Qwest Corp Q4 FY2024 Earnings Call

Greetings everyone, and welcome to Lumen Technologies' Fourth Quarter and Full Year 2024 Earnings Call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. As a reminder, this call is being recorded today, Tuesday, February 4, 2025. Your speakers for today are Kate Johnson, CEO; and Chris Stansbury, CFO. I would now like to turn the conference over to Jim Breen, Senior Vice President, Investor Relations. Please go ahead, sir.

Good afternoon, everyone, and thank you for joining Lumen Technologies' fourth 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 fourth 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 on our earnings press release. In addition, certain metrics discussed today exclude costs for special items as detailed in our earnings materials, which can be found on our Investor Relations section of the Lumen website. With that, I'll turn the call over to Kate.

Thanks, Jim, and thanks to everybody for joining the call today. I'll focus my remarks with a quick look-back on 2024 and then I'll set the vision for 2025 and beyond. In short, 2024 was a remarkable year for Lumen Technologies. We accomplished so much, way too much to share on this call, so I'll just focus on a few of the big things. We strengthened our financial position and restored market confidence in Lumen, starting with the debt restructuring that gives us ample time to execute our transformation. We lowered our debt load by $1.6 billion in '24 and recently sent redemption notices for another $200 million. Importantly, we drove material improvement in both our equity and debt trading values. Next, we established Lumen as the trusted network for AI, closing $8.5 billion in sales with big tech companies like Microsoft, AWS, Google, and Meta, among others. These deals helped us strengthen our free cash flow and enable us to self-fund our transformation. We continue to have deep discussions with several customers to build new routes, and we're going to provide more details on those deals as it makes sense to do so. Throughout '24, we made material progress transforming our corporate functions, and some quick highlights include: In service operations and assurance, we delivered materially better year-over-year customer satisfaction scores in all four enterprise segments all four quarters in a row, and we've built an engine to deliver large, complex private network projects on budget and on time, with the delivery of the State of California's Digital Inclusion program as the latest proof point. Our enterprise sales and customer success teams built a robust engine that delivered over 15% year-over-year sales growth in our North American enterprise channels, with more than 13% sales growth in IP and waves, and drove more than 500 new customers to adopt the Lumen Digital NaaS platform. Our marketing team built new storytelling muscle, standing side-by-side on stage with big tech and great companies like Intelsat, VSP Vision Care, Churchill Downs, and the Pac-12 to evangelize the criticality of fiber networking and reposition Lumen as a trusted network for AI. Our network engineering, IT, and product teams delivered dozens of mission-critical programs for us. One breakthrough program is the delivery of Lumen's unified network architecture, enabling 85% of new Ethernet and IP data service sales in major metro markets. This is the long overdue integration of our four network architectures and has already started delivering benefits. The unified network not only enables NaaS and other more advanced digital services but also reduces our average time to deliver by more than 12 days and cuts implementation costs by as much as 50%. Our HR team successfully embedded our play-to-win culture in every aspect of the company. We can feel it every day in the work that we do, and of course, we're proud of the external recognition we've received with more than 15 culture awards so far. Most importantly, we're excited to see major improvements in our employee engagement scores borne out of this work because it really matters to our overall mission. Finally, our Mass Markets Quantum Fiber team delivered over 500,000 enablements with greater than 90% year-over-year growth in fiber net adds while simultaneously reducing expenses year-over-year. In summary, our progress in '24 validated our mission, vision, strategy, culture, and especially the strength of our team, and it showed that we have great execution muscle and set a strong foundation for accelerating our transformation work. Let's shift gears to look at 2025. We have three clear priorities: driving operational excellence, building the backbone for AI, and cloudifying telecom. Each of these priorities has detailed plans to deliver more customer, shareholder, and employee value in '25 and beyond. Starting with Lumen's financial goals, our 2025 guidance for EBITDA is between $3.2 billion and $3.4 billion, and free cash flow is between $700 million and $900 million. The big takeaway is this: with a combination of improved revenue mix and cost reductions, we see Lumen returning to full-year EBITDA growth in 2026. I'm going to let Chris provide more detail on this shortly. Next, we continue to drive operational excellence in everything we do, ensuring continuous improvement in sales execution and churn mitigation, simplifying our core business processes, and leveraging modernized ERP, CRM, ops platforms, and artificial intelligence to improve employee, customer, and partner experiences. We've identified more than $1 billion of operational expenses and a big chunk of network expenses that we plan to eliminate by year-end '27 with this work. We expect to exit 2025 with over $250 million of run-rate cost benefits delivered. Before I dig into our two big growth levers, I want to provide our view on the market given last week's events in the world of AI. Today, enterprise CIOs are faced with the expectation that they will continue to deliver warp-speed innovation at an efficient cost while pushing lots of data to the right users at the right places at the right time for the right cost. The