Greetings, and welcome to Lumen Technologies’ Second Quarter 2024 Earnings Call. All lines are muted to eliminate background noise. Following the speakers' comments, there will be a question-and-answer session. This conference is being recorded. I will now hand it over to Jim Breen, Senior Vice President of Investor Relations. Jim, please proceed.

Good afternoon, everyone, and thank you for joining Lumen Technologies second quarter 2024 earnings call. On the call today are Kate Johnson, President and Chief Executive Officer; and Chris Stansbury, Executive Vice President and Chief Financial Officer. Before we begin, I need to call your attention to our Safe Harbor Statement on Slide 1 of our second quarter 2024 presentation, which notes that this conference call may include forward-looking statements subject to certain risks and uncertainties. All forward-looking statements should be considered in conjunction with the cautionary statements and the risk factors in our SEC filings. We will be referring to certain non-GAAP financial measures reconciled to the most comparable GAAP measures which can be found in our earnings press release. In addition, certain metrics discussed today exclude costs for special items as detailed in our earnings materials, which can be found in our Investor Relations section of our Lumen website. With that, I'll turn the call over to Kate.

Thanks, Jim. Good afternoon, everyone. Thanks for joining. I'm cognizant of the timing of this call, because over the past two days the markets have been a bit noisy with lots of uncertainty about the health of the economy in the next six to 12 to 18 months. And in contrast, the announcement we made last night about Lumen's pivot to growth is all about building critical infrastructure to support the AI economy for the next several decades. And to net it out, there are three key takeaways from our call today. First, Lumen's enterprise operational turnaround is progressing well with continued sales momentum across our growth portfolio and further improvement in customer satisfaction. We are also executing extremely well in our Quantum Fiber business. Second, Lumen has been anointed as the trusted network for AI by some of the most important technology companies on Earth. With over $5 billion in major partnerships inked to date and visibility to nearly $7 billion more in opportunities, we see the market for Lumen's private connectivity fabric as providing a major positive momentum shift for this company. Third, given our success in forging these partnerships, we're seeing a significant improvement in our overall liquidity profile, further securing our ability to transform the company and pivot to growth. Let me give some detail on the operational turnaround part first. As I've described on prior calls, we're focusing on delivering dramatically improved customer experiences from quote to cash, giving customers a reason to choose Lumen for core network services. The best way to measure that progress is to look at three areas: sales, customer satisfaction, and securing the base. I'm delighted to share our progress across the fundamentals. After a blockbuster Q1, we continue to see strong sales performance in the second quarter, with North American large enterprise and mid-market sales up nearly 26% year-over-year. Additionally, large and mid-market new logo sales increased 10%, and net total contract value for all channels was up nearly 40% year-over-year. Two notable wins are Uber, who is leveraging custom fiber waves from Lumen to ensure unparalleled connectivity between their data centers, and the state of New Mexico, which is using Lumen to build its first statewide education network. To complement these sales results, we saw another step-function improvement in customer satisfaction in our service delivery process with year-over-year transaction net promoter scores rising 10 points for large enterprise, 35 points for wholesale, 37 points for mid-market, and a whopping 42 points for public sector. Once again, every one of our enterprise customer channels shows significant year-over-year improvements which should manifest in lower churn, higher gross sales, and improved overall revenue growth over time. Finally, we're making progress securing the base with our relentless focus on five key levers: installs, renewals, migrations, usage, and disconnects. We think the best way to measure our progress here is to compare ourselves to market trends. And once again, we saw less revenue declines this quarter than our industry peers. We continue to fine-tune our motions, developing and launching new product bundles and educating our customers on the best migration path from legacy to modern technologies. And while we're excited by the progress for our operational turnaround in legacy core network services, the real breakthrough to share with you is how we're repositioning the company for the future in the growing market of AI. Two ways that we're repositioning Lumen. First, we're cloudifying telecom by delivering a digital platform to enable enterprise customers to digitally design, price, order, and consume secured network services quickly, securely, and effortlessly. We're thrilled with our progress driving the adoption of our Lumen Digital flagship network as a service offering with companies like Versa, T-Marzetti, and DXC Technologies, as well as many other companies across the industry. The second way we're repositioning the company for growth is with Lumen's private connectivity fabric. To summarize what's happening, the dramatic rise in AI innovation is bringing explosive growth in data center build-out. And data centers simply have to be connected. We're honored that technology powerhouses like Microsoft and several other big technology firms are choosing Lumen to build their AI backbone. And they're choosing us for two reasons. First, our world-class fiber network with its unique routes, vast coverage, and state-of-the-art fiber solutions from our strategic partnership with Corning. And second, the digital platform we're building that makes consumption quick, secure, and effortless. With $5 billion in closed deals so far and the active discussions we're having with a long list of additional customers, we believe Lumen is becoming known as the trusted network for AI. The growth in this type of sale will be meaningful and accretive to our cash position in the short term and positions us for long-term predictable revenue growth in the future. Looking ahead, I'm sure you, like everybody else on the planet, are wondering how big these networking deals are going to be for AI and what the market looks like. So I'm going to share our early hypothesis with you. We think there are likely to be three distinct phases. The first phase, as evidenced by our closed deals, is with huge technology companies, cloud providers, social platforms, etc., who are AI thought leaders and are building and training AI models responsible for the explosive growth and data center build-out. They were the first to recognize that today's Internet simply won't serve tomorrow's AI economy, and they're partnering with Lumen to massively expand their connectivity infrastructure. We think the next tranche of demand is likely to come from the AI model inference phase, probably with forward-thinking enterprises who see AI as a way to transform their businesses. Think financial services, healthcare, and retail to start. And finally, in the third phase, we suspect breakout growth and demand for connectivity and digital on-demand network services will come when AI starts talking to AI in rings and exchanges. We're in very early discussions with strategic partners who are helping shape our view in this space. Please note that these recent announcements, which were not included in our 2024 guidance, fund the necessary upfront operational expenditures and capital expenditures to ramp and scale these new AI workloads. Additionally, these deals provide funding for continued innovation and strategic cost takeout. And that leads me to my next important piece of news. Today we're announcing that we see a path to creating $1 billion in cost takeout by the end of 2027. This next cost wave of efficiency will come from deeply strategic infrastructure simplification in three major areas: network, product portfolio, and IT. These infrastructure projects are rooted in network standardization. We're now integrating the networks from four different architectures, engineering them into one simplified, standardized, and unified network fabric. This move provides a step-function change in the level of simplification that we can drive inside the company, providing breakthrough improvements in our customer and employee experiences. Let me provide just a little bit more color on the impact of the plan. Our target is to ensure that the majority of our net new services are on this unified network fabric by the end of 2025. This will enable massive simplification in our product portfolio, enabling us to significantly reduce our product count from thousands of product codes to a target of around 300, a massive simplification enabler across Lumen and our ecosystem. Once we unify the network and simplify the product portfolio in our enterprise business, we'll go after technical cost savings in IT. For example, we'd like to compress our 24 order management systems to a target number of one and reduce our 17 billing systems to, well, you guessed it, a target of one. This work is going to take a few years to complete, but it will yield material and enduring bottom-line benefits. To reemphasize, the work wouldn't be possible without the additional liquidity gained from our private connectivity fabric sales, which also allows us to self-fund a spending increase in key areas to drive out these costs for the long term. To summarize our enterprise business transformation efforts, we've got the cash, we've got the assets, and we've got a world-class leadership team needed to execute on the next phase of our transformation, unlocking breakthrough growth opportunities and strategic cost savings moving forward. And finally, I'm really delighted to share that our mass market segment is showing steady results improvement. We continue to opportunistically deploy capital, enabling 136,000 locations in Q2, on track to deliver 500,000 new fiber-enabled locations this year. We also continued our strong fiber sales momentum from the first quarter of 2024, as indicated by our record level of 2Q fiber net additions of 40,000. And we're happy to announce we've reached over 1 million fiber subscribers in July. This is a significant milestone and reinforces the value of the product we're delivering to the consumer. And it also shows our mass markets team really knows how to execute well. With that, I'll turn the call over to Chris.

