Lumen Technologies Q4 2024 Earnings Report

Laramide Resources EPS Results

• Actual EPS: C$0.09
• Consensus EPS: -C$0.05
• Beat/Miss: Beat by +C$0.14
• One Year Ago EPS: N/A

Laramide Resources Revenue Results

• Actual Revenue: N/A
• Expected Revenue: $3.20 billion
• Beat/Miss: N/A
• YoY Revenue Growth: N/A

Laramide Resources Announcement Details

• Quarter: Q4 2024
• Date: 2/4/2025
• Time: After Market Closes
• Conference Call Date: Tuesday, February 4, 2025
• Conference Call Time: 5:00PM ET

Lumen Technologies Q4 2024 Earnings Call Transcript

Presentation

[Operator]

Greetings, everyone, and welcome to Lumen Technologies' Fourth Quarter and Full Year twenty twenty four Earnings Call. During the presentation, all participants will be in a listen only mode. Afterwards, we will conduct a As a reminder, this call is being recorded today, Tuesday, 02/04/2025. Your speakers for today are Kate Johnson, CEO and Chris Stansbury, CFO. I would now like to turn the conference over to Jim Breen, Senior Vice President, Investor Relations.

[Operator]

Please go ahead, sir.

[Jim Breen, Senior VP - IR at Lumen Technologies]

Good afternoon, everyone, and thank you for joining Lumen Technologies' fourth quarter twenty twenty four earnings call. On the call today are Kate Johnson, President and Chief Executive Officer and Chris Stansbury, Executive Vice President and Chief Financial Officer. Before we begin, I need to call your attention to our Safe Harbor statement on Slide one of our fourth quarter twenty twenty four presentation, which notes that this conference call may include forward looking statements subject to certain risks and uncertainties. All forward looking statements should be considered in conjunction with cautionary statements and the risk factors in 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.

[Jim Breen, Senior VP - IR at Lumen Technologies]

In addition, certain metrics discussed today exclude costs for special items as detailed in our earnings materials, which can be found on our Investor Relations section of the Lumin website. With that, I'll turn the call over to Kate.

[Kate Johnson, President and CEO at Lumen Technologies]

Thanks, Jim, and thanks to everybody for joining the call today. I'll focus my remarks with a quick look back on 2024, and then I'll set the vision for 2025 and beyond. In short, 2024 was a remarkable year for Lumin Technologies. We accomplished so much, way too much to share on this call, so I'll just focus on a few of the big things. We strengthened our financial position and restored market confidence in Lumin and it started with the debt restructuring that gives us ample time to execute our transformation.

[Kate Johnson, President and CEO at Lumen Technologies]

We lowered our debt load by $1,600,000,000 in 2024 and recently sent redemption notices for another $200,000,000 And importantly, we drove material improvement in both our equity and debt trading values. Next, we established Lumin as the trusted network for AI, inking $8,500,000,000 in closed sales with big tech companies like Microsoft, AWS, Google and Meta among others. These deals helped us strengthen our free cash flow and enable us to self fund our transformation. We continue to be in deep discussions with several customers to build new routes and we're going to provide more detail on those deals as it makes sense to do so. Throughout 2024, we also made material progress transforming our corporate functions.

[Kate Johnson, President and CEO at Lumen Technologies]

And some quick highlights include in service operations and assurance, we delivered materially better year over year customer SaaS scores in all four enterprise segments, all four quarters in a row. And we built an engine to deliver large complex private network projects on budget and on time with the delivery of the State of California's Digital Inclusion Program as the latest proof point. Our enterprise sales and customer success teams built a robust engine that delivered over 15% year over year sales growth in our North American enterprise channels with more than 13% sales growth in IP and Waze and drove more than 500 new customers to adopt the Lumen Digital NAS platform. Our marketing team built new storytelling muscle standing side by side on stage with big tech and great companies like Intelsat, VSP Vision Care, Churchill Downs and the PAC twelve to evangelize the criticality of fiber networking and reposition Lumen as the trusted network for AI. Our network engineering, IT, and product teams delivered dozens of mission critical programs for us.

[Kate Johnson, President and CEO at Lumen Technologies]

And one breakthrough program is the delivery of Lumen's unified network architecture, enabling 85% of new Ethernet and IP data service sales in major metro markets. This is the long overdue integration of our four network architectures and has already started delivering benefits. The unified network not only enables NAS and other more advanced digital services, but in some cases, it reduces our average time to deliver by more than twelve days and reduces implementation costs by as much as 50%. What's more, our HR team successfully embedded our Play to Win culture in every aspect of the company. We can feel it every day in the work that we do, and of course, we're proud of the external recognition we've received with more than 15 culture awards so far.

[Kate Johnson, President and CEO at Lumen Technologies]

But most importantly, we're excited to see major improvements in our employee engagement scores born out of this work because it really matters to our overall mission. And finally, our mass markets quantum fiber team delivered more than 500,000 enablements with greater than 90% year over year growth in fiber net adds, while simultaneously reducing expenses year over year. In summary, our progress in 2024 did a few things. It validated our mission, our vision, our strategy, our culture, and especially the strength of our team. And it showed that we have great execution muscle and set a strong foundation for accelerating our transformation work.

[Kate Johnson, President and CEO at Lumen Technologies]

Okay. Let's shift gears and look at, 2025. We have three clear priorities, driving operational excellence, building the backbone for AI, and cloudifying telecom. And each of these priorities has detailed plans to deliver more customer, shareholder and employee value in 2025 and beyond. Starting with Lumen's financial goals, our 2025 guidance for EBITDA is between $3,200,000,000 and $3,400,000,000 and free cash flow is between $700,000,000 and $900,000,000 But the big takeaway is this, with a combination of improved revenue mix and cost takeout, we see Lumen returning to full year EBITDA growth in 2026.

[Kate Johnson, President and CEO at Lumen Technologies]

I'm going to let Chris provide more detail on this shortly. Next, we continue to drive operational excellence in everything we do, ensuring continuous improvement in sales execution and churn mitigation, simplifying our core business processes and leveraging modernized ERP, CRM, ops platforms and artificial intelligence to deliver improved employee, customer and partner experiences. We've already identified more than $1,000,000,000 of OpEx and a big chunk of network expense that we plan to eliminate by year end 2027 with this work. And we expect to exit 2025 with over $250,000,000 of run rate cost benefit delivered. Okay.

