Lumen Technologies, Inc. Aktie

Good afternoon, everybody. Welcome to the Lumen fireside chat at the Goldman Sachs Communacopia and Technology Conference. My name is Mike Ng, and I cover Lumen and media cable telecom here at Goldman. And I have the privilege of introducing Chris Stansbury, who is the President and CFO at Lumen. First and foremost, thank you so much for being here this afternoon.

It's great to be here.

So Chris, you've had a very busy year with the sale of fiber-to-the-home assets to AT&T, the Alkira acquisition. Now that those deals have closed and you've hit your leverage target, maybe you can talk a little bit about what execution looks like from here and what the strategic priorities are for the company?

Yes. The future for us is very clear, and that is a complete digitizing of the networking experience. And when you think about our portfolio today, we've already got a significant growth company inside of Lumen. That's over half of our revenue. Last quarter, it grew 14%. We separately have a legacy stream of revenue, and that's sole purpose is to generate cash while we pivot this transformation. And that's something that we'll continue to do on that side. But as we go forward, Alkira, combined with what Lumen's footprint is today and our ability to provide direct cloud access, when you combine that direct cloud access and our NaaS capabilities to get you from premise to the cloud, we now have what we would refer to as an East-West capability, which is really the ability in a very network and cloud agnostic way, move data from anywhere to anywhere on demand.

And so as enterprise moves to inference, the network is the bottleneck. It's not energy, it's not GPUs, it's the network. And we've just created the unlock to make all of that work in a much more efficient way, but also a lower cost of ownership way. So we think it's the right solution at the right time, and that's the focus.

Great. You talked about the strategic revenue within Lumen over 50% of business revenue today. I believe strategic revenue includes PCF, private connectivity fabric, digital and other growth revenue. To set the stage, maybe you could just talk about what's in strategic revenue? What key products are?

Sure. So the historical base of strategic revenue is really connectivity solutions. So you're going to have fiber waves, IP, security will be in there as well. That's the bulk of what's in there. What we're really seeing in terms of growth today is significant growth in on-demand waves, which is not a surprise. When we talk about PCF and those big pipes, those are really of interest to a very few customers. The capacity is enormous. It's largely hyperscale focused. And even with existing conduit and existing routes where we can deploy relatively quickly, it's still years, right, until that capacity is fully online. When you get into other customers that are big customers, big users, neocloud, as an example, waves is really the solution because it's ready and it's ready now. We've invested significantly in the network and our ability to provide 400 gig waves on demand, we had revenue grow, I think it was 11% last quarter, but sales actually grew 35%. So connectivity is still the underlying piece that's driving the strategic revenue.

That's super interesting. I mean why don't we talk a little bit more about waves, private, dedicated bandwidth, SLA reliability, why are neoclouds asking for waves? Where else is the demand coming from? And what does the competitive landscape look like?

Yes. So if we think about what's happened in the connectivity environment over the last few years, there was this burst at the beginning, which was really PCF driven, which was hyperscale demand for training of their LLMs. It was for internal consumption. They need massive pipes to deal with the training aspect of AI. As we move into inference, the next largest customers who are part of that ecosystem is the neoclouds, right? And immediately on the heels of that is enterprise. And that's where you start to move into the waves environment because it gives you that connectivity that you need right now. And our ability to sell that is bolstered by the fact that our waves product today on a NaaS circuit is digitally available. You can self-provision and you can be up and running in a very short period of time rather than waiting for trucks to drive around.

So it's the combination of what we have today as a capability and what's being deployed through network as a service that makes this a very compelling offer for enterprise and the neos.

Super interesting. Maybe we can talk a little bit about PCF. Lumen has one of the largest fiber networks in the world. Obviously, some direct exposure to support distributed AI training in the case of PCF. Maybe you can just talk a little bit about PCF, the growth in that business, potential opportunities you see for more PCF orders in addition to all the success that you've had with that product to date.

Yes. So let's talk about just the broader network footprint for a minute because where there is not a return today is new builds. New routes that require new conduits have really low single-digit returns on investment. And we've been very clear that we're not interested in doing that. We don't need to do it. And we don't need to do it because we've got -- by 2030, we estimate 58 million miles of fiber in the ground. At the same time that we're providing a digital access layer to consume it, and with Alkira, a product that allows enterprise to orchestrate across anybody's fiber. So to invest hundreds of millions of dollars in new routes is just not where we're going to focus. PCF is different.

PCF is existing roads. It's conduit that was put in the ground 25 years ago. It was put in the ground at a time where they thought they'd get about a dozen strands through each 2-inch PVC. And today, we're pulling over 1,700 through each 200 -- through each 2-inch PVC. So the reality is, is that we've got excess capacity. And PCF really solves 3 things for us. The first is it allows us to monetize a dormant asset and at great margins and great returns that has in turn allowed us to delever. The second thing is that it has created proximity with the hyperscalers, which is why we have direct cloud on-ramp access in our facilities. Gone are the days where you have to slow down your signal and pay interconnect fees to get access to the cloud. You can get 400 gig access through Lumen's network without having to go through an interconnect logic.

And without the infrastructure that you need at every point of interconnect, you don't need hundreds of firewalls and load balancers and all the equipment that has to be managed. So you can simplify all of that. The third thing that PCF brought us is as we're pulling fiber for the hyperscalers, we have pulled fiber and continue to pull fiber for our enterprise customers. We've talked about rapid routes. We've talked about metro rings. Our ability to deliver a 35% sales growth on waves is because we've made those investments and we've got capacity that is ready to sell today.

So when we look at our CapEx guidance, which we talked about at Investor Day back in February, that's inclusive of all those investments. So PCF is a great opportunity to unlock that value in those 3 ways. There will be more. We're in multiple conversations today. But whatever is incremental to what's already been sold is not part of our algorithm or our guidance from Investor Day. It's upside, and we'll use those cash proceeds to continue to delever.

Right. And just to clarify, so the CapEx associated with PCF is not for digging new routes, it's for the fiber that goes into the pipe?

That's exactly right. And so of our roughly $3 billion of CapEx that we've guided for the year, about $1 billion is for PCF. And it's not capital intensive because it's paid for before we pay to the suppliers. So there's about $2 billion that is supporting the ongoing base Lumen business and $1 billion that's going into PCF.

Great. And then before we move on from PCF, I was just wondering if you could talk a little bit about the financial contributions that you expect from PCF in terms of revenue? Maybe talk about the cash margins and that sort of thing. You guys have had a tremendous amount of success, right, with Microsoft, GCP, AWS, Meta, Anthropic, I believe, as well. So just talk about what the cash margins looks like.

Yes. So what we said is that the cash contribution is roughly 30%, roughly our EBITDA margins. So EBITDA less CapEx gets you to roughly 30%. And we gave guidance, I can't recite it off the top of my head, but we gave guidance at Investor Day that talked about how the revenue would ultimately come into play because what happens is we recognize the revenue as route segments get delivered, and it gets recognized over the balance of that contract. The cash, we gave guidance on because the cash, 90% of the contract value, the cash is received in the first 3 years, and that's to support the rental fee for the conduit as well as to support all the CapEx. 10% is earned in a year to run the network. And so the Investor Day materials gave an idea of how the revenue would flow, how that CapEx would flow and what the free cash flow look like.

Great. One of the things that you mentioned on last quarter's earnings call that I thought was interesting was just your work around satellite backhaul. And obviously, satellite has been more of a topic of focus recently. And I think Lumen provides satellite backhaul for many enterprises. Are the number of ground stations increasing? Are you seeing that in your satellite backhaul demand? Is it meaningful enough to show up in the P&L? Like how do you think about it?

So it is an area of growth. And I think, clearly, as we see more players in that space, providing network connectivity, we'll continue to see growth there. I think the bigger point is we're at a point in our transformation where enterprise, whether it be a satellite provider or whether it be a multinational bank, people are moving enormous quantities of data today. It's getting more and more dispersed because every piece of data has a home, right? It's sitting on a storage array somewhere. And the issue is there are so many somewheres today that it's getting impossible to manage in the way that networking has traditionally managed it. The way networking has traditionally managed it is, "Oh, you need a pipe between A and B, okay, I'll build it for you. Oh, you need another one, okay, I'll build another one." There are too many to build.

The issue is the complexity and the static nature of those deployments today. So when you combine a network footprint that is extensive, but then you provide an orchestration layer that literally lets you provision, manage security, manage segmentation, give you visibility into the network, provide security and do that, frankly, on a global scale. There's a number of enterprises where that's going to be attractive. And so satellite is just one of them.

Great. I wanted to ask about Starlink as a potential threat, if I could. Starlink has ambitions to build a very large enterprise business, whether that's providing connectivity to enterprises or whether that be for broadband or for backhaul. Do you see that as something that is competitively differentiated relative to what Lumen currently offers?

I see it as complementary because the reality is that there will be endpoints where the most logical way to connect is satellite, right? It's not going to make sense to bring fiber to every location. The reality though is that, that data that flows up to a satellite and back down to Planet Earth is going to need to find fiber as fast as it can. So it's another point of consumption that ultimately ends up on fiber. And again, what it does is it feeds into the complexity, which is enterprise is going to have more and more data that continues to be dispersed further and further away. We don't know where all those endpoints are today. And what we thought was going to be an endpoint last month is not an end point this month because there's a new regulation that says we're not going to allow data centers in our neighborhood. And so that uncertainty and that complexity is exactly what we're able to solve today. So complexity is good. Complexity brings margin.

Great. If we shift gears a little bit, I wanted to ask about digital revenue. Lumen has guidance for $800 million to $900 million in digital revenue by 2030. First, could you just talk about what's in digital revenue? And then what are the primary drivers of that growth through that digital revenue?

So, digital is really taking what is traditional services, traditional connectivity and digitizing it, meaning that you can buy it, provision it, deploy it without a truck having to roll to your location. And so as we -- what we've provided some level of insight to are adoption metrics for Network as a Service, number of customers, number of ports. We're ahead of our own internal desires. A lot of those ports haven't been installed yet because the customer is not ready. They bought it, but they've got to do some work on their end. As soon as those ports are installed, they give us the ability to then sell every other service digitally through software at incremental margin that is starting at 80% and fast approaching 100% because it's digitally delivered. The marginal cost to provide that is effectively 0.

So that's the goal is to digitize the entire network so that all services can be provided digitally. And interestingly, and we've talked about this and there'll be more to come, but in earnings, Kate talked about the fact that some legacy services, I should say, traditionally delivered services that fall into our strategic bucket, direct Internet access. There are a number of ports in our system today that Alkira and their technology effectively makes a digital port. It allows us to deliver more than the service that, that port was installed for. And so the important point is it allows us to scale. So that piece was not in our guidance. We're doing some work on that and we'll communicate more with the market. But ultimately, to the extent that we can digitize those circuits, it allows us to then scale and sell N+1 services beyond that. And so that's another way that we can drive growth.

Great. And as evidence that the digital services are resonating, right, like last quarter, 20% of the first-time NaaS, Network-as-a-Service adopters, were completely new to Lumen, right? So you're getting net new logos as a result of what you're putting out in the market.

And what's -- just really quick, what's important on that, Michael, is that the basic connectivity market, so premise to, whether that's premise to cloud, premise to DC, premise to another premise, there's data explosion, but the TAM is growing at less than 1%. What is that? That's legacy enterprise commoditization and price compression. That's the lane where NaaS plays. NaaS is growing at an annual rate now of 200%. So it's clearly taking share because we're taking what is a very static, unfriendly way of deploying network and making it easy to consume. And so that's the role that NaaS plays. But more importantly, it's a gateway into then saying, okay, now that I digitize that, I need to move data from AWS to Azure, from Azure to Google, from Google to a DC. And you will be able to provision those services from Lumen entirely digitally and move data from anywhere to anywhere on demand.

Right. Super interesting. Who are the main players that NaaS is enabling you to gain market share from? And why aren't your competitors trying to do something similar?

Yes. I think ultimately, they will try. Part of the problem that our traditional competitors have is they don't have the network footprint that we have. And so while our limitation historically was endpoint and NaaS erases that, I'll give you an example in a second. Our strength is in long haul. So when you think about the amount of data that has to be moved, that's where we shine. The vertical that is the fastest adopter of NaaS today, and I would say where the level of engagement around our programmable layer is highest, is financial services because in your industry, you're dealing with massive quantities of data that is very sensitive, that is regulated and regulated differently around the world, it's complex. And it's a nightmare to manage. I mean the large financial institutions are spending tens of billions of dollars a year just to keep that data safe. And we can simplify that. We announced in second quarter that a large multinational bank had purchased about 650 NaaS ports. That's now up to 1,000. And so that's where we see the most traction.

Now what's interesting is that most of those endpoints back to the point I just made, do not sit on Lumen's network. We are the backbone, but the last mile connectivity in most of those locations is actually AT&T. But as soon as that NaaS port hits that branch, that port has a digital twin that sits in Lumen, which means every other service that, that location needs will be purchased from Lumen. So we've erased the endpoint disadvantage. We've now brought scalability to enterprise networking that has never existed because literally every service requires its own box, its own infrastructure layer and that's the beauty of this. The old enterprise networking model didn't work. It wasn't scalable. It was a commodity. We brought scalability to the commodity side, and we brought integration and orchestration to the programmable layer to move product east and west, and that's where there's significant margin.

Right. And what's maybe an example of the ability to cross-sell multiple services through an NaaS port? Is it, hey, I wanted broadband or dedicated Internet access and now want kind of cloud-to-cloud connectivity or is it something else?

Yes. So now I need access to cloud, I need access to my own DC. I need to have automated and real-time backup. So the way this is built is there's the physical pipes we have. There's the programmable layer, which is largely Alkira and then there's an ecosystem. And think of that as API-based partners who do things better than we do that add to that selling motion, Commvault, all right, I want real-time backup, click buy, now, I have real-time backup. Palo Alto, with Lumen, Black Lotus Labs, Palo Alto as last line of defense, and Black Lotus Labs as early threat detection of what's going on in the Internet more broadly so that the Palo Alto block is updated and ready. So that ecosystem will continue to grow. But it's -- when you think about the revenue streams, historically, enterprise networking Lumen included has been limited to that physical layer. The real growth in terms of revenue and margin is coming from the programmable layer and the ability to move traffic from anywhere to anywhere and the ecosystem layer where I can now provision other API-driven services.

And Alkira sits in that middle. Right? Enabling that.

Exactly. Yes.

Great. Could you talk a little bit about AI cloud on ramps? At your Analyst Day, you set a goal of getting to on-ramp coverage by the end of this year, calendar '26. Where are you in that goal? What demand are you seeing for AI on-ramps for your enterprise customers? And how does that translate into?

Yes. So Multi-Cloud Gateway is in the market today. We will continue to see that access grow. We're on target to deliver against the 90%. I'll tell you what the most important feedback is. It's actually from the hyperscalers. And so when you think about cloud traffic, there's 3 things that matter. There's prem to cloud, there's movement within cloud and then there's movement between clouds. The hyperscalers will largely control the movement within their own cloud environment. They may want us to participate or not to help with that. But the reason that they love what they see early on in terms of our ability to deliver prem to cloud and between clouds is it's increasing cloud consumption. It's reducing the spin-up time for enterprise, which means it's faster time to revenue for the cloud providers. And the customers love it because what we've done is we've just simplified their ability to move data around the system as they start to inference and drive AI consumption. So that's the win-win. And so we're early stages, but we're very encouraged by the early data that we're seeing.

Great. I wanted to ask about financial guidance. Lumen has 2026 EBITDA guidance for $3.1 billion to $3.3 billion with business revenue declining 3% to 4% on an underlying basis, excluding some of the PCF-related timing items. How are you pacing against that guidance? Anything that you would call out as we think about second half seasonality, that sort of thing?

So a few things. So we're committed to the EBITDA guidance that we laid out. We obviously don't guide revenue. We guide EBITDA and the cash flow, and we're confident in those in those guidance numbers. We do have seasonality quarter-to-quarter. So one of the things we told the Street is that if you -- second quarter to third quarter, there's always a seasonal reduction in EBITDA because there's an enormous amount of OpEx that's spent in the summer for maintenance, stuff that can't be capitalized. There's also a lot higher energy costs, right, to fuel the network and keep it cool. So our guidance is take Q2 and eliminate the State of California PCF deal, which was very chunky. We got that all delivered. That was about $36 million. But then off of that base, you've got to adjust down $90 million to $100 million for seasonality from Q2 to Q3. The balance to get you to our guide is Q4, which is a big quarter and that is historically true as well.

The one thing, though, that I do want to touch on and I know Kate talked about this in New York yesterday is, as we look at our legacy portfolio, I think the market has put too much weight in the value of that revenue. We're fast approaching the point like others in the space who are ahead of us, where the EBITDA generation from that revenue is becoming lower and lower quality. What do I mean? I mean the amount of CapEx that we have to spend every year just to keep those 30- and 40-year-old systems running is getting to the point where it's no longer worth the investment.

So the whole role of the legacy portfolio to Lumen is cash generation. And for years, that's been driven by revenue. And I think we're approaching the point in the next few years where that will start to pivot to things like we're taking out the CapEx, letting the revenue atrophy and then mining copper. And there's a lot of copper that can be mined. That copper is a very high value because it's pure, it's put in the ground 50 years ago. And so that will be a natural transformation. So our focus, when we talk about revenue is really on the strategic piece of the portfolio, which grew 14% last quarter and is over half of what we have. And the reality is that the revenue declines in the legacy side are really not the point. It's about cash generation and managing for cash. And the way we do that will evolve over time.

Super interesting. And I guess the natural follow-up would be relative to what was communicated at Analyst Day, does the outlook for CapEx or legacy revenue look different?

So we'll see. I mean we've already announced this year that we stopped sale of legacy voice product. The question becomes -- and it's not an easy one to answer, by the way, that like when you look at the mining activities of some of our competitors, when you start to mine copper, the copper doesn't know whether you're servicing a home or you're servicing an enterprise. And so you've got to be ready to turn off both at the same time at a wire center by wire center level. So there's a lot of work going into understanding that. And the answer is, right now, we don't know yet.

But if we do that, logically, we will do that at some point. But when we do that, we would expect CapEx to fall because we're probably spending $200 million or $300 million a year just to keep those old services running.

Right. And then relatedly, Lumen is targeting $700 million in run rate cost savings this year with a $1 billion target by 2027. Maybe you could just expand a little bit on the drivers of those cost savings beyond what you are just thinking?

It really is a simplification of the network. And so when you think about legacy telco because back to where we started the conversation, the cloud that hung over legacy enterprise networking's head was, it wasn't scalable. And it was a commodity. And so there was price compression. And so the way that, that was managed or at least attempted to be managed is, well, we'll just keep consolidating. And we'll eliminate spans and layers of humans. What was never done -- and by the way, that's not just a Lumen story, it's across the industry. They didn't integrate IT systems. They didn't do a whole bunch of things. So you end up with multiple order entry systems. It's a mess.

And so what we're doing as we simplify and quite frankly, as we move further into a scenario where over half of our revenue is coming from newer, more modern products is it's allowing us to take out a lot of expense. Now a lot of that is human based. The amount of headcount in the organization has fallen. But a lot of that is, frankly, driven by people that have dedicated themselves for years to keeping these things alive and they're nearing the end of their careers. It's not easy to find a developer who wants to work in a system that started to be retired 30 years ago. And so that's where a lot of the savings comes is our ability to get IT costs out of the system and just a lot of operational inefficiency.

Great. As we wrap up the conversation in the last couple of minutes here, maybe you could just tie it all together for us and talk about key priorities that the company has that you and Kate have over the next couple of years, operational milestones that investors should be looking out for?

The #1 focus of the entire organization is on driving digital growth. We have a tremendous growth engine inside of the company. It's over half of what we do today. With Alkira now acquired our ability to accelerate that is higher. We haven't quantified what that is yet, and frankly, we don't even know. But the point is that there's real demand at the right time with complexity in enterprise networking and enterprise needs us, getting great feedback from customers, a great adoption on NaaS, and we're going to continue to hammer that. Separately, we are going to do what we said we were going to do, which is manage legacy for cash. And that will become less revenue based over time and more cost efficiency and copper mining based.

So I'd say that's 5% of the focus, and there's a much smaller group of people who have to work on that and figure it out. But the rest of the organization is -- 95% of our energy is focused on driving digital growth.

Chris, thank you so much for participating in the conference. It's been a privilege to have you on stage here.

Thanks so much.

Before we begin, disclosures are available at the registration desk. For those of you I haven't met, I'm Mike Rollins and I cover communication services and infrastructure for Citi. We're pleased to welcome Kate Johnson, CEO of Lumen. Kate, it's great to see you. Thank you so much for being here.

Thanks. It's always great to be with you.

I think back -- it was our January conference 2023, I think where we first met, you'd just come to Lumen.

I was there for a hot second, yes.

And since then, it's been extremely busy for Lumen.

Over the more recent period, the team and you have discussed creating a new industry category. Can you unpack that for us?

Sure. So coincidentally, I started in November of '22 and on November 7, specifically, and ChatGPT-3 was the first publicly available instance of AI that we could all download to our phones, and that launched on November 22 of that same month. And I think when we talked in January, we were just starting to hypothesize this notion of really pivoting the network in support of enterprise data consumption growth, right? And I think we're there. We have created a platform for enterprise networking for AI. And I think while none of us could see it quite clearly, so clearly in November of '22, what we have now is people, data and applications are dispersed geographically. They sit in buildings. They have applications and data sitting in clouds and data centers and at the edge, then you add billions of AI agents, billions of them, and each one of these agents is generating and consuming huge quantities of data. And that data resides kind of everywhere and needs to be shipped everywhere. And the new problem that we are solving for customers is they have the need to ship data from anywhere to anywhere in real time to fulfill their AI ambitions.

And in order to do that, you need three things: you need a massive physical network; you need a programmable network, so a digital platform sitting on top of that, and the cool thing about ours is, is it's agnostic to whose fiber is underneath, so we can leverage our great network but also other people's; and then you needed a connected ecosystem because what you're connected to really matters. It's not just the buildings, the edge points, the clouds and the data centers, but also you need to be connected to other technology companies. And we've got all three working together, and it's given us a growth engine.

I want to dig into this a lot deeper. When I think about -- just to start off, for background, when I think about Lumen's core competency in business and wholesale, I think a lot about Level 3 and what that brought to the table for your company. And I think about it, as you mentioned, like some combination of business locations and data centers and there's a variety of products used to connect all of this together, right? It used to be called like frame, ATM, Internet transit then MPLS. Now it's lit fiber waves, dark fiber. So the question is, as you look today, the Lumen of today, the Lumen of tomorrow, like what you're selling to customers, is it a different menu? Is it different pricing models? Like what should we take in terms of like what you're actually selling into these customers?

Everything is changing. So the classic way of connecting and transporting is becoming digital and on demand. So I want the ability to fire up the circuit and pick my bandwidth and pick my security levels and things like that, but I also want to orchestrate it. So it's all of connectivity and transport just like the past couple of decades, but it's this new set of capabilities, which is unique to us as a carrier, which is the orchestration layer, which says I need to be able to manage policy, I need to be able to control the data flow. I want to pick where it goes and when it goes there and to set all of the attributes of how big it is, how secure it is, how fast it is along the way.

And what that enables us to do is go -- we used to sell physical circuits, how many you want to buy. We worked with procurement, they set a price and bandwidth limit and said not to exceed X and Y. And now we're really selling outcomes. If you think about hospitals need, for example, real-time diagnostics across their systems. Banks need real-time fraud detection services across their branches. Retail companies need real-time inventory management across all of their warehouses to get the right product in the hands of the right customer at the right time. You can't do any of that without AI, and you can't support AI without a programmable network. So we finally have a seat at the table with the CIO and the CTO to have a conversation about delivering business outcomes, which is very different than where we've been in the past.

And so when you mentioned the orchestration layer, is that what you really mean by a programmable network?

Sure. Programmable, really, it's defined by a couple of things. Number one, can I see it through a single pane of glass? Can I see it...

On your screen.

On your computer screen, can I look at the network and see the whole thing? Where is the circuit? What are all the qualities of it? What bandwidth is it? How is it performing? What security services do I have on it, et cetera? Can I see it on a computer screen and can I manage provision and support it without actually having to physically go do intervention, okay?

And so how disruptive is this in terms of a shift? And where do you see the marketplace relative to where you're going?

So it's incredibly disruptive on a bunch of different fronts. So the first thing is it's disruptive from a business model perspective, so let's talk about old telco, point-to-point static bill every month, take a couple of months to deploy a circuit, set it up, and you're good to go for a long, long, long, time. You're not going to get much innovation, right, but you're going to have this static route that's there for you if you need it. That's not where we are now. We're saying that AI requires data to be moved from anywhere to anywhere in real time, which is non-deterministic. So you can't actually build a physical network with the legacy business model to support your AI ambitions today because you wouldn't be able to afford it. You'd need to put a link into every single building and every single cloud and every single data center.

What we're selling is on demand and consumption based. We're selling an option to consume these services on our platform, and that's incredibly disruptive from a business model perspective. But we're also doing a lot of technical innovation that's disruptive to existing business models. I'll give you two examples. One is colos where -- MeetMe rooms where traditional enterprise connected through these colocation facilities and carrier neutral facilities into the cloud, tens of billions of dollars of fees to get that connection. When we built out PCF for the hyperscalers, we also worked with them to start to conceive of a brand-new architecture for cloud connectivity, and our cloud on-ramps bypass these colocation facilities and go directly into the cloud, so it bypasses that fee, it's more secure, it's higher capacity and it's more cost effective. That's one.

Another example of network innovation to disrupt the marketplace. As people, data and applications geographically dispersed, you have this proliferation of these colos as well as firewalls, right? Every time you have a person that needs to access your network somewhere, you have to segment that part of the network and make sure that you have local policy to protect that person's data and also to protect the company from the motions of bad actors as well as whatever that person is consuming on the network. When people keep dispersing, you've got more and more proliferation or sprawl of these firewalls and it all need to be managed locally from a policy perspective, right? We now have a platform that allows us to manage policy centrally with a single cloud service rather than locally across hundreds or sometimes thousands of different firewalls. One service centrally cloud provisioned versus hundreds or thousands of physical interventions locally is a huge economic shift. We saved tens of millions of dollars of hardware for our customers, and we can deploy things instantly which is obviously sort of the way of the world these days. So it's not just the business model disruption, but it's also technically we continue to innovate. I've got a bunch more examples, but I'll leave it there.

No, this is great. So just the centralizing security, essentially is what you're describing. So through software, you're able to centralize the security for multiple business locations, customer access points, and so you're delivering the same quality, reliability, security.

I would say -- I would argue better.

But from an easier point than...

It's more efficient, it's faster and it's more secure. And Mike, I never understood -- when I was working for Microsoft leading their U.S. business, I could never understand why network wasn't cloudified. Compute and storage were cloudified. We could do all these things with compute and storage, but never with networking, I couldn't understand it. And then when I got into the industry, really telco had ceded innovation to all of the tech companies outside of the network, and Lumen is bringing all of that innovation back into the network.

I think as I think about what you're describing, it feels to me like the reason maybe network has been tougher is because there's such a physical aspect to it, right, where cloud compute, you can locate it in different places and get similar...

I don't know. With digital twin technology we can instantaneously create a digital network, so that's why I never really got it because have you seen chips, like they're physical too, right? Storage, compute, physical. But in our minds, all digital. You can actually go find that hardware somewhere. So the fact that there's a physical network, yes, it's geographically dispersed and it happens to be in the ground, which has its own set of challenges, et cetera, sometimes it's aerial. But for the most part, digitizing the network was logical, and it's absolutely essential for AI. We cannot achieve our AI ambitions in this country at a global level without a digitized network.

So when you think of the Lumen value proposition to customers and then ultimately to shareholders, like how do you rank the importance of your physical network versus your software and the technology that you're using to now in the future deliver network? And maybe there's a element of this that's people and resource, like how do you think about what your greatest most valuable assets are?

Back in the day, before this -- we started disrupting the industry, it was just a physical game. You always wanted to win the build, you always wanted to have the physical infrastructure. Since we've created a programmable network, we are now agnostic to the underlying fiber itself and to any cloud or provider. So you can run our services across that, which is great -- across anybody's fiber, which is great because there's this notion of diversification. Customers want to have multiple routes to get to the same thing, and they tend to do that through separate carriers. We can do that for them quite easily. But what's more is we can orchestrate and make AI work on anybody's network. So back to your question, it used to just be table stakes, I got to have the fiber to win the service business. That's no longer the case. Lumen can operate globally now, which expands our TAM massively, but probably more importantly, we do have the world's biggest and best network. Those are my -- that's my opinion.

And I think that it compounds our value in North America for sure, because I could build on ramps, because I partnered with the cloud companies to build multi-cloud gateway, so I can ship data from into any cloud and in between clouds really, really well. And so that's how we think about it moving forward is that sometimes, I want to have the physical link. And I want to have the physical link because I can embed incredible technical capabilities into it to do things that others can't. But since I've been with the company, when I started, we were 12 million fiber miles strong. And by the end of 2031, we will be 58 million fiber miles strong, so almost quintuple what it was. And that's to serve the hyperscalers, but also we've reserved a very large percent of that network for our enterprise business, which is growing now that AI is helping companies transform.

I want to get back to that opportunity in a moment. But before we do, maybe just taking a step back and as you think about this transformation, if you can give us an update on the multiyear journey to return the company to positive financial growth, revenue, EBITDA, free cash flow?

We're right on schedule. So we promised stabilizing free cash flow. Check, got that under control. The second thing is we promised EBITDA growth in '26. Check, on target for this year, which we're super excited about. And then third, the third step of that was returning to revenue growth. And what we've committed to and we see a path to do so is to return to positive revenue growth in the business segment in 2028, on target.

So coming to the PCF opportunity in the hyperscaler opportunity, market is very focused on this. How important are future deals? I think you were at $13 billion contract value. So how important are these future deals? And do you have an update on where you are or where that's going?

First things, how important are the deals to our future. We have zero PCF business based into our long-range plans. We don't forecast it. It's very lumpy, and what that speaks to is how strong our strategic revenue growth is, right? We don't need the PCF deals to transform our business anymore. But we did at the time that we did it -- did those deals, the first $13 billion. We really needed that cash injection. And it helped us transform financially. We were able to recapitalize. We completely transformed our cap structure. We simplified from three filers down to one in combination with selling fiber-to-the-home to AT&T. Really turned the balance sheet in totality from a liability to a very strong asset.

So we're not there anymore. We don't need the PCF deals in order to fund future growth, and the real opportunity for the company, the one that delivers higher margin, higher quality revenue is the digital platform piece of it. So when we think about doing more of these deals, they've got to meet certain criteria, and it's basically builds are not really something that we're signing up to do. We will do over pulls of our existing conduit because we can hit margin metrics that are accretive, and we're pretty committed to delivering a mix shift to digital that delivers margin accretion to our shareholders in addition to revenue growth.

Is there an element of this? You mentioned earlier that one of the things that you're doing is you create these PCF or have created these PCF deals, you're creating this connectivity, you're reserving extra capacity, whether it's to sell the enterprises, whether it's to connect to these clouds directly, so you've got control. So is there a magnetic effect that having more of these customers, so it's beyond just like a return on capital of this specific deal, but there's this evolution of you just want to have all the strategic customers that could be winners in the future because that's going to pull through all this enterprise and the ecosystem?

Once they plug into the fabric, they're in the fabric and they have access to all of the capabilities. But when I talked about the financial transformation that the PCF allowed us to do, that's also where the source of all of our innovation came from. We launched NaaS. We codeveloped on-ramps with all of the hyperscalers. We built multi-cloud gateway. We garnered enough extra cash on hand to go buy an orchestration platform called Alkira. All those capabilities came from that initial tranche, and now that we have all of the biggest companies in the world plugged into the network, we're continuing to innovate with them and to work with them to say how can you take advantage of our network to grow your business, and that's the magic. I say I came from Microsoft, any company or a customer that could help us accelerate cloud consumption was one that we wanted to be a part of the ecosystem, and it's the same. As Lumen builds this platform, we know that the way to ingratiate ourselves with those cloud companies is to accelerate consumption of their platforms. And we do that because we have bigger pipes, they're more intelligent, they're more secure and they drive acceleration.

So you mentioned with the enhanced financial flexibility, you went out, you bought Alkira. We were talking about some of the orchestration cases earlier. What did this acquisition do to turbocharge what you're offering to customers? And what's the value that they're going to see now from having this added capability?

So think about it this way. We bought an orchestration platform that allows us to move data from anywhere to anywhere, cloud core, data centers, edge, buildings, it gave us access to two things, $47 billion of TAM, right, because companies need the ability to move their data from anywhere to anywhere. And it gave us access internationally because it's carrier and cloud agnostic. So there are so many different use cases. It's almost impossible to -- can you tell them excited, by the way, it's impossible to go through them all. But think about extranet, a direct connection between technology companies happens all day long. We can do this with our private network and the orchestration capability.

Moving data from cloud to cloud, we do that exceptionally well. And again, firewall and colo sprawl, it allows us to deliver centralized cloud services that eliminates the need for local policy setting and local intervention, so it's a brand-new set of capabilities. It's capabilities that are sitting with the CIO, the business decision maker, the CTO, we are now out of procurement. We don't sell physical links anymore. We sell business outcomes. Huge transformation for us, huge transformation for our customers and something that's going to take time for us to build the muscle and for them to see us in that way.

So maybe just to double-click on that just for another moment, so you're changing who you're engaging with in the organization. How far are customers along in this journey? So what percent of the customer interactions have now moved to that level versus that's where the puck is still going?

Yes. It's a great question. So I would say that the majority of enterprises are still thinking about network from a procurement perspective. But what we're seeing in large enterprises, and I gave you a hospital, a retail company and a bank where we see enough repeating pattern where those are industries that we're approaching as such. They're no longer individual -- like this is a play that we're running. And we've graduated from procurement to really network buyers where they're having to do a massive network upgrade in order to fulfill the ambition to the various business decision makers on their various AI use cases.

The next step is one that we're doing in partnership with our other technology companies like take Commvault, for example, backup and recovery for a security breach. How fast you can reinstate your cloud depends on how quickly you can move your data from one place to another. And to do that, you don't just need big fat dumb pipes. You need really big digital pipes that are intelligent and secure to allow that restoration to happen instantaneously. And so companies like Commvault are starting to recognize the true differentiation that our platform provides to their customers and they're bringing us with them, and that's the connected ecosystem at its best.

And so when you're describing that example, so is the thought that a customer in a particular building gets wiped out, they need to recover all their data. If they have a fiber pipe that's managed digitally, in that moment, it could scale up to a much higher bandwidth beyond what the customer would normally pay. So a customer might only need -- and I'm going to make this up, like 100 megabits, right, for that location. But to get the gigs and gigs of data and quickly, what you're giving them is the ability to flex that up, get the recovery more quickly...

On demand.

On demand and go back to their normal service, but you pay for the normal service and the optionality of being able to have that.

That's exactly right. On demand and consumption based and not to get too crazy, but talk about data sovereignty, digital sovereignty, operational sovereignty. Once you start moving data, you start putting sovereignty at risk. You have to have a platform that allows you to do that in a private interconnection underneath, and that's why the platform is so valuable.

So you mentioned also that you're agnostic to where the pipes come from. You have, of course, this big network that you're leveraging, so it's very common for many, many years for telecom companies to sell bandwidth of other companies. One of the companies that Lumen owns, TW Telecom from years ago, the management team would coin this as coopetition. How much of these access pipes that you don't have you're procuring, paying another telecom or cable or someone else for versus how much of that is bring your own bandwidth and then you just manage it for the customer?

So I think in our traditional business, it's like not quite half and half, but we expect the same composition because who owns the endpoint, the access point. Now we can just run anything on them with our digital capabilities. So for example, we've talked about a very large financial institution that just standardize on Lumen fabric, the whole thing runs on AT&T's fiber. They're using our platform on somebody else's fiber because the services that we provide are where the value is.

And then the services that you're providing is this flexibility, security?

Orchestration. Control, right?

And then the ability to see everything.

Single pane of glass to manage the whole thing remotely.

So there's another concept that I think the team has been discussing, which is this digital discoverability of DIA ports. Like what does that mean? And why -- or how is that a strategic unlock for Lumen and your customers?

It's a massive strategic unlock. One that, I'm, again, super excited about because DIA, analog or traditional connectivity services, right? It's an Internet product, and it's a very popular one and it's one that's still growing, right?

For those less familiar, access to the public Internet.

That's correct. Okay. But you can also get to -- you can also use it to get to private as well, right?

Right. And that's how -- like these SD-WANs and these VPNs, right? Like there's -- you use the Internet to create private connections.

