Lumen Technologies - Earnings Call - Q3 2025

Executive Summary

• Q3 2025 revenue of $3.087B declined 4% YoY but was roughly flat QoQ; GAAP diluted EPS was $(0.62) while EPS excluding special items was $(0.20). Revenue and EPS both beat Wall Street consensus, and Adjusted EBITDA (ex special items) of $787M exceeded the S&P Global consensus, driven by “grow” products and disciplined execution.
• Management reiterated FY 2025 guidance (Adjusted EBITDA $3.2–$3.4B; FCF $1.2–$1.4B), expecting EBITDA near the high end and FCF supported by lower CapEx, lower interest expense, and a $400M tax refund; net cash interest at the low end.
• Strategic momentum: +$1B in new Private Connectivity Fabric (PCF) deals (total >$10B), expansion of Internet On-Demand to >10M off-net locations, and ecosystem partnerships (QTS, Commvault, Palantir) underpin Lumen’s AI-ready network and digital platform.
• Balance sheet actions reduced annual interest expense by ~$135M year-to-date; expected AT&T FTTH transaction proceeds in early 2026 to further reduce debt and interest expense, removing a key overhang cited by management as a stock reaction catalyst.

What Went Well and What Went Wrong

What Went Well

• Revenue, Adjusted EBITDA, and Free Cash Flow exceeded expectations, with “grow” revenue now 50% of North America enterprise revenue, up from ~35.5% three years ago. “We delivered strong financial results—revenue, EBITDA, and free cash flow all ahead of expectations.” — Kate Johnson, CEO.
• Strategic wins: +$1B PCF bookings (total >$10B) and IoD off-net expansion to >10M locations; active NAS customers +32% QoQ, fabric ports +30%, services sold +36%, supporting Lumen’s P×Q digital flywheel.
• Ecosystem partnerships (QTS, Commvault, Palantir) reinforce AI-centric positioning and go-to-market leverage for digital services across hyperscalers and enterprises.

What Went Wrong

• GAAP net loss widened to $(621)M due to special items (including losses on early debt retirement), with net loss margin at (20.1)% vs (4.6)% YoY; Adjusted EBITDA margin ex special items fell to 25.5% from 27.9% in Q3 2024 amid public sector harvest normalization.
• Wholesale revenue declined ~7.6% YoY; International & Other declined 13% on managed services, VPN, and voice. Mass Markets revenue fell 7.7% YoY despite fiber growth, reflecting ongoing legacy copper declines.
• Q4 outlook flagged additional pressure from normalization in public sector harvest revenue and higher cloud service utilization costs; management reminded of a Q4 2024 one-time grow revenue item that creates a tough YoY comp.

Transcript

Speaker 0

Welcome to Lumen Technologies' third quarter 2025 earnings call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session, and at that time, if you would like to ask a question, please press the star followed by the one on your telephone. If at any time during the conference you need to reach an operator, please press star zero. As a reminder, this conference is being recorded Thursday, October 30, 2025. I would now like to turn the conference over to Jim Breen, Senior Vice President, Investor Relations. Please go ahead.

Speaker 1

Good afternoon, everyone, and thank you for joining Lumen Technologies on today's 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, this conference call may include forward-looking statements subject to certain risks and uncertainties. All forward-looking statements should be considered in conjunction with the 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 in our earnings press release. In addition, certain metrics discussed today exclude costs for special items as detailed in our earnings materials, which can be found on the Investor Relations section of the Lumen website. With that, I'll turn the call over to Kate.

Speaker 2

Thanks, Jim, and thanks everybody for joining the call. We had a very productive third quarter at Lumen. First, we reported strong financial results with revenue, EBITDA, and free cash flow all coming in ahead of street consensus. We're executing well on the essential operational components of our business transformation, including things like a successful phase one implementation of our new ERP system, delivering more than $250 million in run-rate cost takeout through the end of Q3, on track for $350 million this year. We're continuing our balance sheet cleanup with an additional $2.4 billion debt refinancing and subsequent term loan repricing. We're making really good progress on our consumer fiber-to-the-home sale to AT&T, now targeted to close in early 2026. The real headline for this earnings call is the progress we're making to pivot this company back to growth, revenue growth.

We signed an additional $1+ billion in Private Connectivity Fabric deals since our last update, bringing the total PCF deal value to over $10 billion. We continue to scale the adoption of NAS, reaching more than 1,500 enterprise customers since the launch of this platform. We launched our latest NAS innovation, Internet on Demand, or IoT Offnet, giving us nearly 100 times greater market reach to accelerate digital service sales and revenue growth. We're rapidly building a connected ecosystem with dozens of early adopter tech partners who see how Lumen's digital platform can accelerate their time to value with joint customers. While we still carry the weight of declining legacy telecom revenue, our growing revenue base now comprises 50% of North American enterprise revenue, up from 35.5% just three years ago.

We're proud of the significant progress our team has made this quarter, as we believe our investment thesis and strategy are showing tangible results, and those results are being recognized in both the credit and equity markets. The advent of AI has created an urgent need for structural change in network architecture, and Lumen is uniquely positioned to take advantage of the moment. I want to share some quick thoughts on how we see the market to provide context for the rest of my remarks. AI workloads are pushing data center footprints to grow 10 times by 2030, and public cloud spend is expected to eclipse $1 trillion in that very same period. Meanwhile, CIOs are on the hook to deliver insight at the speed of thought while efficiently managing explosive data growth across complex, hybrid, and multi-cloud environments.