Thanks, Kate. Before I discuss the quarter, I want to take a moment to reflect back to Q2 earnings last year. Since that time, we've successfully completed a refinancing that addressed over $15 billion of our debt and extended over $10 billion of our maturities. We secured access to over $2.3 billion in new liquidity. We launched our PCF solutions as well as our suite of new digital offerings. We generated early growth in our public sector and the growth segment of our large enterprise business. And as of yesterday, we announced the largest sales in the company's history, totaling nearly $5 billion, fueled by our AI hyperscaler customers. This is all as we drive a network unification from four discrete enterprise networks to one, resulting in over $1 billion in cost efficiencies. None of this would be possible without our world-class management team who's executing on our vision. We're moving with pace and we're not done. The recent developments in our business reflect major proof points in terms of early and material execution on Lumen's transformation path forward, and we are pleased the market is starting to value this opportunity. We believe we're in the first inning of the AI growth opportunity for our fiber infrastructure and Lumen Digital Services. Accordingly, the positive impact these private connectivity fabric sales will have on our financials are powerful and clear. First, we believe the progress we've made on driving PCF sales these past few months is just the beginning of a vast new total addressable market, which brings long-term, sticky revenue offsetting higher churn legacy product declines. Second, we estimate that the cash received from PCF sales will close any free cash flow deficit between now and when we reach sustainable positive free cash flow growth. Third, we will have ample free cash flow to invest in our transformation and reduce debt. Finally, in our view, PCF sales are significant and incremental to the overall value of Lumen's business. The building blocks of our value creation are clear, starting with our nationwide fiber network. We believe Lumen is one of the few companies with the resources and scale to provide the critical infrastructure for AI, and the partnerships we've announced represent a large and growing opportunity to provide private connectivity fabric solutions. We see a runway to growth as we transform telecom, and we believe that sets up a value creation path for Lumen, all as we continue to execute on our core strategic goals of commercial excellence, securing the base, and innovating for growth. As Kate mentioned, our sales growth engines within our large and mid-market enterprise channels in our business segment, along with our mass market segment, showed solid performance this quarter with large enterprise and mid-market sales, both up over 26% year-over-year. Additionally, Quantum Fiber broadband net additions of 40,000 again set an all-time record and we passed the 1 million total fiber subscriber mark in July, outstanding work by the team. While consolidated revenue and adjusted EBITDA still fuel the impacts of legacy declines, we are encouraged by improvements we're making in the business. Now let's move to the discussion of financial results for the second quarter. On a year-over-year basis, total reported revenue declined 10.7% to $3.268 billion. 36% of the decline was due to the impact of divestitures, commercial agreements, and the sale of the CDN business. Business segment revenue declined 11.4% to $2.577 billion, and approximately 42% of that decline was due to the impact of divestitures and commercial agreements. Mass markets segment revenue declined 8.2% to $691 million. Adjusted EBITDA was $1.011 billion, with a 30.9% margin and free cash flow was negative $156 million. Next, I'll review our detailed revenue results for the quarter on a year-over-year basis. Within our North America enterprise channels, which is our business segment excluding wholesale, international, and other, revenue declined 3.6%. We continue to expect public sector to be the first channel to pivot to sustainable growth later this year, followed by mid-market and then large enterprise. Overall, North American business declined 5.5%. Large enterprise revenue declined 6.9% in the second quarter. Our growth revenue was approximately flat year-over-year with continued pressure in nurture and harvest product revenue. We expect continued variability in trends as we drive towards overall stabilization. Mid-market revenue declined approximately 7% year-over-year with improvement in growth, offset by nurture and harvest. Public sector revenue increased 8% year-over-year driven by strength in our growth and other product revenue and partially offset by declines in nurture and harvest. We continue to see traction with large bookings in this space, which take time to ramp to revenue, and these wins give us continued confidence that public sector will be the first sales channel to return to sustainable growth this year. Wholesale revenue declined approximately 10% year-over-year. The harvest portion of the wholesale portfolio, which is comprised of products like TDM, voice, and private line, saw revenue contract by 17.9% year-over-year in the second quarter. This is primarily driven by telco partners that are selling legacy services. Our harvest product revenue will likely continue to decline over time and is an area that we will manage for cash. International and other revenue declined 67.1% driven primarily by the divestiture of our EMEA business and the sale of select