[Kate Johnson, President and CEO at Lumen Technologies]

Before I dig into our big two growth levers, I want to provide our view on the market given last week's events in the world of AI. Today, enterprise CIOs are faced with the expectation that they will continue to deliver warp speed innovation at an efficient cost. And they have to push lots of data to the right users at the right places at the right time for the right cost. And the architectural landscape has never been more complex with apps and data sprinkled all over the place on prem at the edge and in multiple clouds. High speed, low latency connectivity is table stakes, but it's not the endgame.

[Kate Johnson, President and CEO at Lumen Technologies]

CIOs need digitally controlled, higher bandwidth, higher performing, higher reliability, and higher security networks to navigate this complexity. And that's exactly what we're building at Lumen, a digital platform on top of a rapidly expanding fiber network to help CIOs design, control, configure and consume network services in a multi cloud AI first world. So, when a new global player in AI announces a disruptive breakthrough, we see that as a great thing. Competition increases velocity and decreases cost and basically accelerates the democratization of technology. So in short, the disruption we saw in the market last week will likely make AI more accessible to companies.

[Kate Johnson, President and CEO at Lumen Technologies]

And that just means that our total available market for network fabric just got a lot bigger. That's why we're confident in our two big bets. So let me crack into them. Starting with the first one, building the backbone for the AI economy, we've begun construction on the backlog of work generated from the $8,500,000,000 in PCF sales and it's going really well. I want to share more on our thinking about how we leverage our network for maximum shareholder returns.

[Kate Johnson, President and CEO at Lumen Technologies]

We are increasing two variables at the same time, capacity and utilization. You should be able to see a high level model on the chart in the webcast right now. And I'll start with capacity on the left side of the page. Because we see a significant increase in demand for our network infrastructure across both the hyperscaler and enterprise market segments, we're driving network expansion in several ways. We're building new routes funded by our customers, often multi tenant with great economics.

[Kate Johnson, President and CEO at Lumen Technologies]

We're partnering with Corning to use their latest fiber innovations, allowing us to get as much as four times more capacity from existing and new routes. And we're leveraging photonics innovation for up to two times greater fiber efficiency. If you add all that up, our total network capacity has the potential to go from 12,000,000 total intercity fiber miles in 'twenty two to 47,000,000 miles by 'twenty eight, giving us unmatched room for growth for network services. And I'm not even including our 22,000,000 metro miles in that number. The second aspect of our plan to drive improved shareholder return is all about utilization of our assets.

[Kate Johnson, President and CEO at Lumen Technologies]

On the right side of the chart, you'll see that from 22% to 28%, we simultaneously increase overall network capacity as I just described. But we're also going to increase the overall utilization of our network from 57% to 70%. This is because the hyperscalers are leasing once empty conduit and they're funding new builds, while enterprises are upgrading their networks dramatically. In fact, we saw a nearly 50% increase in 104 gig wave sales across large enterprise and mid markets in 2024 alone. We're closely monitoring customer demand signals and we'll continue to make important capital investments in key major metros to capture this traffic growth.

[Kate Johnson, President and CEO at Lumen Technologies]

Additionally, we'll continue to examine our utilization and capacity planning business rules for maximum shareholder return, adjusting as market dynamics dictate. In summary, the growth lever of building the backbone for AI represents a huge accretive opportunity for this company. We're not only driving the strongest utilization of our network assets in the history of the company, we have unmatched capacity for growth at exactly the right time. Moving on to our second growth vector, disrupting the market by cloudifying telecom. Simply put, we're building a digital layer on top of our physical network to help us deliver friction free, high performing digital network experiences.

[Kate Johnson, President and CEO at Lumen Technologies]

So long dump pipes, hello, intelligent digital network fabric that enables CIOs to be successful in a multi cloud AI first world. As I shared earlier, enterprise CIOs need to move workloads between So, so enterprises were forced to use carrier neutral facilities to access the cloud connectivity market, driving growth and costly and inefficient cross connects. Second, most traditional telecom companies aren't building a platform for digital dynamic frictionless customer experiences. Now Lumen is fixing all of that using ourselves as customer one. I'll share a specific example with a supporting graphic on the webcast that you should see right now.

[Kate Johnson, President and CEO at Lumen Technologies]

To enable our Quantum Fiber's quote to cash process, for example, we utilize multiple cloud and SaaS providers. Order processing workloads are hosted on one public cloud, leveraging its native capabilities for seamless flow through provisioning. But once it's processed, that data required for business operations and financial reporting is then transferred to our corporate data warehouse, which is hosted in a completely different public cloud. Using our own Lumen network fabric, which is now directly connected to three big public clouds in a virtual networking ecosystem, our quantum fiber quote to cash network architecture bypasses carrier neutral facilities and eliminates physical cross connects and their fees, as well as reduces overall port usage. The outcome is a modern multi cloud network architecture at lower cost than traditional architectures with improved network speed, security and reliability.

[Kate Johnson, President and CEO at Lumen Technologies]

We plan to bring this lower cost, higher performing architecture to our customers in late twenty twenty five. And look, the point is this, how we cloudify ourselves to operate efficiency efficiently in a multi cloud hybrid architecture world is informing how we innovate and commercialize our product and services portfolio for our customers. We're creating an innovative networking ecosystem that will bring new value to enterprise CIOs in today's multi cloud AI first world. And this will give Lumen access to a net new total available market that we estimate to be at least $15,000,000,000 We have the right assets, the right vision, the right team at exactly the right time. And that's why we're bullish on our pivot to growth.

[Kate Johnson, President and CEO at Lumen Technologies]

And with that, I'll turn it over to Chris.

[Chris Stansbury, EVP and CFO at Lumen Technologies]

Thanks, Kate. Lumen had a transformative year on many fronts. We completed the TSA in the first quarter, extending debt maturities to 2029 and beyond, providing over $1,000,000,000 in cash and access to $1,000,000,000 revolver. Last earnings call, we announced $8,500,000,000 in PCF deals, solidifying Lumen's place as the partner of choice in building the trusted networks for AI. We successfully executed a debt exchange, terming out over $800,000,000 in 2026 through 'twenty nine maturities to 02/1932 and reduced overall debt by $1,600,000,000 in 2024 and recently sent redemption notices for another $200,000,000 Given our confidence in free cash flow generation, we contributed $170,000,000 to our pension plans.

