recorded. I now turn the call over to Jim Breen, senior vice president of investor relations. Jim, please proceed.

Jim Breen — Senior Vice President, Investor Relations

Good afternoon, everyone, and thank you for joining the Lumen Technologies third quarter 2024 earnings call. Today we are accompanied by Kate Johnson, president and CEO, and Chris Stansbury, executive vice president and CFO. Before we begin, I’d like to highlight our safe harbor statement on Slide 1 of our presentation. This call may include forward-looking statements that involve risks and uncertainties. Please review these statements alongside the cautionary notes in our SEC filings.

We’ll be mentioning non-GAAP financial measures, reconcilable to their GAAP equivalents, as stated in our earnings press release. Certain metrics discussed will also exclude costs related to special items, which are detailed in our earnings materials on the Investor Relations section of the Lumen website. With that, I’ll hand the floor over to Kate.

Strategic Updates and Financial Performance

Kate Johnson — President and Chief Executive Officer

Good afternoon, everyone. Thank you for joining us. The main point from our third-quarter report is clear: transformation is underway at Lumen. We are focused on evolving into a digital network services company that simplifies and modernizes our product offerings, infrastructure, and operations.

We are committed to two key growth areas: building an AI backbone and cloudifying telecommunications services. Progress has been substantial in both areas. However, as anticipated, our financial performance reflects challenges in our legacy revenue streams. Our ongoing investments in transformational initiatives alongside managing our traditional business are putting pressure on our EBITDA results. We acknowledge that we have a long journey ahead and recognize the current financial performance makes it difficult to envision immediate success.

Nonetheless, we believe the foundation for a turnaround exists. Our approach includes reducing costs, improving our balance sheet, and leveraging our resources to create new value for enterprise customers in a multi-cloud environment. It’s important to understand that while these changes will take time to impact our financial statements positively, our strategy is sound.

I want to outline our operational successes and future strategies. Firstly, Lumen is enhancing operational efficiency by increasing sales and improving customer satisfaction in our core business to maximize cash generation and customer value. Secondly, we are establishing the framework for the AI economy, which has contributed over $3 billion in private connectivity fabric sales through partnerships with top tech companies. Lastly, Lumen Digital is pushing the adoption of Network as a Service (NaaS) with over 400 customers, setting the stage for robust digital revenue growth.

Sales performance for the third quarter remained strong, with a 14% year-over-year increase in North American large enterprise and midmarket sales. IP sales saw an 18% uptick year to date, with 100- and 400-gig wave sales soaring by 50% in the same period. Customer satisfaction scores also improved significantly across all enterprise segments.

In our mass markets division, we celebrated a record number of fiber net additions, further solidifying our progress. We previously announced a target to achieve $1 billion in cost reductions by 2027 by consolidating our network from four architectures to one. This initiative, although complex due to our merger history and technology debt, is on track for execution and will require initial spending to see future benefits.

In summary, we are encouraged by our efforts in enhancing Lumen’s core services, driving growth in Quantum Fiber, and modernizing our operations. However, it’s essential to clarify that we are not seeking revenue growth from legacy telco services.

All transformation efforts are geared toward customers ready to utilize technology like GenAI to advance their businesses. The outdated legacy networks simply cannot accommodate the needs of modern enterprises; they are inadequate in size, speed, and security.

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Lumen’s Bold Steps Towards Leading the AI Networking Revolution

The shift to digital networking is reshaping the landscape for businesses everywhere, especially in complex multi-cloud hybrid environments. Lumen is at the forefront of this transformation, positioning itself for long-term financial growth through strategic initiatives. By focusing on key growth areas, the company aims to solidify its role as a vital player in the ever-evolving digital networking space.

Building the Backbone for AI

Lumen is becoming a crucial component of the AI economy. As the market increasingly recognizes that AI relies heavily on vast amounts of data, it’s clear that effective data centers and strong network connections are essential. Major tech companies like Microsoft, Meta, AWS, and Google have turned to Lumen as their trusted networking partner for AI solutions. Investors often ask how significant the AI market is for Lumen, leading to an exploration of the growth phases ahead.

