Q1 2025 Lumen Technologies Inc Earnings Call
James Schneider, James Schneider, James Schneider,
Okay.
Greetings and welcome to the Lumen Technology's first quarter 2025 earnings call. During the presentation, our line will be in a listen-only mode. Afterwards, we will conduct a question and answer session.
At that time, if you have a question, please press the star followed by the one on your telephone.
If at any time during the conference you need to reach an operator, please press star zero. As a reminder, this conference is being recorded Thursday May 1, 2025.
Speaker Change: 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.
Speaker Change: Good afternoon, everyone, and thank you for joining Lumen Technology's first quarter 2025 earnings call. On the call today are Kate Johnson, President and CEO and Chris Stansbury, Executive Vice President Chief Financial Officer.
Speaker Change: Before we begin, I need to call your attention to our safe harbor statement on slide one of our first quarter 2025 presentation, which notes that this conference call may include forward-looking statement subjects, certain risks and uncertainties. All forward-looking statements should be considered in conjunction with the cautionary statements and the risk factors in our SD filings.
Speaker Change: 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.
Speaker Change: In addition, certain metrics discussed today include costs for special items as the detailed and earnings materials which can be found on our investor relations section of our website.
Speaker Change: Finally, new this quarter, we've posted some frequently asked questions along with the earnings materials for your reference.
Speaker Change: With that, I'll turn the call over to Kate. Thanks, Jim, and thanks everybody for joining the call.
Speaker Change: In the first quarter of 2025, we remain focused on our three company-wide priorities to drive operational excellence in our core businesses.
Speaker Change: Bill the backbone for the AI economy and Cloudify Telecom. And I'm happy to share that we made material progress across all three areas, culminating in strong financial results and various external accolades, including being named one of Fortune's most innovative companies and Frost and Sullivan's CIA company of the year.
And today I'm going to explain exactly why. [inaudible]
Speaker Change: I've talked about driving operational excellence in the past. We're upgrading our systems, simplifying our product portfolio, unifying our networks, upgrading our good market teams, and improving execution overall.
Speaker Change: and our financial results in the first quarter show the result to that rigor.
Speaker Change: We strengthen our balance sheet with a term loan refinancing. We beat consensus for revenue, EBITDA, and free cash flow with our North American business grow revenue up 7.9% year over year and total North American business revenue down only 2.2 year over year.
Speaker Change: Approximately one quarter of the decline of our peers in the industry.
Speaker Change: And Wave's revenue grew on a year-over-year basis, a reflection of our strong wave sales with great companies like Activision, T-Mobile, and AARP.
Unknown Speaker
Speaker Change: Thirdly, an important driver of revenue and apodot performance in the first quarter was the lowest level of absolute dollar disconnects in the past five quarters with an over eight percent improvement from the first quarter of 2024.
Speaker Change: We continue to actively engage with our customers to migrate them to the newest technologies showing how our install base is becoming a material advantage in our digital revenue growth trajectory.
Speaker Change: Lastly, Lumen's modernization and simplification work is going very well with continued progress implementing new digital enterprise applications, unifying our network architectures from 4-to-1 and using AI to drive intelligence and automation and everything we do.
Speaker Change: We're confident in our goal of generating at least 250 million in savings, exiting 2025, and a billion and exiting 2027.
Speaker Change: Now let's talk about the other two priorities that represent our future in enterprise digital networking.
Speaker Change: Building the backbone for AI is all about ensuring we continue to widen our strategic mode.
Speaker Change: That is our expansive fiber network. As I explained last quarter, we're dramatically improving the utilization and therefore the economic returns of our physical network, while simultaneously managing the largest network capacity expansion and generations. Thank you very much.
Speaker Change: By connecting all the major cloud and technology providers, we're creating a networking ecosystem that is accessible to all enterprises and provides ample high-speed capacity for the traffic growth from AI and other advanced technologies like quantum computing or yield.
Speaker Change: And we're progressing nicely with the construction of the eight and a half billion of private connectivity fabric or PCF projects that we announced last year. We have 57 different ILA sites under construction, on track to complete the first transit 24 locations on time and on budget in the second quarter. [inaudible]
Speaker Change: We've also initiated deployment of the new Corning 864 Count Fiber on seven different routes and our modern world class project management platform and controls continue to delight customers with on time on budget delivery.
Speaker Change: We continue to be in discussions for the next tranche of PCF deals, and while the market is a bit uncertain, last night you heard some of our partners confirming on their earnings calls, their intention to continue to spend capital for their AI build out. [inaudible]
Speaker Change: From our view, we see that overall PCF demand is still there at both the large DLCSD level as well as at the smaller enterprise deal level. We anticipate that that trend will continue as these networks are just critical infrastructure for the United States to be a world leader in AI. Thank you very much.
