Greetings, and welcome to Lumen Technologies' Third Quarter 2024 Earnings Call. After the speakers' remarks, there will be a question-and-answer session. Please follow the operator's instructions. As a reminder, this conference is being recorded. I would now like to turn the conference over to Jim Breen, Senior Vice President, Investor Relations. Jim, please go ahead.

Good afternoon, everyone, and thank you for joining Lumen Technologies' third 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 one of our third 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.

Good afternoon, everyone, and thanks for joining. Lumen's third quarter headline is this: the transformation is happening; we are making progress in our journey to turn Lumen into a digital network services company with simple and modern product offerings, infrastructure, and operations. We are pursuing two major growth factors: building the AI backbone and cloudifying telco, and have made material progress with each. With that said, and as expected, our financial performance still reflects the secular headwinds on our legacy revenues. We are also investing heavily in transformation programs while running the core business, which weighs heavily on our EBITDA results. We have fully recognized we have a long way to go on this journey, and we understand that our current financial results, coupled with the fact that telcos and the industry are not talking about a turnaround, make it difficult to imagine long-term success for Lumen. However, our team sees a clear path to turn this company around. We have a plan to take costs out, de-leverage our balance sheet, and drive growth by using our assets and intellectual property to provide enterprise customers with new value in a multi-cloud hybrid architecture environment. All of this will take time to execute, and it will take time to show up in our financials. But the path is real, and today I want to share more on the opportunity ahead and what we have accomplished so far. I'll be covering three topics. First, how we are continuing to drive operational efficiency with sales growth and higher customer satisfaction in our core business to ensure we maximize cash generation, customer life and value, and cost out. Second, how Lumen is building the backbone to the AI economy, adding more than $3 billion in incremental private connectivity fabric sales in partnership with the biggest names in the technology industry. And third, how Lumen digital is cloudifying the industry, driving NaaS adoption to well over 400 customers and positioning the company for high-value digital revenue growth. With our operational turnaround, we continue to see solid sales performance in the third quarter, with North American large enterprise and mid-market sales up nearly 14% year-over-year, with notable strengths in IP sales, up 18% year-to-date, and 100 and 400-gig wave sales, up 50% year-to-date through September. To complement these sales results, we saw significant year-over-year improvement in customer satisfaction scores across all our enterprise customer channels, as measured by transactional net promoter scores: 17 points for large enterprise, up 11 points for wholesale, 28 points for mid-market, and an impressive 98 points for public sector. We continue to enhance our efforts to secure the base by focusing on five key levers: installs, renewals, migration, usage, and disconnects. While installs were slightly down this quarter, we saw a 14% sequential improvement in disconnects, with total disconnects being at their lowest level in over five quarters. In NaaS markets, the team is executing well and driving increased value for our consumer segment, with record quarters for fiber net adds. Last quarter, we announced a $1 billion cost reduction by the end of 2027 by unifying our network from four architectures to one, which allows for a dramatic simplification of our product portfolio and IP estate. While this work is incredibly complicated, given our long history of mergers and the accumulation of technical debt, we are on track to develop the plan to execute. We will provide further details on this important work as we progress. To summarize, we are pleased with how we're galvanizing Lumen's core network services business, how we're driving growth in Quantum Fiber, and how we're simplifying and modernizing the company. However, I want to be clear: we are not here to find revenue growth in legacy telco. All of our transformation work is in service to customers who need and want to leverage technology like Gen AI to transform their business. The legacy networks of yesterday simply won't serve tomorrow's enterprise. They're not big enough, they're not fast enough, and they're not secure enough. Additionally, the customer experience in legacy telco is neither quick nor effortless, especially in complex multi-cloud hybrid environments, which have become the norm for every business. Lumen is fixing all of that by reinventing digital networking, and that is what will fuel the company's long-term financial growth. We see several growth vectors in digital networking, and I'm going to share two that we're pursuing right now. The first is what's been receiving a lot of attention given the size of the deals we're signing. Lumen is building the backbone for the AI economy. The market now