CDN contracts in the fourth quarter of last year. Moving to our business product lifecycle reporting, I'll reference the results based on our North America enterprise channel. The 3.6% year-over-year decrease was due to declines in our nurture and harvest segments, partially offset by growth, particularly enterprise broadband, dark fiber, and IT. While results can vary at any quarter, we expect sustained strength in the growth product revenue as we execute on our core turnaround. Within nurture and harvest, we continue to expect headwinds in these markets to decline in categories. However, we continue to take proactive steps to migrate customers to newer technologies, and these actions improve our customer's experience and will provide an uplift in customer lifetime value for Lumen. Additionally, we will continue to pursue opportunities for cost optimization when we help customers migrate from off-net legacy and TDM-based services onto Lumen's network. Within North American enterprise channels, growth products revenue increased 1.5% year-over-year. Growth now represents approximately 43% of our North America enterprise revenue and for our total business segment carried in approximately 80% direct margin this quarter. Nurture products revenue decreased 12.1% year-over-year. Nurture represents 30% of our North American enterprise revenue, and for our total business segment, carried an approximate 66% direct margin this quarter. Harvest products revenue decreased 10.6% year-over-year and continues to be negatively impacted by declines in TDM-based voice and private line. Harvest represented approximately 16% of our North America enterprise revenue in the second quarter. And for our total business segment, they carried an approximate 77% direct margin this quarter. Other product revenue improved 18.5% year-over-year. As a reminder, other product revenue tends to experience fluctuations due to the variable nature of these products. Now moving on to mass markets. Our fiber broadband revenue grew 14.6% year-over-year and represents approximately 38% of mass markets broadband revenue. During the quarter, fiber broadband enabled location ads were 136,000, bringing our total to over 3.9 million as of June 30 and pacing towards our targeted annual 500,000 bill target this year. We also added 40,000 Quantum Fiber customers, which is our best fiber net add quarter reported to date, and this brings our total to 992,000. Fiber average revenue per user was $62, up slightly, both sequentially and year-over-year. Importantly, we reached a significant milestone of 1 million fiber broadband subscribers in July. At the end of the second quarter, our penetration of legacy copper broadband was approximately 9%, and our Quantum Fiber penetration stood at approximately 25%. As we look ahead, we will continue our market-by-market assessment of the mass markets business as we explore a range of strategic options to maximize its value. Those options include potential joint ventures, wholesaling arrangements, or future divestitures to generate incremental cash. Now turning to adjusted EBITDA. For the second quarter of 2024, adjusted EBITDA was $1.011 billion compared to $1.229 billion in the year-ago quarter. Second quarter EBITDA was positively impacted by our strong first quarter sales bookings, as well as efficiency improvements from our second-quarter cost actions and overall margin management. Special items impacting adjusted EBITDA totaled $136 million. The majority of special items in the quarter were related to severance. For the second quarter of 2024, our adjusted EBITDA margin was 30.9%. Capital expenditures were $753 million. And free cash flow, excluding special items, was negative $156 million. As we previously stated, we're leaning into our network investments to support the rapid growth and demand our customers are facing. Now, before I provide an update on our 2024 financial outlook, I'd like to provide some color around the near-term impacts of our PCF sales and the additional liquidity and flexibility we have. As Kate mentioned, we're moving full speed ahead in investing in our transformation, which includes additional spending on network and systems unification that will ultimately lead to more efficient operations and a better customer experience. Given our improving liquidity profile, we intend to pull forward some expenses from 2026 and 2027 into 2025, accelerating the timeline of our cost takeout goals. With the investments in transformation and costs associated with recent PCF sales, and in conjunction with continued legacy revenue declines, directionally, we see 2025 EBITDA below 2024 levels, with a significant rebound in 2026 and growing thereafter. We will provide more detailed 2025 guidance on our fourth quarter 2024 call in February. Now moving on to our financial outlook. We now estimate fiscal year 2024 EBITDA to be in the range of $3.9 billion to $4 billion. Capital expenditures in the range of $3.1 billion to $3.3 billion. Cash interest in the range of $1.15 billion to $1.25 billion and free cash flow in the range of $1 billion to $1.2 billion. This guidance includes some incremental operational expenditures, capital expenditures, and cash flows associated with our PCF sales growth, the gain on a sale of an investment, as well as incremental spending to ultimately improve our cost structure and margins. This additional operational expenditure and capital expenditure will be fully funded upfront by incremental PCF cash flow. And with that, I'll turn it back to Kate for closing remarks.