Speaker Change: But as we've exercised many, many times, Lumen's turnaround story has never just been about commercializing physical fiber and conduit. AI is forcing a pivotal shift in enterprise customer needs.
Speaker Change: driving unprecedented bandwidth demand for real-time data processing and secure uninterrupted access to critical business application.
Speaker Change: As we've discussed, traditional cloud connections to enterprises rely on space and cross connects provided by third-party intermediaries or carrier neutral facilities.
Speaker Change: We've leveraged our network ecosystem to reinvent cloud connection with direct fiber access.
Speaker Change: The ability to connect directly from Lumen's fiber into the cloud providers. It not only simplifies network operations for us and our customers, it also significantly enhances network performance security and scalability.
Direct Fiber Active Position, Volumen Uniquely,
Speaker Change: to deliver a differentiating connectivity experience, essential for the new business landscape.
Speaker Change: A few weeks ago, we announced an important partnership with Google Cloud to provide direct fiber access to customer data centers, providing dedicated connectivity through Lumen's metro fiber with speeds up to 400 gigabets per second.
Speaker Change: We're also integrating with Google's new cloud land pollution, helping customers reduce latency by more than 40% when connecting the SaaS applications from a global footprint.
Speaker Change: Both of these initiatives will lead to faster deployments, enhancing performance and reliability, and cost savings as customers deploy AI asset scale.
Speaker Change: And as I shared before, the Network ecosystem and Direct Fiber Access Capabilities provide Lumen with the unique opportunity to go after a net new rapidly growing $15 billion cam.
Speaker Change: Okay, enough digging out on the physical infrastructure and network architectures piece. Let's move on to the digital layer of our transformation. We continue to increase adoption, velocity on the Lumen digital platform, giving customers network as a service offerings. [inaudible]
Speaker Change: That delivered real-time on-demand connectivity with the ability to control bandwidth latency and security, all wrapped in a cloud-style consumption model. It's another major industry disruptor and a huge business model shifts for Lumen, and it deserves the double click that I'm going to provide you today.
Speaker Change: The Lumen Digital Platform transforms the economics of our business by freeing us from the physical limitations of traditional telecom infrastructure in two important ways.
Speaker Change: First, we're digitizing the entire customer lifecycle, allowing customers to purchase provision and manage on-demand services through a unified customer experience.
Deliverings through Lumen Digital's Control Center.
Speaker Change: This not only delivers a dramatically improved CX compared to legacy telco models, it also drives massive operational efficiency for Lumen and our customers by automating every task and refusing it with AI.
Speaker Change: Second, through the Limit Digital Platform, we've created a device we call the fabric port, acting as a bridge between our control center.
Speaker Change: and the Physical Network. It allows customers to manage their network infrastructure digitally and remotely.
Speaker Change: Fabric Reports can support thousands of services per single port versus legacy architectures of one port per service, a major breakthrough in terms of driving scaled growth at a reduced
Speaker Change: Together, Lumen Digital's Control Center and Fabric Ports give us a new construct for Lumen's growth story. They allow our customers to dramatically simplify their infrastructure, reduce costs and accelerate innovation while providing Lumen a path to compounded revenue growth.
Speaker Change: We now have a clear task to deliver high value cloud economics at scale.
Speaker Change: Lumen's business model is no longer bounded by the traditional friction-filled limitations of telecom's physical infrastructure and analog business processes.
Speaker Change: Instead, our growth will be fueled by our ability to deliver a comprehensive digital services portfolio with a friction-free CX aimed to serve enterprise needs in a multi-cloud AI-first world.
Speaker Change: We'll grow the portfolio of digital offerings by both building and acquiring capabilities to sell in our growing install base of fabric ports. And we've got a great start, as I want to share now.
Speaker Change: I want to introduce you to something we call Lumen Connectivity Fabric or LCF. A portfolio of digital network services made to help connect people, data and applications quickly, securely and effortlessly.
Speaker Change: We have five main customer solution areas, including connectivity, infrastructure, security, media entertainment, and the communication services.
Speaker Change: You can see our flagship NAS services, Internet On-Demand and Ethernet On-Demand in the kind of service customer solution area with more to be launched over the coming quarters.
Speaker Change: Now, one area where we see enormous potential is invoice cloud services. We began a limited offering of the Lumen cloud communications platform this year, we'll call it LCC for short.
Speaker Change: It's a comprehensive group of products that we believe will be unmatched in the broader unified communications and collaboration market, all powered by Lewis extensive network assets, including our more than 130 million telephone numbers.
Speaker Change: While we have offered voice and UCAS products before, they were sold as single-point products with limited go-to-market support from the company. Moving forward, we believe that LCC and our network assets.
Speaker Change: We have a clear right to win in the 47 Billion and growing Cloud Voice stand with these products.
Speaker Change: LCC provides Lumen Legacy voice customers with a clear migration path and therefore helps bend the declining revenue curve by reducing churns.