Okay. So think about our installed base of DIA circuits. We've got more than $1 billion of revenue and tens of thousands, maybe more than 100,000 ports that are in customer locations, operating those live capabilities today. These are in-production circuits. The exciting thing is, through our platform right now, we can see those ports, all right? And what is the breakthrough here strategically and the growth unlock, it is all about growth, is that we are now able to allow a customer to use a single pane of glass to manage that port. And you say, "Well, why is that interesting?" Because the platform can take a traditional port and make it digitizable, which means that, that customer can remotely see it, manage it, provision it, put it in life, put it out of life, change the bandwidth on it, change the security settings on it. They can manage it digitally. So it's good for them. They get more capability out of what they already have.

But what's more is we can now sell into that customer remotely without rolling a truck. And what we can say to them is, I see you have a 1 gig or a 10 gig. And now this is not the case for every single one of these customers because it does depend on the port that they have, but we can convert that port into a fabric port, which means instead of carrying one service like it traditionally did, it could carry thousands of services. And instead of being fixed at some bandwidth of 1 gig or 10 gig or whatever, we can increase their bandwidth dramatically. And we can give them all of these orchestration services and make it available through that once analog circuit, that's now digitized. And any time we sell a service on top of what's already there, it's at 80% margin, so it's great for our shareholders. It's great for customers, and it basically takes a giant installed base and says, "Let us help you get ready for AI," in a really, really efficient way unlike any other telco sales motion.

So what's the experience of when you're upselling these services? What have been the most popular upsells so far? And do you see that evolving where you've got some new services coming out or they're out and they're just starting to sell that could be big?

If you think about kind of like the motion you start with like basic connectivity and transport and then you kind of are like, "Okay, well, we've got this on-demand thing." And they're like, "Oh, let me try that." And just in that basic connectivity space where it's people in buildings connecting to cloud, that market grew at about 1% annually where if you annualize our last quarter's growth rate, we were up over 200% growth. So there's a high demand for digitization of that basic capability. But then they're adding things on it and saying, "Hey, can you give me a security service like Lumen Defender, right, or some DDoS? And then you help me connect to multiple clouds? Can I play in multi-cloud gateway because I've got some data in Azure that needs to get over to GCP and back." And then they say, "Hang on a second, I need help with direct connects to technology companies. I need help with firewall sprawl and I want to manage everything centrally, and the whole set of Alkira services on top of that." So we have an incredibly rich set of services that take everything from basic connectivity all the way through to control and orchestration of your data from anywhere to anywhere.

And then is it fair to say that Lumen doesn't have because of the history of the company, its fair share of the business and wholesale market and that this transformation gives you the opportunity, maybe not just to get your fair share, but to go beyond that?

In the wholesale market, specifically?

The broad business and wholesale market broadly.

So in the business segment, I think it was endpoint driven for a long time, and we were really heavy on the transport side, and the long haul and that was the composition. And I think you're going to see us basically becoming, I think, the provider of choice for large enterprise at the multinational level. And that's also something that I think is incredibly important to our growth plan is this ability to elegantly support multinational corporations with their AI ambitions on the global stage, which is something we just didn't have access to before.

So if we come back to the multiyear financial targets that you have, what are the next hurdles, obstacles to clear? Or what's keeping you up at night?

What's keeping me up at night? So what's keeping me up at night is maybe this lack of awareness of everything we just talked about on the digital side. It's the lack of understanding of how high the quality is of our strategic revenue. It is extremely high-quality revenue, and it's more than half of the revenue at Lumen. It's 53% last quarter -- of the total revenue, and last quarter, it grew 14% year-over-year. It's got some PCF in there, but it's also digital and it's also waves and DIN, things like that. And there is an awakening at the enterprise level of the need to upgrade networks for AI, and we are incredibly well positioned.

And that business is so healthy that it's giving us the opportunity to use legacy as an unlock. And while it used to be that we harvest legacy revenue for cash, we are now thinking about that very, very differently. And we're saying, okay, let's start to harvest the cost side of it for cash, let's decommission applications, let's decommission networks, let's mine our copper, let's reduce the CapEx that we invest in that business because it's low-quality revenue. It's just not as sexy as the strategic revenue that we have and the opportunity that we have. And that's what keeps me up, it's like how do we get the market to metabolize our position.

So in our last minute, what is the market getting wrong about Lumen? What's underappreciated?

I think it's exactly that. It's the growth opportunity that we have in this digital market, in the orchestration platform and what's on the horizon for us to grow. And I think the more time we spend double-clicking on that strategic high-quality revenue side, the better off we'll be.

Finally, how do you define winning in the future?

Look, winning is all about, for Lumen, delivering growth to shareholders, and we're very committed to doing that. We've got a plan to do it. I'm excited about it. But we only do that if we deliver huge value to customers and we've got the portfolio to do that. So I think we become the enterprise networking for AI powerhouse with our platform, and we get others building on it, and that's what great looks like.

Kate, it's great to see you. Thanks so much for joining us.

Likewise always. Thank you.

Greetings, and welcome to Lumen Technologies Second Quarter 2026 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded Tuesday, August 4, 2026. 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 of Investor Relations. Please go ahead.

Good afternoon, everyone, and thank you for joining Lumen Technologies' Second Quarter 2026 Earnings Call. Before we begin, I'd like to remind everyone that today's presentation will include forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements reflect our current expectations, assumptions and projections about future events and financial performance. Actual results may differ materially from those expressed or implied in these forward-looking statements due to a number of risks and uncertainties.

A detailed discussion of these factors can be found in our most recent filings with the Securities and Exchange Commission, including our most recent annual report on Form 10-K and quarterly report on Form 10-Q for this quarter and any subsequent filings. We undertake no obligation to update or revise any forward-looking statements made today, whether as a result of new infomation, future events or otherwise. Today's presentation may also include non-GAAP financial measures. Reconciliations are provided under posted materials.

And with that, I'll hand it to Kate.

Thanks, Jim. I'll start by sharing how excited we are to welcome John Hinshaw to the Lumen Board of Directors. John has led complex technology organizations through major moments of change, and his perspective will be a great asset as we continue Lumen's transformation. And to that end, we're pleased to report that Lumen delivered another solid quarter with financial results in line with expectations.

Before Chris covers the numbers, I'll give some color on our strategy and transformation progress. Great companies don't win by fitting neatly into existing categories. They win by solving hard problems in new ways sometimes creating new company categories along the way. And that is exactly what we're doing at Lumen. We're using 3 assets together in a way no other traditional telecom company is. Our physical infrastructure, our programmable network and the connected ecosystem we're building on top.

We are redefining enterprise networking for AI. And the market's noticing. Most recently, Gartner named Lumen, the company to beat in Enterprise Networking, one of several strong endorsements of our strategy and progress. And since closing the Alkira transaction, our market position has only strengthened. Alkira is now a Lumen Connect solution, and it gives us a critical capability customers really need, a similar faster way to connect and secure multi-cloud and AI environment. Let me double click on the problem we're solving. Over the past decade, people, data and applications have dispersed geographically.

The software industry responded with wave after wave of innovation to help the physical network keep up. launching new capabilities in cloud connectivity, SD-WAN, SaaS firewalls and colo-based interconnection. Basically, they made distributed work possible. But because telecom ceded that innovation to big tech, it happened around the network, not in the network. And that created a whole new set of problems.

Customers ended up having to stitch together too many tools, policies and handoffs. It created sprawl, which is expensive and difficult to manage there going to adapt to the speed of today's business. Lumen is stepping up. we're bringing innovation back where it belongs inside the network. Together with Alkira, we can simplify our architecture, improve control and create more value for customers.

By giving customers one cloud-based control point to connect and secure distributed environments, we can help them connect to any building, data center or public cloud while reducing sprawl. Our network fabric is simple, secure and built for scale and agility. And look, we're not talking about a vision here. These are capabilities that are already delivering breakthrough business outcomes for many customers. Two realized examples, on Alkira industry's simplified network hub setup across multiple clouds, compressing implementation time from 8 months to a single day. And at Michaels, Alkira helped connect more than 1,400 retail locations of Google Cloud in just a few weeks with no CapEx and reduced OpEx.

In Alkira's real economic value report, you can find many more examples of business value delivered on our platform. It's a new chapter for Lumen, our customers and our investors. In the past, too much of telecom's value conversation came down to price, and we're changing all of that. Our digital capabilities help customers reduce costs move faster and create new revenue opportunities. Lumen can now deliver value to customers through business outcomes, not just through discounts.

And our sales team, as you can imagine, are excited to bring these new capabilities to existing Lumen customers. As such, we're rapidly scaling our Alkira go-to-market muscle. Just since we closed, we've already traded nearly 4,000 Lumen employees on the Alkira value proposition. We've established a scalable sales motion and aligned incentives, and we're doing outbound marketing and demand gen to scale the sales pipeline.

And the feedback so far from customers very positive. We feel confident that Alkira will accelerate our strategic revenue growth curve. I will also share our plan for technical integration of the Lumen Connect and Alkira platform, and our goal is really simple. We want to give customers a quick, secure effortless digital experience to discover by provision and manage all of their services across their network.

That includes traffic moving into and out of the enterprise, which we call North South as well as traffic moving across clouds and data centers, which we call East West and do it all on one platform. Our plan is to deliver most of that integration in the next 18 months. But even earlier than that, we plan to bring the digital experience to existing Lumen customers, starting with DIA. We are in the process of making Lumen DIA ports digitally discoverable and service ready through our platform and that's going to allow us to remotely provision manage and support these circuits, upsell additional capability on existing ports without a truck roll and create a path toward more consumption-based offers. This is a huge strategic unlock. I cannot stress this enough.

Our DIA installed base carries traditional telecom economics today, but the platform gives us a path to layer on high-margin digital services like Lumi Defender, DDoS, multi-cloud gateway and more. Those incremental services are expected to approach 80% adjusted EBITDA margin helping drive Lumen's margin expansion. That's why the product portfolio simplification matters so much. We're moving capital and talent towards the existing and future products that define next-gen Lumen.

Their digital, platform-based services that solve real customer problems and expand our margins over time. And this strategy includes pruning the portfolio with discipline. Our recent decision to phase out our enterprise voice and communications products was part of the strategy. We're setting our sights and allocating our capital on higher growth markets where Lumen has a differentiated position to win.

Now speaking of winning, we had another great quarter of NaaS adoption. And today, the total number of NaaS customers exceed 3,000. And in Q2, new customer adoption grew 22% quarter-over-quarter and more than 20% of these first-time NaaS adopters were brand new to Lumin, and active ports grew 34% quarter-over-quarter and active services grew 29% quarter-over-quarter. I have to say, our NaaS growth rates, they exceeded even our own internal ambitions for the first half. And what's more we achieved these results in the North-South connectivity market, a segment that's growing less than 1% per year.

We are clearly taking market share. And we believe this is for 2 reasons: enterprise customers want digital consumption-based network services, and they also see real differentiation in Lumen. Now let me close where our strategy compounds in the connected ecosystem. We just paired Black Lotus Labs network level threat intelligence with Palo Alto Networks leading security platform to create a managed offering that's better together.

Customers get early visibility of fast response and far less tools draw against security threats that are growing more and more complex every single day. We're scaling this partner model in the connected ecosystem by making sure that Lumen brings unique network intelligence and our incredible fiber capabilities together with our tech partners who bring their best products and technologies. Together, we help customers move control and secure data in an AI first world.

Chris, over to you.

Thanks, Kate. I'll build on Kate's remarks by showing how our strategy is showing up in our financial model. through disciplined simplification, improving revenue mix, focused capital allocation and a clearer path to higher growth strategic revenue. Now before I get into the second quarter results, I want to talk about some of the decisions we're making with respect to product simplification.

Product simplification is not just a cost action. It's a strategic capital allocation decision and it's letting us focus resources on the digital, platform-based high-growth, high-margin services Kate described. It's imperative that as an organization, we aggressively manage our product portfolio to maximize margins and cash flow. These are purposeful decisions that remains to an end in driving cash flow to fund our growth.

Legacy remains a cash-generating part of the business, but it's becoming a smaller part of our revenue mix as strategic and digital services grow. We're maximizing the value of our existing legacy asset base while redeploying capital towards our digital initiatives. So to be abundantly clear, extending the life of legacy products has not been and will not be a pillar of our future success. These decisions create the flexibility to invest in capabilities like Alkira that can accelerate our digital revenue curve and support a higher growth, higher return revenue mix over time.

Over the next several quarters, we'll continue to provide color on our shift from legacy to the digital products and how Alkira can help accelerate that process. The second quarter gave us tangible evidence that the transformation Kate described is progressing, strategically, operationally and financially. In the second quarter, we delivered solid financial results with revenue, adjusted EBITDA and free cash flow, all in line with our expectations.

In early July, we closed the acquisition of Alkira. Alkira was not embedded in our Investor Day targets. So while the near-term revenue contribution is immaterial, we view it as upside to the digital growth trajectory we outlined earlier this year. And we've reduced our SEC filers from 3 to 1, simplifying our reporting structure. And just as we're simplifying the customer experience and product portfolio, we're also simplifying how we operate internally, giving investors one unified view of Lumen's financial performance.

Total revenue was in line with our expectations and slightly ahead of consensus. Total business revenue declined 1.8% year-over-year to $2.44 billion as our revenue mix continued to improve, and North America total business was down 1.6% year-over-year. North American enterprise revenue, which excludes wholesale was down only 0.2% year-over-year. Importantly, the positive revenue mix shift continues as strategic revenue grew 14% year-over-year and over 23% going back 2 years.

Second quarter PCF revenue was approximately $91 million associated with the $13 billion in PCF deals announced today. Approximately $36 million was another state of California delivery milestone, which was accelerated into the second quarter from the back half of the year and is now largely complete. PCF remains an example of disciplined infrastructure monetization of underutilized assets while preserving capital for the higher return digital and platform-based opportunities that Kate discussed.

We'll continue to monetize these underutilized assets, but we are not going to invest capital with subpar returns when we have the ability to drive significant returns through our digital portfolio. Within strategic, digital revenue in the second quarter was $39 million. The key near-term drivers are customer growth and service adoption both of which continue to build. Digital revenue remains in line with our expectations as the category scales.

The clearest proof point behind our transformation is a shift in the business, and that shift is happening faster than we expected. Strategic revenue was 53% of total business revenue in the second quarter, up from 51% in the first quarter and compared to 45% in the prior year quarter. The increasing share of strategic revenue allows for more paths to capitalize on products aligned with customer demand in the future of Lumen.

We also note that legacy has declined less than expected implying the expanding share of strategic revenue is all the more impressive and driven by underlying dollar growth. Contributing to the improving mix, strategic waves revenue, 100 and 400 gig grew nearly 11% over a year-over-year in the second quarter in our North American enterprise channels, and we expect that momentum to continue as strategic waste sales were up nearly 35% year-over-year in the quarter, which is a nice precursor to future revenue.

In short, the enterprise business is moving closer to sustainable revenue growth as the mix shifts towards strategic and digital services. And as a reminder, Alkira was not contemplated in our Investor Day digital revenue targets. While its revenue contribution is immaterial today, we believe Alkira can unlock increased adoption over time, making any contribution upside to those targets. We're in the process of quantifying Akira's impact on accelerating our growth and we plan to share that view with investors when we provide our 2027 guidance.

Adjusted EBITDA, excluding special items, was $802 million in the second quarter compared to approximately $877 million in the prior year quarter. The year-over-year decline was predominantly due to the fiber to the home sale in the first quarter as well as expected revenue declines as strategic and digital services become a larger part of the mix, we expect that shift to support improvements in the margin profile of the business over time.

Special items impacting adjusted EBITDA totaled $204 million this quarter, primarily driven by our modernization and simplification initiatives as well as transaction and separation costs. Capital expenditures, excluding special items, were approximately $780 million in line with our expectations and full year guidance. That included approximately $300 million of CapEx associated with PCF deals. PCF cash received was approximately $476 million in the quarter. Free cash flow, excluding special items, was $327 million in the second quarter, and our cash flow performance gives us the flexibility to continue funding the transformation while remaining disciplined around where we deploy capital.

So to wrap up, our focus remains on delivering consistent execution through our strategic initiatives, including the end of sale of enterprise voice and the acceleration of digital growth inclusive of the incredible capabilities Alkira brings to Lumen. We're not managing the client. We're reshaping lumen around where demand is moving, simplifying the legacy portfolio reallocating capital towards higher-growth digital initiatives and building a revenue mix designed to create more durable shareholder value. With that financial context, the message is clear. The strategy is taking hold, and we're focused on translating it into sustainable growth and value creation.

Kate, back to you.

Thanks, Chris. I'll close with this. Lumen is becoming a different company. we're helping create a new category, enterprise networking for AI. Our platform is grounded in fiber scale, network intelligence, digital orchestration and measurable business outcomes and customers see the differentiation. They see a company that understands their networking challenges and can help them connect, secure and scale for AI, and they're voting with their business.

You can see it in the numbers. strategic revenue grew 14%. NAV adoption dramatically outpaced the market, 100 and 400 gig ways in North America enterprise revenue grew 11% year-over-year, while sales of the same grew almost 35%. We're executing with discipline, Alkira expands our opportunity and our momentum is backed by customer demand, stronger capabilities and a clearer economic model. Lumen's pivoted growth isn't a slogan. It's just math.

Operator, let's open up the line for questions.

[Operator Instructions] Your first question comes from the line of Michael Rollins with Citigroup.

First, I was curious if you could talk a bit more about -- Kate, what you were just describing is now to strategic revenue relative to legacy. So, are you seeing that this transition of your customers from legacy to strategic is happening more quickly. If you look at the higher strategic revenue growth and legacy now declining about 15%. And when you look at Alkira, can you share with us some additional ways that you can accelerate that performance to get to more of the strategic services.

And if I could just follow up with one other numbers question. So I think earlier in the discussion, it was mentioned that results were in line with your expectations. And as you look at revenue change for 2Q in business, down about 1.8% year-over-year, but I think for the year, you're thinking about it when you talked about before, correct me if I'm wrong, like maybe the upper 3s to 4. So what does that mean for business revenue declines in the back half of the year?

Do you want to take the second part first, and I'll go to the first.

Sure. So we're still committed to the guidance that we laid out. And obviously, we don't guide revenue or at least we haven't to date. Just keep in mind that the first half, we did have State of California impact both first and second quarter. And while our plans contemplated some of that hitting in the second half, that's now done. So that was accelerated.

I would answer the question certainly from an EBITDA standpoint. If you look historically, adjusted EBITDA is about $100 million less in the third quarter than the second quarter just seasonally because of summer maintenance and energy costs and whatnot. And so if you look at it that way, and then look at what fourth quarter would need to be hit guidance, I think that solidifies what we're saying for the year.

Okay. And Mike, I'll try and hit the first one. So strategic 53% of the portfolio, legacy 47. Strategic growing 14%, legacy down 15%. So, is it a one-for-one match? No. There's a lot of complexity in there. But I think the trends that we see that give us confidence are 2 that I really called out. There are several of them in there, though. The first is if you think about the number of NaaS customers that adopted the platform in Q2 we had another greater than 20% number of them be brand new to Lumen.

These were customers that were not doing business with Lumen that decided to come to the NaaS platform, which is great because it's not a one-for-one cannibalization. What's more? I can't -- I don't remember the exact number, but I think it's somewhere around 6%, we can confirm that off-line, of the customers that were already looming customers were adding mass circuits. They weren't migrating okay? So this is clearly a share take, and it's not a one-for-one translation of the legacy business into strategic.

What's more? I think in legacy, we have the lower bandwidth wave circuits and those are declining. And in strategic, we have 100 and 400 gig and you're seeing a real uptick there, which is indicative, I think, of the second phase of the AI adoption curve where more customers are starting to realize that they've got to upgrade their capacity. And you're also seeing a lot of the neo clouds go long in 100 and 400 gig.

That growth if you juxtapose one for one, I think over time, you're going to see a much faster acceleration on the 100 and 400 gig on the horizon and where we're focused and where we're investing and why our investment in rapid routes has been just such a great return because we can turn up these circuits in days versus what used to take months. So we're very, very encouraged with what we see.

Yes, the only thing that I would add to that is, remember, the vast majority of the legacy is voice in private line. And those are just not in vogue anymore. And to Kate's point, it's the high-speed waves, it's IP, it's dark fiber, it's NaaS. You also asked about Alkira and I think you, in particular, Mike, have done a phenomenal job of really digging in and understanding the strategy. I would encourage you and everybody else to look deeply into the value proposition of Alkira and some of the data that we shared and the materials that are online.

Because when you look at the things that Kate talked about in her script, the complexity of allowing networking to work today, which as you scale that for AI is impossible. Cloud-native solutions, which is what Alkira brings are massively disruptive. And so our belief is that allows us to accelerate our digital transformation, and we're working over the next couple of quarters to quantify that through media guidance next year.

Your next question comes from the line of Frank Louthan with Raymond James. Please proceed with your question.

Great. Can you give us an idea of sort of the MRR of an acre customer and maybe what that would be -- you would be getting with them over above, if they were just a networking customer. And then on the Waves growth, how do you think about it? Do you believe that you're taking share in the waves business? Or are you just -- is that just indicative of the market growth itself?

I mean, rapid routes is clearly giving us an advantage from ability to turn up customer circuits that's being recognized. Again, I'll kind of hammer on this, the Neo clouds have awakened to this notion of Lmen capabilities being able to quick secure and effortless it's working. And the best example is 100 and 400 gig waves with rapid route. So yes, we're taking share. It's growing quite rapidly. The sales number was phenomenal. The pipe looks really good. We have a lot more work to do to offset the decline on the lower end, but we're pretty excited and bullish on the future.

Yes. And from an MRR perspective, it's the right question, Frank. It's a good question. I would say it's too early to say that because it really gets back to what we talked about in terms of scaling the model. Our focus to date has been on driving customer adoption. That continues. That's good news. It's now about getting customers to consume more services for every port because the reality is once you go back in with the second, third, fourth service, you get very close to having 0 marginal cost and little to no CapEx. So too early to tell that. Our goal would be to provide much more clarity around total business segment revenue next year when we give guidance that would incorporate all of that. But certainly, Alkira allows us to expand that. Kate?

Yes. I just want to add one thing. Look, it's been a month since we've closed -- so I don't want to overdo our zeal here, but 2 things that I see them really excited about. When we renew Alkira customer, we're upsizing the deals. And I think that's a very positive outcome of customers that are happy and we have several data points that show that. The second thing is, Frank, which I think is really, really important is traditionally when we're selling connectivity, we're talking with procurement teams and they have a cost budget and they have a bandwidth budget and they not to exceed.

With these net new services, multi-cloud Gateway and the Alkira portfolio, we're now a couple of clicks up from procurement, talking about total network upgrades strategically to allow for them to achieve their AI ambitions and we're knocking on the door of the CIO and CTO and they're answering for the first time since I've been here. And I think that's the really exciting part. So we'll get a larger sort of share of wallet of those customers as we can bring the whole set of capabilities at least that's our aspiration.

Your next question comes from the line of Gregory Williams with TD Cowen.

First of all, on digital revenue. Chris, you mentioned it was in line with expectations, about $39 million. It's up only $2 million from $37 million last quarter. When does that digital adoption, you talked about this NaaS option equate to a higher ramp than $2 million quarter-over-quarter as we think about the cadence over the next few quarters. And second question is just on state of California. Can you quantify the impact of the pull forward? Just trying to see how much you beat on public sector and if it was California or not and to what degree? And is that both PCS revenue and public revenue?

So on the latter, yes, it is. It's both. The public sector business obviously has been, I would say, fairly chunky given what's going on in the world. But we also know third quarter is the strongest quarter for that business. So we'll see. I mean we remain in deep conversations around some fairly strategic investments with the federal government. And so we'll see where that takes us.

As it relates to digital revenue, remember, when we did Investor Day, we laid out not just the mix shift from legacy to strategic, but also within strategic, how much was digital. And so I would say that as a baseline, that's still a good way to look at it. Obviously, Alkira allows us to accelerate that, and that's what we've got to quantify over the next couple of months.

So again, we're operating off of a small base. We're driving significant adoption. It's really a question as to how long it takes to get customers to add that second, third and fourth service. But it will.

Your next question comes from the line of Michael Funk with Bank of America.

Two if I could. So, can you comment on the size of the funnel and where deals are on the front of new enterprise deals? You mentioned earlier some of the pace of those deals as well as the payback for customers as well. And then second, just want to comment about not chasing TCF deals based on price. Can you add some more clarity for where you see deals getting price on development yield or whatever type of yield do you think it is useful in the current environment versus where you'd be more comfortable pricing?

No, I'd love to address that. Thanks for asking. If you look at the PCF deals that Lumen has signed to date, all of those deals were about monetizing conduit that was paid for a quarter century ago. Underutilized assets that allowed us to deliver faster network deployment for hyperscalers that ultimately from a strategic perspective, creative proximity with those hyperscalers that is now helping us bring differentiated services to enterprise.

As we look at new builds the economics are a very different story. And so there's -- I think there's been a number of announcements. There's great headline generating news in those but the returns are terrible. And what I mean by that is that if you look at the cost to build new trenches, deploy new conduits, you're looking at returns that are at or below cost of capital levels. So from our standpoint, the growth of fiber is great news.

Alkira our NaaS solution allows us to deliver services across everyone's fiber, not just Lumen's and we're quite happy for others to build at or below their cost of capital so that we can provision higher margin, higher growth services on top of them. Now with that, we will continue to pay network where it makes economic sense for our shareholders. But we are not going to chase things for headline value anymore. That's just not what we do. It hasn't been what we've done, and we're not going to start now.

Your next question comes from the line of Batya Levi with UBS. Please proceed with your question.

Great. A couple of follow-ups. First, on the comments you made on the PCF network. Can you talk about the CapEx required to deliver the service I believe CapEx has been coming lighter than you had originally expected? Are you finding some improvements in the delivery? And looking out to potential new deals, do you still see some of your existing conduits and fiber assets as you can leverage to gain more deals? And a question on Alkira. Can you just remind us what status is the current business revenue EBITDA that you acquired from the company? And should we anticipate any incremental cost as you integrate that with your platform over the next 18 months?

Yes. So we haven't given specific Alkira guidance and the revenue and costs are immaterial in terms of our results at this point and obviously had no impact on the second quarter. It really is about where we can take it from here. And as Kate said, we're moving very rapidly to drive sales motions around that, and we'll quantify that in the back half of the year. As it relates to PCF, I would say the capital expenditures on PCF, which remember our PayPort upfront by the -- by the customer, we're pretty much on schedule.

I wouldn't say that we're finding significant efficiencies nor do I see any risk. So it's pretty much on schedule. And yes, there is definite opportunity to deploy more of those underutilized assets for the hyperscalers with great returns. And where there's opportunities to do that, we will continue to do so.

And we have a pipeline on that.

We do. Yes, we're in a number of conversations for some fairly material deals. But again, as you know, we don't announce those until they are signed because they are very long sales cycles.

Your next question comes the line of Nick Del Deo with MoffettNathanson.

First, it seems like everyone across the industry is highlighting neo cloud demand. Kate, you mentioned it earlier in the call. Can you do anything to help give us a better sense of just how much that category customers is contributing to your deal funnel or your bookings or to your revenue growth?

We don't report that.

We don't report it. There are NeoCloud deals as part of the $13 billion. They're relatively small.

And I think they're buying weight, right?

Yes, exactly.

So not as much PCF business for the Neo cloud, but a pretty significant uptick in pipe and conversion of waste capabilities for these customers.

Exactly. That is a part of the way it's growth. We're taking -- we're definitely, I would say, taking share of waste because of the capabilities of our 100 and 400 gig routes and just the density in those 58 million fiber miles that we're building that are a bit factored for the neoclouds. And that's how they're choosing to buy their connectivity.

Okay. Okay. That's good color. Second question on enterprise voice. I mean you've articulated the idea of sunsetting those sorts of services for a while, so it's not necessarily surprised to hear that. Can you talk a little bit about the path to get there? Like for how long you're going to support existing customers taking the service and so on? And maybe the steps you're taking to ensure that it doesn't prompt any unwanted churn associated with other services that those customers might be buying?

Yes. I think it's a great question. Our strategy is deeply rooted in the customer. We put the customer at the center of it. And I think it's really important to kind of segment customers in the base of a legacy revenue stream. We have a huge number of customers that have a very small monthly MRR, right, and do not have other services and then we have a much smaller base of customers numerically, like a lower number that actually have a very large book of business with Lumen.

And so we're routing our strategy in the larger footprint of revenue for obvious reasons, and we're intersecting that with our strategy to exit copper. And I think that, that's really important. So we're balancing a couple of things. We're maximizing cash flow as we consider the customers' needs and given the migration strategies that are swift and efficient and makes sense for them and address their AI aspirations. At the same time that we're dealing in some places with regulatory constraints, so it's a bit of a multivariable equation that starts with the customer. Second thing is maximize cash from it. And the third thing is to exit so that we can mine the copper.

Yes. I would just add to that, the the percentage that enterprise voice contributed to our sales is very low single digit. It's immaterial. So it's not about what's driving our future. It comes down to the revenue management. And to Kate's point, there's very few customers that we actually need to be concerned about when we look at the bulk of that business.

Beyond that, though, there are decision points around when we end of life versus end of sale. We announced end of sale, right? End of life is a different story, but we're going to be aggressive about that and make the right financial decisions because, again, it's a distraction. It's -- we will meet the obligations of our customers when we the regulatory obligations we have. But beyond that, this is not our future. And we're full on in terms of extracting every dollar we can to focus on digital growth.

Not to feel really good about the partnerships that we're developing with some providers that can help our customers get the voice that they need in the context of the overall Lumen portfolio of business. So it's a connected ecosystem play that I think will enable better economics for the company.

Absolutely.

[Operator Instructions] Your next question comes from Eric Luebchow with Wells Fargo. Please proceed with your question.

Great. There's obviously been a ton of talk about how satellite could potentially impact telecom and Kate, you brought this up. Just wondering if you could comment on how satellite broadband could maybe help you accelerate your copper decommissioning and what type of cost savings opportunity that could represent for Lumen longer term? And then secondly, maybe, Chris, if you could just touch on the trajectory of the cost savings opportunity, the $1 billion by 2027, where we are in that journey and what we should expect through the balance of the year?

Part of our voice strategy is basically to provide whatever capability makes sense for that customer and to give them choice along the way. So whether it's fixed wireless or satellite we have the capability to drop an airline puck in place of the infrastructure that they have today to give them immediate capabilities to replace, which I think is a great thing.

And we're starting to get that motion in place to do it at scale. Separately, satellite is a significant part of our business as well because as we've talked about in the past, data needs to find fiber as fast as possible. So we do the backhaul for the satellite companies, and it's growing pretty significantly.

Yes. And on the modernization simplification when we guided the year, we said $700 million exiting this year, $1 billion exiting next year. And we are on track to deliver against both of those it's frankly a big piece of how we inflect EBITDA this year while revenue hasn't inflected yet. So the revenue declines slowing is certainly a help, but the M&S savings are what pushes there.

And I'd say, more importantly, the learning that we've been able to extract around the legacy business because of that modernization and simplification program in terms of truly understanding the economic value of individual circuits and routes to market is what's allowing us to be more aggressive on how we ultimately wind down that portfolio. So a few years ago, we would not have had with the level of information that we have today, and it's just allowing us to move faster on becoming a digital company. So it's worked out really well for us.

There are no further questions at this time. I will now turn the call back to Kate for closing remarks.

So the transformation is going well, and we're really excited. And I just want to take a minute to thank all Lumenaries for their incredible work and contribution. Let's keep going, and thanks to everybody today for great engagement on the call and a great discussion. Have a great day.

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, everyone.

Good afternoon. Welcome to day 1 of our 54th Annual TD Cowen TMT Conference. My name is Greg Williams. I cover cable, wireless, telco and fiber here at TD Cowen. Joining me this session is Chris Stansbury, CFO of Lumen Technologies. So Chris, thanks for joining us.

Thank you. Great to be here.

So Lumen has a lot on its plate, including recently closing the AT&T fiber-to-the-home deal, PCF execution now, ramping up digital revenue, the Alkira deal and cost savings initiatives. Where are your priorities at the moment?

Our priority is really on the inflection of the business. And so this year, we inflect EBITDA. There's a lot of focus on that. The cost savings help drive that before revenue inflects, but the revenue inflection is right behind that. And we're doing everything we can to try to accelerate that. As we said at our Investor Day, we expect revenue to inflect in 2028. I think -- at that time, Alkira was not contemplated in those economics. And so that -- we think that will accelerate our revenue growth, but we've got to dimensionalize that. But first, we got to close the deal. So -- but it's really about inflecting the business.

Okay. And looking forward to that. Part of the inflecting the business is PCF demand, at least from a cash flow perspective. You now have $13 billion in PCF deals to date. As a leading indicator for fiber demand, we're tracking data center leasing because these data centers are eventually going to need photons, if you will. And we saw another massive step-up last quarter, 9.4 gigawatts of leasing in the past quarter alone. So should we, in turn, see a similar step-up in PCF wins? Or is your $13 billion in wins already capturing what we just saw in -- data centers?

I think we have to think about them in different buckets. So PCF is really largely consumption for the hyperscalers internal use to train their AI models. There is more demand there. We see more demand. I think we will do more. But it's really not the big growth opportunity for Lumen. The big growth opportunity when you think about DC growth is it goes back to what we've been talking about for a few years now, which is data is getting further and further away from the point of consumption. And in a world of AI, that's a huge problem because as you have agents interacting with customers or running smart factories or whatever it is, those agents are looking for data in real time, trying to make decisions as fast as a human would make them.

And if that data is across the country, you cannot have a data lag or any kind of interruption in getting it there. So what we see with the data center growth is really the growing demand in what a network engineer would refer to as east-west traffic. And that's the movement of data from anywhere to anywhere through a single pane of glass in a very programmable way. And that's what we're building, and that's what Alkira brings. So I think our enterprise focus, which is something our competitors have not had, it's really starting to show as an advantage as AI starts to move more into an inference phase.

Right. So PCF is good for the cash flow, but the programmable network is the future of...

Exactly. And so when you think about that, the PCF deals have largely been focused on just the training of AI, right? And so now we're moving into inference, and that's where the programmable network.

And when does inference really start to overcome training and maybe...

I think it's starting now. How fast it builds is hard to say. I mean I think the latest thing as we all learn our way through AI is, I think the phraseology is tokenomics, right? So you've got -- where does AI make sense and where does AI not make sense? And I think the companies that ultimately will win the day are the companies that rewrite business processes and use AI to fundamentally transform the way they go to market. It's not about taking a bad process and putting AI on top of it. It's about completely rewriting business rules and moving into the next phase of growth.

And while inference will be a huge opportunity, higher margin perhaps, lower CapEx since a lot of the conduits in the ground. On the flip side, a lot of inference will be done perhaps in the availability zones, where there's other fiber providers. So do you see more competition? Do you see pricing risk because you'll be going up against...

I don't. So let's break it down a little bit. Historically, legacy telco, enterprise telco has been focused only on North-South traffic. North-South is defined as premise to somewhere. It can be another premise, it could be a DC, it could be a cloud. That market in the U.S. is about a $12 billion market, and its TAM is growing at 1%, okay? The amount of data growing every year in that is much, much greater than that. So what is that? That's price compression. That is the cloud that has hung over legacy telcos head forever is you sell to the procurement department and it's a race to the bottom on who's going to have the lowest price the next time that the contract comes up for renewal. East-West traffic is what changes all of that because it's about the movement of data between clouds, between DCs. It never touches the prem. That TAM is a global TAM because you don't need to own the network.

If you think about what happens with the closure of the Alkira deal, we will be the first telco on the planet that has married North-South and East-West traffic together. The point of intersection is multi-cloud gateway. It will work on-net or off-net, in a very programmable way, meaning through one pane of glass, I want to move data from here to here right now, you design your own network, you push go and it works. There is no one else who's doing that. And that is what is absolutely critical in terms of giving enterprise the ability to reduce their total cost of ownership because networking has only been thought of in a very static way. This turns it into a very dynamic asset. And that's where we see we can win.

And with Alkira, since you brought it up, it's nice to see them moving back on the acquisition path again. It's a healthy sign. And you acquired them for $475 million. Can you just provide -- you just already did a little bit for real-world examples, like the enterprises have a pane of glass and they can ramp dynamic capacity, but a lot of it could be off-net as well as on-net.

Exactly.

It depend on -- you have SLAs, so you'll depend on other carriers, they put you on broadband here.

So if you think about a global solution, think about a large multinational bank, we could license this technology to a provider in Europe, to a provider in Asia with standards. I mean part of what the value is of marrying that incredibly powerful software layer with our network is the privacy of our network. A lot of what gets moved around for enterprise today is done over the public Internet. more network hops, slower, less secure, and that privacy element is critical from a security standpoint. If we can find partners who will provide that same level of privacy on their footprint where they have it, the orchestration layer is what Alkira brings, and that's ultimately what gets monetized. So I think ultimately, you will continue to see Lumen invest in fiber where it makes economic sense to invest in fiber. But the reality is we don't have to lay one more foot of fiber to have a global footprint that allows the complete orchestration of AI networking needs.