[Chris Stansbury, EVP and CFO at Lumen Technologies]

We continued to make progress in our selling motion with 2024 North American enterprise sales up over 15%. And finally, mass markets had a record year with over 500,000 new fiber homes passed and 161,000 net fiber adds, all while reducing expenses. Looking forward, 2025 will be a year of investment to reach our future goals. As Kate discussed, the PCS sales we signed in 2024 provide flexibility and liquidity to reduce our debt further, enhance our growth products, and invest in our simplification and modernization efforts. Additionally, with the progress we've made to date, we estimate our run rate cost savings exiting 2025 to be approximately $250,000,000 a strong start towards our $1,000,000,000 goal exiting 2027.

[Chris Stansbury, EVP and CFO at Lumen Technologies]

With our 2025 investments and further execution on our modernization and simplification goals, we have confidence in margin expansion and total EBITDA returning to full year growth in 2026 and growing thereafter. We believe the value creation path for Lumin is clear through additional sales, balance sheet improvements and cost structure optimization, all as we continue to execute on our core strategic goals to drive operational excellence, build a backbone for AI and cloudify telecom. Now, let's move to the discussion of financial results for the fourth quarter. Total reported revenue declined 5.3% to $3,329,000,000 20 5 percent of the decline was due to the impact of divestitures, commercial agreements and the sale of the CDN business. Business segment revenue declined 5.1% to $2,659,000,000 And approximately 33% of that decline was due to the impact of divestitures, commercial agreements and the sale of the CDN business.

[Chris Stansbury, EVP and CFO at Lumen Technologies]

Mass markets segment revenue declined 6.3% to $670,000,000 And adjusted EBITDA was $1,052,000,000 with a 31.6% margin. And free cash flow was negative $174,000,000 Now, next, I'll review our detailed revenue results for the quarter on a year over year basis. And within our North American enterprise channels, which is our business segment excluding wholesale, international and other, revenue declined 2.2%. North American enterprise grow revenue increased 15.3% year over year, driven by public sector growth with continued pressure in nurture and harvest product revenue. Overall, the North American business declined 2.8%.

[Chris Stansbury, EVP and CFO at Lumen Technologies]

On a year over year basis, large enterprise revenue declined 5.5% in the fourth quarter and mid market revenue declined approximately 9.8%. In both businesses, positive Grow revenue, 3.5% for large enterprise and 3.4% for mid markets, was offset by Nurture and Harvest. Public sector revenue grew 11.5% year over year. For the full year 2024, public sector revenue grew 3.4%. As we've said in the past, public sector revenue can be lumpy quarter to quarter, but we continue to see traction with large bookings in this space, which take time to ramp to revenue.

[Chris Stansbury, EVP and CFO at Lumen Technologies]

With respect to 2025 and as a result of significant rerating in the wholesale TDM space from select smaller off net connectivity providers, we are working with our customers to either migrate or disconnect some services. While these actions will be a drag on public sector revenue in the first half of the year, we believe they are healthy for the overall business as we're making decisions that are margin accretive. Wholesale revenue declined approximately 4.5% year over year. The harvest portion of the wholesale portfolio, which is comprised of products like TDM, voice and private line, saw revenue contraction by 5.2% year over year in the fourth quarter. This is primarily driven by telco partners that are selling legacy services.

[Chris Stansbury, EVP and CFO at Lumen Technologies]

Our harvest product revenue will likely continue to decline over time and is an area that we will manage for cash. Mercury revenue was down 11% in the fourth quarter on VPN and Ethernet declines, and wholesale grow revenue was positive 1.9%. International and other revenue declined 42.5%, driven primarily by the divestiture of our EMEA business and the sale of select CDN contracts in the fourth quarter of last year. As a reminder, the EMEA transaction closed on 11/23/2023. Moving to our business product life cycle reporting, I'll reference the results based on our North America enterprise channels.

[Chris Stansbury, EVP and CFO at Lumen Technologies]

The 2.2% year over year decrease was due to declines in nurture and harvest, offset by strength in grow, particularly enterprise broadband, dark fiber and IP. While results can vary in any quarter, we expect sustained growth in grow product revenue as we execute on our core turnaround. Within North American enterprise channels, grow products revenue increased 15.3% year over year, up from 4% year over year in the prior quarter. Importantly, grow represents over 47% of our North America enterprise revenue, further reducing our reliance on legacy revenue. Grow products carried in approximately 80% direct margin this quarter.

[Chris Stansbury, EVP and CFO at Lumen Technologies]

Nerter products revenue decreased 16.2% year over year, largely impacted by declines in VPN. Nerter represents approximately 26% of our North America enterprise revenue and for our total business segment carried an approximate 67% direct margin this quarter. Harvest products revenue decreased 7.3% year over year and continues to be negatively impacted by declines in TDM based voice. Harvest represented approximately 16% of our North America enterprise revenue in the fourth quarter. For our total business segment, it carried an approximate 77% direct margin this quarter.

[Chris Stansbury, EVP and CFO at Lumen Technologies]

Other product revenue declined 16.7% year over year. As a reminder, other product revenue tends to experience fluctuations due to the variable nature of these products. Now moving on to mass markets. Our fiber broadband revenue grew 18.9% year over year and represents 42 of the mass market's broadband revenue. During the quarter, Lumin added 105,000 fiber homes passed, bringing our total to over 4,160,000 as of December 31, achieving our full year 2024 target of 500,000 homes passed.

[Chris Stansbury, EVP and CFO at Lumen Technologies]

We also added 42,000 quantum fiber customers, bringing fiber subs to nearly 1,100,000. Fiber ARPU was $61 And I would note that mass markets revenue declines improved year over year in 2024. At the end of the fourth quarter, our penetration of legacy copper broadband was approximately 8% and our quantum fiber penetration stood at approximately 26%. Now turning to adjusted EBITDA. For the fourth quarter of twenty twenty four, adjusted EBITDA was $1,052,000,000 compared to $1,099,000,000 in the year ago quarter.