Traditional network architectures were built for simpler times, and they just won't cut it anymore. They're not big enough, or fast enough, or intelligent enough, or secure enough. Simply put, traditional networks let precious GPU investments sit idle. Lumen is changing all of that, as Dave Ward, our Chief Technology and Product Officer, explained in his recent white paper. He advocates for a fundamental reset in networking to support the new era of Cloud 2.0 and identifies five essential networking capabilities required to thrive: extreme bandwidth and low latency, data center interconnect, expansion into AI corridors, distributed cloud on-ramps, and programmable API-first networks. These requirements are the underpinning of Lumen's three-part strategy, including the physical layer, the digital layer, and the connected ecosystem. Today, I'll translate that into Lumen's evolving business model with some exciting updates, starting with building the backbone for the AI economy.

As I mentioned upfront, we closed another billion-plus dollars in PCF deals, bringing our total to over $10 billion, with a healthy pipeline of deals remaining. Based on our current build schedule, the $10 billion of business in hand, plus the existing O&M run rate business for PCF, we expect will yield a recurring revenue stream ranging between $400 and $500 million by the time we exit 2028. I'll add two important footnotes regarding this business. First, none of the remaining deals in the pipeline have been contemplated in this revenue guidance. They are purely upside. Second, we remain deeply disciplined in our approach by only inking deals that are value accretive to Lumen shareholders, even if this means stepping away from an opportunity. The teams are doing a great job building that backbone.

As of the end of September, we had completed more than 3,200 miles of overpulls on 27 different routes, approximately 130% of our end-year 2025 target, with a full quarter left to go for the year. Building the backbone for the AI economy is not just about overpulls for our hyperscaler and NeoCloud friends. It also requires massive upgrades to our physical network to support Cloud 2.0 needs of enterprise customers. For this, we're investing in three major fabric infrastructure projects, including rapid routes, data center expansion, and metro expansion. Market by market, we're upgrading capacity, increasing data center interconnects, and improving service delivery experience and timeframes to help our customers address the urgent needs of AI and multi-cloud architecture. These investments are how Lumen Technologies is creating a ubiquitous, high-capacity networking fabric that enables our customers to connect everywhere that matters, quickly, securely, and effortlessly.

Moving on to our digital platform update. We've created Lumen Connectivity Fabric and Network-as-a-Service to address the need for programmable API-first networks in the world of Cloud 2.0. I think our growth metrics confirm the market need for what we're offering. The number of active customers in the third quarter grew by 32% since last quarter, the number of Network-as-a-Service fabric ports deployed grew by 30%, and the number of services sold by 36% in that same period. Across all three KPIs, we're showing strong growth. I share these metrics with you each quarter because they're essential to our new business model, which is different than traditional telecom. I'll share more about that now so we can all ground ourselves in a common understanding of how Lumen Technologies will pivot to revenue growth.

At the center of our new P times Q business model is the fabric port, one digital port that delivers many services. When we say Q, we mean total active ports or the number of net new ports in service. When we say P, we mean average selling price, average selling price of each service purchased through Lumen Connect and deployed on the port. In early 2026, we're going to extend this model with the launch of Project Berkeley, a pre-provisioned cross-carrier fabric port that lights up first and third-party services on and off-net, AI-ready from day one. Simply put, Project Berkeley enables intelligent and universal access no matter who owns the pipes. Customers will be able to install the port and light up standard kits of services, including Internet on Demand, Lumen Defender, voice, VPN on demand, and a range of cloud on-ramps.

Soon, through our connected ecosystem work, they'll also be able to light up third-party services. The commercial motions to drive digital growth are simple and repeatable by both our direct sales force and our partner channels. First, they land customers on new ports with a mix of starter services, then they expand by touching more services on installed ports, creating a P times Q flywheel of sorts. At Investor Day next quarter, we'll share more about what we're learning as this new digital marketplace takes shape. Here's what we know: growth will come through selling more ports and upselling more first and third-party services. That's why I'm so excited to share the next two announcements with you. On October 20, we launched Internet on Demand (IoT Offnet), expanding our addressable market by close to 100 times, and that's just in the United States.

Since Lumen Network-as-a-Service (NAS) became generally available in January 2024, the number one piece of customer feedback, it's always been, "Hey, bring Lumen NAS off to market." Here we are. It's early days, but the feedback so far has been very positive, with great customers like Xcel Energy noting how Lumen's off-net NAS will help them achieve important business outcomes, such as more resilient operations and more intelligent services. The second announcement is about the Lumen Connected ecosystem, a major driver of commercial expansion for both ports and services. Last week, we announced a strategic partnership with Palantir, where we not only agreed to buy services from each other, but we committed to bring those capabilities to joint customers.

I want to call your attention to an article from The Street entitled, "Palantir Just Signed a Deal That Could Shift the AI Power Balance." The piece does a really nice job explaining how Lumen's network has become critical infrastructure in the AI race. The purpose of the connected ecosystem is to help more technology companies like Palantir gain competitive advantage by leveraging our platform and allowing Lumen to gain commercial reach. We're excited to report that we're working with dozens of other companies that not only understand the power of our new business model, but they also understand that our AI-ready network enhances the delivery of their solutions.