And the deal rationale is I feel like you needed to do or build an orchestration platform anyway.

Correct.

And maybe this is going to cost you a little bit more, but you're ready day 1 at the right place...

Yes. I mean our estimates are we were going to spend in the next couple of years, $100 million to $200 million to build a lot of what Alkira brings. And it's ready effectively day 1. I mean it's -- our team would -- our technical team would say that this builds the entirety of the foundation that we need. It integrates very easily, and then we can innovate from here. So there's already a lot of innovation that has happened with things like direct cloud on-ramps, multi-cloud gateways, the plumbing that's required to move these big workloads around. The orchestration layer now makes that very programmable through one pane of glass.

And look, what do I mean by programmable because this is really important. The math that matters isn't the cost of a wave. That is no longer a point of conversation. What matters is the total cost of ownership. I need to move petabytes of data from clouds into GPU clusters to be processed. The math that matters is the cost of a GPU cluster, $2,000 an hour. If I've got 10-gig connectivity and it's slow and it's clunky or I've got 400-gig connectivity, it doesn't matter what that cost of that wave is. It matters how long it's going to take me to transport that data. And so we're talking hundreds of thousands of dollars in terms of cost differential for a petabyte of data over 400 gigs versus 10 gigs.

Right. The network cost is so small compared to...

It's so small. And so when we talk about a programmable network, think about a situation where data is trying to get into a region of the country to be processed by GPU clusters and it's reached a capacity limit. And it's reached a capacity limit either because the GPUs are already running at capacity or because there's an energy cap and the local providers are putting a cap on how many of those GPUs can be running.

You route that traffic...

What does the programmable network do? It automatically reroutes it where there's capacity. You don't have to have a telco go out and dig a trench and build connectivity from A to B. You literally log into a screen and you move the workloads or the network does it for you. So that's what we're talking about. And that's the power that we unlock with Alkira and Lumen married together.

Got it. And the network topology where data goes is a great segue to my next question, which is the edge. We recently got back from Connect (X) a few weeks ago, and the edge or the topic of the edge was all the rage. It felt like the 5G edge all over again 8 years ago. Lumen stand to win big because I remember in the older days of Lumen, they had a lot of edge connections, certain amount of milliseconds to every customer. Investors were naturally skeptical, why spend the extra millions of dollars just to shave off a couple of milliseconds. Just curious to hear your thoughts. It seems like there's some validation even yesterday when I Squared bought some of these smaller edge data centers from Cogent. So just curious to hear your thoughts of where the edge is going to go and where data gravity is going to go with AI?

So edge will continue to grow because, again, think about East-West traffic, where you've got data sitting in multiple cloud environments and you need to do API development, you can pull that data down to the edge, manipulate what needs to be done and send it back wherever it needs to go, the data wherever it needs to go rather than trying to pull it all on to a campus somewhere and do it yourself. So it's -- that proximity matters. And latency really matters in a world of AI. I can't think of a better example than, say, a smart factory or how about a customer service agent where you are engaging with a voice agent or a chat agent. What happens if it takes 90 seconds for it to respond, right, versus if it's responding instantaneously as it sources data from everywhere to answer your question that matters. And so latency is a huge, huge issue for AI. It is -- it's ultimately limits AI's capacity. And so we talk about our network being within 95% of U.S. businesses within -- under 5 milliseconds. And that benchmark needs to continue to tighten.

And then I want to talk about the NaaS and digital revenue that you spoke of. Your digital revenue was, I think, $37 million, so en-route to the $500 million to $600 million target.

That just in the quarter, yes.

Yes, just in the quarter alone. And you're assuming a linear ramp in your projections, but you actually think it might be more of a J-curve. So help us envision the scenario and the rationale for this J-curve adoption. Like is it one of the situations where a couple of companies do a proof of concept and they see it and then the adoption of skyrocketing like can you help us time the J-curve, any insights...

Well, I would love to time the J curve, but it's a hard one to call. I mean, look, we're developing a new category. I think the best reference point that we have is what happened in cloud. And if you think about cloud adoption when these -- when cloud companies came into existence, what an enterprise say, well, I don't need that, right? I can -- I've got my on-prem data centers. And then what ended up happening is over time, people realize, hey, wait a minute, the variable nature of that capability, the ability to provision compute and storage on demand, all of a sudden exploded. That was the J-curve.

So we think that's ultimately what happens here. Alkira could be a J-curve moment. We'll see. I can tell you this, we're doing everything we can to make it a J-curve moment. So we've got to obviously close the deal, but we're already thinking about the types of engagements that we can have with customers. We obviously can't do much until the deal closes. But at that point, we will have a target of companies in various industries that we want to go into and use as use cases that we can then share with other customers. Because the selling motion is very different, we're changing the inside of enterprise as we go and sell these solutions, right? Again, today, you sell to procurement departments and network engineers. What do procurement departments and network engineers not want to happen? They don't want you to move their cheese. They don't want you to say, you know what, we don't need you guys doing this anymore. We don't need you to figure out how to cobble together a network solution to move data everywhere. We don't need you to figure out if you can get a lower cost on a wave. It's a very different selling process...

Evangelize it.

Well, and it's C-suite driven. When we talk to CTOs about the capabilities that we're bringing, they're like, wait, what, you can do this when. This changes everything. And so they will rewire the inside of their organizations to adapt to the capabilities that we can bring. But the way the network works today, the network architecture never envisioned AI. And the way companies access cloud data today through neutral third-party facilities with cross-connect fees and slower speeds, that doesn't serve AI, and it's expensive. So it's slower, it's expensive, it's less secure. Our belief is we come with a solution that addresses all of that, and they start to rewrite the way they buy and manage network services inside of their company. So it's very much going to be a C-suite sale.

Right. And you mentioned cross connects are expensive on the on-ramps and the meeting rooms. So speaking of expensive or not expensive, how are you envisioning pricing the NaaS services then?

So I think it's going to look very much like the way cloud prices, right? You will -- depending on what your commit level is, you'll get varying degrees of price discount, right? So...

Based on data like...

Based on volume. Exactly. And by the way, that's not just connectivity because there's other services that we'll continue to bring to the market that can be delivered digitally through this motion. So that will be a primary component. But again, one of the beauties of what we have available is the ability to turn up and turn down capacity on demand as you need it. So there'll be kind of base levels of volume that every enterprise needs, but there's also going to be those peak moments. You don't have to buy to peak anymore, right? You can scale up, you can scale down. And so our belief is because of that flexibility of that as we do more East-West volume with corporations and fix their networking problems, we actually start to take share in North-South.

On Analyst Day, you talked about the P times Q scenarios. I think your balanced view was like $1,400 per port. Is that where we are today? I'm just trying to understand.

We haven't disclosed that. What we've said is, look, if you really think about the full use case of NaaS, right, in the combination of North-South and East-West traffic, we were talking about as much as $5,000 a port. We're obviously at the very early stages. But again, Alkira accelerates a lot of that. So the answer is we don't know. I wish we did know. I wish I could give you better modeling information today. But what I can share is that as we talk to more enterprises about the capabilities we will have once the deal closes in the second half of the year, they're very excited about the kind of problem solving we can bring to their enterprise.

And what's the margin profile versus like traditional telco margins on these services?

It's much higher. If you think about traditional telco, one of the reasons why there's really been a lack of innovation in the space is everything is infrastructure-based. So every service required its own infrastructure layer, its own set of ports, people driving around in trucks, plugging in the next thing. And because that was so capital-intensive and expensive, it really thwarted innovation. What we're bringing to market is software-based. So as Alkira is a software layer that will be able to talk to multiple ports. As we install more NaaS ports for connectivity into Lumen's network, those ports can receive more services. Those services get delivered digitally. No more trucks, no more infrastructure layers every time you come out with a new service. So it's a very scalable model. So what you will see over time, and we committed to this in Investor Day, I think Alkira only furthers that is significant margin growth in the coming years as well as much lower capital intensity.

And do you see competition flowing to the NaaS market? Who is your competition? I feel like it could make a Megaport, but they only have the network or the telcos, but they're doing fiber-to-home and wireless.

It's a good question, and it's one that is always difficult for us to answer because we don't mean this in any kind of an arrogant way. There isn't a pure-play competitor. There is no other competitor that owns the network and has the software connectivity. Megaport is a good example of a provider that can bring a software layer to a company, but it's limited in a couple of ways, their ability to scale is driven by how much network they have to buy to support the customer, right, because they don't own the network. And the second piece of it is that they can't deliver services deep in the network. You can only deliver it at the highest levels of the network. So think about all the layers of the network, our ability to digitally bring services over time to every layer of that network architecture is meaningfully different. So it's really the marriage of the 2 that makes this incredibly powerful.

Got it. I want to switch gears and talk about some finance stuff, the CFO of the company. The cost savings plan for one. You went from $400 million of savings at year-end. I think the goal is $700 million by the end of this year and $1 billion by year-end 2027. Can you elaborate on the efforts, what you've done so far? I think you've flattened the network and the systems. And then what's in store for the next...

It's really more of the same. So again, like a lot of others that have been in the historical space, the way these companies grew is through acquisition. So there's an enormous amount of tech debt. There's things that were never addressed. The efficiency of any kind of M&A activity historically has really been limited to spans and layers, right? It's not about fixing the underlying problem. And we're dealing with that. So we've just completed our ERP. We went from over 30 GLs to 1. We went from multiple procurement systems to one. There's efficiency that comes with that. We still have work to do on things like CRM as an example, that will allow us to unify order entry systems. So that work will continue.

But ultimately, what we're doing is all of the digital products are being built in go-forward systems, one system. The old stuff, we're not going to try to lift and shift. It's just too much work for too little benefit. We're going to slowly retire those products. And as those products retire and convert to a digital product, the IT systems retire with it. So a lot of the work is really around that. And then again, just driving more efficiency. The remaining copper assets in consumer are being managed by the same operations team that manages enterprise. There's a lot of efficiency there. There's copper mining. There's a number of activities. So it's really across the board.

But copper decommissioning that's not part of the plan? Or is that...

It's part of the plan.

It's part of the plan. And any updates to sizing that savings in particular, even the timing of that?

No, we haven't -- it's small today. And over time, I think it will take us well into the future and therefore, isn't contemplated completely in the $1 billion because it's going to -- I mean, that decommissioning is going to take place over many, many years.

Right. Well, interestingly, would LEO threats actually accelerate copper decommissioning and then fixed wireless too?

I don't know. I mean the reality is, I think on the copper side, we're going -- barring something completely unforeseen, I think we're going to continue to see that business kind of attrit at the levels that it has been. And it's just a long, slow decline. Now one of the things that we continue to look at is are there opportunities to more aggressively create that churn by converting customers to a digital product that we can deliver in a much more efficient way because we would love nothing more than to not have those customers attrit, but to cannibalize them ourselves and have them stay in the family and be able to consume other services from us longer term. So as we go forward, we may do some things very intentionally to take some of that legacy business and convert it, but we'll obviously communicate that if and when we do that.

Got it. I want to talk about the EBITDA cadence for the year. You usually beat EBITDA in the first quarter, but you had the help of the $32 million sort of onetime PCF help. 2Q is typically flattish. But then again, in the first quarter, you had a month of fiber-to-the-home. So a lot of moving parts here...

A lot of moving parts...

Third quarter is typically higher spend, maintenance OpEx. And then the fourth quarter is that large step up. But then you have cost savings going through the whole entire balance of the year, just layer that on top of it. So just with all that said, help us with the general puts and takes as we think about the balance of the year?

So in the first quarter, it would be a mistake to model the first quarter by -- and then forward by just seasonally adjusting it because between the onetime nature of some PCF revenue as well as the consumer business, between those 2 things, you're talking between $60 million and $70 million of really kind of high-margin revenue. We also had -- and not prepared to call this as an ongoing benefit, a little better performance in legacy than we thought. And what we think is going on there is that as customers are buying more digital services, they're keeping the old for a little while to make sure everything is working the way they want it to. So I mean, again, we'll take that. That's a nice tailwind, but I don't think that's a trend line change.

And we've also -- we're seeing some higher medical costs like everybody else is. So I think you need to adjust first quarter pretty heavily. Where we see it is we will inflect EBITDA this year. We said it wasn't going to be a significant inflection. Next year is where we start to see, I think, a more significant build in the EBITDA, and that's our guidance. We feel good about the guidance for the year.

Got it. And you did mention input costs are up. The cost of resin is up, optical equipment and DRAM within that is up, I think, as much as 70%, cost of fiber, we've seen reports up to 75%. So your deal with Corning is proving out excellent.

Yes.

Still, could we see higher input costs or cost pressuring the operations...

I mean, yes. But again, a lot of that we're able to pass to customers where it truly exists, and we'll do that where we can. So I'm not as concerned about input costs as we are really about making sure we drive the inflection in revenue. And that's the key focus.

And then how about labor? I mean how much of is insourced versus outsourced?

A lot of the labor is outsourced, and we've got great partners. Two of them are publicly available. They've been very public about what they do, but it's really a West, Central and East. They kind of meet each other where those boundaries touch as we're building these networks for ourselves and for others. And they've been fantastic partners. They've really helped us keep things on time and on schedule.

And then just moving to the balance sheet. You've done a tremendous job on the balance sheet. You paid down the super priorities as promised. I think pro forma leverage is now below 4x. So what's next? Are there any other balance sheet initiatives from here?

The big one is it's publicly, it's out there right now. I mean we've -- there's a few things that we needed to do on our capital structure. The first is reduce the quantum of debt that's happened. We've gone from $20 billion in debt to under $13 billion. The second is fix the maturity curve, right? 50% of our debt due in 1 year a few years ago, 2027 is what it was. And now we've got a maturity curve that looks normal and boring. And quite frankly, we really don't have anything to do for the next number of years.

The last thing was to simplify the structure and not have 3 borrowing entities. So when we close Q2 with the debt exchange that we're doing right now, we will have one reported entity. So equity investors, credit investors, management, everybody is going to be looking at one balance sheet and one P&L. And beyond that, I think it's just more regular course of business. It's nice to be here. There's been a lot of hard work, but the focus is on growth.

Got it. And at the last minute we have, I just want to bring it all together when I think about Lumen a few years from now when the PCF dust settles and then your revenue does inflect in 2029. When I look at your long-term targets from Analyst Day, I'm trying to put them together and extrapolate from what I saw, it seems like you'd be like a $500 million free cash flow company. And there's a lot of numbers here, but EBITDA maybe [ $3.6 billion ] there's some $400 million in noncash EBITDA in those slides, $2 billion in CapEx, $700 million in interest. So is that directionally correct?

Yes, let me answer it this way. So first of all, we think -- what we said at Investor Day was business revenue growth in '28, total Lumen in '29. And again, we'll see how much Alkira can pull that forward. We'll get back to the market on that after we close. What the model showed us at Investor Day was that even if you strip out PCF, the investments we need to make are fully funded.

And we would hit at the end of a 5-year window, a leverage target of 3.25 and we'd have extra cash flow beyond that. So we're in a very healthy spot where we are generating great free cash flow. EBITDA inflects this year, and now it's a question as to how fast we can inflect revenue, and it's happening. I mean just look at the rates of decline on revenue, obviously, just saying that out loud has a negative connotation. But look at those rates of decline vis-a-vis others in the space. And we are way, way ahead because our business mix is already over half of that in growth buckets versus legacy declining buckets. And nobody else can say that. Yes, so it's that -- we're not looking back on that.

Great. With that, we're out of time. Thanks, Chris.

Great. Thanks a lot.

Good morning, everyone. I'm Sebastiano Petti, and I cover the telecom, cable and satellite space for JPMorgan. I want to welcome Chris Stansbury, President and CFO of Lumen. Chris, thanks for joining us this morning.

Great to be here.

I think you have a safe harbor perhaps.

We do have a safe harbor, and it's on our website. I'm not going to try to recite it for memory, but take a look. And obviously, we'll have a good conversation today, but I'm not making any comments on forward-looking stuff.

I don't want Jim to get mad at this one.

Exactly. Thank you for that reminder because I always forget and he does get angry at me.

So Lumen has had a busy start to the year. So you closed on the fiber-to-the-home sale to AT&T. Just a couple of weeks ago, announced the acquisition of Alkira. So let's start at the top. As you look at the rest of the year, what are your biggest priorities? How do you see those priorities fitting together to set up Lumen for success long term?

Yes. As we gave our annual guidance, we said this is the year that we're going to inflect EBITDA, and we are going to do that. We remain committed to that. It's a big step forward for us. And ultimately, that leads to revenue inflection in the next couple of years and growth thereafter.

So we feel very good about that. The sale of the fiber-to-the-home business to AT&T was very strategic for us. I mean it's a space where convergence is real, and it's a space where others are much better suited to grow that business. But when you look at the Alkira announcement, I think that really speaks to where we have a right to win and where we have an advantage. And Alkira, once we close that deal, marrying that with the physical network we have, really opens up enterprise networking in a way that has never existed before.

And we're seeing a lot of interest and traction from customers because it allows us to deliver what is a fully programmable enterprise network. It's not about just the fiber anymore. It's not about point-to-point. It's about the ability to program movement from anywhere to anywhere, and we're going to be able to do that in short order.

Great. And I guess just thinking about the digital transformation and NaaS adoption, at the Investor Day, you talked about expecting linear digital revenue growth, but also, again, leaving the door open to a potential J-curve. So with port growth running around 35%, what are the real-world signals that you're watching that tell you the J-curve is actually starting? And I guess, what do you need to have in place operationally so that you -- the growth doesn't outpace?

Yes. Good questions. And again, what we said at Investor Day is we're going to plan linear because we don't know any better, but we did expect there to be a J-curve moment. We're not calling that now, but I would say that certainly the quarter-on-quarter growth we're seeing in customers' ports and services per port in that 30% range is very encouraging.

To your question on operationalizing that, there's an enormous amount of effort going on inside the company to shift resources from the old to the new. The ops team is all over it. We continue to ask them to plan for more so that we are ready, and we don't delay the adoption of those NaaS ports any longer than we have to.

So we're very encouraged by that. And that, again, if you think about networking in network language, right, a lot of that is north-south, right? And that think of that as premise to a location, right? It could be another on-prem location. It could be to a DC, it could be to a cloud. What Alkira brings is the east-west traffic. And that's where the vast majority of the TAM is.

The north-south traffic is very commoditized, and it's important, but it's not where the growth is in dollars. The growth in dollars is the east-west, the ability to move data between clouds, between DCs, never have it touch a premise and do that in a fully programmatic way in the power of your own hands. And so when you bring our strength in North-South and those NaaS ports to the East-West with Alkira and the connection point really is our multi-cloud gateways that we've announced, that's where we really unlock this.

Great. And then I think you described Alkira as accelerating the consumption flywheel, which you kind of alluded to and meaningfully completing the architecture for where you want to take the platform. So how should we think about maybe the integration time line? What gets integrated first? Are there investments required? And then I guess, when should we see these benefits showing up in revenue in a material way?

Yes. So obviously, we got to close the deal first. We think that will be sometime in the third quarter. And as you just said, the reality is the bulk of what has to be built to enable this is already built. And so it's going to be integration light. We're actually very focused on making sure that the innovation engine that exists at Alkira is preserved. And so that makes the upfront a lot easier. It's really about integrating with the sales force and how we approach customers. And part of what we're dealing with here is we're building something that hasn't been done in networking before. And as we spend more time in the C-suite and they realize the capabilities that we have or will have and our ability to execute against that quickly, there's enormous excitement.

So there's a shift that's going on. I mean I think if you look at enterprise networking historically, it's gotten a bad rap because it's been very kind of telco-centric, declining price per bit, you're selling to the procurement department. Those days are quickly coming to an end. And the reason it's shifting is AI will not work with latency. And it's not about the cost of the wave. It's about the total cost of ownership. And when you're running GPU clusters that cost $2,000 an hour to operate, that's what matters.

And so your ability to move data from anywhere to anywhere to keep those GPUs spinning to allow your AI agents to communicate with a customer in real time by sourcing information that is getting more and more dispersed, that's the math that matters. And so the big piece is really going to be the education at the C-suite that's already underway. And I think that's probably the toughest leg of the journey, but we feel good about the plans that we've got around that.

Great. And then one of the other things I think you brought up was about $100 million to $200 million of CapEx savings. I guess just -- I mean, where does that come from, I guess, in practice? And I guess maybe just help us think about time line there.

Yes. So when we did our Investor Day, inherent in the CapEx estimate that we had was development work to build the software platform that Alkira, frankly, has already built. And so in acquiring Alkira, we estimate that we'll save $150 million to $200 million in total over the next few years. What Alkira does is accelerates that software delivery, the ability to truly have one pane of glass that you can control all of your network flows from anywhere to anywhere, literally every cloud, one network, it's carrier agnostic globally, and it will allow us to do that day 1. So this is an acceleration of a couple of years.

All right. And then just sticking with East West for a minute here. So zooming out, I guess, to the market, so you previously sized the East-West opportunity, I think, at about $11 billion, right? And then -- but now after Alkira, you see that TAM as maybe I think, $58 billion. And so growing at about 20% compound annually. So I guess, who do you view as the real competitors in that market? And I guess, what gives you confidence in your ability to kind of take share and participating in the growth there?

So there are competitors at different points in that total cycle of data movement. There's no one pure-play competitor. So you will -- I won't name them, but there are companies that provide network access overlays. It's a screen of glass. But what they don't have the ability to do is provide a level of service as deep into the network as a company that owns the network, right? And so when you take Alkira's capabilities, you take our multi-cloud gateway, which is what? It's the ability to literally connect. We have direct cloud on-ramps, others have them too, into all the major clouds.

Multi-cloud gateway, though allows you to move data between those cloud environments and between DCs. It's extraordinarily powerful. And so there is no pure-play competitor. And I think the beauty of where we are is you've got this really unparalleled physical network in North America. We can partner with people globally who can provide that kind of service in other areas of the world.

But if somebody wanted to be a pure-play competitor in North America, it would take a long, long time because, one, they'd need to build a physical network that has the depth that ours has. And I think what we've seen over the last couple of years in terms of the differentiation of Lumen's network, that's really exemplified by the PCF deals. No one's been able to keep pace. Yes, there are other people building now, but no one has been able to keep pace with what we've done because we have capacity that no one else has. And so you take that footprint, you digitize it and Alkira is a big piece of that, and you've got something, frankly, that doesn't exist anywhere else.

So sticking with PCF for a minute here. On the -- I think you've said you've signed $13 billion or nearly $13 billion in deals so far. And you've noted that your hyperscale partners aren't talking about a bubble. They're talking about -- they're asking for more capacity faster in many cases. The contracts include incentives, I think, tied to speed, right, speed to market. So from where you sit, how much incremental opportunity is there beyond what's already been signed?

There's definitely more opportunity there. I don't want to size it. I would say that it's actually -- it's something that as time goes on, we're going to be really thoughtful about, right? Because the conduit that's in the ground has a lot of value because it provides customers with the ability to deploy faster than constructing from new and we can sell a resource that -- the one resource they don't have, which is time. But that obviously doesn't last forever. And so we want to be really thoughtful about that.

I think what's interesting is when you think about the strategic growth opportunities here, we actually don't have to lay one more mile of fiber to grow in a really explosive way because Alkira unlocks all of that. Will we build fiber? Yes, of course, we will. But we're going to do it in a way that makes economic sense for our investors because the objective isn't fiber anymore. That's old telco. The objective is one pane of glass, complete control, the ability to move data from anywhere to anywhere, and we will have that with the closure of Alkira.

And an interesting topic, and I spoke with your Chief Technology and Product Officer, Jim Fowler, recently. I think he made a comment to the effect of -- in some of your deal conversations around PCF, you guys say no more than you say yes to deals, which I thought was interesting. And so are you seeing deal structures evolve or conversations around economics evolve at all? Because one of the points you've always made and Jim also made was economics is what drives a lot of the PCF considerations, right? And so maybe help us think about how those conversations have evolved recently.

I would say structurally, the deals haven't changed. I think the value of a specific route can change depending on what capacity looks like. But the underlying conversations haven't changed. If anything, that makes it easier, frankly, because there's a lot of time in legal, if you will, getting the contracts right on both sides of those agreements. But now they've become more regular course.

So I think today, the conversations that I'm involved in are really focused on execution and how quickly can we go. I mean this is -- you said it really well. This isn't about an AI bubble when you talk to these customers. It's about what's coming, the demand is real. And again, they're building to a demand signal that's 2 and 3 years from now. And today, they're asking us to go faster. So I think that speaks to where the demand will be as we go forward.

Got it. And then any update? And so as we think about from a proprietary route perspective, still, again, a lot of the same considerations, I guess, it's nothing new to kind of call out?

No, nothing new. I mean we obviously announced a new route from Minneapolis to Seattle. That's a corridor that, as you can imagine, has a lot of demand. That's something that we've been working on for a while now. It's been part of our capital plans. There are others that we're working on as well. We keep that close to the vest, but that gives us the opportunity to sell into those as well.

So again, those are good examples of high-density, meaningful routes that we can monetize in a very favorable way for our investors, we'll build those routes. We're not going to build routes so that we can try to drive the price of waves to the bottom. That's -- we'll leave that for others.

The other thing that's interesting is as we focus more on the east-west traffic flows because that really is where all the value is, because customers are going to be able to consume that through one pane of glass, our belief is that we will very likely take share in the North-South, that more commoditized space because we're going to be really easy to do business with. It will truly be point-and-click. I need connectivity from here to here, okay, I have it. It will be up and running in a very short period of time. So we'll see how that plays out, but that's certainly our hypothesis.

So I guess just sticking with waves for a sec here. There was a clear call out that strategic waves. I think what you defined as 100 gigs or greater?

Yes.

Were a standout driver in the quarter. There was also a mention of material uptick and rapid routes adoption. So I guess, I mean, what's changed in terms of customer demand or in your product that's driving that momentum?

So 2 things. I think on the supply side, we've now been talking about it for over a year. But as we've been deploying these large fiber networks for hyperscalers, we're also pulling fiber for ourselves. And 2 specific areas that we've highlighted are rapid routes. So these are clusters of 16 markets at a time. And it's basically on-demand 400-gig connectivity so that customers can be up and running really quickly. And so we've got the first 2 clusters done.

The third one, I think, is close to being done. We've also done a metro expansion so that in the dense metros, there's more capability there. So that's the supply side. The demand side is that, again, I think we're starting to see the early stages of inference where enterprise is starting to consume AI in a more meaningful way. And again, latency matters. The example that I share is just think about it, all of us have, in one way or another, already had some kind of an interaction with a customer care agent. What would that experience be like if it took 30 seconds for that agent to respond, right, either through chat or voice. It would be horrendous.

And remember, that agent is answering questions by going and looking for data, and that data could be anywhere. It could be in Texas. It could be in Virginia, it could be in North Dakota. It could be in all those places. And it's putting together its response in real time so that, that customer experience is a good experience. We have that today where customers can get information on inventory or on an outage. Outage is a really good example, right? Outage just happened. That agent is trying to answer that question with real-time data, and we don't know where that data is. We know what sits in the cloud, but I couldn't tell you physically where it is. And so the latency is what matters. And that's why I think we're starting to see an uptick in the demand in these kinds of connectivity.

All right. Maybe touching on some other areas here. I think one of the more interesting points from 1Q was a call out on cannibalization. I think you said that NaaS adoption is not cannibalizing the legacy revenue as much as expected and that I think over 60% of existing customers, existing customer NaaS customers are choosing to expand rather than simply just migrate. So I guess what's driving that behavior from either a product, packaging, sales motion, customer economics perspective? And do you think it's durable?

So it's a really good question. I think there's more hypothesis there than fact because we're at early stages. I think our running hypothesis is customers want to make sure that they're comfortable with the new before they let go of the old. And so do we think that it's permanent? No. I think that's foolish. And frankly, we don't want it to be. We want people to adopt the new as fast as possible. We'll take the fact that they're going to run the old with the new for a while. That's a great problem to have.

But I don't think it is durable over time. I think you'll start to see customers as they experience NaaS want to run with it more permanently. Now the flip side of that is that in consuming NaaS, they will be consuming more services. So we're seeing that service growth. And again, remember, what is a NaaS port? It is a port that allows us to deliver all future services digitally. No more truck rolls, right, and no more fixed infrastructure. It's delivered as software. And so the faster that they start to consume those ports as their daily motion, the more likely it is that they'll start to consume more and more services on top of that. And that's the scalability that we've been looking for.

Got it. And then just closing the loop on Alkira. As you think about, does it help you sell more into the same customers? Is it help you expand into new segments? Is it about improving retention, wallet share, all of the above?

It's all of the above. I mean, look, Alkira, as we said earlier, it really, once we close, is the fast path to where we ultimately want it to be. There's more innovation though that can come behind that. And again, we can use fancy words like programmable network, but let's just talk about what that means for a second and why it's important.

Networking has always been just the necessary evil, right? The reality is in today's world, it starts to become a vehicle by which you can unlock additional value. And think about energy, right? There's a lot of conversation around energy. Well, if you've got a bunch of data that's headed to Virginia to be processed, and again, GPU cluster, $2,000 an hour, and you reach an energy limitation in Virginia and that data is just sitting in a parking lot waiting to be processed, that's huge cost.

Now what happens in a world where you've got GPU capacity and energy capacity in North Dakota or Texas or somewhere yet to be determined because people continue to build data centers. What happens if the network could automatically repair itself and reroute those workloads to where there is energy and GPU capacity. That's an enormous unlock for enterprise. That's the network that we're building. That's the network that Alkira will help us deliver faster, and that's a network nobody else has today. That is huge, huge unlock, and that's why we're so jazzed about this.

Great. And shifting gears to 2026 guidance expectations and EBITDA. So just some -- I want to get a little bit more color, I guess, on some of the puts and takes around the EBITDA guidance for the year, which you reaffirmed. But the first quarter was stronger than anticipated, which implies a pretty big step back or step down in the back half of the year. I guess help us think about the puts and takes that we should be considering to help understand the EBITDA trajectory for the balance of the year?

Yes. We've had this question a lot since earnings. Remember, in first quarter, a few things that you need to adjust for. So we sold the fiber-to-the-home business halfway through the quarter. We also had onetime revenue, high EBITDA from publicly disclosed state of California that doesn't repeat itself. Those 2 things combined are about $60 million. And then you've got this legacy thing that we just talked about, where legacy ran a little hotter and certainly not something we're going to plan for.

So I really think you've got to adjust down Q1 for those kind of items. And I think you get to a number that's a lot more reasonable in terms of run rate, the $770 million, $780 million kind of run rate. And I think that's what we'd see as baseline as we go forward. Now what we don't know yet, and we haven't changed our annual guidance as a result is when will Alkira close and how quickly can we start to monetize that. So that's what we're working on right now.

And then I think there's also some seasonality we need to kind of keep in mind, right, in the third quarter.

Absolutely. Yes. Yes. There's a lot of construction work and whatnot that's done in the third quarter because of weather and whatnot.

Got it. And then underlying a lot of this is your cost transformation program, right? You hit $400 million run rate in 2025 -- exiting 2025 rather. And you're targeting, I think it's $700 million exiting 2026 and then ultimately getting to the $1 billion level in 2027. So maybe help us think about what are the next major cost takeout -- cost work streams that are coming out, I guess? And where do you see the biggest incremental savings coming from within the program?

So it's really -- it's across the whole company. I would say that, again, we have, as a lot of folks in the space have a lot of old IT systems. We actually just launched the final phase of our ERP, which is huge to have behind us. Team did a tremendous job with that. But ultimately, that allowed us to turn off, I think, what was in the neighborhood of 30 to 35 different GLs. The second phase now -- that was first phase.

The second phase is procure to pay, which will unlock more value, right, as we go forward. We still have work to do around CRM and whatnot. So there'll be savings in that. Operationally, we continue to drive savings. So with the sale of the fiber-to-the-home business, the remaining consumer business that we're managing for cash is being absorbed into our enterprise ops team. So one management structure there, so more savings there. But you'll continue to see efficiency across the network itself as really being the core driver. And that's everything from real estate and utilities and whatnot. It's also going to be labor efficiencies as we get better at what we do.

Got it. And do you see -- is there a credible path to exceed the $1 billion target? Is the focus more on execution certainty rather than trying to stretch that headline number?

So we are very confident in the $1 billion. We'll see if we can go further. But the answer is go faster, go bigger if we can. And so there's a lot of focus on that.

Okay. That's great. And then on free cash flow, you raised the '26 guidance to $1.9 billion to $2.1 billion. There's about $729 million of fiber-to-the-home proceeds that flowed into OCF. So if we strip that out, though, how should we think about the organic free cash flow growth in 2026? I guess, what's the shape of that trajectory as we maybe lookout?

It's still going to be spiky because of the PCF flows that move around quarter-to-quarter. I mean, again, the headline messages are that all in, we're generating, to your point, organically some great cash flow this year. And over the next 5 years, the financials we laid out at Investor Day, which were pre-Alkira, we're fully funded. So we should see leverage over the next 5 years come down into the low to mid-3s. And a lot of that at this point is going to be driven by, frankly, EBITDA growth versus absolute debt reduction.

The cap stack is in great shape. We're just finalizing a few things now, but the reality is that should largely be behind us by the time we close this quarter.

Okay. And that's a great transition. As we think at the Analyst Day, you also talked about organic growth first, then inorganic, then debt reduction and then finally, buybacks as your capital allocation priorities. As you just said, now that you're fully funded, I guess, what are the milestones you want to hit or what we should be thinking about from outside looking in perspective? What should we be thinking about before capital returns begin? And I guess, how should shareholders think about potential timing?

Yes. So I think -- look, back to those priorities, I think we actually just did that with Alkira, right? We paid cash for that. And again, when you look at the CapEx that's avoided, we think that acquisition cost us on a net basis, somewhere call it, $275 million to $300 million, all paid for with cash. The jobs #1, #2, #3 and #4 are get to revenue growth. And again, what you're seeing inside of Lumen today and what you're seeing in our results is a revenue performance that is still declining but dramatically better than our competitive set.

So everything that we can do to accelerate that return to growth is what we're doing first. So to try to give an estimate on time in terms of when we would start to return capital because we think we've exhausted those growth avenues, it's just too early to call that, especially with Alkira in the mix. I think if anything, our opportunity right now is to hopefully pull in that point of inflection on revenue sooner. When that is, hard to say at this point. But we had said that revenue would inflect on the enterprise business in '28 and total Lumen in '29.

And so once we close, we'll try to give a perspective on what we think that is. But all of our energy right now is on how we can light that up as quickly as possible as soon as the deal closes.

So maybe on the other side of Alkira, we could get revision or maybe updated viewpoint and how you're thinking about the revenue trajectory?

Yes. So the answer, yes, but we're also going to learn as we go. I mean, again, we're creating something that hasn't been created before. The good news is, is I think we can look to some of the growth curves of things like cloud as a reference point. But we'll continue to update the market as we move along this journey. I mean it's super exciting. I think if anything, we are shielding some of our enthusiasm for this because we don't know how quick it will go, but there's a lot of internal excitement about this being big for Lumen. And so we're going to try to make that happen.

And then do you have a -- well, do you have a preference for the method of capital returns?

If we got to that point, it would be, I think, share repurchases likely. Look, we've made the tough decisions around things like a dividend. I don't think you're going to see us return to that at the first possible chance because the reality is this is an area in terms of networking in an AI world that continues to evolve. And until we've exhausted the investment opportunities that we think drive differentiated return for shareholders, it's way too early to make that call. And candidly, we don't even know what all those pathways are going to be yet.

Yes. And I guess, a great segue. Just thinking about -- so Alkira opportunity, right, kind of unveiled itself, it could be interesting, but there could be multiple paths here. So how are you thinking about potential M&A going forward? I mean, you've emphasized in the past discipline and reasonable valuations and Alkira fits that framework. But as you look ahead, how should we think about your appetite for additional acquisitions? What could be strategic? What could be compelling?

Yes. So I think it would be more things like Alkira, things that further the digitization of the network. Those would certainly be our priority. But again, with Alkira, we're not just buying software. The management team and then quite frankly, deep below the management team on the Alkira side are super excited about this transaction because it has the ability to bring their dreams to life.

So there's an innovation pipeline that exists. There are other ideas that exist inside of Alkira. And so I think it's highly likely you'll see more coming from that, and it just gives us more organic pathways to grow as well. But look, if there's something else that would further the strategic agenda, we'll look at it. And -- but time will tell. Nothing on the books right now.

All right. Well, nothing to announce here today, unfortunately.