recognizes that AI needs data, data needs data centers, and those data centers need to be connected. Several of the biggest names in technology, including Microsoft, Meta, AWS, and Google have chosen Lumen as their trusted network for AI. We get asked all the time: what does the AI market mean for Lumen? How many of these deals are out there? How long will this growth spurt last? As I've shared, we see a few phases playing out. In Phase 1, hyperscalers, social platforms, and cloud companies are massively expanding their networks to support data center build-outs for their AI model training. As long as these companies keep building data centers, we will have the opportunity to connect them. These deals are highly beneficial to Lumen and well-timed for our transformation. We shared that we booked more than $5 billion in PCF sales in last quarter's call, providing ample liquidity to close near-term funding gaps. Since then, we have booked more than $3 billion in additional PCF sales, allowing us the opportunity to employ the extra cash for deleveraging. We remain in active discussions for more deals like this and will update you on our progress when they materially affect our guidance. Finally, we've established a dedicated operations team to build these next-generation AI networks, and they've already broken ground on this exciting work. So if you're wondering why and how we're able to close more than $8 billion in PCF sales so quickly, I'll share this: Big Tech is choosing Lumen because our geographically diverse conduit-based intra and intercity fiber network was built for this moment. Lumen's private connectivity fiber, which has just been awarded the Competitive Strategy Leadership Award by Frost & Sullivan, is a best-in-class architecture that provides customers the control, capacity, performance, and security they need. We believe that the second phase of AI evolution is starting to emerge as enterprises begin to use those AI models at scale and recognize the need for major network upgrades. These enterprises are coming to Lumen because they know we connect all three public clouds, and they see that we are investing in future networking needs unlike any other company in the networking marketplace. We believe Lumen has become the thought leader in this space, and it's showing up in our business results. We're observing an increased demand for higher-performance Lumen services, specifically for Waves and IP in our large enterprise and mid-market segments, with IP sales of 18% year-to-date and Wave sales of over 25% year-to-date through September for these customers. That's why we expanded our high-speed IP service to include 400-gig ports in 14 different markets, with plans to expand to several more markets this year. Additionally, we currently offer 400-gig Waves in over 70 markets across nearly 80,000 route miles, with plans to increase Waves CapEx to further expand this footprint in 2025. In the third phase of AI evolution, we see AI communicating with AI, leading to another potential parabolic increase in data workload volume. It's too early to share proof points for this phase, but given our network, our digital platform, and our portfolio of intellectual property, we believe that Lumen is well-positioned to handle the volume, pace, and complexity of enterprise networking needs, and we are playing to win. Cloudifying telecom is going to disrupt the industry and provide Lumen with another major growth sector. Expanding the Internet and building the required critical infrastructure is just step one, but customers expect to be able to quickly, securely, and effortlessly use that infrastructure. That's why Lumen is building a digital platform, natively integrating with our fiber network to enable enterprises to digitally design, price, order, and consume secure networking in a hybrid multi-cloud world. To our knowledge, no other telco that owns a fiber network is doing this, and we see it as a significant differentiator and revenue generation opportunity for Lumen in the future. A year ago, we established a Lumen digital team and launched our flagship Network-as-a-Service (NaaS) offering. As of today, over 400 customers have adopted Lumen NaaS, which is a promising start. The NaaS overlay allows our customers to get the network components they want, when they want it, how they want it, in true consumption form. Recent wins for our NaaS product include Agilisys, the Blackstar Group, the PAC-12, and C3Aero, among others. The Metro Ethernet Forum (MEF) recently named Lumen the best NaaS provider in North America. Our progress in such a short period of time isn't just exciting or encouraging; it has fundamentally repositioned this company. NaaS is merely the beginning. With our world-class fiber network, our PCF architecture, ExaSwitch, and a range of Big Tech companies across all three clouds committed to our network for the long haul, we have all the elements necessary to redefine networking and deliver significant value in a multi-cloud hybrid world, which is precisely what our customers want and need. To conclude, we have the cash, we have the assets and intellectual property, we have a world-class leadership team and culture, we have a great strategy, and we have a lot of momentum. Lumen's future is very bright. With that, I'll turn the call over to Chris.

