Lumen Technologies, Inc. Q4 FY2025 earnings call

• Completed the transaction with AT&T, which had significant impact on capital structure and financials, including paying off super priority bonds, reducing debt to less than $13 billion, net leverage below four times, and reducing interest expense by roughly $500 million. • 2025 financial results were strong in revenue, EBITDA, and free cash flow. Exceeded cost reduction target with over $400 million in run rate savings in 2025, targeting another $300 million in 2026 for total $700 million run rate savings. • PCF sales were strong in the fourth quarter, with nearly $13 billion in deals inked and more in the pipeline. • NAS business had growth with rising ports per customer, indicating enterprises are standardizing on aluminum fabric for cloud 2.0. • Added new executives, Jim Fowler as Chief Technology and Product Officer and Jeff Sherez as chief revenue officer. • Focused on building the backbone for AI, cloudifying and agentifying the network, and expanding the LumenConnect ecosystem with 16 connected ecosystem partnerships yielding over 180 potential sales opportunities.

Total reported revenue declined 8.7% to $3.041 billion. Business segment revenue declined 8.8% to $2.425 billion, including over three fifty basis points of anticipated downward impact from one-time dark fiber and elevated public sector harvest revenue growth in 2024. Mass market segment revenue declined 7.9% to $616 million. Adjusted EBITDA was $767 million with a 25.2% margin, and free cash flow was negative $765 million. Fourth quarter North American enterprise revenue totaled 52%, improving the business revenue mix. The business revenue is expected to inflect back to growth in 2028. The fourth quarter also saw strong PCF sales, with nearly $13 billion in PCF deals inked, and NAS business had growth with rising ports per customer.

• For 2026, estimate adjusted EBITDA to be in the range of $3.1 billion to $3.3 billion, expecting adjusted EBITDA to inflect to growth. • Adjusted EBITDA guidance includes organic business revenue declines roughly 75 basis points better than 2025. • Excludes roughly $400 million in transformation costs associated with reducing expenses by a billion dollars by year-end 2027. • Total capital expenditures for 2026 expected in the range of $3.2 billion to $3.4 billion. • Expect to generate free cash flow in the range of $1.2 billion to $1.4 billion for 2026. • Estimate net cash interest expense to be $650 million to $750 million, a reduction of over $550 million at the midpoint versus 2025. • Taxes expected to be a cash inflow of 350 to $450 million in 2026 inclusive of the tax refund but exclusive of divestiture taxes.

• Uncertainty regarding infrastructure construction delays which could impact revenue recognition and delivery timelines. • Market acceptance of new network architectures and business models may not proceed as expected, affecting the pace of business revenue growth inflection.

Q: Wanted to focus on the PCF deals announced today. So with the $2.5 billion in this tranche, can you share with us how that business may be similar or different to the first $1 billion that you announced especially with respect to margins and returns? And then secondly, can you just help frame the timing of CapEx investments and cash receipts just given now the quantum of these deals maybe relative to the CapEx that you spent over the last couple of years, and it seemed like there's more to go. So just curious if you could frame how that's going to pace out over the next few years.

A: Yes. Thanks, Mike. So the recent deals, the 2.5 billion, or so the structure is really the same as what we've experienced today because we're doing these deals on existing network conduit, so they don't have new routes. So the economic profile is very similar. You know, on your follow-up question, we will get into that detail at investor day. We're gonna give you visibility into the PCF versus non-PCF impact on cash flow. I think the thing that I would definitely share with everyone today, though, is if you think about our capital intensity, I'm gonna speak in rough numbers because it's easier. Know, $4 billion in CapEx last year, a billion of that went away. With the sale of a consumer business without much of a loss in EBITDA. So in effect, we've reduced our capital intensity by almost 25% right there. As I mentioned in my prepared remarks, a billion of the three or so that we're guiding for this year relates to PCF. And remember, those deals are prefunded because of the quantum of those dollars. So when you get to the underlying capital intensity, outside of PCF, we're at about a $2 billion business. And so as PCF builds will eventually go away, again, we're prefunding all of those. We're really looking at a CapEx intensity profile. It's roughly half of where we were last year. So you know, that combined with the margin improvements really do drive ROIC improvement for investors.

Q: Hi. Good evening, and thanks for the Just wanted to quickly I mean, follow-up on the, I guess, guidance for 2028 business revenue. Growth. I mean, with and I think last quarter, you kind of talked about I think NAS was supposed to contribute you know, 4 to $500 million in 2028, and then PCF about 300 to 400 million correct me if I'm wrong, more or less in that quantum. Or 4 to 500 rather on the PCF, 3 to 400 on the on the digital. So 5 to 600 on digital. And why is there not upside to that numbers given what you guys have talked about today? Right? PCF I guess, 25, 35% larger than what we talked about exiting the third quarter call. And the NAS and digital adoption seems to be accelerating. And so any kind of color, you know, Chris, or Kate, you could provide on maybe the shaping of revenue and maybe there's upside relative last quarter's expectations. Thank you.

A: Yeah. Thanks, Soshan. I'll let Chris handle the financial side of it. I just me talk about the structural side of change in the industry. So any sort of change to critical infrastructure takes a long time. And what we're doing, just like the world of technology did in the, you know, transformation in the cloud era. A decade or two ago. It's the same kind of thing. Everything changes. The product changes. The way you deploy it changes. The way you buy it changes, the way you service it is gonna change. And we're being, I think, pretty conservative in the way that we think about not just our ability to deliver everything, but the market's ability to absorb that change We see the catalyst of AI in cloud 2.0 you know, driving a clear and pressing need for that change. But, you know, we're being cautiously optimistic you know, and making sure that, that we're doing everything we need to do to prepare and provide change management for our customers as well. Chris, if you I don't know if you wanna give any financial guidance on top of that. Yeah. So know, Sebastiano, you're certainly right that the additional $2.5 billion of deals does help. But keep in mind, we're in 2026. It's gonna take three years for those for those routes to get built at scale. So where will there be some revenue impacts know, in 2028, yeah, I would expect it. Does that impact maybe pull and pull forward in the year when we inflect the growth? Yeah. That's possible. I think the more important thing as we as we move to investor day, we will, again, give you those the PCF map there. But it's really on the digital side to your point with and NAS is obviously a big piece of that. But the other leading metrics that Kate talked about. Right? That's not the number of circuits and the number of ports and the number of customers, but the number of services and the fact that we now have the ability to have a significant off-net presence is really the opportunity we have to drive that digital adoption. And I will be very candid with你 and give you a spoiler alert for Investor Day. We're humans. We're projecting kind of linear growth in digital. The reality is we all know that at some point that the j curve but we're not gonna try to predict where that j curve comes into play. So, you know, I think what we're what we're showing is a middle of the fairway estimate with the possibility for us to overachieve. But time will tell. Great. Thank you.