[Chris Stansbury, EVP and CFO at Lumen Technologies]

For the fourth quarter of twenty twenty four, our adjusted EBITDA margin was 31.6%. EBITDA margins declined 40 basis points year over year compared to a 90 basis point year over year decline in the third quarter. Special items impacting EBITDA totaled $132,000,000 The majority of special items this quarter were related to transaction separation and real estate transaction costs. And lastly, capital expenditures were $915,000,000 Free cash flow, excluding special items, was negative $174,000,000 mainly due to the timing of cash from PCF deals. We would expect free cash flow to be lumpy quarter to quarter as we move through the large PCF builds.

[Chris Stansbury, EVP and CFO at Lumen Technologies]

Now moving on to our financial outlook for the full year 2025. We expect adjusted EBITDA to be in the range of $3,200,000,000 to $3,400,000,000 Our EBITDA guidance includes organic declines similar to 2024 and roughly $200,000,000 in incremental costs, including the annualized spend associated with building a team to expand and deliver on the PCF partnerships, the proactive disconnects of uneconomical legacy services, and additional investments in cloud infrastructure to reduce future CapEx associated with utilizing our own data center assets. Excluded from the guidance above is roughly $300,000,000 in transformation costs to begin the multiyear task of reducing expenses by $1,000,000,000 As we stated on prior calls, we'd also like to give some preliminary thoughts on 2026 EBITDA. Given anticipated improvements in sales performance, lower absolute declines in the legacy products and the approximately $250,000,000 in run rate savings exiting 2025, we see 2026 EBITDA being greater than $3,500,000,000 with growth in future years. Moving to capital spending and our other outlook metrics.

[Chris Stansbury, EVP and CFO at Lumen Technologies]

For the full year 2025, we expect total capital expenditures in the range of $4,100,000,000 to $4,300,000,000 The majority of the increase in CapEx from 2024 to 2025 is associated with a cost to execute against our signed PCF contracts. We continue to see maintenance CapEx between $400,000,000 and $600,000,000 and quantum fiber CapEx at approximately $1,000,000,000 similar to 2024 as our homes passed target for 2025 is also $500,000 The majority of the remaining CapEx is associated with our core enterprise business. We expect to generate free cash flow in a range of $700,000,000 to $900,000,000 for the full year 2025. Additionally, we estimate net cash interest to be $1,200,000,000 to $1,300,000,000 and cash taxes to be $100,000,000 to $200,000,000 in 2025 given a prepayment in 2024. In terms of other special items for 2025, we continue to expect dedicated third party costs to support transition services for the divestitures.

[Chris Stansbury, EVP and CFO at Lumen Technologies]

The reimbursement for these services will be in other income with no material net impact to our cash flows. Additionally, special items includes costs associated with Lumen's one billion dollars in cost takeout by year end twenty twenty seven. Before we move to Q and A, just a couple of housekeeping items. First, please remember that the first quarter typically has a higher, seasonally higher expenses related to the timing of bonus payments and other prepaid expenses. Additionally, as noted in our financial trending schedule, fourth quarter 'twenty four was positively impacted by the timing of some public sector revenue and EBITDA, which tends to fluctuate quarter to quarter.

[Chris Stansbury, EVP and CFO at Lumen Technologies]

Following the great strides forward in 2024, Lumen's transformation is on track. The progress we've made around our core strategic goals has resulted in a stronger balance sheet, improvements in sales, a decreased reliance on legacy products, stronger free cash flow generation and progress on modernization and simplification, giving us increased confidence in an inflection to EBITDA growth in 2026 and beyond. We'll now take your questions.

[Operator]

Thank you, We will take the first question today from Michael Rollins, Citi.

[Michael Rollins, Analyst at Citigroup]

Thanks and good afternoon. A couple of questions, if I could. First, if you look just in total in terms of what's happening with sales that you mentioned in the business, I think in North America up 15%, how is that translating to progress in the verticals like large enterprise and mid markets? And then secondly, just looking at the schedule that you provided, like the customer verticals and product verticals, as you mentioned, Grow was up sequentially and it looks like maybe about $82,000,000 sequentially and wholesale, I think it was wholesale harvest was also a significant number in the quarter. How much of that might have been recurring and it's a bouncing off point for 1Q 'twenty five versus one time in nature?

[Michael Rollins, Analyst at Citigroup]

Thanks.

[Chris Stansbury, EVP and CFO at Lumen Technologies]

Yes. I'll start with the end of the question first. So, we're pleased with the grow product revenue broadly and I'll get into that in a little more detail. The quarter was positively impacted by our State of California initiative around PCF that was announced, gosh, about a year ago, I guess. And a lot was delivered in the quarter, so revenue started to get turned up.

[Chris Stansbury, EVP and CFO at Lumen Technologies]

But I think what's really interesting when you look at the impact overall in the portfolio is going to touch on in my prepared remarks, but the growth bucket is now almost half of what we sell. And I think if when you look at our overall growth rates vis a vis our major competitors who had very different performance than us, it really relates, to the customer experience that we're driving and the focus on those growth products as we go forward. And you can actually see that in our wholesale results, right, where legacy declines were significant, but the grow product sales were actually pretty low. The competition is just not focused on it. We are.

[Chris Stansbury, EVP and CFO at Lumen Technologies]

And so that's without the clarification of telecom. And ultimately, to your point, sales obviously precede revenue. 2024 was challenged with disconnects. We talked about some forced disconnects we're going to do in the first half of this year. But as it relates to things like renewals and the things that are, I would say, manageable and margin accretive to us, we've got motions in place to drive improvements on those as we move into 'twenty five.

[Jim Breen, Senior VP - IR at Lumen Technologies]

Next question, please.

[Operator]

Next up, we'll hear from Sebastiano Petti, JPMorgan.

[Sebastiano Petti, Executive Director - Equity Research at JP Morgan]

Hi. Sorry about that. Thanks for taking the question. Thank you for the 2025 EBITDA outlook. But wanted to see how you can maybe help us think about, Chris, the top line dynamics there, particularly in light of the public sector comments.

[Sebastiano Petti, Executive Director - Equity Research at JP Morgan]

But as AI Fabric revenue come online in the next several years, what's the inflection or the growth to or what gets you to top line growth, I guess, in the business or what's the expectation around that? And public sector did grow in twenty twenty five twenty twenty four, but it sounds like there's going to be some one time items that weigh on it in the first half of the year. Is the expectation that public sector growth continues from here? Thank you.