Exactly. Nothing to announce here today, other than the fact that we're super excited, and we think this is going to be big.

Well, Chris, thank you, as always, for joining us, and thanks, everybody. I think that's a great place to end it, and everybody, enjoy the rest of your day.

Thanks.

Greetings, and welcome to Lumen Technologies' First Quarter 2026 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded Tuesday, May 5, 2026. Your speakers for today are Kate Johnson, CEO; and Chris Stansbury, President and CFO.

I would now like to turn the conference over to Jim Breen, Senior Vice President of Investor Relations. Jim, please go ahead.

Good afternoon, everyone, and thank you for joining Lumen Technologies' Q1 2026 Earnings Call.

Before we begin, I'd like to remind everyone that today's presentation will include forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements reflect our current expectations, assumptions and projections about future events and financial performance. Actual results may differ materially from those expressed or implied in these forward-looking statements due to a number of risks and uncertainties. A detailed discussion of these factors can be found in our most recent filings with the Securities and Exchange Commission, including our most recent annual report on Form 10-K, our quarterly report on Form 10-Q for this quarter and any subsequent filings.

We undertake no obligation to update or revise any forward-looking statements made today, whether as a result of new information, future events or otherwise. Today's presentation may also include non-GAAP financial measures. Reconciliations are provided in our posted materials.

I'll pass it on to Kate.

Thanks, Jim, and thanks, everybody, for joining the call and also for your feedback following the Lumen Investor Day. In addition to hearing your perspective about our strategy and new business model, we're tweaking the format of our earnings call by shortening our prepared remarks and leaving more time for your strategy-oriented questions.

So let's get to it. Lumen delivered a solid performance during the first quarter, with revenue and EBITDA in line with expectations. I'll let Chris handle the detail in a few minutes after I provide an update on our strategy and execution.

Enterprises are facing a huge challenge. They're trying to build an AI-driven future on infrastructure that simply wasn't designed to support it. It's no longer about point-to-point connectivity, it's about whether you can move massive amounts of data securely, predictably and in real time across highly distributed environments.

And just as importantly, it's about whether you can control and orchestrate that movement dynamically. Lumen is solving that problem. We're bringing together 3 core assets: world-class physical infrastructure, a programmable network and a connected ecosystem of clouds, applications and partners. And individually, each of these assets matter. But together, they solve the complexity problem by forming a comprehensive platform designed for AI and rooted in simplicity.

The whole industry now recognizes the need for better networking, better performance and better economics. It's not just Lumen talking about disruption anymore. But we believe it is Lumen who stands alone in our readiness to deliver game-changing capabilities to meet the needs of enterprise customers in an AI-driven world.

And it starts with the physical layer. Lumen already has one of the largest fiber networks in the world. We're making significant investments in long-haul capacity, metro expansion, data center-interconnect and cloud adjacency. And we're on track to deliver all of the commitments we shared in detail at Investor Day.

This physical foundation is table stakes that supports the proliferation of data workloads, but alone, it's insufficient to capture the full value of opportunity that we see. That's where the programmable network comes in: a single pane of glass where enterprises can control and orchestrate connectivity across their entire technology footprint of clouds, data centers, applications and partner networks. Lumen has made strong progress in capturing the North-South part of this market with Lumen Connect and NaaS, giving customers API-driven on-demand access to our network.

And today, we announced our intent to acquire the software company Alkira. Alkira is expected to extend and enhance our programmable network into the fastest-growing segment of the enterprise networking market, the East-West part, establishing the control plane for cloud connectivity. After close, our combined capabilities will enable us to provide comprehensive coverage of North-South and East-West connectivity, whether on-net or off-net, with game-changing innovation, including direct cloud on-ramps and Multi-Cloud Gateway, and all of this in a single programmable system. We'll also be able to provide digital marketplace access to a myriad of ecosystem partners, simplifying network purchase and deployment experiences.

Together, Lumen Connect and Alkira will significantly accelerate time to value for customers operating in a complex multi-cloud and AI-driven architecture world. Strategically, this acquisition will substantially complete our digital architecture. And post close, it's all about integration and continuing our first- and third-party service innovation to deliver new value for customers and growth for Lumen.

As you know, we've also had some exciting recent announcements. AWS and Lumen partnered to launch AWS Interconnect - last mile, a service allowing enterprises to establish fast, secure, private direct connections from on-prem to the AWS cloud. And Google just announced the availability of private connectivity discovery through Google Cloud Marketplace, with an upcoming preview of API provision prem to cloud connectivity offering, all powered by Lumen.

These two new offerings are another example of how we're innovating to help enterprise customers deliver on their AI ambitions while simultaneously giving Lumen an opportunity to capture some of the over $2 billion in annual revenue currently served by carrier-neutral facility cross-connects. And it's Lumen Multi-Cloud Gateway that makes these direct on-ramp offerings possible, enabling customers to connect any cloud and any data center in any combination over our private network rather than the public Internet. It's how we bridge North-South and East-West connectivity domain securely and consistently.

Now after closing the acquisition, Multi-Cloud Gateway and Alkira together will turn direct cloud on-ramps into more than just access points into clouds and data centers. They will become programmable entry points into a broader digital fabric.

And speaking of that digital fabric, let's spend a minute on our Q1 adoption metrics. We're continuing to see strong adoption of our NaaS services with strength in off-net and large enterprise adoption this quarter. In the first quarter specifically, customer adoption grew 25% quarter-over-quarter, active ports grew 35% quarter-over-quarter and active services grew 32% quarter-over-quarter.

What's more, in Q1, we had two landmark wins. A leading global financial services firm committed to a more than 600-site branch upgrade with Lumen NaaS. Their goal is to drive deposit growth with faster new branch activation and deliver AI advisory and fraud detection services across all of those sites. And a large global logistics firm is deploying Lumen NaaS at 300 sites to ensure faster activation of acquired service centers, directly accelerating freight capacity and revenue. Both customer wins tell the same story: Programmable networks are essential in delivering AI-powered business transformation.

Back in February at Investor Day, we shared a multiyear road map for how we plan to drive digital service innovation, adoption and revenue growth. And since then, we've made meaningful progress in execution, and we have some encouraging buying pattern data that we'd like to share. Starting with basic NaaS. We now have nearly 2,500 NaaS customers, with more than 30% of them being repeat purchasers. What's more, over 20% of first-time NaaS adopters in Q1 were customers who are brand new to Lumen. They weren't doing any business with us before they bought our NaaS ports and services.

Now the remaining NaaS first-time adopters this quarter were existing Lumen customers. But what's interesting is that more than 60% of them were expanding their footprint with Lumen NaaS, not migrating from the old services. These trends are encouraging, as they suggest market share gain, and we'll continue to track them as we grow the business.

In the second scenario, upselling services, approximately 25% of all NaaS customers are attaching more than one service per port, primarily DDoS and Lumen Defender, another positive indicator of growth. And in the third buying scenario, Multi-Cloud Gateway, it's already in-market, enabling innovation with tech titans like AWS and Google, as I shared. And after we close the Alkira transaction, it will be the bridge between East-West and North-South traffic, giving our customers the feeling of one network, any cloud, total control globally. And the fourth and fifth buying scenarios, direct connections into SaaS providers and dynamic East-West cloud interconnects, that will be our focus post-Alkira transaction close, as we believe there's material growth potential there.

Now let me finish up by sharing what we think this acquisition means to Lumen, our customers and our shareholders. Alkira is a bull's eye in terms of strategic alignment and value creation. For Lumen, we expect it to dramatically accelerate our road map execution from years to months. It will reduce execution risk. It will give us an injection of talent, and it will give us a partner platform that's expected to be marketplace-ready on day 1.

Our customers will get the value they deserve: ample bandwidth, control, simplicity and accelerated time to value. And our investors will get what they deserve: better economics across the board from Lumen. Lumen has firmly entered a growth phase, and our future is very bright. Chris, over to you.

Thanks, Kate. I'm pleased that Lumen has delivered another quarter of positive momentum towards our financial and operational goals. First, we transformed the balance sheet by closing the fiber-to-the-home sale to AT&T, reducing leverage below 4x and reducing annual interest expense by nearly $300 million.

Second, we recently simplified our capital structure by refinancing our revolver with a new $825 million facility. We also simplified our reporting structure this quarter, moving from 3 quarterly filings to 2, and we expect to move to a single parent company filing beginning next quarter after completion of the Qwest exchange offer.

Now this is a big deal. Why? For the first time in over 15 years, our equity investors, our bond investors and management will be aligned on one financial view of Lumen. Finally aligning those 3 together, we'll all be looking at the same information at the same time.

Third, we further aligned our operating systems by implementing Phase 2 of our ERP platform and are now on a unified ledger. This positions us to retire legacy systems and drive additional efficiencies over time. Fourth, we delivered solid financial results in line with our expectations and above consensus, with strategic business revenue for the first quarter at 51% of our total.

And last, today, we announced our acquisition of Alkira. This is an important moment for Lumen. As our balance sheet has become a strategic asset, we've been asked about potential M&A. We've said that we'd be interested in technology assets only if they enhance our product portfolio, only at a reasonable valuation and only if accretive to the broader financials, and Alkira checked all those boxes.

We believe that the Alkira acquisition will enhance Lumen Connect and expand our digital offerings across the East-West TAM, with the potential to accelerate digital revenue as adoption scales. We plan to finance the $475 million transaction with cash on hand. Once closed, we estimate the transaction will be immaterial to financials and neutral to margins in the near term, but accretive to both as the platform scales. We estimate the deal will close sometime in the third quarter, and we look forward to welcoming our new teammates.

Now moving on to our financial performance in the first quarter. Before I start, we provided additional detail on the fiber-to-the-home sale impact in the financial trending schedule. Total revenue was in line with our expectations and ahead of consensus as our revenue mix continues to improve. Total business revenue declined 3.2% year-over-year to $2.44 billion as our revenue mix continued to improve in North America. Total business was down 2.8% year-over-year. North American enterprise revenue, which includes wholesale, was down only 0.8% year-over-year. In short, as Kate mentioned earlier, we believe Lumen is taking market share.

Strategic revenue was 51% of total business revenue in Q1, up from 49% in the fourth quarter, even with legacy results slightly ahead of internal expectations. Digital revenue in the first quarter was $37 million, in line with our expectations. And as a reminder, included in that digital revenue number is NaaS security products and cloud voice services. We're still early in the adoption curve, and the shift to consumption-based revenue will take time.

Quarterly results can be variable, and the key signals are customer adoption and expanding consumption. Our projections assume linear growth, but we believe there will be an inflection as the consumption flywheel gains traction, and we believe Alkira will be a tailwind to that timing. We're encouraged by the increased interest we're seeing from both existing and prospective customers.

First quarter PCF revenue was $78 million associated with the nearly $13 billion in PCF deals that we've announced to date. Roughly $32 million of that was a delivery milestone payment that was anticipated in our Investor Day projections for 2026 PCF revenue, but won't reoccur in Q2. Our long-term PCF revenue projections shared at Investor Day do not include any incremental PCF deals beyond those already announced. We remain opportunistic on additional accretive opportunities. And while PCF is a key pillar, we believe that our differentiation comes from monetizing the network through a programmable digital layer and partner ecosystem to drive durable, higher-quality digital revenue.

Adjusted EBITDA, excluding special items, was $849 million in Q1 compared to approximately $929 million in the prior year quarter. The year-over-year decline reflects expected revenue trends, higher [ healthcare ] costs and the sale of our fiber-to-the-home assets. Special items impacting adjusted EBITDA totaled negative $430 million this quarter, and this includes a gain on the fiber-to-the-home transaction, severance, transaction and separation costs and our modernization and simplification initiatives. This onetime gain from the sale of the fiber-to-the-home business was $596 million in the quarter. And with that sale now closed, we expect the transaction-related special items to decline throughout the year.

Capital expenditures, excluding special items, were approximately $859 million, in line with our expectations and full year guidance. That included approximately $161 million of CapEx associated with PCF deals.

Now we're raising 2026 free cash flow guidance from $1.2 billion to $1.4 billion to $1.9 billion to $2.1 billion as a result of $729 million of the proceeds from the fiber-to-the-home deal being classified as cash flow from operations. As such, free cash flow in the first quarter was $756 million, excluding special items. The cash proceeds from the divestiture have been primarily used to pay down debt in the first quarter of 2026. We received roughly $870 million in cash associated with the PCF deals, and we expect free cash flow will continue to be lumpy quarter-to-quarter, but trends remain in line with our full year guidance.

Now to wrap up. We remain on track to meet our full year guidance, and we'll continue investing in our transformation to serve customers in a multi-cloud AI world. We've meaningfully strengthened our balance sheet, which allows us to make strategic investments like our anticipated acquisition of Alkira, all while keeping leverage below 4x.

We're focused on building credibility through execution and transparent disclosure, highlighted by one -- sorry, on-time and on-budget PCF builds, improving digital revenue visibility and continued ERP and modernization progress. We're pleased with our progress towards our key financial goals. We're operating with agility across the company, and we will continue to put in the hard work, fortifying our position as the premier digital enterprise services provider. Back over to you, Kate.

Thanks, Chris. Look, the big takeaway for today, the vision for Lumen and Alkira is all about simplifying the customer experience, providing them quick, secure and effortless connections between people, data and applications. We're going to deliver one network, any cloud, total control globally. It's an exciting time.

So with that, we'll take questions, operator.

[Operator Instructions] Your first question comes from the line of Michael Rollins with Citigroup.

So I have a strategic question and an operating question. So 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, where -- if you could frame maybe what went better for certain of the verticals and products and maybe what -- if there's anything that didn't contribute as much as you were hoping?

Yes, I'll start with the strategy, and Chris, will turn the revenue question over to you. Mike, thanks for the question. Alkira is pretty exciting because it gives us access into data center-interconnect and cloud-to-cloud connectivity, which is the fastest-growing part of the market, growing, we think, 20% CAGR, which is pretty darn exciting. If you take our installed base of customers all up, legacy and strategic revenue, and you offer that to the commercial engine that we're going to create for Alkira, it becomes a pretty exciting accelerant. It gives us new access to much more significant TAM growing at a much faster rate.

I think what's more is that we now enable in a CapEx-efficient way, international expansion. Because it's carrier- and cloud-agnostic. And so that's what we plan to do. We don't plan to absorb Alkira. We plan to enable and accelerate them by bringing our network as an underlay and making sure that they have the very best of our pipeline pointed right at their value proposition. So we're pretty excited about the growth trajectory. And obviously, we want this to accelerate our path to growth.

Yes. And just on the operational question, if you look at kind of key drivers to total, I would say one standout was strategic waves. And again, those are waves that are 100-gig or greater. We saw some nice growth there, and we expect that to continue. And as Kate mentioned, more broadly, we're just seeing strength in the broader digital portfolio.

The part that was a pleasant surprise, and it was really highlighted in some of the data Kate shared, is that as customers are lighting up NaaS services, we're not seeing as much cannibalization. And I think that's one reason why legacy did a little better than we anticipated. And look, we'll take that all day long as we drive the conversion to our digital future.

And just one last thing on that point. Is that a temporary benefit of -- that, that cannibalization may be just further down the road? Or do you think that it just represents that the customers just need to invest more, and so the aggregate outcome is better?

I think the end game here is, yes, eventually, the new does replace the old and we fully cannibalize. I think as customers -- it's early. So we're still trying to read all these signals. But as customers are driving to the new, at least in the near term, they're maintaining the old. And again, I think that's a bit of a tailwind that we hadn't anticipated. We'll see if it continues. But again, the cash that, that business provides is welcome, and we'll use it to continue to invest in the transformation.

Your next question comes from the line of Frank Louthan with Raymond James & Associates.

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 issues with availability of memory or chips to -- for those products?

Yes. So the transaction-related costs were about $50 million in the quarter. And as I said in my prepared remarks, we would expect that to go down significantly in future quarters. So you'll continue to see that special items number get a little smaller.

As it relates to waves, I mean, again, I'm going to touch a nerve here. It's not about just selling on price anymore. And we've been saying that for a long, long time now. It's about solving a customer's problem. And the speed to dial up waves is important, but it's really around the broader problem that customers are trying to solve, which is the ability to move data all over the place. Our RapidRoutes investment and the ability to light up high-capacity, low-latency waves very quickly, we think is certainly a driver of that strategy.

And saw a material uptick in the adoption rate on RapidRoutes specifically in the quarter, which is great because it hasn't even been in production for very long.

Your next question comes from the line of Gregory Williams with TD Cowen.

Great. I also have one strategic and one operational question. On the strategic side, with Alkira, it sounds like it enables the [ cross-side ] platform to off-net customers. And Kate, you mentioned international. I just remember last September, you unveiled Project Berkeley, and that was supposed to deliver off-net service as well. So does this replace that? Or it sits on top of that? Or are they not related? I'm just trying to understand the two.

So -- yes, go ahead. Second part?

On the operational side, I was just thinking about EBITDA by the Street by about $50 million. You did not raise guidance. Curious, if you expect some sort of step down through the balance of the year? And how much of that EBITDA was from the cost-saving initiatives?

Chris, do you want to hit EBITDA first? I'll just...

Yes. We're not disclosing the cost-saving initiatives by quarter. But again, we remain on track and are super positive about where we're headed for the year. Remember that the first quarter also had effectively, a month of fiber-to-the-home EBITDA in that. So you do need to adjust for that. All that said, it was a strong quarter, but we remain firm on the guidance for the year and our ability to inflect at this point.

Yes. And strategically, your question about fabric ports is actually a really good one. So remember, fabric ports is about enabling building on-prem to be able to connect to the cloud and to be able to grow those services in a cloud economic way. And the Alkira platform really focuses on the East-West interconnect. So that's data center-to-data center, cloud-to-cloud, et cetera.

So they operate with more of a virtual port kind of a model, and it's better together. So our fabric ports are really -- Project Berkeley is really the Lumen Connect platform all up. It's not just a piece of hardware. And when you put Alkira and Lumen together, you get coverage of all the different interconnection possibilities.

Your next question comes from the line of Michael Funk with Bank of America.

You mentioned a bit earlier that you don't intend to absorb Alkira. But I am wondering, what will be an evolved integration process with Alkira even in terms of some of the back-office systems like billing, customer onboarding?

And then second question, more numbers-based. You mentioned the milestone payment in 1Q. Any help thinking about other milestone payments projected in 2026? And the tracking to -- I think you talked about $1,650 to $1,850 in PCF cash flow for the year?

Regarding the integration, when I said we won't absorb it, of course, we'll look to take whatever capabilities on a single digital platform [ post cash procure ] to pay. Which, by the way, we're pretty proud of the fact that we've implemented and upgraded a brand-new ERP system, Phase 1 and Phase 2 at Lumen as of this week. So we're making huge progress, and we'll leverage all of that technology platform.

What I was referring to when I talked about not absorbing it, I'm very cognizant of a big company swallowing or suffocating the smaller company. I have a bunch of experience in the tech world of doing a bunch of acquisitions. And we need to make sure that Alkira stays Alkira in this transaction because we love what they do. They're customer obsessed. They have an amazing engineering team, an incredible platform, and their speed is incredible. So I think what you'll see is more of Lumen integrating into Alkira rather than the other way around.

Yes. And on your question of kind of the onetime benefits, there was about $32 million in PCF in the quarter that won't recur. I think in the third quarter, we're expecting a smaller one. And so we'll give some more color at that time.

While I don't think it will impact 2026, I mean, one thing with the Alkira transaction is we do expect our CapEx in the coming years to be reduced by somewhere in the $100 million to $200 million range. And so after we get a little more time to inspect that, we'll give everybody an update.

Okay. And that's an aggregate, the $100 million or $200 million, or that's per annum?

Yes. That's aggregate.

[Operator Instructions] Your next question comes from the line of Nick Del Deo with MoffettNathanson.

First, just another little clarification from Chris on the performance payment in 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 the -- and again, it wasn't performance-based. It's just the way that, that contract was delivered that we were...

I'm sorry, the delivery pay. I used the wrong term, sorry.

Some of it [ was in ] public. Yes.

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, it's -- 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.

Okay. Okay. 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?

Yes. So we aren't sharing anything. They do have a number of customers today. Their revenue is relatively small, I will say that. Look, I think that the powerful combination here is that we bring a customer installed base and scale that Alkira didn't have on what is, in an unparalleled way, the strongest enterprise network on the planet.

And what Alkira brings to Lumen is really the brain of that control plane and the ability to connect those things together and move workloads from anywhere to anywhere, right? As Kate said, one network, every cloud, total control globally. That's a big deal, and nobody else is doing that. So that's where we see the power of these things coming together, and frankly, delivering much faster, what our vision has been for the last 3 years. And so it was a great opportunity, and we're excited to share more after we close.

Your next question comes from the line of Batya Levi with UBS.

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?

So again, we don't guide revenue in total. What I would say is that on our path to inflecting EBITDA this year and ultimately, revenue over the next couple of years -- and again, we'll get back to you with how we see Alkira can help us accelerate that -- is you will continue to see kind of a rate of decline that is better than our competition and one that improves year-over-year in total. So there will be fluctuations quarter-to-quarter, but we feel very good about the fact that we are clearly differentiating ourselves in the marketplace, and the performance is going to show that.

As it relates to public sector, as I just mentioned previously, yes, part of that $32 million was in public sector. And public sector also benefited from lower legacy churn than what we've been previously experiencing.

Do you expect that to continue?

Look -- and I think we can't look at strategic and legacy as two separate and distinct things. I would love nothing more than to tell you that legacy declines in public sector accelerated because a number of new strategic initiatives were signed, right? So what's the objective here? For everything to be strategic over time.

And so yes, we do expect that to happen at some point in the future. I hope we actually see some faster decision-making that would allow us to drive more strategic. And in part, that would be driven by turning off some legacy product. That would be a great thing.

There are no further questions at this time. I will now turn the call back to Kate Johnson for closing remarks.

Thanks, operator. Just a short note to say thank you to all Lumenaries for your amazing work and helping get us here. The transformation is going so well because of all you do every single day.

Our future is very bright. And with that, thanks for joining the call. Have a great night.

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, everyone.

Great. Thank you all for joining us. And Chris, thanks for being here. We know you've had a busy couple of weeks with the Investor Day a few weeks ago. So we appreciate spending the time today.

Yes. Great to be here.

So let me start with a similar, if not the same question that I started with last year at this conference, which was last year, in this case, 2025 was a real pivotal year for Lumen. Closed on the sale of the assets to AT&T, dramatically improved the balance sheet. What's next? When you look forward towards 2026 and beyond, what gets you really excited?

The reality is that Chapter 1 of the transformation is done, right? We've built a company that's stable. It's got a great capital structure that's no longer a liability. It's an asset. And we have optionality. And so our focus really is on the execution of building the trusted network for AI and really being AI's data supply chain.

And so the way I closed the Investor Day last week is the first thing we had to do was disrupt ourselves. Now we're going to go disrupt an industry. And so this is where it gets fun.

And what are the data points investors should be looking at as you kind of click towards the next metrics of success?

So what we really talked about last week is that with some, I would say, fairly conservative assumptions in terms of what we see happening with the traditional way of selling and its impact on revenue by folding in what we see coming from only the $13 billion of PCF deals that we've signed, nothing more and then some digital revenue that we get back to revenue growth by 2028. We're reflecting EBITDA this year, revenue growth by 2028. But underneath all that, what's really important is margins are expanding considerably. We see margins going from the mid-20s to mid-30s.

We see capital intensity going from mid-20s down to mid- to high teens and maybe below that. So cash conversion improves. The model to do all that is fully funded, including things like pension contributions. So we've actually got ourselves in a situation where there's excess cash flow to do other things with.

And so I think all of those metrics and the clarity around that have really struck its own with investors.

So taking even a further step back, you've got some great metrics of success with your investors. Stock is up, whatever it is, 40% over last year. I know it's not where you want it to be, but it's still up 40%. Most of the debt complex is trading close to par.

Your multiple has actually gone up over time, which has been a really tough run for some of your peers and competitors. What do you think investors are missing as you look back over the next 12 to 18 months? What are they underestimating the opportunity here?

I think what people are underestimating is that what we have, no one else has, and it can't be replicated. That's the fundamental thing. And what makes all that meaningful is AI. So if you think about AI in an enterprise context, you need to move massive quantities of data from anywhere to anywhere on demand. Period. And the way networking has historically worked is not that. Right?

I need point-to-point connectivity. It's going to take 90 days. The way we talked about it last week, we use the language that network engineers used, and they talk about 2 kinds of traffic, North-South traffic and East-West. And they don't mean geography.

North-South is traditional telco networking, and it is a gain to be lost because it is literally prem to cloud, prem to prem, prem to DC. And it's a $12 billion TAM growing at 1%, but it's not growing at 1% because people aren't consuming data. They're consuming massively more quantities of data every year, but the price per bit is going down.

That's where telcos would sell to the procurement department, right? Okay, your 3-year contracts up for renewal, how much are you going to lower the price? There isn't value in that. That's what got us into trouble. That's what's getting many of our competitors who focus on basic connectivity into trouble right now as we speak.

The value is in the East-West traffic. And AI is what's creating the demand environment for that. That's where you need to move data from cloud to cloud, from DC to DC, from DC to edge, from cloud to edge to do all of your operations and push it back with really low latency.

The only way that works is if you have the network capacity to do that, and we're the only ones that have the network capacity to do that. So we're the only ones with the network capacity to accomplish that, and we're the only ones that are building a digital layer on top of that where you can consume that data on demand.

That's where I think investors are starting to wake up to it. We see more growth investors coming in, but we're still at the beginnings of that. So people are just starting to understand that.

And how do you see your competitive set different between North-South and East-West?

So the North-South competitors would be the traditional competitors, and they would be...

From the telcos.

They would either be the large telcos or they would be the smaller connectivity providers that like to talk about the price per wave, right? The East-West competitor, the largest would be there's a company out of Australia that provides East-West services, but they don't own the network. So they have to buy network.

They have to buy network from us and from others, and they can't scale because as fast as they sign a customer, they got to buy more network. They don't have owners' economics. And they also can't provide services as deeply in the network.

So one of the things that we've built as we've done these PCF deals is we now have proximity to the largest -- large language model companies on the planet. And we can, in our facilities because of that proximity, build things like multi-cloud gateways, direct cloud on-ramps.

We're at 400 gig soon to be 800 gig, 1.6 terabyte, you get direct access to cloud. You're not paying cross-connect fees. You are in a secure connection and able to move your data really quickly over huge pipes.

Got you. Turning to customers a bit. You talked on the Investor Day a lot about demand from customers is accelerating. Talk a little bit about the relationship you now have with the enterprise companies and the hyperscalers now that's changed with the new Lumen.

Yes. And again, we're at the front end of it. But I would say the biggest change is that as we think about that shift from North-South to East-West, we're talking to the CTO now, the CIO. We're not talking to the procurement department. And it's about the total cost of ownership. And in a world of AI, the biggest cost that you face as enterprise are GPU downtime, right?

And how do I load balance where I've got energy issues. I mean one of the things that we're starting to realize is the power of this very dynamic programmable network that we're building, we don't even fully understand yet, where companies that are doing a lot of AI development work can use the network to load balance where there's energy concerns, right?

I have a cluster here. I'm running at 100% of peak energy, and I can either keep a bunch of stuff in the queue waiting for it to go in or I can rapidly on demand move that data to another location where I do have power available. And so it's just cool.

And how does that sales proposition work as you move towards more of a strategic partner relationship from a connectivity relationship speaking with...

It really is about solving business -- and so we're at the forefront with AI. I mean we've seen this before, right? We've seen what happens and what happened when the hyperscalers created cloud. And all of a sudden, there was this understanding of the value that, that brought and there was a rush to that. I think what we're seeing in AI is that, but it's happening much faster.

And it's happening faster because whoever isn't on the leading edge is going to get left behind. And if I go back 18 months and I think about my conversations with peers, it was about how are we using some of Microsoft's capabilities with Copilot, which are really powerful.

But now wind the clock ahead to where we are today, and we're talking about how we're using AI agents to engage with customers on a service outage or whatever it is, where that learning agent is literally accessing data in the network and providing it in real time to the customer. It's happening so fast. And so companies have to get on board or they're going to be behind.

And so the proposition is more of a consultative approach as opposed to kind of a connectivity approach and 100,000 problems...

100%. And right now, we got to do both. But I think we'll see that pivot. And our belief is that the more we're solving problems in East-West and our network is easy to consume because it is programmable, that ultimately, we win in North-South because it's just going to be easier to buy from us. Period.

So I think we are -- as I said, we've disrupted ourselves. I think we're really going to disrupt the enterprise telecom landscape.

And you talked about on the Investor Day again around returning to business revenue growth in 2028. Can you just double-click on that a little bit as to how you're going to get there, what that means and some other signposts along the way.

Yes. It's really based on some basic assumptions. And the assumptions are that everything that we sell today in a traditional manner grows or declines with market. Market is defined by companies like IDC and Forrester, right?

And the only exception to that is that we layer in the revenue impacts of the $13 billion of the PCF deals we sold to the hyperscalers already. We're not counting on more. We know what that delivery curve looks like, so we can commit to that revenue. That's a low-risk assumption.

And then the second incremental assumption is that we go from $117 million in digital revenue in '25 to between $500 million and $600 million by '28. We do those things, we get to growth. And those aren't huge aspirations.

Again, the $13 billion we know and the $600 million in digital revenue, if you look at that as it relates to our current network footprint in terms of number of customers, number of ports, it's low single-digit kind of comparability. So there's a huge opportunity.

And I mean just again, one more level deep, the mix shift itself with PCF you articulated other than digital revenue, what else is kind of driving this thing long term?

So we're at a point today. We talked -- we used to talk about Grow, Nurture, Harvest. We simplified that to strategic the things that are growing and legacy to things that are declining. In 2026, over half of what we sell is going to be strategic. By the time we get to 2030, that's going to be over 70%.

So the reality is we're now at the point where the declines of the legacy business are actually a tailwind because they continue to get smaller and smaller and less important and the growth items continue to get bigger. And we're much further ahead of our competitors on that than I think people understand.

And when you look at the rate of business decline in total in the business segment today versus others, you would see that. We're declining at about half the rate because of the size of that strategic business.

And that's what gets you to, I think you mentioned in the day that you'd be kind of mid-single-digit growth rate kind of 2030 and beyond.

That's the underlying assumption. Again, we'll have to see what happens. Our belief is if you think about every major disruptive technology that we've experienced, they see a period of growth and then they see explosive growth. We would think that this would follow a similar path. We just don't want to predict where that point of explosive growth is, right? That's playing with fire.

So we've assumed a relatively linear growth rate between '25 and '28, but we're doing everything we can to drive customer adoption. So even internally, the revenue isn't the thing we're most focused about with digital right now. It's about customer adoption, how many customers, how many ports, how many services.

Because when we get a port inside of a customer, they can then consume as many services as they want to consume. They're delivered digitally, which means the revenue is instantaneous. You don't have a delay. It's higher margin. It's lower churn. It's less capital intensive.

So candidly, on the mix, if we could accelerate the decline of legacy by taking a chunk of our existing legacy business and moving it into that digital selling motion, that would be a really good thing for our business. So we continue to look at that. That's not in the model, but those are the things that we continue to do.

Yes. And moving down the income statement, help us think through it translates into EBITDA via margin expansion. I think you've targeted kind of mid-30s by 2030 plus.

Yes. So the shift of legacy to strategic, but importantly, the growth of digital, the growth of PCF, those are margin accretive. And it's -- we talk about momentum. And on the way down the only thing you can do with momentum is endure, right?

On the way up, it has all kinds of positive benefits, right? So as we inflect EBITDA, as we slow the rate of decline on revenue and ultimately inflect that, we start to also drive operating leverage in the business. And so all of those things contribute to that margin expansion on EBITDA.

And then with lower capital intensity because more is being delivered digitally, we end up with great cash conversion. And oh, by the way, thanks to Morgan Stanley and some of our other partners, we've taken $0.5 billion of interest expense off the table between when we sat here last year and where we sit here today.

So those things all contribute to what is, I think, a very positive cash flow future for the company.

Let's do a deeper dive on the digital and the Network as a Service revenue. You talked about that briefly earlier. But maybe a bit more as to where the growth is coming from, how the customer relationships work because you're training behavior and people think about these type of things.

Exactly.

And how do you teach people to behave and think differently in this environment?

And that's why it's all focused on adoption, right? You've got to get it inside of the customers' facilities and they got to start playing with it. And Kate talked about this last week. There's some really great content on our website, if you haven't seen it. But it's really a land-and-expand motion, which is, okay, there's a couple of ports play with them. Oh, I can provision connectivity. I can provision security.

I can do -- it works. Wow, it's on demand. Okay, I'm going to take it from 2 facilities to 50. Now it's in 50 facilities. Now oh, wait a minute, now I need this other thing. Oh, I can have direct cloud on-ramps. I want that.

And so the goal ultimately, it really is the PxQ model, the scalable model for enterprise networking where the port can hold -- one port can hold thousands of services. And so you move the customer up the stack to more complex solutions where we showed an example where a customer could go from starting at maybe $1,000 a month of MRR to over $5,000 a month of MRR.

And so -- and by the way, between first deployment and the end of that, there's no truck rolls. Everything is consumed point and click through Lumen Connect to pane of glass. That's the magic.

And trick is kind the wrong word, but the trick is the land part, right, getting them to adopt this thing to let's try it. And once they try it, I would imagine the sell-through rate is pretty high, the upsell rate.

Exactly. We see very rapid conversion. Once they adopt, we see much lower rates of churn. There's just goodness across the board. So part of it -- and again, we're exploring multiple different approaches here because we are at the beginning stage.

We had 1,000 customers in August. We've got over -- we said last week, over 2,000 today. It's growing about 30% quarter-on-quarter. But we've got to think about how we're even more aggressive.

Like do we go into an existing customer who really, really, really wants us to add that old legacy VPN connection to building # 51 that they just built. And do we need to think differently and say, look, we know change is painful, but we're going to give you NaaS ports for those 51 buildings, and we want you to convert now, and we'll give them an incentive to do that because if we can drive that motion, we will drive that adoption even faster.

And so we're looking at a lot of different approaches right now. Jeff Sharritts, our new CRO, helps Cisco actually convert from that upfront license model to a consumption model, and that's why he's here.

So we're going to explore all the options and see where the biggest opportunity is, and that's what we're pursuing.

I need to address some of this. But is the initial pitch to the customer that you've got this capability remote the software? Or is the network that you have, which enables you to be more efficient than your competitors and more cost effective, I should say. Or is it all the above?

It's really all the above. And so I think that's what's so interesting about the model. It doesn't matter what the entry point is. You can either start to consume back upstream or you can go further downstream. It doesn't really matter where in that capability set, you enter your discussion with Lumen.

You can move around the system. So what we've heard, though, is -- and this has been really important is that when you look at our scores with customers, our customer service scores, it's a different Lumen than it was 4 years ago. And so even on kind of the old way of delivery, customers are telling us this is a totally different company than what existed a few years ago.

I mean I said this morning, I had an investor tell me when I first started at Lumen that Lumen's product was a dividend and networking was a hobby, right? And I think about where we are today, and it's fundamentally different. So fixing a lot of that internal stuff so that we can deliver was critical.

And now there's the credibility there. So now with easier to consume digital approach, there's validity in the fact that we're going to perform.

Okay. Okay. Moving to PCF a little bit. You've got, what, $13 billion of signed deals. Tell us a little bit about how those are working? And how do you think about these investments and kind of what's next.

Yes. As I said last week, we love PCF, right? This is monetizing conduit that was put in the ground a quarter of a century ago. And the reason it was never monetized was because just how fast optoelectronics technology has changed. At the time, they thought they would get 10 strands through a conduit. We're pulling as many as 1,728 strands right now and in the same conduit.

And that's 400 gig today that will very quickly over the next few years, turn into 800 gig, 1.6 terabytes. So each one of those strands over the next 3 to 4 years is going to get 4x bigger, if you will, right, in terms of its capacity. So that's huge. And that has allowed us to recapitalize the company in addition to selling what were nonstrategic assets for us.

But it's not what saves the company. What really puts the multiple into frame is this digital expansion and this programmable, easy-to-consume network that AI demands. And so it's both. We'll continue to do both. We love PCF. There's more opportunity there, but the future is all about digital. That's the thing that's going to move the needle.

But as a funding source, you don't really need stability anymore, but as a funding source and other relationship building, PCF still matters. There's more to do and more you can.

Absolutely.

But it's not your growth.

It's not our growth. We're not counting on it in our growth, and there will be more deals that we can and will sign, and that will be incremental cash that we can reinvest in our growth story.

Okay. You talked earlier about capital intensity coming down kind of the upper teens, excluding PCF. You can talk a little bit more about what's driving that and what gives you confidence you're going to get there over time?