Phases of Growth in Networking

In the first phase, major tech firms are expanding their networks to support the construction of data centers for AI model training. As long as these companies continue to invest in data centers, Lumen stands to benefit from numerous networking opportunities. Recently, Lumen has reported over $5 billion in sales related to its Partner Connectivity Fabric (PCF) during last quarter’s earnings call, providing substantial liquidity for immediate funding needs.

Since then, Lumen has added more than $3 billion in PCF sales, which allows the company to manage its debt more effectively. With ongoing discussions for further deals, updates will come when they have a significant impact on guidance. A new operations team is also dedicated to building next-generation AI networks, having already commenced work on this initiative.

Why Big Tech Trusts Lumen

Big Tech’s preference for Lumen stems from its extensive, reliable fiber network, which provides necessary capacity and security. Recently, Lumen’s private connectivity fabric received accolades for its strategic advantages, further establishing its value in the market. As enterprises begin deploying AI models at scale, they are increasingly aware of their need for major network upgrades, prompting them to seek Lumen’s services. Unlike competing companies, Lumen invests in meeting future networking requirements across all public clouds.

Growing Demand for Lumen’s Services

Lumen’s role as a thought leader in networking is evident through its performance. The demand for higher-performance services is rising, with IP sales increasing by 18% and wave sales by over 25% year-to-date through September. In response, Lumen has expanded its high-speed IP service to include 400-gig ports in 14 markets, with plans to broaden its reach further.

In a potential third phase of AI evolution, the interaction between AI systems is expected to drive data workload volumes higher than ever before. Although proof points are still emerging, Lumen believes it has the infrastructure and digital platform necessary to manage these demands effectively, positioning itself to benefit from this market shift significantly.

Innovating with Digital Platforms

Building the internet and critical infrastructure is merely the first step. Customers expect to utilize these resources quickly and securely. In response, Lumen is developing a digital platform that integrates seamlessly with its fiber network, allowing businesses to easily design, price, and order secured networking solutions in a hybrid multi-cloud environment. This unique approach stands to provide Lumen with a considerable competitive advantage.

Last year, Lumen launched its Network-as-a-Service (NaaS) offering, which has already attracted over 400 customers. NaaS allows clients to select network components flexibly and takes a consumption-based approach. Recent successes include partnerships with notable organizations such as Agilysys and the Pac-12, and Lumen has even been recognized as the top NaaS provider in North America.

Looking Ahead: Lumen’s Future

The strides made in such a short time frame highlight Lumen’s repositioning for the future. With a robust fiber network, innovative architecture, and backing from leading tech companies, Lumen is equipped to redefine networking. As the company continues to pull together all its resources, the outlook remains positive.

Moving forward, Lumen holds significant financial assets, technological resources, and leadership capabilities. With a solid strategy and promising momentum, the company’s future appears incredibly bright.

Christopher David Stansbury — Executive Vice President and Chief Financial Officer

Thank you, Kate. Lumen is committed to advancing its business towards transformation. In the third quarter, we signed over $3 billion in new PCF deals, reinforcing our status as a preferred partner for developing reliable networks for AI. Additionally, we executed a debt exchange aimed at managing around $800 million of our maturities to 2032.

We are also confident in our ability to generate free cash flow, contributing $170 million toward our pension obligations, which brings us close to 90% funding. With over $8 billion in new PCF sales booked since June, our customers have affirmed Lumen’s unique role in building the AI economy’s essential backbone. While we will no longer report specific PCF sales quarterly, we have highlighted the recent $3 billion for three primary reasons.

Firstly, we take pride in our team’s efficiency in capturing this once-in-a-lifetime market opportunity. Secondly, the significant nature of this deal will boost our 2024 cash flow guidance, which I will clarify shortly. Lastly, today’s PCF announcements share similarities with previous sales in scale and will also involve new routes with varied enterprise clients, with discussions likely to extend over the next few quarters.

Lumen Technologies Reports Q3 Performance Amid Transition to AI Network Growth

Key Developments in Financial Metrics and Strategy

Lumen Technologies is focusing on the growing opportunities within the AI economy while emphasizing core metrics like sales growth, margin improvement, and free cash flow generation. As highlighted in last quarter’s call, Lumen’s shift toward driving PCF (Platform, Cloud, and Fiber) sales is seen as just the start of tapping into a significant Total Addressable Market (TAM). This shift is expected to create a steady revenue stream that could help counterbalance the declining revenues from legacy products.