architectural landscape has never been more complex, with apps and data sprinkled everywhere, on-prem at the edge, and in multiple clouds. High-speed, low-latency connectivity is table stakes, but it's not the endgame. CIOs need digitally controlled higher-bandwidth, higher-performing, higher-reliability, and higher-security networks to navigate this complexity. That's exactly what we're building at Lumen, a digital platform on top of a rapidly expanding fiber network to help CIOs design, control, configure, and consume network services in a multi-cloud AI-first world. When new global players in AI make disruptive breakthroughs, we see it as a positive development. Competition increases velocity, decreases costs, and basically accelerates the democratization of technology. The disruption we saw in the market last week will likely make AI more accessible to companies, and that just means our total available market for network fabric just got a lot bigger. That's why we're confident in our two big bets. Let me dive into them. Starting with the first one, building the backbone for the AI economy, we've begun work on the backlog generated from the $8.5 billion in PCF sales, and it's going really well. I want to share more on how we leverage our network for maximum shareholder returns. We are increasing two variables simultaneously: capacity and utilization. You should see a high-level model on the chart in the webcast right now. I'll start with capacity on the left side of the page. We see a significant increase in demand for our network infrastructure across both the hyperscaler and enterprise market segments, and we're driving network expansion in several ways. We're building new routes funded by our customers, often multi-tenant with favorable economics. We're partnering with Corning to use their latest fiber innovations, allowing us to get as much as four times more capacity from existing and new routes. We're leveraging Photonics innovation for up to two times greater fiber efficiency. If you add all that up, our total network capacity has the potential to grow from 12 million total inter-city fiber miles in '22 to 47 million miles by '28, providing us unmatched room for growth for network services. I'm not even including our 22 million metro miles in that number. The second aspect of our plan to drive improved shareholder return is the utilization of our assets. From '22 to '28, we simultaneously increase overall network capacity as I just described, while also increasing overall utilization of our network from 57% to 70%. This is due to hyperscalers leasing once empty conduits and funding new builds, while enterprises are substantially upgrading their networks. We saw a nearly 50% increase in 100- and 400-gig wave sales across large enterprise and mid-markets in 2024 alone. We're monitoring customer demand signals closely and will continue to make critical capital investments in key major metropolitan areas to capture this traffic growth. Additionally, we'll keep examining our utilization and capacity planning business rules for maximum shareholder return, adjusting as market dynamics dictate. In summary, the growth lever of building the backbone for AI represents a substantial opportunity for this company. We're driving the strongest utilization of our network assets in the history of the company, and we have unparalleled capacity for growth at exactly the right time. Moving on to our second growth vector, disrupting the market by cloudifying telecom. Simply put, we're creating a digital layer on top of our physical network to help us deliver friction-free, high-performing digital network experiences. So long dumb pipes, hello intelligent digital network fabric that enables CIOs to succeed in a multi-cloud AI-first world. As previously mentioned, enterprise CIOs need to move workloads between locations, on-prem, at the edge, and multi-cloud, and it needs to be cost-efficient and friction-free. But that's not happening. It's not for two reasons. First, legacy networks were not built for a multi-cloud world. Enterprises were forced to use carrier-neutral facilities to access the cloud connectivity market, driving growth in costly and inefficient cross-connects. Second, most traditional telecom companies aren't creating a platform for dynamic, frictionless customer experiences. Lumen is addressing all of that, using ourselves as customer number one. I'll share a specific example along with a supporting graphic on the webcast that you should see right now. To enable our Quantum Fiber's quote-to-cash process, for instance, we utilize multiple cloud and SaaS providers. Order processing workloads are hosted on one public cloud, leveraging its native capabilities for seamless flow-through provisioning. Once it's processed, the data required for business operations and financial reporting is transferred to our corporate data warehouse, hosted in a completely different public cloud, using our own Lumen network fabric, now directly connected to three big public clouds in a virtual networking ecosystem. Our Quantum Fiber quote-to-cash architecture bypasses carrier-neutral facilities, eliminating physical cross-connects and their fees while reducing overall port usage. The result is a modern, multi-cloud network architecture at a lower cost than traditional architectures, with enhanced speed, security, and reliability. We plan to bring this lower-cost, higher-performing architecture to our customers in late 2025. The point is how we cloudify ourselves to operate efficiently in a multi-cloud, hybrid architecture world informs how we innovate and commercialize our products and services portfolio for our customers. We're creating an innovative networking ecosystem that will yield new value to enterprise CIOs in today's multi-cloud AI-first world. This will give Lumen access to a net new total available market that we estimate to be at least $15 billion. We have the right assets, the right vision, the right team at the opportune time, and that's why we're optimistic about our pivot to growth. And with that, I'll turn it over to Chris.