Thanks, Kate. Lumen continues to move forward along its path to transforming the business. In the third quarter, we've taken additional steps towards achieving that goal. We signed over $3 billion in incremental PCF deals as we continue to be the partner of choice in building the trusted networks for AI. We successfully executed a debt exchange, extending over $800 million in 2026 through 2029 maturities to 2032. Additionally, given our confidence in free cash flow generation, we contributed $170 million to our pensions in the quarter, bringing us to nearly 90% funding. As Kate discussed, we are now at over $8 billion in new PCF sales since June. Our customers have validated Lumen's unique position to build the backbone of the AI economy. While we will not be reporting on specific PCF sales every quarter, we chose to highlight the over $3 billion today for three reasons. First, we're incredibly proud of our team for how quickly they've managed to capture what we believe is a once-in-a-generation market opportunity. We possess the right assets and the right people to build the trusted networks for AI. Second, the incremental size of this over $3 billion will positively impact our 2024 free cash flow guidance, which I will update you on shortly. Lastly, the PCF sales we're announcing today resemble the previous $5 billion largely sold on existing routes. Future PCF sales will also include new routes with a diverse set of enterprise customers. Given the complexity of these builds, discussions are ongoing, and will take place over several quarters. In the future, we will provide updates when PCF sales significantly impact our financial guidance. We introduced PCF sales last quarter and updated them this quarter because there was a need for investors to understand our strategy, the market opportunity, and the structure of these PCF deals. We will continue to educate the market on those opportunities for Lumen and the AI economy while also focusing on core metrics of sales growth, margin improvement, and free cash flow generation. As we stated last quarter, we believe the progress we've made on driving PCF sales in 2024 is just the beginning of a large growth opportunity, which will bring long-term, sticky revenue while offsetting higher churn legacy product declines. We're currently in the planning stages of constructing these networks, securing the necessary equipment and labor, and we're confident in the cost and margin structure we've estimated for the AI network builds. We estimate the cash received from the initial $5 billion in PCF sales provides the necessary free cash flow to sustain our business, leading us to expect sustainable, positive free cash flow growth. The additional cash provided by the over $3 billion in recently signed contracts gives us increased flexibility to enhance our balance sheet and meaningfully address our capital structure. With respect to the balance sheet, another highlight of the quarter was our successful execution of a debt exchange, extending over $800 million in 2026 through 2029 maturities to 2032. Now, we have approximately $1.8 billion in maturities, excluding leases, due through 2028, down from about $2.6 billion at the end of the second quarter, and we're not finished yet. Transformations are complex, especially in industries where such dynamics have never occurred before. As we navigate ours, we strive to bring you transparency regarding both the successes and challenges. In Q1, we noted that demand for networking was heating up. In Q2, we delivered against that, substantially increasing free cash flow guidance and indicated an additional opportunity. This quarter, we announced progress towards that opportunity and raised free cash flow guidance once again. Importantly, in both Q2 and today, we're stating that our legacy business is declining, consistent with industry trends, and requires investment to build our digital future while unlocking a billion dollars worth of cost efficiency. This may result in lower 2025 EBITDA before improvements arise in 2026. In short, we understand that maintaining credibility is crucial, and we are diligently ensuring that our messaging is consistent with our delivery. We believe the path to value creation for Lumen is clear. Through boosted sales, improving our balance sheet, and optimizing our cost structure, all while we continue to execute our core strategic goals of driving operational efficiency, building the AI backbone, and cloudifying the industry. We recognize that we're in the early stages of a significant transformation of Lumen, and remain focused on achieving the goals we've set for ourselves. Now let's delve into the discussion of our third quarter financial results. Our sales growth engines within our large and mid-market enterprise channels, along with our Mass Market segment, exhibited solid performance this quarter, with large enterprise and mid-market sales up nearly 14% year-over-year. Additionally, Quantum Fiber broadband net additions again reached an all-time record. While consolidated revenue and adjusted EBITDA still feel the impacts of legacy declines, we are encouraged by the improvements we're making in the business, as disconnects improve both sequentially and year-over-year. On a year-over-year basis, total reported revenue declined 11.5% to $3.221 billion. About 32% of the decline was due to the effects of divestitures, commercial agreements, and the sale of the CDN business. Business segment revenue decreased 12.7% to $2.536 billion, with approximately 37% of that decline attributable to the same factors. Mass market segment revenue fell 6.9% to $685 million. Adjusted EBITDA stood at $899 million, with a 27.9% margin, and free cash flow was positive at $1.2 billion, benefiting from cash contributions from recent PCF sales. Next, I'll review our detailed revenue results for the quarter on a year-over-year basis. Within our North America enterprise channels, which exclude