Just some of the marquee tech companies we're working with include, of course, Microsoft, Google, and AWS, the big hyperscalers, but also data center companies like Digital Realty and QTS, AI platform companies like Palantir and Meter, data cloud services companies like Databricks and Snowflake, security companies like Palo Alto Networks, Zscaler, F5, and Netskope, and backup and recovery and data protection services companies like Rubrik, Commvault, and Cohesity, and so many more. Together, Lumen Connectivity Fabric and Lumen's connected ecosystem offer a meaningful source of revenue growth. Our early read on growth from all of our digital capabilities, that includes NAS, edge solutions, security, and the connected ecosystem, is somewhere between $500 million and $600 million of incremental revenue run rate exiting 2028.

While it's hard to accurately forecast revenue when you're creating a new market, we do feel good about these numbers and will continue to be super transparent about all of our assumptions and learnings as we go. To bring our revenue story home, PCF should yield between $400 million and $500 million of incremental revenue exiting 2028. Lumen Digital should yield between $500 million and $600 million of incremental revenue in the same period. That's $900 million to $1.1 billion of incremental revenue exiting 2028, and that's the path for Lumen's business segment to achieve revenue growth. We're changing the game in networking by building the fastest open platform mesh network connected to everywhere that matters while delivering a digital on-demand experience so enterprises can quickly, securely, and effortlessly move their data. It's what our customers need, and it's what our investors deserve. Chris, over to you. Thanks, Kate.

Lumen delivered another quarter of solid execution. We reported strong third-quarter financials, implemented phase one of our new ERP system, and continued to improve the balance sheet. Financially, revenue, adjusted EBITDA, and free cash flow results were better than expected. Our total business grow revenue was up 7.7% year over year, and our total business revenue was only down 3.2% year over year, well ahead of the competition. The launch of phase one of the ERP system, quote to cash, is a significant milestone for Lumen as we continue to transform the company by simplifying systems to support our future growth. When phase two is completed next year, we will be on a unified ledger and will continue to sunset old systems and drive additional efficiencies across the organization. We continue to strengthen our balance sheet with multiple capital markets transactions during the quarter.

In August, we successfully priced $2 billion of 7% first-lien notes due 2034 at Level 3, which enabled us to extend maturities by approximately four years and delivered $48 million in annual interest expense savings. We followed in September with pricing a $425 million add-on to the 7% notes to redeem all the remaining 2030 Level 3 first-lien maturities and repriced our $2.4 billion term loan, reducing the rate by 100 basis points. Lastly, in September, we used cash to redeem both the $238 million of 7.25% Qwest notes and the $350 million of 10% Level 3 second-lien notes. The third-quarter debt refinancings, term loan repricing, and debt reduction actions further reduced annual interest expense by approximately $135 million. Year to date, we've reduced annual interest expense by approximately $235 million through proactive balance sheet management.

Looking forward on a pro forma basis and considering the early 2026 expected closing of the announced $5.75 billion sale of our fiber-to-the-home business, the proceeds will allow for the paydown of approximately $4.8 billion in Lumen super priority debt. This action is expected to further increase Lumen's annual interest expense savings up to approximately $535 million. We will continue to work toward improving our debt profile ahead of the anticipated close of the AT&T transaction in early 2026 as we continue to seek opportunities to further delever, extend maturities, simplify the capital structure, and reduce our cost of capital. Upon closing the AT&T transaction, we expect to have approximately $13 billion in debt, reducing our overall leverage before four times adjusted EBITDA.

I could not be more proud of the team's hard work to deliver such impressive results, as well as the opportunities that a new financial profile unlocks for Lumen's future. I'm really pleased to say debt is no longer a headwind for Lumen. The balance sheet is quickly becoming a point of strength for us. Let's move to the discussion of financial results for the third quarter. Total reported revenue declined 4.2% to $3.087 billion. Business segment revenue declined 3.2% to $2.456 billion. Mass market segment revenue declined 7.7% to $631 million. Adjusted EBITDA was $787 million, with a 25.5% margin, and free cash flow was $1.7 billion. Within North America enterprise channels, excluding wholesale, international, and other, revenue declined by approximately 1%. North America enterprise grow revenue increased 10.5% year over year, driven by continued strength in dark fiber and IP.

We saw expected and typical declines in nurture and harvest. Overall, including wholesale, North America business revenue declined 2.8%. As previously communicated, grow will become a larger percent of our North America enterprise revenue base over time. We're pleased to share that grow now represents half. I'll say that again, half of our North America enterprise revenue. This was driven by our core network grow products, with non-PCF driving the largest portion of the increase. The emerging growth of digital has yet to materially impact our revenue performance. As Kate mentioned, when we first reported this metric in early 2022, grow revenue represented approximately 35% of our North America enterprise portfolio. To those who have stuck to their thesis that our legacy portfolio will prevent our return to growth, or that our growth is over-relying on PCF, the facts show that thesis is increasingly incorrect and frankly irrelevant over time.

Wholesale revenue declined approximately 7.6% year over year, in line with our expectations. International and other revenue declined 13% or $12 million, driven primarily by managed services, VPN, and voice declines. Now, moving on to mass markets, our fiber broadband revenue increased 18.4% year over year and represents over 49% of mass markets broadband revenue. During the quarter, Lumen added approximately 122,000 fiber-enabled homes, bringing our total to approximately 4.5 million as of September 30th. We also added 39,000 Quantum Fiber customers, bringing fiber subs to approximately 1.2 million. Fiber RPU was $64. At the end of the third quarter, our penetration of legacy copper broadband was approximately 7%, and our Quantum Fiber penetration stood at approximately 26%. Now, turning to adjusted EBITDA. For the third quarter of 2025, adjusted EBITDA, excluding special items, was $787 million compared to approximately $900 million in the year-ago quarter.