Thanks, Kate. Lumen had a transformative year on many fronts. We completed the TSA in the first quarter, extending debt maturities to 2029 and beyond, providing over $1 billion in cash and access to a $1 billion revolver. Last earnings call, we announced $8.5 billion in PCF deals, solidifying Lumen's position as the partner of choice in building the trusted networks for AI. We successfully executed a debt exchange, terming out over $800 million in 2026 through '29 maturities to 2032, and reduced overall debt by $1.6 billion in 2024 while recently sending redemption notices for another $200 million. Given our confidence in free cash flow generation, we contributed $170 million to our pension plans. Our progress in selling has been substantial, with North American enterprise sales up over 15% in 2024. Mass Markets had a record year with over 500,000 new fiber homes passed and 161,000 net fiber adds, all while reducing expenses. Looking forward, 2025 will be a year of investment to achieve our future goals. As Kate discussed, the PCF sales we signed in 2024 provide the flexibility and liquidity to further reduce our debt, enhance our growth products, and invest in our simplification and modernization efforts. With the progress made to date, we estimate our run-rate cost savings exiting 2025 will be approximately $250 million, a strong start toward our $1 billion goal by the end of 2027. With our 2025 investments and further execution on modernization and simplification goals, we have confidence in margin expansion and expect total EBITDA to return to full-year growth in 2026 and continue to grow thereafter. The value creation path for Lumen is clear through additional sales, balance sheet improvements, and cost structure optimization, all while we continue executing our core strategic goals: driving operational excellence, building the backbone for AI, and cloudifying telecom. Now, let's move to the discussion of financial results for the fourth quarter. Total reported revenue declined 5.3% to $3.329 billion. Twenty-five percent of the decline was due to divestitures, commercial agreements, and the sale of the CDN business. Business segment revenue declined 5.1% to $2.659 billion, with approximately 33% of that decline due to divestitures, commercial agreements, and the sale of the CDN business. Mass Markets segment revenue declined 6.3% to $670 million. Adjusted EBITDA was $1.052 billion, with a 31.6% margin, and free cash flow was negative $174 million. Next, I'll review our detailed revenue results for the quarter on a year-over-year basis. Within our North American enterprise channels, our Business segment, excluding wholesale, international, and other, revenue declined 2.2%. North American enterprise Grow revenue increased 15.3% year-over-year, driven by public sector growth amid continued pressure in Nurture and Harvest product revenue. Overall, the North American business declined 2.8%. On a year-over-year basis, large enterprise revenue declined 5.5% in Q4, while mid-market revenue declined approximately 9.8%. In both businesses, positive Grow revenue, 3.5% for large enterprise and 3.4% for mid-markets, was offset by Nurture and Harvest declines. Public sector revenue grew 11.5% year-over-year, with the full-year 2024 public sector revenue up 3.4%. Public sector revenue can be lumpy quarter-to-quarter, but we are seeing traction with large bookings in this space, which take time to convert to revenue. For 2025, as a result of significant re-rating in the wholesale TDM space by select smaller off-net connectivity providers, we are working with our customers to either migrate or disconnect some services. While these actions will pressure public sector revenue in the first half of the year, we believe they are healthy for the overall business as these decisions are margin-accretive. Wholesale revenue declined approximately 4.5% year-over-year. The Harvest portion of the wholesale portfolio, which includes products like TDM, voice, and private line, saw revenue contraction of 5.2% year-over-year in the fourth quarter. This was primarily driven by telco partners selling legacy services. Harvest product revenue will likely continue to decline over time, and we will manage that for cash. Nurture revenue was down 11% in the fourth quarter due to VPN and Ethernet declines, while wholesale Grow revenue was positive at 1.9%. International and other revenue declined 42.5%, driven primarily by the divestiture of our EMEA business and the sale of select CDN contracts in the fourth quarter of last year. As a reminder, the EMEA transaction closed on November 23, 2023. Moving to our business product lifecycle reporting, I’ll reference results based on our North American enterprise channels. The 2.2% year-over-year decrease was due to declines in Nurture and Harvest, offset by strength in growth, particularly enterprise broadband, dark fiber, and IP. While results can vary in any quarter, we expect sustained growth in Grow product revenue as we execute our core turnaround. Within North American enterprise channels, Grow products revenue increased 15.3% year-over-year, up from 4% year-over-year in the prior quarter. Importantly, Grow represents over 47% of our North America enterprise revenue, further reducing our