So there's a few things. In our baseline CapEx today, we're still spending a lot of money kind of fixing the technical debt. And what do I mean by that? Lumen, like others in the space, did a lot of consolidation. So the way that legacy telco tried to scale was through consolidation, and it still didn't work, right? We're living examples of that, and thankfully, that's behind us.

But what happened in those acquisitions is there was never IT integration. And so you have got dozens and dozens and dozens of systems that are decades old where the people that service those systems are retiring, try getting Gen Z to go learn that code, right, forget it. And so we're modernizing.

We did Phase I of our ERP, Quote-to-Cash, Phase II, Procure-to-Pay is coming this year. We've got CRM to put in. There's just a lot of things to fix. There's also things -- again, when your remit is to focus on paying a dividend, what you do is you don't spend the money elsewhere, right?

And so there's literally generators that are 20, 30 years old that fail when there's hurricanes. That's a problem. And so a lot of our capital is in that right now. That's going to go down. As more is consumed digitally and you don't have truck rolls and you don't have literally a port for every service you provide because you have a port where services are provided digitally, you reduce CapEx. So that's really what's driving the reduction in capital intensity.

Okay. And where does kind of the network come into all this? I mean you've got probably one of the deepest, largest networks in the country. How does this play into the -- not just your capital needs going forward? How do you think about return on capital and investing?

Yes. I mean it really is, as we go forward about driving that free cash flow conversion between the inflection of EBITDA and revenue, margin expansion, the lower capital intensity, the reduced interest expense because of our ability to continue to borrow and borrow at better rates, that's going to drive, obviously, incrementally much better returns for shareholders from here forward. So we're excited about that.

And do you hear from customers? How do people think of the network that you have as a strategic asset? I mean it's one where it doesn't get a lot of press, doesn't get to talk about, but it's really deep and it's broad. It's been -- part of the acquisition history of the company has been the company has bought a lot of these assets over time. You've put together this fabric of connectivity that is maybe without peer.

It is without peer. And I think there's no greater evidence of that than the PCF deals, right? We don't have a competitor that would walk past $13 billion of opportunity if they could deliver on it. The answer is they can't because they don't have the footprint that we have. What's interesting is that within networking circles, they understand the power of that network.

What do you mean networking circles?

So the network engineers inside of enterprise, inside of government, our customers, they understand what we have. What they also complained about for the longest time is we were not easy to deal with, right? And that has changed. I mean, again, we've fixed a lot of those things. We continue to work on them, but now we can build on that and grow from here.

Okay. So let's move into the balance sheet. I think the term you've used, Chris, is financial freedom. So you've got tremendous amounts of flexibility today with lower leverage. You referenced lower interest expense, better credit rating. Tell us about what you can use with that flexibility, both organically and inorganically.

Yes. I mean, first of all, for the first time in the 4 years that I've been at Lumen almost 4 years, we're not looking at a 5-year forecast that has a solve in it. Right? And that solve ultimately was around cash flow, right? Our investment needs are fully funded. Pensions are paid, taxes are paid, and there's still excess cash flow after that. So really, our objectives are organic growth first because there's tremendous returns associated with that as we monetize this wonderful asset that we sit on top of.

The second thing would be we will scour our scouring, we'll continue to scour the market for opportunities where an acquisition could accelerate the digital conversion. So that's not in the model, but something that we would certainly consider.

After that, we've said that our leverage target, we're at about 3.8x right now is between 3x and 3.5x and when all is said and done, that still leaves us with excess cash. And if we can't find a growth opportunity to invest in, then at that point, I think you'd see us considering buybacks.

Got you. Okay. Okay. Taking a step back as we kind of close out here a little bit, tell us what -- where we started out, where you think the most compelling part of the Lumen story is today? Like what's kind of the key takeaway as to what really drives growth here really versus your peer group?

So the business answer is what I talked about, really an unparalleled network that no one else has that if money wasn't an object, and it obviously is, but if money wasn't an object and they started today and tried to replicate it, it would probably take 10 years, permitting and construction times and everything else. So this is a locked advantage. And on top of that, building a very programmable consumption layer to manage the data supply chain for AI, we're the only ones that can do it.

And that's not a solution trying to find a problem. That's a problem that exists and is real, and we're ready for it. So that's the business answer. The personal answer is different. What got us here is our culture. And as finance people, we don't talk about that enough. But when I arrived when Kate arrived, I remember when she and I first talked before she was hired, we talked about the mindset of telecom.

And we talked about legacy telecom being a space where winning was defined as dying last. Where playing to lose was viewed the same way as playing to win, and they are two completely different things. And so the focus on fixing the underbelly of the ship at the same time that we drove a massive cultural transformation, that's how Lumen is winning.

We are having fun. We are aggressive. We are playing to win, and we know that this space is our right to win and our right to own, and we're going to go do it.

And as part of that change in culture, you've made a lot of changes in the organizational structure and employees. Any data point you're willing to share or can share around that?

Look, I guess the first one is that I am the longest-standing senior leadership team member, and I've been there for not quite 4 years, right? The second would be that we have had some rotation of the senior leadership team, and it's very much, I would say, in a very positive way, think of it as a football team, right?

And it's about the best athlete in the position at the right time. And at some point, I won't be the right player for the right time. But we're building a team that is met for the needs of right now and where we need to go next and that the energy inside the company is palpable. We're starting to see a shift in our investor base, which is validation. We're obviously seeing the credit ratings improvements, which is validation. And so this is where momentum turns positive, and we're not going to let out.

Great. Thank you. Congrats on all the success.

Thank you.

Good day, everyone. Welcome to Investor Day. We're so excited to have you with us. So let's dive right in. Let's give a warm welcome to Lumen's SVP Investor Relations, Jim Breen.

Good morning, everyone, and thank you for joining Lumen's 2026 Investor Day. Before we begin, I'm going to read the safe harbor because I can't memorize it.

I'd like to remind everyone that today's presentation will include forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements reflect our current expectations, assumptions and projections about future events and financial performance. Actual results may differ materially from those expressed or implied in these forward-looking statements due to a number of risks and uncertainties as detailed in our most recent SEC filings.

We undertake no obligation to update or revise any forward-looking statements made today, whether as a result of new information, future events or otherwise. Today's presentation may include non-GAAP financial measures. You'll find reconciliations to those on our website. And the presentation is available on the IR website as well.

So thanks for coming. Really happy to everyone here, given the weather and enjoy the short video before we begin.

[Presentation]

Let's a warm welcome to Lumen's Chief Executive Officer, Kate Johnson.

Good morning. Good morning, everybody, and thank you so much for coming today, getting through the snow, the hail to sleep the rain to hear our story. Thanks for taking the time to be with us. It's been a while, right, since we've done a deep dive, more than 2.5 years. And so much has changed. We're so excited to share that progress with you. And it really starts with a commitment that I made to our people and to the market that we would rebuild Lumen from the people up. And we've refreshed our people and our culture in such a profound way.

First and foremost, we took people who are in the company already, and we empowered them to show us the way. And that's been an important part of where we started. We imported industry leadership from telecom and from networking at all levels of the company across all functions. And wherever required, we retrained and upskilled and we're still committed to doing that, particularly as we build AI skills across the company.

We rebooted our culture, and I don't say that lightly. It's actually a very significant part of the reason why we've made so much progress. We were in survival mode, we were planning not to lose focused on trying to slow the decline, right? Harvesting cash to pay a dividend, and now we're playing to win. We're making intentional bets, and that takes a completely different mindset when you're playing to win, you have to constantly learn so that you can take feedback from the market to pivot. It takes a certain amount of agility you have to have courage to speak truth to power, to point to the problems, and you have to have the mindset of we can fix it, we can overcome.

And that's how we built the Lumen 8. It's the 8 behaviors that define our culture. And I think the important thing to know about them is these weren't random behaviors that we selected. There are actually 8 behaviors that are associated as common denominators with companies that have driven successful transformation. Big reason why we're here today.

Second, we rebooted our strategy fundamentally to become the trusted network for AI. We simplified the product portfolio, really getting rid of adjacencies that didn't make sense. We declared our major. We're going to focus on serving the enterprise in the world of cloud 2.0 and AI. We've driven a massive expansion of our physical network and continue to do so and probably most importantly, and a significant focus of our story today, we built a digital platform that's representing a very exciting and fast-growing organic platform -- organic growth platform for the company. The future looks bright.

Finally, we established financial freedom, two ways. Number one, we inked $13 billion of private connectivity fabric deals with the biggest technology companies in the world. Secondly, we sold our consumer fiber-to-the-home business to AT&T, huge injection of cash. We very wisely use that cash to absolutely reboot our capital structure and all of this put together has driven incredible feedback from the financial markets.

Our debt is trading at greater than 95% of par for the first time in a couple of years, up from a very low number before that. We've received upgrades from all of the agencies. We just announced on Monday. So that's pretty encouraging. Our equity price, equity investors have enjoyed a 400% return in the past 2 years alone. The average stock price given -- assigned to us by the community here that we're talking to today has risen from slightly above $1 to slightly above $7, which is also very encouraging. And we've seen a substantial increase in growth-focused investors.

We have had a lot of volatility. I think there are 2 parts to that story. The first is we are now a part of the AI trade and there's a lot of thought on one day, it's positive, the next day might be negative about what's going on in the AI economy. We're now a part of that story, and we see volatility as a result of it. Secondly, we need to make sure that the world understands our story. It's a very powerful one, and I think it will tend to moderate the volatility over time once that story becomes well known.

And finally, our trading multiple, up 25 points compared to the backdrop of other competitors in the industry, this is pretty solid performance. So today marks the line. The dark days are over. We've stabilized the company. We've driven a turnaround to both credit and equity investors and the future is very bright. We're going to focus on how we grow. We're going to give you great insight into exactly that path today and we're very excited about it.

The lineup for today is, I think, a very solid one and what we're talking about, I think it's going to be a lot of new content. I'm going to our strategy and the business model and I think that will shed a lot of light on our path to pivoting the company to growth; Jim Fowler, our new Chief Technology and Product Officer, is going to talk about building the stack to address this complicated market called Cloud 2.0 and the world of AI; Ryan Asdourian, our Chief Marketing Officer is going to take us through the Lumen difference and what we look like compared to the rest of the market; And Chris Stansbury, our CFO, is going to back clean up and take us through the financials and our guidance. Then we're going to open it up the entire Lumen leadership team. We'll be on stage 45 minutes of Q&A. And then I know you've heard that there's no such thing as a free lunch. But today, you're going to get exactly that. Okay.

All right. 2.5 years ago or 2.5 years ago plus, I started my presentation with this slide. And it's changed a little bit and refreshed, but it still provides the North Star for our transformation. Our focus, what we wake up to do every single day is to ignite business growth by connecting people, data and applications quickly, securely and effortlessly.

Now we've been connecting for decades, right? The difference here is the quick secure and effortless customer experience is defining in the telecom industry and much needed. We've established 5 core customer solution areas. This is that simplification I talked about, getting rid of the stuff that doesn't make any sense and really focusing on our assets and the value that we can deliver to customers. And that has proven actually very fruitful in terms of our focus, both slowing decline as well as accelerating growth.

A couple of years ago, I really focused on profitable growth, and that is what we're going to do. We've already talked about driving growth in revenue in our business segment by 2028, still a primary goal but we've added some things. We want to deliver the best experiences for employees, customers and partners that requires digital, that requires a fundamental reset of our IT backbone from quote to cash, which is underway. But this is new. I think this is new for telecom. It's new for Lumen and it's probably the most important thing on this page. We want to build products and services that customers love. We want to innovate to deliver true value to them. And I think the growth of our NaaS business, which we just announced on Tuesday, 2,000 customers or a doubling since the last time we quoted that a number for you. I think it's proof that we're on to something very special here.

The whole thing sits on top of that culture. These are the 8 behaviors growth mindset, courage, et cetera. These things, again, not random, but they're based on a very important thesis that our path to greatness lies by giving agency to the people who do the work at our company. And it's an incredibly virtuous cycle, the more we empower the more they deliver, as you can see in our results so far.

Okay. Who are we going to be in 3 to 5 years? This is an incredibly important line we're drawing in the sand. This is where we're headed. We want to be a digital network services company that delivers ubiquitous and universal connectivity to enterprises, right? You know, we're all about high bandwidth, low latency, secure resilience. These are words we've used for a long time, but intelligent fiber solutions as well. And we want to deliver them digitally and on demand to our customers to give control for a change. This is something that they've seen in the cloud space with compute and storage, and we want to give it to them from a networking perspective.

A couple of words that are new here and are essential to our build-out that Jim is going to take you through in a few minutes, this notion of ubiquitous. We want to be available everywhere that our customers are, which is everywhere. And we want them to have optionality to send their data from anywhere to anywhere. That's why we universally cover every combination, whether it's on-prem, at the edge, in any data center or any cloud because on-net or off-net, we want our customers to move data from anywhere to anywhere anytime.

Intelligent, we talk about being the trusted network for AI. This is incredibly important, this word because we want our products and services to be infused with AI as well. So it's not just about helping other companies use it we're on the hook to become masters of leveraging AI to reimagine what the networking business is, and that's well underway. And finally, on demand. This is a new business model. On demand, we know about this model from cloud. Bringing it to telecom is completely new. We're driving consumption patterns in our NaaS business that I'll talk about shortly. It's an incredibly important shift.

And again, it's about putting control in the customer's hands. You only pay to use. That's value. And this value is coming at just the right time because CIOs, they've got a real problem. As always, they're on the hook to drive insight at the speed of thought. But today, it's in the sea of complexity with Cloud 2.0 and AI. Cloud 1.0 was about the simple on-prem to cloud connection, static point-to-point analog. Cloud 2.0 is about intelligent application-centric serverless environments, and with explosive growth in data centers and clouds, it just makes moving your data more and more complex and the problem is becoming more and more intense with AI.

So I want to unpack the AI economy a little bit and how we see it and the role that we play in it. And it really starts -- I'm sorry, it really starts with the supply side, right? $2 trillion being spent on data center expansion over the next decade. Why? Because data centers are becoming AI factories. There where intelligence is being created. These are where the new knowledge worker the AI agent live. What do they need? They need chips, the fastest depreciating asset on planet Earth. That's why we think about TCO. It's because we're trying to add that value for our customers to help them with a very real and complex problem. And there's obviously the great search for affordable clean energy.

And third, and we think most critical, is you need networking because otherwise, those data centers are just bricks. And the biggest proof point that Lumen is critical infrastructure in the construction of the supply side of the AI economy is the $13 billion of private connectivity fabric deals that we've done. As big tech is building out the infrastructure to provide AI services to enterprises.

They've tapped Lumen as the trusted network for AI. But there's a demand side and the demand side actually is going to be the focus of today. It's where most of our growth lies. It's where the exciting part of our valuation will come into play. And there's a massive shift that's happening. Today, enterprises spend about 36% of their network spend connecting premise to cloud or [ premise ] to premise, right? And about 64% on what we call cloud core. That's the interconnection between all those net new data centers and cloud, multi-cloud over to prem, all of that interconnection and with AI corridors emerging, it becomes more and more important.

Over the next 3 years, we see that shifting pretty dramatically to 84% of their spend being there. Why? Yes, they have to connect those data centers. But probably more importantly, they also need services to help them move their data in an agile way between them. And that's the essence of our strategy because they need 5 things in order to do that quickly, securely and effortlessly.

It starts with massive amounts of bandwidth, extreme bandwidth and low latency. They need data center interconnect to happen, which were a fundamental part of that story. They need to take advantage of those AI corridors that are emerging. We have line of sight into that and are expanding into those quarters. And they need on-ramps. On-ramps in the cloud, on ramps into the AI quarters. Basically, we're investing, as Jim is going to say, in all of the right places. And all of that depends on one very, very important concept we are making our physical network programmable and API-driven.

It enables the whole strategy. It's an essential part of the story. We're going to tell you exactly what that means today. These are the things that we're investing in. And we've got a laser-focused strategy that is enduring and delivering results, 3 pieces. We will continue to be the undisputed leader as the backbone for AI. That's our commitment to constantly invest in our physical network to drive massive expansion for greater coverage in case of that ubiquity concept I talked about, but also investing in state-of-the-art fiber and equipment to make sure that it's a no-brainer to choose us as your backbone.

Second, on the digital side, making everything programmable, it's all about that customer experience. It's all about recognizing we have to make it easy for enterprises to move their data from anywhere to anywhere, anytime, in real time. The connected ecosystem, we're going to bring this to life today and show you why it's so important, a huge part of our growth strategy to bring third-party services to our customers via a very elegant implementation and we'll bring that to life with real stories and how our customers are doing it today, whole thing on the commitment to constantly address our technology debt, simplify our IT backbone from quote to cash, make sure we have state-of-the-art implementation of all core systems, ERP, CRM, ServiceNow, et cetera, all sitting on that culture that we continue to invest in because it helps us go fast.

So I'm going to ask Jim Fowler to come up to the stage in just a second, but I want to tell you about Jim and how Jim and I know each other. We worked with each other at GE a bunch of years ago. I was always impressed with Jim, smart, able to execute visionary, great to work with, incredible collaborator. So when the Board of Lumen had a chance to bring him on to the Board as a director I was gleeful, so excited. And the role that Jim played over the past 2 years is he represented the customer. He's been a CIO for a couple of decades and CTO and all the other labels that we put on people who care for the technology that makes our business possible.

And he always represented the customer perfectly, and he brought incredibly incredible value to our story. He helped shape this strategy, and he brought commercial truth to it. He would say, I'd pay for that. I wouldn't pay for that. That's invaluable for this company. So when we had a chance to bring them from the Board, to become our Chief Technology and Product Officer. We jumped up the chance.

Jim, come on up.

Thanks, Kate. Really appreciate it. As Kate mentioned, this year, I had the opportunity to make the transition from a Board member to management team and now I'm 52 days into the job. And the question that I keep getting all of the time is, was it a hard decision? And the answer I keep giving everybody is it's the hardest, easiest decision that I ever had to make. It was hard because one, I was leaving a company I love, the brand I love working for.

Two, I was rolling off the Board, and I'll tell you for the last 2 years, it has been A very interesting point of view to have to be able to watch the transformation that Kate talked about in the role of governance on the Board of Directors. But the easy part of it really kind of boiled down to 3 things. One, this is a spectacular management team. I can't tell you how well they work together and work off of each other. It feels very much like a start-up mentality and how they're thinking about the way the company gets run. The second is the culture of the company. Kate and the management team have really kind of taken this old telecom mentality, and they've taken out of the organization. When you meet the leaders across the organization, what you're going to find people are passionate, they're passionate about change, they're passionate about what they see the opportunity for.

But the third is kind of what Kate alluded to, after 30 years in enterprise tech, 20 years and some various role as either a CTO or a CIO in lots of different industries, the problem couldn't be more clear to me. Like I see it, like I was experiencing it as an enterprise technology leader. My first CTO role was 20 years ago and what seemed really complicated to me then is actually not that complicated. All of my applications and my data sat in 2 data centers, those data centers were about 300 miles apart. If 1 failed the other took over.

All of my users sat in about 100 locations around the world. They were connected by T1 and T3 lines back into those data centers. We had firewalls that protected us. The perimeter the perimeter was actually pretty easy to manage. But I would say all of that has changed in the past 10 years, the enterprise. The perimeter, the perimeter now is now the whole of the Internet, and it's really driven by a few things. One, there isn't one enterprise leader who hasn't moved to Software-as-a-Service. They're CRM is sitting in Salesforce. They're ERP is setting an and SAP's cloud environment. They're running MRP systems that are running in other companies' data centers that manage them for them, SaaS really started to expand the perimeter of the data and the applications that enterprise leaders have to manage that made it more difficult.

Those 2 data centers I talked about, we moved them to the cloud, right? So now they're not just sitting in 2 data centers, they're sitting in 20 data centers. And by the way, not just on cloud, they're sitting at AWS, some combination of AWS, Azure and GCP, depending on the workloads that you were trying to move, again, the perimeter kept expanding.

That workforce that sat in those 100 locations, well, now they're sitting in 20,000 locations because they're a hybrid workforce, and they're working from home periodically. And so that increased the edge of what you had to protect and how you had to think about data movement. And then I mentioned it was a global organization. When you think about data sovereignty laws, requiring you to keep data around the world, this perimeter issue really drove the problem that Kate unpacked for you earlier, which is AI-driven proliferation is real.

Data is sitting everywhere. Apps and data and users are widely dispersed and as an enterprise technology leader, that was a core problem that I was faced with how do you manage every day. As the perimeter expanded, the second thing that really happened is you ended up with a proximity issue of how you thought about data. From a proximity perspective, the perimeter breakdown really means that data, which is really the fuel for business is distributed everywhere. The days of having compute and data together, like those 2 data centers, I could have the data and the compute sitting next to each other, those days are over, and they're never coming back to us, quite frankly.

Compute and data are going to be sitting at the edge and the value of investments that we're making in things like artificial intelligence, they're really being throttled by the public Internet because that's really the way we've been connecting the data and the compute together as it sits in different clouds in different data centers around the world. And those hybrid architectures, they're not going away. They're only going to get more complicated and they're only going to continue to grow.

So the third problem that I clearly saw is kind of an enterprise technology one of reliability and resilience. There was a day last year where one of the major cloud providers had an outage in a region. We couldn't book product for the day. We couldn't service products for the day. So think about the complexity change that happened in 20 years from a resiliency and a reliability perspective, all my apps, all my data set and two data centers fill from one to the other, pretty simple. Well, today, a business process, not even a system, a business process can span multiple data centers and multiple cloud providers and how as an enterprise leader as an enterprise technology leader, can you really manage that?

Those are some of the key problems. And frankly, it was the key problem that I could see that really made it so easy to say yes to Kate and the management team. So okay, thank you for calling. It's going to be a fun ride. And you don't have to look far to see examples of this playing out today, data that you can look at to see this happening. The first one I'll call it is data center growth. Over the next 5 years, we're going to see a 10x increase in the number of data centers located in the United States as we build out the capacity for artificial intelligence and the world that we see coming at us.

Those data centers are not going to be in the same space as the data centers are today because they're going to follow the 3x increase in power builds that are going to move to rural America. They're going to move to where there's fuel, where there's capacity and where there's land and where there's tax abatements. And that perimeter that we've been talking about is going to continue to get worse as -- the enterprise is to really think how do you manage this dispersion of data and systems and processing.

The second is one of cost. I have a friend who's a CEO of a large bank and I was talking to them about what they're doing to build their own large language model. They're one of the few enterprises that I see doing this, but they recognize they've got 20 years of data about their customers, about the transactions they've made, and they believe that there's a financial planning capability that they can build in a specialized model.

And the problem that the CIO was faced with is to be able to get to the GPUs, which are in short need, they're having to go to Neo cloud providers that are providing GPU as a service. That's not where their data is at. And so here they are, they're paying $2,000 an hour for these chips to be able to build this model, but they got to bring petabytes of data from their data centers to get there. And so the problem they're faced with is the CPUs, the GPUs that they had to pre reserve to be able to get them are sitting idle at $2,000 an hour. So we just kind of give you a quick example here. If you think about moving a petabyte of data over what most companies have traditionally had a 10-gig circuit, that's 222 hours. That's 222 hours of potential downtime for that CPU while you're trying to get the data to the GPU to actually train it.

So this is why you're going to hear us talk about the need of the future is around high bandwidth, getting to 400 gig circuits, 800-gig circuits, 1.6 terabyte circuits, it reduces this from a 222 hour problem to a 6-hour problem, and that's worth almost $0.5 million of savings from a GPU cost perspective for that one customer in doing training. So cost, you're seeing this start to unfold as a big issue in idle time within the infrastructure driven by the capacity limits of the network.

And then the third thing you're going to hear more and more about, right? We're at this point where companies have moved on from experimentation of artificial intelligence to implementation, latency is going to matter so much. One of the biggest examples when I talk to my peers in the technology industry that most enterprises are going after is the call center. There's a lot of great new technologies that can be that first call receive either a text or a chat or a voice call. This isn't the voice systems of the past 20 years. This is going to seem and feel like you're talking to a real person that's able to talk to you, and you're going to have this issue of inference that's going to come into play for that application to matter, for that virtual agent to be able to talk to you clearly and plainly and be able to converse at the speed that you want to converse at, it has to be able to infer and get data from the rest of the system that's spread out.

If that doesn't happen for voice applications at a 5 to 20 millisecond level, it's not going to feel real and it's not going to work. Think about all of the different applications here, image recognition, 50 millisecond cycle time. You go to some more advanced capabilities like telesurgery, drones and robotics, you've got to be under 5 milliseconds. It's one of the big reasons that from a Lumen perspective, we've been really focused on making sure that our network is within 5 milliseconds of 85% of the hyperscalers or the data centers inside the United States. Latency is going to be the third big problem that enterprises are going to feel that they're going to need a new network, a new way of thinking about the network to be able to deal with.

So when Lumen talks about Cloud 2.0, this is what we mean. It's about helping customers unlock these value levers. How do they get to scalability without runaway cost, right, that first bucket. How do they get to bandwidth that keeps the GPUs, the XPUs, all of the new processing unit types for being productive and from being idle. And how do we get latency that is really low enough to enable an entirely new class of artificial intelligence-driven applications. This all starts with a network that's high bandwidth, this low latency and it is programmable by design. It's resilient and ability for our customers to be able to control that world.

Now Kate talked about supply and demand, and she started to find kind of 2 markets that we're focused on within Lumen, and I want to make sure everybody understands these 2 markets. The first we'll talk about is kind of the north-south. Think about North-South as an enterprise connecting their premises, their buildings to their data centers or to their cloud or their premises connecting to each other. This is the complex version of the world that I described, I was in 20 years ago. It's not new. It's about a $12 billion TAM for us. It's not growing, but it is getting far more complex whereas 20 years ago, I was connecting a set of buildings together within 2 data centers that I own, I now have to connect into 20, 30 different data centers to the SaaS providers, to the hyperscalers. The complexity of the North-South getting bigger. The market itself, though, is not.

The second market, the one that's the really interesting market for us is East West. As the world generates more data as data becomes the fuel for business, as we think about what's sitting in the data centers and the hyperscalers the east-west traffic of moving petabytes of data back and forth between hyperscalers to neo clouds, between neo clouds and on-premise data centers that's where a lot of the growth is going to be.

We believe this is -- we don't believe this is an $11 billion TAM for us today. It's growing at about a 13% CAGR. We expect this to be a $20 billion TAM for us by 2030. This is where AI training and inference really matter because you're moving really large amounts of data around. And what's important for all of you to understand is that most providers are focused on one or the other. They're either focused on that north-south traffic and how do I get my enterprise and my customers' enterprise connected to the cloud or there's a set of companies that are focused on cloud to cloud. Very few are building a platform that's designed to serve both markets.

Cloud 2.0 is Lumen's answer to that. We're building a network architecture that addresses both enterprise to cloud and cloud to cloud connectivity together at scale, with the bandwidth, the latency and the control that these workloads demand. Now here's the rest of the story. I told you that the North-South is static. It's not growing. But we also believe is the winner on East West is going to take share from North-South because what enterprise, right? This is me the customer 53 days ago, what customer wants to have to go to multi-providers to deal with the end-to-end issue that I have as an enterprise.

So from our perspective, winning East West is also about taking share from a North-South perspective. That's something I want to make sure everybody understands about our strategy here. It's not the fun stuff. This is the stuff that I geek about. This is where we get to get into how do we make it work. This is our road map. How are we doing this? This is the road map that we're going to really make Cloud 2.0 real.

In 2026, we'll invest about $500 million really to build a truly programmable network for AI-driven workloads. And we're doing this across 3 really tightly integrated layers of building blocks, and Kate kind of took you through this. The first is the physical network. We talked about large capacity, low latency networks. We need to do this at the inner city level. That's our rapid routes work that we're doing to get 400 gig circuits across the United States.

Once you've built intercity, you need to do within City, that's our metro work where we're doing a metro network that is able to be able to support high-speed Ethernet within the individual metro areas where our network exists. And then you've got to get it out to the data centers. How do you make sure that you can go from the metro to the data center again with that 400 gigabit band circuit. All of that supporting the work that we're doing to get to the cloud on ramps, the AI on ramps and making sure that we can get that enterprise connectivity from a wing-to-wing perspective in place.

We started, if you recall, with the PCF deals, that was about helping the hyperscalers to be able to build out the large language model capabilities within their clouds. What you see is the building blocks above that are what we Lumen are building out for our enterprises to be able to get their data from. This is very much a homogenous relationship between what we've done with the PCF and what we're now doing at the enterprise level to build out the physical network. Taken together, the second part of this -- sorry, the second part of this is the digital platform. Once we've given the physical network, we want to give control to our customer. It starts with how we go to market. That's Network-as-a-Service. Again, you heard our successes this week. We crossed the 2,000 port number as Network-as-a-Service. That is the motion that we will go forward to have one port and many services.

To make that work, we're building a platform called Lumen Connect. Lumen Connect is that digital skin that we're giving to our customers to be able to own their own connectivity their own connectivity, their own service addition and modification to be able to manage the network much the way they manage the cloud. The third is the fabric port. This is the physical device and the network components that make it happen that allow this all to get connectivity together. And then multi-cloud gateways is a way to give customers a 1 point of connection into all of the clouds all of the SaaS providers that we're building to make it easier for them to not have to build individual connections. And then once we've got the physical layer and the digital layer, the platform together, we know that we have partners that need access to the same level of connectivity.

So through Lumen validated designs and marketplaces, being able to use the underlying platform that we've built to allow our customers to get connectivity in. Taken together, this is how we turn the network into a programmable asset, a platform, one that supports both enterprise and cloud core use cases, both North, South and East West, it scales with AI demand as we go forward. And it really lets customers consume connectivity the same way they consume compute and storage in the cloud. All of the benefits that I got as an enterprise leader of moving to cloud. From a time-to-market perspective, we want to provide it to network layer as well.

And so I'm going to drill into a few of these just to kind of give you an idea of where we're at. The first one I'm going to start with this rapid routes. This is where we're looking intercity across the U.S. How do I make sure that they've got 400 gig circuits that run across the United States. The progress we've made, we've got 36 new routes high-speed can spin them up in just a matter of days for customers to be able to get 400 gig intercity capacity. By the end of this year, we'll grow that to 49 new routes, and we'll expand 18 additional routes to have that 400 gig capacity to be able to move large amounts of data between cities across the U.S.

So now you've landed in a city. We've got to make sure we're doing it there. That's our metro expansion. Metro expansion is where we're providing high-speed Ethernet services in key metro markets where we know a lot of these AI-enabled growth is happening. Today, we have gateways in 6 markets. And by the end of this year, that's going to grow to 35 gateways, 32 markets. It will be in over 248 of our wiring centers around the United States. So this is -- once you get into metro, how do I get to your premise and how do I get to the data center, which leads into the third big market for -- the third big component for us, which is data center expansion.

Data center expansion is, I got you to the metro, now need to get you from the metro to the data center with the 400 gig circuit. Today, there are 68 data centers that we have this level of connectivity to in 15 markets. By the end of this year, that will grow to 139 data centers in 28 markets. So now wing-to-wing, city-to-city within a city all the way out to the data centers I've provided that wing-to-wing capability for you to get high bandwidth services in place. And by the way, this is just 400 gig. We're building this out in a way to grow it to 800 gig into 1.6 terabytes of capacity as the demand grows over time.

And so this isn't an endpoint. This is a stopover point as we're building out that capacity. And then all of it focuses on this Recognizing that we need access to both the cloud on-ramps and the AI on ramps that are developed across the United States. Today, we have about 44% coverage of the on-ramps with this level of capacity. By the end of this year, of the existing on ramps will cover 90% of them.

Again, really focused on that enterprise need to be able to get to the large language, model capabilities that the hyperscalers have built on top of our PCF network we need to be able to provide the enterprise networking capabilities to be able to get them there. And so that's the physical layer. Now we're going to talk about the digital piece of this. Network-as-a-Service is how customers are going to consume our services going forward. What we're talking about is really a shift from a process where you contacted your salesperson, you put a manual order in place. They did some design work. We rolled a truck. We did a network configuration for you. And at its core, what we're trying to do is really shift that experience to have it be more like a programmable network for you.

Traditionally, this has been static. It's been manually procured. And in fact, if you estimate a change to your service today, the cycle time for us inside is about 20 to 30 days of average cycle time, from the time that you start that ordering process until we get it through our systems. It's just not acceptable anymore. And so what Network-as-a-Service does is it really flips that traditional telecom model on its head.

It turns connectivity into a software-driven configuration that can be provisioned, it can be scaled and it can be reconfigured really as the customer needs to it will behave like cloud infrastructure. Customers want flexibility. An example here in my last one, I had a large team of data scientists who sat across the United States. And one of the problems we uncovered is their day would start off by them coming in and saying, I need to move a large chunk of data from point A to our premise to be able to get it into the analytical models I'm running on my laptop and get it back out.

That was a 2-hour window of time to move data for them sometimes. And what NaaS gives us the capability to do is to be able to say, you know what, you're going to schedule that job between 6:00 a.m. and 7:00 a.m. and between 6:00 a.m. and 7:00 a.m., I'm going to dedicate more of the bandwidth that I have to those data movements so that we have standard times of moving data around the organization to reduce your downtime. So I don't lose 2 hours of data scientist today that's how we're thinking about this. This is what we want the capabilities of the programmable network to be.

So as you think about Network-as-a-Service and you think about Lumen, this isn't just a product shift for us. This is a business model shift. We're really thinking about how we monetize the programmable network, how we improve our capital efficiency, how we align the economics of how Lumen runs to how our customers actually want to buy and use connectivity going forward. So as you kind of anchor the digital story, it anchors off NaaS.

But the second part that this digital platform anchors off of is Lumen Connect. This is the front end of our programmable network. It's where customers go when they're using network as a service to replace the manual processes and give them on-demand control to change bandwidth to add services, to modify services over time. This is an evolution from a product we had called control center. This is not a reskin or a refresh. This is a brand-new strategic platform that will replace that and be the front-end of our NaaS product. It will let customers discover the services that are available to them and the capabilities that are on their network today.

It will help them provision new services. It will help them it will help them manage the services they have to scale up or down on demand. We're already seeing in NaaS customers who, on a nightly basis spin up or spin down the capacity they have in their network. Based on specific needs. We know we're going to see more of that. And we know that it's going to be API-driven, digital workflow driven. And Lumen Connect is the place where that's going to happen. And rather than me telling you more about it, let's show you a quick video about how Lumen Connect works.

[Presentation]

So I'd encourage you when -- after the meeting today, there's a booth outside. If you want to see more, they'll be happy to kind of share with you a little bit about Lumen Connect and get to see it. This is really what makes NaaS economically compelling because it really helps reduce the manual work that our customers have. It accelerates service delivery that allows us to scale revenue without really scaling the cost of how we operate the business at the same time.

Now underneath this, kind of the next layer of that road map I talked about is the fabric port. And some of you have heard us talk about this capacity -- this capability in the past is Project Berkeley. Berkeley was a development effort that we've been working on for the past year really to come up with the technical capabilities at the port level to be able to support what we're talking about.

Fabric port is the productized outcome of that work. And going forward, that's how you'll hear us talk about it. At the center of the Fabric port is a fabric network interface that is a single physical port that can support multiple services. So in the past in the old world, a port and a service we're pretty synonymous with each other, and they didn't have a lot of flexibility. It's what drove a lot of truck rolls, et cetera. Going forward, our technology will actually bring those together where you can have multiple services on that same port. It will make it more of a user-driven experience.

The fabric port also extends Lumen's network to the customer site. This allows them to add services, to modify them kind of locally, it allows us to issue APIs that will allow us to do a lot of the configuration work back and forth with the customer, all without new hardware roles. Hardware rolls out to the customer. The important part of the fabric part is really this is what makes NaaS scalable for us.

This is how the physical network of what we're doing really becomes programmable going forward, and it's really how Cloud 2.0 for us becomes a repeatable margin-accretive business. And so a lot of the work we've been doing in the last 12 months is to come up with this fabric port capability. And then the last piece of the digital building blocks that I'll talk about is really the multi-cloud gateway.

This is a self-service virtualized routing solution that really simplifies how enterprise get connections into the multi-cloud. My old world, we were in multiple clouds. Each one of those clouds was a separate physical connection that we had to design and build to be able to get into those cloud providers. At Lumen, we really want to eliminate that complexity of managing those individual connections and create a full cloud mesh capability that once you have the fabric port and once you are in the Lumen multi-cloud gateway, it's as simple as a service addition or change to be able to get you access to new clouds, new regions, new SaaS providers and their capabilities over a private network where you're not where you're not having to fight with traffic with the rest of the Internet.