Thanks, Chris. Before we open up the call for questions, I wanted to pause to acknowledge where we are. AI represents one of the most significant technology shifts in history. Every person and every organization on Earth will be impacted. AI needs data, data needs data centers, and data centers need to be connected. What was once an overbuilt fiber network is shifting from commodity to something much more valuable. At Lumen, we aren't streamlining and digitizing our operations to try to find growth in legacy telco markets. Instead, we're building a digital platform to help us become the trusted network for AI so we can capitalize on the markets that will likely see explosive growth for decades. This is Lumen's moment. We are playing to win. This is the business that we are in. Operator, we're ready for questions.

Thank you. The floor is now open for questions. Your first question comes from Michael Rollins with Citi. Please go ahead.

Thanks and good afternoon. First, with respect to the $5 billion of sales, curious if you could give some additional color on the competitiveness of that process? Are these customers using single vendors for the solution or multiple vendors? So this is something that's not just helping Lumen, but maybe the ecosystem. And then for Lumen specifically, can you share the mix of assets that are existing fiber, existing conduit, leveraging assets that are already out there from you versus what you're building as new infrastructure. And as you consume some of those fiber inventories such that investment mix or margin mix might look differently over time as you continue to sell within this new private connectivity fabric segment? Thanks.

Hey, Mike. So I'll take the first part, I’ll let Chris do the second part. So first part, what does the competitive landscape look like? Look, obviously, I'm a little bit biased, but here's my observation. Our network is the crown jewel that we always thought it was. It's got great coverage, unique routes, it's diverse, and it's got state-of-the-art fiber because we've been taking care of it for a long time. And that's giving us great positioning with our customers. They're looking at sometimes building some routes by themselves. Most of the time, understanding that we can get them there faster with higher quality and better service, and that's the observation across the deals we've won so far.