reliance on legacy revenue. Grow products carried an approximately 80% direct margin this quarter. Nurture products revenue decreased 16.2% year-over-year, largely impacted by declines in VPN. Nurture represents about 26% of our North America enterprise revenue, and for our total business segment, it carried an approximate 67% direct margin this quarter. Harvest products revenue decreased 7.3% year-over-year and continues to be negatively impacted by declines in TDM-based voice. Harvest represented approximately 16% of our North America enterprise revenue in the fourth quarter. For our total business segment, it carried an approximate 77% direct margin this quarter. Other product revenue declined 16.7% year-over-year and tends to experience fluctuations due to the variable nature of these products. Moving on to Mass Markets. Our fiber broadband revenue grew 18.9% year-over-year and represents 42% of Mass Markets broadband revenue. During the quarter, Lumen added 105,000 fiber homes passed, bringing our total to over 4.16 million as of December 31, achieving our full-year 2024 target of 500,000 homes passed. We also added 42,000 Quantum Fiber customers, bringing fiber subscribers to nearly 1.1 million. Fiber ARPU was $61, and I would note that Mass Markets revenue declines improved year-over-year in 2024. At the end of the fourth quarter, our penetration of legacy copper broadband was approximately 8%, and our Quantum Fiber penetration stood at approximately 26%. Now, turning to adjusted EBITDA. For the fourth quarter of 2024, adjusted EBITDA was $1.052 billion compared to $1.099 billion in the year-ago quarter. Our adjusted EBITDA margin was 31.6%. The EBITDA margin declined 40 basis points year-over-year compared to a 90 basis point year-over-year decline in the third quarter. Special items impacting EBITDA totaled $132 million, primarily related to transaction, separation, and real estate transaction costs. Lastly, capital expenditures were $915 million. Free cash flow, excluding special items, was negative $174 million, mainly due to the timing of cash from PCF deals. We expect free cash flow to be lumpy quarter-to-quarter as we move through the large PCF builds. With respect to our financial outlook for the full year 2025, we expect adjusted EBITDA to be in the range of $3.2 billion to $3.4 billion. Our EBITDA guidance includes organic declines similar to 2024 and roughly $200 million in incremental costs, including annualized spend associated with building the team to expand and deliver on the PCF partnerships, proactive disconnects of uneconomical legacy services, and additional investments in cloud infrastructure to reduce future capital expenditures associated with utilizing our own data center assets. Excluded from the guidance above is roughly $300 million in transformation costs to begin the multiyear task of reducing expenses by $1 billion. As we've stated on prior calls, we'd also like to provide some preliminary thoughts on 2026 EBITDA. With anticipated improvements in sales performance, lower absolute declines in legacy products, and approximately $250 million in run-rate savings exiting 2025, we see 2026 EBITDA being greater than $3.5 billion, with growth in future years. Moving to capital spending and our other outlook metrics, for the full year 2025, we expect total capital expenditures in the range of $4.1 billion to $4.3 billion. The majority of the increase in capital expenditures from 2024 to 2025 is associated with the costs to execute against our signed PCF contracts. We continue to see maintenance capital expenditures between $400 million and $600 million and Quantum Fiber capital expenditures at approximately $1 billion, similar to 2024, as our homes passed target for 2025 is also 500,000. The majority of the remaining capital expenditures are associated with our core enterprise business. We expect to generate free cash flow in the range of $700 million to $900 million for the full year 2025. Additionally, we estimate net cash interest to be $1.2 billion to $1.3 billion, and cash taxes to be $100 million to $200 million in 2025, given a prepayment in 2024. For 2025, we continue to expect dedicated third-party costs to support transition services for the divestitures. The reimbursement for these services will be in other income, with no material net impact on our cash flows. Special items include costs associated with Lumen's $1 billion cost takeout by year-end 2027. Before we move to Q&A, just a couple of housekeeping items. Please remember that the first quarter typically has seasonally higher expenses related to the timing of bonus payments and other prepaid expenses. Additionally, as noted in our financial trending schedule, fourth quarter '24 was positively impacted by the timing of some public sector revenue and EBITDA, which tends to fluctuate quarter-to-quarter. Following the great strides forward in 2024, Lumen's transformation is on track. The progress we've made around our core strategic goals has resulted in a stronger balance sheet, improvements in sales, a decreased reliance on legacy products, stronger free cash flow generation, and progress on modernization and simplification, giving us increased confidence in an inflection to EBITDA growth in 2026 and beyond.