Speaker Change: Woodsmore, our cloud voice product is built on an IP network, which is far less expensive than the old pop infrastructure, and will ensued it for the demands of remote hybrid workforce.
Speaker Change: Voices shifted to an API-driven AI-infused data-rich services-oriented market, creating higher-value opportunities like specialty lines for fire, alarm, and security systems, and with Lilland's modern voice offering.
Speaker Change: customers can gain national reach on a cloud consumption experience. And this is just one example of how we're simplifying and modernizing our product portfolio to take advantage of the new business construct, learing multiple services on the fabric ports managed by the individual.
Transcription by CastingWords
Speaker Change: We measure success in this digital business through adoption, specifically how many new customers we acquire, how many new fabric ports they buy, and how many services they're layering on those ports.
Speaker Change: and in the 90 days of Q1, we saw a new Lumen digital customers grow by 23% quarter over quarter. In the same period, we saw a 26% uptick in the number of new fabric ports provisioned and managed through the Lumen digital platform.
Speaker Change: As customers adopt this new model for wide-area networks, we expect a new port growth rate to accelerate. And lastly, the number of services sold across these customers and fabric ports grew by 29% in the same quarter of a quarter period.
That's the P&2 of our new digital networking business.
Speaker Change: And on a side note, we've been deploying fabric port technology for a while before the advent of the Lumen Digital Platform, and as such,
Speaker Change: We're investigating the opportunity to connect existing install-based fabric ports into control center, which would yield a large base of sockets to upsell our new LCF services. We'll keep you posted as this would be a major accelerator to our digital adoption and ultimately revenue growth.
Speaker Change: It's an exciting time for Lumen. The transformation is going really well with our operational rigor delivering sound financial, but what's more?
Speaker Change: We've created a growth engine called Lumen Digital that not only harnesses the power of our world-renowned fiber network, it provides a springboard for innovation that helps CIOs navigate a complicated set of problems in this multi-cloud AI-first world, and with that I'll turn
Chris Stansbury: Thanks, Kate. Lumen is having a great start to 2025 as we focus on our course strategic goals to drive operational excellence, build a backbone for AI, and quantify telegram.
Chris Stansbury: Financially, we're encouraged by the trends we're seeing despite uncertainty in the broader macro environment.
Chris Stansbury: Many of our initiatives are things we can control, like our modernization and simplification, cloudification of our services ordering and delivery platforms, and continued execution on the bill of the $8.5 billion in PCF contracts we've signed to date.
Chris Stansbury: The work we're doing inside Lumen to improve our cost structure, product portfolio, and go to market need to happen regardless of external conditions and positions us to be more efficient and improve the overall customer experience. All of this provides us with confidence and our ability to reach our goals.
Chris Stansbury: During the quarter we continue to improve our balance sheet with the March refinancing $2.4 billion in turn loans. This transaction reduces our annual interest expense by approximately $55 million and extends the loan maturity from $29.30 to $20.32.
Chris Stansbury: This refinancing is a key milestone in fortifying women's balance sheet and free cash flow profile. The significant interest savings is the first step of many to improve our cost of capital, reduce our leverage, normalize our maturity profile, and dramatically simplify our capital structure.
Chris Stansbury: We secured better long terms in part because of our recent credit rating upgrades by Moody's and S&P Global who recognized the AI-driven demand for Lumen PCF and our stable outlook.
Chris Stansbury: Based on our great start to 2025 on both our core connectivity business and our modernization and simplification program, we have confidence in our margin expansion in total EBITDA, returning to full year growth in 2026 and growing thereafter.
Chris Stansbury: We believe the value creation path for Lumen is clear through increased sales, balance sheet improvements and cost structure optimization. We're excited about our start to 2025 and the progress we're making on our core strategic goals.
Chris Stansbury: Now let's turn to the discussion of our financial results for the quarter. Total reported revenue declined $3.3% to $3.182 billion.
Chris Stansbury: Business Segment Revenue Declined $2.6% to $2.5 to $4 billion, and the Mass Market Segment Revenue Declined $5.9% to $658 million.
Chris Stansbury: Adjusted EBITDA was $929 million dollars with a 29.2% margin and free cash flow was $354 million.
Chris Stansbury: Next, I'll review our detailed revenue results for the quarter on a year-over-year basis.
Chris Stansbury: with Inter-North America Enterprise Channels, which is in our business segment, excluding wholesale, international, and other.
Chris Stansbury: Revenue declined by 1.7 percent. North American Enterprise Grow revenue increased 9.9 percent year-over-year, driven by large enterprise and public sector growth with continued pressure in nurture and harvest product revenues. Overall, the North American business declined 2.2 percent.
Chris Stansbury: On a year-over-year basis, large enterprise revenue declined 3.7% in the first quarter, and mid-market revenue declined approximately 11.1%. And large enterprise and mid-markets grow revenue was up 10.1%, and 1.2% respectively offset by nurture and harvest.
