Lumen Technologies, Inc. (LUMN) Earnings Call Transcript & Summary

And then the financial profile impact to Lumen post close. How does that change the Lumen financial product profile?

It's pretty dramatic because, again, today, and this really gets back to the justification for the deal on both sides. Today, that business doesn't generate a lot of EBITDA for us. And when you look at where the landscape of fiber-to-the-home has evolved, it really has become about convergence between cellular and fiber-to-the-home. And so AT&T's ability to drive better penetration, lower churn, et cetera, it's just higher. So from -- that's the value that they're getting and they can speak to that. The value to us is, we're selling an asset that generates very little EBITDA. This year, we said about $150 million. Next year, depending on timing of close, the impact would be $200 million to $250 million in EBITDA. But we're walking away from over $1 billion of CapEx. And so our capital intensity as Lumen over the next 4 to 5 years is about half as we go forward, as the PCF build is complete, as we exit the consumer fiber-to-the-home business, the amount of CapEx per dollar of revenue is going to be cut effectively in half. So our future cash flow metrics are looking very good. That's allowing us to delever at close to go from kind of high 4s to high 3s. And barring any other opportunities that we can't foresee at this point that would allow us to really drive down leverage closer to 3 in the coming years and dramatically reduce interest expense. But even without any kind of major assumptions there, we're going to cut our interest expense in half from where we were post the close of the debt renegotiation to where we are on an annualized basis post the close of the deal with AT&T. So we'll take out about $700 million of interest expense. It's a big deal.

So you mentioned the 3x-ish leverage post close. Is that your target? Is that where you want to be? Or how do you think about -- how should we think about...

I wouldn't go so far as to say it's the target because, again, it's -- all that is today is simple math on where the cash flow takes us if we don't see any other opportunities. Now, I do think as we digitize the network that more and more services will make sense to consume through those fabric ports. And so the question is, are those done through partnerships ecosystem? Or are they done through acquisition? We just don't know yet. And so I would say that we're keeping our eyes open. But very clearly, we're going to be sub-4. That's a really important benchmark for us. And I'd say at a minimum, we'd love to be mid-3s or less because then that gives us flexibility to do things along the way. But more to come in terms of what an absolute target would be.

Great. One last point, going back to the AT&T transaction. There's been some commentary on your side around building fiber between now and closing. Can you just clarify what Lumen may be doing in terms of building fiber between now and closing or anything beyond that?

Sure. So in the term sheet, which is public, there's a minimum build that we've committed to for this year, just under 450,000 enablements. And we'll be well over that tolerance. But anything above that level, we get -- we get [indiscernible] and as we get into next year, let's assume the deal doesn't close for a few months, any CapEx that we build, we will get paid for in the form of an adjustment to the purchase price. So the incentive is to keep building, to keep building quickly and we'll be compensating our quarterly.

Great. So as you think about your financial outlook, returning to top line growth, you mentioned is important, '28, '29, I think you referenced. What as you think about is driving that, is there -- is it the growth segments? Is it AI? Is it the digitization, all the above? What gives you the confidence that you said that you're going to reach there?

We had a really good discussion on this yesterday because so many of the variables are actually known today, right? So a little more disclosure. I think our rates have declined on the Nurture and Harvest buckets. I think we know them, right? They haven't changed. Everything is going to keep declining at the rate that it's at. You can pretty much draw a linear line that shows where we're going to be. So I would argue that that's a known. I would argue that the vast majority of our dark fiber builds are known. We're not -- in our statements on revenue inflection, we're not speculating on future deals that we might sign. This is only deals that have been sold, and we know what they are. And we know when they're going to get built and when they're going to convert to revenue. So that's a known. On our existing portfolio of Grow products that are delivered in a more traditional way, we know what that growth rate is, right? And again, we're not making major assumptions. So the only thing that really becomes a point of debate and if you will, knowledge building is how quickly can we scale the digital revenues. And so the key focal point there is NaaS, Network as a Service adoption because adoption will drive consumption. We announced a couple of weeks ago that we surpassed 1,000 customers. And while that might not sound like a big number in itself, it's certainly not satisfying to us, it is very, very rapid expansion when you look at other NaaS players in the space, and we're reporting on that every quarter. I think in Q2, we grew 35%. And we've gone actually well beyond that 1,000 to date, and there'll be more information on that when we close Q3. But what we're seeing from those NaaS customers really early on is reduced churn. So depending on which product they're consuming, a reduction in churn of 25% to 50%, and we're seeing a reduced time to repurchase. So whether that's an additional port or it's another service on an existing port, we're seeing that repurchase take place within 30 days. So again, really early. We need to build the knowledge base around this as to how it scales, but all signs are positive, but the key thing is adoption. As we get the adoption, the consumption will fall.