Solid Cash Flow Boosts Financial Health

Expected cash from Lumen’s initial $5 billion in PCF sales is projected to enhance free cash flow, supporting the company’s long-term sustainability and expected positive cash flow growth. Additionally, contracts worth over $3 billion provide the flexibility necessary to manage debt and improve the company’s capital structure. During the quarter, Lumen executed a debt exchange, refinancing over $800 million in debts due from 2026 to 2029 to 2032. This restructuring has significantly reduced upcoming maturities, from approximately $2.6 billion down to $1.8 billion through 2028.

Commitment to Transparency in Transition

Recognizing the messy nature of industry transformations, Lumen has committed to transparency regarding its progress and challenges. In the first quarter, demand for networking began to rise, and the company delivered into that demand in the second quarter. This quarter, Lumen reiterated its confidence by increasing free cash flow guidance once again while acknowledging the decline of its legacy business, which aligns with broader industry trends. Efforts to modernize and achieve $1 billion in cost efficiencies will pull down 2025 EBITDA before recovery in 2026, underlining the importance of credibility in their messaging.

Sales Growth in Enterprise and Mass Market Segments

Lumen’s strategy appears solid as it continues to identify value creation opportunities through increased sales and improvement in its balance sheet. The company’s enterprise channels, particularly large and midmarket segments, demonstrated a strong performance, with year-over-year sales climbing nearly 14%. The Quantum Fiber broadband initiative also set a record by adding significant subscribers this quarter.

Quarterly Revenue Trends and Analysis

Despite ongoing challenges from legacy product declines, there were positive signs in Lumen’s financial performance. Reported revenue dipped 11.5% year over year to $3.221 billion, with 32% of this decline attributed to divestitures and the sale of their CDN business. The business segment’s revenue fell 12.7% to $2.536 billion, with similar reasons contributing. In particular, mass market revenue decreased 6.9% to $685 million, while adjusted EBITDA stood at $899 million with a 27.9% margin, leaving free cash flow at a noteworthy positive $1.2 billion due to contributions from recent PCF sales.

Performance Insights by Sector

Analyzing revenue streams, Lumen’s North America business, excluding wholesale and other sectors, saw a 6.9% decline. Specifically, large enterprise revenue diminished by 8.2%, while midmarket revenue decreased by about 6.9%. Although the public sector revenue decreased 4% year over year, large bookings in this area suggest future growth potential.

Focus on Future Sales and Growth Strategy

Wholesale revenue saw a significant year-over-year decline of approximately 9%, largely due to decreasing demand for legacy services. Moreover, the international segment experienced a sharp 64.8% drop, primarily due to divestitures. Nevertheless, Lumen showed promise in its grow product line, led by enterprise broadband, contributing to an overall rise of 4% year over year in North America’s enterprise channels. With sustained efforts in the Grow category, Lumen anticipates steady growth ahead.

Mass Market Improvement in Fiber Broadband

Lumen’s fiber broadband revenue showed a remarkable 16.6% growth year over year, contributing to about 40% of the mass market broadband revenue. This quarter added 131,000 fiber-enabled locations, aiming for an annual target of 500,000. Notably, Quantum Fiber customers rose to over 1 million, marking the best quarter for fiber net additions in Lumen’s history.

As of September 30, the penetration of legacy copper broadband was about 9%. Lumen’s strategic moves are geared toward enhancing its market position and responding effectively to the rapidly changing demands of the digital landscape.

Lumen’s Financials Reflect Strategic Shifts Amid Industry Changes

Examining Market Strategies for Future Growth

For the third quarter of 2024, adjusted EBITDA was $899 million, down from $1.049 billion a year earlier. The decline was influenced by decreasing legacy revenues, elevated seasonal operating expenses, and initial costs linked to the custom networks group. The adjusted EBITDA margin for this quarter stood at 27.9%, marking a drop of 90 basis points from the previous year. This decline is a mild improvement compared to the 270-basis-point drop seen in the second quarter.