Yes. And just on the economics, it's a really good question, and then I'm not going to be evasive with you. But the reality is, it's really complicated. So it's deal to deal, every deal is different in terms of where they want to go from and to, how much capacity they need. And inevitably, you will end up with a combination of existing fiber, new fiber, existing conduit, and new conduit. It really does vary deal to deal. Now, on that, we'll never disclose it, because these are called private connectivity fabric for a reason. Our customers want to keep it private because it's a competitive secret that they have, as is it a competitive secret for us. So, it will vary deal to deal, but the video that we released, I think, gives a good flavor on average.

Thank you.

Next question.

Hi. Thank you for taking my question. I have a quick inquiry regarding the free cash flow guidance. Can you clarify if this is primarily influenced by customer deposits from the private custom fiber fabric AI, or is it also related to the gain on the sale that Chris mentioned? Additionally, could you help us understand if the increase in free cash flow you are seeing is something that will remain on the balance sheet in 2024, or is it likely to be spent to support the higher CapEx you've indicated? I'm trying to get a clearer picture of how the build-out will proceed. Thank you.

I'll give you credit, because you asked one of the great questions on the call early. So the cash flow guidance for this year is driven by both some of the upfront cash received. We haven't received all of it, obviously, for the private connectivity fabric deals, and it is also related to the asset sale that we did. So both of those things contributed to the free cash flow. As it relates to where we go from here, and again, I want to really be really careful because we're not giving 2025 guidance yet. But we haven't received all the cash yet. That will be received some this year, some next year, some the following year, because again, these are massive construction projects. They take time. And we will start to spend the capital expenditures as evidenced by our guidance this year and have more next year. But the point is, on these deals, we're not financing the build. So we get paid in advance of the construction. The only thing that is kind of hanging as you go out 12 months is, we pay tax on the cash received. So even though the revenue is amortized, the IRS likes to be paid on a cash basis for these deals. So that will be something that we deal with, and we'll get more color on that as we move through. But high level, I would say that next year free cash flow looks good.

Thank you.

Next question.

Great. Thank you. Looking at the EBITDA guidance change for the year, is that purely related to the incremental operational expenditures for getting ready for these network? Is there any change in terms of the underlying trend? And can you just go over the $1 billion cost savings you expect over the next three years, the pacing of that? I think you mentioned some of the expenses will be pulled forward. And then, is there any incremental cost to achieve that savings through the next three years? Thank you.

Yes. Regarding this year, the main factor affecting EBITDA is the private connectivity fabric deals and the necessary operational expenditures to scale up our construction factory. We already have a team in place, which is one of Lumen's key strengths, but we need to significantly expand this team to manage the volume of deals. This is the primary focus. Concerning the $1 billion cost savings, I want to avoid discussing 2025 guidance too much. We do not expect to see those savings start until next year, although there will be some investments made then, which we will outline when we provide next year's guidance. The objective is to accelerate investments that we originally planned for 2026 and 2027 into this year and 2025. This is to enhance our IT systems, as Kate mentioned, which need to be more streamlined and simplified to improve customer experience. A key aspect of this is consolidating our four enterprise networks into one, as this current legacy setup needs to be refined to foster a smoother customer experience moving forward.

Got it. Thank you.

Next question please.

Hi, guys. Thanks so much for taking the question. Chris, I guess it's not so much a question, I just wanted to put forward a hypothesis and I want you to tell me what you think is right or wrong about it. So we've got this $5 billion deal, but the majority of the cash is coming in, in the next three to four years, and the majority of that cash is also going out the door in the next three to four years. So any kind of cash inflow we're getting is kind of a timing benefit relative to the CapEx that's required under the contract. And if it's a $5 billion contract and the majority of it is related to the construction piece, let's just call it $3 billion round numbers. That means that the actual revenue piece is about $2 billion. And as you shared in your video, that revenue doesn't start until after the build is done, which would be probably year four or five, over a 20-year period, $2 billion is a $100 million a year. Very high margin, maybe $85 million in EBITDA, tax affected, as you've mentioned in your video, maybe, again, the taxes will be timing related, but let's just call it $65 million of tax-affected cash flow over a 20-year period. So a $5 billion deal announcement turns into $65 million of cash flow five years from now, what's right and what's wrong about that assessment?