I've heard you guys mention churn reduction in your earnings, it is just great to hear now, I think across telecom, I think we all know churn is -- reducing churn is a key value creation. What specifically are you guys doing at Lumen to drive that reduction in churn?

Well, on the NaaS piece, really, it's about the customer experience, right? Because it's a seamless experience. It's easy to turn up, turn down, buy more, buy less, reprovision. It's just extremely helpful. I think, a much stickier customer relationship in the end. But more broadly, we've gotten a lot smarter about, okay, how aggressive do we want to be on rerates, right? So if you think about -- I mean, again, this isn't rocket science. And I have said this, Kate has said this. If you were to look at the mindset of legacy enterprise telecom, it's a mindset of playing to not lose, that is very different than a mindset of playing to win. And playing to not lose is, oh, I got to pay my dividend. So, oh, can we do some rerates this quarter to generate a little more cash, right? Oh, darn, those rerates just drove some more churn. Oh, I gotta do more rerates because the churn -- I mean, it's just this death spiral. And so we've stopped the nonsense. We've become far more customer-centric. We track those metrics around customer satisfaction, and we report on them regularly and they've been improving. And so it's, I think, quite simply putting the customer first and understanding what they need and focusing on their needs rather than our needs and being financially motivated around short-term results. And that all started with eliminating the dividend and then refinancing the debt and then getting us to the position we're in today. So we now sit in a position, I think, for the first time in decades where Lumen is looking at a balance sheet that I would argue is more asset than liability. And that's great gun powder to have. It gives us options, and it allows us to be customer focused and invest where we need to.

You guys raised your cost savings target for this year, $250 million to $350 million, still on track for $1 billion in overall cost savings initiatives you mentioned earlier. Can you provide a little more specificity on examples of what are you doing to drive those costs out of the business?

It's a really good question. Again, the network that exists today inside of Lumen and more broadly across enterprise is really a consolidation of a number of networks. And so inside of Lumen today on legacy systems, we run 4 networks. And there -- you'll know this, they're identified internally and by our customers who bought from us for a long time by color. And it was the color of the logo that was acquired, right, blue, green, orange, red. And and so what that means is, is that when you're trying to buy a point-to-point solution, I need this much red, I need this much orange. It's a mess, okay? And in that, not only is there a bad customer experience, but there's a lot of cost. And so as we go forward and we build this digital layer, everything is in a new system where there's end-to-end visibility, it's cleaner and those other revenues can atrophy off. But in the meantime, there's a lot we can do with that. So I think you'll see an announcement, I think, tomorrow, we've been working very closely with Palantir. And the value that Palantir brings in a situation like this is their AI approach is data source agnostic. So if I think about my team and I think about things like customer disputes, that data sits in multiple systems. Palantir's algorithms cross those systems and look for relationships that we can't see as humans in an AI way. And so what they're able to do for us is take a customer dispute that would have taken hours or days and turn it into minutes or hours. That drives efficiency. That's just one example. And so we're doing those kinds of things across Lumen, and that's allowing us to capture a lot of that efficiency. But as we go forward, the rest of that $1 billion journey gets to some of the heavier lifting around integrating IT systems and the things that you need to do that frankly have never been done.

So AI is driving your revenue and driving your cost reductions as well.

Absolutely. Yes.