[Chris Stansbury, EVP and CFO at Lumen Technologies]

Yes. So, a couple of things. On the overall revenue trends, we obviously don't guide revenue, but I'll provide some color. When we said that our revenue trends will look largely similar to what we saw in 2024, there's a lot of activity in there like the disconnects that I've talked about that impact that. And then you've got underlying improvements in things like sales and other disconnects that are more manageable that they kind of net out.

[Chris Stansbury, EVP and CFO at Lumen Technologies]

I think when we move into 'twenty six, we should see continued improvement there because we'll be lapping things like the forced disconnects. We're going to start to turn on some of that PCF revenue. There's going to be very little this year. That's really more 'twenty six, 'twenty seven ramping fully in '28. And we've also got new product announcements that we'll be making that ultimately benefit as we go forward.

[Chris Stansbury, EVP and CFO at Lumen Technologies]

The way we can get there though, really big picture, if you just forecast market declines against our nurture and harvest buckets, and you put us at growing at market rates on things like IP and waves, and quite frankly, I think we do better than market, and Kate alluded to that. We get to growth in the 2829 window on revenue, that's really where we inflect. So, there's not heroic assumptions being made here. And importantly, the platform layer that is so critical for differentiating Lumen is not really included in that math. So, our ability to, to really disrupt the space is a tremendous opportunity for us.

[Chris Stansbury, EVP and CFO at Lumen Technologies]

As it relates specifically to public sector, tough to call. I would say in itself, it's challenging because of the disconnects that were going to take place in the first half. But the team is very focused, on, aside from that, trying to grow this year. So, more to come as we move through the year. It's a little early to call.

[Sebastiano Petti, Executive Director - Equity Research at JP Morgan]

Thanks, Ashley.

[Operator]

Satya Levi has the next question.

[Batya Levi, Equity Research Analyst at UBS Group]

Great. Thank you. A couple of questions. First, on your network utilization chart, what kind of enterprise needs growth are you assuming that drives your assumption for lower utilization for the enterprise segment by 2028? Is that just a function of revenue mix, meaning much higher growth from the hyperscalers side versus enterprise?

[Batya Levi, Equity Research Analyst at UBS Group]

Or is there anything else that's in there? And then the second question, if you don't mind helping out with the cadence of incremental costs we should expect for $25,000,000 I believe you mentioned $200,000,000 included in the EBITDA guide and there's an incremental $300,000,000 that's not included? And within free cash flow, are you assuming any incremental deferred revenue? Thank you.

[Kate Johnson, President and CEO at Lumen Technologies]

I'll let Chris hit the last part of your question first and then I'll hit the utilization capacity chart.

[Chris Stansbury, EVP and CFO at Lumen Technologies]

Yes.

[Chris Stansbury, EVP and CFO at Lumen Technologies]

We're not assuming any new PCF deals in either the EBITDA or the free cash flow. So, that was your last question, I think.

[Kate Johnson, President and CEO at Lumen Technologies]

However

[Chris Stansbury, EVP and CFO at Lumen Technologies]

But we continue to be deep in those conversations. And as those deals are confirmed, we will obviously be updating guidance, which is very consistent with obviously what we've done to date. Yes, so within EBITDA, there's a $200,000,000 headwind, which really relates to three things. It's the ramp up that we've talked about last year in the team required to do these big PCF builds. It's a shift in our strategy to move from on prem data centers to cloud.

[Chris Stansbury, EVP and CFO at Lumen Technologies]

As Kate said, we're customer number one. But that's a shift from CapEx to OpEx. And we're basically avoiding, quite frankly, about a half a billion dollar investment in data centers in the coming years by that shift. And then it's the TDM disconnects from those smaller off net providers that we're driving. So, that's the 200 in EBITDA.

[Chris Stansbury, EVP and CFO at Lumen Technologies]

The $300 in special items really relates to dedicated expenses associated with getting the $1,000,000,000 of cost out. And they're one time in nature and they will go away.

[Kate Johnson, President and CEO at Lumen Technologies]

Okay. And then the first part of your question about utilization, it's really important to note that the utilization chart is really about fiber miles. And so, it's the total fiber in our entire network and how each of these major segments enterprise consisting of commercial, public sector and wholesale customers as well as our own use of the network through services and then the hyperscalers in a different category. And so we're increasing both the capacity with innovation, putting net new fiber solutions in there, which allow for up to four times the capacity, better photonics, etcetera, greater density, greater efficiency, in the same stretch of conduit. And then, of course, we're adding new routes.

[Kate Johnson, President and CEO at Lumen Technologies]

I think the big piece here is there was a lot of unused conduit. It was empty for twenty five years and we were able to lease it, to the hyperscalers to connect to their data centers. And so that's why the chart looks so dramatic in terms of the increase of the hyperscaler utilization, but it's not taking away from enterprise. And in fact, we have more enterprise growth capacity, than we've ever had before with these innovations.

[Jim Breen, Senior VP - IR at Lumen Technologies]

Next question, please.

[Operator]

David Barden, Bank of America is next.

[David Barden, Managing Director at Bank of America Merrill Lynch]

Hey, guys. Thanks so much for taking the questions. Appreciate it. So I guess just maybe for Chris, two questions. The first would be with respect to the free cash flow guidance this year and maybe as it translates into 2026, it would be how much money is coming in from the construction contract customers versus how much is going out?

[David Barden, Managing Director at Bank of America Merrill Lynch]

And so if we excluded that, what would the cash flow actually look like? That's question one. And then the second question would be, I think, Chris, you also kind of alluded to this, is that as we look at 2026 and then even more in 2027 and beyond, the accounting of how we put the cash flow we're getting today into the income statement down the road when we've built it and then we can start accounting for it. What kind

[David Barden, Managing Director at Bank of America Merrill Lynch]

of

[David Barden, Managing Director at Bank of America Merrill Lynch]

contribution is that making to the 2026 better than $3,500,000,000 EBITDA expectation? Thank you so much.

[Chris Stansbury, EVP and CFO at Lumen Technologies]

Yes. So, a couple of things. On the 2026, we while PCF will start to roll in, it's actually going to be pretty small. So, we're not because we're still at the very early stages of it. So, I would say that the $3,500,000,000 the increase that you see is largely driven by the modernization and simplification efforts.