wholesale, international, and other segments, revenue declined 6.9%. Overall, North America business revenue decreased by 7.5%. Large enterprise revenue declined 8.2% in the third quarter. Our growth revenue increased by 1.6% year-over-year, facing continued pressure in nurture and harvest product revenue. We expect ongoing variability in trends as we strive towards overall stabilization. Mid-market revenue decreased approximately 6.9% year-over-year, with improvement in growth revenue to 5% year-over-year, offset by nurture and harvest declines. Public sector revenue fell by 4% year-over-year. While public sector revenue can be lumpy from quarter to quarter, we continue to see large bookings traction in this space, which takes time to ramp to revenue. Such wins give us ongoing confidence that public sector will grow year-over-year in 2024. Wholesale revenue fell approximately 9% year-over-year. The harvest portion of the wholesale portfolio, which includes products like TDM, Voice, and Private Line, saw revenue contract by 16.3% year-over-year in the third quarter, primarily driven by telco partners that are selling legacy services. Our harvest product revenue will likely continue to decline over time, and we will manage this area for cash. International and other revenue declined 64.8%, primarily due to the divestiture of our EMEA business and the sale of select CDN contracts in the fourth quarter of last year. Moving onto our business product lifecycle reporting, I'll reference results based on our North America enterprise channels. Higher sales in our growth product portfolio were led by enterprise broadband, dark fiber, and IP. These sales were offset by declines in nurture and harvest, resulting in an overall decline of 6.9% year-over-year. Results can vary by quarter, but we expect sustained growth in growth product revenue as we execute on our core turnaround. Within North America enterprise channels, growth products revenue rose 4% year-over-year, up from 1.5% year-over-year last quarter. The growth segment accounts for roughly 45% of our North America enterprise revenue, and for our total business segment, carried an approximate 80% direct margin this quarter. Nurture products revenue fell 15.2% year-over-year, significantly impacted by declines in VPN and Ethernet services. Nurture represented 29% of our North America enterprise revenue, and for our total business segment, kept an approximate 67% direct margin in this quarter. Harvest product revenue decreased by 14.1% year-over-year, continuing to languish due to TDM-based voice declines. Harvest represented approximately 16% of our North America enterprise revenue in the second quarter, maintaining a 73% direct margin this quarter. Other product revenue declined 11.1% year-over-year, and as a reminder, other product revenue tends to exhibit fluctuations due to the variable nature of these products. On to Mass Markets: our fiber broadband revenue grew by 16.6% year-over-year and represents approximately 40% of Mass Markets broadband revenue. During the quarter, fiber broadband-enabled location ads hit 131,000, bringing our total to over 4 million as of September 30th, and on track for our targeted annual 500,000 build goal this year. We added 43,000 Quantum Fiber customers, marking our best fiber net addition quarter reported to date, bringing our total to over 1 million. Fiber ARPU stood at $62, remaining flat sequentially and slightly up year-over-year. This accomplishment is a testament to our team's outstanding work. At the end of the third quarter, our legacy copper broadband penetration was approximately 9%, and Quantum Fiber penetration was around 26%. Looking ahead, we will continue our market-by-market assessment of the Mass Markets business, exploring a variety of strategic options to maximize its value. These options include potential joint ventures, wholesaling arrangements, or future divestitures to generate incremental cash. Now turning to adjusted EBITDA; for the third quarter of 2024, adjusted EBITDA was $899 million, compared to $1.049 billion in the previous year. This quarter's EBITDA was negatively impacted by legacy revenue declines, seasonally high operating expenses, and some startup costs associated with our custom networks group. The adjusted EBITDA margin for the third quarter stood at 27.9%. EBITDA margins dropped by 90 basis points year-over-year, relative to a 270 basis point year-over-year decline in the second quarter. Special items affecting adjusted EBITDA totaled $56 million, primarily related to transaction separation costs. Capital expenditures were $850 million, and positive free cash flow excluding special items was $1.2 billion. As previously stated, we're leaning into our network investments to meet the rapid growth and demand our customers are facing while improving our overall cost structure. Now, turning to our financial outlook; we continue to estimate FY '24 EBITDA to fall in the range of $3.9 billion to $4 billion. However, given the overall business trends and initial cost impacts from the incremental PCF sales, we foresee FY '24 EBITDA at the lower end of that range. As mentioned earlier, we expect EBITDA to decline year-over-year in 2025 due to continued legacy declines, startup costs for PCF contracts, and incremental transformation expenses, with the longer-term goal of improving the broader cost structure. 2024 CapEx is projected to range from $3.1 billion to $3.3 billion, and cash interest is expected to range from $1.15 billion to $1.25 billion. Lastly, we are raising our 2024 free cash flow guidance from a previously anticipated $1 billion to $1.2 billion, now to $1.2 billion to $1.4 billion. This guidance accounts for incremental operating expenses, capital expenditures, and cash flows associated with our PCF sales growth, as well as additional spending necessary to ultimately enhance our cost structure and margins. With that, I'll turn it back to Kate for closing remarks.