For the third quarter of 2025, our margin was 25.5%. Adjusted EBITDA margins were disproportionately impacted by anticipated declines in public sector harvest revenue in the third quarter. Special items impacting adjusted EBITDA totaled $216 million. This includes severance, transaction and separation costs, and our modernization and simplification initiatives. Lastly, capital expenditures were approximately $1 billion. Free cash flow, excluding special items, was over $1.7 billion. As a reminder, we expect free cash flow to be lumpy quarter to quarter as we move through the large PCF builds. I'll now talk about our outlook for the remainder of 2025. As we saw in the third quarter, we expect fourth-quarter revenue to be negatively impacted by additional declines in public sector harvest revenue as that revenue returns to more normalized levels, similar to the third quarter of 2024.

On a year-over-year basis, I would remind everyone that we had a positive one-time revenue item in the grow bucket in the fourth quarter of 2024. With respect to 2025 adjusted EBITDA, we reiterate that we expect to come in near the high end of our $3.2 to $3.4 billion guidance range, despite the previously announced $46 million RDOF give back in the second quarter. We expect increased costs associated with our utilization of cloud services to continue in the fourth quarter, as well as a negative impact on EBITDA from the above-mentioned public sector harvest normalization. As a reminder, our adjusted EBITDA guidance assumes organic revenue declines similar to 2024 and excludes roughly $300 million in transformation costs to support our multi-year commitment to reduce expenses by $1 billion.

We remain confident that we will achieve adjusted EBITDA stability over the next few quarters and see an inflection to growth in 2026, driven mainly by continued M&S savings as well as improving revenue declines. We maintain our 2025 guidance for CapEx spending at $4.1 to $4.3 billion. As we previously communicated, we expect to be at the low end of that range, mainly because of build timing and increased efficiency from our team, offset by some strategic investments for growth. As we've said, we expect our overall capital intensity to fall over time. Our 2025 cash interest guidance remains at $1.2 to $1.3 billion. We continue to expect it to be at the low end of the range because of the improvements we've made to our debt profile.

Finally, we're reiterating our full-year free cash flow guidance of $1.2 to $1.4 billion, mainly because of lower-than-anticipated CapEx spending, better adjusted EBITDA performance, lower interest expense, and the expected $400 million tax refund. I would note our free cash flow outlook reflects our expectation of receiving the $400 million refund from recent tax legislation in 2025. While the IRS has accepted our request for the refund, the receipt of this cash could be delayed by a prolonged shutdown of the U.S. government. Now, as I wrap up, I want to emphasize that as we disrupt the market for legacy enterprise telecom offerings with next-generation Cloud 2.0 connectivity digital solutions, we'll change the way we measure and provide insights into our business. The future is about digital scalability and growth, and this requires a different way of thinking, a different way of modeling.

As we transform Lumen, we simply won't fit the models of yesterday's telecom. For those of you open to changing your models to track our journey, we appreciate your thoughtfulness and will provide as much guidance as we can, including a deeper dive look at our upcoming investor day in February. Kate talked about $500 to $600 million in digital revenue exiting 2028. Digital includes NAS, cloud on-ramps, security, as well as revenue from ecosystem partnerships. We see multiple paths to achieving those digital revenue goals over the next three years. We're still testing assumptions, but what we do know is we're seeing great adoption for NAS, as well as immediate interest from industry-leading tech companies as we build our ecosystem partnerships. More than half of our North America enterprise revenue is coming from growing products today.

While we're still gauging the timing of the revenue on our new digital products and enterprise buying habits, the early trends we're seeing give us increased confidence in our return to business revenue growth in 2028. As we learn more, we'll be transparent as we introduce concepts to investors that will be highly correlated to our strategy and distinctly differentiated in the market relative to the backdrop of traditional telecom. We believe this will make sense as our business evolves over time. While there are a lot of moving parts over the next 12 to 18 months, we believe our transformation and innovation will lead to new revenue streams that satisfy the needs of customers in today's Cloud 2.0 environment.

Our cost structure optimization and increasing digital revenue help improve margins and free cash flow, reduce our capital intensity, lower our leverage and borrowing costs, and ultimately provide the financial flexibility to invest in Lumen's future growth. We're pleased with our performance this quarter as we make great strides across all three layers of the business: physical, digital, and ecosystem. We're also pleased with the reaction from the credit and equity markets as our trading multiple is beginning to reflect the impact of our significant balance sheet improvements, our improving revenue mix away from legacy to growing products, and the early proof points for our digital growth engine. We're excited by what the future holds, especially given the financial impact of our digital future and that they're not materially reflected in our results today. We look forward to providing more updates along our journey.

I'll now hand it back to the operator for Q&A. Thank you. If you would like to register a question, please press the star followed by the one on your telephone. You will hear a three-tone prompt to acknowledge your request. If your question has been answered and you would like to withdraw your registration, please press the one followed by the three. One moment, please, for the first question. Our first question comes from the line of Mike Rollins with Citi. Thanks, and good afternoon. Two topics, if I could. First, on the PCF deals, how does this new $1 billion of bookings compare to the last set of deals or tranches where I think previously you guided to an unlevered free cash flow margin of like 30 to 31%? Just curious if the margins from these are different from that.