Chris Stansbury: Public sector revenue grew 14.7% year over year, and as we've set in the past, public sector revenue can be lumpy quarter to quarter, but we continue to see traction with large bookings in the space, which take time to ramp to revenue.
Chris Stansbury: with respect to 2025, and as a result of significant re-rating in the wholesale TDM space from select smaller off-net connectivity providers, we're working with our customers to either migrate or disconnect some services.
Chris Stansbury: Well, these actions will be a drag on public sector revenue in the first half of the year. We believe they are healthy for the overall business, as we're making decisions that are EBITDA and margin accretive.
Chris Stansbury: wholesale revenue decline to approximately 3.6% year-over-year, the harvest portion of the wholesale portfolio, which is comprised of voice and private line, so what revenue contraction by 5.8% year-over-year in the first quarter.
Chris Stansbury: This is primarily driven by telco partners that are selling legacy services. Our service product revenue will likely continue to decline over time and is an area we'll manage for cash.
Chris Stansbury: Nurture Revenue was down 7.8% on the first quarter on BPN nature net declines, and wholesale grow revenue was positive 1.9%.
Chris Stansbury: International and other revenue declined $11.3% or $11 million, driven primarily by DPN declines.
Chris Stansbury: He has a reminder that our international and other revenue base was reduced due to the AMIA transaction which closed on November 1, 2023.
Chris Stansbury: Moving to our business product lifecycle reporting, our reference to results based on our North American Enterprise Channel.
Chris Stansbury: The 1.7% year-over-year decrease was due to declines in nurture and harvest, offset by strength through growth, particularly non-PCF-dark fiber, ways, and IP. While results can vary in any quarter, we expect sustained growth in the growth product revenue as we execute on a core turnaround.
Chris Stansbury: Within North American Enterprise channels, pro-products revenue increased 9.9% year-over-year, down from 15.3% year-over-year in the fourth quarter due to the timing of large contracts within public sector.
Chris Stansbury: Bro now represents over 48% of total North America enterprise revenue, almost half, and for our total business, I've been carried in approximate 77% direct margin this quarter.
Chris Stansbury: nurture products revenue decreased 16.6% year-over-year largely impacted by declines in VPN nurture represents approximately 26% of our North American enterprise revenue and for our total business segment carried an approximate 61% direct marginless quarter.
Chris Stansbury: Harvest and Product Revenue decreased 9.8% year over year and continues to be negatively impacted by declines in TDM based voice. Harvest represented approximately 16% of our North American enterprise revenue in the first quarter.
Chris Stansbury: For our total business segment, it carried an approximate 69% direct margin this quarter. Other product revenue increased 8.4% year over year. As a reminder, other product revenue tends to experience fluctuations to the variable nature of these products.
Chris Stansbury: Now moving on to mass markets, our team continues to do a terrific job of building fiber to the home and adding new subscribers and providing great service to existing customers.
Chris Stansbury: Our fiber broadband revenue grew 22.9% year over year and now represents 45% of mass markets broadband revenue.
Chris Stansbury: During the quarter, Lumen added 101,000 fiber-enabled homes, bringing our total to approximately 4.3 million as of March 31st.
Chris Stansbury: We also added 39,000 quantum fiber customers bringing fiber subs to over 1.1 million.
Chris Stansbury: Fabriarch, who was $64.00. At the end of the first quarter, our penetration of legacy copper broadband was approximately 8%, and our quantum fiber penetrations did an approximately 26%.
James Schneider, James Schneider, James Schneider,
Chris Stansbury: Now, turning to adjusted EBITDA. For the first quarter, 25, adjusted EBITDA was $929 million, compared to $977 million in the year of real court.
Chris Stansbury: For the first quarter of 2025, our Justin Evidom margin was 29.2%. Evidom margin declined 50 basis points year-over-year compared to a 40 basis point year-over-year increase in the fourth quarter.
Chris Stansbury: Special Items Impacting Adjusted EBITDA, total of $99 million. This includes severance, transaction and separation costs and are modernization and simplification initiatives.
Chris Stansbury: Lastly, capital expenditures were $791 million. Pre-cash flow, excluding special items, was $354 million. And as a reminder, we expect pre-cash flow to be lumpy quarter to quarter as we move through the large PCF bills.
Chris Stansbury: Now as we look at the outlook for 25 where we're iterating our EBITDA guidance of $3.2 to $3.4 billion.
Chris Stansbury: The first quarter EBITDA results were above expectations, and we feel it's prudent to continue evaluating the evolving macroeconomic landscape before considering increasing our guidance.
Chris Stansbury: We've had a strong start to 25, but it's still early in the year, and as we gather more information, we'll adjust as needed.