Thanks, Chris. I know what we're saying is different from what everyone else in the industry is saying. It's going to take some time for the growth vectors I talked about to overcome the secular headwinds and become evident in our financials, but we are confident that our plans will achieve exactly that. We appreciate you taking the time to understand our story. With that, operator, we are ready for questions.

Thank you. Please follow the operator's instructions. Your first question comes from the line of Michael Rollins with Citi. Your line is open.

Thanks, and good afternoon. I wanted to just ask about some of the PCF disclosures. There were three new customer announcements over the last few weeks. Did those specifically relate to these new sales in this quarter, or did that relate to the prior initial $5 billion? And then, Kate, you mentioned at the beginning of the call some details where you're seeing improvements in business sales. I'm just curious where that's coming from. Can you provide an update on marketing and distribution? And are these PCF sales also serving as a magnet to attract additional wins from hyperscale customers? Thanks.

Yes, for sure. So, thanks, Mike. The four customer stories that we shared come from the $8.5 billion in total, and we do not plan to differentiate between the buckets. However, they serve as a significant magnet. When you secure such prominent clouds in your ecosystem, coupled with a digital platform that makes service consumption easy, you've got something exceptional. It's different from what everyone else is doing. We've got the cash to facilitate this. Regarding the uptick in IP and Waves, particularly at the higher capacity levels, it is solely an indicator that our customers recognize a need for expanded networks due to the demands placed upon them. We don't have specific data to affirm it's all AI-related. That's the conversation we're having with our customers, and it aligns perfectly with the trajectory we've discussed: first, Big Tech constructs networks for AI models and trains them; second, these customers use these models to transform their businesses, subsequently increasing their networking needs. We believe that every AI strategy must be accompanied by a network strategy, and our thought leadership has attracted customers to Lumen.

Thanks. Next question, please.

Your next question comes from the line of Sebastiano Petti with J.P. Morgan. Your line is open.

Hi, thank you. Quick housekeeping on the incremental PCF announcements: should we think about that broadly as having a similar timeline to what was discussed last quarter regarding contributions in the IRU constructs that you laid out last time? I know you mentioned they are similar to the last deal, but I just want to clarify timing.

Yes. You are right. If you examine the structure of these newly signed incremental deals, in terms of margins, cash flows, and timing, they very much resemble the previous $5 billion deal. So, I think that's a solid way to model it.

Okay, that's helpful. And then, since you did guide to the lower end of the 2024 guidance range, does it imply a fair degree of acceleration sequentially to hit that target? Is there anything specific that should be on our radar regarding timing or costs? Thank you.

It's primarily seasonality that we observe in the summer months. We typically see heightened construction, maintenance, and energy costs, which alleviate somewhat as we transition into the fourth quarter. Additionally, we intentionally made some investments during this quarter to accelerate our efforts to capture the $1 billion. When you consider the timing of these swings, that's what gives us confidence in achieving the lower end of our guidance for the year.

The next question comes from Batya Levi with UBS. Your line is open.

Thank you. Regarding the incremental PCF sales you signed, should we expect that they are mostly from big tech, or are we beginning to see demand from enterprises as well? To confirm, I believe you mentioned that this new mix aligns with the existing constructs laid out for the original PCF deal; does that mean the CapEx requirements will essentially be included within the original deal?