I would say most of that assessment is incorrect. Yes, David, let's clarify this. The $5 billion figure comes from multiple deals, not just a single transaction. In the video, we discussed a cash contribution margin, which essentially is the EBITDA minus the capital expenditures, pre-tax, and that aligns closely with our current EBITDA margin. If you calculate that, it will show the pre-tax free cash flow generated from these deals. As you pointed out, this cash flow primarily comes at the beginning. There will also be ongoing payments for space and power, and for operating and maintenance services if they request us to manage the networks, which provide us with steady cash flow over the years. However, the tax impact will also be front-loaded. The important aspect here is that, within these $5 billion deals, the net after-tax cash generated completely covers the liquidity gap we have been discussing for some time during these calls. That issue is resolved and behind us, but we still have more to do. As we mentioned, there are discussions for another $7 billion currently in progress. This demand is not a one-time event. That's a crucial distinction. There is actually more cash in these deals than what you have outlined, and there is more on the horizon.

And additionally, it's not one deal. The $5 billion represents multiple customers, and each contract is very different. I think that's important to stress.

Thank you. I would like to follow up on that, Chris, if I may. To clarify, if the majority of the cash is coming in as mentioned in the press release within the next three to four years, and it is also being disbursed in that timeframe, then we are left with a small portion of the $5 billion that will be realized over the next 20 years. Is that correct? Does that mean there's essentially a net zero? And what about the subsequent income? How does that align with what you expressed in the press release?

I'm not quite following the net zero concept. The net is important and fully covers the liquidity gap that you and others have forecasted for the upcoming years. That issue has been fully resolved. You're correct that the renewals extend over a much longer period. However, this cash enables us to support the transformation, pay down debt, and begin addressing the debt structure. This pertains to the initial group of deals totaling $5 billion, with more anticipated.

Just to clarify my last point, when you mentioned in the press release that most of the cash will come in the next three to four years and that there will be an approximately equal amount of expenses, it suggests that the capital expenditures related to the deal are smaller. If I combine the deficit and the necessary capital expenditures to secure these deals, it brings us to the breakeven point and the liquidity you've discussed.

That's right. So said another way, David, the cash contribution, the $5 billion, less the OpEx to support it, less the CapEx to support it, leaves us with an amount of cash. We pay tax on that cash. And the after-tax impact of that fully funds the liquidity gap that we have modeled over the next few years, from this first kind of deals.

Operator, next question please.

Good afternoon. Thank you for taking my question. I would like to know more about the customer diversity within the $5 billion of closed deals. Are there a few large hyperscale customers, or is there a longer tail that includes corporate clients? Additionally, could you provide insights on the $7 billion in deals you are currently pursuing?

The first $5 billion represents the initial tranche I mentioned earlier. It includes hyperscalers, social platforms, large technology companies, and cloud companies. As these entities build and train their AI models, they're recognizing that current networks cannot keep up with the expected growth. Consequently, they are expanding their data centers since data requires computing power. This demand results in inquiries from them about how we can assist in their connectivity needs, specifically regarding how to link them back to the main Internet highways to maintain service for their customers. The second tranche is still in the early stages and pertains to enterprises utilizing AI models. Our company is also adopting AI models to enhance our business operations. We have established strong partnerships with these enterprises to reduce costs, improve efficiency, gain insights, and develop more intelligent services. The leading enterprises primarily belong to healthcare, retail, and financial services, and their approach differs from traditional methods. They do not usually require a fully customized private network but rather a combination of fiber and advanced services, which significantly boost their bandwidth and performance requirements.

Thank you. Regarding the network build-out, at your Analyst Day last year, you mentioned that you had 6 million inner city fiber route miles in the network and planned to double that, which aligns with your earlier announcements. With the pre-funding and associated revenues from these deals, is this simply accelerating the build-out you previously planned and shifting it forward in time? Or is there any change to the profile or structure of that build plan?

I had a hard time understanding the baseline of your question. Here's what I can share about our current progress. We are enhancing connectivity both within metro areas and across long-haul networks, which involves establishing new routes and adding more fiber to existing ones. It’s a mix of these efforts, and each project varies. When you combine all of them, we are seeing a doubling in metro connectivity and a notable increase in long-haul capabilities.

I would like to add that the fiber we have already installed and the fiber we are currently adding supports 400 gig waves. Over the next two years, this capacity will expand to 800 and 1.6 terabytes. The fiber being laid down has significant potential for expansion. As far as I know, there isn't anyone else investing at this pace to meet customer demands.

Thank you very much.

Next question please.