If you can give us an update on how much pipeline is still out there for Lumen to pursue for these types of deals. Secondly, you mentioned a few times the grow revenue being above 50% of the North America business revenue. The grow revenue grew over 10% year over year in the quarter. Can you unpack a little bit more of what's driving that grow revenue? Is double-digit growth in this grow bucket a new sustainable level for Lumen to achieve? Thanks. Hey, Mike. It's Kate. I'll take the first one and let Chris handle the second one. On the PCF deals, the billion-plus, it was more than one deal, and the composition of that portfolio of bookings is equivalent in margin to the prior tranches. I think you can see us kind of approach this business with a very disciplined approach, as I referenced in my prepared remarks.

We're only going to do the business that's deeply appreciative, and we're going to remain focused on that. Regarding the pipeline, it's a lot of different hyperscalers and NeoCloud providers. We're not going to commit to a number anymore. I think we're going to exceed probably our expectations as we set last year, only because this is not going to be an overnight sensation. This is turning out to be a fairly protracted phase of what we see as a three-phase process: hyperscalers and NeoClouds connecting their data centers for training and for provisioning of services to their customers, and then the enterprise phase of it, where enterprises start consuming those models through inferencing, and they need massive upgrades to address all the needs of Cloud 2.0.

There's that third section, which is referenced in the Cloud 2.0 remarks that I made, which is basically AI corridors emerging, and you've got AI talking to AI. It's a huge amount of data traffic and requires a massive expansion. We're still figuring out what the demand curves look like across all three of those cycles, but I think that gives you a sense for it. Yeah, in terms of the overall growth rate, PCF has started to trickle in, but I emphasize in my prepared remarks that it's actually not the majority of that growth. We still see strong mid to high single-digit growth in things like dark fiber, IP, Waves, connectivities, traditional connectivity solutions that ultimately will convert to digital. In the near term, PCF is certainly contributing, but it's not driving the total growth.

I also want to remind everybody that over time, PCF is actually not a growth engine because those deals are static, and once completed, they don't increase every year. When we're talking about getting back to growth, we know that eventually there's a headwind as those builds come to conclusion and level off. PCF is a great way to monetize the assets that are in the ground and this tremendous network that we have the opportunity to run, but they really aren't something that we believe are a significant part of our long-term growth trajectory. Next question. Thanks. Your next question comes from the line of Sebastian O. Petty with J.P. Morgan. Hi. Thank you for taking the question. Chris, if maybe you could just, given the.

Run rate that you've outlined for not only the PCF but for the digital revenue buckets, against the backdrop of some of the transition and transformation costs that you're kind of wearing, for lack of a better term, in 2025, can you maybe help us think through the piece parts or the puts and takes as we look out to the EBITDA bridge from 2025 through 2026? Obviously, the mass markets, that's kind of well understood. Maybe some of the other core or remaining analysis? Thank you. Yeah. So a few different things. As it relates to revenue, you will continue to see that that grow bucket becomes an increasing portion of our business over time. Business mix continues to improve, which means the rate of decline continues to improve. That's obviously a tailwind.

The big driver, I mean, let's be really straight about it, Kate called it out, is the modernization and simplification efforts as we navigate our way through the inflection point of EBITDA. A lot of modernization and simplification as we close out the year. We've said that we're going to be above what we initially guided for this year, and then more to come next year. Those are really the two key drivers: reduced rate of decline on enterprise and the modernization and simplification benefits that impact EBITDA. Thank you. If I could ask a quick follow-up, Chris, I think you said that the balance sheet is no longer a constraint but a source of strength. Is Lumen strategically complete as you think about trying to attack some of these growth areas that maybe legacy telcos are not necessarily having their purview? Thank you.

I would say, number one, once we close the transaction with AT&T, that'll bring us down to the high threes, but we're not done yet. There's a playbook to further reduce leverage over time. The point is that when you look at the maturity chart and the curve that we shared in the presentation, this is not the old Lumen. This is a balance sheet and debt profile over time that allows us to do multiple things. What I wanted to be really clear about in today's reported remarks, and it's exactly what I frankly shared at the Industry Analyst Day, is it's time to stop talking about our balance sheet as a headwind because it's simply not true. It's time to start talking about our inflection back to growth. Next question, please. Your next question comes from the line of Vatian Levy with UBS. Please proceed with your question.

If your line is on mute, please unmute it. We will go to the next question. Your next question comes from the line of Frank Luthan with Raymond James. Great. Thank you. There were three announcements this week. You touched on some of them. There was the announcement with the touch of the 10 million business locations and the Palantir and the QTS network. Can you give us an idea of sort of the revenue impact from those items and the timing and magnitude of when those will start to hit? Thanks. Yeah. All of them were a part of the connected ecosystem storyline, which, if you think about it, has a couple of different tenets. The first is continued connectivity with the hyperscalers. The second is connecting, interconnect for all the data centers. That was the QTS deal.

The third being technology partners who are seeing value in integrating networking into the offerings that they bring to customers. We're starting the flywheel, Frank. It's really about a go-to-market partnership, better together. I think networking has always been purchased separately. You buy a cloud solution, and then you go figure out if you have enough network. What we're doing is designing the network solution to support the specific cloud offerings of these companies and making them available in digital marketplaces to make it easy to buy and improve the velocity to value for the customer. You're going to see it over time in improved results of all the same things we're selling today. We're just harnessing the power of other people's sales forces to give network a seat at the table for the first time ever. Okay. Thank you.