I'll address the first part. The customer mix, as we mentioned last quarter, comprises over 15 customers across these tranches. We had some repeat business alongside new business. So, it's a mix. Predominantly, these customers are building AI models. If you look at some of the logos we shared standing alongside us in our strategy, it's all three clouds and a significant social platform. These companies are reporting substantial infrastructure investments to support their AI initiatives, and they're coming to Lumen. That's the essence of the story. As for the second piece, Chris?

Yes. Regarding the second portion of your question, of the total $12 billion opportunity set, the $8.5 billion we've discussed today that we have secured thus far appears quite similar. The same ratios of CapEx to sales value, and the recurring versus upfront amounts, should apply based on the parameters we've shared previously. The notable change regarding this year's impact revolves around timing of cash flows, wherein we have some inflows associated with the timing of these deals. Nonetheless, when we publish guidance for 2025, significant cash flows for the next year's revenue will be factored in accordingly.

Got it. Thank you.

Next question, please.

The next question is from Jim Schneider with Goldman Sachs. Your line is open.

Good afternoon. Thanks for taking my question. I wonder if you could clarify the incremental $3 billion piece of the $7 billion you mentioned. Does that indicate there's $4 billion of pipeline remaining, or is there an additional pipeline beyond the first $7 billion to extend it beyond the total $12 billion? Additionally, could you comment on your mass market business? Given the level of activity there, are you seeing any solid indications of interest and potential acquisition for that asset? Thank you.

To align on what we're all discussing, of the $7 billion opportunity, we stated today that we secured over $3 billion. Let's call that roughly half. For the remaining amount, that pertains to new routes, as I've mentioned in prior answers, which will unfold over upcoming quarters. Customer interest remains strong not just for new routes but also existing routes. We will not continue to update the pipeline; this will be classified as normal course business, and we aim to be in that motion. We initially mentioned the $5 billion and the $7 billion to make clear to the market the validation behind what we've been asserting earlier this year: this remains a substantial and significant opportunity, as we will continue to report updates as guidance is impacted. As for the consumer side, I would emphasize the outstanding efforts by the team, which has been well-recognized externally as well. We're not the only ones taking notice of their execution on enablement and penetration. While we acknowledge for years that this sector would eventually consolidate, we are currently observing that shift occur. We’ve also stated that we possess two great businesses in our enterprise and consumer segments that we feel ought to be invested in, yet ultimately don't belong together strategically since they possess different return profiles. When the timing is right, we will decide how to separate them. However, there is no new news to report today. We have been clear about the consumer business's economic status, particularly focusing on the distinctions between copper and fiber. This is a piece for you all to model to determine what impact it might have on our ability to deliver as an enterprise-focused company.

Thank you.

The next question comes from Jonathan Chaplin with New Street. Your line is open.

Thanks, guys. A quick follow-up on that, Chris, and then I have a network question as well. Regarding the thought process behind the potential sale of mass markets, one consideration was separating the fiber business from the rest of mass markets. Could you provide context on how you would accomplish that, particularly the physical separation of those networks?

I'll address the network question. As we stated in the last call, we have not sold any of these assets. These involve long-term leases of conduits; sometimes just fibers, and at times both. It's about constructing new networks on existing routes, as well as building net new routes, putting new conduits underground, etc. We strategically plan with our customers on when to deploy more or fewer conduits. It's worth noting the significant partnership we established with Corning, utilizing their new fiber solutions that enhance the capacity of our existing network. We're confident in our network's strategic positioning and our access to the best fibers in the market to grow alongside our customers. Moreover, none of the long-term leases on those routes grant our customers the right to compete against us in those areas. Just to clarify any misinformation, these deals are substantial, and they provide us a significant cash infusion that energizes our expansion efforts. Additionally, Chris, would you like to elaborate on the consumer aspect?

Regarding consumer, I don't want to delve into specifics as we still have a lot to figure out. But let me reiterate: consider the consumer business as two separate segments. The copper segment generates the majority of EBITDA while the fiber segment consumes most of the CapEx. Thus, it is essential to analyze this when considering their potential separation. While separating these segments is feasible, we must acknowledge the complexities involved; however, history shows we can tackle significant challenges. We'll have to wait and assess where this leads us, but that's all I can disclose at the moment.