Great. Thanks for taking the question, guys. First, just to follow up on David's question. I wonder if you could help contextualize the recurring revenue piece that comes on the back of these massive transactions that you're doing? How should we think about these transactions driving growth in the growth segment? Presumably this is sort of all large enterprise at this point? And then given how important this sort of transformative event for the business is, unlike embarrassed to be asking about mass markets, but you did really well on net adds in mass markets this quarter. It's been sort of a pretty dramatic acceleration in the business over the course of the last two quarters. And I'm wondering if you can give us some context to what's driving that? And also just speak to sort of the strategy around average revenue per user a little bit. It looks like average revenue per user is well below peers. I assume that's sort of a conscious decision to drive penetration. I'm wondering if there's sort of a plan to close the gap over time? Thanks.

Yes. There's a lot in there. I'll try to remember. As it relates to the private connectivity fabric deals, we did say in the video that once you get to scale, and again, as David pointed out, it's anywhere between that three and five year window. In some cases, not all, customers will ask us to run the networks, we will also provide space and power. So again, if you're powering a signal from San Francisco to New York, along the way, you're going to need huts where you can put rats, you can put the equipment that powers those signals. And we said that on average, think about that as roughly 10% of the total contract value. And that revenue and cash will be earned in the year the services are provided. So that's, I think, a good broad guideline. As it relates to mass markets, yes, I could not be more proud of the team. They're killing it. There's an intense focus on driving marketing execution and really focus on both enablement and penetration. And they kept the enablement machine chugging along, but we're just super pleased that the growth in penetration. They're executing flawlessly right now. On average revenue per user, that's part of the strategy, yes. I mean we're not trying to over or under price. In fact, we have raised prices where we see the opportunity to do so, and we'll continue to do that. But we're pleased with the way everything is working in combination average revenue per user penetration, etc. So more to come.

Thanks, guys.

Next question please.

Hi. Thanks for taking my questions. First, Chris, the comments you've made around the cash contribution margins associated with these deals seem to apply mostly to the $5 billion in signed deals. As we think about future deals, like the $7 billion you have in negotiation, would you expect those to have more favorable cash economics by leveraging some of the fiber being put in the ground for these earlier deals, or should they be kind of in the same ballpark?

Yes. I believe the guidance we provided is generally accurate. It's difficult to predict at this point. We've made specific decisions about whether to invest incrementally in routes where our capacity might be somewhat limited to support future growth. While this could be beneficial, we still need to fully understand what all our customers desire, which might necessitate additional actions that are not currently possible. Given the complexity and scale of the deals, it's challenging to provide a definitive answer right now. However, I do think our guidance serves as a solid framework for understanding the situation.

Okay. So not trying to get too far ahead of signed deals in terms of capital commitments and whatnot?

We will continue to invest in our network as we always have, which I see as a fundamental responsibility. When it comes to significant capital expenditure expansions, we will proceed cautiously. This is not a gamble. If we identify a route with anticipated future demand and we are already installing fiber, we may choose to install additional fiber. Conversely, if a route already has ample capacity, we will not. Our analysis is done on a route-by-route and mile-by-mile basis, and I'm genuinely impressed with what the team is accomplishing in modeling this out. This analytical capability is a core strength of ours, and I believe it's one of the reasons customers are attracted to Lumen, in addition to the digital services we offer.

Okay. Okay. And then Chris, you quickly alluded to it in your prepared remarks, but I was hoping you could expand a bit on how you're thinking about cannibalization risk, whether current revenue or revenue that you otherwise might have generated. So for example, if you're selling someone dark fiber, I'm guessing you're not selling them waves on that route going forward?

So think about it this way: private connectivity fabric is a bundle of everything from dark fiber to wave to IP. It's your network, your way. The initial deals are primarily large infrastructure and dark fiber agreements, with some other components included. Over time, I expect the mix to keep evolving. It all depends on what the customer desires and where they want to go, which will determine whether we have some of that fiber already in place or if we need to install more.

I'd also like to add, as a person coming from the tech world into telecom, there's this proclivity to worry about cannibalization rather than the evolution of the portfolio. And I think that's how we got to a place of being quite overbuilt. And as I look at the demand for these services and our strategy moving forward, we are going to prioritize penetration of our assets to deliver returns to our shareholders. And I think that that's going to be very accretive long term.

Yes. This is not to be very clear. We haven't even talked about cannibalization. This isn't cannibalization of legacy at all. This is about net new and where we're going. And this is why we see the upside that we see in our ability to drive returns for shareholders.

Next question please.

Great. Thanks for taking my questions. We're all trying to size the total addressable market of AI and you did a good job of articulating those three phases. Maybe we'll start just with that first phase and all these deals are more dark fiber, as Chris said. So really, I think the addressable market would be how many new data centers are they creating? And we are talking a stab at it earlier this week in some reports. And really the better way of asking you guys how many new data centers are you feeding roughly $4 billion to $5 billion of deals? Is it like 10? Is it 30? I'm just trying to get a sense of that, and it helps us with our scope? Thanks.