That's how we think about what the multi-cloud gateway should work. We just announced this capability last week. This also opens up for us East-West traffic market I talked about because, yes, this helps with the North-South, but it also gives us a capability to allow those customers now to have a better way to be able to transfer data across those cloud providers. That's all part of what we're building within the multi-cloud gateway.

And then the last thing I want to talk about is now go up to the third element of the stack and talk about the ecosystem. When we talk about Cloud 2.0, the core idea is that the network becomes a platform, not just to transport anymore. We're building a programmable digital foundation that lets us integrate best-in-class solutions at the edge, in the core and across the multi-cloud environment without forcing customers to stitch together the network to make it work. And what we know is there are several partners who need that capability for their solutions to work for their solutions to be able to scale with the same capacity needs and latency needs that we're talking about.

And so that, we've kind of created this idea of lumen validated designs where we'll partner with other companies in this ecosystem for solutions that take the best of what we're doing from a network perspective and the best of what they're doing from a technology perspective and bring them together and just 2 examples to leave you with today. The first is meter. Meter is really thinking about within the facilities they manage, how do you really unify the local area networking capabilities that they're building out with the wide area network in a single AI-driven experience that really better unifies the connectivity configuration of their customers.

The solution that we're working on together as a Lumen validated design really simplifies that it creates a single place to buy it uses things like natural language processing to give them the ability to ask for what they're looking for, and it accelerates the deployment of those capabilities for both meter and Lumen. So that's one example of a partnership that we really believe comes out in the ecosystem.

And the second one I really love because I happen to be responsible for our own internal data, and this is a solution that we're using internally from Commvault. We're using Commvault for our immutable backup system. And the lumen validated design we're building with them is really to think about how do you integrate AI powered data protection directly into our programmable network. They're one of the largest data protection service providers. They are delivering policy-driven backups. This a mutable backup space. They're identifying identity resilience and they're focused on how to build ultrafast kind of clean rooms for recovery when companies do have losses.

When you think about the amount of data that has to transfer at real time to get a company back up and running, those 10-gig circuits aren't going to work anymore. So having a design where we can scale the network to their needs for these backup solutions, that's a marriage that we want to move forward with. And so those are two examples of what the ecosystem looks like I'll maybe leave you with one last video to unpack what the relationship with Commvault has looked like.

With that, thanks very much.

[Presentation]

Okay. Let's bring it all home. Lots covered. Thank you, Jim, for that overview. We're investing in 3 ways. We talked about the continued expansion of the physical network with upgrades, we talked about building a programmable network with our digital layer. And now we've talked about the connected ecosystem and how we bring third-party capabilities to enrich the offerings that we bring to our customer.

I believe that most of you have come here today to understand how does this pivot the company to growth? How do you get there? And so we wanted to take you through the path. And we thought the best way to do that was to give you an illustrative example of a company and how they will consume our services. And the whole story starts with the Fabric port, formerly known as Berkeley. This is the revenue socket for our business, think iPhone, think computer, a piece of hardware that hosts these services and the value of a fabric port grows with services, not with truck rolls, okay? So that's an incredibly important part of our story because we're delivering cloud economics in the world of telecom.

Increasing scaled revenue reduced marginal cost, incredibly important part of our value prop over time. So 5 different demand scenarios, let's call it a manufacturing company with 1 site. Very simple example, but brings a whole story to life. Starting off, this manufacturing company, the CIO says, we got to get out of TDM circuits. We've outgrown them. We want to modernize our communication capability and our Internet access let's buy a fabric port from Lumen. Let's put some Internet on demand on that fabric port and maybe some voice, some Lumen cloud communications.

And let's see how that works. One port, it might require a truck roll for that first instance, multiple services, get up and running, it's quick, it's secure, it's effortless. New [ CISO ] joins the company says, guys, we need some security protection here. He decides maybe he needs some immutable backup from Commvault, maybe firewall adds both of those services with Lumen Validated Design. Now you've got a secure connection, quick, secure effortless.

The data centers are aging. CIO is on the hook to migrate them to cloud, chooses AWS for the apps, chooses GCP for the analytics. Multi-cloud gateway, the capability that Jim talked about, that we just announced availability on Monday is essential to that storyboard. Same fabric port, more service revenue growing across every one of these demand point examples. 30-, 40-year-old ERP, time for an upgrade, want to go SaaS, by the way, this is starting to sound a little bit like our journey at Lumen. But we got our ERP in this year. So we're pretty excited or last year.

It's a tough scenario. First thing you got to do go to that marketplace, make sure you set up Lumen private data connection through the SaaS providers marketplace and get yourself access to a SaaS-based ERP and CRM platform. And then finally, maybe the CIO at this manufacturing company wants to build AI-powered services franchise. And to do that, they need some models. They're going to put those in Azure, and they need lots and lots of data, which just happens to be over in GCP. And they need a 400-gig intercloud connection that they're going to buy through Lumen Connect in order to do this.

Five different scenarios, starting at $990 monthly recurring revenue with Lumen and growing to $5,500 of monthly recurring revenue with the company. growing via addition of services on one fabric port over time, no truck rolls, remotely monitored through a single [ pane ] of glass, Lumen Connect.

At the bottom of the [ trip ] behind me, you'll see the first 2 scenarios are really about North-South connectivity. The simplest of the connection. The next 3 are really about the Cloud Core, Cloud 2.0 and all of that complexity and growth that we see on the horizon. It's important to note that a customer can start anywhere on this journey, right?

Any time they get the fabric port, they can add services first or third party in any order that they see fit. Last point on this chart that I think is incredibly important. How do you get the pricing, Kate? I want to say that the service prices that you see here are constant, but they reflect a discount providing a billing with a growing commitment with a customer, just like in the cloud world, right? You make a big commitment you get a bigger discount off your bill, but the service prices are the service prices. And that's reflected in this illustrative example that I just gave you.

Let's click on that box all the way over on my left, your left, right? Basic NaaS services. This is where we have 2,000 customers that have chosen Lumen and decided to standardize on our fabric. We have learned a ton in the past 2 years. First of all, NaaS became GA in January of 2024. And in August of 2025, we announced that we had 1,000 customers that had adopted the platform. It's only 6 months since that point that we've now doubled the business. That's a pretty phenomenal growth rate.

This is our organic growth platform inside the company. All of those customers now have fabric ports. All of them represent revenue sockets that we can sell into, first and third-party services. And we're learning a ton about the consumption business, right? Because that's different. It's different for telco, but we have many of us that came from cloud. We've seen this movie before, and we're applying the lessons. A couple of things that I want to point out. 2,000 customers have adopted it. We've actually sold 7,000 ports more than 7,000 ports of those customers.

When Chris gets up here, he's going to show 3,800 of those ports are active, there's consuming -- there's consumption happening across them, live services running. How does this work? A customer commits to the first port then they start expanding. They have multiple ports, but we have to help them get to the consumption point. We have to -- if it's a net new customer, maybe we've got to send a truck out to do the first fabric port. As we turn more services on the path to consumption gets shorter and shorter, but there is a moment where there's a purchase and then over time, they've got to implement and then they get to consumption.

And the reason why this is important is because the customer success function inside of our go-to-market team has traditionally been focused on stemming the decline of revenue. They're doing a pretty darn good job. If you look at our decline rates of the legacy business compared to our competition. We are pivoting those resources to say, okay, now that we've got the motions here. We want to add to your job that you're going to help our customers get to consumption faster, a faster path, more services and how do we turn it on as quickly assumingly possible to get that J curve going.

I thought it might make sense to take you through the consumption of a real customer. This is an example of an engineering design firm that's multi-site I did not give you the logo because these are real revenue consumption numbers. Land, expand, consume. That's the motion that we're driving with our organic growth engine to pivot the company to revenue growth. And it really starts with this customer decided they wanted one high end on net port to pilot their [ WAN ] modernization. They started using it. They turned it on quickly. They validated the design. And they said, this works. It's quick, secure and effortless as advertise, let's move forward.

They expanded to 20 sites. At those sites were satellites. They had a mix of bandwidth needs. They weren't all high end. They basically got to a point where all 20 of those sites were working, and they said, let's go out to all of our remaining sites. They just happen to have 60 across North America. Again, different bandwidth at all these different sites. And that's important because if you're thinking, Kate, you told me $990 million for a fabric port IOD and some voice on it, shouldn't that be $60,000 a month, if there are 60 sites? It depends. It depends on the service. It depends on the bandwidth they're going to consume, and it depends on the overall commitment that they make because they will achieve discounts if they go all in with Lumen.

This is a common pattern, and we're excited about the expansion, and it represents all the things. If you look at how many ports would this customer have that are active, the number will probably be right now, less than 60 because they've purchased 60, so that's our sales number, but what's active, they're right in the middle of this implementation. When they get to full steady state consumption, all of those ports will be considered in our active count.

How do we grow from here? $46,000 a month, like that number to be higher, it's about third party. And that's why the ecosystem is so instrumental to our growth story. This is new for telecom as well. This is a page taken out of the cloud book, right? That's why we're doing it. Because connected ecosystems represent opportunity, executives who are trying to grow their company, they expect their technology partners to be a part of an ecosystem. They want us to do the work with the technology partners to take the friction out of the system. They want that thing working. They want to validate a design, they want to snap it in place and get to value as quickly as possible. In ecosystems on average, deliver about a 2x accelerated path to a return on investment technology solutions, which is why 75% of executives favor them.

And finally, and I think this is a really important point because it too is new. Every dollar spend on our products and services inside of an ecosystem are likely to generate 6x to 8x those dollars in a services ecosystem on top. As we partner with the 17 companies on this page and the dozens more behind them, we are creating opportunity for services firms, consulting firms, to come advise, guide direct design, implement all the things that they do. We represent an opportunity for them to grow. And when they get interested, there becomes this heat, this energy around the ecosystem, that gives us a competitive advantage. Go with Lumen, they've got the service industry behind them. They've got a myriad of technology partners, and they can help you go faster.

And here to tell more about that Lumen Difference is Ryan, our Chief Marketing Officer.

Awesome. Awesome. Thanks, Kate. Thanks, Jim. Good morning, everybody. So you just heard the what, the how, the strategy, the build, the programmable network and the ecosystem. It's what we're doing to win in Cloud 2.0. So now I want to talk about what matters most, what's the proof? Because here's the thing, in our category, there are a lot of companies that can go and tell a story.

The question is, does the market back to customers, do analysts, do partners so they start seeing the same thing without us prompting them. And so I want to start with a simple customer rooted truth. In the AI economy that we're talking about, trust is becoming the product. Customers are betting their operations, their security posture, their AI ambitions their infrastructure that has to be fast. It has to be resilient. It has to be safe.

So when we say the trusted network for AI, that is not marketing poultry, it's actually a buying requirement. Because in Cloud 2.0, if the network doesn't match the moment, AI cannot thrive. So what we're doing is we're building these scenarios that have focus on the customer outcomes. Analysts are changing their language, partners are leaning in, Lumen is becoming recognized as different. These are things that reduce friction, improve performance and ultimately support the economics that you're going to hear Chris walk through in just a little bit.

So I want to start with some of the early indicators that show some of this, our brands, our reputational shift. What we did was in the beginning of 2024, we talked about how we are the trusted network for AI. It wasn't to be clever. It was to be very clear. And customers were waking up to a new requirement. You heard Jim talk about this. New requirements that they have to support AI changes the network demands and customers need a partner to build for it.

The market is validating the strategy. I want to talk about a couple of places that we see this. So if you first look at brand clarity, plus 12 points. Now it is rare to actually see double-digit growth in this category. But what we're seeing is the market is embracing the vision. It means more enterprise decision-makers understand the simple story about Lumin. What do we do? Why does it matter? Why are we different? And our brand helps clarify that vision so that those people that are telling the story that need to understand this, the CIOs, we can go have a clear conversation as they look end to end for their business.

Then as we think about the narrative shifts plus 63 points in media sentiment. And this is a sharp favorable move. The headlines tell you why we're seeing that kind of growth. AI infrastructure, partnerships, leadership visibility, it's credibility compounding in public. And then if you look at customer advocacy, plus 21 points in recommendations. I trust this metric a lot, and it means a lot. It means it's because ITTMs are trusting Lumen more with our conversations that we're having, we're having them with different decision-makers. It's not just the network operations person, it's the CIO because the CIO knows to have an AI strategy, you have to have a data strategy and you have to have a network strategy at the same time.

And we also know, you don't recommend a network partner unless they can go deliver. Delivery, reliability, security, responsiveness. So you see a couple of these awards of the year. Year-over-year NaaS leadership awards, cybersecurity accolades, these slogans are earned. And this is really about how can third parties recognize us also as this trusted backbone and having these capabilities. And the words are great, very happy to receive those, but it's about the customer. It's always about the customer and our customer experience is showing up in different market signals that are making a difference. We know that when customers win, brands strengthen analysts covered shifts and our recommendation rises, and that's what we're seeing happen here.

Now I want to translate this here into customer choice, why are customers picking Lumen. In Cloud 2.0, customers need 4 things at 1 time, capacity, performance, control and reach, and they need it without complexity. And so those 4 boxes you see at the top, they're not just labels, but their differentiators our customers can feel. If you first look at capacity, access to Corning's cutting-edge fiber technology, this benefits our customers with some of the highest quality and bandwidth glass available in the market and it's 4 Lumen customers.

If you then think about performance, 400-gig-ready less than 5 millisecond performance. Jim talked about this. This is AI era physics, and it changes the workloads that are even possible, telesurgery, drones, robotics, and there's so many emerging tech scenarios that require this.

Third, you've got control on-demand services, turn it up for your needs, take complete control. Our network becomes our customers' network and you get cloud-like controls. You get provision, you get scale, you get change. And fourth, Kate talked about this ubiquitous and universal design. It's a consistent experience across environments, connect from anywhere. You're going to get the same experience, on-prem, edge, cloud data center.

Now if you think about the other network players here, customers, as they're looking, typically see 3 main architypes. The Lumen is the one who's bringing them all together. And Jim also talked about, as a customer, you're looking for someone that can help you do this all together in the right way. If you think about legacy telcos, national scale, but oriented around wireless, fiber-to-the-home convergence, they have a different center of gravity. If you then think about cloud-based network providers, modern customer experience, but they don't own the physical network. And that limits the economics. It limits capacity. It limits control at scale. And then you also have fragmented fiber. You have the strong in pockets, but it's fragmented backbone. It's fewer on-net data centers, they're challenged to scale, and they're not built for the AI demands that we are talking about.

And it all comes back to what this means for customers. For the first time, customers have one place to get the 4 things at the top: capacity, performance, control and reach from one trusted partner. In other words, Lumen is here to build and lead that reset that we use because we've got the own physical advantage, digital programmability and a modern customer experience. We are focused on how we get ready to get our customers ready for the demands of AI. And speaking of customers, I want to take you through a couple because let's make it real with them.

In our mission we talk about igniting business growth by connecting people, data and apps. And how do we do that? How do we talk about it quickly, securely and effortlessly. This is the how that customers feel. So let's take how you can really translate these words. And I'll tell you, it's not something that has really been associated with telco ever. So we're going to work really hard to make sure our customers feel that every single day.

If I start with Pac-12 over here. long-time customer, legacy connectivity, longtime [ Vivics ] relationship, they are modernizing how live sports gets produced. Remote production, tons of live events, 0 room for failure. The broadcast lane needs are changing as well, and yesterday's networks won't -- here's the game changer that they were thinking about. They had to figure out a way to turn up gigabit capacity in minutes, especially when you think about multiple events, multiple sports happening, all simultaneously, and they started to run into these scenarios. They had real cancellation risk, time sensitive, high visibility revenue on the line.

What they did was they partnered with us, they looked beyond [ Vivi ], they looked at our NaaS capabilities, and they enable the fast way to turn this up that save the moment. They repeated it. They use us again and again for their live events. They were able to reduce that risk and ensure that we watching those sports never missed one of those critical moments that we get excited about. And that's what we mean by quick. If I think about Apex datacom, they're an IT consulting and software company. And it's really about trust that you can operationalize.

If you think about the rise of ransomware, DDoS, all these sophisticated attacks. It is hard to stay protected yet. Nothing could be more important. So they started with infrastructure at the edge. And as they thought about how they could build this platform, they really leaned into security in a different way using Lumen Defender Plus. And what we were able to do is we were able to take their solutions, stack these together and make it so that they could get this to their customer in a really quick and seamless way. Not adding it later, it's not a bolt-on. You can't think about security later. Customers want this embedded. They need the protection with fast deployment, less customer work.

And what was great about this platform that Apex Datacom was building, is that they're a customer. But they're also a channel seller. So they were able to take this and get it to their customers quick, easy, fast. And I want to talk about -- on the right side, you see Arctic Glacier. Now as we know, it's a bit too cold in New York this week, but I'm going to tell you a little story about a cool customer because one of the things -- you've heard of them before, you've been to your grocery store, you've been to a gas station and you've likely bought ice from them. And they should not be slowed down by IT.

But what they would tell you is that their IT was disjointed. They had outdated tools. They had strict compliance and they need it all to simply work. So what they did was they moved from a legacy connectivity solution into managed services. They got a knock, they have a service desk, and they're using something called customer premises equipment as a service. What this means is they get these new hardware upgrades without the upfront cost, they stay modern and they have a simpler, more reliable environment.

We change for them with fewer vendors, fewer handoffs, fewer steps, and that gave them better uptime and faster time to value. It means more cold drinks at the neighborhood party because here's the thing. When you distribute 2 billion pounds of ICE across 75 customer locations, I tell you, they're the ones with the cool network. So across all 3 of these, you've got quick secure and effortless.

Quick helps businesses be agile, which means they're more competitive, secure reduces risk and increases customer confidence and then effortless reduces cost and complexity. And that's how the strategy we've been talking about is turning into customer preference and preference, we're watching turn into momentum.

I want to close quickly with just some outside validation because it's what keeps us honest as well as we build this. Our customers that include the largest hyperscalers, the largest social networks, the Neo clouds. If you saw today, we just talked about anthropic as a customer of ours as well. They are choosing us because we are sharing a vision, we are pushing the boundaries of what cloud and network together those solutions can enable.

They're trusting us both on the supply side and on the demand side. Our AI ecosystem recognizes us as part of this infrastructure layer that customers need to become AI winners, which is what every customer is after right now. And it goes from building customer GTM plans with Palantir to security solutions with Microsoft, our analysts also recognize the shift. They're seeing us as revitalize new leadership, new culture. You heard Kate talk about this. You heard Jim talk about this, but when our management team works together, we are painting the picture of what this AI economy needs and thinking about our customers first, we're doing it a way that is ready to disrupt because we see this emergence of this new category for AI-ready networking.

Old telco playbook. It's cell contracts, it's compete on price, it's explained churn. Disruption is different. You sell outcomes, you remove that friction. You become a platform customers can trust with their own business because. The only way this changes is through the lens of the customer, and it is being customer-obsessed one of the behaviors that we've been talking about. It's the shift that we are seeing.

You have to go from connectivity as a commodity to the network as a platform. Our customers are seeing this benefit every day. We're working with them. And I'd love for you to take a look. Let's roll the tape.

[Presentation]

We will now take a break. Please be back by 10:20. Thank you.

[Break]

[Presentation]

We're thrilled to welcome to the stage, Lumen's Chief Financial Officer, Chris Stansbury.

Good morning, everybody. to be with everybody today. When Kate opened, she talked about drawing a line between our past and our future. And as I sat watching the presentations this morning and as I look around this audience today, I can't help but take a little walk down memory lane back to April of 2022 when I started at Lumen. And there's particular faces in this room, in particular moments that will be forever etched in my mind when I got what they call candid feedback. .

And when I think about our past and our future I think about 2 words. I think about trust, and I think about opportunity. And we're going to talk about both of those things today. I'm going to focus first a little bit on the past. And the reality is we had to earn your trust. And we have to continue earning that trust. But how do we do that? We had 4 objectives. The first was to return the company back to free cash flow growth. There was a crisis in the company. It was debt, and we're going to talk about that and unpack that a little bit more. But we had to show that we could get back to a future that had solid free cash flow. And we saw the opportunity in both digitizing the network, but also in PCF. And that's really what started to unlock our future.

The second was, and I just touched on it, we had to transform the capital structure. The capital structure sadly was the story. That's all we talked about. And I'll unpack that a little bit more in a minute. The third thing, got to get EBITDA back to growth. We committed to making that happen in our guidance this year, and that's really driven by our modernization and simplification efforts in the near term. But then longer term, the PCF revenue coming into the model and the growth of our digital and ecosystem platforms.

And then lastly, we've got to return to revenue growth. That's going to take a couple more years but there's really favorable tailwinds, and we'll talk about why our confidence in hitting that number is so high. I'm also going to give you the answer on what you need to watch for because there's some really simple assumptions in this that we've made, and there's only one big one. And I think the upside there is more significant than the downside, and we're going to show you that today.

So how do we transform the capital structure? Obviously, those PCF cash flows gave us fuel. But we entered the market at the beginning of last year, and over the course of the year, we did 6 transactions touching $11 billion of our debt structure. This is before the sale of the fiber-to-the-home business. We sold the fiber-to-the-home business to AT&T, as Kate said, paid down $4.8 billion of highly restrictive super priority debt.

And the combination of those 2 things reduced our interest expense burden by almost $0.5 billion. Again, more fuel. That lowered our cost of capital. As Kate touched on, our bonds are trading at all-time highs. And our job is to earn a return greater than our cost of capital, kind of hard to do when your cost of capital is north of 20%. So we had to get that fixed, and we did that. What we're seeing is we go through the simplification efforts on our debt structure, we've eliminated about 40% of the tranches that were out there. We're getting more covenant flexibility, ratings upgrades are starting to happen. And now we're in that cycle where we should see continued lower cost of capital, more opportunities for us to refinance, et cetera.

This is the last time I want to show this slide, but I think it's important. The upper left was the existential threat, right? When I arrived, when Kate arrived, we were looking at a situation where $20 billion of debt, that was a thing. But the real thing was almost half of that was due in 2027. And you all know the storied history that we went through as we renegotiated that debt, which had a lot of complexity behind it, that didn't fix the problem. It bought time.

And I'm going to remind you that many of you, frankly, many of our advisers, a lot of the media said, why on earth would you go through all of that effort? And the reason was, we knew that there was underlying demand for this incredible asset that has been on the ground for a quarter of a century, and that was our ability to deploy PCF we had the ability to sell the hyperscalers the one resource they don't have time because we could deploy those networks faster than building their own. And had we gone down a different path? Have we gone down a path like many of our predecessors in the industry and said, we're just going to go through a Chapter 11 kind of restructuring, we wouldn't have capitalized on what -- at the time, we thought it was a $12 billion opportunity. And as Kate said, to date, we've delivered $13 billion. That's why we did it. And now we're in a position to go digitize the industry.

The impact of the refinancings I talked about, the lower left or lower right is where we sit today post the sale to AT&T. We're looking at a normal capital structure with normal maturities and a leverage ratio that's below 4. So we're here, and I think we can stop talking about this now.

So where do we go from here? There's a few more things we can do. We're actually actively engaging in conversations right now to put a new revolver in place. That's just normal course of business. We will continue to focus on collapsing the number of debt silos. And reported entities so that we can simplify the way we report to you. And so that what you look at and how you look at evaluating the company is exactly the same way we're managing the company.

And then lastly, as EBITDA continues to grow, we will see continued deleverage, and we'll look for opportunistic ways where we can further reduce debt. So all of that really results in a near-term leverage target of 3 to 3.5x. We're at about 3.8 right now. And the good news is, is that I think the objective we set for ourselves, which is a really boring balance sheet we've achieved. Boring is good. And so now we can pivot to the future.

All right. Where do we go from here? You've seen a lot today. And I want to get into why the economics that stem from that strategy are so compelling. The PCF builds and the scaling of digital combined with what we see in the legacy business that continues on a dollar basis to get smaller and smaller are huge tailwinds and give us enormous confidence in that inflection back to revenue growth.

Our capital allocation around that, we're going to go through in a little more detail today. But what that results in is higher margins and lower capital intensity, better free cash flow. We're going to continue to focus on our modernization and simplification efforts, and I'll jump into that in just a second. And then free cash flow generation, as I said, is going to be really as a result of all of that. So on modernization and simplification.

Remember, last year when we gave our guidance, we said we thought we would do $250 million as we exited 2025 and are on our journey to deliver the $1 billion that we committed exiting 2027. We delivered $400 million last year. Our target for this year is $700 million. We're still targeting the $1 billion and are highly confident in that for 2027. But what I really want to focus on here is this isn't just about the dollars. This is not a traditional cost out program. This is truly about getting into the DNA of the company and fixing things that have accumulated over decades. This is about eliminating IT systems. It's eliminating real estate. It's consolidating to new and modern platforms. It's about using AI first in how we manage ourselves and there's savings that results from that.

But the big outcome is focus, the amount of effort that goes into trying to keep software live where the people that wrote the code have long since gone, and there's really no support left, it's enormous. And so every passing day, we're seeing more and more focus on the enterprise vision that we've laid out. So let's talk about CapEx. We talked about the physical, the digital and the ecosystem. But underneath all of that is basically the stuff I just talked about.

There are some things that have to be fixed. Phase 1 of our ERP went in last year. Phase 2 will be going in a few months. We got to do CRM. We've got to exercise against and execute against our North Star vision for IT, a much more simplified, modernized IT structure. We also still have a lot of success-based capital. We're still selling the old way where we pivot to the new. And so that's about half of our total CapEx. That layer, that foundation is about $1.5 billion.

PCF, another $1 billion. We've talked about that a lot publicly, and it's going to stay at that level for a while, and I'll get into some more detail in a second. The rest of it, the $500 million is really going into what we talked about today. That's the expansion of things like RapidRoutes and MetRON and DC to DC and Cloud Connect, but it's also about developing the digital layer in the ecosystem layer.

We promised we'd give you some visibility on PCF. Here it is. And we're giving you ranges for every year because we know what the numbers are. And we know what the numbers are because we're only sharing what's been contracted. We have been very consistent in saying we are not going to forecast PCF cash inflows based off of a deal that we might or might not get because they are really big and they're super chunky and they're hard to predict.

So what you're going to see as I close out with the economic model today is the assumption that we don't sign anymore. That's upside. This is just what we've signed. And so what you see is cash inflows, obviously front-end loaded. And for those of you that have already started your modeling, I see you -- you're going to say that doesn't add up to $13 billion. So I'll give you that answer now. It doesn't add up to $13 billion for 2 reasons. There were some inflows on the builds in '24. There will be some more inflows post [ '30 ] on the builds that are contracted. And then don't forget, roughly 10% of the contract value is for operating and maintenance really over the remaining 20 years of those contracts, and that will obviously be a huge piece that flows in after this time fared.

CapEx lags those inflows. And you've got those estimates here. Again, big, chunky, it's going to bounce around quarter-to-quarter. Last year, we were answering a lot of questions about whether we were going to come in under our CapEx guidance. There was obviously a lot of CapEx in Q4. That's this, right? That's what drives us. And then revenue, revenue is pretty simple. We know what the construction schedule is. And as those routes get delivered to the customer, that's when the revenue starts to get recognized. It moves off the balance sheet and into the income statement, and that's what you see here. So we've said that we expect to be between $400 million and $500 million in 2028, which is what you see here. And we would expect that with the recent signings to go up to about $550 million to $650 million by the time we exit 2030.

Okay, a quick refresher. Part of the very candid feedback that many of you gave to me when I first came into Lumen resulted in this thing called Grow Nurture and Harvest. And that was our best attempt to give more visibility to the market into what the heck was going on inside of enterprise. And it served its purpose. It really has helped us. It's allowed the market to track progress over the last few years. But it's also come of age. And it's time for us to simplify. And so really since the end of the third quarter last year, we've been talking about this.

This is a map on how you get from Grow Nurture Harvest to strategic and legacy. And what we did is we went 1 layer deeper. We said rather than saying all waves is grow, while 1 gig waves doesn't grow, right? That's moving more into the legacy bucket. This is finally about taking a product life cycle mindset to the way we manage the company financially. And so we pull those 1 gig ways out. The same is true in the other direction, not all Ethernet, which at a nurture is in decline. Ethernet on demand is a huge growth opportunity for us as we move to more software delivery and the digital motion. So that's what we've done here. And coincidentally, you get to a place where strategic is about the same size of growth.

So now one of my favorite charts. This is just gravity. This isn't big assumptions. This is saying, if we take what we sell today and we grow or decline it with market and we layer in only what's contracted under PCF based off of the delivery schedules that we are meeting with our customers today, and we layer in digital. This is where you get. And the reality is mix is finally a tailwind -- this year, strategic is going to be over half of what we sell. And by the time we get to 2030, because of PCF and because of digital coming into the model, and because of the absolute dollar volume of our legacy business declining, we get to over 70% that's strategic. And by the way, that legacy business isn't a bad thing. That's cash. That's what's allowing us to invest as aggressively as we are in our digital future.

Okay, digital. Let's talk a little bit about what's in digital. It's the first time we're disclosing a number here today, $117 million in digital in 2025 in digital revenue. As we said, we want to get to $500 million to $600 million by the time we get to 2028, Pretty good start. What do we know about digital? If you look at the shift to a consumption model across other areas of tech, all of them have experienced J-curve growth at 1 point or another, where you've got steady growth and then you hit an exponential curve. We think that will play out here. We don't know where that is.

So what we're not projecting, as I get into the numbers in a minute, is the J-curve. We're projecting linear growth. That's upside. What do we sell today? We sell infrastructure services, which is really edge fabric and fabric ports, connectivity services, that's where NaaS sits. Communications, security. But what I really want you to focus on is the right-hand side because this is where if you're really interested in the lumen opportunity forget about revenue.

You have to ground yourself in adoption metrics because if we drive customer adoption, we get more customers, they land and expand and consume, we get more ports, we get more services. The revenue will come. That's what ultimately leads to that J-curve moment. These are the things that we've been tracking. These are the things we've been talking to the market about for a number of quarters now, and we will continue to do so. So as Kate said, we sold a lot more than 3,800 ports. Now some of that are redundant ports because wherever you have a port, you need a lot of services on it, you're going to want redundancy.

But some of it is ports that have been sold that haven't been installed yet. So this is moving very rapidly. And while this doesn't look like a very big number in terms of services, the same thing is going on there, right? Services haven't been deployed yet. And in the example that Kate showed of the engineering firm and how they've grown, we're seeing more in the 3 to 4 services range today. Obviously, there's ability to grow that as more and more services come online. I do want to do 1 housekeeping thing though.

One of the competitors that provides this service kind of on top of networks, Ryan talked about earlier, they count the numbers differently. They assume the port, including a redundant port as a service sort of inflates those numbers. The way we're looking at it, we're really trying to give you transparency into this. The port is not in the service count. These are software services that are delivered on top of those ports. And here we are, [indiscernible] math. And if I were to use one word to describe this chart and [ board ] does it feel good, optionality. Haven't had too much of that in the past. And what it's showing you is that we have multiple pathways to get to $600 million. If you look at the assumptions that are underneath each of these scenarios, the key assumption is really the amount of North-South versus East-West traffic. And I want to drill in a little bit on something that Jim said earlier, that North-South bucket isn't growing in dollars.

You know what it is growing? The amount that's being consumed in that bucket. So what is that? That's the old enterprise telco feedback that we've gotten from many of you around, but it's a commodity. As fast as volume is growing, prices falling. That's North-South. The only North-South value-added that really has existed in the marketplace is what we've been able to do with PCF.

East-West is where the gold is. That's where the growth is, that's where the margin is. And as Jim said, there's a huge opportunity that as we capture more and more East-West traffic that we can capture more share in North-South. So what you're seeing here are 4 different scenarios. The first scenario is what's in our model, we picked one. And the reality is we will go where the market demand is. If there are 2 attributes of Lumen that I admire the most, it's the fact that we are nimble and we're agile. And we go where we need to go to execute. How we got here isn't necessarily what we thought the plan was when we started all this. And the same unfold here. So we'll deploy our resources, where we see the market moving. And again, the opportunities here are huge. -- really important number.

Okay. Look at these number of ports, you see somewhere between 20,000 and 40,000 ports. What is that as a percentage of the total footprint that Lumen has today, excluding TDM. That's a low single-digit percentage of our network today. So what am I saying? I'm saying the opportunity for scalability here is huge.

Okay. Let's talk about the key drivers of our long-term growth algorithm. I've already touched on a lot of this. Digital revenue, $500 million to $600 million. We've talked about that by '28, that obviously grows. By the time we get to '30 to more like $800 million or $900 million. PCF revenue, just touched on that a few minutes ago. Growth businesses in the base grow with market. Legacy businesses declined with market. What you see happening within strategic is that PCF early on gives us a boost in terms of revenue. But it's really digital. That is the bigger opportunity as we go forward. Both of those have upside as we talked about, but digital is really what becomes the growth driver for the company over the long run.

All of this leads to better margins, both PCF and digital. And PCF, if you think about what we've done, we've invested significantly in a fixed cost base to go deploy these things. So as more and more of that revenue scales into our model, you're going to see operating leverage benefits, which impact our margins. And digital, obviously, as we said, no truck rolls. On-demand, quicker time to revenue. All of those things help our margin structure.

Okay, so here's the algorithm. And what you'll see is our revenue growth last year, we were down about 4.5% in the business segment. We expect that to moderate a bit this year. We guided that. In '27, it's a much more significant impact. And it's a more significant impact because we see digital scaling because we see the deployment of those PCF builds scaling. We hit inflection in '28, and then we think we'll get to kind of low single-digit growth thereafter.

EBITDA margins rise substantially from the mid- to high 20s right now to the mid-30s. We're very confident in that. Cash interest stays about the same. And our capital intensity ex-PCF,[ YX-PCF ] because PCF isn't capital intensive, it's paid for upfront. Ex-PCF, our capital intensity goes down by 25%. So significant impacts. Now let me tell you what isn't on the page, but is in this model because it's really important. Everything is funded, everything. What do I mean? It means all the capital that we need to invest, to fix that foundational layer and get our IT environment cleaned up, it's everything that Jim talked about that we're building physically and digitally. It's PCF, it's all funded.

What else is in there? Things like pension funding requirements, all funded. Okay. What else? All of our tax liabilities. And we're assuming that as debt matures, it's paid down at maturity. Now whether we do or we don't, that's obviously a choice point at that time, given market conditions, given where our leverage is with EBITDA growth. But right now, the model assumes that. Why am I saying that? Because when you model all that out with those assumptions, you're going to get to a remainder that's positive. This business, after all of that, if you model this out, is generating free cash flow after all of those items. And so what are we going to do with that?

Well, as leaders of the company, we have a responsibility -- the first is growth. And so we'll invest in organic growth first always where we see a return. Second, inorganic growth. If we see an opportunity to acquire something that furthers our vision and accelerates our ability to convert to a digital consumption model and there's a return on that for shareholders, we'll do that.

The third thing, we'll continue to manage our capital structure really efficiently. And after all of that has been exhausted, if there's something left, then we'll consider share repurchases.

Okay. We're going to finish where we started. We've covered a lot today, and I want us to go back to where we started, which is our strategy. And I think the most important thing is we have turned the page on our past. This is not the Lumen that we walked into. This is not the Lumen that I got all that feedback on, right? And we couldn't have done that without the team that we have and the culture we have. And quite frankly, I don't think too many people thought we would be here today.

So what truly differentiates us, that physical network, the digital model that we're building, the ecosystem partners. This isn't a legacy telecom anymore. We're a digital network services company. And that's why you need to change the way you think about modeling because it really is all about those adoption metrics.

So how would I summarize it? The first thing we had to do is disrupt ourselves. Now we're ready to go disrupt in the industry. So we're going to go to Q&A next. But first, a quick video from some friends up the street.

[Presentation]

We're now opening the floor for Q&A. If you have a question, please raise your hand, and we'll bring a mic your way.

Okay. All right. Thank you so much for spending the time with us. I hope that was insightful. We're ready and open to answer any kind of questions. First thing I want to do is just quickly run through the paces that weren't on stage today. Integral part of our team. And we'll start with you, Mark, tell them who you are.

Yes. Thanks, Kate. I'm Mark Hacker, I've been with Lumen about 10 months now, and I'm the Chief Legal Officer I'm responsible for the legal team as well as the public policy team and also the public sector segment.

Hi, everyone. My name is Kye Prigg. I've been with Lumen for 2.5 years. Interestingly, my first day at Lumen was the last Investor Day here in New York.

And I can tell you, it is a completely different company compared to the company that I joined a couple of years ago. I'm the Chief Commercial Operations Officer. I look after the planning, the design, the deployment, manage professional service operations of the network. And as of a couple of weeks ago, also have the accountability for the remaining mass markets business.

Hi, everyone. Ana White. I'm the Chief People Officer. And I've similar to Kye, been here for 2.5 years, joined a few months after you and I head up HR and really drive the people and culture agenda to increase employee engagement and also work to drive business performance. .