Thank you, sir. We will take the first question today from Michael Rollins, Citi.

Thanks, and good afternoon. A couple of questions, if I could. First, considering what's happening with sales that you mentioned in the business, particularly in North America, how is that translating to progress in verticals like large enterprise and mid-markets? Secondly, looking at the customer verticals and product verticals you provided, Grow was up sequentially, and it looks like the $82 million sequential increase in wholesale Harvest was significant. How much of that might have been recurring, and is it a bouncing-off point for Q1 '25 versus being one-time in nature? Thanks.

Yeah, I'll start with the end of the question first. We're pleased with the Grow product revenue broadly. The quarter positively benefited from our State of California initiative around PCF that was announced about a year ago, I guess. A lot was delivered in the quarter, so revenue started to ramp up. What's really interesting when you look at the portfolio's overall impact, as I touched on in my prepared remarks, the Grow bucket is now almost half of our sales. When looking at our growth rates versus major competitors, who had very different performance, it relates to the customer experience we're driving and the focus on those Grow products as we move forward. You can see that in our wholesale results where legacy declines were significant, but Grow product sales were lower. Competition is simply not prioritizing that. We're focused on it, and that's without cloudifying telecom. Sales drive perceived revenue. 2024 was challenging due to disconnects. We talked about some forced disconnects we're addressing in the first half of this year, but we have motions in place to drive improvements as we enter '25.