Understood. Does the Zipty transaction alter your perception of that asset's value?

I believe that transactions occurring in the market broadly validate our perspective that consolidation is necessary, and there is immense value associated with these assets. We possess a sizable asset that is part of this consolidation trend, which I leave you to evaluate quantitatively.

Next question, please.

Your next question comes from David Barden with Bank of America. Your line is open.

Hey guys, thank you so much for taking my questions. I appreciate it. I have two questions. First, regarding the $3 billion: Chris, you mentioned that this would look a lot like the $5 billion deal. You provided substantial details around that $5 billion, and it seemed that approximately 15% or $800 million of that amount came in over a three to four-year construction period. Additionally, we noted that another 5% was drawn over the following 20 years in terms of IRU maintenance, etc. The $3 billion, which mirrors this structure, might equate to approximately a $500 million cash contribution over the build period. Are you indicating that you're applying some of this upfront payment to balance sheet improvement before subsequent expenditure on builds? That would be my first question.

Absolutely. I appreciate you bringing this up, David. I've been here for two-and-a-half years, and Kate for a couple as well. I highlighted this in my prepared remarks intentionally, because some narratives suggest doubts about our credibility and intentions. I want to reaffirm that we're avoiding miscommunication with the market. We will not convey anything that either misrepresents or is unfeasible. To clarify regarding the $5 billion, our transformation objectives required substantial modeling and investments, which encompassed efforts to rectify our business while simultaneously investing in our future and fulfilling pension obligations along with maturing debt. The initial $5 billion secured our financial gaps, and the $3 billion solidifies our ability to reduce debt. It's important to consider our overall cash on hand, which precedes the $5 billion, allowing us to address our cash flow needs systematically. You'll learn more about this as we can share more specifics, but our aim is to enhance the company through these deals.

Got it, thank you. And as a follow-up, as we ponder your comments about the need to ramp up EBITDA in Q4, which will begin at a minimum of about $1 billion for 2025, you've indicated a downturn in 2025. How severe is this decline, and can you provide a basis for evaluating the quarter-over-quarter comparison of EBITDA from 4Q 2023 to 4Q 2024? Would that serve as a reasonable benchmark to assess how the 2025 down year unfolds? Thank you.

I prefer not to go too deeply into 2025 guidance right now for understandable reasons, as we're still quantifying our investment needs, particularly in those contracts. Moreover, let me clarify one aspect: the customers that have signed these contracts have also inquired whether we could accelerate our capability. Therefore, discussions around these subjects are ongoing. At this point, if I reflect on street averages, they may be slightly elevated compared to expectations for next year. While we plan to provide clarity for 2026 alongside the 2025 guidance, as I anticipate that '26 will be a significant inflection point considering the cost reductions we can achieve. Until we advance our assessment further, that is all I'm willing to disclose.

I understand, and I appreciate that. Thank you, everyone.

Next question, please.

Your next question comes from Nick Del Deo with MoffettNathanson. Your line is open.

Hi, thanks for taking my questions. First, you presented metrics that indicate significantly improved sales in North American Enterprise over the past several quarters. When should we expect to see that impact reflected in the P&L in a more pronounced way? Additionally, Kate, you mentioned having over 400 NaaS customers signed up, which is encouraging to hear. To what extent is NaaS contributing incremental revenue? Are these new customers attracted by NaaS, or are existing customers spending more due to it? Thank you.

I'll take the second question, Chris. Starting with the NaaS customers, we’re developing a new digital platform, focusing on driving adoption. This emphasis is rooted in customer-centricity. With our strong network infrastructure, every component we build on that digital platform is integrated natively. This positions us to achieve efficient economics and a substantial delta of capabilities compared to alternative offerings. Many companies approach us purely to fill the circuits beneath their portals. While early on, we’re seeing customers experiment: starting with one port and increasing as they experience positive results. That's where we can innovate and enhance our service offerings, such as Lumen Defender, which presents further opportunities for us. However, we do not intend to disclose how precisely it impacts revenue just yet, as we’re still refining our approach. That process will take time. This is true for all cloud businesses, and we are adopting the cloud methodology in our planning.