Chris Stansbury: As a reminder, part EBITDA guidance includes organic decline, similar to 2024, and roughly $200 million in incremental costs.
Chris Stansbury: Included in the annualized spend associated with building the team to expand and deliver on the PCF Partnerships, the proactive disconnects of un-economical legacy services, and additional investments in cloud infrastructure to reduce future cat-x associated with utilizing our own data center assets.
Chris Stansbury: Excluded from the EBITDA guidance is roughly $300 million in transformation costs to begin the multi-year task of reducing expenses by $1 billion.
Chris Stansbury: As we stated in our last call, we estimate 2026 EBITL will be greater than three and a half billion dollars.
Chris Stansbury: Our estimates are based on anticipated improvements in sales performance, lower absolute declines in the legacy products, and $250 million in run rate savings exiting 2025. Then as such, we have confidence in margin expansion and total heap of doubt for returning to full-year growth in 2026 and growing thereafter.
Yeah.
Chris Stansbury: Lastly, before we take your questions, I'd like to address recent rumors around the sale of our consumer fiber business.
Chris Stansbury: Well, we will not comment directly on the details of the rumors. We've been very consistent in saying we're proud of the consumer fiber platform we built, but the investment in return profile are not consistent with our desire to focus on the enterprise connectivity and services market. [inaudible]
Chris Stansbury: We have no news to report now, but we will update the market when it's appropriate to do so.
Chris Stansbury: Jim Summary, we're up to a great start to the year as we challenge the norms of traditional legacy telecom through the transformation of Lumen's financials, network assets, and service delivery platforms.
Chris Stansbury: We believe our innovation will lead to new revenue streams that satisfy the needs of customers in today's multi-cloud AI environment.
Chris Stansbury: While the transformation of Lumen leads to leverage and cost of capital reductions and cost structure optimization. We're excited about the path we're on and look forward to providing more updates along our journey. We'll now take your question.
James Schneider, James Schneider, James Schneider, James Schneider
Chris Stansbury: Thank you. If you would like to register a question, please press star followed by the one on your telephone. You will hear a three-tone prompt to acknowledge your request.
Chris Stansbury: If your question has been answered and you would like to withdraw your question or your registration, please press the one followed by the three. One moment please, well for the first question. Our first question comes from the line of Michael Rollins with City, please go ahead.
Michael Rollins: Thanks, and good afternoon. Two topics that could please. First one of business revenue. Just curious if you could provide some additional context on the reasons.
Michael Rollins: that the grow revenue was up 10% year-over-year during the first quarter, including how much they'd be coming from existing versus new customers.
and Kenneth Bucket continue to sustain. [inaudible]
Speaker Change: Double digit growth as you look out over the next few quarters. And then just a second topic, you mentioned earlier some of the legacy TDM revenue that might need to come out and just curious what happened to be what was anticipated to be front and loaded during the first quarter in terms of some of this. [inaudible]
Speaker Change: Churn, including within the public sector, and how much is less that may come out during the second quarter or the rest of this year? Thanks.
Chris Stansbury: Patrick Skriss, so a couple of things on the grow revenue, we said that it was really driven by dark fiber deals that were not related to the 8.5 billion in PCF, so this is...
Chris Stansbury: This is underlying demand from a large enterprise, primarily also some in public sector, as well as ways in IP. And in all of those areas, we do expect those trends to continue. Businesses are preparing
Chris Stansbury: for the future of AI, and our offering provides something that others are simply not providing. So, we feel very good about that, and I think importantly,
The fact that that grow-bucket is now-
You know, roughly half of what we sell.
Chris Stansbury: is I think a key leading indicator to the fact that the end of revenue declines will ultimately get to it. We've been very focused on this for some time.
Speaker Change: And this is really before the digital innovation that Kate really leaned into today.
Speaker Change: I think it starts to impact our results, so we feel very good about that. In terms of how much is new customers versus existing, I can't answer that off the top on my head, so I think we'll need to circle back on that one. And then as it relates to the disconnect. Next.
Speaker Change: There was some activity in the first quarter. We're still working through the final arrangements on the balance of that and will certainly provide some color through the quarter. The reality is in total, I'm not too concerned about it because from an EBITDA standpoint,
Speaker Change: It's at worst case a neutral and very likely a positive and we will see margin improvements from that.
Thanks.
Next question.
Speaker Change: Our next question comes from line of Batya Levi with UBS. Please proceed with your question.
Unknown Speaker
Great, thank you. Can you?
Speaker Change: Could some of the strategies that you're implementing on the cloud communication side could also be implemented on last markets, maybe to accelerate the profitability of that unit? [inaudible]
Speaker Change: And just a quick follow up on the fiber side. As you continue the strategic review, can you just remind us on how you will think about incremental fiber builds and if you're saying any change in cost to both. Thank you.