Any color on sort of the magnitude and timing of the revenue from those, or are these just sort of kind of lumped in with everything else in growth? Yeah. I'll take that. Frank, it really gets back to my closing comments, which is we see multiple pathways to getting to our revenue objectives for digital. The only thing that we're getting really good certainty around at this very early stage is tremendous NAS adoption. As Kate laid out in the P times Q map, it comes down to number of ports, number of services per port, and price per service. As we move through that journey, we'll definitely give investors a lot more visibility to that. We'll certainly share our prevailing point of view at Investor Day. No matter what we share, I guarantee it's going to be different by the time we get to the other end.

We'll constantly update the market. The thing that gives me enormous confidence is, when you've got ports, services, and price, you have multiple pathways to get to that outcome, and we feel really good about it. Just to clarify, Frank, the connected ecosystem is a part of the storyboard of how we have confidence in getting to $500 to $600 million incremental revenue exiting 2028. It's one and the same. It's not a separate revenue stream. It is acceleration of the existing digital capabilities in flight. Great. Thank you very much. Next question, please. Your next question comes from the line of Greg Williams with TD Cowen. Your line is open. Thanks for taking my questions. Chris, the stock's been showing some outside strength in the last three weeks.

I know it's been volatile recently, but if it sustains up here at these levels, does it make sense to equitize some of the company and sell some shares and further bolster the balance sheet? Does it change the capital allocation calculus at all? Second question, Kate, you did mention the three phases of AI. Are we in a prolonged training phase one right now? What I mean is a couple of the hyperscalers and AI companies are pushing now more towards AGI models, like bigger, larger models here. I'm curious if that prolongs phase one of this journey. Thanks. I think it's a great question as to whether or not phase one is prolonged. I think it's definitely intensifying, and the amount of capital being deployed is probably bigger than we even imagined last year.

How long it takes, this isn't—we're building critical infrastructure for the biggest technology shift in the history of mankind. It's a multi-decade journey. I want to be clear that it's not linear. Phase one will overlap with phase two, phase two being as enterprises start to use all of these models, which is happening right now. I think that it's really interesting to see the proliferation of NeoClouds coming into the story to sort of offload a bit of the pressure on trying to find GPUs and commit to buying them. I think you're seeing the market change. I don't know that anybody knows the answer or how long this is going to last, but right now, we're just focused on executing. Obviously, we're delighted with the commitment of capital that our partners and customers are making to this incredible technology.

On the stock price, obviously, tech has had a good run of late, and I want to make sure I say that clearly as a backdrop. If you really dissect what's been going on with Lumen Technologies' stock price, there was a significant discount put on our stock price because of a few things. One, perceived risk on the balance sheet side. Again, look at that debt maturity chart. Two, and quite frankly, some of your peers still hold this view that we could never return to growth because of the legacy backdrop. I think what the market now realizes, and by the way, the credit markets realized this six, nine months ago, is that neither of those things are true. The balance sheet is getting healthy really quickly and is no longer something to be discussed as a risk.

Our portfolio of business today, before we really start to pull in the digital upside associated with transforming enterprise telecom, is half that portfolio is growing. When you look at the stock price today and normalize the balance sheet post-close, which we said today and AT&T said on their call, we expect an early first quarter, you actually get to a multiple that's pretty reasonable and comparable to better-performing peers in our space. I think we're now finally at the point where we're being recognized for what we've done, and we're now more fairly valued than we have been for the last period of time. From here, we got a lot of work to do, but we feel really good about the upside as we drive digital adoption. On the equity raise side, we'll continue to look at everything.

I would never say no, but I also want to be really clear. Our equity holders have stuck with us. We've done a lot on the debt side. Our creditors are obviously very pleased with what the return has been on their investments as we see bond trading values come up. Now it's time to focus on our equity holders, and that's why we're so pleased to see what's happening in the market. Next question, please. Your next question comes from the line of Eric Luchow with Wells Fargo. Great. Thanks for taking the question. Appreciate the kind of revenue color on the digital and NAS ecosystems, $500 million, $600 million.

Just curious if you could talk about some of the incremental work you have to do internally, investments you have to make to be able to achieve that outcome, whether it's upgrading data centers, additional cross-connects, additional on- or off-net locations. Whether that could show up in the OpEx or CapEx line to be able to reach that goal in a few years. My second question would just be around disconnects of legacy services. It seems like those have been coming in a little better than expected. Just wanted to check if there's any kind of timing-related things to call out there that we should expect to roll off in the next few quarters, or maybe you're just performing better than you previously anticipated. Thank you. I'll take the first part, and I'll leave the disconnect timing question to Chris.

The investments required to build the digital platform are definitely significant. They're already contemplated in all of our plans. They're in the operating plan, and we've got a very strong pipeline of innovation. It's just beginning with Internet on Demand (IoT Offnet). We've got Project Berkeley coming to market in the first quarter and more enhancements to the platform after that. I think it's important to remember that we talk about cloudifying telecom, which really means driving cloud economics for us and our customers. That's about scaled revenue growth with reducing marginal cost of hardware required to deliver these services, which is very, very exciting. Additionally, the old way for Lumen to grow was really sort of fixed to a level of capital intensity that I think is changing over time.

The capital intensity required to deliver the digital portfolio over time reduces, and I think that's an important part of our story over the next couple of years. Chris, you want to take that? Yeah. On disconnects, it's really last quarter was an anomaly, as we said, around the public sector side. Things, I would say, just returned to normal as we move into the fourth quarter. I think the bigger impact in the fourth quarter is what I mentioned in my remarks, which is, remember, we had a big one-time revenue enablement item in grow last year surrounding the state of California. That's really the biggest thing that's out there. Thank you. Next question, please. Your next question comes from the line of Nick Del Dio with Moffett Nathanson. All right. Thanks for taking my questions.