Financial Impact of Special Items and Capital Expenditures

Special items affecting adjusted EBITDA reached $56 million, largely due to transaction and separation costs. The company reported capital expenditures of $850 million, while free cash flow, excluding special items, rose to $1.2 billion. Leaders emphasized ongoing investments in network capabilities to meet customer demands and enhance overall cost structures.

Outlook for Future Earnings and Cash Flow

Lumen estimates its fiscal year 2024 EBITDA will range between $3.9 billion and $4 billion. However, due to current business trends and cost implications from new PCF sales, projections suggest EBITDA may trend towards the lower end of this range. Expectations for 2025 indicate continuing declines driven by legacy revenue reductions, startup costs, and costs associated with transformation strategies aimed at cost improvements.

In 2024, capital expenditures are anticipated to be between $3.1 billion and $3.3 billion, with cash interest projected in the range of $1.15 billion to $1.25 billion. Importantly, free cash flow guidance has been raised, now expected to lie between $1.2 billion and $1.4 billion. This revision incorporates increased operational expenditures, capital investments, and cash flows linked to PCF sales growth, as well as spending aimed at enhancing overall margins. Kate Johnson will now conclude with final thoughts.

CEO Kate Johnson’s Insights on Company Strategy

Kate Johnson — President and Chief Executive Officer

Thank you, Chris. Our position may differ from others in the industry. However, we believe our growth initiatives will eventually counterbalance inherent challenges, and we appreciate the opportunity to share our vision.

Engaging With Analysts: Q&A Session Begins

Operator

Thank you. [Operator instructions] Your first question comes from Michael Rollins with Citi. You’re on air.

Michael Rollins — Analyst

Good afternoon. I have a question regarding the recent PCF announcements. Were the three new customer deals linked to this quarter’s sales or previous figures? Also, Kate, could you share insights on the business sales improvements you’ve seen?

Specifically, what impact are these new PCF sales having on gaining further clients from hyperscale enterprises?

Kate Johnson — President and Chief Executive Officer

Thanks, Mike. The four customer success stories reflect our $8.5 billion total and aren’t separated into distinct categories. These deals indeed attract additional business.

We’ve created a robust ecosystem by leveraging all three cloud services, which helps streamline operations for our customers. They recognize a growing need for extensive networks due to increasing workloads. Although we can’t confirm the exact metrics are related to AI, our interactions suggest a significant demand driven by these technological advancements.

This scenario aligns perfectly with our strategy: tech companies develop networks and AI models, then leverage them to enhance operations, which ramps up their network requirements. We’re positioned as thought leaders in this space.

Jim Breen — Senior Vice President, Investor Relations

Thank you. Next question, please.

Operator

Your next inquiry comes from Sebastiano Petti with JPMorgan. The floor is yours.

Sebastiano Petti — Analyst

Thank you. Regarding the recent PCF announcement, should we expect a similar timeline as last quarter? I’m trying to gauge cash contributions and IRU structures from the earlier discussions.

Christopher David Stansbury — Executive Vice President and Chief Financial Officer

Yes, that’s correct. The incremental deals signed this quarter share similarities in margins and cash flows with previous deals. It’s a logical approach to use for modeling purposes.

Sebastiano Petti — Analyst

That’s useful, thank you. Considering your 2024 guidance range, what should we note regarding potential timing on cost reductions that might impact this? Thank you.

Christopher David Stansbury — Executive Vice President and Chief Financial Officer

Our guidance is influenced by seasonal shifts; we generally see increased costs during the summer months, including construction and energy expenses, which typically decrease in the fourth quarter. We’ve also made key investments this quarter to enhance our operations, aiding our forecast for meeting the lower end of our guidance.

Operator

Lumen Technologies Discusses AI Demand and Market Strategies

During a recent investor call, key executives from Lumen Technologies responded to questions regarding their customer base, capital expenditures, and market strategies, particularly in the context of rising AI demands.