Next question, please?

Hi. Thanks for taking the question. I appreciate the 2025 EBITDA outlook. I wanted to see, Chris, if you could help us think about the top-line dynamics, particularly in light of your public sector comments. Regarding AI fabric revenue coming online in the following years, what inflection points or growth factors do you anticipate for top-line growth in the Business? Is public sector growth expected to continue from here despite some one-time items weighing on it in the first half of the year?

A couple of things. While we don't guide revenue, I can provide some color. Our revenue trends will largely mirror 2024. Many factors impact that, including disconnects. Underlying improvements in sales and manageable disconnects net out. As we move into '26, we anticipate improvements, especially since we'll be past forced disconnects. We expect to begin recognizing some of that PCF revenue in '26, though it will be minimal this year. New product announcements will also benefit us as we progress. Ultimately, if you forecast market declines against our Nurture and Harvest buckets, you can model us growing at market rates for IP and waves. With no overly aggressive assumptions, we can reach growth in the '28-'29 window, which is significant. The platform layer critical to differentiating Lumen isn't factored into that math.

Next question, please?

Great. Thank you. Could you give us insights into the enterprise needs growth driving your utilization assumptions for the enterprise segment by '28? Is it just due to revenue mix, with much higher growth from hyperscalers versus enterprise, or are there other factors? Additionally, could you clarify the cadence of incremental costs we should expect for '25? I believe you mentioned $200 million included in the EBITDA guide, and there's an incremental $300 million that's not included. Regarding free cash flow, are you anticipating any incremental deferred revenue?

The utilization chart focuses on fiber miles, illustrating the total fiber in our network and how major segments—enterprise, public sector, wholesale customers, as well as our internal use of the network—are represented. We are increasing both capacity with innovation that allows for better efficiency and density within the conduit and adding new routes. There was historically a lot of unused conduit that we can lease to hyperscalers to connect to their data centers. The chart reflects this dramatic increase in hyperscaler utilization while allowing enterprise growth. We also have more enterprise growth capacity than ever before due to these innovations.

Next question, please?

Hey, guys. Thanks for taking my questions. I have two questions, Chris. First, regarding free cash flow guidance this year and its impact on 2026, could you elaborate on money coming in from construction contract customers versus outflow? Excluding that, what would cash flow look like? Second, regarding your mention of fiber securitization deals originated by others, what opportunities do you see for you to leverage fiber financing in the current market?

Regarding 2026, while PCF revenue will start to roll in, it will be minimal, as we're still in the early stages. Most of the projected $3.5 billion increase is achieved through modernization and simplification efforts, offsetting legacy declines. Over the past three years, we’ve seen significant changes in our sales mix benefiting from our focus. Regarding your first question, I can be transparent—we had a funding gap before the PCF deals, and the deals filled that gap, enabling us to invest in our transformation efforts. We won't provide specific details; however, many factors will drive free cash flow improvement over time.

Next question, please?

Good afternoon. I'm curious about your view on the recent DeepSeek announcement. How do you think this might change the connectivity market moving forward? Do you expect this might result in a shift towards more inference or more training, and what does that imply for connectivity demand from hyperscalers?

This is a great question. As I noted in my remarks, developments like DeepSeek accelerate the democratization of AI. This pressure compels everyone to innovate faster, reduce costs, and broaden access to technology. A rising number of companies must learn to operate successfully in the complex multi-cloud AI-first world, significantly increasing our total available market for network fabric. We see this as a prime opportunity for Lumen given our strong position and heavy investments in differentiation.

Thank you. As a follow-up, could I ask about the competitive dynamics you anticipate in the PCF market? I realize you have a current advantage, but do you foresee increased competition as you move forward?

We appreciate our lead in this market. Securing $8.5 billion before others recognized the potential was an achievement, but we're vigilant, working to fortify our competitive moat. Our unmatched network coverage, unique routes, and investments in fiber solutions set us apart. We have a considerable amount of capacity and performance that is critically expected. What's more, our platform on top differentiates us further and is driving interest from all customer segments.