How about you Skade? [inaudible]
Speaker Change: The exciting part of the limited digital platform is that it enables what we're calling
You get out of the linear revenue growth. Thank you very much.
you know, tied to the cost.
Structure.
So, it's the soft lies in two places.
Speaker Change: The first is in the Lumen digital platform and the second is in the fabric port.
and the two go together to... [inaudible]
Make it possible...
Speaker Change: to sell thousands of services on one port and in the old come-strucks.
One important. [inaudible]
Speaker Change: You know, could only support one service, and a service typically needed, you know, the...
Speaker Change: and the termination point, right? So in the new construct, [inaudible]
Speaker Change: Imagine you have a customer that's running internet on the man, or you know, ethernet on the man that has, you know, with it on a fabric port, you can sell in voice cloud, you can sell in Lumen defender and start layering in these digital services on top of one port.
Speaker Change: So, revenue goes up and the marginal cost of delivering that revenue goes down.
and that's the exciting part and it really... [inaudible]
It's early to call to call.
Speaker Change: What that's going to look like, you know, we're building out a digital platform. It's a traditional jakers.
Speaker Change: We're delighted by the adoption progress with how many customers are coming and how fast they're going from one to two and more ports, but it's probably early to make a call on the margins and the fact part of your question, I'll be out of it.
Yeah, and on that, Batya, we will...
Speaker Change: As we move through the year and approach an investor day in September , we'll give a lot more color on what that future looks like, including a new model at that point. But...
Speaker Change: that early feedback from customers is incredibly positive. On the on the additional builds, progressing really nicely, we're confident that we'll continue to see expansion there and the economics.
Speaker Change: I'll continue to look similar to what we saw in the first round. And the team is doing a fantastic job, as Kate said, of building on schedule, if not a little bit ahead at this point and on budget, so very pleased with that motion.
Unknown Speaker
Excelsior, thank you.
Al-
Speaker Change: Our next question comes from the line of Jim Schneider with Goldman Sachs. Please proceed with your question.
Jim Snyder: Good afternoon. Thanks for taking my question. Two, if I may. One is relative to the PCF pipeline. Just kind of curious how you would expect the conversion of the remaining sort of $3.5 billion of the pipeline to potentially roll in, and what do you expect?
Jim Snyder: sort of those more advanced fiber deals, but could you maybe address the flip side of that, you know typically when times of budget pressure enterprises consider sort of decommissioning legacy servers a little bit faster than they might have otherwise. So I'm wondering if you see any potential for downside on that side of things. Thank you.
Jim Snyder: Kate, just a couple things. So, with respect to the pipeline, as I said, we are in active discussions with these customers.
Kate Johnson: and the complication and the timing is around the notion that they're net new routes. It's complicated to design and we work side-by-side with customers to make sure that we get it exactly right. But they're still progressing. We feel good about it. Can't give you a specific time frame, but it's moving along.
Kate Johnson: What we're seeing as an increase in demand and interest around are both private connectivity fabric as well as
Kate Johnson: are living, you know, kind of be fabric for services from enterprises because what they're seeing is this unprecedented increase in volume of data generated from AI. And a lot of times they got to get it from on premise the cloud or from cloud to cloud or back to the edge. [inaudible]
Kate Johnson: and every combination therein. And so they're looking for a networking partner that can provide them, you know, not just the coverage and reach of the physical network but a digital platform to make it easy to navigate, you know, in that multi-cloud AI world. And that's what we built for them. So we're super excited.
Kate Johnson: that it's progressing and bullish on what this means. And I'll kind of answer the third part of your question because it really speaks to. Thank you, Jim.
Kate Johnson: Fiber Networking is critical infrastructure for us to build an AI economy in the United States and for us to be competitive on the innovation platform at a global level.
Kate Johnson: and so while there could be uncertainty in the market, and nothing for session proof per se, these are long term strategic investments that customers have to make in order to compete. [inaudible]
Kate Johnson: And that's why we're continuing to progress because what we've got is what they need in order to live through that next phase of our technology diffusion life cycle.
Thank you.
Transcription by CastingWords
James Schneider, James Schneider, James Schneider, James Schneider
Next question.
Speaker Change: Our next question comes from the line of Nick Delio with Muffet, Nathanson, please go ahead.
Hey, thanks for hearing my questions. I'd too
Speaker Change: You know, first, going back to public sector, Chris, last quarter you had talked about some large payments you've got from a middle mile project in California that helped revenue there. I guess did something similar happen again this quarter, I'm just trying to get a bit of a better sense to the underlying trends there. [inaudible]
Kate Johnson: And then second for Kate, how are you pricing some of the new services that you walk this through on the digital platform? I mean, are you thinking that you're going to price at a discount because they're more efficient and easier to deliver? Or are you thinking about pricing at a premium because you think they're better products?