[Chris Stansbury, EVP and CFO at Lumen Technologies]

And that is more than offsetting kind of legacy declines. And again, keep in mind, I mean, we have now been disclosing kind of the grow, nurture, harvest buckets. And I think that that will evolve to more disclosures in time. But we've been doing that now for almost three years, David. And the mix has substantially changed, in our favor because of the focus that the company has had.

[Chris Stansbury, EVP and CFO at Lumen Technologies]

So, don't forget to model every quarter mix improvements as legacy continues to become a smaller and smaller piece of what we do. And sorry, remind me, what was the first question?

[David Barden, Managing Director at Bank of America Merrill Lynch]

Just on the street On

[David Barden, Managing Director at Bank of America Merrill Lynch]

cash, yes.

[Chris Stansbury, EVP and CFO at Lumen Technologies]

Yeah. Yeah. So, I want to be really clear before I tell you, I'm not going to give you that detail. We said and I want to be really transparent about this. We had a funding gap before we had the PCF deals.

[Chris Stansbury, EVP and CFO at Lumen Technologies]

And that remains to be true. And the PCF deals not only filled that funding gap, it's allowed us to lean in far more heavily into our transformation efforts. And that all remains to be true. We're not going to give 26 guidance, on that yet because here's what I can tell you for certain. There's meaningful things that we can and will do over time as it relates to more PCF contracts, debt refinancings, a number of levers that we can pull that ultimately drive improved free cash flow as we move through the year.

[Chris Stansbury, EVP and CFO at Lumen Technologies]

So, more to come as we go through the year. This guidance doesn't assume any of those refinancings. This guidance doesn't assume any, PCF deals. It doesn't assume any major transactions. Any and all of those things could happen.

[Chris Stansbury, EVP and CFO at Lumen Technologies]

And we'll continue to give you updates. But I think there's far more tailwinds to our free cash flow story than there are headwinds.

[David Barden, Managing Director at Bank of America Merrill Lynch]

And if Jim, before you cut me off, if it's possible, I would love to Chris, one more question, which is we've seen some pretty successful cyber securitization deals out of Uniti, out of Zayo. You guys obviously have redone your whole balance sheet and I'm not smart enough to figure out how much opportunity is there for you to kind of take advantage of what's happening in the market right now for fiber financing?

[Chris Stansbury, EVP and CFO at Lumen Technologies]

Yes. It's a good question, David. It is an opportunity. But I think, that is on the B list of priorities versus the A list of priorities. There's a number of things, that we can and will be doing around the debt structure that I think, really get to, putting the company in more of what I would call a normal capital structure.

[Chris Stansbury, EVP and CFO at Lumen Technologies]

And at that point, then we can start to look at those things that are on the B list. But, more to come.

[David Barden, Managing Director at Bank of America Merrill Lynch]

Many thanks guys.

[David Barden, Managing Director at Bank of America Merrill Lynch]

Appreciate it.

[Jim Breen, Senior VP - IR at Lumen Technologies]

Next question please.

[Operator]

Jim Schneider from Goldman Sachs is next.

[Jim Schneider, Senior Equity Analyst at Goldman Sachs]

Good afternoon. Thanks for taking my question. First of all, I was wondering if you could maybe contextualize your view on the recent DeepSeek announcement, realize it's still very early days. But directionally, how do you think this changes the connectivity market going forward? Do you think this is likely to result in because of lower costs, more inference or more training?

[Jim Schneider, Senior Equity Analyst at Goldman Sachs]

Or could we actually get less training and more inference? And what do you think that means, if anything, for the continuity demand needs you're seeing from hyperscalers? Do you think there is a chance that we could actually see less? Or is it more likely that we're actually see the market stimulated by lower cost?

[Kate Johnson, President and CEO at Lumen Technologies]

Yes. It's a great question.

[Kate Johnson, President and CEO at Lumen Technologies]

So I think as I noted in my prepared remarks, this is going to accelerate the democratization of AI. Okay. So DeepSeek is putting pressure on everybody to go faster to innovate and to take costs down and to make the technology more accessible. And when you've got more companies that have to navigate in the multi cloud AI first world, as I described, that's more total available market us to sell our connectivity fabric into. So we see this as an increase in the total available market and a huge opportunity for us.

[Kate Johnson, President and CEO at Lumen Technologies]

And we have a pretty good head start in this space and we're investing heavily in a platform to differentiate and we think it's going to allow us to capture share.

[Jim Schneider, Senior Equity Analyst at Goldman Sachs]

Thanks. And maybe as a follow-up, can I maybe just sort of ask about the sort of competitive dynamics you're expecting to see in the PCF market going forward? I mean, clearly, you've talked about all the reasons why you believe you have a privileged advantage market position today. One of those I believe is because of the empty or available conduits you have to fill right now. But I'm sort of curious as you go into the next couple of years, do you see more competition for these kinds of deals?

[Jim Schneider, Senior Equity Analyst at Goldman Sachs]

And do you see your sort of your lead extending yourself? Or do you think more incremental competition is likely to come in? Thank you.

[Kate Johnson, President and CEO at Lumen Technologies]

Yes, of course, Jim. So first of all, we're grateful for the lead. It was nice to get $8,500,000,000 in there before anybody else realized that this was a market. But we're paranoid and we're going to maintain focus on building out the competitive moat. Our network has unmatched coverage.

[Kate Johnson, President and CEO at Lumen Technologies]

It has unique routes and we've invested heavily in the fiber solutions that frankly our competition hasn't. So, we're in the right places with the amount of capacity and the performance that everybody expects, but that's just the infrastructure talking. I think what's differentiating is the platform on top and that's becoming more and more interesting, to frankly all of our customer segments as we're able to present them with a network fabric that gives them access to all the capabilities no matter where they are. So, we're pretty pumped about our position. We think we're going to continue to be able to execute well and the future is pretty bright.

[Kate Johnson, President and CEO at Lumen Technologies]

Chris, do you have anything to add to that?

[Chris Stansbury, EVP and CFO at Lumen Technologies]

No. That's it.

[Jim Breen, Senior VP - IR at Lumen Technologies]

Next question, please.

[Operator]

Jonathan Chaplin from New Street Research is up next.