Next question, please?

Thanks, guys. Could you provide an update on how things are progressing with the fiber cells? I would imagine that the ultimate owners of these assets are likely one of the three major national wireless carriers. Do you think they would also value copper assets alongside fiber? Is there a way to structure sales of fiber that enables buyers of these assets to utilize your copper infrastructure to build more fiber?

Good question. There are two schools of thought here: one is to sell everything, while a lot of work suggests selling it all may result in significant EBITDA loss. Our approach is to think of it as two different businesses: a robust fiber business that's not yet EBITDA positive due to high OpEx and another where much of our EBITDA has come from copper, which carries low CapEx maintenance needs. If someone is interested in either segment, we're open to those discussions, and we will make decisions based on valuation.

The copper decom process is market-driven instead of consumer-driven, influencing both the enterprise and consumer spaces. We've aggressively converted copper to fiber where it's feasible, benefiting both customers and us. This process is an integral part of our modernization and simplification strategy, promising a significant EBITDA boost in the coming years.

Next question, please?

Hi, thanks for taking my questions. First, I'm curious about the public sector performance in the quarter. Chris, you mentioned it was due to sales or turn-up services for the State of California. Is that revenue primarily recurring or linked to one-time delivery or performance fees? Additionally, regarding the fiber deployment utilization table, it seems like fiber miles used by enterprise channels were approximately flat from '22 to '25, but you're projecting a doubling from '25 to '28. What drives that increase?

The pieces of the PCF for the State of California that were activated are indeed one-time, linked to that implementation. Additional components of public sector earnings are ongoing, but we haven't broken them out. Regarding fiber usage, we saw a strong increase in 100-gig and 400-gig wave sales. This demand increase is mainly due to the hyperscalers expanding their networks for AI training due to historical underutilization of that resource.

Next question, please?

Thanks for the questions, everyone. Chris, following up on the deep conversations you're having beyond the $8.5 billion pipeline, are you observing any early signs of the inference phase coming into view, or are we still in early stages? As for the DeepSeek transition, yes, we see the democratization of AI increasing our available market, but could there be a risk that scales back hyperscaler plans temporarily to reassess?

We haven't seen a pause. We're still in active, deep conversations. We mentioned earlier that the pipeline of work generated as a result of the $8.5 billion in sales is progressing positively. Major cloud companies are requesting us to accelerate implementations. Regarding the inference phase, it's early to predict trends. However, industries like financial services, retail, and healthcare are asking for network upgrades to support inference needs.

Next question, please?

Thanks. Could you provide more insight into the public sector's position for next year, as you mentioned a potential pullback? Is this related to federal government cost-cutting and does that pose any additional risk? Furthermore, where do the billing system projects stand?

Regarding public sector, our sales rates are not declining. The revenue pullback in 2025 is due to substantial rerate activity from a select few clients—some even over a thousand percent. These adjustments, primarily within the federal space, force some customers to migrate or shut down. This decision benefits both them and us. About our IT work, we're making solid progress. Our ERP's first phase should complete early in Q2, with the second phase scheduled later in the year. It's worth noting we’re not focusing on consolidating order entry or billing systems but rather rolling off old systems as revenue transitions to the future state.

Next question, please?

Thanks, guys. Regarding your intercity fiber mile vision, the 2028 target of 47 million miles—does that rely solely on the announced PCF deals, or will it require additional deals and CapEx? Regarding new fiber routes, does that alter your outlook for how many Mass Market fiber homes you can reach? Does this help in discussions with partners for providing backhaul for their ventures?

The target of 47 million miles is based solely on current business agreements; any future deals could prompt an update to that figure. As for mass market homes, we consider fiber deployment and building new conduits separately.

Lastly, operator, we have time for one more question.

There are no further questions in the queue. That concludes the conference call for today. We thank you for your participation and ask that you please disconnect your lines. Have a great day, everyone.