The first one, Kate, you touched on this in your prepared remarks, but I was hoping you could dig in a little bit more. Can you talk some about the specifics of how you're promoting Network-as-a-Service (NAS) to customers and educating about the product and how you're incenting the sales force to sell it versus other services? Kind of related to that, if the off-net opportunity is 100 times larger than the on-net opportunity, how are you prioritizing each? How are you resourcing each? Yeah. It's a great question and a hot topic for Lumen Technologies right now because we're going to relentlessly pursue our digital future. That means allocating resources accordingly. When NAS was a bit nascent, we had to kind of do it as a hobby.

Now that it's becoming core and showing a very promising adoption curve, which will translate into a very promising revenue growth curve, we've got to dedicate more resources to it. For any company in transformation, Nick, you have to be ambidextrous. You have to take care of the old, and you have to build the new at the same time. The trick is, when do you move resources from the old to the new? We're right in the process of doing that. There are many examples that I could go through. At the highest level, where there's a NAS capability being offered to customers, we will demote the old-school analog version of that service and prioritize it in terms of engineering resource, marketing resource, sales resource, and operations resource.

You'll see the sales team being more and more incented to go after it and the rest of the company in support of that sales force. I think your other question about the availability of 10 million buildings, we still need to target. We still need to get aggressive in terms of aligning our sales efforts with the massive metro upgrades that we're doing so our customers can take advantage of everything we're doing at the same time: the on-ramps, Network-as-a-Service, the capital improvements, the rapid routes, all of that stuff as we improve the capacity, bandwidth, and performance market by market. It's also important to note that if you think about most large enterprises, they have a mix of buildings in any geography that are on and off-net. We have to be very cautious about how to present this to customers.

Now, we can ask our entire sales force to talk to every customer about purchasing NAS and about what the benefits are of an agile digital native experience. Digitally is going to be fundamentally different and provide a better customer experience to these customers. It wasn't available in totality in the past. Now that it is, it'll actually be easier for our sales force to approach customers because they don't have to pick and choose on-net and off-net. They can just do a total network refresh. Okay. That's helpful. Thanks, Kate. Can I ask one clarification on the PCF front as well? A few minutes ago, you said that the margin on the PCF deals that you signed in this quarter was equivalent to what you previously outlined, the prior deals that you signed, rather.

Last quarter, I thought you were suggesting that the funnel that you had had some different attributes to it since they skewed more towards new builds rather than leveraging existing assets. Maybe could you just touch on that a little bit? Thanks. Yeah. I mean, basically, new builds, construction projects, much more complex. There's pressure for lower margin over those projects as opposed to overpulls or lighting up existing dark fiber. The composition of the portfolio is incredibly important to us. We're not going to do bad deals. There's an enormous amount of pressure from some of our partners to go back to the old telco ways of zero margin for the promise of traffic of the future. We're not really doing that.

We're looking for much more creative partnerships with these builds to say, "If it's a new build, we will share costs if there's existing traffic there." Chris, do you want to add anything to that? Yeah. The billion dollars looks like the deals that we've signed so far because it's primarily existing conduit where we're doing overpulls. It's a similar economic profile. Okay. Makes sense. That's perfect. Thank you both. Next question, please. Your next question comes from the line of Mike Funk with Bank of America. Great. Thank you for the questions tonight. I'm going to butt in your comment during prepared remarks. You said that it does not fit the models of traditional telecom. Can you expand on that for me if you could, please? Traditionally, telecom is kind of known for being very commoditized from buying the same equipment, same service capabilities.

I guess, how do you veer from that more traditional model? What did you mean by the earlier statement? Yeah. First of all, let's start with the fact that nobody's doing what we're doing. What I would clarify, though, is when Kate talked about our digital future, there were keywords in there, which is, "One port, many services." Traditional telecom was a battlefield of every single service requiring its own infrastructure layer, its own set of ports. You'd have multiple players in the ecosystem go chase VPN or Ethernet or whatever it was, and you'd end up with massive amounts of hardware in the system. Everybody would say, "Uh-oh. The only tool we have to compete against each other with is price." That's not what we're doing.

What we're doing is we're monetizing what is the most modern, the most high-capacity, the fastest network by adding a digital layer and an ecosystem layer. Those are services, to Kate's point, whether they come from us or they come from third parties that allow us on and off-net. Off-net is not a disadvantage anymore because of what we're bringing to market, where we can actually, for the first time in enterprise telecom, bring scale. You'll see declining capital intensity because every service will not require its own infrastructure layer. You'll see increasing margins because those services increasingly will be delivered digitally. The whole model is changing. It's the P times Q math that Kate went through. Lumen is not your mama's telecom anymore. We will not look like and are proud to not look like our competitors in this space.

Michael, I would strongly encourage you to look at some of the slides that we prepared for today's presentation, specifically the essential Cloud 2.0 networking requirements. I challenge you to come up with another company that is doing the five things that we outline on the page. We are massively expanding bandwidth and reducing latency with our upgrades of rapid routes and data center interconnect and metro updates. We are connecting to everywhere that matters, especially with the data centers, which means we're bringing that higher-level bandwidth and lower latency to all of those locations. We're expanding into AI corridors. We've connected with all of the hyperscalers for these on-ramps, and we're delivering everything with a vision that it's got to be programmable and it's got to be interconnectable through APIs. This is a complete modernization of old telco.

