Lumen Technologies, Inc. Q1 FY2026 earnings call

• Kate Johnson mentioned enterprises face challenges with building an AI-driven future on inadequate infrastructure and that Lumen is solving this by bringing together core assets. She also discussed NAS service adoption, customer wins, and the acquisition of Alcura. - Chris Stansbury talked about transforming the balance sheet, simplifying the capital structure, aligning operating systems, delivering solid financial results, and the acquisition of Alkira. He also provided details on revenue, EBITDA, capital expenditures, and free cash flow.

Total revenue was in line with expectations and ahead of consensus. Total business revenue declined 3.2% year over year to $2.44 billion. Strategic revenue was 51% of total business revenue in Q1, up from 49% in the fourth quarter. Adjusted EBITDA excluding special items was $849 million in Q1 compared to approximately $929 million in the prior year quarter. Capital expenditures excluding special items were approximately $859 million, in line with expectations and full-year guidance. Free cash flow in the first quarter was $756 million, excluding special items. NAS services saw strong adoption with customer adoption growing 25% quarter over quarter, active ports growing 35% quarter over quarter, and active services growing 32% quarter over quarter.

• Raised 2026 free cash flow guidance from 1.2 to 1.4 billion to 1.9 to 2.1 billion. - Remain on track to meet full year guidance and continue investing in transformation. - Expect transaction-related special items to decline throughout the year. - Plan to finance the Alkira acquisition with cash on hand, estimate the deal will close in the third quarter and be immaterial to financials and neutral to margins in the near term but accretive as the platform scales.

Q: On the strategic side with the acquisition, can you frame the opportunity to accelerate and the speed at which you can go to market with the capabilities that you're acquiring? And then on the operating side, if you could unpack a bit more of the business segment revenue performance in the quarter, and particularly in the North American enterprise...

A: Alcura gives access to fast-growing data center interconnect and cloud to cloud connectivity. Regarding North American enterprise revenue, one standout was strategic waves with nice growth and pleasant surprise of less cannibalization of NAS services.

Q: One question on some of the costs that you called out, some of the modernization costs and so forth. I assume some of those are related to the transaction with AT&T. Is there a total amount of that? How long will those types of costs go on? And then on the Wavelength business, you just called out, you mentioned that outperformed. Are you seeing any customers having issues making installations or having any any issues with availability of memory or chips to for, for those, those products...

A: Transaction related costs were about 50 million in the quarter and expected to go down significantly in future quarters. Wavelength business is about solving customer problems beyond just selling on price, saw material uptick in adoption rate on rapid routes.

Q: On the strategic side with Alkira, it sounds like it enables the cross-cloud platform to off-net customers. You mentioned international. I just remember last September you unveiled Project Berkeley, and that was supposed to deliver off-net service as well. So there's just replace that or just sit on top of that? Are they not related? I'm just trying to understand the two. Yeah, go ahead. On the operational side, I was just thinking about EBITDA. You beat by the street by about 50 million. You did not raise guidance. Curiousity specs almost sort of stepped down through the balance of the year. And how much of that EBITDA help was from cost-giving initiatives...

A: Alkira platform focuses on east-west interconnect, Fabric Ports and Project Berkeley are different but better together. EBITDA beat was strong but remained firm on guidance for the year.

Q: You mentioned a bit earlier that you don't plan to absorb Alkira, but I am wondering what will be involved in the integration process with Alkira, even in terms of some of the back office systems like billing, you know, customer onboarding. And then second question, more numbers-based, you mentioned the milestone payments. in one queue. Any help thinking about other milestone payments projected in 2026 and the tracking to what you talked about 1650 to 1850 and PCF cash flow for the year?...

A: Integration will leverage new ERP system, look to take capabilities on single digital platform and not absorb Alkira. There was about $32 million in PCF in the quarter that won't recur, expect smaller one in third quarter.

Q: Just another little clarification from Chris on the performance payment and PCF. Is that what drove the sequential step up in public service revenue or was something else going on there? No, it wasn't driven by that. And again, it wasn't performance-based. It's just the way that contract was delivered that Delivery pay. I used the wrong term. Sorry. Some of it was in public. Okay. Anything else we should be aware of in public sector as we think about the coming quarters? I think in the current quarter, legacy performed a little better. And in the coming quarters, again, there's tremendous opportunity in that space. It's just a very long decision cycle. So it's hard to predict when decisions will get made, but we feel very good about our position and ability to deliver to those customers. OK, OK. And then maybe one on Alkira. Are you able to share anything regarding its current revenue or EBITDA? Or if not, can you share anything to help give us a sense of its market presence or its customer base or its traction in the market today?...

A: Part of $32 million was in public sector and public sector also benefited from lower legacy churn. Alkira has number of customers today, revenue is relatively small, powerful combination with Lumen's installed base and scale.

Q: Just a follow-up on the public sector. Was part of the $32 million booked in there, and what else drove the sequential strength in that line? And can you just talk in general about your expectations for business revenues for the full year?...

A: Part of 32 million was in public sector and public sector benefited from lower legacy churn. Don't guide revenue in total but expect rate of decline better than competition and improving year over year.