So you can control your side of the business, but we all live in a competitive world. And can you share a little bit on how you see the competitive landscape both -- you mentioned your NaaS competitors in your last earnings call, but more broadly, also the Verizons, the AT&Ts, the large telcos and the competitive landscape, the cable companies who continually expand into the business and enterprise segment and how you see them competing for the regular enterprise customers, but also the PCF deals?

Yes. I think the PCF example is probably the best example to show structurally what's going on because our competitive point of differentiation here is the network. And that network is the most robust in terms of its intra and intercity reach with high-speed fiber and conduit. And every quarter since we closed Q4 last year, we have shared updates on our network utilization. And even with quadrupling the amount of fiber miles inside of that conduit, we're still only like mid-70s utilized. And that doesn't contemplate ripping and replacing conduit that sits in existing fiber. And just by a point of reference, the fiber that we would have been pulling 2 years ago was 432 count. The fiber that's getting put in those DUCs today is either 864 or 1728. And there's DUCs that have 200 count fiber. So there's more that we can do. That point of differentiation, no one else can tell you they have. They don't have the conduit routes, they don't have the capacity. So just table stakes to be able to do what we're doing, whether it's PCF or any of these other things that we've talked about would require years and tens of billions of dollars to create a level playing field. So that's the first clear point of differentiation. From there, look, they've been very public, as have we about what their strategic focus is. And their focus is on the convergence of fiber-to-the-home and wireless. And we've seen M&A activity that reinforces that across those competitors. That's their next best dollar of investment. That clears a pathway for us to have the right to win where we have the right to win, which is in the enterprise space. Advantage network and now the digitization and the ecosystem that we can create on top of that. No one else can do that. And no one else is doing that. We're years and years ahead. So we feel very good about that. There are some other competitors who continue to play the game by focusing on price. They are not going to win. And they're not winning. And the reality is if you are playing by price and you are not taking massive market share, by default, that's a formula that doesn't work. And the reason it doesn't work is because customers are looking beyond what does it cost for my waves to get from A to B and they're saying, "wait, wait, wait, what I'm trying to solve here is a very different problem. I need lower latency. I need higher speed connectivity. I need more density. I need to be able to utilize AI and a network that supports that." And so the cost of the waves is a fractional piece of that total solution. And so if there's a solution that reduces latency, gives you 400-gig connectivity, eliminates cross-connect fees and solves a lot of problems, then do they really care what the waves piece of that deal is? They don't. And I think we're starting to see that play out in our results and in that of our competitors.

The one customer segment we haven't talked about yet is government. So how does Lumen think about the government segment in terms of their growth plans and focus efforts?

We saw it with the tax legislation, and there's obviously a lot of public support and media around the need to upgrade infrastructure, everything from FAA to maintaining our lead in AI. And candidly, I think that's bipartisan, right? It's -- Washington is a messy place, but there is bipartisan support for those things. Our government affairs team, our public sector sales team, they are top notch. And they're in the right circles, having the right conversations. So we're obviously in a situation where the cycle time around decisions is long, but I assure you that we're very well positioned for those conversations. So we'll see where that takes us.

Great. We only have a few minutes left. Are there any questions from the audience that people would like to raise? I got one more if you want to think about it. So you mentioned your Analyst Day, February 2026. So as we think about the first Analyst Day in 2.5 years for Lumen, what should we be expecting out of Lumen for February Analyst Day?

Between now and then, I talked about really building our own knowledge base around the scalability of the fabric port. And between now and then, we will do a lot more learning because what we want to be able to come to you with is the P times Q math of the fabric port as the unit of economics going forward. Here's how many customers. Here's how many ports per customer. Here's how many services per port per customer. Here's how much revenue per service per port per customer. It's finally P times Q math for enterprise. And so we're building that knowledge base between now and then. But between now and then, there's an enormous amount of innovation going on with ecosystem partners who are building APIs into our network. There's other innovations around how we expand the reach of NaaS. And so one of the reasons for the February date is being able to bring more of that to the market. So there's more clarity. We can put more metrics around it when we stand in front of you and talk about it, and that's the goal. So really look forward to giving everybody that update in February.

Excellent. Thanks for doing it. Any questions from the audience? Great. Well, Chris Stansbury. Thank you very much.

Thanks a lot, Jesse.