Lumen Technologies, Inc. Q3 FY2024 earnings call

• Lumen is on a journey to transform into a digital network services company, making progress in building the AI backbone and cloudifying telco. - Continues to face secular headwinds on legacy revenues while investing heavily in transformation programs. - Has signed over $3 billion in incremental PCF deals as part of building the AI backbone. - Lumen digital has over 400 customers using NaaS, with MEF naming Lumen the best NaaS provider in North America. - North American large enterprise and mid-market sales up nearly 14% year-over-year, and Quantum Fiber broadband net additions set a record. - Disconnects are improving both sequentially and year-over-year.

Total reported revenue declined 11.5% year-over-year to $3.221 billion. Business segment revenue declined 12.7% to $2.536 billion, and Mass market segment revenue declined 6.9% to $685 million. Large enterprise and mid-market sales were up nearly 14% year-over-year. Quantum Fiber broadband net additions set an all-time record. Adjusted EBITDA was $899 million, with a 27.9% margin, and free cash flow was positive $1.2 billion. Large enterprise revenue declined 8.2% in the third quarter, mid-market revenue declined approximately 6.9% year-over-year, public sector revenue declined 4% year-over-year, wholesale revenue declined approximately 9% year-over-year, and other product revenue declined 11.1% year-over-year. Fiber broadband revenue grew 16.6% year-over-year, and Quantum Fiber added 43,000 customers, bringing total to over 1 million.

• FY '24 EBITDA is estimated to be in the range of $3.9 billion to $4 billion, but at the low end due to business trends and initial cost impacts from PCF sales. - Expect EBITDA to decline year-over-year in 2025 due to legacy declines, startup costs for PCF contracts, and incremental transformation costs. - 2024 CapEx is expected to be in the range of $3.1 billion to $3.3 billion, and cash interest in the range of $1.15 billion to $1.25 billion. - Raised 2024 free cash flow guidance from $1 billion to $1.2 billion to $1.2 billion to $1.4 billion, including incremental OpEx, CapEx, and cash flows from PCF sales growth and cost structure improvement.

• Secular headwinds on legacy revenues continue to impact financial performance. - Heavy investment in transformation programs weighs on EBITDA results. - Difficult market perception regarding Lumen's current financial results and long-term success due to lack of industry talk about a turnaround. - Uncertainty regarding the progress and impact of PCF sales on financial guidance.

Q: Michael Rollins asked about PCF disclosures and where sales growth is coming from.

A: Kate Johnson said the 4 customer stories come from the $8.5 billion total, PCF sales are a magnet, and uptick in IP and waves is due to customers recognizing need for expanded networks.

Q: Sebastiano Petti asked about incremental PCF announcements' timeline.

A: Chris Stansbury said they look similar to the $5 billion deal in terms of margins, cash flows, and timing.

Q: Batya Levi asked about PCF customer mix and CapEx requirements.

A: Kate Johnson said customer mix is a mix including big tech and enterprises, Chris Stansbury said the $3 billion looks similar to the $5 billion in terms of CapEx to sales value ratio.

Q: Jim Schneider asked about PCF pipeline and mass market asset sale.

A: Chris Stansbury said over $3 billion secured to-date is part of the $7 billion opportunity, and on mass market, consumer business has two parts with different return profiles.

Q: Jonathan Chaplin asked about mass market separation and network consumption.

A: Kate Johnson said PCF contracts are on new and existing routes, Chris Stansbury said consumer business has copper and fiber parts with different EBITDA and CapEx.

Q: David Barden asked about $3 billion use and 4Q EBITDA.

A: Chris Stansbury said not spending other people's money for balance sheet then building, and $3 billion looks like the $5 billion deal.

Q: Nick Del Deo asked about North American enterprise sales impact on P&L and NaaS contribution.

A: Kate Johnson said NaaS is accretive over time but no transparency yet, Chris Stansbury said sales convert to revenue in about 3 months.

Q: Greg Williams asked about mass market separation and North American enterprise business dynamic.

A: Chris Stansbury said there are ways to maintain synergies on mass market and nurture bucket decline is a quarterly blip.

Q: Frank Louthan asked about wavelengths revenue and PCF growth.

A: Chris Stansbury said not disclosing individual product details yet.

Q: Eric Luebchow asked about mass market competition and free cash flow.

A: Chris Stansbury said mass market has potential fiber growth opportunity and Lumen will be free cash flow positive cumulatively.