What's remarkable is that new architecture that we're building not only gives better performance, more secure, higher bandwidth, higher performing, lower latency, all those things, intelligent, it also reduces cost because it takes the intermediaries out. That's incredibly important when we're starting to talk about commoditization. Things get commoditized because there was a utility mindset and there was no innovation. This company is completely innovating and delivering a fundamental reset in networking in support of AI and making massive capital investments in support of that. We're already seeing the uptake. It is very, very different. The only add that I would make is that when you look at PCF, that physical layer, the reason we're at $10 billion of business and you're not hearing much from others isn't because they want to walk past $10 billion. It's because they can't do it.

If you were to normalize the underlying physical layer, it would be years and billions and billions of dollars until a competitor could close that gap. That's before we talk about the digital and ecosystems layer where we're making this consumable on demand by the customer. That is the differentiation. That's why you continue to see our profile look so different to our competitors. One more if I could, really quickly. I appreciate all that insight. I'll definitely review the decks again for those facts. You've given us some landmarks for the revenue and revenue growth. I apologize if I missed it from the analyst event you hosted or today, but what does the cash EBITDA CAGR look like over that same time period? You referenced in the call today that the market's not giving you credit for growth rate relative to peers.

It'd be helpful to have a thought on that to be able to better frame the valuation on cash EBITDA growth. Yeah. I'll say two things. First, we're going to give you all of that at Investor Day. Second, in preparation for Investor Day, as we look at, again, only the PCF deals that are signed to date, nothing new, and there is more there, and we look at the capital investment to do the things that we're talking about, we have ample cash flow, free cash flow over the next five years to the point where even post the AT&T close, we will continue to deliver. This is a business that will continue to generate free cash flow because capital intensity falls, because margins go up, and because ultimately revenue inflects. We'll give you more at Investor Day. Great question, please.

Your next question comes from the line of Jonathan Atkin with RBC Capital Markets. Thanks. Wondered if you could comment a little bit about off-net NAS capabilities and maybe just repeat or go into more detail on kind of what lies ahead around that capability and demand for off-net NAS. Yeah, that would be my question. Thanks. Yeah, sure. The exciting part about off-net NAS is we do off-net today in existing capabilities, right? It depends on who owns the endpoint. If one of the other carriers has the endpoint into a building, but the customer wants to do a network with Lumen, we would have a wholesale relationship for that endpoint. The really cool thing about Internet on Demand (IoT Offnet) is that we now can offer on-demand internet services to customers no matter who has the endpoint to the building.

If Verizon or AT&T or anybody else has fiber into the building, that customer can still run Lumen NAS, and that's a great thing. What's more, and this is something that we reviewed at Analyst Day, in September we're going to bring lots more detail when we launch Project Berkeley. We have a fabric port that allows us to make any pipe smart. We turn anybody's pipe into an intelligent and secure internet connection. It really accelerates our commercial expansion capabilities. What's more is that fabric port, Berkeley specifically, has a Swiss Army knife. It's a cross-carrier mesh, if you will, that enables fixed wireless, satellite, fiber, copper, 5G, whatever service you have can all go into that port, which is really cool because it's kind of like a control point for the internet.

What that means is not only can we expand, but we can provide more services to our customers over time as they want to manage cross-carrier. Finally, the connected ecosystem part of our story is exciting because our partners want to provide services on our network out of the gate. Just imagine the vision, and this is vision. We still have to get all the pieces together, but imagine a customer who says, "I want to have a Lumen network." We dropship a Berkeley device. If you can plug in an Ethernet cable, you can make that device work. It shows a digital twin back in Lumen Connect, the mothership, the cloud, so that we can remotely provision, we can remotely manage and service it under a single pane of glass.

What's really neat, and this is what I tried to tease out on the prepared remarks, is that customer can say, "Okay, I have a new building. I'm going to buy a Berkeley device. I'm going to put it in place, and I'm going to get some internet on demand. I'm going to throw some voice on there, maybe some Lumen Defender. I want to connect to two of the clouds directly without going through carrier-neutral facilities." Oh, and I want some of this security service from my favorite security provider. Click, click, click, click. They can build that service remotely. It's a very forward-leaning vision, and we're bringing it to market in 2026. Is there any external investment, tuck-in M&A or whatnot that makes sense either in regard to this direction, or is there anything else around the broader business? I'm sorry.

Did you ask if there are any tuck-ins? Sorry. Yeah. Does M&A accelerate? Does it make sense to do M&A to maybe accelerate the path that you outlined? I really love questions about M&A. It really shows how different things are today. Thank you so much for the question. Of course, we look at everything constantly. The best use of capital, is it to invent something new? Is it to pay down debt? Is it to buy back equity? Or is it to go buy something to tuck in? We're looking at all of it, and we'll bring it to you as soon as we have any changes in our current trajectory. Next question. At this time, there are no further questions. I will turn the call back over to your host, Kate, for closing remarks.

Thanks so much, operator, and thanks to everybody for the remarkable time and attention that you spent and the great questions. We're so excited to share our progress and our journey ahead. We couldn't be happier with what's going on at Lumen. A special shout-out to the thousands of luminaries working so hard every day to make this progress a reality. I'm so proud of you, and I love working with all of you. See you in the field. All right. Thanks, guys. That does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your line. Have a great day.