[Jonathan Chaplin, Lead Analyst at New Street Research]

Thanks, guys. I'm wondering if you could give us an update on how things are progressing with the Fibrocell. And then in the context of the Fibrocell, it seems to me that the ultimate owners of these assets are probably one of the three big national wireless carriers. And I would have thought they would value copper assets in addition to fiber assets. And I'm wondering if there's a way you can structure the sale of fiber that gives the buyer of that asset the ability to use your copper infrastructure to build more fiber.

[Jonathan Chaplin, Lead Analyst at New Street Research]

And then looking at the progress that AT and T has made with copper decommissioning, I'm wondering if there's an opportunity for you guys in pursuing that or whether that's an opportunity you might hand off to somebody else as well?

[Chris Stansbury, EVP and CFO at Lumen Technologies]

Yes, it's a good question. And I'm going to stick to things that we said publicly. So, first of all, the it's interesting because there are two schools of thought, right? One could be you sell the whole thing. But there's been a lot of work done, good work that has said, yes, but you also give up a lot of EBITDA and that and is it really a delevering transaction.

[Chris Stansbury, EVP and CFO at Lumen Technologies]

The comment that we've made is think about it as two businesses, right? You have a fiber business that today is doing just tremendously in terms of its build outs, but isn't yet in a position where it's generating much EBITDA. There's a lot of OpEx that goes into driving customer penetration. And at the same time, it's consuming $1,000,000,000 a year in CapEx. The bulk of the EBITDA sits on copper today, which doesn't have a huge CapEx burden, basically some maintenance.

[Chris Stansbury, EVP and CFO at Lumen Technologies]

So,

[Chris Stansbury, EVP and CFO at Lumen Technologies]

could it could somebody

[Chris Stansbury, EVP and CFO at Lumen Technologies]

be interested in all of it? Yes. Could somebody be interested in pieces? Yes. We're open to any and all of those discussions and we'll see where it takes us.

[Chris Stansbury, EVP and CFO at Lumen Technologies]

But ultimately, you know, we've said this for years, it comes down to valuation and at the right time, we'll make that decision. And as that decision and that moment comes, we'll obviously share it with you. So, that's how we think about it. As it relates to copper decom specifically, think about copper decom being largely market driven, not consumer driven. Because copper decom is really both an enterprise and a consumer motion.

[Chris Stansbury, EVP and CFO at Lumen Technologies]

And so, I think like a lot of our competitors, that's how we think about it. We have been very aggressive about in the consumer space converting copper to fiber where we do have fiber passings, because it's a better outcome for the customer and it's a better outcome for us. And that will continue. But the copper decom process, there's a playbook that we've developed. Frankly, it's part of our modernization and simplification.

[Chris Stansbury, EVP and CFO at Lumen Technologies]

There's a lot of unlock there. And we think there's even more EBITDA to be generated in the coming years through those activities.

[Kate Johnson, President and CEO at Lumen Technologies]

Yes. It's a major tenant of driving operational excellence. Wire center by wire center across the country, we have a P and L view, so we can see it all now. And it makes for great decision making. And it's a huge vector, as Chris said of our cost takeout.

[Jonathan Chaplin, Lead Analyst at New Street Research]

Is that part of the $1,000,000,000 Yes.

[Chris Stansbury, EVP and CFO at Lumen Technologies]

Yes.

[Chris Stansbury, EVP and CFO at Lumen Technologies]

It is part of $1,000,000,000 Got it. Thanks.

[Operator]

And the next question today comes from Nick Del Deo, MoffettNathanson.

[Nick Del Deo, Managing Director at Moffettnathanson LLC]

Hi. Thanks for taking my questions. First, I guess, what happened in the public sector in the quarter, it's not still entirely clear to me. Chris, you said it was driven by a lot of sales or turn up services in the state of California.

[Nick Del Deo, Managing Director at Moffettnathanson LLC]

Is that revenue largely recurring

[Nick Del Deo, Managing Director at Moffettnathanson LLC]

or were there one time delivery or performance fees lumped in there?

[Nick Del Deo, Managing Director at Moffettnathanson LLC]

I'm just trying to get

[Nick Del Deo, Managing Director at Moffettnathanson LLC]

a sense as to the right baseline. And then, Zach, you're looking at your I'm sorry, go ahead. Sorry.

[Chris Stansbury, EVP and CFO at Lumen Technologies]

Yeah. I'll just I'll answer that real quick. So, the pieces of the PCF for the state of California that got turned on, are one time in nature as that got lit up. There are other things that happen in the public sector, which are more ongoing. We haven't split that out.

[Chris Stansbury, EVP and CFO at Lumen Technologies]

We don't intend on doing that. And I think the color we gave around some of the headwinds that channel faces in 2025 with the disconnect is really what we want to say about that at this point. Sorry, what was your second question?

[Nick Del Deo, Managing Director at Moffettnathanson LLC]

Okay. No, no. Thanks for that, Chris. I guess looking at the fiber deployment utilization table, if if my math is right, the fiber miles used by enterprise channels is roughly flat from 22 to 25, but then you're expecting it to double from 25 to 28. So, I'm just wondering what products are driving that doubling?

[Chris Stansbury, EVP and CFO at Lumen Technologies]

Well, I think to start with in Kate's prepared remarks, we're seeing 100 gig and 400 gig waves growing at 50% in 2024. And we talked about that and gave color around that during the year because we shipped to CapEx to support that. So, we're at the very again, think about it back to the phases of AI, that we've talked about. And the first phase is inference, which is where sorry, training where the hyperscalers are building these networks for their own consumption to train the AI models. The second phase is inference, which is where large enterprise starts to use those models to run workloads.

[Chris Stansbury, EVP and CFO at Lumen Technologies]

And so, we're at the very beginnings of that. And we can see it in IP in ways. But I think you'll see more consumption of large enterprise connectivity because of the platform layer that Kate talked about. Because ultimately, the value that we can bring to enterprise in the form of cost reduction isn't us reducing prices for dumb pipes. It's us providing newer, cheaper, faster, more efficient and flexible ways of reaching their data.

[Nick Del Deo, Managing Director at Moffettnathanson LLC]

Alright.

[Jim Breen, Senior VP - IR at Lumen Technologies]

Next question?

[Operator]

We'll take the next question from Greg Williams, TD Cowen.