Questions on Customer Mix and Sales Strategy

Batya Levi — Analyst

Thank you. I have a question about the new PCF sales. Should we assume that they’re mainly from major tech companies, or are you observing any enterprise interest? Also, did I understand correctly that the new sales will follow the existing structure of your original PCF deal? Would this imply that the capex requirements are largely covered by that initial deal? Lastly, how should we view the prepaid revenue mix from these additional sales? Thank you.

Kate Johnson — President and Chief Executive Officer

I will address the first part, and then Chris will handle the second part.

Christopher David Stansbury — Executive Vice President and Chief Financial Officer

Absolutely.

Kate Johnson — President and Chief Executive Officer

As we mentioned last quarter, we have over 15 customers in various stages of engagement. Some are repeat clients while others are new. The majority of these customers are focused on building AI models. Many of the notable firms we highlighted are investing heavily in infrastructure to support AI developments, and they are choosing Lumen as their partner.

This trend is significant. The next phase involves enterprise customers, who typically invest less because they aren’t as focused on commercializing AI models. Instead, they utilize AI to enhance their own business operations and improve products and services for their clients.

Christopher David Stansbury — Executive Vice President and Chief Financial Officer

On that second question regarding the capex, of the total $12 billion opportunity, the $8.5 billion we’ve secured to date remains consistent with what we shared last quarter. The ratios of capex to sales, and recurring versus upfront amounts, are in alignment with our previous parameters. This year, we’re expected to see a timing shift in cash flow due to when deals were signed. However, significant capex will be factored into our guidance for 2025.

Importantly, as we progress, we’re focused on a $7 billion opportunity related to new networks that we are building. The economics for these new routes may differ significantly from existing ones. We’re currently engaged in numerous discussions, and as we hone our cost estimates, we will adjust guidance and keep you informed. However, it may take a few quarters before we solidify this information.

Batya Levi — Analyst

Understood. Thanks.

Jim Breen — Senior Vice President, Investor Relations

Next question, please.

Operator

The next question comes from Jim Schneider with Goldman Sachs. Your line is open.

Jim Schneider — Analyst

Good afternoon. I’d like some clarification on the additional $3 billion of the $7 billion opportunity you mentioned. Does this indicate that $4 billion is still in the pipeline, or is there even more opportunity beyond the initial $7 billion that could extend the total to $12 billion? Additionally, can you comment on your mass market business? Are you seeing any firm interest in potentially divesting that asset?

Christopher David Stansbury — Executive Vice President and Chief Financial Officer

Certainly, Jim. To clarify, within the $7 billion opportunity, we’ve confirmed that over $3 billion has already been secured. So, around half of that is now accounted for. The rest concerns new routes, and as I mentioned earlier, further developments will take time. There’s certainly continued interest from customers, both in new and existing routes. However, we won’t provide ongoing updates about the pipeline since it’s now part of our standard business operations.

The point of discussing the $5 billion and $7 billion opportunities was to confirm that we’re witnessing a significant market presence, and we will report on updates as they influence guidance. Now, concerning the consumer segment, I want to acknowledge the excellent progress our team has made, which is gaining wider recognition.

Over the years, we’ve consistently suggested that the mass market space is ripe for consolidation, and current trends seem to support that. We have two strong segments: enterprise and consumer, but they possess different return profiles and may not be strategically aligned. When the timing is right, we will consider separating them. While we have nothing to announce today, the economics of our consumer business—especially regarding copper and fiber—are clear for your analysis on their impact on our strategic focus.

Operator

Thank you. The next question comes from Jonathan Chaplin with New Street. Your line is open.

Jonathan Chaplin — Analyst

Thanks, everyone. I’d like to follow up on your thoughts about selling the mass market business. I recall you considering separating the fiber operations from the rest of this segment. Could you explain how you might achieve that physical network separation? Also, could you provide context on how much of your network has been affected by the PCF contracts so far? I believe Level 3 originally employed 12 conduits, and I’ve heard that some of these conduits have been sold or rights transferred in connection with the new PCF agreements.

Company Progress Report: Key Insights on Financial Strategy and Network Expansion

Kate Johnson — President and Chief Executive Officer

To address your second question first, I want to clarify something from our last earnings call: we have not sold any of our assets. Our focus remains on long-term leases regarding conduit and fiber. We are expanding existing routes and creating new ones by installing additional conduit as needed.