Speaker Change: So, first of all, no, there was no big step up in the second quarter. It's a release to the timing of delivery around. I think it particularly impacted us last quarter was the state of California delivery. It's a release.
Speaker Change: You know, that does get lumpy quarter to quarter to this quarter. It was a lot less than last quarter. The reality is there's strength in the public sector space. We have a killer team. They're doing great work. [inaudible]
Speaker Change: and we continue to be engaged on multiple large scale opportunities and so I think public sector is going to continue to be a point of strength for us.
Speaker Change: Yeah, sure. Regarding pricing of services on the Lumen digital platform, I'm so glad you asked because this is a really important point. So I think in the old world of telecommunications, people referred to our physical network, though it was deeply insulting, as dumb pipes.
Speaker Change: And those days are long gone. We have a digital platform that we can use to really make things easier to consume for customers in a really, really complex.
You know, hybrid architecture that they're navigating through every day.
Speaker Change: and our orientation is around total value of ownership, and this is really important.
Speaker Change: because if we can actually help customers build higher performing, lower latency, more secure, larger capacity networks.
Speaker Change: That helps them execute their business outcomes better. They have faster innovation, faster time to revenue, you know, et cetera. If we can also at the same time lower cost like, for example, bypassing disconnects
Speaker Change: in the old constructs, sorry, cross-connect, sorry, bypassing cross-connects of third parties when trying to connect between clouds or from data center to cloud.
Speaker Change: You know, this delivers more value so we can help them on the top line and we can help them on the bottom line.
Speaker Change: And that doesn't mean we drop the price of our service. That means our service is inherently more value and there's no more price or way to the bottom in competition with other providers. We feel like we've got real value here and our adoption metrics are showing it.
Next question, please.
James Schneider, James Schneider, James Schneider, James Schneider,
Speaker Change: Our next question comes from the live of Greg Williams with T.D. Cohen.
Please proceed with your question.
Greg Williams: Thank you, great, a good afternoon, and thanks for taking my questions. Just two questions. One, I think you go to CapEx, it's $791 million, so it sounds like it's going to ramp up.
Speaker Change: Pretty fast, and I know Chris, you mentioned free cash, so could be lumpy, but can you help us with a sense of the cadence of the cap expense through the balance of the year? And same question on the upfront hyper scale fees that you get that would help. Second question just around the public sector, you noted it was a point of strength was sounds encouraging because the question I have is are you seeing any risk on the doge efficiency cuts in the sector? You know you noted . . . . . . .
Speaker Change: Public would be strong, but a few of your peers noted some some pressure from government cuts. Thanks
Yeah, so I'll answer the first part.
Unknown Speaker
Speaker Change: It really don't want to get into kind of a timing of, you know, inflows and outflows quarter by quarter.
Speaker Change: We're really confident in the annual guidance, which would, obviously, should get, but on the on the capex pen side, that you will see a ramp up. It is really, you know, volatile quarter to quarter in terms of the timing of payments. [inaudible]
Speaker Change: We're dealing with, you know, major network components that can move by hundreds of millions of dollars, quarter to quarter. So, trying to predict. [inaudible]
Speaker Change: Um, you know, effectively to get, you know, get the quarters, you got to get the weeks and days.
Speaker Change: and the reality is it's not that predictable, but in total we feel very good about the guidance for the year and then.
Speaker Change: Yeah, and regarding the impact of Doge in the public sector market.
Speaker Change: Look, what we're seeing is that this administration is very committed to modernization and simplification, and they're trying to reduce cost and enable the United States to be more competitive in the various global theaters.
Speaker Change: and that presents a huge opportunity for our company given our network and the platform that we're building on it.
Speaker Change: And also, there's a pretty significant return to office trend that's, you know, delivering near-term opportunities as well. So all in all, we are pretty bullish in the public sector space as well.
It's helpful. Thank you.
Next question.
Speaker Change: Our next question comes from the line of Frank Louthan with Raymond James. Please go ahead.
James Schneider, James Schneider, James Schneider,
Frank Laupin: More color on your NOS product and, you know, how are you differentiating yourself in the market with that?
Frank Laupin: and what sort of traction you're getting there. And then secondly, it's a little bit more clarification on the public sector. Can you give us some color on the weakness? Your reference is it going to be weaker relative to what you reported this quarter or to going forward from this level? How should we think about it? Thanks.
Speaker Change: So Frank, you cut out and we didn't hear the first part of your question. I'll let Chris answer the second part, but what was the first part?
Speaker Change: The first part of the question was around the kind of activity fabric, the NAS product. How are you differentiating that in the industry? Who is buying that product? Where are you finding traction with that in the market? [inaudible]
Speaker Change: So, interestingly enough, there's a couple things. The NAS product in market doesn't have a like for like competitor.
Speaker Change: So there are digital companies that don't own the network and so they can't integrate the platform capabilities into the fiber. And then there are, you know, networking companies that aren't building a digital platform.