Three extremely humble people. I think of Mark as the guy who helps us safely get to yes, in transforming a telecom into a digital company. I think of Kai as the person that took us from negative Net Promoter Score to positive across literally every single segment and did it on time and on budget. Thanks, Buddy.

And I think about Ana as the culture ninja literally inculcating everything about our culture into all of our processes, it's why we're here. So thanks to the 3 of you. There's a new kid in town.

I appreciate you call me a kid.

You got it. Anything by the way, return the favor. So Jeff Sharritts joined us 2 weeks ago, 3 weeks ago?

2 weeks, 2 weeks.

Have you sold anything yet?

Yes, we're working on it.

All right. So why don't you tell them about yourself.

Good morning. I'm Jeff Sharritts. I'm the Chief Revenue Officer, and I joined the company, like Kate said, about 2 weeks ago. I spent 24 years at Cisco Systems prior to coming to Lumen.

Awesome. Think connected ecosystem and think Cisco sales model, and you might be on to what we're trying to accomplish here. So we're super excited about that. You're the moderator, did I tell you that?

I get to moderate. So we've got mic runners.

Please wait for the mic to get there to ask a question because, we've got hundreds of people that are streaming in today for this, and we want to make sure they can hear your question. Also, please say your name and the company that you're with. But with that, why don't we get started?

Batya Levi from UBS. Thanks for all the information that you provided. Maybe stepping back, what we're really focused on this transition of digital revenues ramping and legacy base coming down. So can you set the stage in terms of where we are right now in terms of that [ MRR-990 ] of digital? What is the legacy piece? And where is the sort of the new digital customers, are they all new? Are they accelerating the legacy declines to take on these digital services?

And you have made assumptions that maybe legacy declines similar to market rate, but because you're accelerating the digital effort, does that accelerate the legacy decline. So that path would be helpful. And maybe just sort of what do you see as the biggest risk to this 5-year outlook.

I'll take the customer patterns, you take the rest of the -- you do take the hard stuff.

Sure.

Okay. Great. So if we think about who's buying NaaS and why? We really, again, kind of started this as a test. It was a little bit of a hobby. And what we saw were customers that were requiring a network upgrade and they wanted to modernize and do so quickly. were the ones that came. Lots of midsized companies. And frankly, the platform was tailor-made for them. As we started taking our store to large enterprise, there were a few things that we needed to do in order to cover their requirements, which I think we've gotten locked and loaded, and we've got some really exciting large enterprise multisite opportunities in the pipe right now. And it's a mix. These are companies that are in existence today, and they've recognized that their networks aren't big enough, fast enough smart enough or secure enough. And so they're making the transition.

Sometimes, we're doing a migration project and their services involved. Sometimes it's the beginning of the life cycle and it's just a test -- and once that test happens, we usually get to yes pretty quickly after there. I think we're going to have a hybrid environment, Batya, for a really long time. And I will just say, when we're -- cloud.

We've seen this movie before. Remember when we thought everything was going to cloud. And the first, nothing was going to cloud. I'm not putting my data in that thing. Then when CIOs got their head around moving data into the cloud, it was kind of like, okay, now everything is going to go. And that's just not the case. It's what's the most cost-efficient way for me to drive storage and compute. And now how can I have a programmable network that helps me achieve that cost efficiency curve, and that's going to be hybrid. They're still going to be on-prem. There's still going to be edge. There's going to be lots of multi-cloud and data center. And it's the opportunity for our company. We move data for a living, and it needs to be moved from anywhere to anywhere all the time.

So you want to translate that to numbers?

Yes. So first of all, in the model, the assumption on that $600 million is the incremental piece. Now with that, there isn't one of us on stage if granted one wish, who wouldn't wish for complete cannibalization of our legacy business because what we're seeing in the customers that consume digitally is a much lower rate of churn, a much higher rate of service adoption and a much faster time to revenue at higher margins.

So the reality is this is an industry, again, let's go back to that phrase, playing not to lose, protect the legacy, protect the legacy versus playing to win, playing to win is, I want to take all that share to myself. And if we can get customers on that platform, then we would expect the $600 million to be higher. So first of all, and second of all, we think that, that's got a much better lasting economics for our shareholders.

I think there's one more point to add. And Jim, I might ask for your help here. What we described today in the tech platform, the intelligence sits in Lumen Connect, right? Lumen Connect, the single pane of glass, the control panel for a programmable network is what makes a fabric port a fabric port.

And what we are testing, and we don't have this baked into our numbers is our ability to go into our installed base and remotely see legacy ports and convert them to become fabric ports. Now that wouldn't change the state of the customer. It would simply enable us to make that customer port into a port that could carry multiple services wouldn't require a truck roll and would become a point of growth. It's limited by several factors, including what's the bandwidth of that port where is it a bunch of different things that we're trying to figure out right now, but it's a potential accelerator.

Anything to add to that?

No, you got it. So kind of picture, if you will. We have a customer today that uses us for direct Internet access. Our vision is -- they go into Lumen Connect. They flip a switch, and all of a sudden, it is now a fabric port, and they have the ability to add additional services like multi-cloud gateway, which then gets them kind of one place across all their Meet-Me-Rooms to be able to route traffic east west across their cloud providers. That's how we see what we have as our installed base turning into a growth engine.

Bill Matthews from Global Credit Advisers. If you think about the kind of EBITDA margin expansion from 27 to the mid-30s and that $600 million revenue piece of it. Can you just help us kind of understand how much that margin expansion is driven from these new revenue additions versus kind of cost saves and maybe tying that to, if you think about this NaaS network up and down dynamic positioning where customers can dial up and back, how is that pricing versus existing long-term contracts.

So the margin expansion, I would say, is coming from 4 areas, right? The digital expansion, PCF onboarding and our modernization and simplification programs are all margin accretive. But as EBITDA starts to grow, we're also going to get operating leverage benefits because our fixed cost structure isn't going to change materially. And so all of those initiatives are feeding that. We're not splitting that out. And I think you probably understand that. I want to hand that to our competitors. But they're all high-margin services and they all benefit us over the long run. Do you want to talk about the pricing?

I'll let our Chief Marketing Officer and strategy and talk about it.

Yes. One of the things that we're doing is we are going across all of our products. We're looking at margin. The first thing we have to do is we have to get our customers loving our customer experience. So everything is rooted first in that customer experience. We're bringing those services to them. We're also making sure that they have value accretive services added to that and then we're able to go and deliver the experience thereafter and match the pricing where they're able to go in and have those bundles. And one view that a CIO can look at end-to-end to look at a real value-accretive solution together from a trusted partner where we're bringing it all together for them.

That's right. It's no secret. I came from a world of cloud from Microsoft. I learned a ton there. And wherever I can plagiarize from the playbook of the movie that we all saw in cloud, we're going to do so. and I think an extremely efficient pricing model that we are applying to our Network as a Service platform is the service price is the service price.

You make a bigger commitment to us, we're going to make a bigger commitment to you in terms of driving price efficiency. And I think that's new to telecom. It provides a little bit of resiliency in terms of the go-to-market offerings and the pricing and the way that we do it, and it drives loyalty and commitment. And work like term in the days of cloud. So we'll be copy pasting that one.

Bill [ Coler ] of Odeon Capital. I may be a little confused. So can you walk me through 2 things. They're both on the legacy side. What's going on in the legacy copper business that last time we -- you discussed it, it was worth like $6 billion as an NAV. And then is the $600 million that you're talking about incremental to is the way you're converting your legacy business revenues that are declining? And is that the business that you're talking about? Because like, I think we're all confused about where does this $600 million come in? And how does that fit in with the kind of growing orange bar?

Yes. So on the $600 million, Kate talked about over 2,000 customers. Many of those customers are new. Some of them are existing. What we're seeing is that as customers engage in a digital motion, they're buying more. They're buying it more quickly. It's getting deployed more quickly. It's a higher margin and they churn less. So that's really the path forward for growth across the entirety of our platform.

As it relates to legacy, our legacy business, when we talk about it, it's largely copper-based, and it's going away, right? That's -- those are the businesses that are naturally declining. That's what we forecasted in the model. they're cash rich, and there's a tremendous opportunity inside of that. There's an opportunity around how we expand the amount of cash that we can extract in that business. And there's also an opportunity to say, hey, customer, there's this new thing over here.

Now how we go about that, the timing in which we'll engage with a customer on that is going to depend. But Kai's really leading our efforts on how we manage the legacy business from a copper standpoint and maybe you could provide some color.

So the copper network, or the, we call it, the ILEC network supports a large enterprise base as well as a consumer base. So what we've been spending our time on is really mapping out the entire base, understanding each and every one of our wire centers. And of course, there's hundreds of wire centers across the country. we've been able to map the P&L for every single one of those wire centers. And so we know the direction of travel when one of those wire centers becomes unprofitable, that will be a trigger point for us to then work with our customers to move them to go-forward products, right? So go-forward products for consumer go-forward products for enterprise. We will then be able to shut down those wire centers methodically over the next few years as each and every one of those approaches that.

In the meantime, though, we have to care for those customers. And so there's a lot of work Obviously, that goes into maintaining the network, making sure that when the customers have outages that we're able to respond to those customers and look after those customers to the best of our abilities. So you'll see us working on the operations, on the maintenance, keeping the systems up and running, serving the customers that rely on those systems day in, day out. But then you'll see us taking action where we need to take action where we see the P&L of a particular area of the network is heading in that direction where it's cash flow negative, and then we'll be taking different actions with the customers and with the network in those areas.

Frank Louthan with Raymond James. So 2 questions. When we look out to your longer-term guidance of sort of mid-30% EBITDA margins. If we back out the MAR from the revenue and the EBITDA, what would that margin look like under that kind of scenario? And then for Jeff, just curious your vision for the organization and how long do you think it's going to take to sort of implement that to see the benefits from the changes you're going to make.

Yes. On the first one, we're not going to break it out that way. What I would just go back to the answer that I gave earlier. If you think about the key initiatives, right, growth in the digital and the ecosystem, growth in PC modernization and simplification and operating leverage, that's -- all those things individually contribute to the margin expansion that we're seeing. And again, let's not forget. And this is where I think a lot of people get wrapped around the axle is they're like -- but the legacy business is super high margin, Yes. So is this stuff. Okay? We're going to be okay. And so it's about when is the right time, as Kai said, to convert a customer from old to new, and we're going to be very methodical about that.

Yes. I mean I think from a go-to-market perspective, I mean, Kate talked about the transition in the cloud business, software going from on-prem or perpetual-based licensing into subscription-based licensing. I know that Cisco, we did roughly of our business was subscription. We moved that to north of 50%. So I've been -- we've kind of seen this motion and the transformation that's required in the go-to-market model to be able to deliver.

The good news is, I think there's some good foundational pieces in place, if you think about the work that's being done in the connected ecosystem. We have some good work and pilots going on around customer success in the new motion. But there is some work to do on how do we upskill our sellers as it relates to moving up the stack, delivering more value to clients, calling on a different buying center that's a little higher in the stack than what they're used to traditionally think about scaling customer success motion, scaling the connected ecosystem.

And then there's a significant opportunity to scale through general partners in the marketplace, as well. So if you think about VARs, resellers, SIs, et cetera, we think there's an opportunity to drive growth through an extended channel as well. So there's work to do, but I think there's a good foundation in place to build upon.

Jeff Harlib with Barclays. Chris, 2 things. First, on the revenue outlook slide, when you said a legacy decline in line with market grow in line with the market. Can you quantify that a little bit? And then the comment on opportunistic deleveraging, anything else you can say about that? Is that going to be through the free cash flow you expect in '26? I know you've pushed out a lot of your maturities to '28, '29, et cetera.

Yes. So on the deleveraging piece, we will be opportunistic. And it's really going to depend on what happens with things like our borrowing rates, right? That will be a market condition, it will also be based off of what happens with upgrades. And so if we see an opportunity where it makes economic sense to retire something earlier, then we'll do that. But again, the model assumes for now, nothing opportunistic, it simply assumes that everything is paid on maturity when it comes due.

And sorry, the first part of the question -- slipped in my mind.

The other one was on the revenue level grow versus legacy -- quantify...

Yes. So in terms of what defines the market rates of growth, and decline for strategic and legacy. That's really what you would see published by industry analysts. So the Gartners, the Forresters of the world, it's really those numbers.

Nick Del Deo with MoffettNathanson. Thanks for hosting the event. Two questions. First on NaaS, the slide with all the different logos, a lot of diversity there. So I was wondering if you could talk about some of the commonalities between those customers and why they came to you for the service and the education process required to get them to sign up. And then from an M&A perspective, a few months ago at your industry analyst event, Kate, I think you talked about potentially acquiring service capabilities. And I was wondering if you could expand a bit on that and whether that's still something that's of interest.

So we are looking actively for any capabilities that are available in the marketplace that will help us accelerate our path to growth period. And we have a very crystal vision about what a programmable network looks like, what Lumen Connect and single pane of glass looks like and the kinds of things that would help us leapfrog we're not looking for continued linearity that's expensive. That's not interesting. It's -- if we see a leapfrog, you're going to see us move to grab it. And when I say service, I want to make sure we're not talking about professional services. We're talking about digital services that we would be able to put on ports and grow that NaaS business through the J-curve, okay?

NaaS customers and themes. It's interesting because I took you through an engineering design firm with 60 sites. You think financial services, retail, hospitals, they're all multisite. They all have a need to move data in between these buildings. But it's not just about networking buildings anymore. It's about networking, workloads and agents and applications, and they all are seeing that fundamental need with this urgency around being the most efficient point of the cost curve, like CIO deliver insight at the speed of thought in a sea of complexity at a cost point that probably is less money than you were allowed to spend last year. And NaaS helps us do that in a number of different ways because operationally, it's easier to manage. Once you get that first fabric port in there, you can grow and expand without the traditional marginal cost associated with that. there's an efficiency of cloud-based solutions. You're counting on Lumen to do the innovation for you. So you get that by default, and we continue to give you more and more. So it's going to put a little bit of wind in your sales.

These are the kinds of things that the companies that first took a step into this thought about. And we are -- it's still pretty early but I think what you'll see is with the Lumen validated designs and with our technology partners, as technology companies mature, they start to really align by industry so that they can speak the language really have mastery over the business outcomes. And for the first time ever for this company and probably in networking link the value of the network to the business outcomes that our customers are trying to drive. That will be the next couple of steps that we take, and we'll do so as and when we can. I think Jeff and Ryan, who's jump in to add to this would obviously share.

Yes. The one thing I would add here is I talked about quick secure and effortless during the presentation. But when you talk to some of our customers, they are saying that what we've actually promised, we are delivering. And that is not something that always happens. They're surprised at the customer experience, you heard, as Kai talked changing our NPS scores and some of the metrics that our customer satisfaction plays a key role into. Some of the things that we're delivering with rapid routes where you're actually turning up some of these routes much, much faster than ever before. And then you're turning the bandwidth up and down as you need it.

That is not something that these customers have had before. And so we see this across industries and we are committed to what we're presenting here, actually delivering and exceeding that. And that's what we've been doing, which is why you see the growth of that customer -- of the customer count going up significantly in that manner.

It's a cluster in here, yes.

Dave Barden from New Street Research. Kate, I really like your presentation because he did something I've never seen before, which is try to create a P times V construct around this industry, something that I know Chris has been working on for a long time. So what I saw was customers, ports, active ports, services report and MRR per port. And if you could kind of continue to disclose that, I think that, that would strengthen people's conviction in getting to that $600 million number. Are you guys going to do that?

Don't answer that question.

She was waiting for you ask a question. Yes, and so it's certainly to begin with, it's number of customers port services. The MRR piece in time, I don't know that we'll do that right away. But yes, we will continue to share adoption metrics, so that you guys can see the pacing of what we're doing. I think what's really encouraging and gives us conviction is that if you just look back over the last few quarters, those rates of growth have been in the high 20s to 30s quarter-on-quarter. And so it's important that we continue to do that, and we will.

A follow-up for you. How does that long-term outlook slide change? If an old person like me wants to back out the noncash IRU revenue which seems to be a big part of the pivot in revenue growth and EBITDA margin but isn't really about what's happening in the business today. It's about what happened last year or 2 years ago.

That's a good question. And what we have said publicly about that is that if you get the model right, what you're going to see is that the PCF business generates a lot of free cash flow. And then everything else is effectively breakeven. Now it's a bit -- we're burdening that a little bit too much because we're assuming all the tax liability of PCF actually sits in the base. So we've got to do a little more work on that.

But the reality is that the non-PCF business is fully funding itself, including all the things that I talked about like pension and debt retirement and whatnot. We're not allocating any of that to PCF in our thinking. So we'd like for that lands right now because we're in growth mode. We're investing every extra dollar that we have from that business back into that business. So I think that's what you'd find if you split it up.

Mike Rollins from Citi. Thanks for hosting us, and congrats on the progress. I have 3 questions, if I could. The first is on the TAM, the second on strategy and third, a financial question. So on the TAM, you've gotten to 2,000 NaaS customers in a very short period of time. Can you help frame that relative to the number of customers that your company has captured over the past 25 years. And also how many customers are out there that you could go after that you currently don't have? So just trying to size that TAM.

The second, how much do...

We'll let you keep going. Well, this is hot. Let's...

Let's answer that, and then we'll come back to the other 2.

Yes. Yes. When you look at the TAM that we talked about for both North, South and East West and you look at our customer base and you look at the numbers that you -- that we showed you from Chris' presentation, it's a small single-digit percentage of the total capacity that we can go after. So we've taken a very conservative view on how we built out the financials and how we think about what the market is. But it is a small single-digit percentage of what we think the total market share is.

The thing I didn't cover is in my mind, we have access to both on-net and off-net for these services. So when we talk about NaaS, it's not just an on-net capability for us. We can do the same services for both on-net and off-net customers which increases the population we can go at even greater than what our existing installed base is.

And as I described earlier, I think that installation base -- is going to become an asset in the acceleration of our digital business as we figure out the ability to turn or convert legacy ports -- the ones that qualify to fabric ports.

Great. And then secondly, how much of your opportunity do you expect to go through network-neutral data centers, which have been a meeting place for a wide range of diverse networks and ecosystems versus how much of this can you bypass these neutral data centers, get it completely on the Lumen network or those of your customers, which could create a different experience, value proposition et cetera?

So I think I'll start. I'll let Jim finish. What I've learned from our customers is that they really want choice. And what I've learned from the ecosystem is that they're trying to figure out where everybody is playing and what constructs are going to endure versus which ones are going to change. My prediction, and it is only that, is that taxing constructs of the Cloud 1.0 era are going to become obsolete. And I think revenues associated with that, like cross connect fees, like egress fees are at risk.

Value with quick secure effortless connections to where you need to be without that taxing system. Any time we charge something for a customer will be because there's innovation behind it, whether it's multi-cloud gateway, whether it's the fiber solutions that we have in our physical network, whether it's on ramps, et cetera, et cetera. We will get fair market value for those capabilities, which oftentimes are net new.

But I talked to Batya about a hybrid world. It's not like every CIO is going to shut down their network and pivot overnight. These are sticky structural issues that if you go back to the cloud movie and you watch it, you know that it takes some time. But after maybe 5, 6 years, you hit this acceleration moment where there's critical mass leaning into the changes because there's value there. And so it's not a data center cross-connect model or ours. We think our customers are going to probably want both. Guess what? Those data centers, they need us to connect to those 400 gig on ramps as well. we get the business from both sides of the equation. The disruption is all about knowing that these models are actually going to have an impact on the old taxation system.

Do you have anything to add?

Yes, I do -- I get this question at the break, and I did a horrible job of answering it. And it's really around this multi-cloud gateway is where your question is really headed. And the Meet-Me-Rooms, you brought up, Meet-Me-Rooms are really a cloud 1.0 construct. They're a physical instantiation of a way to connect into the clouds. That's a 1.0 construct. There are thousands of them across the United States what our multi-cloud gateway does is it takes the inner cloud communications that go from Meet-Me-Room to Meet-Me-Room and we push it up into our network. It doesn't have to come back to your facility anymore. Our ability to facilitate the cross-cloud communications though the multi-cloud gateway, reduce the number of hops back and/or reduce the number of hops you're making on the public Internet to run your business versus over the private lumen connection framework we've built across all the cloud on ramps. So when you think meet-me room, that's Cloud 1.0, cloud 2.0 is our multi-cloud gateway that pushes that up into our commission framework.

And I would just add, the compelling event for the customer is also the new type of scenarios. We gave a couple of examples of the less than 5 millisecond scenarios. But as more and more of those come that's a compelling event that requires. There's also that financial benefit of ingress, egress fees and looking at cross-connect fees that could be at risk. But the customers may be compelled to move because scenarios will look different and perform differently for their customers when we can quickly move that into a service faster with a multi-cloud gateway.

And I think when all of that, we're starting to see new KPIs emerge fastest in the first token is a new metric that we are obsessed with because we have a right to win when it comes to performance against that. I think TCO is also something which Jim hit directly in his presentation. It's like you can have DPUs sitting idle. You can't. And so you need bigger fatter pipes washing those GPUs with data, and that's exactly what we bring to bear.

Very helpful. In fact, just follow up [indiscernible]. Just quick on the financials mass markets. So it looks like in the margin calculation, mass market revenue is in that revenue denominator. So it's total revenue, the margin on that. And the question is, if that's fair, what's the average rate of mass market revenue decline that is the base case for Lumen?

Yes. Yes. So the revenue forecast that I showed is business segment only, okay? Because what we've said is that the business segment we think in flex in 2028, total business is 29 because of that mass market's base.

As it relates to mass markets, our best guess is, again, basically continuing with market trends, which would put us kind of in the low double-digit decline rate territory. So it's going to take many years for that to go away, which then leads into what Kai said earlier. And by the way, part of the thinking with the mass market customer there is there an alternative service that we could provide through wholesale arrangement or something like that. So there's multiple pathways. But the reality is it is cash rich, and that's how we're going to manage it.

Remember, our locations where we have copper, broadly speaking, are more remote and the customer skews older and generally doesn't like change. And the proof point that is didn't move to cable 20 years ago, right? They've stayed on ESL and copper voice. So part of this is just going to be customer atrophy. But again, there's a long runway there for us to harvest that.

There's a long runway and we have transparency. I think what Kai has brought to us is rare for process, but also transparency of data. So he talked about when something goes cash flow negative, I used to surprise us, and now we can see it turn orange before it turns red. And the orange is the trigger point for activation for us to use all of our tools to exit that market, which is super cool.

Mike Funk from Bank of America. AWS and Google signed or formed a multi-cloud agreement in December, which makes me wonder if the PCF deal you're signing today, if you're potentially arming future competition for that east-west traffic that you talked about and why those customers could not provide that service.

So I'll take the first part of it. And one thing that we've been very clear about in that regard is that those pipes, the capacity is for their own internal consumption for model training. It can't be resolved period. But I don't know if...

Sebastiano Petti, JPMorgan. Just a quick question on Chris clarification on 2026 EBITDA growth. I think in the prepared remarks on the fourth quarter call, you talked about an inflection in 2026, but not necessarily each quarter. And then today, it's exiting the year. Is any kind of nuance there that we're reading into?

No, there's no hidden message there. EBITDA will inflect year. We're not predicting the quarter that, that happens in. But for the full year, EBITDA will be higher in '26 than it was at '25.

Okay. And then just a follow-up on cash interest expense. You're focusing on deleveraging, EBITDA's growing. Why should we assume cash interest expenses flat over the forecast period?

That's an inherent assumption on where market would go. So if you look at the debt that matures the soonest. It's pretty low coupon debt that was put into place years ago. And so when you replace that, you pay that down, and then there will be some replacement along the way. we would expect that we end up in relatively the same place. So there's -- you could argue there's some servertism in that. But I think for now, it's a fairly safe assumption.

Got it. And then I guess 1 last shot at EBITDA trajectory after 2027. But operating leverage makes sense, mix shift. Are there any other transformational kind of investments? Or is that basically embedded within the operating leverage you kind of see...

It's really -- the only other one that we've talked about extensively is really the modernization and simplification, that $1 billion run rate exiting '27. I mean, look, we've been really candid that, yes, we're going to inflect EBITDA this year. It's a huge accomplishment. It's not a huge inflection, right, because we're now getting kind of that trough where we move from a downward trend to an upward trend. From here forward, the growth rate gets more meaningful as those other things start to come online.

Jiten Joshi from BNP Paribas. This question is for Chris. When you announced the first set of PCF deals, you did the video that kind of explained the timing of the cash flows and then the back end on the IRU, could you mind just kind of quickly refreshing us on that? That's question one.

Two, do most of the PCF deals that you have signed subsequently and that you expect to sign going forward, will they look similar? And then lastly, I think more importantly, how do we think about sort of the embedded IRR in those PCF deals that Lumen is earning and that kind of would help us, I think, just sort of split out in the forecast, the PCF part of it.

Sure. Okay. I'll try to remember all those. But if we go back to what we said when we -- and the guidance on how to think about the economics, we really touched on a lot of it today. What we've said is as follows: cash contribution margins roughly 30%. That's net of the CapEx. We've said that roughly 90% of the contract value is cash received to fund the builds. And they're obviously a profit in that, that is what's remaining and that's what we talked about today and it's what's helped us get to what we got.

And then the revenue, that cash as it comes in, sits in deferred revenue on the balance sheet and it gets recognized as routes are -- deleted. So it's not the whole contract. It's the contract is broken down segment by segment. So as those segments are delivered -- to us team has been a essential we're on budget on time, then that starts to get recognized.

And then the 10% that is the operating and maintenance for the network, once that segment is delivered, generally speaking, that's where that comes into play. And that is cash in revenue and EBITDA that earned in the year from there through the remaining 20 years of the contract, okay?

In terms of IRR, it's interesting because technically to do an IRR, you have to have an outflow before you have an inflow. We don't. I mean, one of the beautiful things financially about what PCF is doing for us, is it's an investment that was put in the ground 26 years ago. In fact, we were within -- our first PCF announcement was within a month of the long time ago CEO being on the front page of Barron's talking about this vision to build this conduit network around the country.

And so what happened is, is that because of advances in fiber optic technology, there was a lot of that capacity that remain. And now it's met its time, and so we're able to monetize it. So the from an IRR standpoint, it's infinite. The way we think about it is we price those conduit based off of what the market conditions are. So we're earning our rightful value vis-a-vis what a market price would be or replacement cost would be and then the margin and whatnot flows from that.

Now in terms of the last part of your question, on what about from here. So first of all, I would say everything that's been signed, the $13 billion, you can fit into the framework I just laid out. What we're not going to do, is go do what they did 26 years ago. We are not going to go build a bunch of empty pipes around the country and wait for people to show up. That is not a playbook that works. And that's been proven. That's what almost bankrupted Lumen the first time.

So we still have and we disclose every quarter a lot of embedded capacity in our network today, and that can continue to be monetized. What's not on the slide that we share every -- we still have the opportunity to rip and replace from low count fiber to high-count fiber in the conduit that exists. So there is a lot of capacity in the network. If we did build something new, it's going to be like a new route, it's going to be because of a customer demands it, and we have a contract that backs that up.

You recently -- I haven't been on recent earnings calls, but have you talked about what the pipeline looks like right now for some of these bigger deals? Are you...

We aren't disclosing pipeline numbers anymore because the reality is, when we did that a few years ago, we were wrong, and we've now surpassed that. What we're seeing is more and more demand as the complexity gets bigger and bigger and people are trying to get more and more places with low latency and big pipes. And so that's why our initial estimate of a $12 billion opportunity for Lumen has turned into $13 million. There is more opportunity out there. There are conversations happening, but we're not going to try to frame how big that is. That would just be considered upside. And as we sign those, we'll announce them.

Greg Williams, TD Cowen. Following up on that. Is there a resource issue taking on additional PCF of the $13 billion pipeline? Obviously, the capital because the hyperscalers pay upfront, but how about your internal resources as you focus now more on digital?

He's got loads of time. And why don't you take that?

The short answer is we're not seeing any issues at the moment. We started a brand-new team about 18 months ago that we call custom networks. So that team was built with the sole purpose of serving the hyperscaler PCF contracts. There's a separate team that was started a program management, where we have a program management team that interfaces each and every hyperscaler. So there's a dedicated account team who are there to serve the customer and make sure the customer gets what they need. And then it's all executed through this custom network team.

So you think about the United States split into 3 different regions with the -- President, who heads that up with the construction management, the health and safety teams, the governance teams, planning engineering teams all highly scalable. So as we add more customers, we can easily scale those processes. We built new tools and systems. So it's all underpinned by a system that we call Lumen vision, partnered with a company called OneVision. That system enables us to do risk-based planning. So we have a 6-month, 9-month view ahead in terms of any bottlenecks and issues we see with materials with construction pets, with crew availability and so on and so forth. So we're able to kind of predict way in advance any kind of resource issue.

And then finally, we built an ecosystem. We work very closely with Corning. We have dedicated facilities. So we have certainty of the supply of fiber coming in. We built dedicated facilities with a company called Thermo Bond in South Dakota, who are producing all of the huts or the ILA facilities for us that are then shipped across country. We did almost 300 locations last year, which is a lot and then we've partnered with some of the bigger construction companies across the country as well, right? And so we have, I think, built tremendous scale across the country with multiple vendors, partners down to a very granular level. So we're -- we're in good shape, I would say.

And I'd just like to add to that, Kai, your team is doing a brilliant job partnering with all those partners you just mentioned, and I think you have a different way of engaging. And one example I would give is Kate mentioned the [ Lumenate ] culture in the very beginning. That culture goes far beyond our own 4 walls of lumen into when we work with our partners, and we get exceptional feedback from our partners on how we live different than some other companies as well.

I think we've got time for 1 last question.

Ana Goshko from Bank of America. So 2 questions. So first of all, I know Kate mentioned a preference on the inorganic front for services that would be accretive, especially on NaaS ports, et cetera. But what is the potential for kind of old school traditional telco consolidation, especially Well, especially among fiber networks where they're could be room for additional synergies? That's the first question.

That was the best nonverbal entree.

I don't know what else to say. So if we need it, we'll get it. We'll either build it or we'll buy it. But our commitment to driving utilization of our assets is first and foremost because that's what's going to generate the return to our shareholders. That's frankly long overdue.

Yes. Yes. We're -- I would just -- I would say that -- and I'm actually glad the question was asked. There's a -- we talked about the division between the past and the future. That's old playbook. New playbook is how we monetize the assets we have and how we create a different layer. So your question, if I think really specifically, is a North-South question, right? The real growth opportunity, the real economic opportunity the East West. And so if it fits into that model to Kate's point, and it furthers that, then yes. But if not, that's not a playbook.

And to your point, there's a line around the block of bankers coming to us with ideas for legacy consolidation plays. And I love that because we're looked at as a strong player now. And we could get acquisitive in that way, but it's only to serve the need of building a digital network services company. if we were to make any such moves, it would be in service of that.

Okay. Great. And then, Chris, I know hard to believe, just that you've gotten to this point, but I know you have an...

Is that a compliment?

I think it was.

[indiscernible].

In the past, you mentioned the potential or goal of reaching investment grade ratings on your debt. And -- but you also mentioned the fact that you do have some interest rates and your capital structure back from and money was free kind of a few years back. So it's going to be hard to kind of refi your way into reducing interest expense. As you simplify your capital structure, how much have you thought about going into the ABS market? Because I think virtually a lot of your peers really have been able to go in sort of investment-grade parts of their capital structure.

We will continue to look at all of those options. And if it makes economic sense, then we'll pursue it. I think the key thing for us at a higher level is the target on our leverage is 3 to 3.5. And I would include ABS as part of that. The one thing that we've got to be cautious about with ABS doesn't mean that it's a no, is that what is ABS right? You're basically selling EBITDA streams on your assets, which by default, means those assets now become less flexible.

And if you get underneath the transaction with AT&T, there's a number of different reasons, but a key reason why we sold from the edge of neighborhood into the neighborhood and kept the pipes is because we need those wire centers not all of them, but many of them to further our enterprise ambitions. This is where a lot of those on-ramps are going to set physically. So again, everything we do is around our ability to expand that. So absolutely would consider it if it's economically beneficial, but would look at those other factors as well and say, does this limit us in terms of our flexibility in using assets to do something bigger. So we're going to be very thoughtful about that.

Okay. All right. Number one, thank you so much for the time and the engagement, great questions, and this was fun for us to bring our story to you. Thank you for listening. We are going to stay there with you. Anybody who wants to stay who's in the room, we've got a box lunch for you and can take more questions at your leisure. Thank you so much for the time.

Greetings, everyone, and welcome to Lumen Technologies Fourth Quarter and Full Year 2025 Earnings Call. [Operator Instructions]. As a reminder, this conference is being recorded Tuesday, February 3, 2026.

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. Please go ahead.

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; Chris Stansbury, Executive Vice President and Chief Financial Officer.

Before we begin, this conference 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 our Investor Relations section of the Lumen website. With that, I'll turn it over to Kate.

Thanks, Jim, and thanks, everybody, for joining the call. We had a great 2025, laying a solid foundation to execute our strategy to become the trusted network for AI. And of course, the big news is that yesterday, we closed the transaction with AT&T. This marks a defining moment for Lumen, completing our pivot to become a simpler, stronger, enterprise-focused technology infrastructure company. The impact of the deal on our capital structure and financials is very significant. With the $4.8 billion in net proceeds and cash on hand, we've paid off all our super priority bonds in the last 24 hours. Recall that in the last month, we also paid off our second lien debt. Our total debt now stands at less than $13 billion, and our net leverage has been reduced by a full turn, now below 4x.

All of this capital markets activity has reduced our interest expense by roughly $500 million or nearly 45% down from 2025 levels. And lastly, this divestiture reduces our annual CapEx by over $1 billion, driving a significant reduction in capital intensity as we stop fiber-to-the-home builds and focus our capital on building a digital network services company. Closing this transaction marks a new day for Lumen. We're focused on serving public and private enterprises as the trusted network for AI. And our 2025 results clearly demonstrate the power of this focus. We reported strong 2025 financial results for revenue, EBITDA and free cash flow.

Our business revenue mix continues to improve with fourth quarter North American enterprise revenue, grow revenue totaling 52%, eclipsing nurture and harvest revenues. We continue to expect this trend to inflect our business revenue back to growth in 2028. EBITDA was at the high end of our guidance range, which included the RDOF giveback in 2Q, and free cash flow was solid even without the $400 million tax refund that is now expected to come in the first half of 2026. We exceeded our increased target for cost reduction, ending the year at over $400 million in run rate savings.

Exiting 2026, we're targeting another $300 million of cost out, totaling $700 million run rate savings, which positions us to hit our 3-year $1 billion cost-out target as well as our expected EBITDA growth this year as previously guided. Also noteworthy, we had a banner performance in PCF sales in the fourth quarter. You may recall that just over 18 months ago, we announced our first $5.5 billion in PCF deals with a goal of reaching $12 billion over time. As of today, we are now at nearly $13 billion with more deals in the pipeline. And we had another strong quarter of growth in our NaaS business, rising ports per customer show that enterprises are starting to standardize on the Lumen fabric as their programmable network control plane for Cloud 2.0.

Each additional port expands our platform economics by unlocking higher-margin digital services revenue accelerating cloud and AI on-ramp adoption and deepening ecosystem network effects for Lumen and partner-delivered services. Lastly, we added two amazing new executives to our team. Jim Fowler, our new Chief Technology and Product Officer, who is uniquely suited to help us execute our vision; and Jeff Sharritts, our new Chief Revenue Officer, who is uniquely suited to help us drive commercial scale. We're proud of the team we've built and all of their accomplishments throughout 2025, and we're pleased to see both the credit and equity markets rewarding the Lumen team for all of that work. Looking ahead to '26 and beyond, I'd like to reiterate our belief that there's an urgent need for structural change in network, architectures and business models to more closely align with customer needs in a multi-cloud AI first world.

This is the investment thesis behind our 3-pillar strategy as we build the backbone for AI, Cloudify and Agentify telecom and expand our connected ecosystem. I'll briefly touch on each strategic imperatives, starting with the backbone work. We successfully reached our 2025 goal of implementing 17 million intercity fiber miles. The roughly $2.5 billion of new PCF deals that we inked in Q4 will raise our total network expansion to a whopping 58 million fiber miles in 2031. And while simultaneously expanding our capacity for enterprise customers. But as we've shared, our physical expansion is about more than just the number of fiber miles. It's also about giving customers bandwidth expansion lightning fast implementation time lines, rich data center interconnect and investment in geographies where they need it most.

And as we all know, every fiber mile isn't created equal. That's why we're investing significantly in 3 major network upgrades, building 400-gig rapid route waves across 36 routes with more on the way, enabling 400-gig services for data centers across key markets, and focusing on metro expansion so that we connect the most needed routes, data centers and cities across America. To support this work, we've expanded our partnership with Corning, ensuring we have priority access to the newest state-of-the-art fiber technology, delivering the AI backbone for today's and tomorrow's most important customers.