We have forged a significant partnership with Corning, leveraging their new fiber technology, which has the potential to quadruple our network’s capacity. With our strategy in place, we possess the infrastructure necessary to support our customers effectively.

It’s essential to highlight that these long-term lease agreements establish profound collaborations with our customers, who, by contract, cannot compete with us in those regions. There have been some misunderstandings in the media regarding this, but I assure you these are valuable agreements that provide substantial cash flow, essentially acting as the propulsion needed for our growth. Chris, would you like to discuss the consumer side?

Christopher David Stansbury — Executive Vice President and Chief Financial Officer

On the consumer side, I will keep details limited because we are still assessing our position. Remember, our consumer business can be viewed in two segments: the copper business, which yields most of our EBITDA, and the fiber business, which requires a considerable amount of capital expenditures (capex). These segments could potentially be separated, though it isn’t straightforward. We have tackled more challenging matters in the past, demonstrating our commitment to effectively manage our resources. I’ll share more once we have a clearer vision.

Jonathan Chaplin — Analyst

Chris, does the recently announced Ziply transaction impact your assessment of asset value?

Christopher David Stansbury — Executive Vice President and Chief Financial Officer

The recent transactions within the market validate our belief that consolidation is vital and that there is considerable value in these assets. We own a substantial asset within this consolidation landscape, and I will allow you to draw your conclusions based on that.

Jonathan Chaplin — Analyst

Thank you, guys.

Operator

The next question comes from David Barden with Bank of America. Your line is open.

David Barden — Analyst

Thanks for taking my questions. I have two. First, regarding the $3 billion Chris mentioned, could you elaborate on how it aligns with the $5 billion deal from before? You’ve indicated that about 15% of the previous $5 billion deal, around $800 million, would appear within a three- to four-year construction timeline, with another 5% over 20 years for maintenance. Should we expect the same cash flow outlook with this $3 billion arrangement, alongside the new flexibility you’ve created for addressing balance sheet issues?

Christopher David Stansbury — Executive Vice President and Chief Financial Officer

Thank you for your question, David. Since joining two and a half years ago, I’ve seen an abundance of speculation about our strategy. I want to emphasize that we are committed to transparency regarding our capabilities. To clarify, we are not utilizing funds from our partners to pay down our debt, only to allocate those resources to network developments and investments necessary for our future success. The $5 billion deal enabled us to manage our investment priorities, including aspects like pension obligations and debt repayments, while the new $3 billion agreement enhances our flexibility to reduce liabilities.

It’s important to recognize that we entered this situation with cash reserves. We will be using various funding sources to safely reduce our debt levels, and you will see the impacts of this soon.

David Barden — Analyst

Got it, thanks. My second question is about the expected EBITDA increase of at least $1 billion in the fourth quarter as a baseline for 2025. You’ve mentioned that 2025 will likely see a decline. Can you give us a clearer picture of what that drop might entail? Also, as you examine the fourth quarter of 2023 compared to 2024, can you help us understand what trajectory we should expect?

Christopher David Stansbury — Executive Vice President and Chief Financial Officer

I cannot go into specific guidance for 2025 at this point. We are still evaluating the necessary investments related to our deals. Notably, customers involved in our contracts are already expressing a desire for us to accelerate the process, which adds another layer to our planning. Consequently, we will finalize our approach for the upcoming quarter’s investments and what we will need for the $1 billion target. It seems that current market expectations may be slightly higher than our own, yet we remain keen to meet our objectives.

Lumen Technologies Updates Investors on Financial Outlook and Growth Strategies

Key Points from Recent Analyst Questions

During a recent earnings call, executives at Lumen Technologies provided insights into their financial health and growth prospects. The discussion highlighted the ongoing transition to a digital platform and outlined future revenue expectations.

Financial Performance and Expectations

Lumen CEO Kate Johnson remarked on the company’s promising growth in North American enterprise sales, noting the need for patience regarding financial impacts. “We believe that 2026 will be a significant inflection point due to our cost-cutting measures,” she stated, while acknowledging the necessity for further work before providing specific forecasts.