[Gregory Williams, Analyst at Cowen]

Great. Thanks for my questions. Actually, Chris, your last answer is a good segue into a question is, in your deep conversations you're having above and beyond the $8,500,000,000 pipeline, are you seeing any of the inference phase starting to materialize? Are we still too early there? Second question is on deep seeking.

[Gregory Williams, Analyst at Cowen]

I get the democratization of AI and you see a larger TAM, but is there a near term risk, with massive scalable AI that would drive a temporary pause of the hyperscalers, to rethink some of their plans? Thanks.

[Kate Johnson, President and CEO at Lumen Technologies]

We haven't seen a pause. In fact, are still in deep conversations. We've talked about the pipeline that we're pursuing is predominantly, comprised of new routes connecting data centers and we're deep in those conversations. And it's complex to design these kinds of networks, so it takes a bit more time. But they're still progressing with no sign of slowdown.

[Kate Johnson, President and CEO at Lumen Technologies]

In fact, we have been asked by every single one of the major cloud companies that we've done a deal with, with no exception, if there's a possibility to accelerate the implementation of what they've purchased so far. With respect to the second phase, in inference, I would say that it's early to start calling the ball on trends of exactly what's going to happen here. If anybody tells you they know, they don't. What we are seeing is in some of the major industries, financial services, retail, healthcare, they're starting to they're the ones that are asking for the network upgrades. And they're starting to use inference to transform their companies.

[Kate Johnson, President and CEO at Lumen Technologies]

And, they're recognizing the fact that they need something fundamentally different. And so that's kind of the trends that we can shine a light on so far. As we learn more, we'll bring it to you. I think it's really important the discussion that I gave you an overview on the multi cloud AI ready network architecture. Every single one of these companies is moving data and workloads back and forth between clouds.

[Kate Johnson, President and CEO at Lumen Technologies]

And today, it's too complicated, it's too slow, it's too expensive and it's not secure. And our fabric, now that we're connected to all three clouds, allows you to do that in a cost effective, high performance, secure way. And this is a net new capability that we're bringing through our platform and our fabric that no other company is doing. So, we're really excited and we think we'll continue to have a good view on what's happening during inference and we'll keep you posted.

[Gregory Williams, Analyst at Cowen]

Great. Thank you.

[Operator]

Next question comes from Frank Louthan, Raymond James.

[Frank Louthan, Managing Director at Raymond James Financial]

Great. Thanks. Can you give us a little bit more color on the public sector for next year? I think you said it was going to pull back a bit. Is any of that related to federal government cost cutting?

[Frank Louthan, Managing Director at Raymond James Financial]

And does that add any additional risk? Can you give us an update on the billing system, collapsed and the other system changes that you're working on? Where are you as far as completing those projects? Thanks.

[Chris Stansbury, EVP and CFO at Lumen Technologies]

Sure. So, as it relates to public sector, our sales rates aren't declining. What's impacting revenue in 2025 is, yeah, I'll use a word, egregious re rate activity by a select few. I mean, we're talking thousands of percents really over the last few years, where customers largely in the federal space and unfortunately, some customers who rely critically on that technology for running their businesses are being forced to migrate or turn off those switches. And it's the right call for the customer, it's the right call for us.

[Chris Stansbury, EVP and CFO at Lumen Technologies]

So, really, the big headwind there is that. As it relates to the IT work, we're making good progress. Our first phase of our ERP should be complete, I would say, probably early in the second quarter. And we're expecting the second phase, which first phase is really quote to cash, second phase is procure to pay is later in the year. Now, remember, what we're not doing, I want to be really clear about this, we are not doing a big consolidation of order entry or billing systems.

[Chris Stansbury, EVP and CFO at Lumen Technologies]

What we're doing is as we consolidate networks and we turn on the ERP, we will, over time, roll off of old systems that support existing revenue as that revenue kind of retires out. And all of the new revenue will be put into a new modernized system. So, as that grow bucket continues to grow, more and more of the product is on the future state. We're not doing any kind of a conversion.

[Frank Louthan, Managing Director at Raymond James Financial]

All right. Great. Thank you very much.

[Operator]

And Sam McHugh from BNP Paribas has the next question.

[Sam McHugh, Managing Director at BNP Paribas]

Thanks guys. On your intercity fiber mile vision, I think the $20,000,000 20 8 million dollars 40 7 million dollars or 47 miles. Is that based on the announced PCF deals or would that require additional PCF deals and CapEx to kind of get to that vision, part one? And then secondly, on the investment in new fiber routes, does that change your view on how many fiber homes in the mass market business you

[Sam McHugh, Managing Director at BNP Paribas]

might be able to reach?

[Sam McHugh, Managing Director at BNP Paribas]

And is that helping you in discussions with partners on basically being able to provide more backhaul for their own five ventures? Thank you.

[Kate Johnson, President and CEO at Lumen Technologies]

So the 47,000,000 miles just on base on the business that we've already inked, it doesn't include any new deals. So as we potentially do that, we might be updating this chart for you hopefully sooner rather than later. And I could you hit your, fiber development question again, please?

[Sam McHugh, Managing Director at BNP Paribas]

Yes. Sorry. I was just saying as you build out more of the conduit and build new conduits, is that changing your view of kind of the terminal kind of build in mass market? I think you talked to 6,000,000 to 8,000,000 locations in the past. So can you do more with fiber miles?

[Kate Johnson, President and CEO at Lumen Technologies]

We think about them separately.

[Sam McHugh, Managing Director at BNP Paribas]

Okay. Thank you.

[Jim Breen, Senior VP - IR at Lumen Technologies]

Operator, we have time for one more question.

Participants

Executives

• Jim Breen, Senior VP - IR
• Kate Johnson, President and CEO
• Chris Stansbury, EVP and CFO

Analysts

• Michael Rollins, Analyst at Citigroup
• Sebastiano Petti, Executive Director - Equity Research at JP Morgan
• Batya Levi, Equity Research Analyst at UBS Group
• David Barden, Managing Director at Bank of America Merrill Lynch
• Jim Schneider, Senior Equity Analyst at Goldman Sachs
• Jonathan Chaplin, Lead Analyst at New Street Research
• Nick Del Deo, Managing Director at Moffettnathanson LLC
• Gregory Williams, Analyst at Cowen
• Frank Louthan, Managing Director at Raymond James Financial
• Sam McHugh, Managing Director at BNP Paribas