In a world of Cloud 2.0, the largest tech companies are choosing Lumen to help construct the supply side of the AI economy, and that's because of our physical network prowess. Our network size, scale and quality position us to provide superior performance on three key metrics emerging in the AI race: Fastest time to first token, GPU idle time and interconnect latency. What's more, as data centers begin to decentralize to accommodate energy supply constraints, our vast network provides valuable proximity. Together, our capital investments and PCF deals create a strategic competitive advantage, and we're expanding and upgrading our network alongside the most influential companies in the AI race, making it easier for enterprises to consume AI. And speaking of the consumption side of the economy, this is where businesses are recognizing that yesterday's network doesn't support AI and Cloud 2.0.

They need quick secure effortless on-demand services to move their data from anywhere to anywhere in real time. That's why Lumen is Cloudifying and Agentifying the network. Think of it as building a programmable network platform that finally puts networking on par with compute and storage in the world of cloud. And our customers love it, as shown by another great quarter of adoption metrics, the number of active customers grew by 29% quarter-over-quarter.

The number of NaaS Fabric Ports deployed grew 31%, and the number of services sold grew 26% in that same period. Recall that in October, we announced NaaS Internet on demand, off-net. And while it's still early, we believe off-net growth significantly expands our addressable market for NaaS services. Great brands across industries are adopting this new capability with more than 900 off-net ports sold so far. The investments we're making in building a programmable network are driving significant growth in high-value digital revenues, which we believe will ultimately drive higher return for Lumen investors. And we'll share more on this and Project Berkeley at Investor Day.

Finally, let's talk about the progress we're making since launching the Lumen connected ecosystem 6 months ago. The team is fully staffed in building a commercial flywheel to marry AI-ready Lumen validated designs with partner cloud solutions enhancing joint value props and accelerating our collective time to value for customers. Not only do these partnerships give us greater commercial reach, they give us a seat at the table where business decisions are being made. Instead of networking being purchased by infrastructure procurement teams as an afterthought, our Lumen team is included in the entire life cycle of the sale elevating awareness of the critical importance of network and differentiating our company in the marketplace.

We've signed 16 connected ecosystem partnerships to date, yielding more than 180 potential sales opportunities so far. Recently, we've made a slew of announcements including at AWS Reinvent we shared a gated preview for AWS Interconnect to help AI workloads dynamically scale bandwidth while providing high availability and security. At Microsoft Inspire, we announced Lumen Defender with Microsoft Sentinel. And at meter up, we launched our joint network management offering to give customers preferred connectivity solutions and faster time to value. With every connected ecosystem partner, we're working to deliver scenarios and outcomes that transcend legacy telco capabilities.

We're uniquely positioned to do this because of our API-driven programmable network and digital services portfolio, all of which enable a new world of customer-obsessed partner-delivered technology solutions. All right. To wrap it up, it's a new day for this company. Lumen is separating itself from the traditional telecom pack. It's not a story about share take or price protection in a declining legacy market. This is about taking a once commoditized asset, innovating new architectures and capabilities and commercializing it through a modern business model so that enterprises can focus on using AI to reimagine their workflows and business models during the biggest technology shift in history. It's a strategy that for several quarters has helped us slow overall revenue decline more effectively than our peers.

And as our strategic revenues eclipse the size of our declining legacy revenue, it's a strategy that we expect will ultimately deliver new revenue streams that are both margin accretive and require less capital investment, ultimately improving overall margins and free cash flow even further. I'll hand it over to Chris to talk more about our financial performance and guidance.

Thanks, Kate. As Kate said, since the debt restructuring in the spring of 2024, we set out to achieve four major financial goals. Return free cash flow to growth, fix our capital structure, inflect adjusted EBITDA to growth in 2026 and return to business revenue growth in 2028 and total revenue growth in 2029. In 2025, our team executed numerous transactions and reached key milestones along our path to achieving these goals and Lumen's overall financial transformation. Over the past 12 months, we signed almost $4.5 billion in new PCF deals, taking the total amount of signed deals to nearly $13 billion. These deals provide us with cash to strengthen the balance sheet and invest in growth, cementing our place with the trusted network for AI and highlighting the value of our assets to customers in a multi-cloud AI world.

We reached over $400 million in run rate cost reductions on track for $1 billion exiting 2027. We launched Phase 1 of our new ERP system, streamlining our accounting processes and reducing long-standing systems complexity. And we continue to improve our revenue mix with 52% of North American enterprise revenue now coming from growth products, up from the mid-40% range in 2024, which supports our confidence in a return to business revenue growth in 2028. We successfully executed 7 debt refinancing transactions with a total value of over $11 billion, extending and smoothing our maturity profile while materially reducing our annual interest expense by more than $180 million.

Through these transactions, we also simplified our capital structure. We eliminated the second lien layer at Level 3 and reduced the number of debt tranches outstanding by 10 and at 16 when you include the recent super priority paydown. Almost a 40% production. These disciplined actions help to materially improve our financial flexibility. And today, our capital structure is no longer a headwind. It's a position of strength. And finally, yesterday, we announced the close of our fiber-to-the-home business to AT&T for $5.75 billion. The net proceeds and cash on hand were used to pay down the full $4.8 billion of super priority bonds which reduces annual cash interest expense by an additional $300 million. In total, annual interest expense has been reduced by nearly $0.5 billion in the last 12 months.

I want to give a little more detail on the debt transactions because we're particularly proud of what we've accomplished, and it levels no one outside of Lumen, investors, analysts, advisers and the broader media thought was possible over such a short period of time. We have that confidence in ourselves and we have delivered. After the AT&T close, we now have under $13 billion in debt. more than $5 billion retired since January 1 of '25. These actions have reduced our overall leverage to 3.8x trailing 12 months adjusted EBITDA, and we're not done. There are just additional steps that we can and will take to improve and simplify our balance sheet and overall capital structure. We'll share more details at our Investor Day on February 25.

Our team's hard work has delivered impressive results and created opportunities for Lumen's future through a transformed financial profile. This is what playing to win looks like. Now turning to results. Fourth quarter revenue and adjusted EBITDA were in line with our expectations and updated 2025 guidance. As we've mentioned at recent investor conferences, this quarter, we also introduced a new reporting view, strategic and legacy to better reflect how we run the business. It increases transparency by separating the growth engines we're investing in from the legacy revenues we're actively managing for cash and simplification.

Lumen's transition from grow, nurture and harvest to strategic and levity revenue segmentation reflects our commitment to driving sustainable growth by focusing investment and innovation on our most scalable future-oriented businesses. By simplifying our financial reporting and aligning with our enterprise First strategy, we're better positioned to accelerate margin expansion and deliver long-term value. Now let's move to the discussion of financial results for the fourth quarter and full year. Total reported revenue declined 8.7% to $3.41 billion. Business segment revenue declined 8.8% to $2.425 billion which includes over 350 basis points of anticipated downward impact from onetime dark fiber and elevated public sector harvest revenue growth in the fourth quarter of 2024. The Mass Market segment revenue declined 7.9% to $616 million.

Adjusted EBITDA was $767 million with a 25.2% margin percent margin and free cash flow was negative $765 million. Total business grow revenue was roughly flat year-over-year in the quarter. as expected and previously communicated, impacted by those onetime revenue items in the fourth quarter of 2024. For the fourth quarter and full year 2025, we recognized revenue of roughly $41 million and $116 million, respectively, associated with the nearly $13 billion in PCF deals we've announced to date. These prefunded deals have both strategic and financial impacts for women, allowing us to expand our capacity and build alongside the largest technology companies while also providing capital to fully fund our business plan.

We will provide a longer view of the PCF business at our Investor Day. Within North American enterprise channels, excluding wholesale, international and other, revenue declined approximately 8.9%. North America enterprise revenue increased slightly, driven by continued strength in IP. We saw expected and typical declines in nurture and harvest. And overall, including wholesale, the North American business revenue declined 8.6%. Wholesale revenue declined approximately 7.8% year-over-year, in line with our expectations. International and other revenue declined 16.3% or $15 million, driven primarily by managed services, VPN and voice declines. Now turning to adjusted EBITDA. For the fourth quarter of 2025, adjusted EBITDA, excluding special items, was $767 million compared to approximately $1.52 billion in the year ago quarter. Year-over-year declines were largely impacted by expected revenue trends including those onetime revenue items in the fourth quarter of 24%, increased health care costs as well as increasing cloud migration costs that we've talked about in previous quarters.

Special items impacting adjusted EBITDA totaled $280 million. This includes severance, transaction separation costs and our modernization and simplification initiatives. Lastly, capital expenditures were approximately $1.6 billion in the quarter as we expected and in line with our full year guidance. Free cash flow, excluding special items, was negative $765 million. As we discussed previously, fourth quarter free cash flow was negatively impacted by a delay in a $400 million tax refund, which we now expect to receive in the first half of 2026. Now moving on to our financial outlook for the full year 2026, which includes the impact of yesterday's February 2 close of the AT&T transaction, we estimate adjusted EBITDA to be in the range of $3.1 billion to $3.3 billion. We expect adjusted EBITDA to inflect the growth in 2026.

Our adjusted EBITDA guidance includes organic business revenue declines roughly 75 basis points better than 2025. And as we continue to focus investment on our growth products and manage our legacy portfolio for cash. Excluding from the guidance -- excluded from the guidance above, is roughly $400 million in transformation costs associated with the multiyear goal of reducing expenses by $1 billion by year-end 2027. As Kate mentioned, for year-end 2026, we now target a $700 million run rate associated with our modernization and simplification program.

And moving to capital spending and our other outlook metrics. For the full year 2026, we expect total capital expenditures in the range of $3.2 billion to $3.4 billion. The majority of the reduction in CapEx from 2025 to 2026 is associated with the sale of our fiber to the home business to AT&T. As a reminder, CapEx spent on the assets held for sale from January 1 until close was reimbursed at clubs. We estimate the CapEx associated with the nearly $13 billion in PCF deals to be approximately $1 billion. The majority of the remaining CapEx is associated with our core enterprise business. We expect to generate free cash flow in the range of $1.2 billion to $1.4 billion for the full year 2026. Additionally, we estimate net cash interest expense to be $650 million to $750 million, a reduction of over $550 million at the midpoint versus 2025.

Taxes are expected to be a cash inflow of $350 million to $450 million in 2026, inclusive of the aforementioned tax refund by exclusive of divestiture taxes. In terms of other special items for 2026, we continue to expect dedicated cost to support transaction services for the divestitures. The reimbursement for these services will be in other income with no material net impact to our cash. Additionally, special items include costs associated with Lumen's $1 billion in project takeout by the year-end of 2027. As we continue our journey in disrupting enterprise networking, will also evolve how we guide, measure and report our performance, especially around PCF impacts to our financials because it's a meaningful contributor but not the whole story. While the growth in the PCF revenue certainly helps it does not fully reflect the improvements you'll see in our core enterprise business over the next several quarters. We'll share more specific details at our upcoming Investor Day.

Now at the beginning of my remarks, I laid out 4 goals we set for ourselves 24 months ago. We've already successfully achieved the first two, free cash flow growth and fixing the capital structure and expect to deliver the third adjusted EBITDA inflection in 2026 and remain on track to the fourth returning business revenue to growth in 2028. We've achieved the goals we've communicated to investors over the past year, and we continue to see multiple paths to reaching business revenue growth inflection in 2028. We will continue to provide investors with adoption metrics and other proof points along the way to increase confidence in our ability to reach that goal. We're pleased with our performance in 2025 as we made great strides across all three layers of the business. physical, digital and ecosystem and the early results for our digital growth engine are encouraging.

Over the next few years, our cost structure optimization and increasing digital revenue are expected to help improve margins and free cash flow, reduce our capital intensity, further lower our leverage and borrowing costs and continue to increase our financial flexibility to invest in Lumen's growth. The future is bright. We look forward to providing you with more details on our long-range plan in a few weeks. And with that, I'll hand it back to Kate before we move to Q&A.

Thanks, Chris. Before we open it up for questions, I just want to say how proud we are of all the luminaries who continue to execute our strategy to build the world's trusted network for AI. Whether you're doing a PCF deal driving NaaS adoption, helping us do a major strategic divestiture, it takes every single function operating as 1 team from HR to operations to product, IT and engineering to marketing and sales into finance and legal, all of you matter deeply and it's because of your work that Lumen's future is still very bright. Moderator, we'll open it up for questions now.

[Operator Instructions]. Your first question comes from the line of Michael Rollins with Citi.

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 received just given now the quantum of these deals maybe relative to the that you spent over the last couple of years didn't seem 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.

Yes. Thanks, Mike. So the recent deals, the $2.5 billion or so, the structure is really the same as what we've experienced to date because we're doing these deals on existing network conduit, so they don't have new routes. So the economic profile is very similar. On your follow-up question, we will get into that detail at Investor Day. We're going to give you visibility into the PCF versus non-PCF impact on cash flows. I think the thing that I would definitely share with everyone today though is if you think about our capital intensity, I'm going to speak in rough numbers because it's easier $4 billion in CapEx last year, $1 billion of that went away with the sale of the 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, $1 billion of the 3 or so that we're guiding for this year relates to PCS. And remember, those deals are prefunded because of the quantum of those dollars. So when you get to the underlying capital intensity outside of PC 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 is roughly half of where we were last year. So that, combined with the margin improvements really do drive an ROIC improvement for investors.

Your next question comes from Sebastiano Petti with JPMorgan.

I 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 NaaS was supposed to contribute $400 million to $500 million in 2028 and PCF about $300 million to $400 million. Correct me if I'm wrong, but more or less in that quantum, or $400 million to $500 million rather on the PCF 300 to 400 on the digital, so 500 to 600 digital. Why is there not upside to that number, given what you guys have talked about today, right? PCF, I guess, TAM now is what, 25%, 35% margin than what we talked about exiting the third quarter call and the NASA digital adoption seems to be accelerating. And so, any kind of color, Christopher, or Kate, you could provide on maybe the shaping of revenue and maybe there's upside relative to last quarter's?

Yes. Thanks, Sebastian. I'll let Chris handle the financial side of it. I just -- let 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 less technology did in the transformation in the cloud era. A decade or 2 ago, it's 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 going to 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 and Cloud 2.0. Driving a clear and pressing need for that change. But we're being cautiously optimistic and making sure that we're doing everything we need to do to prepare and provide change management for our customers as well. And Chris, I don't know if you want to go to any financial guidance on top of that.

Yes. So Sebastian, you're certainly right that the additional $2.5 billion of deals does help. But keep in mind, we're in 2026, it's going to take 3 years for those routes to get built at scale. Will there be some revenue impacts in 2028? Yes, I would expect it. Does that impact maybe and pull forward in the year when we inflect the growth? Yes, that's possible. I think the more important thing as we move to Investor Day, we will, again, give you those -- the PCF math there.

But it's really on the digital side, to your point, and NaaS is obviously a big piece of that. But the other leading metrics that Kate talked about, right, not just 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 you and give you a spoiler for Investor Day. We're humans. We are projecting kind of linear growth in digital. The reality is we all know that at some point, that's a J-curve adoption, but we're not going to try to predict where that J curve comes into play. So I think what we're showing is a middle of the fairway estimate with the possibility for us to overachieve. But time will tell.

Your next question comes from the line of Batya Levi with UBS.

Can you provide a little bit more color on bridging to '26 EBITDA? I think you mentioned fiber sold was contributing about $300 million of EBITDA. You exited the year with higher cost savings than planned, but it also looks like SG&A ramped up higher as you exited the year. So how should we think about these cost items in totality as we go through 2026 and maybe pacing of the EBITDA could be helpful as well. And I'm not sure if you mentioned this, but did you quantify the PCF sale contribution for '26?

Not yet. No. We'll give you some more visibility to that at Investor Day because we'll talk about how PCF is impacting revenue by your free cash flow. To your question, we are going to be releasing an 8-K tomorrow with the pro forma economics that will get specifically to your question, Batya. So I don't want to get into the details, but when you take out the EBITDA from the 25 base year, you take out a little bit of EBITDA that we would have generated in the first month of this year, and then you compare what's left, that's where you see the growth.

Okay. And the other cost items, how much should we think in terms of what's embedded in there for maybe higher SG&A as you exited the year? And then maybe the modernization spend that you've been incurring. Is that all done? Or do you anticipate more?

Yes. So the modernization is largely in special items. So we tried to separate that out in terms of its impact. We have projected in kind of the run rate that we're seeing on things like medical costs into the year. But the reality is, as Kate mentioned, we exited with our M&S savings at $400 million in '25. We're projecting $700 million in '26. So that's going to mute a lot of that. And again, we'll share 5 years of financials at Investor Day. I do want to -- again, I want to share one other thing that we shared with investors that I think is really important.

What that 5-year model is going to show is that we are fully funded. We are not required to borrow money to fund our future anymore. We have excess cash over the 5 years, and we'll get into specifics on that. And our objective is to: one, fully fund our growth initiative and our -- the transition of the company, and that is fully funded in that mode. The second thing would be to continue to reduce leverage a little bit. And after that, if there's nothing that achieves those first 2 objectives, then we'll look to start buying back stock.

Your next question comes from the line of Frank Louthan with Raymond James & Associates.

So on the slide where you list about a fiber that you have that you're building out, how much of that fiber are you retaining for your own purposes versus what you're building for the customers?

No, I'm not exactly sure the question. So we break it down into all the various consumers of it. We've got the hyperscalers connecting their data centers, that's the supply side. we've got enterprise utilization, that's the demand side of our role in the AI economy. And then we have available capacity for growth on the bottom line. And I think what's really interesting is in 2031, when we'll have 58 million miles of fiber installed in the ground, we will have more available for growth than when we started this journey in 2022.

Our next question comes from the line of Gregory Williams with Cowen.

Just on PCF since you announced all those deals back in August of 2024, have you completed any of those projects? I know you said it takes up to 3 years on these things. What I'm getting at is, is there any more -- is there any amortized PCF revenue running through the business at this point? And how much? Or is it still too early in seeing that revenue? Second question is just on the NaaS metrics on Slide 9 and alluding to the earlier Network as a Service or digital revenue question. So are you basically trying to say that you're conservative on your estimates for 2028 inflection and that the metrics I see on Slide 9, the new customers, Newport, you're pacing ahead of that or you're pacing in line with the sort of $500 million to $600 million in digital revenue.

Okay. So I'll take the first piece. So when I was talking about conservatism and structural change, I just want to be super clear. The pipes that are in the ground today that are running mission-critical applications for businesses. These are going to be very cautious in how they approach changing that infrastructure. And we think the buying patterns in NaaS represent exactly what this looks like. they buy a port, they test it. They buy a second port and they run an application against it. When they have success, they start to by 3, 4 and 5 ports to run more of their locations. It's a standard land-and-expand model. And it's still pretty early to draw the curve to figure out exactly what's going to happen. But we're confident in the numbers we've given to the Street with an over and an under on that.

And we've given you a range because it's very hard to predict the exact revenue outcomes for a massive change in industry, and that's what we are basically presenting. Regarding the PCF infrastructure sales, the ranges we've given you there are tied to whenever we finish construction, we light it up, and we start to recognize the revenue. And the $13 billion the builds go all the way out through 2031. And the ranges that we gave you for exiting 28 are not inclusive of what we just sold in Q4 because those builds won't be completed until after 2028. Chris?

Yes. And just a few more details. So in my prepared remarks, I said that in all of last year, we had $161 million of revenue recognized. Sorry, $116 million and $41 million of that was delivered in the fourth quarter. So you can see it's starting to scale and ramp now. but we are either on or ahead of delivery schedule at this point with all of our customers.

Your next question comes from the line of Michael Ng with Goldman Sachs.

I wanted to ask about the new segment reporting between strategic and legacy I think strategic is made up of a portion of Grow and NURTURE. Could you just talk a little bit about what's in strategic, what part of grow didn't make it in. I would assume it's like VOIP, but would love to hear a little bit more about that. And then what are your assumptions in terms of like the strategic revenue growth and the legacy revenue declines as we inflect to business revenue growth in 2028?

Yes. Yes, no problem. So the shift, what we did is the grow items that didn't make the cut, and again, grow really relates to the most modern forms of connectivity, everything from is delivered in a traditional manner to deliver digitally. But what we took out were specific product lines that are in decline. So when you think about lower capacity connectivity versus higher capacity connectivity, there are parts of those businesses that are in decline. And in effect, those are legacy businesses now. And by the way, this is something that is very rules-based internally.

And as we go forward because of product life cycle, you'll continue to see us move products through that life cycle so that we're giving you a very clear view the items that moved out of nurture and into strategic were really things like Ethernet on demand, right? VPN on demand. Those are digitally delivered products that are in demand and grow products, products that our sales team should be selling. Now to the second part of your question, we will continue to see the mix shift in our favor and that strategic bucket grow from the 52% from here forward. And we'll give you a better view of that in a few weeks at Investor Day.

Your next question comes from the line of Nick Del Deo with MoffettNathanson.

So you talked about NaaS sales being strong. Interest in PCF seems pretty strong. Can you talk more broadly about what you're seeing with respect to gross sales for the remainder of the business and maybe share some insights into churn trends? And then second, just a follow-up on Greg's question earlier. Thinking about the PCF revenue that you disclosed this year. Should we think of that as sort of a 90-10 noncash versus cash split akin to the overall mix that you originally described? Or was there a different noncash versus cash mix?

So in terms of the first part, Nick, we saw a particular strength in IP this quarter. But again, there's really across all connectivity solutions, there's demand right now. So no surprises there. Churn trends in total have remained fairly consistent with where they have been, which obviously was an improvement in '25 versus '24. But one thing we are seeing and we don't have numbers to disclose. But on our NaaS offering, the churn rates are dramatically less than what we see on traditional sales. It's a much stickier sale.

And Nick, what was the second part of your question?

So the PCF revenue that you disclosed, the $41 million in the quarter and the $16 million for the year. Should we think of that as being like 90% noncash, 10% cash? Or is there a different mix because you're kind of early in the process?

I think that's reasonable just to assume as we go forward because, again, to your point, our guidance has been that 90% of the cash is received upfront for the builds and then and then 10% as we like that fiber, we don't recognize the revenue until we lay the fiber. So I think it's a good assumption. And again, we will give you the 5-year outlook for the impact to revenue from those deals in a few weeks.

Your next question comes from the line of Michael Funk with Bank of America.

Yes, so first one, a lot of reports the construction blade briefly, specifically data center builds. So what are you doing specifically to avoid construction delays. And just trying to understand better in the contracts that you have with customers and revenue recognition for the PCF. Are they able to delay acceptance for delivery? Or once it's finished, you light adopt is to recognizing revenue at that point?

Couple of things. First, what are we doing to deliver on time? We have scale and scale across many different elements that really matter. So scale across the supply chain. So our contracts are very favorable in terms of first off the line priority status. We have scale in terms of workforce. So if you want to join a construction team that's going to be at this for several years, you want to join one of our partners because they're building the largest expansion of the Internet at large for Lumen. And so our scale really, really matters here and gives us the accessibility to all the things that we need to ensure that there are no constraints put on our ability to execute on time. Regarding demand and pressing pause, the general feeling in the market is how fast can you go.

And it's widely recognized that we can go fast because we're often times already there. and the amount of work that we have to do is about overbuilding and not building for the first time. I will tell you -- I can't reveal any names here, but we did a large deal with a company, a cloud company, and it was the first time that we've done work with this company and went so fast that we got a call from the head of operations that said we've never experienced this kind of speed before with the telco. Can we meet more regularly so that we can understand your true capacity and ability to go at this pace because we weren't quite ready for it. So that was 1 of the more fun phone calls I've ever gotten. I'm going to be very honest with you. And then, Chris, do you want to add something?

Yes, I'd say a couple of other things. On the first part of the construction, again, we've got a very special relationship with Corning. And we are doing very well in terms of access to fiber. I think the other point, though, and I'm going to kind of go with the nuance of your question, which is, can they hit pause because of concerns over a bubble? I can say consistently and in terms of our engagements with those customers. And you can hear it in the market. Hyperscalers are not talking about a bubble. They are talking about, they don't have enough fast enough. And I would also tell you that many of our contracts have performance bonuses in them for us to go faster. So that's the reality that we live with every day, and we're delivering against it.

Yes. And I think one of the final things I'll mention is that, the reason why we're able to execute it as swiftly as we are is the same reason why we get chosen and that's because a lot of the deals that we're doing are to existing data center areas where our network has proximity.

Your last question comes from the line of Sam McHugh with BNP.

I have a couple of follow-ups for you, Chris, if you don't mind. The first one was on the EBITDA guide. I think you mentioned about the growth in the $3.5 billion prior guide. I just wanted to clarify the range of $3.1 billion to $3.3 billion. Are we saying it's still growth versus 25 throughout the whole range or at the midpoint of the range. And then the second one, and I'll try but -- You go first.

Yes, yes. So, just to answer that. So the $3.5 million was when we still had the consumer business in there. And I think the estimate for 2026 at that time was about $300 million in EBITDA -- adjusted EBITDA. So that's broad numbers, that's really what's driving us there. As it relates to inflection, we're saying inflection on the year. It's not going to be in every quarter. And again, when you see the pro forma math in the 8-K tomorrow, that will help with that. But sorry, you had a follow-up.

And the follow-up was 1 on PCF. And I guess maybe we won't get an answer, but until the CMD, but rough math would suggest like working capital and PCS cash inflows are around 1.7 billion or something based on the guide. Can I miles off with that? And is there any reason why working capital could be massively positive or negative?

Yes. I mean working capital will definitely be positive. That's obviously the work we're those PCF inflows and outflows or inflows show on the balance sheet and then the outflows obviously show up in CapEx. So again, as we've said to the market, at some point, when PCF stops will have trailing CapEx that we've already received the cash for. But with $2.5 billion coming in and more demand in the pipeline. That's just not something that we're encountering right now. And that obviously increased our guide for next year. And I think that's why people are seeing that we're higher than consensus on that estimate.

There are no further questions at this time. I'll now pass it back to Kate Johnson, CEO, for closing remarks.

Thanks, moderator, and thanks, everybody, for engaging in today's call. We look forward to speaking with you more about the future of Lumen at our Investor Day in just a few weeks. Have a great night.

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, everyone.

All right. Good afternoon, everybody. Thank you for joining us. I'm Eric Luebchow, senior analyst on the Wells Fargo Communications Infrastructure and Telecom Services team. Thank you for joining us. We're very pleased to have Chris Stansbury, the CFO of Lumen. Thank you for joining us, Chris.

Yes. Great to be here today.

So maybe we could start off kind of at a high level. I think one of the critical components to your story is kind of the progression to revenue growth in the next few years. And maybe you could, at a high level, kind of give us some of the building blocks from the kind of mid-single-digit declines that we have in the base today to get back that glide path to growing revenues by 2028 or 2029.

Yes. I mean the transformation is well underway. It's working. And if you look at where we sit today, just this past quarter, in the third quarter, we announced that half of our revenue stream is coming from the items that are actually growing and the other half is from items in decline. So we're already from a portfolio standpoint in a very advantaged position versus our competition. And that's why you see our rates of decline at roughly half of what you see in the industry. If you play that forward, if you quite simply just take the industry rates of growth and decline by product and then you layer in the revenue impact from the PCF deals that we sold, the $10 billion of deals as well as $500 million to $600 million in digital revenue, you get to growth on the business segment by the end of '28. So roughly $0.5 billion in each of those 2 buckets, the PCF and the digital. So they're not crazy assumptions at all. Obviously, we'll work hard to go faster, but we feel really good about where we sit.

Yes. And if you think about the relative growth rates or declines in your business, like how should we expect legacy? Is that going to be declining at a faster rate than grow in the near future? Or do you think you'll kind of be able to eclipse that over the next couple of years when we think about the relative...?

I think it will continue to decline at rates that are a little faster than grow for the next year or 2. It really depends on how fast the digital adoption comes, and it is coming our way. I mean we're seeing incredible rates of adoption, albeit on a small base for our Network-as-a-Service offerings growing at 30% quarter-on-quarter consistently now. So it's just a matter of time, but you will definitely see the rate of decline improve as we move through that window. And we'll continue to give visibility around the components of that as well as the adoption rates around the digital product portfolio growth. But you will continue to see the growth items each quarter become a bigger and bigger percentage of the business as we go forward. So that's all positive.

In the Network as a Service growth category, from someone who comes from a more traditional telecom background, it's probably relatively misunderstood. And I'm sure you guys will help us along the way to understand it better. But maybe you could just talk about that platform. I think you have north of 1,500 customers today. You could talk about what makes that particularly unique to other players you're competing with in the telecom ecosystem that are primarily really just focused on the connectivity layer.

Yes. I'm going to hover here for a couple of minutes and walk people through it. If you look through enterprise telecom over history, its Achilles heel has been that it's not scalable, period. So every single provider when they provided a new service to a customer required a level of infrastructure to support that. If you want Ethernet, if you want VPN, if you want Internet on demand, it literally was truck rolls and boxes and things getting plugged into other things. It's very static. It's slow moving. And as a result, it stifled innovation. It also generated a lot of cash, which led to dividends, which led to declining rates of sales, which led to borrowing to pay the dividend, and we've seen that story repeat itself multiple times. Network as a Service for the first time, brings scalability to enterprise telecom.

Quite simply, it is one infrastructure layer, one port at a customer location that can carry thousands of services on it. Those services are delivered digitally. The customer can self-provision those services. There are no truck rolls or far fewer truck rolls. And so it's infinitely scalable. That's why it's so important. And we're the only ones investing in that infrastructure broadly. But that isn't just about consuming services at that location. It's also about the ability in a world where data is proliferating, both in its magnitude, but also in terms of where it sits as data centers to support cloud to support AI are chasing cooler temperatures, power, water. So the ability to access digitally all your data in all the places and move it through very high capacity, low latency pipes is absolutely critical. It's table stakes for AI, and that's why we're doing it. And the crazy thing is no one else is. So we feel really good about where we sit.

And as we think about kind of the PxQ math to get to the revenue run rates that you've talked about, how should we think about that? Is there kind of a base connectivity layer price that you'll charge? And then as they take more and more services, you can obviously drive up kind of your average revenue per user? Or how should we think about kind of the interplay of the PxQ?

Yes. It's -- the PxQ is exactly the way to think about it. We're going to give some more information on that at Investor Day because we're learning on the fly. We're learning a lot right now. But think about PxQ really being broken down into a number of subsets because there's DC to prem connectivity. There's DC to DC. There's DC to cloud. There's prem to cloud, right? There's all those different combinations. And depending on how you want to access that data and move it around, the PxQ will be slightly different for each of those. But we do think about at its most basic level, the number of ports per customer and the number of services per port and the price per port. We're still looking at that initial port. Do we charge for that port? Or do we just put that port in that location because then we're going to force adoption a lot faster and people start consuming services faster. So still TBD, but more to come at Investor Day.

And as you think about pricing that, when we think about the history of telecom, pricing compression was just a way of life forever, right? Obviously, you're building a platform that's different that none of your peers necessarily can or plan to replicate at least based on what they've said. So does that give you maybe a little bit more stickiness in the pricing you think you can achieve just given the fact your peers are not even trying to adopt something similar?

Yes, I mean look, if you think about the PCF deals, what is our durable competitive advantage? It is the network. It's that conduit that was put in the ground 25 years ago that has remained empty because of the advances in photonics. At that time, we were pulling under 100 strands of fiber through each conduit. Today, we're pulling as much as 1,728 and it's faster. So there's a lot of scalability there. And for anybody who wanted to compete with us, they'd have to replicate that. It doesn't exist. No one has the pipes. And by the way, if it did exist, there'd be a lot more noise about other people winning a lot of the $10 billion that we've won. There is no more definitive proof that we have an advantage than the fact that we have won $10 billion of PCF deals. There is more to come and others have not. But when you think about the digitization, it's so important. There's a -- I think it was Microsoft that actually had a really great clarifying metric that they're very focused on right now. And it's referred to as time to first token.

And that is the time it takes for data to be consumable in AI. And all of the economics are driven around how do you shorten that time. And the reason that's important is today, a GPU cluster costs about $2,000 an hour to run. And in order to earn a return on those clusters, you have to keep them fed and spinning as fast as they will spin. If you are using legacy telecom that say is a 10-gig connection, it would take 222 hours, almost $450,000 of GPU time to move a petabyte of data. If you're using a 400-gig connection, it's 6 hours. So the services that we're bringing are giving customers in the power of their hands the ability to move their data from anywhere to anywhere digitally on demand and shorten that time to token time frame. So the value we bring now isn't about, hey, I can sell you a cheap wave to the procurement department. We're talking to C-suite executives because they're rewriting their business models. based off of our ability to improve their total value of ownership.

And maybe related to that, Chris, we were talking about this a little bit before our discussion here, but there's been a lot of fear in the market, particularly the last couple of weeks around an AI bubble forming and inflated valuations in the sector. There have been parallels that have been drawn to the current AI craze with the telecom bubble that crashed over 20 years ago. So maybe you could kind of give your perspective on where we're at in terms of that -- the AI infrastructure build-out and how it may be a little bit different than what we experienced 20 years ago and how you're positioned relative to your peers?

I'd say 3 things. Point number one, 20 years ago when the Internet was developed, there wasn't a use case. It was just a thing. And the financing that drove that was a lot of private funding and highly leveraged companies. Today, the checks that are being written are by very extremely well capitalized, the best capitalized institutions in the world. And so this is just cash off their balance sheet. There's not a lot of financial risk in that. AI is real, okay? That would be the second point. And I don't know, we don't know, none of us know who's going to win or lose. But what is absolutely a truth is that as a country, we have to stay in the lead on AI or we will fall behind.

This is the great way to narrow the gap between nations, and we have to stay in front. and enterprise has to stay in front, and they're leaning into it hard now because they know it's the next wave of productivity. The third, last and most important point as it relates to Lumen is unlike those chasing data centers or GPUs, we're in the networking business. We are the only ones who are building a network ecosystem to support AI and multi-cloud. The network is not getting overbuilt. The big investments we're making in the network are prepaid by our customers. There is no financial risk. And so what I know with confidence, what we know with confidence is that while we don't know who the winners and losers will be, we know that the winners will be riding on our network.

And there's also been some skepticism in the market around the large hyperscalers building data centers, but a new wave of AI model developers, neocloud, GPU as a service, companies that have to take on more leverage are not necessarily that profitable today, driving a lot of the demand. I mean are they companies that you do business with today as well? And do you have kind of different terms and conditions when you do business with them versus a much more established hyperscaler?

It's really interesting because when we started the announcements around the PCF sales 18 months ago, things like neocloud weren't even in the decision set. We couldn't have predicted that at the time. Are they customers -- potential customers today? Absolutely. Every contract looks a little different, but broadly speaking, they behave the same. So I think that's what the mode would be. But we've actually said recently, we said on the last earnings call, we're not going to try to predict how big that TAM is anymore because we don't know, right? We wouldn't have predicted this a few years ago. We're at $10 billion. More is coming. We're involved in a number of conversations right now. But the demand is there.

And of that $10 billion of PCF, how much do you attribute that to more AI training in more remote locations versus kind of the next wave that Kate talks about that we hear about a lot, kind of inferencing more edge use cases that are going to require more metro fiber, locations that are closer to the end consumers. I know that's going to take place over a number of years, but where are we in that evolution?

It's a really good question. Really, over the last year or so, we've seen it shift quite a bit. You still have a lot of training going on, and the training will continue. I was at a at a conference recently and some of the AI experts were saying that over the next 3 years, AI is going to become 10,000x more capable than it is today. And so that will continue to evolve. But companies are definitely leaning into it. You've seen our discussion around Palantir and what we're doing. So we're definitely starting to see more inference now. And that's where our tools become so critical because it's about self-provisioned access to the network.

I mean we had an announcement yesterday, and it was really exciting. It's with a smaller company, but it's with Meter. And it's really the first example when we talk about ecosystem partners where tech providers are coming to us to build APIs into our network because it makes their product better. It's kind of a synonymous relationship. They're a LAN company. We have WAN. So today, digitally, you can provision your networking needs that allow you to move stuff to the edge, right, in a digital way. You're going to see a lot more of those announcements. And I think that is evidence of the fact that everybody is preparing for enterprise needing to, in a very flexible way, access those AI algorithms.

Interesting. As we look at the mix of the $10 billion today, maybe you could talk about where you're at in kind of the CapEx cycle to build out the rest of the infrastructure. I know there's kind of a combination of existing conduit and some new routes that are part of this deal. Has a lot of the capital spend so far really just been pulling through conduit, overpull work? Or there are a lot of new route builds as well that we should expect over the next year?