Chief Financial Officer Christopher David Stansbury shared that the company typically sees sales convert to revenue within a three-month period. He emphasized the recent growth in revenue for the “Grow” segment, which increased to 4% year-on-year from just 1.5% in the previous quarter. “This is encouraging, but we must monitor the trends closely,” he cautioned, as the legacy business continues to generate substantial cash flow, impacting overall revenue growth.

Advisor Insights on NaaS Adoption and Revenue Impacts

During the Q&A, analyst Nick Del Deo inquired about the contributions of the Network as a Service (NaaS) segment to Lumen’s revenue. Johnson explained that while it’s early to gauge exact figures, the company is focused on customer engagement and satisfaction. “We are fortunate to have a strong network,” she said, indicating that existing customers are beginning to expand their service usage.

The executive acknowledged that while they anticipate incremental revenue from NaaS, concrete results will take time to materialize. “Every cloud business needs time to scale effectively,” Johnson noted, as Lumen utilizes cloud methodology to enhance its offerings.

Challenges and Market Dynamics

Greg Williams from TD Cowen raised concerns about potential dis-synergies resulting from ongoing market changes, particularly regarding fiber and copper splits in overlapping markets. Stansbury reassured investors that Lumen’s acquisition of CenturyLink and Level 3 positions them well. “Our enterprise delivery will remain strong despite these adjustments,” he said. He further clarified that the quarterly performance dips in certain service segments, specifically VPN and Ethernet, are not indicative of broader issues but rather represent temporary fluctuations.

Email analyst Frank Louthan also sought clarification on the revenue from wavelength contracts. Stansbury noted that these contracts usually see revenue expansion over time, presenting further opportunities. “While it’s challenging to predict exact figures, we could see potential upside to the current $8 billion in revenue over the coming years,” he projected.

This discussion exemplifies Lumen’s strategic focus on digital transformation, customer retention, and navigating market complexities, as executives remain cautiously optimistic about future growth and revenue potential.

Lumen Technologies Discusses $8 Billion Ambitions Amid Competitive Landscape

Optimizing Growth While Building Customer Confidence

During a recent conversation, the focus centered on the $8 billion initiative, with discussions ongoing about accelerating progress. Customers seem eager to engage with Lumen, indicating strong confidence in the company’s network-building capabilities. While specific details remain undisclosed, there’s an acknowledgment that faster development could be on the horizon.

Insights into Market Position and Fiber Expansion

Frank Louthan — Analyst

Amidst competition from emerging private overbuilders, Christopher David Stansbury — Executive Vice President and Chief Financial Officer, provided insights into the company’s market footprint. Lumen currently services approximately 18 million homes, with significant potential for growth in fiber connections. Out of these, around 4 million homes are already served, which suggests that the remaining 8 million home opportunity remains viable, especially in attractive rural markets.

Free Cash Flow Expectations and Financial Flexibility

Eric Luebchow — Analyst

In a follow-up discussion, Luebchow inquired about the recent improvement in Lumen’s financial flexibility. Stansbury responded affirmatively, expressing confidence that the company would generate positive free cash flow moving forward. He noted, however, that there might be fluctuations year-to-year due to factors such as tax payments and capital expenditure timing. Overall, the focus remains on achieving a positive cumulative cash flow while managing economic realities.

Final Thoughts and Future Engagement

As the call concluded, Kate Johnson — President and Chief Executive Officer, expressed gratitude for the engagement and reaffirmed Lumen’s commitment to transparently reporting advancements in its strategies at upcoming conferences.

Call Participants:

Jim Breen — Senior Vice President, Investor Relations

Kate Johnson — President and Chief Executive Officer

Christopher David Stansbury — Executive Vice President and Chief Financial Officer

Michael Rollins — Analyst

Sebastiano Petti — Analyst

Chris Stansbury — Executive Vice President and Chief Financial Officer

Batya Levi — Analyst

Jim Schneider — Analyst

Jonathan Chaplin — Analyst

David Barden — Analyst

Nick Del Deo — Analyst

Greg Williams — Analyst

Frank Louthan — Analyst

Eric Luebchow — Analyst

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