Speaker Change: And, you know, as you know, we've got a pretty big competitive or strategic mode.
with Art Physical Network. It's got...
Speaker Change: Scale coverage, unique routes, huge capacity with room to grow, and the major CSPs are all now connected to it, and so we've got this ecosystem, and the digital platform itself.
Speaker Change: Is starting to bring customers who just want an easier experience?
Speaker Change: They want to sort of not have the old experience of static point-to-point [inaudible]
Speaker Change: and long-ordering cycles and all that kind of step they want to fire up. [inaudible]
Speaker Change: Any port, any service, anytime, anywhere because that's what they get with cloud and that's their expectation and they can get that on the Lumen Digital platform and I think there's a third piece. [inaudible]
Speaker Change: You put all these together with some of the other announcements we've made, direct fiber access.
In to the clouds, direct fiber access between. Wearing.
You know, Prem locations and add just data centers.
Speaker Change: is very unique and it's something that we're excited about because it's going to continue to improve performance of our network and further separate us from any other company that tries to compete.
and on Public Sector Frank.
Frank Laupin: Yeah, I think the reality is what we're seeing in terms of
Both opportunity and booking trends.
Frank Laupin: is very strong performance out of the public sector team. I don't want to try to predict what that means in terms of the performance this quarter versus where we end up next quarter. I think in the end, the impact of this this off net piece. [inaudible]
Frank Laupin: is, you know, one will obviously share what it is when we get there.
Frank Laupin: But it's not going to have an impact on bottom line and will isolate what that impact is when we make the changes in the second quarter. But broadly speaking, a number of different opportunities from a number of different agencies that we're working on and. And uh...
We feel really good about where we sit right now.
Okay, great. Thank you.
Speaker Change: Question comes from the line of Jonathan Chaplin with New Street Research. Please go ahead.
Jonathan Chaplin: And just one question for tape so that the exhalation of how the
Speaker Change: Collectively platform that is going to be disrupted to the industry was really helpful. Thank you very much.
Speaker Change: I was wondering if you could give us some context on who's disrupted. So on the revenue side, I understand how the platform sort of facilitates revenue growth for customers.
Speaker Change: How much of the sort of the revenue that goes on to that platform is coming at expense of your nurture. Thank you very much, Mr. Scherrer.
and Harvest Categories.
Speaker Change: Um, and then how much, you know, how much thing from outside of Lumen and on the cost disruption side, who's getting disrupted there? Is it, is it sort of? Yeah.
Speaker Change: The traditional data center companies, or is it your enterprise competitive 18-teen Verizon? Thank you.
Speaker Change: Yeah, great question. So this disruption is kind of across the industry across the ecosystem and all the players.
Speaker Change: So, what customers get is they're getting, you know, a digital experience, higher performance.
Speaker Change: More value and you know they can avoid the costs that they pay to these third party intermediaries like the carrier neutral facilities because they're you know they're eliminating the need for cross connects. Thanks.
Speaker Change: So, there's a lot of value for customers, and it's different. And, you know, we're building it out, and it's felt early days, but we have a huge amount of demand for this notion of, you know, direct fiber access and. [inaudible]
Direct On Ramp,
Speaker Change: from Cloud to Cloud because a lot of enterprises need to move data from one cloud company to another.
Safe from Azure, into GCP and back and forth. [inaudible]
Speaker Change: And today, if they want to do that, they've got to do a lot of hopskipping jumps across companies that charge them fees.
Speaker Change: And what we're offering is the direct connection where those cross-connect fees are no longer needed. And that's disruptive, obviously, to the data center companies. It's also disruptive, but in a very positive way to the cloud service providers.
Speaker Change: What we're seeing as an early trend and an early days [inaudible]
Blair Nas offering is driving...
Higher Band With Consumption Through Our Cloud Connect Offering Into Clouds
Speaker Change: And when I say higher, like it's an incredible rate, I don't want to give it right now, but over the past 90 days, very, very significant growth. And what that suggests is that there's a faster path to revenue.
Speaker Change: for the cloud companies, partnering with Lumen to provide networking for their end customers. So, you know, and I think we want to spend more time on this at Investor Day because it's really disruptive in a lot of different ways. And the thesis is this.
Telecom hasn't innovated in a long, long time.
Speaker Change: and you know, we made some really tough choices two years ago.
Speaker Change: To rethink how we spend our capital and you're seeing the fruits of those investments now with this platform. [inaudible]
Speaker Change: and with value that we're delivering to enterprises. And it's still early in our transformation life cycle, but the feedback from customers is really terrific. The feedback from the cloud service providers, really terrific. So we're very, very excited our progress.
All right. Thanks, Kate.
There are no further questions at this time.
Speaker Change: Great. Thanks everyone for joining the call today. We appreciate you reaching out with any questions. Thanks.