Typically, we would expect sales to convert to revenue in around a three-month window. As we increasingly sell digital services, that timeframe diminishes, which is one of the key benefits, but we still have some distance to cover. I should emphasize that in our growth segment, growth revenue grew 1.5% year-over-year last quarter and elevated to 4% this quarter, which we appreciate. However, we need to be diligent in observing that prospect carefully. We have a substantial legacy business generating significant cash, hence our ability to invest in our future. This legacy business, by virtue of its scale, continues to offset growth within those growth segments. While we aim for a modest improvement in the rate of decline moving forward, it is likely that, given factors in the industry, revenue pressure may persist alongside customer disconnects.

Next question, please.

The next question comes from Greg Williams with TD Cowen. Your line is open.

Thank you for my questions. Regarding the potential Mass Market sale, where you're considering splitting fiber from copper, could you provide insight into potential dis-synergies? I recall you mentioning dis-synergies from the sale to Brightspeed; however, there wasn't a significant enterprise overlap at that time. In this instance, you could have a greater overlap considering multiple markets.

A key advantage of consolidating CenturyLink and Level 3 is that there are certain routes from CenturyLink that we won't sell since they are vital to our future enterprise delivery. I believe there are ways for us to maintain the existing synergies in light of these dynamics without getting overly specific. Additionally, just like in the enterprise segment, we can make improvements in customer experience by unifying our legacy copper operations. Therefore, the dis-synergies we're concerned about are less of a worry right now, but we will share more as we gain further clarity.

On that subject, I've noticed that within the North American enterprise sector, the nurture bucket is declining faster than the harvest bucket. You mentioned declines in VPN and Ethernet; I'm interested in understanding this dynamic better.

On this matter, I would assert that the nurture bucket specifically reflects the impact from VPN and Ethernet. There isn’t anything particularly significant pointed out that moved the needle negatively. We've already initiated migration strategies designed to transition numerous VPN and Ethernet customers to newer offerings, but the results of this haven't yet been realized. Thus, I would categorize this as a quarter-to-quarter fluctuation.

Got it, thank you.

Next question, please.

The next question comes from Frank Louthan with Raymond James. Your line is open.

Could you provide details on the annual revenue generated from wavelengths and the respective margins compared to your other products? Moreover, contracts of this nature often see some expansion over time. If they're already urging you to accelerate progress, what are your thoughts on the potential for upside to this $8 billion, and over what timeline could that potentially manifest?

At this point, we cannot share specific metrics, as it's still a premature phase, but ongoing conversations are still evolving regarding how we can advance, and we will be transparent when that becomes available. Initially, we won't delve into much detail beyond our existing product categorizations of grow, nurture, and harvest.

Operator, we have time for one more question.

Your final question will come from Eric Luebchow with Wells Fargo. Your line is open.

Thank you for accommodating my question. Focusing on the mass markets business, you've recently announced numerous activities from various private overbuilders. With your existing footprint, which I believe encompasses roughly 18 million copper homes, how does this growing competition affect your perspective on future growth opportunities, either through your efforts or those of a partner? Additionally, how do you envision the potential for fiber build-out accompanying attractive economics?

We have noted publicly that of those 18 million homes, there's a sizable share in rural areas. Reasonably, you might estimate around 8 million as potential targets; perhaps a bit higher, perhaps a bit lower. Presently, we're sitting at about 4 million. The markets where fiber constructions are emerging prove to be very enticing. If you examine our current fiber footprint and compare it to the opportunity for expansion, we remain the largest asset on the market that has yet to undergo consolidation. Those are the facts, and we will see how it evolves. Regarding the funding gap, it has indeed closed, which now provides us greater flexibility. This effectively indicates a long-term positive cash flow stream from this point onward. While I want to emphasize that this is cumulative—due to tax payments and CapEx timing, there could be a year where we’re negative on cash flow relative to what was initially anticipated—we are still on track as we effectively manage those movements. Additionally, cumulatively, yes, we fully expect to generate free cash flow. Even considering diverse pressures on revenue, we maintain confidence in our path forward, further bolstered by the billion-dollar cost reductions we've outlined.

Thank you, everyone, for your questions and for participating in today's call. We look forward to updating you on our progress in the coming quarters as we continue our strategic transformation. Enjoy the rest of your day.

This concludes today's conference call. We appreciate your participation. You may now disconnect.