I mean, we're not tracking that really. What we're tracking is across the group of technology companies that we're speaking to, which is at this point in the dozens, what do their needs look like? What are the synergies between the requests that we can drive economies of scale and how can we drive to closure as fast as possible so we can group them in those ways by route, and by how operationally we can deliver upon these. The one thing we do look at when we model it out is where is the power. Data centers need power, space, cooling, and fiber. And I think the energy piece of the equation is where can you build a data center that you can deliver a green footprint because there's also that piece of it as well. And so it's pretty complex.

Next question please.

Thank you. Could you share more details about the $5 billion group, specifically what the largest deal represents as a percentage of revenue? Additionally, regarding the $5 billion in bookings, what is the average annual bookings, and how much has it increased this year, including the private connectivity fabric deals?

In terms of the largest deal, I can't provide specific details about customers, as it could lead to speculation about their identity, which wouldn't be fair to them and is sensitive information for us. Regarding bookings, could you clarify if you're asking how our scale relates to what we're currently selling?

It seems you have achieved $5 billion in sales, which sounds more like a bookings figure rather than revenue reflected in the income statement. Could you share what the additional upside from those bookings could be in 2024 compared to 2023, especially considering the increase from the private connectivity fabric deal?

Yes. I would say from a modeling standpoint, I would think about that as largely all incremental. We always sell dark fiber. And I think the dark fiber run rate I'd have to go back and check, Frank, because I don't know off the top of my head, but ex these deals, dark fiber is obviously in the growth bucket, and we continue to grow that segment. But yes, we had the state of California in the fall that we mentioned, right, so that was a big deal. But again, we've done those in the past, and we'll do other deals like that going forward. This shift that we're seeing right now, which, quite frankly, I don't think comes as a surprise, right? There's been so much research and communication around the amount of investment required to support AI. And everybody forgot about the fact that the data doesn't originate in the data center and stay in the data center, right? It's got to get in, it's got to get out. So what we're really seeing is that now finally being realized and I'd say that's largely incremental.

Okay. Can you clarify the split and the increase in free cash flow between the asset sale and the upfront cash?

The asset sale was, I think, after tax, $190 million.

Okay. Thank you.

Next question please.

Appreciate you taking the questions. Thank you. So you talked about getting back to EBITDA growth in 2026 after a step down next year. How should we think about the visibility of getting back to revenue growth, given the trajectory of bookings you've had? And it sounds like these private connectivity fabric deals since they'll be amortized over a very long contract duration. They'll certainly help revenues, but I don't know if there are enough to really get you back to revenue growth by 2026 as well? If you could kind of talk through the moving parts there? Thanks.

I don't want to provide too much detail on our guidance at this point. Revenue is expected to lag behind the EBITDA recovery due to our focus on significant cost reductions as we streamline our operations from four networks to one. As for the timing of revenue, our recent assessment indicates it will lag by at least a year, and I believe that remains accurate. Additionally, I want to clarify that my previous comments about the outlook for 2025 and 2026 do not include the ongoing discussions related to the $7 billion. We won't factor that in until it materializes, as similar initial deals are challenging to predict, both in terms of what is needed to fulfill them and their timing.

Yes, understood. Just one follow-up. You've mentioned the new data center deals you’ve announced and those in your pipeline, linking them to your intercity fiber investments, where you plan to double your fiber capacity over the next few years. There are discussions about data center deals moving to more rural locations due to power constraints in many markets. Can you provide insights into the distribution between middle mile, long-haul fiber and metro fiber in your pipeline to support these deals, especially with the trend of data centers being established in more remote areas? Thank you.

What I'll say is this, our network, one of the reasons why it's so attractive. And by the way, when I say network, it's fiber and in some cases, it's conduit, right? It's this vision that was built 25 years ago. And now because of the advances in fiber technology, we have the ability to monetize it. So it's both. It's both of those things. And so I would say the strength of both the inner city and the metro that customers, broadly speaking, are wanting to access. And as we continue to invest in things like waves, it will be to deliver against both of those. Wave customers want two things. They want to get where they want to get, and they want to get there quickly. And I don't know if anyone else in the space who is investing the kind of money that we are to make sure that happens.

Next question please.

Thanks so much. To wrap, it's an exciting time for Lumen as AI charts the course for our pivoted growth, and our future is very, very bright. Thanks for joining today. We look forward to meeting you at the upcoming conferences and updating you on the significant progress we're making in transforming our company. Have a great night.

Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.